SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

FORM 10-Q

 

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from _________ to _________.

Commission file number: 1-3203

_______________________

CHESAPEAKE CORPORATION

(Exact name of registrant as specified in its charter)

| Virginia
54-0166880
(State or other jurisdiction    of incorporation or organization)
(I.R.S. Employer    Identification No.)
1021 East Cary Street    Richmond, Virginia
23219
(Address of principal    executive offices)
Zip Code
Registrant’s telephone number, including area code: 804-697-1000

Not Applicable

(Former name, former address, and former fiscal year, if changed sincelast report)

_______________________

Indicate by check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90 days. Yes/X/. No / /.

Number of shares of $1.00 par value common stock outstanding as of April 29, 2001: 15,132,573shares.

 

 

CHESAPEAKE CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001

INDEX

PAGE
NUMBERPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Statements of Earnings-Quarters    ended April 1, 2001, and April 2, 2000                       3Consolidated Balance Sheets at April 1, 2001,    and December 31, 20005Consolidated Statements of Cash Flows-Quarters    ended April 1, 2001, and April 2, 2000                        7Notes to Consolidated Financial Statements9Item 2.Management’s Discussion and Analysis of    Financial Condition and Results of Operations                     19Item 3.Quantitative and Qualitative Disclosures About    Market Risk25PART II. OTHER INFORMATIONItem 1. Legal Proceedings26Item 4. Submission of Matters to a Vote of Security    Holders26Item 6.  Exhibits and Reports on Form 8-K26 Signature
27
   

 

 

 

 

 

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**PART I**

**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EARNINGS**
(Unaudited)
Quarters Ended*(in millions, except per share data)*
April 1, 2001
April 2, 2000Net sales$            198.2$             134.2Costs and expenses:     Cost of products sold159.8108.7     Selling, general and    administrative expenses30.320.5Income from continuing operations8.15.0Other income (expenses), net2.2(0.5)Interest expense, net9.83.1Income from continuing operations before    taxes and extraordinary item0.51.4Income tax expense (benefit)0.2(0.9)Income from continuing operations before    extraordinary item0.32.3Discontinued operations:     Loss from    discontinued operations, net of income tax benefit of ($2.9)-(4.6)     Gain on disposal of    discontinued operations, net of income taxes of $92.5130.9-Extraordinary item, net of income taxes of    $0.9-(1.5)Net income (loss)$            131.2$              (3.8)
 

 

 

 

 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EARNINGS, Continued**
(Unaudited)
Quarters Ended*(in millions, except per share data)*
April 1, 2001
April 2, 2000- Basic earnings (loss) per share:

Earnings from continuing operations before extraordinary item
                        $              0.02               $              0.13
Discontinued operations
8.73(0.26)
Extraordinary item, net of income taxes
-(0.09)Basic earnings (loss) per share$                8.75$              (0.22)Weighted average number of common shares15.017.3Diluted earnings (loss) per share:
Earnings from continuing operations before extraordinary item
                 $             0.02            $             0.13
Discontinued operations
8.67(0.26)
Extraordinary item, net of income taxes
-(0.09)Diluted earnings (loss) per share$                 8.69$              (0.22)Weighted average number of common shares and    equivalents outstanding, assuming dilution15.117.5Cash dividends declared per share of common    stock$                 0.22$                0.22  See accompanying Notes to Consolidated Financial Statements.
 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**
Unaudited                                                                                                                                      *       (in millions)*
                    Apr. 1, 2001
                       Dec. 31, 2000ASSETSCurrent assets:     Cash and cash    equivalents$            115.3$            31.2     Restricted cash8.0-     Accounts receivable    (less allowance of $3.0 and $3.5)127.8126.4     Inventories:             Finished goods48.147.3             Work in process21.318.5             Materials and supplies24.928.7             Total inventories94.394.5     Deferred income taxes12.615.6     Other current assets13.340.6     Total current assets371.3308.3Property, plant and equipment429.6455.2Less accumulated depreciation79.383.0350.3372.2Goodwill, net523.8554.8Net assets of discontinued operations226.8225.8Other assets84.779.8Total assets$          1,556.9$          1,540.9
 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS, Continued**
Unaudited                                                                                                                               *(in millions)*
                      Apr. 1, 2001
                              Dec. 31, 2000LIABILITIES AND STOCKHOLDERS'    EQUITYCurrent liabilities:     Accounts    payable$            104.7$            110.2     Income    taxes payable289.913.0     Accrued    expenses84.998.2     Current    maturities of long-term debt12.647.1     Dividends    payable3.33.3     Total    current liabilities495.4271.8Long-term debt517.0634.7Other long-term liabilities46.343.4Postretirement benefits other than    pensions15.415.6Deferred income taxes36.7226.2Total liabilities1,110.81,191.7Stockholders' equity:Preferred stock, $100 par value,    issuable in series; authorized, 500,000 shares; issued, noneCommon stock, $1 par value;    authorized, 60,000,000 shares; outstanding: 15,088,543 at Apr. 1, 2001, and 15,095,046 at    Dec. 31, 2000, respectively15.1             15.1Unearned compensation(2.1)(2.8)Accumulated other comprehensive    loss(93.1)(61.3)Retained earnings526.2 398.2 Total stockholders' equity446.1 349.2 Total liabilities and    stockholders' equity$        1,556.9 $         1,540.9   See accompanying Notes to Consolidated Financial Statements. 
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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**
(Unaudited)
Quarters Ended*(in millions)*
April 1, 2001
April 2, 2000Operating activities:Net income (loss) $             131.2$           (3.8)Adjustments to reconcile net income (loss) to    net cash provided by operating activities:     Gain on disposal of    discontinued operations, net of taxes(130.9)-     Extraordinary item,    net of taxes-1.5     Depreciation and    amortization of intangibles20.316.7     Deferred income taxes0.40.4     Undistributed    earnings of affiliates(1.2)-     (Gain) loss on sale    of property, plant and equipment(3.2)0.2     Changes in operating    assets and liabilities, net of acquisitions and                         dispositions:             Accounts receivable, net(7.3)6.5             Inventories0.2(5.5)             Other assets(0.2)(1.1)             Accounts payable(16.9)6.0             Accrued expenses(12.5)8.4             Income taxes payable23.8(6.5)             Other, net(1.0)(1.5)Net cash provided by operating activities2.721.3
 

 

 

