EXHIBIT 13.1
Portions of the
CHESAPEAKE CORPORATION
Annual Report To Stockholders
For the year ended December 31, 1993
Financial Review 1991-1993
Earnings Overview
Operationally, 1993 was a good year for Chesapeake; however, poor
sales prices, especially for kraft products, resulted in lower earnings
than in either 1992 or 1991. Increases in sales volume and productivity,
combined with effective cost control and working capital management,
enabled the Company to achieve record cash flow from operations and to
reduce its long-term debt despite lower earnings. Disposal of certain
assets, which were no longer strategic, had a net positive impact on
earnings, offset in part by a charge relating to a change in deferred taxes
resulting from the new federal tax law.
1989 1990 1991 1992
1993
Graph: Sales by Business Segment 813.1 841.2 840.5 888.4
885.0
(Millions of Dollars)
(Percent)
Kraft products 46% 43% 41% 41%
39%
Tissue 24 28 31 32
32
Packaging 30 29 28 27
29
Total 100 100 100 100
100
Chesapeake's 1993 net sales were $885.0 million, 1% less than
1992's record net sales of $888.4 million and 5% higher than 1991's net
sales of $840.5 million. For the third straight year, all three of
Chesapeake's major businesses--kraft products, tissue and packaging--
achieved record shipments. Shipments were up 11% for kraft products, 4%
for tissue and 3% for packaging over last year. Competitive pricing
1
pressures that began for the industry in 1990 continued to confront
Chesapeake for many of its products in 1993. Overall kraft product prices
were down 13% from 1992. Prices of certain kraft products began to show
some improvement near the end of 1993 and in early 1994. Tissue prices
began to improve during the second quarter, with the first of three price
increases implemented in 1993, and were up slightly compared to the
previous year. Overall packaging prices approximated those of the previous
year. Net sales of the consumer products business declined 5% as a result
of the reorganization of that business, and net sales of building products
were down 6% from 1992 because of the conveyance of the assets of the wood
treating business to Universal Forest Products, Inc. at the beginning of
the fourth quarter. Sales of Chesapeake's land development business more
than doubled over last year's depressed levels, but remain a small part of
Chesapeake's total operations. Chesapeake continued its emphasis
on specialty products that the Company believes have less price volatility
and higher growth and profitability potential than commodity products.
During 1993, sales of these specialty products remained at approximately
60% of Chesapeake's total sales. During the last three years, low selling
prices for commodity products, such as bleached market pulp and corrugating
medium, have offset much of the benefit derived from specialty product
sales.
1989 1990 1991 1992
1993
Graph: Net Income
(Millions of Dollars)
Income before cumulative
effect of accounting
changes 47.6 16.7 15.4 14.4
10.4
Net Income 47.6 16.7 15.4 4.7
10.4
2
Net income for 1993 was $10.4 million, or $.44 a share, down 28%
from $14.4 million, or $.63 a share, earned in 1992 before the cumulative
effect of accounting changes, and down 32% from $15.4 million, or $.75 a
share, earned in 1991. Included in 1993 results was an after tax gain of
$3.4 million, or $.15 share, resulting from the disposal of certain assets
as part
3
of the Company's plan to reduce assets which were no longer strategic.
These transactions included the conveyance of the assets of the Company's
wood treating business to Universal Forest Products, Inc.; the
consolidation of a packaging plant at West Des Moines, Iowa, with one in
Sandusky, Ohio; and the sale of approximately 19,000 acres of timberlands.
Net income for 1993 also includes a charge of $2.4 million, or $.10 share,
to reflect changes in deferred taxes resulting from the 1993 Revenue
Reconciliation Act. During 1992 Chesapeake adopted Statements of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and No. 109 "Accounting for Income Taxes",
which resulted in a net one-time, after-tax charge of $9.7 million, or $.46
a share. The one-time effect consisted of a transition obligation charge
of $11.9 million to accrue for the costs of future health benefits for
retirees and current employees after retirement, and an increase in net
income of $2.2 million from changing the method of accounting for income
taxes. These new accounting standards, which reduced net income for 1992
to $4.7 million, or $.17 a share, had no effect on cash flow or income
before the cumulative effect of accounting changes. See Notes 4, 6 and 13
to the consolidated financial statements for information regarding these
accounting changes.
1989 1990 1991 1992
1993
Graph: Income from Operations 102.5 58.9 58.5 52.2
44.0
(Millions of Dollars)
Income from operations for 1993 was $44.0 million, or $8.2
million less than in 1992. Increased depreciation expense of $3.7 million
in 1993 was primarily related to the first full year of depreciation on the
4
recovery boiler and related equipment completed at Chesapeake Paper
Products' West Point mill during 1992. Included in 1993's operating
expenses was approximately $2.0 million relating to the consolidation of
the Company's West Des Moines, Iowa packaging plant into its Sandusky, Ohio
facility and additional expenses related to the reorganization of the
consumer products business. Operating expenses for 1992 included
approximately $4.8 million of unusual charges related primarily to the
reorganization of the Finess consumer products business and the write-off
of some older equipment replaced by the start-up of the new recovery boiler
at Chesapeake Paper Products' West Point, Virginia mill. Also, the
shutdown of an old recovery boiler at the West Point mill before its
replacement was operational increased 1992 costs by $2.8 million during the
year. Cost of products sold increased by 1% from 1992 and represented
approximately 76% of net sales for the year. Gross profit and operating
margins were down 1% compared to the previous year. Selling, general and
administrative expenses in 1993 decreased $4.6 million, or 4%, from 1992
and remained at 12% of net sales.
1989 1990 1991 1992
1993
Graph: Interest Expense 25.9 29.4 35.4 31.4
32.0
(Millions of Dollars)
The $7.0 million increase in other income, net in 1993 resulted
primarily from the sale, in the fourth quarter, of approximately 19,000
acres of timberland holdings that were no longer strategic. The sale
produced a pre-tax gain of approximately $8 million. Interest expense for
1993, net of $.4 million of capitalized interest, was $32.0 million, while
interest expense for 1992, net of $3.7 million of capitalized interest, was
5
$31.4 million. Excluding capitalized interest, interest expense in 1993
decreased $2.7 million from 1992 due to reduced debt levels and lower
interest rates.
6
Income taxes for 1993 include a charge of $2.4 million, or $.10 a
share, to reflect changes in deferred taxes resulting from the 1993 Revenue
Reconciliation Act.
1989 1990 1991 1992
1993
Graph: EBIT + D
(Millions of Dollars)
Earnings before cumulative
effect of accounting
changes 104.4 58.5 61.5 53.9
52.7
Non-Cash charges for
Depreciation, Cost of
Timber Harvested and
Amortization 50.3 58.5 64.8 68.3
71.9
154.7 117.0 126.3 122.2
124.6
Liquidity and Capital Structure
Net cash provided by operating activities was a record $113.6 million
in 1993, 64% higher than the $69.2 million generated in 1992. EBIT + D, a
measure of internal cash flow combining earnings before interest, income
taxes and the cumulative effect of accounting changes plus noncash charges
for depreciation, cost of timber harvested and amortization, was $124.6
million for 1993, 2% more than 1992's $122.2 million. Compared to 1992,
working capital decreased $35.1 million to $87.1 million at year-end 1993
due to a decrease in inventories and an increase in accounts payable and
accrued expenses. The ratio of current assets to current liabilities was
1.9 at year-end 1993 compared to 1992's 2.4 and 1991's 2.1. Accounts
receivable at year-end 1993 decreased $ .9 million with the average
collection period up one day from last year. Inventories at the end of the
year decreased $25.5 million compared to 1992. Inventories of the treated
7
wood business, sold to Universal Forest Products at the beginning of the
fourth quarter of 1993, were $13.5 million at year-end 1992. The remaining
decrease occurred primarily in the finished goods and work-in-process
inventories of the kraft
8
products and tissue businesses. The annual inventory turnover rate
increased from 6.8 for 1992 to 7.6 for 1993. Accounts payable and accrued
expenses increased $10.5 million due to the timing of payments.
The Company is in a very capital intensive industry and generally uses
long-term debt to fund major capital expansions that cannot be funded by
internally generated funds. In 1993, increased sales volume and
productivity, combined with effective cost control, working capital
management and controlled capital spending, resulted in net cash provided
by operations exceeding capital investments by nearly $50 million. In
turn, Chesapeake was able to reduce its long-term debt by $50 million, or
13%, during 1993. In conjunction with the first quarter sale of $85
million principal amount of 7.2% debentures due March 15, 2005, the Company
entered into an interest rate swap agreement in order to increase the
portion of its debt that would bear interest at a floating rate. During
the third quarter this interest rate swap was terminated resulting in a
pre-tax gain of $1 million to Chesapeake. The gain is being recognized
over the estimated 18 month life of the swap. See Note 3 to the
consolidated financial statements for additional long-term debt
information.
