Chesapeake Corporation 2000 Annual Report UBLIC "-//IETF//DTD HTML 2.0//EN">

 Business Segment Highlights 

The following tables set forth net sales and earnings before interest and taxes andnonrecurring items ("EBIT"), by continuing business segment. The pro formainformation (unaudited) is presented as if all 2000, 1999 and 1998 acquisitions anddispositions had occurred as of the beginning of the periods presented. 

| *(in millions)* | As Reported
Pro Forma2000
Net Sales
EBIT
Net Sales
EBIT- Paperboard Packaging
**$547.1**$50.7**$678.3**$62.5- Plastic Packaging
**86.4**7.2**101.8**7.5Forest Products/Land Development**21.2**15.5**21.2**15.5Corporate/Other**-**(17.4)**-**(17.4)Total Continuing Operations**$654.7**$56.0**$801.3**$68.11999- Paperboard Packaging

$353.8
$25.5
$699.8
$53.7- Plastic Packaging

-
-
91.1
7.0Forest Products/Land Development
42.9
16.4
18.3
12.9Corporate/Other
-
(18.3)
-
(18.3)Total Continuing Operations
$396.7
$23.6
$809.2
$55.31998- Paperboard Packaging

$44.5
$(2.1)
$677.1
$46.3- Plastic Packaging

-
-
85.9
3.7Forest Products/Land Development
44.8
16.3
7.2
7.1Corporate/Other
-
(12.7)
-
(12.7)Total Continuing Operations
$89.3
$1.5
$770.2
$44.4
 
* 
Graph:Pro Forma Net Sales by Segment (millions of $)**2000
1999
1998- Paperboard Packaging
**678.3
699.8
677.1- Plastic Packaging
**101.8
91.1
85.9Forest Products/Land Development**21.2
18.3
7.2      Total    **801.3
809.2
770.2      Graph:    Pro Forma EBIT by Segment (millions of $)**2000
1999
1998- Paperboard Packaging
**62.5
53.7
46.3- Plastic Packaging
**7.5
7.0
3.7Forest Products/Land Development**15.5
12.9
7.1Corporate/Other**(17.4)
(18.3)
(12.7)      Total    **68.1
55.3
44.4      Graph:    Pro Forma EBITDA by Segment (millions of $)**2000
1999
1998- Paperboard Packaging
**113.0
107.8
94.6- Plastic Packaging
**18.4
18.9
14.9Forest Products/Land Development**15.6
12.9
7.1Corporate/Other**(15.9)
(16.2)
(11.3)Total**131.1
123.4
105.3
10

Chesapeake Corporation 2000 Annual Report UBLIC "-//IETF//DTD HTML 2.0//EN">

Management's Discussion and Analysis of Financial Condition and Results of Operations 
Chesapeake's Business 
During 2000, Chesapeake Corporation (the "Company" or "Chesapeake")accelerated the implementation of its strategy of transforming the Company from a UnitedStates-based paper and forest products manufacturer to a global supplier of specialtypackaging. This strategic shift has resulted in substantial changes in the businessportfolio through acquisitions and divestitures of businesses and restructuring ofoperations. In January 2001, the Company announced its plan to sell the principalbusinesses included in its former Merchandising and Specialty Packaging segment and anagreement to sell the remainder of its former Tissue segment, consisting of a 5 percentequity interest in Georgia- Pacific Tissue, LLC (the "Tissue JV") to Georgia-Pacific Corporation. The sale of the Tissue JV interest was completed on March 2, 2001.Accordingly, these segments are now accounted for as discontinued operations (see"Discontinued Operations"). The Company has restated its results of operationsfor prior periods for this presentation. The Company's continuing operations, locatedprimarily in Europe, are in three industry segments: Paperboard Packaging, which includesField Group plc ("Field Group"), the paperboard packaging operations of BoxmoreInternational PLC ("Boxmore"), Green Printing Company, Inc. ("GreenPrinting") and First Carton Group Limited ("First Carton"); PlasticPackaging, which includes the plastic packaging operations of Boxmore; and ForestProducts/ Land Development. The businesses comprising these segments and the impact ofacquisition and divestiture activity are described hereafter. Earnings per share amountsthroughout this discussion are calculated on a diluted basis.- Earnings Overview 

The Company reported net (loss) income of $(67.3) million, or $(4.20) per share, for2000; $250.8 million, or $12.29 per share, for 1999; and $47. 3 million, or $2.23 pershare, for 1998. The net (loss) income for these periods has the following components: 
2000
1999
1998      (in millions, except per share data)    
Amount
Per Share
Amount
Per Share
Amount
Per ShareIncome (loss) from continuing operations**$ 11.2**$ 0.70
$ 46.1
$ 2.26 
$ (2.4) 
$(0.11) Discontinued operations:     (Loss) income from                        discontinued operations**(33.4) **(2.09)
10.6
0.52
36.4
1.71     (Loss) gain on disposal of                       discontinued operations**(43.6) **(2.72)
194.1
9.51
-
-Cumulative effect of accounting change**- **- **- **- 
13.3
0.63Extraordinary item**(1.5)**(0.09)
-
-
-
-     Net (loss) income**$(67.3)**$(4.20)
$250.8
$12.29
$47.3
$ 2.23
Discontinued Operations 

The Company has decided to sell the principal businesses included in its formerMerchandising and Specialty Packaging segment and has sold its 5 percent equity interestin the Tissue JV, which comprised the remainder of the former Tissue segment. Accordingly,these segments have been accounted for as discontinued operations (see Note 3 to theConsolidated Financial Statements for further detail on discontinued operations). The saleof the Tissue JV interest was completed on March 2, 2001. The Company anticipates that theremaining divestitures will be completed during the second quarter of 2001. 