 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued**
(Unaudited)
Quarters Ended*(in millions)*
April 1, 2001
April 2, 2000Investing activities:Purchases of property, plant and equipment(11.3)(14.6)Acquisitions(7.2)(338.0)Proceeds from sales of businesses237.0-Proceeds from sales of property, plant and    equipment5.7-Other, net0.30.3Net cash provided by (used in) investing    activities224.5(352.3)Financing activities:Net payments on credit lines(122.1)(10.6)Payments on long-term debt(14.2)(1.6)Proceeds from long-term debt7.084.3Debt issuance costs(3.1)(2.5)Purchases of outstanding common stock-
(25.2)Dividends paid
(3.3)
(3.8)Other
0.6
0.1Net cash (used in) provided by financing    activities
(135.1)
40.7Increase (decrease) in cash and cash    equivalents92.1(290.3)Cash and cash equivalents at beginning of    period31.2306.6Cash and cash equivalents at end of period$           123.3$             16.3  See accompanying Notes to Consolidated Financial Statements
 

 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

Note 1. Summary of Significant Accounting Policies
Basis of Presentation

The consolidated financial statements of Chesapeake Corporation and subsidiaries("Chesapeake" or the "Company") included herein are unaudited, exceptfor the December 31, 2000, consolidated balance sheet, and have been prepared by theCompany pursuant to the rules and regulations of the Securities and Exchange Commission.In the opinion of management, the consolidated financial statements reflect alladjustments, all of a normal recurring nature, necessary to present fairly theCompany’s consolidated financial position and results of operations for the interimperiods presented herein. These consolidated financial statements should be read inconjunction with the consolidated financial statements and the notes thereto incorporatedby reference in the Company’s latest Annual Report on Form 10-K. The results ofcontinuing operations for the 2001 interim period should not be regarded as necessarilyindicative of the results that may be expected for the entire year. Certain prior-yeardata have been reclassified to conform to the 2001 presentation.

Note 2. Adoption of Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standards No. 133 ("SFAS 133"),"Accounting for Derivative Instruments and Hedging Activities" and in June 1999and June 2000, respectively, its amendments, Statements 137 and 138. The Company adoptedthe new Statement as required effective January 1, 2001. SFAS 133, as amended, requiredthe Company to record all derivative instruments on the balance sheet as assets orliabilities, measured at fair market value. Derivatives that are not hedges must beadjusted to fair value through income. If the derivative is a hedge, depending on thenature of the hedge, changes in the fair value of the derivative are to be offset againstthe change in fair value of the hedged assets, liabilities or firm commitments throughearnings or recognized in other comprehensive income until the hedged item is recognizedin earnings. 

The ineffective portion of a derivative's change in fair value is to be immediatelyrecognized in earnings. The new accounting standard did not significantly change theCompany's approach to managing foreign currency or interest rate risks. Chesapeake hedgesagainst these exposures using forward exchange contracts and interest rate swaps. Anycontracts that have been designated as hedges of anticipated future cash flows will bemarked to market through other comprehensive income until such time as the relatedforecasted transactions affect earnings. At the end of the first quarter of 2001,accumulated comprehensive income includes a decrease of $2.0 million, net of taxes of$1.3 million, to recognize the fair market value of derivatives. The impact to theCompany's operating results related to the ineffectiveness from forward exchange contractswas not significant at adoption and during the quarter. 

Note 3. Comprehensive Income

Comprehensive income (loss) for the quarters ended April 1, 2001, and April 2, 2000,was $99.4 million and $(19.3)million, respectively. The difference between net income (loss) and comprehensive income(loss) is primarily due to foreign currency translation. The 2001 comprehensive incomealso includes a charge to recognize $2.0 million, after taxes, for changes in thefair market value of derivatives. (See Note 2 for additional information onderivatives.)  

 

 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

Note 4. Acquisitions and Dispositions

In January 2001, the Company announced plans to sell the principal businesses includedin its Merchandising and Specialty Packaging segment, which has been accounted for as adiscontinued operation. The Company anticipates that these divestitures will be completedduring the second and third quarters of 2001. The businesses that made up this segment areas follows:- Chesapeake Display and Packaging Company, which specializes in the design, manufacture,    assembly and packing of temporary and permanent point-of-purchase displays. 
- Consumer Promotions International, Inc., which specializes in the design, manufacture    and assembly of permanent point-of-purchase displays. 
- Chesapeake Packaging Co., which designs and manufactures corrugated shipping containers    and other specialty corrugated packaging products. 
- Chesapeake's 46 percent interest in Color-Box, LLC, which is a joint venture with    Georgia-Pacific Corporation ("G-P"). The venture designs and manufactures    litho-laminated corrugated graphic packaging. 

On April 6, 2001, the Company announced the signing of a definitive agreement withInland Paperboard and Packaging, Inc., a subsidiary of Temple-Inland, Inc.("Inland"), by which Inland will acquire the stock of Chesapeake Packaging Co.,and on April 23, 2001, the Company announced the signing of a definitive agreement bywhich CorrFlex Graphics, LLC will acquire substantially all of the U. S. Display assets ofChesapeake Display and Packaging Company.

On March 2, 2001, the Company sold its 5 percent equity interest in Georgia-PacificTissue, LLC (the "Tissue JV") to G-P. Chesapeake received approximately $237million for its agreement to terminate the joint venture, consideration for the sale ofits ownership interest and certain indemnifiable deferred tax liabilities. The saleresulted in an after-tax gain of approximately $140.6 million. As a result of the taxablegain, the net deferred income tax balance decreased and the income taxes payable increasedby approximately $185 million. The Tissue JV is also accounted for as a discontinuedoperation.  

Summarized results of discontinued operations are shown separately in the accompanyingconsolidated financial statements, except for the consolidated statements of cash flows,which summarize the activity of continuing and discontinued operations together. Revenuesfrom discontinued operations were $91.6 million for the first quarter of 2001 and $104.9million for the first quarter of 2000. The Company has recognized an additional $9.7million in the first quarter of 2001 to increase the estimated net loss on disposal to$53.3 million, which includes asset valuation losses of $40.2 million related to netassets held for sale, charges of $14.9 million for severance and exit costs, estimatedholding period operating losses of $17.2 million and a tax benefit of $19.0 million.Estimated holding period losses include an actual first quarter 2001 pre-tax loss of $11.8million from discontinued operations.  Interest costs charged to discontinuedoperations were $3.6 million for the first quarter of 2001.   

During the first quarter of 2001, Field Group plc ("Field Group"), a whollyowned subsidiary of the Company, acquired the in-house carton printing operations ofBritish American Tobacco in Bremen, Germany.