1989 1990 1991 1992
1993
Graph: Capital Structure 704.4 783.7 820.8 849.6
799.7
(Millions of Dollars)
(Percent)
Long-Term Debt 43% 49% 51% 45%
42%
Deferred Taxes 13 11 10 11
12
Stockholders' Equity 44 40 39 44
9
46
Total 100 100 100 100
100
10
Chesapeake's total capitalization was $799.7 million at the end of
1993. The year end ratio of long-term debt to total capital decreased to
42% for 1993 compared to 45% for 1992 and 51% for 1991. Chesapeake's long-
term debt to total capital ratio target range is 35% to 45%. The year end
ratio of long-term debt to stockholders' equity was 91% for 1993, 103% for
1992 and 131% for 1991. The 1993 decrease in the ratio of long-term debt
to stockholders' equity was attributable to lower debt levels, while the
1992 decrease resulted primarily from the public offering of 2.5 million
shares of the Company's common stock.
During 1993 the Company maintained cash dividends of $.72 a
share, the same level as the previous
four years. Chesapeake's dividends paid as a percentage of net cash
provided by operating activities were 15% for 1993, 24% for 1992 and 22%
for 1991. Outstanding common shares at year end 1993 totaled 23.5 million,
up .2 million for shares issued in connection with employee benefit plans.
Outstanding shares increased 2.7 million in 1992 due to the public offering
of 2.5 million shares of the Company's common stock and the issuance of .2
million shares in connection with employee benefit plans. In the five
years prior to 1992, the number of outstanding shares of common stock
remained virtually unchanged, as purchases of shares by the Company offset
shares issued for employee benefit plans. No shares were purchased by the
Company under board of directors' stock purchase authorizations in 1993 or
1992. See Note 7 to the consolidated financial statements for capital
stock and additional paid-in capital information. Year end 1993
stockholders' equity per share was $15.65, approximating 1992 and 1991
amounts. The market price for Chesapeake's common stock ranged from $17.13
per share to $25.75 per share in 1993, with a year end market price of
11
$25.50 per share.
12
1989 1990 1991 1992
1993
Graph: Net Cash Provided by
Operating Activities 98.6 69.2 67.8 69.2
113.6
(Millions of Dollars)
Capital Expenditures
Expenditures for property, plant and equipment in 1993 were $64
million, 25% less than the $85 million spent in 1992. Capital spending in
1991 was $92 million. About one-third of the capital spending in 1993 was
related to the rebuild of the No. 2 paper machine and expansion of the pulp
mill and bleach plant at Chesapeake Paper Products' West Point mill. The
Company also spent $7 million completing the final phase of an expansion
program that doubled the capacity of Color-Box, Chesapeake Packaging's
consumer graphic packaging subsidiary. Other capital expenditures for
1993, none of which was individually material, focused on operational
improvements throughout the Company.
1989 1990 1991 1992 1993
Graph: Total Assets 789.7 875.9 915.5 958.9
919.3
(Millions of Dollars)
(Percent)
Goodwill & Other 8% 8% 9% 8%
9%
Current Assets 23 22 21 22
20
Property, Plant & Equipment 69 70 70 70
71
Total 100 100 100 100
100
About one-half of the capital spending in both 1992 and 1991 related
to the $100 million project at Chesapeake Paper Products' West Point mill
for a recovery boiler, evaporators and related equipment. This project was
13
completed late in the third quarter of 1992 with the successful start of
the recovery boiler.
14
Planned capital spending for 1994 approximates 1993 levels, with no
1994 capital project individually more than 5% of the total planned
spending. Projected capital expenditures are expected to be funded with
internally generated cash supplemented by proceeds from borrowings. See
Note 13 to the consolidated financial statements for information regarding
capital commitments.
Operating Results
Until the early 1980s, Chesapeake's products were primarily
commodities in slow growth markets. Because of strategic changes
implemented by management, approximately 60% of sales now come from
specialty products that the Company believes have less price volatility and
higher growth and profitability potential than commodity products. Low
prices of commodity products, such as bleached market pulp and corrugating
medium, have offset much of the benefit derived from specialty product
sales in the past three years.
Another strategic change is the increased use of recycled fiber.
Chesapeake is a leader among paper manufacturers in the use of recycled
fiber. During 1993 Chesapeake recycled nearly 568,000 tons of fiber. 100%
of the paper produced at Wisconsin Tissue is made from recycled fiber,
while more than 35% of Chesapeake Paper Products' raw material was recycled
fiber in 1993. This high recycled content lowers production costs,
provides marketing advantages and reduces solid waste to landfills.
1989 1990 1991 1992
1993
Graph: Capital Expenditures 139.5 128.5 92.2 85.0
63.9
(Millions of Dollars)
15
16
1993 vs. 1992
Kraft Products
Chesapeake Paper Products recorded a slight loss in 1993 because of
terrible pricing. Negative price variances from 1992 totaled approximately
$40 million. Overall average sales prices declined an additional 13% from
1992's already depressed levels. Prices for bleached hardwood pulp, which
dropped dramatically late in 1992, fell another 33% in 1993. Total
shipments were up 11% in 1993 to a record 798,000 tons. Productivity and
quality gains were experienced in all product categories, as the mill
achieved record good tons produced per day for the year and reduced off-
quality production by 8% compared to last year. Specialty white top
paperboard, which has higher profit margins than brown paperboard, remained
at 80% of the paperboard mix. Depreciation expense increased 15% because
of the first full year of depreciation on the recovery boiler and related
equipment, which were completed near the end of the third quarter of 1992.
Operating costs for 1992 were increased by the premature shutdown of an old
recovery boiler prior to the start of the new boiler and by the write-off
of the old recovery boiler and related equipment.
Chesapeake Building Products was formed in 1993 with the merger of
Chesapeake Forest Products' lumber division and Chesapeake Wood Treating
Co. Results of the lumber division improved significantly in 1993 as sales
volume and prices increased 6% and 27%, respectively, from the prior year.
Substantially all of the assets of the wood treating business were conveyed
to Universal Forest Products at the beginning of the fourth quarter. Net
sales of the wood treating business were approximately $16 million in the
fourth quarter of 1992. The Company recorded charges of $1.3 million in
1993
17
and $1.0 million in 1992 related to the conveyance. The combined earnings
in 1993 and 1992 of normal operations of this business nearly offset these
charges.
Tissue
Wisconsin Tissue's EBIT for 1993 improved 6% over 1992 and was just
below 1991's record results. Sales prices, which eroded in 1992, began to
recover in the second quarter of 1993 when the first of three 1993 price
increases was implemented, and for the year averaged slightly higher than
in 1992. Even with the increases achieved during the year, average sales
prices remain below levels experienced in the late 1980s. Shipments were a
record 220,000 tons in 1993, up 4% from 1992. Secondary fiber costs
increased during 1993 resulting in slightly lower margins. Paper machine
operating rates averaged at or above 100% for all four paper machines.
The reorganized Chesapeake Consumer Products business reduced its loss
in 1993 by $2.9 million, or 52%, from 1992. Net sales declined 5% from the
previous year, because of the reorganization of the Finess portion of this
business. Operating expenses increased due to additional costs related to
the reorganization of the business.
1989 1990 1991 1992
1993
Graph: Dividends Declared Per Share .72 .72 .72 .72
.72
(Dollars)
Packaging
Chesapeake Packaging's EBIT for 1993 increased 15% from 1992, as
results improved for two of its three businesses. Average sales prices
approximated 1992 levels, while total shipments were a record 3,725 million
square feet, an increase of 3% from 1992 shipments. Shipments of
18
corrugated shipping containers increased 1%, while shipments of point-of-
sale displays decreased
19
2%. Shipments of consumer graphic packaging increased 25% as a result of
the completion of the final phase of a capital expansion program that
doubled the capacity of the Color-Box facility. Additional growth is
anticipated in graphic packaging and corrugated shipping containers with
the January 24, 1994 acquisition of Lawless Holding Corporation by
Chesapeake Packaging. Operating expenses were increased in 1993 by the
consolidation of the West Des Moines, Iowa packaging facility into the
Sandusky, Ohio facility.