Revenue for the discontinued operations was $407.4 million, $765.3 million and $861.1million for 2000, 1999 and 1998, respectively. The (loss) income from discontinuedoperations was $(33.4) million, $10.6 million and $36.4 million for 2000, 1999 and 1998,respectively. The decline in sales and operating margins for 2000 compared to 1999 was theresult of lower sales volumes and operating margins in the former Merchandising andSpecialty Packaging segment in 2000 and lower Tissue segment income after the contributionof the Company's tissue operations to the Tissue JV at the beginning of the fourth quarter1999. The decline in sales and operating margins for 1999 compared to 1998 was due to theinclusion of a full year of operating results for the former Tissue segment in 1998 versusnine months of operating results in 1999 and increased costs in 1999 due to"Y2K" expenditures. 

In 2000, the Company recorded an estimated net loss of $43.6 million after taxes on thedisposition of its discontinued operations, which included an asset valuation loss of$36.6 million related to net assets held for sale, charges of $9.4 million for severanceand other exit costs, estimated holding period operating losses of $14.1 million and a taxbenefit of $16.5 million. The Company intends to use the cash proceeds from the sale ofits discontinued operations to reduce long-term debt. 

11

Management's Discussion and Analysis of Financial Condition and Results of Operations(continued) 

In 1999, the gain on disposal of discontinued operations of $194.1 million after taxesrelated to the contribution of the Tissue segment assets to the Tissue JV. 

Accounting Change and Extraordinary Item 

The 2000 results include an after-tax charge of $1.5 million for the earlyextinguishment of debt. 

The 1998 results include an after-tax gain of $13.3 million, resulting from a change inaccounting policy to capitalize certain timber reforestation costs that were previouslyexpensed. The Company believed this policy was preferable because it achieved bettermatching of reforestation costs with the revenues realized from the eventual harvesting ofthe timber. 

Continuing Operations 

Management evaluates the Company's financial performance on a continuing operationsbasis by excluding the financial results of restructuring and other special charges andgains or losses on sales of businesses. The term "income from continuing operationsbefore nonrecurring items" excludes those adjustments and will be used throughout thefollowing discussion. 

Nonrecurring Items 

Nonrecurring items affecting the results of continuing operations in 2000, 1999 and1998 include:- In 2000, the Company incurred net costs of $2.6 million including expenses associated    with the offer to acquire Shorewood Packaging Corporation ("Shorewood") offset    by a gain on Chesapeake's sale of 4.1 million shares of Shorewood common stock and a    related tax benefit when the offer expired, which in total had no resulting impact on net    income from continuing operations on an after- tax basis. The year 2000 also included    restructuring costs of $7.7 million ($4.7 million after taxes, see    "Restructuring/Special Charges"). 
- In 1999, results included an after-tax gain of $48.0 million, or $2.35 per share, for    the sales of businesses, which included the sale of the Company's Building Products    business and approximately 278,000 acres of timberland. The year 1999 also included    restructuring and other special charges of $27.7 million ($20.1 million after taxes, see    "Restructuring/Special Charges"). 
- In 1998, the Company recorded restructuring costs of $3.2 million after taxes for    severance and exit costs related to its French packaging operations. 

Restructuring/Special Charges 

Additional details on the restructuring programs for 2000 and 1999 are as follows: 
2000 
During 2000, the Company recorded restructuring/special charges before income taxes of$7.7 million ($4.7 million after taxes) which consisted of defense fees incurred torespond to an unsolicited proposal by Shorewood to acquire Chesapeake, and severance andexit costs associated with the closure of one of its paperboard packaging facilities inthe United Kingdom. The facility to be closed was redundant after the acquisition of FirstCarton. Severance costs included planned work force reductions of approximately 160employees, which were partially offset by a pension termination benefit. The followingtable sets forth the details of the Company's restructuring/special charges recognized in2000: 
*(in millions)*
Paperboard Packaging
Corporate
Total2000 provision:     Defense fees**$ -**$5.1**$5.1     Employment reduction**1.9**-**1.9     Facility closure**0.7**-**0.7**$2.6**$5.1**$7.7
 

The Company anticipates that future savings of $2.8 million per year will be achievedthrough the closure of the paperboard packaging facility, described above. 

12

Management's Discussion and Analysis of Financial Condition and Results of Operations(continued)
1999 
In the fourth quarter of 1999, the Company recognized $38.0 million before taxes forrestructuring/special charges. Of these charges, $27.7 million ($20.1 million after taxes)related to continuing operations. 