On October 10, 2000, the Company completed the acquisition of First Carton GroupLtd. ("First Carton"), a paperboard packaging supplier for the premium brandedfood and drinks markets, for approximately $69 million plus the assumption of $50 millionof debt. First Carton has operations in six locations in the United Kingdom and Germany.The purchase price for the acquisition was paid through borrowings under theCompany’s senior credit facility and the issuance of loan notes. On September 1,2000, the Company acquired Lithoprint Holdings Limited ("Lithoprint").Lithoprint is a Scottish supplier of wet-applied labels and commercial printing.Lithoprint is included in the Field Group results. 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

On February 24, 2000, the Company completed its acquisition of substantially all of theoutstanding capital shares of Boxmore International PLC ("Boxmore"), apaperboard and plastic packaging company headquartered in Belfast, Northern Ireland. Theacquisition was effected through a tender offer by Chesapeake UK Acquisitions II PLC("Chesapeake UK II"), a wholly-owned subsidiary of Chesapeake, for all of theoutstanding capital shares of Boxmore at a purchase price of (pound) 2.65 per share. Thetender offer represented a value of approximately $319 million for Boxmore's outstandingshare capital. The purchase price for Boxmore's capital shares was paid in cash ofapproximately $234 million and approximately $85 million in unsecured loan notes issued tocertain Boxmore shareholders by Chesapeake UK II. 

During the first quarter of 2000, the Company also completed the acquisitions of GreenPrinting Company, Inc. ("Green Printing"), a specialty packaging producer andprinter in Lexington, North Carolina, and a corrugated container facility in WarrenCounty, North Carolina, and finalized the formation of a joint venture with G-P, in whichthe two companies combined their litho-laminated graphic packaging businesses. The WarrenCounty facility and the litho-laminated joint venture are included in the Company's formerMerchandising and Specialty Packaging segment that is accounted for as a discontinuedoperation. 

Each of the acquisitions has been accounted for using the purchase method and isincluded in the results of operations since the purchase date, except for those businessesincluded in discontinued operations. As of the acquisition date of Boxmore, the Companyinitiated plans to eliminate duplicate functions and processes at Boxmore and restructurecapacity at certain acquired facilities. Approximately $8 millionwas recorded in the opening balance sheet for restructuring reserves, consisting primarilyof $5 million related to severance and $3 million related to closure costs.This reserve has been substantially utilizedas of the end of the first quarter of 2001. 
The purchase price amounts for the acquisitions which occurred during the quartersending April 1, 2001, and April 2, 2000, have been allocated to the acquired net assets assummarized below (in millions):
Quarters Ended
April 1, 2001
April 2, 2000Acquisitions:     Fair value of    assets acquired$               7.2
$           475.6       Liabilities    assumed or created-
(132.2)     Cash acquired-
(5.4)     Cash paid for    acquisitions, net
$               7.2
$           338.0 Dispositions:     Fair value of    assets sold$           237.0-          Cash received from    sale of business$           237.0$                  -
 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

Pro forma financial information reflecting the results of the Company asif the Boxmore acquisition occurred on January 1, 2000, is as follows (in millions, exceptper share amounts):
Quarter EndedApr.    2, 2000Net sales from continuing operations$ 168.8 Income from continuing operations before extraordinary item1.8 Net loss(4.3)Earnings per share from continuing operations before    extraordinary item:     Basic0.10      Diluted0.10 Net loss per share:     Basic(0.25)     Diluted(0.25)
Note 5. Restructuring/Special Charges

In the fourth quarter of 1999, the Company recognized a pretax restructuring/specialcharge of $38.0 million related to employment reduction, the closure of one facility,impairment of assets in the Company’s French operations and defense costs incurred torespond to an unsolicited proposal by Shorewood Packaging Corporation("Shorewood") to acquire Chesapeake. Of these charges, $27.7 million related toongoing operations and $10.3 million related to discontinued operations. The restructuring liability from the 1999 plan has been substantiallyutilized except for the ongoing severance payments for the French social plan. 

During 2000, the Company recorded restructuring/special charges beforeincome taxes of $7.7 million ($4.7 million after taxes) which consisted of additionaldefense costs related to Shorewood and severance and exit costs associated with theclosure of one of its paperboard packaging facilities in the United Kingdom. The facilityto be closed was redundant after the acquisition of First Carton in 2000. Severance costsincluded planned work force reductions of approximately 160 employees, which werepartially offset by a pension termination benefit. Paymentsmade through the first quarter of 2001 for employment reduction included approximately 160 employees.TheCompany anticipates completing the 2000 restructuring activities by the end of the thirdquarter of 2001.An analysis of the restructuringreserve as of April 1, 2001, is as follows (in millions):

 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**
Employment ReductionFacility ClosureDefense Costs          TotalBalance, 1999 restructuring charge
$   0.2
$     -
$            -
$         0.2Restructuring charge 2000
1.9
0.7
5.1
7.7Cash payments 2000--(1.5)(1.5)Foreign currency translation0.1--0.1Balance, Dec. 31, 2000
2.2
0.7
3.6
6.5Cash payments 2001(1.5)(0.6) (3.6)(5.7)Foreign currency translation(0.1)--(0.1)Balance, Apr. 1, 2001$   0.6$     0.1 $            -$     0.7
Note 6. Income Taxes

The Company’s effective income tax rate from continuing operations was 40 percent for the quarter ended April 1, 2001 and 43 percent for the quarter ended April 2, 2000, excludingnonrecurring items.  The first quarter of 2000 included a nonrecurring tax benefitrelated to the transaction costs associated with the offer to acquire Shorewood and thereversal of an estimated tax provision on the 1999 accrual of Shorewood defense costs thattotaled $2.6 million.  The decrease in the effective income tax rate is primarily dueto the foreign tax benefits related to the consolidated tax loss for 2000 versus aconsolidated taxable income in 2001 and the use of foreign tax credits in 2001.

Note 7. Debt

On February 23, 2000, Chesapeake terminated a bank commitment to make available to theCompany a $1.075 billion senior credit facility (which commitment had been obtained inconnection with Chesapeake's efforts to acquire Shorewood), which resulted in anextraordinary charge of $1.5 million after taxes. 

On June 15, 2000, Chesapeake entered into a five-year $450 million senior creditfacility which has been subsequently amended.  During the third quarter of 2000, theCompany determined that certain covenants in its $450 million bank credit facilityrelating to leverage and interest coverage needed to be addressed, primarily as a resultof operating losses in the former Merchandising and Specialty Packaging segment. TheCompany received a waiver of these covenants for the fourth quarter of 2000. In February2001, the bank credit facility was amended to change certain financial covenants for 2001.In addition, under the amended credit facility, any proceeds in excess of customary costsreceived by the Company from the sales of its discontinued operations, other than itsinterest in the Tissue JV, must be used to permanently reduce the credit facility by up to$200 million. The credit facility must be reduced to $250 million by June 30, 2001, inorder to avoid more stringent covenants, including the suspension of dividend payments.  