1989 1990 1991 1992
1993
Graph: Earnings Per Share:
(Dollars)
Earnings before cumulative
effect of accounting
changes 2.31 .81 .75 .63
.44
Earnings 2.31 .81 .75 .17
.44
1992 vs. 1991
Chesapeake achieved record net sales in 1992 of $888.4 million, 6%
higher than 1991's $840.5 million. For the second straight year, all three
of Chesapeake's major businesses - kraft products, tissue and packaging -
achieved record shipments. Shipments were up 2% for kraft products, 11%
for tissue and 6% for packaging from 1991. Despite the improvement in
sales volume, continued pricing pressures prevented any earnings
improvement. The combined decline in prices from 1991 in our kraft and
tissue businesses was $10 million. Net sales of consumer products grew 11%
and net sales of treated wood products were up 22% from 1991. The real
estate business remained depressed, with sales approximating 1991 levels.
Chesapeake's shift to specialty products continued in 1992, as sales of
20
these products increased 8% over 1991 and represented approximately 60% of
Chesapeake's total sales. Income for 1992, before the cumulative
effect of accounting changes, was $14.4 million, or $.63 a share, down 6%
from $15.4 million, or $.75 a share,
21
earned in 1991. New accounting standards, adopted in 1992, reduced net
income for 1992 by $9.7 million, or $.46 a share, to $4.7 million, or $.17
a share, but had no effect on cash flow or income before the cumulative
effect of accounting changes.
1989 1990 1991 1992
1993
Graph: Return on Common
Stockholders'Equity* 17.0% 5.3% 4.9% 4.5%
2.8%
*Before cumulative effect of
accounting changes - 1992
(Percent)
Income from operations for 1992 was $52.2 million, or $6.3 million
less than in 1991. Included in 1992's operating expenses was approximately
$4.8 million of unusual charges related primarily to the reorganization of
the Finess consumer products business and the write-off of some older
equipment replaced by the start of a new recovery boiler at Chesapeake
Paper Products' West Point mill. The shutdown of an old recovery boiler at
the West Point mill before its replacement was operational increased costs
by $2.8 million during 1992. Cost of products sold increased by 7% from
1991 primarily as a result of the increase in sales and represented
approximately 75% of net sales for the year. Increased depreciation
expense of $4.4 million in 1992 was primarily related to the new recovery
boiler and related equipment. Despite these additional costs, gross profit
and operating margins declined only 1% from the previous year. Selling,
general and administrative expenses increased $3.6 million, or 3%, from
1991, but remained at 12% of net sales. Despite the difficult economic
times of 1992, bad debt expense declined to $1.7 million, compared to $3.4
22
million in the previous year.
The $1.3 million decrease in other income, net in 1992 was due in part
to accrued costs associated with the anticipated sale of the Company's wood
23
treating business. Interest expense for 1992, net of $3.7 million of
capitalized interest, was $31.4 million, while interest expense for 1991,
net of $2.5 million of capitalized interest, was $35.4 million. Excluding
capitalized interest, interest expense decreased $2.8 million due to lower
debt levels and lower interest rates.
Kraft Products
Chesapeake Paper Products' EBIT for 1992 was slightly over that of
1991 as a result of higher volumes and a modest increase of 1% in overall
average sales prices. Kraft shipments were a record 721,000 tons, an
increase of 2% from 1991. Shipments of specialty white top paperboard
exceeded 80% of the paperboard mix, as shipments of white top paperboard
increased 20% to 285,000 tons. Prices for bleached hardwood pulp dropped
dramatically during the latter part of the fourth quarter. Slow market
conditions near the end of the year and record production for 1992 caused
finished goods inventory levels to increase substantially late in the year.
About $2.8 million of additional operating costs were incurred due to the
temporary reduction of chemical recovery capabilities resulting from the
premature shutdown of an old recovery boiler prior to the start of a new
recovery boiler. Operating costs also increased due to write-offs of some
older equipment replaced by the new boiler late in the third quarter.
Depreciation expense increased 10% because of the new recovery boiler and
related equipment.
Results of the wood treating business in 1992 improved over 1991, as
shipments and average selling prices increased 6% and 1%, respectively.
The results of Chesapeake Forest Products' lumber division, a small part of
Chesapeake's total operations, showed significant improvement in 1992, as
24
both sales volumes and sales prices increased significantly.
25
Tissue
Wisconsin Tissue's EBIT for 1992 was only 9% less than 1991's record
results despite severe pricing pressures throughout most of the year. The
average sales prices for tissue products dropped 5% to approximately 1984
levels, as industry operating rates averaged less than 90% for the year.
Shipments, however, were a record 211,000 tons, up 11% from 1991. Paper
machine operating rates averaged near 100% for the year and direct costs
continued to be tightly controlled.
Chesapeake Consumer Products continued to show improvement in sales
and overall performance during 1992. Compared to 1991, sales increased 11%
and operating losses were reduced 20%, or $1.3 million. The Appleton
portion of the business that lost more than $12 million in 1990 turned
profitable for the year, but the Finess portion continued to be
unprofitable. Costs increased during the fourth quarter due to charges
related to the reorganization of the Finess portion of the business.
Packaging
Overall EBIT for Chesapeake Packaging declined approximately 25% in
1992, as results of its businesses were mixed. Corrugated shipping
container sales volume increased 10% and consumer graphic packaging gained
5%. Shipments of point-of-sale displays declined 5% due to changes in
promotional spending of large consumer products companies and increased
competitiveness. Overall average selling prices were unchanged from 1991.
A permanent display division was formed during 1992 in order to offer
customers a full-service merchandising program.
26
Other
More information about Chesapeake's businesses is provided under the
caption "Business Segment Highlights" and in Note 14 to the consolidated
financial statements.
Environmental
Chesapeake has a strong commitment to protecting the environment. The
Company has an environmental audit program to monitor compliance with
environmental laws and regulations. The Company is committed to abiding by
the environmental, health and safety principles of the American Forest and
Paper Association. Each expansion project has been planned to comply with
applicable environmental regulations and to enhance environmental
protection at existing facilities. The Company faces increasing capital
expenditures and operating costs to comply with expanding and more
stringent environmental regulations, although compliance with existing
environmental regulations is not expected to have a materially adverse
effect on the Company's earnings, financial position or competitive
position. See Note 13 to the consolidated financial statements for further
capital spending information relating to environmental compliance.
Chesapeake operates under, and believes that it is in substantial
compliance with, the terms of various air emission and water and effluent
discharge permits and other environmental regulations.
27
1989 1990 1991
1992 1993
Graph: Stockholders' Equity Per
Share 15.28 15.36 15.43 15.88
15.65
(Dollars)
Common Stock Price Range
Low 17.88 12.75 13.25 18.25
17.13
High 24.13 21.50 24.00 29.13
25.75
(Dollars)
28
BUSINESS SEGMENT HIGHLIGHTS*
1993
1992 1991
(Dollar amounts in millions)
Net sales:
Kraft products $343.5 39% $365.8 41%
$339.1 41% Tissue 283.5
32 276.2 32 260.5 31
Packaging 252.7 29 243.8 27
238.2 28
Corporate 5.3 - 2.6 -
2.7 -
$885.0 100% $888.4 100%
$840.5 100%
Operating income:
Kraft products $12.5 20% $23.8 36%
$21.5 30%
Tissue 31.1 51 26.3 40
28.2 40
Packaging 17.6 29 15.5 24
21.3 30
61.2 100% 65.6 100%
71.0 100%
Corporate (8.5) (11.7)
(9.5)
Income before interest, taxes
and cumulative effect of
accounting changes $52.7 $53.9
$61.5
*1992 and 1991 results have been restated to conform with the current year
presentation. See Note 14 to consolidated financial statements for further
information regarding business segments.
29
RECENT QUARTERLY RESULTS
Per Share
Income (loss) Earnings (loss)
Before Before
Cumulative Cumulative
Effect of Net Effect of
Net Gross Accounting Income
Accounting
Earnings
Dividends
Stock Price
Quarter Sales Profit Changes (loss)
Changes
(loss)
Declared High
Low
(Dollars in millions except per share amounts)
1991:
First $198.4 $ 38.7 $ 2.4 $ 2.4 $ .12
$ .12
$ .18 $17.25 $13.25
Second 218.9 39.1 2.4 2.4
.12 .12 .18 21.63 16.13
Third 219.4 41.2 4.9 4.9 .23
.23
.18 21.50 18.25
Fourth 203.8 42.6 5.7 5.7 .28
.28
.18 24.00 19.00
Totals $840.5 $161.6 $15.4 $15.4 $
.75$ .75
$ .72
1992:
First $210.1 $ 37.1 $ 2.3 $(7.4) $ .11
$(.35)
$ .18 $29.13 $23.00
Second 229.3 40.6 4.3 4.3 .19
.19
.18 25.38 21.88
Third 236.2 44.1 6.5 6.5 .28
.28
.18 25.25 19.38
Fourth 212.8 37.1 1.3 1.3 .05
.05
.18 23.25 18.25
30
Totals $888.4 $158.9 $14.4 $ 4.7 $
.63 $ .17
$ .72
1993:
First $209.3 $ 32.4 $ (.8) $ (.8) $(.03)
$(.03)
$ .18 $23.13 $19.00
Second 236.4 35.7 1.3 1.3 .05
.05
.18 21.50 17.63
Third 238.3 41.0 2.6 2.6 .11
.11
.18 20.63 17.13
Fourth 201.0 37.0 7.3 7.3 .31
.31
.18 25.75 19.63
Totals $885.0 $146.1 $10.4 $10.4 $
.44$ .44
$ .72
31
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Chesapeake Corporation is responsible for the preparation, integrity and
fair
presentation of its published financial statements. The financial
statements
have been prepared in accordance with generally accepted accounting
principles
and, as such, include, where necessary, amounts based on judgments and
estimates
made by management.