The 1999 restructuring program for continuing operations (i) eliminated redundant andoverlapping positions in the Paperboard Packaging segment and the Corporate headquarters;(ii) recorded an impairment charge relating to the write-down of goodwill and otherlong-lived assets in the French packaging operations acquired in 1996; and (iii) recordeddefense fees incurred to respond to an unsolicited proposal by Shorewood to acquireChesapeake. At December 31, 2000, the restructuring liability established by the 1999program was utilized as planned. 
Results Of Operations 
Overview 

The following analysis of consolidated results highlights major year-to-year changes inthe Company's income statement. More detail regarding these changes is found under thecaption "Segment Review." Pro forma amounts reflect continuing operations aftergiving effect to all acquisitions and dispositions as if they had occurred at thebeginning of the periods presented. 
2000 vs. 1999 **Sales: Chesapeake's 2000 net sales from continuing operations were $654.7 million,up 65 percent compared to 1999's net sales from continuing operations of $396.7 million,reflecting the additional sales from businesses acquired in 1999 and 2000. On a pro formabasis, net sales for 2000 were $801.3 million, down one percent from pro forma net salesof $809.2 million for 1999, primarily due to unfavorable foreign exchange translationrates, partially offset by volume growth. Excluding the impact of unfavorable foreignexchange translation rates, pro forma 2000 net sales were up 9 percent compared to proforma 1999 net sales. 
**Income: Income from continuing operations in 2000 of $11. 2 million, or $0.70 pershare, compared to 1999 income from continuing operations of $46.1 million, or $2.26 pershare. Income from continuing operations before nonrecurring items was $15.9 million for2000, compared to 1999 income from continuing operations before nonrecurring items of$18.2 million. The decrease in income from continuing operations before nonrecurring itemswas primarily the result of the impact of unfavorable exchange translation rates partlyoffset by the favorable impact of the acquisitions completed during 2000. 

The operating margin from continuing operations in 2000 increased by more than twopoints compared to 1999 due to improvement in operating efficiencies. 

Selling, general and administrative ("SG& A") expenses in 2000 increased$35.6 million, or 56 percent, compared to 1999, primarily due to the acquisitions ofBoxmore, First Carton and Green Printing. However, SG& A expenses were slightlyreduced as a percent of net sales from continuing operations in 2000 as compared to 1999,as the Company continued its focus on controlling overhead costs. 

Earnings before interest and taxes ("EBIT") for 2000 from continuingoperations before nonrecurring items increased to $56.0 million from $23.6 million in1999, due primarily to the acquisitions of Boxmore, Green Printing and First Carton,offset, in part, by the impact of unfavorable foreign exchange translation rates. EBIT ona pro forma basis was $68.1 million for 2000 compared to $55.3 million for 1999,reflecting sales volume growth in the Paperboard Packaging segment and acquisitionsynergies offset, in part, by the negative impact of unfavorable foreign exchangetranslation rates. 

Interest expense from continuing operations was $28.1 million in 2000, versus $0.4million in 1999, due primarily to borrowings associated with the acquisitions completed in2000. 

Tax expense for 2000 included a $5.6 million tax benefit related to the transactioncosts associated with the offer to acquire Shorewood and restructuring/special charges.Tax expense for 1999 included $32.9 million on the gain associated with the sale of theBuilding Products business and approximately 278,000 acres of timberland and a tax benefitof $7.6 million related to restructuring costs. The Company's effective income tax ratefrom continuing operations excluding these nonrecurring items was approximately 42.9percent for 2000 compared to approximately 21.5 percent for 1999. The increase in theCompany's effective income tax rate is primarily due to goodwill and other purchaseaccounting adjustments and to the change in the mix of businesses in continuingoperations. 

13
- Management's Discussion and Analysis of Financial Condition and Results of Operations    (continued)
1999 vs. 1998 **Sales: Chesapeake's 1999 net sales from continuing operations were $396.7 million,up from 1998 net sales from continuing operations of $89.3 million, primarily due toadditional businesses acquired in 1999. Net sales from continuing operations on a proforma basis were $809.2 million in 1999, a 5 percent increase from pro forma net sales of$770.2 million in 1998, primarily due to increased volumes in pharmaceutical andhealthcare packaging sales for both Field Group and Boxmore. 
**Income: Income from continuing operations in 1999 of $46.1 million, or $2.26 pershare, compared to a 1998 loss from continuing operations of $2.4 million, or $0.11 pershare. Income from continuing operations for 1999 before nonrecurring items was $18.2million, up from net income before nonrecurring items of $0.8 million in 1998, dueprimarily to the acquisition of Field Group. 

The operating margin from continuing operations in 1999 was similar to the operatingmargin for 1998. 

 SG&A expenses from continuing operations in 1999 increased $36.8 millioncompared to 1998, primarily due to the acquisition of Field Group. However, SG&Aexpenses from continuing operations decreased as a percent of net sales in 1999, ascorporate overhead was spread over a larger sales base. 

EBIT for 1999 from continuing operations before nonrecurring items increased to $23.6million UBLIC "-//IETF//DTD HTML 2.0//EN">from $1.5 million in 1998, due primarily to the acquisition of Field Group. EBITon a pro forma basis was $55.3 million for 1999 compared to $44.4 million for 1998, dueprimarily to strong growth in pharmaceutical and healthcare packaging sales and improvedoperating efficiencies. 

1999 net interest expense from continuing operations decreased by $0.7 million from1998, due principally to the reduced level of debt in the fourth quarter of 1999. 