On March 28, 2001, Field Group entered into a 20 million British pound multi-currencyline of credit which replaced a previous multi-currency revolving credit facilityagreement dated November 20, 2000.  Under the new agreement, the Company is requiredto maintain on deposit with the bank not less than $8 million until June 30,2001. After this date, the release of cash will be at the bank's discretion, based onthe financial performance and capital structure of Field Group.

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

Note 8. Commitments and Contingencies

Environmental Matters

Chesapeake has a strong commitment to protecting the environment. The Company has anenvironmental audit program to monitor compliance with environmental laws and regulations.The costs of compliance with existing environmental regulations are not expected to have amaterial adverse effect on the Company's financial position or results of operations. 

The Comprehensive Environmental Response, Compensation and Liability Act("CERCLA") and similar state "Superfund" laws impose liability,without regard to fault or to the legality of the original action, on certain classes ofpersons (referred to as potentially responsible parties or "PRPs") associatedwith a release or threat of a release of hazardous substances into the environment.Financial responsibility for the clean-up or other remediation of contaminated property orfor natural resource damages can extend to previously owned or used properties, waterwaysand properties owned by third parties, as well as to properties currently owned and usedby a company even if contamination is attributable entirely to prior owners. As discussedbelow, the United States Environmental Protection Agency ("EPA") has givennotice of its intent to list the lower Fox River in Wisconsin on the National PrioritiesList under CERCLA and has identified the Company's subsidiary, Wisconsin Tissue MillsInc., now WTM I Company ("WT"), as a PRP. 

Except for the Fox River matter, the Company has not been identified as a PRP at anyCERCLA-related sites. However, there can be no assurance that the Company will not benamed as a PRP at any other sites in the future, or that the costs associated withadditional sites would not be material to the Company's financial position or results ofoperations. 

In June 1994, the United States Department of Interior, Fish and Wildlife Service("FWS"), a federal natural resources trustee, notified WT that it had identifiedWT and four other companies located along the lower Fox River in northeast Wisconsin asPRPs for purposes of natural resources liability under CERCLA arising from allegedreleases of polychlorinatedbiphenyls ("PCBs") in the Fox River and Green BaySystem. Two other companies subsequently received similar notices from the FWS. The FWSand other governmental and tribal entities, including the State of Wisconsin, allege thatnatural resources, including endangered species, fish, birds, tribal lands or lands heldby the United States in trust for various Indian tribes, have been exposed to PCBs thatwere released from facilities located along the lower Fox River. The governmental andtribal entities are proceeding with a natural resource damage assessment with respect tothe alleged discharges. On January 31, 1997, the FWS notified WT of its intent to filesuit, subject to final approval by the Department of Justice, against WT to recoveralleged natural resource damages. WT and other PRPs have engaged in discussions with theparties asserting trusteeship of the natural resources concerning the damage assessmentand the basis for resolution of the natural resource damage claims. In addition, the PRPshave been cooperating with the Wisconsin Department of Natural Resources ("DNR")in its preparation of a natural resource damage assessment. WT and other PRPs have alsoengaged in discussions with the State of Wisconsin with respect to resolving possiblestate claims concerning remediation, restoration and natural resource damages related tothe alleged discharge of PCBs into the Fox River and Green Bay System.

On June 18, 1997, the EPA announced that it was initiating the process of listing thelower Fox River on the CERCLA National Priorities List of hazardous waste sites. The EPAidentified several PRPs, including WT. 

 

 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

On February 26, 1999, the DNR released for public comment a draft remedialinvestigation/feasibility study ("RI/FS") for the lower Fox River site. In thedraft RI/FS, the DNR reviewed and summarized several categories of possible remedialalternatives for the site, estimated to cost in the range of $143 million to $721 million,but did not identify a preferred remedy. (As required by applicable regulations, the draftRI/FS also includes a "no action" alternative that does not entail remediationcosts, but WT does not believe that the "no action" alternative will beselected.) There can be no assurance that many of the cost estimates in the draft RI/FSwill not differ significantly from actual costs. WT submitted timely comments on the draftRI/FS both individually and in conjunction with other PRPs. After finalizing the RI/FS,the DNR and the EPA are expected to announce a preferred remedial alternative in aProposed Remedial Action Plan. The Proposed Remedial Action Plan will be subject to apublic comment period, and enforcement of any definitive Remedial Action Plan may besubject to judicial review. 

The largest components of the costs of the more expensive clean-up alternativespresented in the draft RI/FS are attributable to large-scale sediment removal, treatmentand disposal. Based on current information and advice from its environmental consultants,WT believes that an aggressive effort to remove substantial amounts of PCB-contaminatedsediments (most of which are buried under cleaner material or are otherwise unlikely tomove), as contemplated by certain alternatives presented in the draft RI/FS, would beenvironmentally detrimental and therefore inappropriate. Instead, WT believes that lessintrusive alternatives are more environmentally appropriate, cost effective andresponsible methods of managing risks attributable to sediment contamination. 

On October 25, 2000, the federal and tribal natural resources trustees released aproposed Restoration and Compensation Plan ("RCP") presenting the federal andtribal trustees' planned approach for restoring injured federal and tribal naturalresources and compensating the public for losses caused by the release of PCBs. Theproposed RCP states that the final natural resource damage claim will depend on the extentof PCB clean-up undertaken by EPA and DNR, but estimates past interim damages to be $65million, and, for illustrative purposes only, estimates costs of restoration to addresspresent and future PCB injuries in a range of $111 million to $268 million. WT believesthat the alleged damages to natural resources are overstated in the proposed RCP andjoined in the PRP group comments to that effect on the RCP. The RCP has not beenfinalized. 

The ultimate cost to WT associated with this matter cannot be predicted with certaintyat this time, due to uncertainties with respect to: which, if any, of the remedialalternatives presented in the draft RI/FS will be implemented, and uncertaintiesassociated with the actual costs of each of the potential alternatives; the outcome of thefederal and state natural resource damage assessments; WT's share of any multi-partyclean-up/restoration expenses; the timing of any clean-up/restoration; the evolving natureof clean-up/restoration technologies and governmental regulations; controlling legalprecedent; the extent to which contributions will be available from other parties; and thescope of potential recoveries from insurance carriers and prior owners of WT. While suchcosts cannot be predicted with certainty at this time, WT believes that the ultimateclean-up/restoration costs associated with the lower Fox River site may exceed $100million for all PRPs in the aggregate. Under CERCLA, each PRP generally will be jointlyand severally liable for the full amount of the clean-up costs, subject to a right ofcontribution from the other PRPs. In practice, PRPs generally negotiate among themselvesto determine their respective contributions to any multi-party clean-up/restoration, basedupon factors including their respective contributions to the alleged contamination andtheir ability to pay. Based on presently available information, WT believes that severalof the named PRPs will be able to pay substantial shares toward remediation andrestoration, and that there are additional parties, some of which have substantialresources, that may also be jointly and severally liable. 