To fulfill its responsibilities, Chesapeake maintains and continues to
refine a
system of internal accounting controls, policies and procedures to
provide
reasonable assurance that the Company's assets are safeguarded,
transactions are
executed in accordance with proper management authorization, and the
financial
records are reliable for the preparation of financial statements. This
system
of internal controls, policies and procedures is evaluated regularly
by the
Company's internal audit staff to confirm that it is adequate and is
operating
effectively.
As indicated in the report of independent accountants, Coopers &
Lybrand
performs an annual audit of Chesapeake's consolidated financial statements
for
the purpose of determining that the statements are presented fairly,
in all
material respects, in conformity with generally accepted accounting
principles.
The independent accountants are appointed annually by Chesapeake's
board of
directors based upon a recommendation by the audit committee, and
the
appointment is ratified by Chesapeake's stockholders.
The audit committee of the board of directors, composed of outside
directors,
meets periodically with the Company's management, internal auditors
and
independent accountants to review internal accounting controls and
financial
reporting practices and the nature, extent and results of audit efforts.
The
independent accountants and the internal auditors have direct and
independent
access to the audit committee.
/s/Andrew J. Kohut
Andrew J. Kohut
Vice President Finance &
Chief Financial Officer
January 25, 1994
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Chesapeake Corporation:
We have audited the accompanying consolidated balance sheet of
Chesapeake
Corporation and subsidiaries as of December 31, 1993 and 1992, and the
related
consolidated statements of income and retained earnings and cash flows for
each
of the three years in the period ended December 31, 1993. These
financial
statements are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these financial statements
based on
our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements are free of
material
misstatement. An audit includes examining, on a test basis, evidence
supporting
the amounts and disclosures in the financial statements. An audit also
includes
assessing the accounting principles used and significant estimates
made by
management, as well as evaluating the overall financial statement
presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Chesapeake Corporation and subsidiaries as of December
31, 1993 and 1992, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in notes 4, 6 and 13 to the consolidated financial statements,
the Company changed its methods of accounting for postretirement benef
its other than pensions and accounting for income taxes in 1992.
/s/ COOPERS & LYBRAND
COOPERS & LYBRAND
Richmond, Virginia
January 25, 1994
34
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
1993 1992
(In millions)
ASSETS
Current assets:
Cash $ .7 $ .7
Accounts receivable 87.5 88.4
Inventories 79.7 105.2
Deferred income taxes 12.2 12.4
Other 6.1 5.2
Total current assets 186.2 211.9
Property, plant and equipment:
Plant sites and buildings 140.8 134.3
Machinery and equipment 999.4 984.9
Construction in progress 19.3 14.8
1,159.5 1,134.0
Less accumulated depreciation 545.5 507.1
614.0 626.9
Timber and timberlands 39.8 41.4
Net property, plant and equipment 653.8 668.3
Other assets 79.3 78.7
$ 919.3 $ 958.9
35
December 31,
1993 1992
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 90.5 $ 80.0
Current maturities of long-term debt 1.5 4.3
Dividends payable 4.2 4.2
Income taxes payable 2.9 1.2
Total current liabilities 99.1 89.7
Long-term debt 333.1 382.8
Postretirement benefits other than pensions 20.5 19.6
Deferred income taxes 98.6 96.4
Stockholders' equity:
Common stock, $1 par value;
authorized, 60 million shares;
outstanding, 23.5 million and
23.3 million shares 23.5 23.3
Additional paid-in capital 102.6 98.8
Retained earnings 241.9 248.3
368.0 370.4
$919.3 $958.9
The accompanying Notes to Consolidated Financial Statements are part of
the financial statements.
36
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
For the years ended December 31,
1993 1992 1991
(In millions except per share data)
Income:
Net sales $885.0 $888.4 $840.5
Costs and expenses:
Cost of products sold 668.7
663.0 616.8
Depreciation and cost of timber
harvested 70.2 66.5 62.1
Selling, general and administrative
expenses 102.1 106.7 103.1
Income from operations
44.0 52.2 58.5
Other income, net 8.7 1.7 3.0
Income before interest, taxes and
cumulative
effect of accounting changes
52.7 53.9 61.5
Interest expense (32.0) (31.4) (35.4)
Income before taxes and cumulative
effect of
accounting changes 20.7 22.5 26.1
Income taxes 10.3 8.1 10.7
Income before cumulative effect of
accounting
changes 10.4
14.4 15.4
Cumulative effect of accounting changes -
(9.7) -
Net income $ 10.4 $ 4.7 $
15.4
Per share:
37
Earnings before cumulative effect of
accounting changes $ .44 $.63 $ .75
Cumulative effect of accounting
changes - (.46) -
Earnings $ .44 $ .17 $.75
Retained earnings:
Balance, beginning of year $248.3 $260.3 $259.7
Net income 10.4 4.7 15.4
Cash dividends declared, $.72 per share each year (16.8)
(16.7) (14.8)
Balance, end of year
$241.9 $248.3 $260.3
The accompanying Notes to Consolidated Financial Statements are part of the
financial statements.
38
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
1993 1992 1991
(In millions)
Operating activities:
Net income $ 10.4 $ 4.7 $ 15.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, cost of timber harvested
and amortization of intangibles 72.4 68.6
65.2
Deferred income taxes 2.4 (2.5) (2.4)
Cumulative effect of accounting changes -
9.7 -
(Gains) losses on sales of property, plant and equipment (9.4)
( .4) .2
(Gains) losses on sales of businesses 1.3 1.0
(1.3)
Changes in operating assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable .9 (4.4) (1.0)
Inventories 25.5 2.0 (12.4)
Other assets (3.0) (4.3) (1.6)
Accounts payable and accrued expenses 10.5 (3.5)
6.5
Income taxes payable 1.7 (2.2) ( .8)
Other payables .9 .5 -
Net cash provided by operating activities 113.6 69.2 67.8
Investing activities:
Purchases of property, plant and equipment (63.9) (84.7) (90.0)
Acquisitions - - (1.1)
Proceeds from sales of property, plant and equipment 15.9 1.5
4.4
Other (.3) ( .2) (2.5)
Net cash used in investing activities (48.3) (83.4) (89.2)
Financing activities:
Proceeds from long-term debt 82.1 .2 109.3
Payments on long-term debt (80.3) (36.8) (10.5)
Net borrowings (payments) on credit lines (54.3) 2.7
(63.3)
Proceeds from issuances of common stock 3.7 63.7 .6
Dividends paid (16.8) (16.3) (14.8)
Other .3 .4 .3
Net cash provided by financing activities (65.3) 13.9 21.6
Increase (decrease) in cash .0 ( .3) .2
Cash at beginning of year .7 1.0 .8
39
Cash at end of year $ .7 $ .7 $ 1.0
Supplemental cash flow information:
Interest payments $ 32.7 $ 35.2 $ 37.5
Income tax payments, net of refunds $ 3.7 $ 13.9 $ 14.3
The accompanying Notes to Consolidated Financial Statements are part of the
financial statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a. Principles of Consolidation: The consolidated financial
statements include the accounts and operations of Chesapeake
Corporation and subsidiaries (the "Company"). All significant
intercompany accounts and transactions are eliminated.
b. Inventories: Inventories are valued at the lower of cost
or market. The cost of certain product and manufacturing materials
inventories is determined by the last-in, first-out (LIFO) method. The cost
of other inventories is determined principally by the average cost method.
c. Property, Plant and Equipment: Property, plant and
equipment, except timber and timberlands, are stated at cost. Timber and
timberlands are stated at cost net of the accumulated cost of timber
harvested.