The Company's income taxes increased to $30.2 million in 1999, from $0.4 millionbenefit in 1998, primarily due to the change in mix of businesses included in continuingoperations and the sale of the Building Products business and timberland. **- Segment Review**
Paperboard Packaging 

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. Thissegment specializes in the design and production of cartons, containers, printed leafletsand labels and is primarily focused on three end- use sectors: pharmaceutical andhealthcare; international and premium branded products; and food and household. Thepharmaceutical and healthcare division offers pan- European integrated manufacturing anddistribution of cartons, labels and leaflets. The international and premium brandedproducts division produces packaging and labels primarily for the beverage, tobacco andconfectionery markets. The food and household division produces packaging primarily formultinational consumer products companies. 
2000 vs. 1999 
Net sales for 2000 increased by $193.3 million, or 55 percent, over 1999, due to theacquisitions in 2000 of the paperboard packaging businesses of Boxmore, First Carton andGreen Printing. On a pro forma basis, net sales were down $21. 5 million, or 3 percent,for 2000 versus pro forma results for 1999. The decrease in pro forma net sales was dueprimarily to the impact of unfavorable foreign exchange translation rates and lower foodand household packaging volumes, which were partially offset by strong tobacco packagingvolumes. Excluding the impact of unfavorable foreign exchange translation rates, pro forma2000 net sales were up 6 percent compared to pro forma 1999 net sales.- EBIT and operating margins for this segment for 2000 increased over 1999 largely due to    the addition of the Boxmore paperboard packaging business and productivity improvements in    the Field Group. On a pro forma basis, EBIT was up 16 percent for 2000 compared to 1999.    The increase in pro forma EBIT was largely due to volume growth and productivity    improvements offset, in part, by the impact of unfavorable foreign exchange translation    rates. 
*(dollars in millions)***2000***2000**
1999*
1999**
1998*
1998**Net sales**$547.1**$678.3
$353.8
$699.8
$44.5
$677.1EBIT**50.7**62.5
25.5
53.7
(2.1)
46.3Operating Margin %**9.3%**9.2%
7.2%
7.7%
(4.7)%
6.8%- * As reported
** Pro forma
14

Management's Discussion and Analysis of Financial Condition and Results ofOperations (continued)
1999 vs. 1998 
The Paperboard Packaging segment contributed $353.8 million of net sales and $25.5million of EBIT in 1999, compared to 1998 net sales and an EBIT loss of $44.5 million and$2.1 million, respectively. The change in as reported sales and EBIT is due primarily tothe acquisition of Field Group. Pro forma 1999 net sales were $699.8 million, compared topro forma 1998 net sales of $677.1 million. On a pro forma basis, 1999 EBIT was $53.7million compared to 1998 EBIT of $46.3 million. The pro forma net sales and EBIT increaseswere the result of lower volume and selling prices experienced late in 1998, particularlyin Field Group's export businesses. 

Plastic Packaging 

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 and EBIT for the segment were $86.4 million and $7.2 million for 2000,respectively. On a pro forma basis, net sales and EBIT were up approximately 12 percentand 7 percent, respectively, for 2000, compared to 1999. These improvements were generatedfrom volume increases and improved production efficiencies, partially offset by the impactof unfavorable foreign exchange translation rates. Excluding the impact of unfavorableforeign exchange translation rates, pro forma 2000 net sales were up over 30 percentcompared to pro forma 1999 net sales. 
*(dollars in millions)***2000***2000**
1999**Net sales**$86.4**$101.8
$91.1EBIT**7.2**7.5
7.0Operating Margin %**8.3%**7.4%
7.7%- * As reported
** Pro forma
Forest Products/Land Development 

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. The Company currently owns approximately30,000 acres of land which it plans to monetize over the next few years. Land developmentsales consist of lot sales and the sale of bulk acreage which third parties develop forboth residential and commercial uses. As part of the Company's strategy to divest cyclicalbusinesses and monetize land holdings, during 1999 the Company disposed of its BuildingProducts business, approximately 278,000 acres of timberland, and Stonehouse Inc.'sinvestment in a real estate development joint venture with Dominion Capital Inc. 
2000 vs. 1999 
Net sales and EBIT for 2000 were $21.2 million and $15.5 million, respectively,compared to 1999 net sales and EBIT of $42.9 million and $16.4 million, respectively. Thefluctuations in sales and EBIT reflect the impact of the sale of 278,000 acres of theCompany's timberland and its Building Products business in the third quarter of 1999,offset, in part, by increased bulk land sales. 
*(dollars in millions)***2000*
1999*
1998*Net sales**$21.2
$42.9
$44.8EBIT**15.5
16.4
16.3Operating Margin %**73.1%
38.2%
36.4%- * As reported
1999 vs. 1998 
Net sales for 1999 were $42.9 million, down 4 percent from 1998's net sales of $44.8million, while EBIT of $16.4 million for 1999 was up one percent from 1998 EBIT, as highermargin bulk land sales were offset in part by the impact of the sale of 278,000 acres oftimberland and the Building Products business in the third quarter of 1999. 

15

Management's Discussion and Analysis of Financial Condition and Results ofOperations (continued)
Liquidity and Capital Resources 
Management assesses the Company's liquidity in terms of its overall ability to generatecash to fund its operating and investing activities. Significant factors affecting themanagement of liquidity are cash flows from operating activities, capital expenditures,access to bank lines of credit and the Company's ability to attract long-term capital withsatisfactory terms. 

Capital Structure 

Chesapeake uses financial markets worldwide for its financing needs. The Company is aparty to various bank credit facilities, which are discussed in Note 7 to the ConsolidatedFinancial Statements. These credit facilities give Chesapeake the financing flexibility itneeds to satisfy anticipated future funding requirements. 