WT also believes that it is entitled to substantial indemnification from a prior ownerof WT, pursuant to a stock purchase agreement between the parties, with respect toliabilities related to this matter. WT believes that the prior owner intends to, and hasthe financial ability to, honor its indemnification obligation under the stock purchaseagreement. 

 

 

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**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

Pursuant to the Joint Venture Agreement for the Tissue JV, WT has retained liabilityfor, and the third party indemnity rights associated with, the discharge of PCBs and otherhazardous materials in the Fox River and Green Bay System. Based on presently availableinformation, WT believes that if any remediation/restoration is done in an environmentallyappropriate, cost effective and responsible manner, the matter is unlikely to have amaterial adverse effect on the Company's financial position or results of operations.However, because of the uncertainties described above, there can be no assurance that WT'sultimate liability with respect to the lower Fox River site will not have a materialadverse effect on the Company's financial position or results of operations. 

On April 19, 1999, the EPA and the Virginia Department of Environmental Quality("DEQ") each issued Notices of Violation ("NOVs") under the Clean AirAct Amendments of 1990 ("CAA") against St. Laurent Paper Products Corp.("St. Laurent") (and, in the case of EPA's NOV, Chesapeake) relating to St.Laurent's kraft products mill located in West Point, Virginia (the "West PointMill") formerly owned and operated by Chesapeake Paper Products, L.L.C. ChesapeakePaper Products, L.L.C. was sold by Chesapeake to St. Laurent Paperboard (U.S.) Inc.("St. Laurent (U.S.)") in May 1997, pursuant to a Purchase Agreement dated, asof April 30, 1997, by and among Chesapeake Corporation, St. Laurent Paperboard Inc. andSt. Laurent (U.S.) (the "Purchase Agreement"). In general, the NOVs allege thatfrom 1984 through the date of the NOVs, the West Point Mill installed certain equipmentand modified certain production processes without obtaining required permits. Underapplicable law, the EPA and DEQ may commence a court action with respect to the mattersalleged in the NOVs seeking injunctive relief to compel compliance with the CAA, and acourt may impose civil penalties of up to $25,000 per day of violation ($27,500 per dayfor violations after January 30, 1997) for violations of the CAA (provided that a court,in determining the amount of any penalty to be assessed, shall take into consideration,among other things, the size of the business, the economic impact of the penalty on thebusiness, the business' compliance history and good faith efforts to comply, the economicbenefit to the business of noncompliance and the seriousness of the violation). ThePurchase Agreement provides that Chesapeake may be required to indemnify St. Laurentagainst certain violations of applicable environmental laws (including the CAA) that wereidentified as of the May 1997 closing date (and other such violations that existed priorto such date as to which Chesapeake had "knowledge," as defined in the PurchaseAgreement). Chesapeake's indemnification obligation to St. Laurent with respect to suchmatters is subject to certain limitations, including a cap of $50 million and, in certaincircumstances, a $2.0 million deductible. The Company and St. Laurent have jointlyresponded to and are defending against the matters alleged in the NOVs, and have presentedan initial settlement offer, consisting primarily of engineering measures, to the EPA andDEQ. Based upon a review of the NOVs and an analysis of the applicable law and facts, theCompany believes that both it and St. Laurent have substantial defenses against thealleged violations and intend to vigorously defend against the alleged violations. TheCompany and St. Laurent are negotiating with EPA, the United States Department of Justiceand DEQ to address the matters that are the subject of the NOVs. The ultimate cost, ifany, to the Company relating to matters alleged in the NOVs cannot be determined withcertainty at this time, due to the absence of a determination whether any violations ofthe CAA occurred and, if any violations are ultimately found to have occurred, adetermination of (i) any required remediation costs and penalties, and (ii) whether St.Laurent would be entitled to indemnification from the Company under the Purchase Agreementand, if so, to what extent. 

Litigation

The Company is a party to various other legal actions, which are ordinary andincidental to its business. While the outcome of legal actions cannot be predicted withcertainty, the Company believes the outcome of any of these proceedings, or all of themcombined, will not have a material adverse effect on its consolidated financial positionor results of operations.

 

 

 

-16-

**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

Note 9. Segment Disclosure

Chesapeake currently conducts its business in three segments:  the PaperboardPackaging segment, the Plastic Packaging segment and the Forest Products/Land Developmentsegment. 

The Company’s Paperboard Packaging segment is comprised of the Field Groupoperations, the paper-based specialty packaging operations of Boxmore, Green Printing andFirst Carton. This segment specializes in the design and production of cartons,containers, printed leaflets and labels and is primarily focused on three end-use sectors:pharmaceutical/healthcare; international and premium branded products; and food andhousehold. The results of the operations of Boxmore, Green Printing and First Carton areincluded in the consolidated segment results since their respective acquisition dates ofFebruary 24, 2000, March 15, 2000, and October 10, 2000. (See Note 4 for additionalinformation on acquisitions.) The Plastic Packaging segment is comprised of theplastic-based packaging operations of Boxmore, which was acquired on February 24, 2000.This segment serves three primary markets: pharmaceutical/healthcare; food and beverage;and specialty chemical. The Forest Products/Land Development segment consists of DelmarvaProperties, Inc. and Stonehouse Inc. This segment manages the Company’s real estateholdings. The following tables summarize the net sales, earnings before interest and taxesand identifiable assets for each of the Company's segments: 
*(in millions)*
Quarters    EndedApr. 1, 2001Apr. 2, 2000Net sales:Paperboard Packaging$         172.0$     122.0Plastic Packaging25.99.9Forest Products/Land Development0.32.3$         198.2$     134.2Earnings (losses) before interest and    taxes:Paperboard Packaging$           14.4$            9.1Plastic Packaging1.61.0Forest Products/Land Development-2.0Corporate/Other(5.7)(7.6)$           10.3$            4.5
 

-17-

**CHESAPEAKE CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), continued**

 
*Segment Disclosure, continued*Apr. 1, 2001Dec. 31, 2000Identifiable assets:Paperboard Packaging$         930.6$        982.0Plastic Packaging177.6185.4Forest Products/Land Development35.535.0Corporate/Other186.4112.7Discontinued Operations226.8225.8$   1,556.9$  1,540.9
 

 

 

 

 

 

 

 

 

 

 

 

 

 

-18-

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

**Discontinued Operations**

In January 2001, the Company announced its plans to sell the principal businessesincluded in its former Merchandising and Specialty Packaging segment.  In March 2001,the Company sold its 5 percent equity interest in the Tissue JV, which comprised theremainder of the former Tissue segment.  Accordingly, these segments have beenaccounted for as discontinued operations. 

