-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cl4EDCrR9xtMfm13HPqgH5K23HbBJbr1sDDOsTu00PqcxT32aBEfbEYNLXWo+lqz DDX8EErg6xLyIrlQau9d3w== 0000812708-98-000002.txt : 19980326 0000812708-98-000002.hdr.sgml : 19980326 ACCESSION NUMBER: 0000812708-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLMAN INC CENTRAL INDEX KEY: 0000812708 STANDARD INDUSTRIAL CLASSIFICATION: PLASTIC MAIL, SYNTH RESIN/RUBBER, CELLULOS (NO GLASS) [2820] IRS NUMBER: 041671740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10033 FILM NUMBER: 98572817 BUSINESS ADDRESS: STREET 1: 1040 BROAD ST STE 302 CITY: SHREWSBURY STATE: NJ ZIP: 07702 BUSINESS PHONE: 9085427300 10-K 1 FORM 10-K FOR YEAR ENDED 1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to__________ Commission file number 0-15899 WELLMAN, INC. - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-1671740 - --------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1040 Broad Street, Suite 302 Shrewsbury, New Jersey 07702 - --------------------------------- ------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (732) 542-7300 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ---------------------- Common Stock, New York Stock $.001 par value Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by nonaffiliates of the registrant, computed on the basis of $21.06 per share (the closing price of such stock on March 20, 1998 on the New York Stock Exchange): $647,348,219. The number of shares of the registrant's Common Stock, $.001 par value, and Class B Common Stock, $.001 par value, outstanding as of March 20, 1998 was 31,141,883 and -0-, respectively. DOCUMENTS INCORPORATED BY REFERENCE 1. Proxy Statement for the 1998 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission on or before April 30, 1998) is incorporated by reference in Part III hereof. 2 PART I Item 1. BUSINESS - ------ -------- Wellman, Inc. (which, together with its subsidiaries, is herein referred to as the "Company") is principally engaged in the manufacture and sale of polyester products, including Fortrel(R) brand polyester textile fibers, polyester fibers made from recycled raw materials and PermaClear(R) PET (polyethylene terephthalate) packaging resins. RECENT DEVELOPMENTS - ------------------- Construction of the Company's new PET resins and polyester fiber production facility ("Pearl River Plant") in Mississippi, which is approximately 50% completed, is expected to commence operation in three phases beginning in late 1998. The construction is proceeding on plan and costs to date have approximated the construction budget. Upon completion, it will have an initial annual capacity of approximately 470 million pounds of PET packaging resins and 230 million pounds of polyester fiber. See "Capital Investment Program" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." During the second quarter of 1997, the Company implemented a restructuring plan to reduce costs and enhance the competitive position of its European operations, resulting in a pretax charge of approximately $7.5 million. The primary components of the restructuring charge relate to the modification of certain supply and service agreements at the Company's Netherlands-based PET resins business and termination benefits related to a workforce reduction at the Company's Irish fiber operation. See note 6 to the consolidated financial statements and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." On December 30, 1997, the Company sold its subsidiary, Creative Forming, Inc. (CFI), located in Ripon, WI, to a management and investor group. The Company incurred a nonrecurring loss on the sale of CFI, which manufactures thermoformed packaging and extruded sheet primarily from virgin and recycled PET. See note 3 to the consolidated financial statements and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's Irish fiber operation experienced a fire in July 1997 that destroyed two out of five warehouses at the site. All damages were covered by insurance. It is the Company's intention to replace the destroyed buildings. See note 3 to the consolidated financial statements. PRODUCTS AND MARKETS - -------------------- The Company's operating structure is organized in three product groups: the Fibers Group, composed of the chemical-based polyester textile fiber manufacturing operations; the Recycled Products Group (RPG), primarily consisting of polyester fiber manufacturing operations in the United States and Europe and their related recycling operations, which procure and process waste raw materials, as well as the nylon engineering resins and wool businesses; and the Packaging Products Group (PPG), which includes the PET packaging resins businesses in the United States and Europe. CFI was included in the PPG through the date of sale. The following table presents the combined net sales (in millions) and percentage of net sales of the Company by product group for the periods 3 indicated. In the table, intercompany transactions have been eliminated and historical exchange rates have been applied to the data.