Chesapeake's total capitalization (consisting of total debt net of cash, deferred taxliabilities and stockholders' equity) was $1,226.0 million at the end of 2000, compared to$777.1 million at the end of 1999. The year-end ratio of total debt net of cash to totalcapital was 53.1 percent for 2000, compared to 1.2 percent for 1999. The change in theratio from 1999 to 2000 reflects the cash received from the sale of timberland and theBuilding Products business, the cash distribution received from the Tissue JV in 1999 andthe use of cash to fund acquisitions and share purchases in 2000. Chesapeake's targetlong-term debt-to-total-capital ratio is in the range of 40 percent to 50 percent.- The Company paid cash dividends of $0.88 per share in 2000 and 1999, compared to    dividends of $0.82 per share in 1998. In addition, during 2000, the Company purchased    approximately 2.5 million shares of its common stock, or about 14 percent of the    outstanding shares at December 31, 1999, for an average price of approximately $28.50 per    share. The Company has substantially completed its share repurchase program as of December    31, 2000. At the end of 2000, the Company had 15.1 million shares outstanding. (See Note    11 to the Consolidated Financial Statements for more details on capital stock and    additional paid-in capital.) Stockholders' equity at December 31, 2000, was $349.2    million, or $23.13 per share, down $8.40 per share compared to year-end 1999, primarily    due to foreign exchange translation and 2000 operating losses from discontinued    operations. The market price for Chesapeake's common stock ranged from a low of $16.75 per    share to a high of $35.75 per share in 2000, with a year-end price of $20.56 per share.
*Graph:*Capital Structure (millions of $)**2000
1999
1998Stockholders' Equity**349.2
551.7
443.3Deferred Taxes**226.2
216.3
74.3Total Debt Net of Cash**650.6
9.1
213.8Total**1,226.0
777.1
731.4 *Graph:*Common Stock Price Range & Stockholders' Equity Per Share    (dollars)**2000 
1999
1998Common Stock Price Range**16.75-35.75
25.75-38.63
31.75 - 41.75Stockholders' Equity Per Share**23.13
31.53
20.71
Bank Facilities 

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 the same date, the Company enteredinto a six-month $250 million senior credit facility to satisfy short-term liquidityrequirements.16

Management's Discussion and Analysis of Financial Condition and Results of Operations(continued)- On June 15, 2000, Chesapeake terminated its six-month $250 million senior credit    facility and entered into a five-year $450 million senior credit facility, which has been    subsequently amended. Interest accrues on the outstanding balance of the loan based upon    Chesapeake's choice of the following rates: (i) an alternative base rate, which is equal    to the higher of the administrative agent's base rate or the federal funds rate plus    one-half of one percent, plus a margin determined by reference to the Company's leverage    ratio; or (ii) LIBOR, based on U.S. dollars, British pounds or Euros, plus a margin, based    on the Company's leverage ratio. The Company is required to pay a loan guarantee fee,    which varies based on the Company's leverage ratio, on the outstanding loan note balance    issued in connection with the Boxmore and First Carton acquisitions. In addition, the    Company is required to pay a fee based on the total facility commitment and the Company's    leverage ratio. The facility has customary covenants, including debt, stock repurchase,    capital expenditure and acquisition limits, interest coverage, minimum EBITDA and a    minimum net worth requirement. The facility is collateralized by a pledge of the    inventory, receivables and intangible assets of the Company's U. S. subsidiaries, and the    obligations of the Company's foreign subsidiaries under this facility are collateralized    by a pledge of their stock. 

During the third quarter of 2000, the Company determined that certain covenants in its$450 million bank credit facility relating to leverage and interest coverage needed to beaddressed, primarily as a result of operating losses in the former Merchandising andSpecialty Packaging segment. The Company received a waiver of these covenants for thefourth quarter of 2000. In February 2001, the bank credit facility was amended to changecertain financial covenants for 2001. In addition, under the amended credit facility, anyproceeds in excess of customary costs received by the Company from the sales of itsdiscontinued operations, other than its interest in the Tissue JV, must be used topermanently reduce the credit facility by up to $200 million. The credit facility must bereduced to $250 million by June 30, 2001, in order to avoid more stringent covenants,including the suspension of dividend payments. The Company believes the amendment willhave a favorable impact on interest rates, compared to the fourth quarter 2000 waiverperiod, if certain improved leverage ratios are achieved (which it expects to achieve byapplying the proceeds from the planned sales of discontinued operations to reduce debt),and that adequate financial resources will be available to support anticipated long-termand short-term capital needs and commitments. 

Credit Ratings 

In the fourth quarter of 2000, Moody's Investor Services lowered its implied rating onChesapeake senior debt from Ba1 to Ba2. The Company's senior debt rating from Standard& Poor's was lowered from BB+ to BB in January 2001. 

Chesapeake's long-term financing strategy targets a capital structure that isconsistent with achieving an "investment grade" senior debt rating. This capitalstructure would allow Chesapeake's stockholders to enjoy the benefits of prudent financialleverage while ensuring ready access to capital markets. The Company expects to improveits capital structure, and ultimately its credit ratings, by applying the proceeds fromthe sale of discontinued operations and cash flows from operations to reduce debt. 

Cash Flow- Net cash provided by operating activities in 2000 of $31.1 million compared to net cash    used in operating activities of $8.1 million in 1999. The increase in 2000 net cash flow    from operations compared to 1999 is due primarily to reduced working capital usage offset,    in part, by a decrease in EBITDA (including both continuing and discontinued operations).    EBITDA is a measure of internal cash flow which combines earnings before interest, income    taxes and non-cash charges for depreciation, cost of timber harvested and amortization,    and excludes the effects of restructuring charges and accounting changes. EBITDA for 2000    was $89.8 million, 47 percent lower than 1999's EBITDA of $169.1 million. This decrease in    EBITDA was due primarily to timing of acquisitions and divestitures in both years and 2000    losses in the former Merchandising and Specialty Packaging segment. 