On April 6, 2001, the Company announced the signing of a definitive agreement withInland by which Inland will acquire the stock of Chesapeake Packaging Co. for a purchaseprice of $120 million, subject to adjustment for changes in working capital. The sale ofChesapeake Packaging Co. is subject to satisfaction of customary closing conditions, andis expected to be completed in May of 2001. On April 23, 2001, the Company announced thesigning of a definitive agreement by which CorrFlex Graphics, LLC will acquiresubstantially all of the U.S. Display assets of Chesapeake Display and Packaging Companyfor a purchase price of $40 million, subject to adjustment for changes in working capital.The sale of the U.S. Display assets is subject to regulatory approvals, CorrFlex'sfinancing and satisfaction of other customary closing conditions, and is expected to closein June 2001. The Company anticipates that the remaining divestitures will be completedduring the third quarter of 2001. The Company intends to use the cash proceeds from thesale of its discontinued operations to reduce long-term debt. (See Note 4 to theConsolidated Financial Statements for further details on discontinued operations.) 

**Overview**

Net sales from continuing operations were $198.2 million for the first quarter of 2001,up 48 percent over first quarter of 2000 net sales from continuing operations of $134.2million and down 5 percent compared to first quarter 2000 net sales from continuingoperations of $208.8 million on a pro forma basis. The pro forma results reflect allacquisitions and divestitures that occurred during 2000 as if they had occurred at thebeginning of 2000. The decrease in pro forma net sales was primarily due to unfavorableforeign exchange translation rates, partially offset by strong tobacco and pharmaceuticalpackaging volume. Excluding the impact of unfavorable foreign exchange rates, firstquarter 2001 net sales were up 4 percent compared to pro forma first quarter 2000 netsales. 

Net income for the first quarter of 2001 was $131.2 million, or $8.69 per dilutedshare, compared to a net loss for the first quarter of 2000 of $3.8 million, or $0.22 perdiluted share. Results for 2001 included a non-recurring after-tax gain of $140.6 million,or $9.31 per diluted share, resulting from the sale of the Company's 5 percent interest inthe Tissue JV, partially offset by a revision to the estimated loss on the sale of theMerchandising and Specialty Packaging business of $9.7 million, or $0.64 per dilutedshare. Net income for the first quarter of 2000 included a loss from discontinuedoperations of $4.6 million, or $0.26 per diluted share, and an extraordinary charge of$1.5 million, or $0.09 per diluted share, for the early extinguishment of debt. Net incomefrom continuing operations for the first quarter of 2001 was $0.3 million, or $0.02 perdiluted share, compared to net income from continuing operations before extraordinaryitems of $2.3 million, or $0.13 per diluted share, for the first quarter of 2000. Thedecrease in earnings per share from continuing operations before extraordinary items wasprimarily the result of lower land sales which, in the first quarter of 2000, contributed$2.0 million to the Company's operating income. The following table sets forth firstquarter net sales and earnings before interest and taxes and nonrecurring items("EBIT") by continuing business segment:

 

 

 

 

 

-19-

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS, continued**
Sales and EBIT by Continuing    Business Segment
Qtr. Ended Apr. 1, 2001
Qtr. Ended Apr. 2, 2000*(in millions)*
As    Reported
As    Reported
Pro FormaNet SalesEBITNet SalesEBIT*Net SalesEBIT*Paperboard Packaging$172.0$14.4 $122.0$   9.1$181.2$13.0 Plastic Packaging25.91.6 9.91.025.31.3 Forest Products/Land Development0.3-  2.32.02.32.0 Corporate/Other-(5.7)-(5.0)-(5.0)Total Continuing Operations$198.2$10.3$134.2$  7.1$208.8$11.3 
*before nonrecurring items.

Gross margin in the first quarter of 2001 was $38.4 million, compared to $25.5 millionin the first quarter of 2000. The increase in gross margin primarily represents theadditional sales from businesses acquired in or after the first quarter of 2000. Grossmargin as a percentage of sales increased slightly to 19.4 percent in the first quarter of2001, compared to 19.0 percent in the first quarter of 2000.

Selling, general and administrative ("SG&A") expenses as a percentage ofnet sales from continuing operations of 15.3 percent remained flat in the first quarter of2001 compared to the first quarter of 2000. 

Other income and expenses, net, increased $2.7 million for the quarter ended April 1,2001, compared to the same period in 2000, primarily due to expenses incurred in 2000 inconnection with the Company's offer to acquire Shorewood.****The first quarter of 2000included nonrecurring expenses associated with the Shorewood tender offer of $10.3million, which were largely offset by a $7.7 million gain on Chesapeake’s sale of 4.1million shares of Shorewood common stock. In addition, other income and expenses for thefirst quarter of 2001 included a gain on the sale of a facility in Ireland, which waspartially offset by moving expenses associated with the closure of a paperboard packagingfacility in the United Kingdom and severance costs. The net impact of these items was abenefit to other income in the first quarter of 2001 of approximately $0.7 million.

Tax expense for the first quarter of 2000 includes the benefit related to thetransaction costs associated with the offer to acquire Shorewood and the reversal of anestimated tax provision on the 1999 accrual of Shorewood defense costs that totaled $2.6million. The Company's effective income tax rate from continuing operations for the firstquarter of 2001 was approximately 40 percent, compared to approximately 43 percentexcluding nonrecurring items for the first quarter of 2000. The decrease in the Company'seffective income tax rate is primarily due to the change in the mix of businessescomprising continuing operations.

Net interest expense increased by $6.7 million for the first quarter of2001, compared to the first quarter of 2000, due to thetiming of additions to or repayments of debt associated with the acquisitions anddivestitures and the use of cash in 2000 to acquire the Company's common stock.