The costs of major rebuilds and replacements of plant and equipment
are
capitalized, and the costs of ordinary maintenance and repairs are
charged to
income as incurred. When properties are sold or retired, their costs
and the
related accumulated depreciation are removed from the accounts, and the
gains or
losses are reflected in income.
d. Depreciation: Depreciation for financial reporting
purposes is computed principally by the straight-line method, based on the
estimated useful lives of the assets. Depreciation rates vary according
to the
class of equipment or buildings and average 6% for equipment and 4% for
buildings.
e. Cost of Timber Harvested: Cost of timber harvested is
41
computed on quantities cut from individual Company-owned tracts based on
costs and estimated volumes of recoverable timber.
f. Income Taxes: The Company defers to future periods the
income tax effects resulting from temporary differences (principally
depreciation) between financial and taxable income.
g. Earnings Per Share: Earnings per share are based on the
weighted average number of outstanding common shares and equivalents
(23,431,411
in 1993, 22,679,425 in 1992 and 20,543,658 in 1991).
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
h. Other: Goodwill, the cost in excess of estimated fair
value of identifiable assets of acquired businesses (net of $10.1 million
and
$9.1 million accumulated amortization at year-end 1993 and 1992,
respectively),
is being amortized on a straight-line basis. Specifically identifiable
purchased intangible assets (net of $3.9 million and $3.2 million
accumulated
amortization at year-end 1993 and 1992, respectively) are being
amortized
according to estimated economic lives. Amortization periods are limited
to 40
years or less. Research and development costs, not significant in
amount, are
charged to operations as incurred.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Inventories
Year-end inventories consist of:
1993 1992 1991
(In millions)
Finished goods and work in process $49.3 $70.6 $ 64.8
Materials and supplies 30.4 34.6 42.4
Totals $79.7 $105.2 $107.2
Inventories determined by the LIFO method, included in the above,
totaled (in millions) $15.8 for 1993, $22.9 for 1992 and $18.9 for
1991, or
$4.5, $5.6 and $5.2 less than the respective amounts of such inventories
stated
at current costs. The amount of work in process inventories is
insignificant in
relation to total inventories.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Long-Term Debt
Long-term debt at year-end consists of:
1993 1992
(In millions)
Notes payable - banks (unsecured):
Credit lines, interest
1993 3.40%, 1992 3.43% to 3.85% $ 3.1 $57.4
Term loan, interest 3.77% to 3.83%, due 1996-2003
40.0 50.0
8.85% term loan - 12.0
Unsecured notes:
11.75% notes, due 1995 50.0 50.0
9.375% notes, due 1996 - 50.0
10.375% notes, due 2000 55.0 55.0
9.875% notes, due 2003 60.0 60.0
7.20% notes, due 2005 85.0 -
Industrial development authority obligations:
9% note, due 1994 10.5 10.5
10% to 10.125% notes, due 2004-2009 20.8 20.8
6.375% to 6.875% notes, due 1994-2003 6.2 9.7
65% of prime rate notes, due 1994-1999 3.2 3.8
Other debt, interest 4.0% to 10.25%, due 1994-2005 .8 7.9
Totals 334.6 387.1
Less current maturities 1.5 4.3
$333.1 $382.8
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Long-Term Debt, continued
Principal payments on long-term debt
(excluding renewable credit lines and $10.5 million note) for the next
five
years are (in millions): 1994 $1.5; 1995 $51.0; 1996 $5.1; 1997 $6.5; and
1998
$5.5. Because of the availability of long-term financing under the terms
of the
committed credit lines, the $10.5 million note and the borrowings
under
uncommitted credit lines have been classified as long-term debt.
The Company maintains two-year renewable credit lines with several
banks under which it can borrow up to $75 million at the prime rate or
lower. Nominal commitment fees are paid on the
unused amount. Other lines of credit totaling $75 million are maintained
with
several banks on an uncommitted basis.
During the first quarter of 1993 the Company issued $85 million
principal amount of 7.2% debentures due March 15, 2005. The net
proceeds from the sale of these debentures were used to redeem at
par the $50 million outstanding principal balance of the Company's 9.375%
notes
due March 15, 1996, to reduce outstanding bank credit line borrowings
and for
general corporate purposes.
Certain loan agreements include provisions permitting the
holder of the debt to require the Company to repurchase all or a
portion of such debt outstanding upon the occurrence of
specified events involving a change of control or ownership. In
addition, various loan agreements contain provisions that restrict the
disposition of certain assets, require the Company to maintain a ratio of
long-term debt to
46
total capital not in excess of 60% and to meet an annual cash flow test.
The Company is required to maintain adjusted stockholders' equity of at
least $310 million and a consolidated current ratio of at least 1.5 under
the provisions of certain loan agreements. Under the most restrictive
covenant, the Company had approximately $70.1 million of retained
earnings available for dividends as of December 31, 1993.
Interest expense is net of capitalized interest of $.4 million, $3.7
million and $2.5 million for 1993, 1992 and 1991,
respectively.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Long-Term Debt, continued
In accordance with Statement of Financial Accounting Standards
No. 107 "Disclosure about Fair Value of Financial
Instruments," the Company has estimated the fair value of long-term
debt for 1993 to be $365.6 million, or 10% higher than the book value of
$333.1
million.
The fair value is based on the quoted market prices for similar
issues or current rates offered for debt of the same or similar
maturities.
The difference between fair and book values is due to the decline of
interest rates during the past few years. The Company believes that
its long-term debt was financed at the most favorable rates available
at the dates borrowed.
The carrying amounts of trade receivables and trade payables approximate
fair value because of the short maturity of the instruments.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Income Taxes
In 1992, the Company elected early adoption of the
liability method of accounting for deferred income taxes
pursuant to Statement of Financial Accounting Standards No. 109. As a
result,
first quarter 1992 earnings were restated for an accounting change
that
increased net income $2.2 million, or $.11 per share.
The provision for income taxes consists of:
1993 1992 1991
(In millions)
Currently payable:
Federal $ 7.2 $10.9 $11.8
State .7 (.3) 1.3
Total current 7.9 10.6 13.1
Deferred:
Federal 2.2 (3.0) (2.2)
State .2 .5 (.2)
Total deferred 2.4 (2.5) (2.4)
Total income taxes $10.3 $ 8.1 $10.7
Deferred income taxes result from temporary differences in
the recognition ofincome and expenses for income tax and financial
statement purposes. Significant components of the year end
deferred income tax assets and liabilities are:
1993 1992
(In millions)
Postretirement medical benefits $ 7.9 $ 7.3
Alternative minimum tax credit 21.2 15.1
Other 14.2 13.4
Deferred tax assets 43.3 35.8
Accumulated depreciation (117.1) (110.1)
Pension accrual (7.8) (6.7)
Other (4.8) (3.0)
Deferred tax liabilities (129.7) (119.8)
49
Net deferred taxes $(86.4) $(84.0)
Classified in balance sheet as
Current assets $ 12.2 $ 12.4
Long term liabilities (98.6) (96.4)
Net deferred taxes $(86.4) $(84.0)
50
The 1991 deferred tax provision totaled $(2.4) million and was
composed of accelerated depreciation $(2.4) million; pension expense $.5
million; inventory valuation $.4 million; facility shutdown $.4 million;
and other $(1.3) million.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Income Taxes, continued
The differences between the Company's effective income tax rate
and the statutory federal income tax rate are:
1993 1992 1991
Federal income tax rate 35.0%
34.0% 34.0%
State income tax, net of federal
income tax benefit 2.6 .5 2.9
Purchase accounting adjustments 1.8 1.6 7.5
Effect on deferred taxes of tax rate increase 11.7 - -
Other, net (1.5) - (3.4)
Consolidated effective income tax rate 49.6% 36.1% 41.0%
Income tax expense for 1993 includes a charge of $2.4 million,
or$.10 a share, to reflect changes in deferred taxes
resulting from the 1993 Revenue Reconciliation Act.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Employee Retirement Plans
The Company maintains several noncontributory defined benefit retirement
plans
covering substantially all employees. Pension benefits are based
primarily on
the employees' compensation and/or years of service. Annual pension
costs are
actuarially determined, and the plans are funded with sufficient assets to
meet
future benefit payment and regulatory requirements. The net periodic
pension
cost includes amortization of prior service costs over periods of the
greater of
15 years or the average remaining employee service period.