17

Management's Discussion and Analysis of Financial Condition and Results of Operations(continued)

Cash used in investing activities in 2000 of $475.2 million compared to the prioryear's cash provided by investing activities of $414.2 million. The cash used in investingactivities in 2000 primarily reflects the cash used for acquisitions, while cash providedby investing activities in 1999 primarily reflects the proceeds received from the sale ofbusinesses, net of cash used for acquisitions in 1999. 

Cash provided by financing activities in 2000 was $168.7 million compared to cash usedin financing activities of $161.9 million in 1999. Cash provided by financing activitiesin 2000 consists primarily of net borrowings on the Company's credit facilities to fundacquisitions and UBLIC "-//IETF//DTD HTML 2.0//EN">to purchase approximately 2.5 million shares of the Company's commonstock at a net cost of $71.3 million. In 1999, the Company used $137.1 million to purchase4.2 million shares of its common stock. (See Note 7 to the Consolidated FinancialStatements for additional information regarding long-term debt.) 

Acquisitions 
2000 
On October 10, 2000, the Company completed the acquisition of First Carton, apaperboard packaging supplier for the premium branded food and drinks markets, forapproximately $69 million plus the assumption of $50 million of debt. First Carton hasoperations in six locations in the United Kingdom and Germany. The purchase price for theacquisition was paid through borrowings under the Company's existing senior creditfacility and the issuance of loan notes. 

On February 24, 2000, the Company completed its acquisition of substantially all of theoutstanding capital shares of Boxmore, a paperboard and plastic packaging companyheadquartered in Belfast, Northern Ireland. The acquisition was effected through a tenderoffer by Chesapeake UK Acquisitions II PLC ("Chesapeake UK II"), a wholly-ownedsubsidiary of Chesapeake, for all of the outstanding capital shares of Boxmore at apurchase price of L2.65 per share. The tender offer represented a value of approximately$319 million for Boxmore's outstanding share capital. The purchase price for Boxmore'scapital shares was paid in cash of approximately $234 million and approximately $85million in unsecured loan notes issued to certain Boxmore shareholders by Chesapeake UKII. 

During 2000, the Company also completed the acquisitions of Lithoprint HoldingsLimited, a Scottish supplier of wet-applied labels and commercial printing; GreenPrinting, a specialty packaging producer and printer in Lexington, North Carolina; and acorrugated container facility in Warren County, North Carolina, and finalized theformation of a joint venture with G-P, in which the two companies combined theirlitho-laminated graphic packaging businesses. The Warren County facility and thelitho-laminated joint venture are included in the Company's former Merchandising andSpecialty Packaging segment that is accounted for as a discontinued operation. 
1999 
On October 22, 1999, the Company completed the acquisition of Consumer PromotionsInternational, Inc. ("CPI"), a designer and manufacturer of permanentpoint-of-sale displays. CPI, based in Mount Vernon, New York, has operations in the UnitedStates, the United Kingdom, France and Spain. CPI is included in the former Merchandisingand Specialty Packaging segment that is accounted for as a discontinued operation. 

On March 18, 1999, Chesapeake completed its acquisition of substantially all of theoutstanding capital shares of Field Group, a paperboard packaging company headquartered inthe United Kingdom. The acquisition was effected through a tender offer by Chesapeake UKAcquisitions PLC, a wholly-owned subsidiary of Chesapeake, for all of the outstandingcapital shares of Field Group at a purchase price of L3.60 per share. The purchase priceof approximately $373.0 million was funded through a combination of approximately $316.0million in borrowings under a credit facility, $22.0 million in unsecured loan notesissued to certain Field Group shareholders and $35.0 million in cash. 

During 1999, Field Group acquired Berry's (Holding) Limited, one of Ireland's largestsuppliers of printed pharmaceutical leaflets and self-adhesive labels, and formed a jointventure with one of Spain's leading printing groups, Mateu Cromo Artes Graphicas S.A. 

18

Management's Discussion and Analysis of Financial Condition and Results of Operations(continued)

2001 Outlook 

These forward-looking statements reflect management's view of the Company's outlook forits continuing operations in 2001 as of February 2, 2001. Except as otherwise indicated,the forward-looking statements do not reflect the potential impact of any acquisitions,divestitures or other structural changes in the Company's continuing operations that maybe completed during 2001 or fluctuations in foreign exchange translation rates, primarilyfrom British pounds and the Euro to U.S. dollars. 

The following statements are subject to certain risks and uncertainties, includingthose listed under the caption "Forward-Looking Statements." The Companyexpects:- Revenue from continuing operations to be in the range of $820 million to $870 million. 
- EBITDA from continuing operations is expected to be in the range of $130 million to $140    million. 
- Capital spending from continuing operations is expected to be in the range of $50    million to $60 million. 
- Depreciation from continuing operations is expected to be approximately $50 million to    $55 million. 
- Goodwill amortization from continuing operations is expected to be approximately $15    million. 
- Income from continuing operations is expected to be in the range of $1.20 to $1.40 per    share. 

There are no individually significant planned capital spending initiatives in 2001.Projected 2001 capital expenditures are expected to be funded with internally generatedcash. All 2001 capital projects are expected to be consistent with Chesapeake's strategyof expanding the Paperboard Packaging and Plastic Packaging segments, reducing costs andfocusing on projects that are expected to generate a return on investment that exceeds theCompany's cost of capital. 