-20-****
**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS, continued****- Segment Information**
*Paperboard Packaging*
2000
Increase/(Decrease)*
Increase/(Decrease)**
                                         *(in millions)*
        2001
As reported
Pro forma
                         $
                         %
                     $
                     %Net sales$172.0$122.0$181.2 $50.041.0% $(9.2)(5.1)%EBIT 14.49.113.0 5.358.2%  1.410.8%Operating margin 8.4%7.5%7.2%- 12.0%- 16.7%
*   compared to 2000 as reported

** compared to 2000 pro forma

Chesapeake's Paperboard Packaging segment consists of Field Group, acquired in March1999, the paper-based specialty packaging operations of Boxmore, acquired in February2000, Green Printing, acquired in March 2000, and First Carton, acquired in October 2000.These operations have been consolidated since their respective acquisition dates.  

Net sales for the first quarter of 2001 were $172.0 million, up 41 percent compared tonet sales of $122.0 million in the first quarter of 2000, reflecting the acquisitions madein or after the first quarter of 2000. On a pro forma basis, net sales for the firstquarter of 2001 were down $9.2 million, or 5 percent, compared to pro forma 2000 net salesof $181.2 million, due to the negative impact of unfavorable foreign currency translation,offset in part by higher tobacco and pharmaceutical packaging sales volume. Excluding the impact of unfavorable foreign exchange rates, first quarter 2001 net saleswere up 3 percent compared to pro forma first quarter 2000 net sales.- EBIT for this segment was $14.4 million for the first quarter of 2001, an increase of    $5.3 million, or 58 percent, over the first quarter of 2000, again reflecting the    acquisitions in 2000. First quarter EBIT for 2001 increased by $1.4 million, or 11    percent, compared to pro forma first quarter EBIT for 2000 of $13.0 million. Excluding the    impact of unfavorable foreign exchange rates, EBIT for the first quarter of 2001 increased    19 percent compared to pro forma first quarter 2000 EBIT, primarily due to increased    tobacco and pharmaceutical packaging sales volume. Included in this segment's first    quarter 2001 results was a gain on the sale of a facility in Ireland, which was partially    offset by moving expenses associated with the closure of a facility in the United Kingdom    and severance costs. The net impact of these nonrecurring items was a benefit to the first    quarter 2001 EBIT of approximately $0.7 million. Excluding these nonrecurring items,    operating margin for this segment increased by approximately 0.8 points for the first    quarter of 2001 compared to pro forma 2000 results.

 

 

 

 

-21-

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS, continued**

*Plastic Packaging*
2000
Increase/(Decrease)*
Increase/(Decrease)**                                          *(in millions)*
        2001
       As reported
Pro forma
                        $
                       %
                         $
                   %Net sales $25.9$ 9.9 $25.3$16.0161.6%$0.62.4%EBIT 1.61.0 1.30.660.0% 0.323.1%Operating margin 6.2%10.1% 5.1%- (38.6)%- 21.6%
*   compared to 2000 as reported

** compared to 2000 pro forma

The Plastic Packaging segment is comprised of the plastic-based packaging operations ofBoxmore, which was acquired in February 2000. This segment serves three primary markets:pharmaceutical and healthcare; food and beverage; and specialty chemical. 

Net sales for the first quarter of 2001 increased to $25.9 million, compared to netsales of $9.9 million in the first quarter of 2000, primarily as a result of recording afull quarter of sales in 2001. On a pro forma basis, net sales were up approximately $0.6million for 2001 compared to 2000. The improvement was generated primarily from higher PETbeverage container volume, partially offset by the impact of unfavorable foreign exchangetranslation rates. Excluding the impact of unfavorable foreign exchange translation rates,2001 net sales were up 15 percent compared to pro forma 2000 net sales. EBIT for thesegment was $1.6 million for the first quarter of 2001, an increase of $0.3 million frompro forma EBIT for the first quarter of 2000.  This increase was primarily due tohigher PET beverage container volume, offset in part by lower margins in the specialtychemical sector. Operating margin increased by approximately 1.1 points for the firstquarter 2001 compared to pro forma 2000 results. This increase resulted from improvedmargins in the food and beverage sector partially offset by lower margins in the specialtychemical sector. 

 

*Forest Products/Land Development*

Increase/(Decrease)*(in millions)*
2001
2000
$
%Net sales$0.3$ 2.3 $(2.0) (87.0)%EBIT -2.0 (2.0) (100.0)%Operating margin -87.0% - (100.0)%
 

-22-

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS, continued**

Chesapeake's Forest Products/Land Development segment consists of Delmarva Properties,Inc. and Stonehouse Inc. The Company markets land that it believes is more valuable whenused as developed property than as timberland. Land development sales consist of lot salesand the sale of bulk acreage which third parties develop for both residential andcommercial uses. Net sales and EBIT for the first quarter of 2001 both decreased $2.0million from net sales and EBIT reported for the first quarter of 2000 due to a shift inthe timing of land sales in 2001 as a result of the Company's effort to realize thegreatest value from its remaining land holdings. 
Liquidity and Financial Position- Net cash provided by operating activities in the first quarter of    2001 of $2.7 million compared to net cash provided by operating activities of $21.3    million in the first quarter of 2000. The decrease in first quarter 2001 net cash flow    from operations compared to first quarter 2000 is due primarily to an increase in working    capital offset, in part, by an increase in EBITDA. EBITDA is a measure of internal cash    flow which combines earnings before interest, income taxes and non-cash charges for    depreciation and amortization, and excludes the effects of nonrecurring items.  EBITDA from continuing operations for the    first quarter of 2001 was $25.4 million, 40 percent higher than EBITDA in the first    quarter of 2000 of $18.1 million.  This increase in EBITDA was due primarily to the timing of acquisitions in    2000. 

Cash provided by investing activities in the first quarter of2001 of $224.5 million compared to the prior year's first quarter cash used in investingactivities of $352.3 million. The cash provided by investing activities in the firstquarter of 2001 primarily reflects the proceeds from the sale of the Tissue JV, while thecash used in investing activities in the first quarter of 2000 primarily reflects the cashused for acquisitions. 

Cash used in financing activities in the first quarter of 2001was $135.1 million, compared to cash provided by financing activities of $40.7 million inthe first quarter of 2000. Cash used in financing activities in the first quarter of 2001consists primarily of payments on the Company's long term debt and credit facilities usingthe proceeds of the sale of the Tissue JV. Cash provided by financing activities in thefirst quarter of 2000 is due to borrowings under the Company's credit facilities used tofund acquisitions and common stock repurchases. Chesapeake's net debt-to-capital ratio was46 percent at April 1, 2001, compared to 53 percent at December 31, 2000. - The Company paid cash dividends of $0.22 per share in the first quarter of both 2001 and    2000. In addition, during the first quarter of 2000, the Company purchased approximately    950,000 shares of its common stock in open market transactions at an average price of    $26.40 per share. The Company completed its share repurchase program as of December 31,    2000. 