Assumptions used in determining the net pension credit (based upon
beginning of
the year assumptions) for 1993, 1992 and 1991 and related pension
obligations
(based upon year end assumptions) as of October 1 were:
1993 1992 1991
Discount rate 7 1/2% 8 1/2% 8 3/4%
Increase in future compensation levels 5 5 1/4 5 1/2
Long-term rate of return on assets 9 1/2 9 1/2 9 1/4
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5.Employee Retirement Plans, continued
The following table, based on actuarial valuations as of October 1,
1993 and 1992, sets forth the plans' funded status and amounts recognized
in the Company's consolidated financial statements for 1993 and 1992:
1993 1992
(In millions)
Accumulated benefit obligation:
Vested benefits $ 63.0 $ 49.3
Nonvested benefits 8.6 6.3
Totals 71.6 55.6
Effect of projected future salary increases 20.6 16.8
Projected benefit obligation for service rendered to date
92.2 72.4
Plan assets at fair value, primarily corporate equity and
debt securities 119.3 108.1
Plan assets in excess of projected benefit obligation 27.1
35.7
Unrecognized net (gain) loss from past experience different from
that assumed and effects of changes in assumptions 3.1 (4.3)
Unrecognized net (asset) at beginning of plan year being
amortized principally over 17 years (13.4) (14.8)
Prepaid pension cost recognized in Other assets $ 16.8 $
16.6
The components of the net pension credit for 1993, 1992 and
1991 are as follows:
1993 1992 1991
(In millions)
Service cost - benefits earned during the period $ 3.5 $ 3.0 $ 2.7
Interest cost on projected benefit obligation 6.1 4.8 4.2
54
Actual (return) loss on plan assets (13.3) (19.3) (17.9)
Net amortization and deferral 1.9 9.7 9.9
Net pension credit $(1.8) $(1.8) $(1.1)
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance benefits to
certain hourly and salaried employees who retire under the provisions of
the Company's retirement plans. The Company does not pre-fund these
benefits.
In 1992, the Company adopted Statement of Financial Accounting Standards
No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), which requires recognition of the liability for
these benefits during the period employees render service rather than the
Company's previous practice of recognizing these costs as claims were
paid. The Company elected to recognize immediately, as an accounting
change, the accumulated liability measured as of January 1, 1992.
First quarter 1992 results were restated for a one-time pre-tax charge of
$19.1 million ($11.9 million, or $ .57 per share, net of taxes). The
adoption of SFAS 106 decreased 1992 income before taxes and
cumulative effect of accounting changes by approximately $.5 million.
Postretirement benefits expense was $2.3 million in 1993, $2.2 million in
1992 and $1.3 million in 1991. The components of expense in 1993 and
1992 were as follows:
1993 1992
(In millions)
Service cost-benefits earned during the period $ .6 $ .6
Interest cost on accumulated postretirement benefit obligation 1.7 1.6
Net postretirement benefit cost $ 2.3 $ 2.2
The following table sets forth the accumulated postretirement benefit
obligation
recognized in the Company's consolidated balance sheet as of December 31,
1993 and 1992.
56
1993 1992
(In millions)
Retirees $15.6 $13.4
Fully eligible active plan participants 5.2 4.1
Other active plan participants 4.1 3.3
Accumulated postretirement benefit obligation 24.9 20.8
Unrecognized net loss (4.4) (1.2)
Accrued postretirement benefit
obligation $20.5 $19.6
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6.Postretirement Benefits Other Than Pensions, continued
The assumed health care cost trend rate used in measuring future benefit
costs was 14% in 1992 and 13% in 1993, gradually declining to 5.5%
by 2003 and remaining at that level thereafter. A 1% increase in this
annual trend rate would increase the accumulated postretirement benefit
obligation at December 31, 1993 by $1.7 million and the 1993
postretirement benefit expense by $.2 million.
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 1993 and 8.5% in 1992 and
the assumed rate of increase in future compensation levels was 5% in 1993
and 5.5% in 1992.
The Company will continue to manage and control postretirement
benefits, and pay benefits as incurred.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Capital Stock and Additional Paid-In Capital
Changes in common stock and additional paid-in capital during 1991,
1992, and 1993 are:
Common Stock Additional
Aggregate Paid-In
Shares
Par Value Capital
(Dollar amounts in millions)
Balances, January 1, 1991 20,435,826 $20.4 $ 33.7
Issuances of shares:
Employee stock plans 199,309 .2 3.5
Other - - .3
Balances, December 31, 1991 20,635,135 20.6 37.5
Issuances of shares:
Public offering 2,500,000 2.5 57.0
Employee stock plans 194,397 .2 4.0
Other - - .3
Balances, December 31, 1992 23,329,532 23.3 98.8
Issuances of shares:
Employee stock plans 184,846 .2 3.5
Other - - .3
Balances, December 31, 1993 23,514,378 $23.5 $102.6
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Capital Stock and Additional Paid-In Capital, continued
In addition to its common stock, the Company's authorized
capital includes 500,000 shares of preferred stock ($100
par), of which 100,000 shares are designated as Series A Junior
Participating Preferred Stock ("Series A Preferred"). None was
outstanding during the three years ended December 31, 1993.
On April 1, 1992, the Company sold 2.5 million shares of its common
stock in an underwritten public offering at $25.00 per share. The net
proceeds from the sale, after underwriting discounts and
expenses payable by the Company, were approximately $59.5 million, and were
used to repay at maturity a $25 million, 11.5% note due August 1, 1992,
to reduce amounts outstanding under the Company's committed and
uncommitted bank lines of credit and for general corporate purposes.
Each outstanding share of the Company's common stock has attached
to it one preferred share purchase right,
which entitles the shareholder to buy one unit (one one-thousandth of a
share) of Series A Preferred at an exercise price of $70 a
share, subject to adjustment. The rights will become exercisable only
if a person or group acquires or announces a tender offer for 20%
or more of Chesapeake's common stock. When exercisable, Chesapeake
may issue a share of common stock in exchange for each right other
than those held by such person or group. If a person or group
acquires 30% or more of the common stock, each right will
entitle the holder, other than the acquiring party, upon payment of the
exercise
price, to acquire Series A Preferred or, at the option of Chesapeake,
common stock, having a value equal to twice the right's purchase price.
If Chesapeake is acquired in a merger or other business combination or if
50% of its earnings
60
power is sold, each right will entitle the holder, other than
the acquiring person, to purchase securities of the surviving Company
having a market value equal to twice the exercise price of the rights.
The rights will expire on March 15, 1998, and may be redeemed by the
Company at any time prior to the tenth day after an announcement that
a 20% position has been acquired, unless such period has been extended by
the board of directors.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stock Options
The 1993 Incentive Plan provides that the executive compensation
committee of the board of directors or its delegate may grant stock opt
ions, stock appreciation rights ("SARs"), stock awards,
performance shares or stock units and may make incentive awards to the
Company's key employees and officers. The maximum aggregate number of
shares of common
stock that may be issued under the plan is the sum of 1% of the
outstanding shares of common stock as of January 1 of each calendar
yearduring the term of the plan. The plan also limits the number of
shares that may be covered by the grant of options, SARs, stock awards,
performance shares and stock units in any calendar year. The annual
limitation is 1% of the outstanding shares of common stock as of
January 1 of that year increased by 1) the number of shares
available but not awarded during all prior years during the term of the
plan plus 2) any forfeited or terminated grants that were not exercised.
In addition, the maximum aggregate number of shares that may be covered by
performance shares and that may be issued in any calendar year as a stock
award or in settlement of stock units is 30% of the annual share
limitation. The annual share limitation for 1993 was 233,295 shares. The
options granted may be either incentive stock options ("ISOs") or
nonqualified stock options. Options may be granted at not
less than the fair market value at the date of grant if the option is an
ISO, or not less than 85% of the fair market value if the option is a
nonqualified stock option. SARs may be granted in relation to option
grants ("corresponding SARs") or independently of option grants. Grants
may provide options and SARs exercisable over periods of up to 10
years.
62
The Non-employee Director Stock Option Plan provides for grants to
the Company's non-employee directors of stock options for up to 93,500
shares of the Company's common stock. Automatic awards will be made in
lieu of projected increases in the cash retainer and meeting
fees payable to participants. Each participant may also choose to
receive an elective award in lieu of all or part of his or her regular
cash retainer of an option to purchase 125 shares for each $1,000 of
foregone retainer. The option price per share for automatic awards and
elective awards will be the average closing price of the Company's common
stock for
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stock Options, continued
the twenty trading days before the October 31 that immediately
precedes the grant date.
For both plans, payment may be made by the participant in cash or
the Company's common stock. Up to 326,795 shares plus 1% of shares
outstanding as of January 1 of each calendar year through 2002
may be issued after December 31, 1993, upon exercise of options or
SARs for these two plans.