Seasonality 

Due to the shift in the Company's business portfolio, the Company's earnings stream isseasonal, with peak operational activity during the third and fourth quarters of the year.

Risk Management- Chesapeake continually evaluates risk retention and insurance levels for product    liability, property damage and other potential exposures to risk. The Company devotes    significant effort to maintaining and improving safety and internal control programs,    which are intended to reduce its exposure to certain risks. Management determines the    amount of insurance coverage to purchase and the appropriate amount of risk to retain    based on the cost and availability of insurance and the likelihood of a loss. Management    believes that the current levels of risk retention are consistent with those of comparable    companies in the industries in which Chesapeake operates. There can be no assurance that    Chesapeake will not incur losses beyond the limits, or outside the coverage, of its    insurance. However, the Company's liquidity, financial position and profitability are not    expected to be materially affected by the levels of risk retention that the Company    accepts. 

Chesapeake's financial results could be affected by changes in foreign exchangetranslation rates or weak economic conditions in the foreign markets in which its productsare manufactured or sold. The Company's currency exposures are cash, debt and foreigncurrency transactions denominated primarily in the British pound and the Euro. Chesapeakemanages its foreign currency exposures primarily by funding certain foreign currencydenominated assets with liabilities in the same currency and, as such, certain exposuresare naturally offset. 

As part of managing its foreign currency exposures, Chesapeake enters into foreigncurrency forward exchange contracts. These agreements are generally used to fix the localcurrency cost of purchased goods or services or selling prices denominated in currenciesother than the local currency. The use of these agreements allows Chesapeake to reduce itsoverall exposure to exchange rate fluctuations, as the gains and losses on the agreementssubstantially offset the gains and losses on the liabilities being hedged. Forwardexchange agreements are viewed as risk management tools, involve little complexity and, inaccordance with Company policy, are not used for trading or speculative purposes.Chesapeake is not a party to any leveraged derivatives. At December 31, 2000, theCompany's forward exchange agreements were not material to its operations or financialposition. 

19
- Management's Discussion and Analysis of Financial Condition and Results of Operations    (continued)

The Company has entered into interest rate swaps to convert floating interest rate debtto fixed rate debt. Amounts currently due to or from interest swap counterparties arerecorded in interest expense in the period in which they accrue. The related amountspayable to, or receivable from, the counterparties are included in other accruedliabilities. At December 31, 2000, the Company had interest rate swap agreementsoutstanding with a notional principal amount of $154.7 million and a fair market value ofapproximately $(1.9) million. The fair value of interest rate agreements was determinedusing a model that estimates fair values at market rates, or was based upon quoted marketprices for similar agreements with similar maturities. A sensitivity analysis to measurepotential changes in the market value of the swap contracts resulting from a change ininterest rates indicated that a one percentage point increase or decrease in interestrates would have impacted the net aggregate market value of these instruments by $(3.6)million and $3.7 million, respectively, at December 31, 2000.- At December 31, 2000, 50.8 percent of the Company's debt portfolio consisted of variable    rate debt (net of the debt that is subject to interest rate swaps). A sensitivity analysis    to measure potential changes in the interest expense from a change in interest rates    indicated that a one percentage point change in interest rates at December 31, 2000, would    affect the Company's annual interest expense by $3.5 million. At December 31, 1999, the    Company's debt portfolio consisted mostly of fixed rate instruments. 

The Company's cash position includes amounts denominated in foreign currencies. TheCompany manages its worldwide cash requirements considering available funds held by itssubsidiaries and the cost effectiveness with which these funds can be accessed. Therepatriation of cash balances from some of the Company's subsidiaries could have adversetax consequences. 

Conversion to the Euro Currency 

On January 1, 1999, certain member countries of the European Union established fixedconversion rates between their existing sovereign currencies and adopted the EuropeanUnion's common currency ("Euro") as their new common legal currency. For athree-year transition period, transactions can be conducted in both the Euro and thelegacy currencies. After June 30, 2002, the Euro will be the sole legal tender of theparticipating countries. Issues facing the Company as a result of conversion to the Euroinclude converting information technology systems, reassessing currency risk, negotiatingand amending contracts, and processing tax and accounting records. The Company iscontinuing to address these issues and does not expect the conversion to the Euro to havea material effect on the Company's financial position or results of operations. 

Accounting Developments 

As of July 1, 2000, the Company adopted Financial Accounting Standards Board("FASB") Interpretation No. 44, "Accounting for Certain TransactionsInvolving Stock Compensation," an interpretation of APB Opinion No. 25 ("FIN44"). FIN 44 clarifies the application of APB Opinion No. 25 as to (a) the definitionof "employee" for purposes of applying APB Opinion No. 25, (b) the criteria fordetermining whether a plan qualifies as a noncompensatory plan, (c) the accountingconsequence of various modifications to the terms of a previously fixed stock option oraward and (d) the accounting for an exchange of stock compensation awards in a businesscombination. FIN 44 did not have a material impact on the Company's financial results. 

 In December 1999, the Securities and Exchange Commission ("SEC") issuedStaff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"("SAB 101"), which provides guidance on the recognition, presentation anddisclosure of revenue in financial statements filed with the SEC. SAB 101 outlines thebasic criteria that must be met to recognize revenue and provides guidance for disclosuresrelated to revenue recognition policies. SAB 101 did not have a material impact on theCompany's financial statements. 