As a result of the taxable gain on the sale of the Tissue JV, the deferred income taxbalance decreased and the income taxes payable increased by approximately $185 million.(See Note 4 for additional information on the sale of the Tissue JV.)

On February 23, 2000, Chesapeake terminated a bank commitment to make available to theCompany a $1.075 billion senior credit facility (which commitment had been obtained inconnection with Chesapeake's efforts to acquire Shorewood), which resulted in anextraordinary charge of $1.5 million after taxes. 

 

 

 

 

-23-

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS, continued**

On June 15, 2000, Chesapeake entered into a five-year $450 million senior creditfacility which has subsequently been amended. During the third quarter of 2000, theCompany determined that certain covenants in its $450 million bank credit facilityrelating to leverage and interest coverage needed to be addressed, primarily as a resultof operating losses in the former Merchandising and Specialty Packaging segment. TheCompany received a waiver of these covenants for the fourth quarter of 2000. In February2001, the bank credit facility was amended to change certain financial covenants for 2001.In addition, under the amended credit facility, any proceeds in excess of customary costsreceived by the Company from the sales of its discontinued operations, other than itsinterest in the Tissue JV, must be used to permanently reduce the credit facility by up to$200 million. The credit facility must be reduced to $250 million by June 30, 2001, inorder to avoid more stringent covenants, including the suspension of dividend payments.The Company expects to apply the net proceeds from the sales of the stock of ChesapeakePackaging Co. and the U.S. Display assets of Chesapeake Display and Packaging Co.,together with a portion of the proceeds of the sale of its interest in the Tissue JV, tosatisfy this requirement and avoid the more stringent covenants.  The Companybelieves the amendment will have a favorable impact on interest rates, compared to thefourth quarter 2000 waiver period, if certain improved leverage ratios are achieved (whichit expects to achieve by applying the proceeds from the planned sales of discontinuedoperations to reduce debt), and that adequate financial resources will be available tosupport anticipated long-term and short-term capital needs and commitments. The Companyhas met all of its debt covenants for the first quarter of 2001 and expects to meet itsdebt covenants for the remainder of the year.

On March 28, 2001, Field Group entered into a 20 million British pound multi-currencyline of credit which replaced a previous multi-currency revolving credit facilityagreement dated November 20, 2000.  Under the new agreement, the Company is requiredto maintain on deposit with the bank not less than $8 million until June 30, 2001. After this date, the release of cash will be at the bank's discretion,  based on thefinancial performance and capital structure of Field Group.

**Outlook**

The following statements reflect management's outlook for the Company for itscontinuing operations as of April 20, 2001. Except as otherwise indicated, theforward-looking statements do not reflect the potential impact of any acquisitions,divestitures, other than the dispositions of discontinued operations, or other structuralchanges in the Company's continuing operations that may be completed during 2001 orfluctuations in foreign exchange translation rates, primarily from British pounds andEuros to United States dollars. 

The following statements are subject to certain risks and uncertainties, includingthose listed under the caption "Forward-Looking Statements." For continuingoperations for the full year 2001, the Company expects:- Revenue in the range of $820 million to $870 million. 
- EBITDA in the range of $130 million to $140 million. 
- Capital spending in the range of $50 million to $55 million. 
- Depreciation of approximately $50 million to $55 million. 
- Goodwill amortization of approximately $15 million. 
- Earnings from continuing operations for the full year 2001 in the range of $1.20 to    $1.40 per diluted share. 

**Accounting Pronouncements**

See Note 2 to the Consolidated Financial Statements.

 

 

-24-

**Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS, continued**

**Forward-Looking Statements**

Forward-looking statements in the foregoing Management's Discussion and Analysis ofFinancial Condition and Results of Operations include statements that are identified bythe use of words or phrases including, but not limited to, the following: "willlikely result," "expected to," "will continue," "isanticipated," "estimated," "project," "believe," andwords or phrases of similar import. Changes in the following important factors, amongothers, could cause Chesapeake's actual results to differ materially from those expressedin any such forward-looking statements: the ability of the Company to completedivestitures in a timely manner and on satisfactory terms; foreign exchange ratemovements; competitive products and pricing; production costs, particularly for rawmaterials such as folding carton and plastics materials; fluctuations in demand;governmental policies and regulations affecting the environment; interest rates; theability of the Company to remain in compliance with its debt covenants; and other risksthat are detailed from time to time in reports filed by the Company with the Securitiesand Exchange Commission. 

** Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**
There are no material changes to the        disclosure on this matter made in the Company’s Annual Report on Form 10-K for the        year ended December 31, 2000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-25-

**PART II**

Item 1.    Legal Proceedings

On March 26, 2001, the Securities and Exchange Commission (the"SEC") issued a formal order that a private investigation be conductedconcerning matters related to the Corporation's financial reporting. The investigation isbased on SEC inquiries arising out of the Corporation's restatements and revision ofearnings in 2000 related to its U.S. Display business. The Corporation is cooperating withthe SEC in the investigation and the outcome of the investigation cannot yet bedetermined. 

In addition, reference is made to Note 8 of the Notes to ConsolidatedFinancial Statements included herein.

Item 4.    Submission of Matters to a Vote of SecurityHolders

At the Annual Meeting of Stockholders on April 25, 2001, the followingbusiness was transacted:

(1)    All nominees for election to the Board ofDirectors were elected.
Number of Shares ForNumber of Shares Authority WithheldThomas H. Johnson11,836,251450,397Frank S. Royal11,251,1151,035,533Hugh V. White, Jr.11,992,946293,702
Item 6.     Exhibits and Reports on Form 8-KExhibits:

2.1      Stock Purchase Agreement by and    between Chesapeake Corporation and Inland Paperboard and Packaging, Inc., dated April 5,    2001

2.2      Asset Purchase Agreement by and    between CorrFlex Graphics, LLC and Chesapeake Display and Packaging Company, dated April    20, 2001

3.1      Amended and Restated Bylaws of    Chesapeake Corporation, dated April 25, 2001

10.1    Second amendment to service agreement with Mark    Ennis, dated April 25, 2001
Reports on Form 8-K:

None.

 

 

 

-26-

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 

CHESAPEAKE CORPORATION

(Registrant)

 

 

Date:  May 4, 2001
 

BY: /s/ Christine R. Vlahcevic

Christine R. Vlahcevic

Controller

(principal accounting officer)

 

BY: /s/ William T. Tolley

William T. Tolley

Senior Vice President – Finance & Chief Financial Officer

(principal financial officer)

 

 

 

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