The 1987 Stock Option Plan provided for grants to the Company's key
employees and officers of stock options and corresponding SARs for up to
1,000,000 shares of the Company's authorized, but unissued common stock
and up to 200,000 SARs independent of stock options. As
of December 31, 1993, there were 1,032,964 shares issuable under this
plan, including 375,308 shares available for grants. With the adoption
of the 1993
Incentive Plan, awards under this plan were discontinued.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Stock Options, continued
The following schedule summarizes stock option activity for the
three years ended December 31, 1993:
Number of
Option Price
Stock Options Per Share
Outstanding, January 1, 1991 665,775 14.17 to 22.75
Granted 171,400 13.89 to
19.50
Exercised 127,962 13.89 to 21.43
Cancelled 35,879 14.58 to 21.43
Outstanding, December 31, 1991 673,334 13.89 to 22.75
Granted 163,900 21.66 to 25.23
Exercised 101,079 13.89 to 21.43
Cancelled 32,912 18.65 to 21.43
Outstanding, December 31, 1992 703,243 13.89 to 25.23
Granted 194,100 19.15 to 20.49
Exercised 11,905 18.65 to 20.88
Cancelled 31,882 16.63 to 23.88
Outstanding, December 31, 1993 853,556 13.89 to 25.23
Exercisable:
December 31, 1991 367,685 14.38 to 22.75
December 31, 1992 389,842 13.89 to 22.75
December 31, 1993 504,044 13.89 to 25.23
Available for grants:
December 31, 1991 484,569
December 31, 1992 438,099
December 31, 1993 506,203
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Employees' Stock Plans and Other Compensation Plans
The Company has stock purchase plans for certain eligible
salaried and hourly employees. Shares of the Company's common stock are
purchased based upon participant and Company contributions. At
December 31, 1993, 590,285 shares remain available for issuance under
these plans.
The Company also has a noncontributory Employee Stock Ownership Plan
that covers eligible salaried and hourly employees. Shares of the
Company's stock are purchased at the Company's discretion. No purchases
were made in 1993, 1992 or 1991.
The Company also sponsors, in accordance with the provisions of
Section 401(k) of the Internal Revenue Code, pre-tax savings programs
for eligible salaried and hourly employees. Certain participants'
contributions are matched up to designated contribution levels by
the Company. Contributions are invested in several investment options,
which may include common stock of the Company, as selected by the
participating employee. At December 31, 1993, 200,000 shares of the
Company's common stock are reserved for issuance under these programs.
The 1993 Incentive Plan (see Note 8) provides that the executive
compensation committee of the board of directors may select certain
officers to receive annual incentive awards in the form of cash,
common stock or a combination thereof, based upon the Company's overall
financial performance and the officer's individual performance. Annual
66
incentive awards for officers during 1992 and 1991 were granted under
the Officers' Incentive Program.
The Long-Term Incentive Plan provides that the executive
compensation committee of the board of directors may award
key employees shares of restricted stock with or without restricted stock
units.
A maximum of 300,000 shares of common stock may be issued under the plan.
As of December 31, 1993, award potentials had been granted with respect
to 83,500 shares of common stock, of which 2,092 restricted stock
shares and 864 restricted stock units had been earned.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Employees' Stock Plans and Other Compensation Plans, continued
ith the adoption in 1993 of the 1993 Incentive Plan, awards under
the Officers' Incentive Program and the Long-Term Incentive Plan, which
plans were in effect for 1992 and 1991, were discontinued.
The Company has other incentive compensation plans in effect for key
employees under which awards are based principally on operating results.
The charges to income for these plans approximated $4.9 million in
1993, $4.8 million in 1992 and $5.1 million in 1991.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Litigation
The Company is a defendant in various litigation related to fire
retardant treated plywood ("FRT plywood"). Between 1984 and 1988, the
Company treated plywood with a chemical intended to retard the spread
of flames. It has been alleged that the fire retardant chemical applied
to the FRT plywood has caused some of the plywood prematurely to lose'
some of its structural strength under certain circumstances.
Management believes that, to the extent that the Company has
responsibility for any such claims, its insurance carriers and the
supplier of the fire retardant chemical will indemnify the Company for
significant portions of the claims. Although the outcome of the claims
related to FRT plywood is not determinable at this time, the Company
believes that the resolution of the claims, individually or in the
aggregate, will not have a materially adverse effect on its
consolidated financial position or results of operations.
The Company is a party to various other legal actions which are
ordinary and incidental to its business. While the outcome of legal
actions cannot be predicted with certainty, the Company believes the
outcome of any of these proceedings, or all of them combined, will
not have a materially adverse effect on its consolidated financial position
or results of operations.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Supplemental Income Statement Information
1993 1992 1991
(In millions)
a. Other income, net:
Interest earned $ .2 $ .1 $ .1
Gains on sales of property and equipment 9.4 1.3 .4
Gains (losses) from sales of businesses (1.3) (1.0) 1.3
Miscellaneous income 5.4 4.8 4.5
Miscellaneous deductions (5.0) (3.5) (3.3)
Totals $ 8.7 $ 1.7 $ 3.0
b. Selected charges to costs and expenses:
Taxes other than payroll and income taxes:
Property $ 6.6 $ 6.2 $ 6.1
Other 1.1 .8 .6
Totals $ 7.7 $ 7.0 $ 6.7
Maintenance and repairs $55.5 $56.8 $56.8
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. Supplemental Balance Sheet Information
1993 1992
(In millions)
a. Accounts receivable, net:
Trade $89.4 $89.9
Other 1.1 1.2
Allowance for doubtful accounts (3.0) (2.7)
Totals $87.5 $88.4
b. Other assets
Goodwill, net $28.0 $28.9
Purchased intangible assets,net 2.3 3.0
Other 49.0 46.8
Totals $79.3 $ 78.7
c. Accounts payable and accrued expenses:
Accounts payable:
Trade creditors $31.0 $ 27.1
Bank checks in transit 10.2 8.0
41.2 35.1
Accrued expenses:
Interest 7.8 8.5
Compensation and employee benefits 24.3 20.5
Other 17.2 15.9
49.3 44.9
Totals $90.5 $ 80.0
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Commitments and Other Matters
At December 31, 1993, commitments, primarily for capital
expenditures, approximated $35 million of the Company's 1994 $65
million capital spending estimate. These commitments include
anticipated expenditures of $16 million in 1994 related to environmental
protection in connection with planned expansions and upgrades mainly at
the Company's facilities in West Point, Virginia and Menasha, Wisconsin.
The remaining commitments of $19 million are for various capital
projects, none of which is individually material.
Uncommitted environmental protection projects may cost the Company
another $9 million during the next several years. Additional
non-determinable environmental protection expenditures could be
required in the future when facilities are expanded or if more
stringent standards become applicable.
The Company leases certain assets (principally transportation and
information processing equipment and office space) generally for three to
five year terms. The present value of any unrecorded capital leases and
the impact on net income if these leases were recorded are not material.
Rental expense for operating leases totaled (in millions) $13.1 for
1993, $14.0 for 1992 and $12.6 for 1991. As of December 31, 1993,
aggregate minimum rental payments in future years on noncancelable leases
approximated $12.9 million. The amounts applying to future years
are (in millions): 1994 $4.9; 1995 $3.7; 1996 $1.8; 1997 $1.4; 1998 $.4;
and thereafter $.7.
72
Early in the fourth quarter of 1993 Chesapeake conveyed to Universal
Forest Products, Inc. the assets of Chesapeake's Fredericksburg,
Virginia; North East, Maryland; Stockertown, Pennsylvania; Elizabeth
City, North Carolina; and Holly Hill, South Carolina facilities; and
the machinery and equipment from the Pocomoke City, Maryland
facility. The assets, which were conveyed under lease and purchase
agreements having a present value of $3.4 million, represented
substantially all of the assets of the former Chesapeake Wood Treating
Co. Net sales of this business were $85.8 million in 1993, $97.7
million in 1992 and $81.7 million in 1991.
This conveyance concluded Chesapeake's involvement in the wood treating
business and enables the Company to better focus on its three primary
businesses. Also, in the fourth, quarter Chesapeake announced
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Commitments and Other Matters
the consolidation of the Company's West Des Moines, Iowa packaging
plant into its Sandusky, Ohio facility. Lastly, during the fourth
quarter, the Company sold approximately 19,000 acres of timberland
holdings which were no longer strategic. These three events netted
to a $5.4 million pre-tax gain during the fourth quarter.
As of December 31, 1993 Chesapeake signed an agreement of merger
for Chesapeake Packaging Co. to acquire Lawless Holding Corporation,
based in North Tonawanda, New York. Lawless Holding Corporation
had annual sales of over $60 million in 1992 and includes the
Lawless Container Corporation corrugated container plant in North
Tonawanda, corrugated sheet plants located in Scotia, New York, Le
Roy, New York and Madison, Ohio, and Lawless Packaging and Display, a
consumer graphic packaging plant located in Buffalo, New York. This
transaction closed on January 24, 1994.