In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133("SFAS 133"), "Accounting for Derivative Instruments and HedgingActivities" and in June 1999 and June 2000, respectively, its amendments, Statements137 and 138. The Company is required to adopt the new Statement effective January 1, 2001.SFAS 133, as amended, requires the Company to record all derivative instruments on thebalance sheet as assets or liabilities, measured at fair market value. Derivatives thatare not hedges must be adjusted to fair value through income. If the derivative is ahedge, depending on the nature of the hedge, changes in the fair value of the derivativeare to be offset against the change in fair value of the hedged assets, liabilities orfirm commitments through earnings or recognized in other comprehensive income until thehedged item is recognized in earnings. 

20
- Management's Discussion and Analysis of Financial Condition and Results of Operations    (continued)

The ineffective portion of a derivative's change in fair value is to be immediatelyrecognized in earnings. The new accounting standard will not significantly change theCompany's approach to managing foreign currency or interest rate risks as discussed under"Risk Management." Chesapeake hedges against these exposures using forwardexchange contracts and interest rate swaps. Any contracts that have been designated ashedges of anticipated future cash flows will be marked to market through othercomprehensive income until such time as the related forecasted transactions affectearnings. Based on the Company's derivatives positions at December 31, 2000, the Companyestimates that, upon adoption, it will report a decrease in other comprehensive income of$1.9 million. 

Environmental 

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 U.S. Environmental Protection Agency ("EPA") has given notice of itsintent to list the lower Fox River in Wisconsin on the National Priorities List underCERCLA and has identified the Company's subsidiary, Wisconsin Tissue Mills Inc., now WTMICompany ("WT"), as a PRP. 

 Except for the Fox River matter, the Company has not been identified as a PRP atany CERCLA-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.

21
- Management's Discussion and Analysis of Financial Condition and Results of Operations    (continued)

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. 

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. 

22
- Management's Discussion and Analysis of Financial Condition and Results of Operations    (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. 

Other Litigation 

The Company is a party to various legal actions, including those which are ordinary andincidental to its business. (See Note 14 to the Consolidated Financial Statements.) 

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 SEC. 

23

Consolidated Balance Sheets 
*December 31,*      (in millions)    **2000
1999AssetsCurrent assets:     Cash and cash equivalents**$ 31.2
$ 306.6     Accounts receivable (less allowance    of $3.5 and $4.1)**126.4
170.5     Inventories**94.5
106.7     Income tax receivable**31.7
1.3     Deferred income taxes**15.6
22.4     Other**8.9
3.4          Total    current assets**308.3
610.9Property, plant and equipment:     Plant sites and buildings**148.7
101.0     Machinery and equipment**301.5
407.3     Construction in progress**5.0
12.1**455.2
520.4     Less accumulated depreciation**83.0
164.7          Net    property, plant and equipment**372.2
355.7Goodwill (less accumulated amortization of $17.2 and $9.8)**554.8
296.4Net assets of discontinued operations**225.8
-Other assets**79.8
110.2**$1,540.9
$1,373.2Liabilities and Stockholders' EquityCurrent liabilities:     Accounts payable**$ 110.2
$ 92.5     Accrued expenses**98.2
111.6     Current maturities of long-term debt**47.1
91.3     Income taxes payable**13.0
20.6     Dividends payable**3.3
3.9          Total    current liabilities**271.8
319.9Long-term debt**634.7
224.4Other long-term liabilities**43.4
44.4Postretirement benefits other than pensions**15.6
16.5Deferred income taxes**226.2
216.3          Total    liabilities**1,191.7
821.5Stockholders' equity:     Common stock, $1 par value;    authorized, 60 million shares; outstanding,15.1               million and 17.5 million    shares**15.1
17.5     Unearned compensation**(2.8)
(4.8)     Accumulated other comprehensive loss**(61.3)
(7.2)     Retained earnings**398.2
546.2          Total    stockholders' equity**349.2
551.7          Total    liabilities and stockholders' equity**$1,540.9
$1,373.2  The accompanying Notes to Consolidated Financial Statements are an integral part of the  financial statements.
24 

Consolidated Statements of Income and Comprehensive Income 
*For the years ended December 31,*      (in millions, except per share data)    **2000
1999
1998- Income:
Net sales**$ 654.7
$396.7
$ 89.3Cost of products sold**508.3
317.0
70.4Selling, general and administrative expenses**99.0
63.4
26.6Restructuring/special charges**7.7
27.7
3.2     Income (loss) from operations**39.7
(11.4)
(10.9)Gain on sale of businesses**-
80.8
-Other income, net**6.0
7.3
9.2     Income (loss) from continuing    operations before interest, taxes, cumulative effect of accounting change, and    extraordinary item45.7
76.7
(1.7)Interest expense, net**(28.1)
(0.4)
(1.1)     Income (loss) from continuing    operations before taxes, cumulative effect of  accounting change, and extraordinary    item17.6
76.3
(2.8)Income tax expense (benefit)**6.4
30.2
(0.4)     Income (loss) from continuing    operations before cumulative effect of accounting change and extraordinary item**11.2
46.1
(2.4)Discontinued operations:     (Loss) income from discontinued    operations net of tax (benefit) expense of  $(15.3), $13.4 and $22.2**(33.4)
10.6
36.4     (Loss) gain on disposal of    discontinued operations, net of tax (benefit) expense of $(16.5) and $138.8**(43.6)
194.1
-Cumulative effect of accounting change, net of income taxes    of $8.4**-
-
13.3Extraordinary item, net of income taxes of $0.9***************************************************************************************************************************************************************************************************************************************************************************************************** |
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