During the fourth quarter of 1992, Chesapeake adopted new, required
accounting rules for postretirement benefits other than pensions and
for income taxes, recording, as accounting changes, a net one-time,
after-tax charge of $9.7 million, or $.46 per share. The
cumulative effect consisted of a transition obligation charge of $19.1
million pretax, or $11.9 million after tax, to accrue for the costs of
future health benefits for retirees and current employees after
retirement, and an increase in net income of $2.2 million from changing
the method of accounting for income taxes. These new accounting rules
had no effect on cash flow or income before
74
the cumulative effect of accounting changes.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Business Segment Information
The Company's three business segments are kraft products, tissue
and packaging. The kraft products segment includes kraft, forest and
building products. Tissue is comprised of commercial, industrial and
consumer tissue products. Packaging consists of point-of-sale
displays, special packaging, consumer graphic packaging and corrugated
shipping containers. General corporate expenses, gains (losses) from
the sales of businesses and land development are shown as corporate.
Sales between segments reflect transfer prices at market value.
Intersegment sales not included below were $18.5 million in 1993, $17.3
million in 1992 and $16.6 million in 1991. Segment operating income is
revenue less allocable operating expenses. Operating expenses include
all expenses except interest, income taxes and the cumulative
effect of accounting changes.
Segment identifiable assets are those which are directly used in
segment operations. Timber and timberlands are included in the kraft
products segment. Corporate assets are cash, certain
nontrade receivables, real estate held for sale and other assets.
Industry segment groupings were changed in 1993 to better reflect
the way Chesapeake manages its businesses. Prior year amounts have been
restated to reflect this change.
Export sales, principally to Europe, Canada and Asia, were (in
millions): 1993 $62.9; 1992 $67.1; and 1991 $51.9.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Business Segment Information, continued
Financial information by business segments:
1993 1992 1991
(In millions)
Net sales:
Kraft products $343.5 $365.8 $339.1
Tissue 283.5 276.2 260.5
Packaging 252.7 243.8 238.2
Corporate 5.3 2.6 2.7
Consolidated net sales $885.0 $888.4 $840.5
Operating income:
Kraft products $12.5 $23.8 $21.5
Tissue 31.1 26.3 28.2
Packaging 17.6 15.5 21.3
61.2 65.6 71.0
Corporate (8.5) (11.7) (9.5)
Income before interest, taxes and
cumulative effect of accounting changes 52.7 53.9 61.5
Interest expense (32.0) (31.4) (35.4)
Income before taxes and cumulative effect of
accounting changes $20.7 $22.5 $26.1
Identifiable assets:
Kraft products $433.5 $451.8 $409.6
Tissue 335.1 358.8 367.5
Packaging 118.4 111.4 107.4
Corporate 32.3 36.9 31.0
Consolidated assets $919.3 $958.9 $915.5
Capital expenditures:
Kraft products $41.9 $66.8 $69.9
Tissue 9.5 6.9 8.7
Packaging 12.4 11.2 13.4
Corporate .1 .1 .2
Totals $63.9 $85.0 $92.2
Depreciation and cost of timber harvested
Kraft products $36.3 $33.1 $30.8
Tissue 24.3 24.3 22.9
Packaging 9.2 8.7 8.0
Corporate .4 .4 .4
Totals $70.2 $66.5 $62.1
77
ELEVEN-YEAR COMPARATIVE RECORD
(Dollar amounts in millions except per share data)
1993 19921 1991 1990 1989
Operating Results
Net sales $885.0 $888.4 $840.5 $841.2 $813.1
Net cost except depreciation and cost
of timber harvested 794.1 799.4 752.3 756.3 686.7
Depreciation and cost of timber
harvested 70.2 66.5 62.1 55.8 47.9
Income before taxes and cumulative effect
of accounting changes 20.7 22.5 26.1 29.1 78.5
Income taxes 10.3 8.1 10.7 12.4 30.9
Income before cumulative effect of
accounting changes 10.4 14.4 15.4 16.7 47.6
Cumulative effect of accounting changes - 9.7 - - -
Net income 10.4 4.7 15.4 16.7 47.6
Cash dividends declared on common stock 16.8 16.7 14.8 14.8 14.8
Income retained for use in the business (6.4) (12.0) .6 1.9 32.8
Net cash provided by operating activities 113.6 69.2 67.8 69.2 98.6
Percent of income before cumulative effect
of accounting changes
To net sales 1.2% 1.6% 1.8% 2.0% 5.9%
To stockholders' equity 2.8 4.5 4.9 5.3 17.0
To total assets 1.1 1.6 1.8 2.1 7.2
Common Stock
Number of stockholders of record 7,778 7,964 7,741 7,789 7,387
Shares outstanding (in thousands) 23,514 23,330 20,635
20,436 20,564
Per share
Earnings before cumulative effect of
accounting changes $.44 $ .63 $ .75 $ .81 $ 2.31
Earnings .44 .17 .75 .81 2.31
Dividends declared .72 .72 .72 .72 .72
Stockholders' equity 15.65 15.88 15.43 15.36 15.28
Financial Position
Working capital $ 87.1 $122.2 $101.7 $ 92.8 $ 98.3
Property, plant and equipment, net 53.8 668.3 641.6 616.2 544.7
Total assets 919.3 958.9 915.5 875.9 789.7
Total capital 799.7 849.6 820.8 783.7 704.4
Long-term debt 333.1 382.8 415.9 381.0 301.1
Deferred income taxes 98.6 96.4 86.5 88.9 89.2
Stockholders' equity 368.0 370.4 318.4 313.8 314.1
Percent of long-term debt
To total capital 41.7% 45.1% 50.7% 48.6% 42.7%
To stockholders' equity 90.5 103.3 130.6 121.4 95.9
Additional Data
Capital expenditures $63.9 $ 85.0 $ 92.2 $128.5 $139.5
Acres of timberland owned (in thousands) 3295 3505 3505 3505 3575
Number of employees 4,833 5,062 5,039 5,104 4,945
78
NOTES TO ELEVEN-YEAR COMPARATIVE RECORD
Accounting policies are stated in Note 1 of Notes to Consolidated
Financial Statements. Percent of income before cumulative effect of
accounting changes information is calculated using beginning of year and
acquisition amounts where appropriate.
1. Includes net one-time, after tax charge of $9.7 million, or $.46
per share, related to the adoption of SFAS 106 and SFAS 109 in 1992.
5. Excludes 17,000 - 25,000 acres held by land development subsidiaries
during 1989 - 1993.
79
OPERATING MANAGERS AND LOCATIONS
CHESAPEAKE PAPER PRODUCTS Company
Thomas Blackburn
West Point, Virginia
Recycling Centers
Baltimore, Maryland
Greensboro, North Carolina
Norfolk, Virginia
Richmond, Virginia
Roanoke, Virginia
CHESAPEAKE FOREST PRODUCTS Company
Thomas Blackburn
West Point, Virginia
Elizabeth City, North Carolina
Keysville, Virginia
Pocomoke City, Maryland
Chesapeake Building Products Company
Jack C. King
West Point, Virginia
Keysville, Virginia
Milford, Virginia
Princess Anne, Maryland
WISCONSIN TISSUE MILLS INC.
Charles S. Cianciola
Menasha, Wisconsin
Neenah, Wisconsin
CHESAPEAKE CONSUMER PRODUCTS Company
William A. Raaths
Appleton, Wisconsin
LAND DEVELOPMENT
Joel K. Mostrom
Delmarva Properties, Inc.
Robert F. Brake
West Point, Virginia
Stonehouse Inc.
Joel K. Mostrom
Williamsburg, Virginia*
80
OPERATING MANAGERS AND LOCATIONS, (Continued)
CHESAPEAKE PACKAGING CO.
Samuel J. Taylor
Chesapeake Display and Packaging Company
George F. Barnes
Bruce M. Pinover
Winston-Salem, North Carolina
Bruce A. Watson
Sandusky, Ohio*
West Des Moines, Iowa
Permanent Display Division
George F. Barnes
Rural Hall, North Carolina
Color-Box, Inc.
Jack L. Creech
Richmond, Indiana
Chesapeake Packaging Divisions
Robert F. Schick
Robert S. Argabright, II
Baltimore, Maryland
Edward R. Badyna
Binghamton, New York
Scranton, Pennsylvania
Terry R. Jenkins
Louisville, Kentucky
St. Anthony, Indiana
Gerald E. Nelson
Richmond, Virginia
Edward P. Godsey
Roanoke, Virginia
Corporate Headquarters
1021 E. Cary Street, Box 2350
Richmond, Virginia 23218-2350*
804/697-1000
* Leased real property
81