1997 1996 1995 -------------- -------------- -------------- Net % of Net % of Net % of Sales Total Sales Total Sales Total ----- ----- ----- ----- ------ ----- Fibers Grp $ 419.4 38.7% $ 450.6 41.0% $ 483.9 43.6% RPG 386.2 35.7 372.9 33.9 479.7 43.2 PPG 277.6 25.6 275.3 25.1 145.8 13.2 ------- ----- ------- ------ ------ ------ TOTAL $1,083.2 100.0% $1,098.8 100.0% $1,109.4 100.0% ======== ===== ======== ===== ======== ====== - ------------
Fibers Group - ------------ The Fibers Group manufactures chemical-based polyester staple fibers and polyester partially-oriented yarn (POY) for sale to the textile industry. Staple, the primary product produced, is multi-strand fiber cut into short lengths to simulate certain properties found in natural fibers, such as cotton and wool, and/or to meet the end product needs of the Company's customers. POY is a continuous polyester filament. Both products are marketed under the Fortrel(R) brand. Staple customers include integrated textile mills and yarn spinners which process polyester staple into yarn and fabric for a variety of applications, including apparel, home furnishings and industrial uses. The Company manufactures polyester textile staple from two petrochemicals, purified terephthalic acid (PTA) and monoethylene glycol (MEG), at its Palmetto Plant in Darlington, SC. The stated annual fiber production capacity of the Palmetto Plant is approximately 500 million pounds. POY is produced at the Company's Fayetteville, NC plant from fiber-grade polyester resin manufactured from PTA and MEG at the Company's Palmetto Plant. POY is sold to integrated textile mills and texturizers, which further process it before making it into fabric for use in apparel, home furnishings and industrial applications. The stated annual POY production capacity of the Fayetteville Plant is 130 million pounds. Recycled Products Group - ----------------------- The major product manufactured by the RPG is polyester staple fiber for use as fiberfill (for pillows, comforters and furniture), and in carpets, rugs and industrial uses. Domestically, these products are made from recycled raw materials at facilities in Johnsonville and Marion, SC. The stated annual fiber production capacities of the Johnsonville and Marion Plants are approximately 260 million and 30 million pounds, respectively. The Company utilizes two categories of recycled raw materials: postindustrial materials and postconsumer PET soft drink bottles. Postindustrial materials include off-quality or off-spec production, trim and other materials generated from fiber, resin or film manufacturing processes, a portion of which is purchased from manufacturers that compete with the Company in the sale of fiber and resin. The Company obtains postconsumer PET bottles primarily from deposit return and curbside recycling programs. The Company's recycling operation in Johnsonville, SC is responsible for the procurement of these materials, which it processes into usable raw 4 materials for the fiber and engineering resins businesses. As a result, this operation is primarily an internal supplier. The raw material mix for the Johnsonville and Marion Plants is approximately 50% postconsumer PET bottle flake and 50% postindustrial material. In Europe, the RPG manufactures polyester staple fiber from recycled raw materials through Wellman International Limited (WIL), a wholly-owned subsidiary based in Mullagh, Republic of Ireland. The stated annual fiber production capacity of WIL is approximately 174 million pounds. WIL's polyester fibers are used primarily in fiberfill, nonwovens and industrial applications. WIL exports, primarily to the United Kingdom and continental Europe, virtually all of its fiber production. The majority of WIL's raw materials are postindustrial materials, some of which are obtained from suppliers who compete with WIL in the fibers business in Europe. WIL also utilizes as raw material postconsumer PET bottles obtained from its recycling facilities in Spijk, the Netherlands and Verdun, France and from third party purchases. WIL's raw material mix is approximately 40% postconsumer PET bottle flake and 60% postindustrial material. Including domestic and European production, the Company believes it is the world's largest producer of polyester staple fiber made from recycled feedstocks and the world's largest postconsumer PET bottle recycler. The Company's Engineering Resins Division, located in Johnsonville, SC, manufactures and markets nylon engineering resins under the Wellamid (TM) brand to the injection molding industry. These resins are produced using virgin, postindustrial and postconsumer nylon compounded with various additives (glass, minerals, fire retardant, etc.) to impart desired performance characteristics. These resins are used primarily in automotive, lawn and garden and electrical applications. The RPG also produces wool top and anhydrous lanolin in Johnsonville, SC. Packaging Products Group - ------------------------ The PPG manufactures solid-stated and amorphous PET packaging resins at the Company's Palmetto Plant. Solid-stated PET resin is primarily used in the manufacture of soft drink bottles and other food and beverage packaging and is sold under the PermaClear(R) brand. Amorphous resin, which is produced from PTA and MEG, is used internally for solid-stating (a process which upgrades the resin) and, to a lesser extent, sold to external customers. The Company's domestic production capacity for amorphous resin is approximately 500 million pounds per year, 420 million pounds of which is solid-stated. Solid-stated capacity includes a new 200 million pounds per year production line which commenced operation in the second quarter of 1997. The Company also has a solid-stated PET packaging resin production facility in Emmen, the Netherlands ("PET Resins-Europe"). The stated annual production capacity of this facility, where PTA and MEG are also used as raw materials, is 110 million pounds. Virtually all of the resin is sold to PET bottle and packaging manufacturers in Europe. In 1997, the Company incurred a restructuring charge related to the modification of certain supply and service agreements at this operation. See note 6 to the consolidated financial statements and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5 Chemical Raw Materials - ---------------------- The Company purchases PTA under an exclusive supply contract with Amoco Chemical Corporation, the primary domestic supplier. MEG is purchased under a supply contract with Oxy Chem Inc. The Company also has commitments to supply its new Pearl River Plant scheduled to commence operation in phases beginning in late 1998. The prices of PTA and MEG, which are typically set on a quarterly basis, have fluctuated in the past and are likely to continue to do so in the future. See "Forward Looking Statements; Risks and Uncertainties." Capital Investment Program - -------------------------- Capital expenditures in 1997 were approximately $221 million. Major capital projects included in the 1997 expenditures were construction costs associated with the Pearl River Plant in Mississippi, expected to commence operation in phases beginning in late 1998, and the domestic solid-stated PET resins expansion which commenced operation in the second quarter of 1997. Capital expenditures are expected to total approximately $300 million over the next two years. These expenditures primarily include the remaining construction costs of the Pearl River Plant, the total construction cost of which is budgeted at approximately $400 million. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Sales and Marketing - ------------------- Approximately 50 employees market the majority of the Company's products. For certain fiber sales outside the United States, the Company also utilizes representatives or agents. The Company's polyester fibers are also promoted through various activities, such as advertising, sales promotion, market analysis, product development and fashion forecasting, directed to its customers and to organizations downstream from its customers. As part of this effort, the Company's marketing personnel encourage downstream purchasers of apparel, home furnishings and other products to specify to their suppliers the use of Fortrel(R) brand polyester in their products. The Company's markets have historically displayed price and volume cyclicality. The cost of PTA and MEG is a primary determinant of polyester fiber and PET resins prices. The Company's sales are neither materially dependent upon a single customer nor seasonal in nature. The polyester fiber markets are subject to changes in, among other factors, polyester fiber and/or textile product imports, consumer preferences and spending and retail sales patterns, which are driven by general economic conditions. Consequently, a downturn in either the U.S., European, or global economy or an increase in imports of textile or polyester fiber products could adversely affect the Company's business. Polyester textile fiber demand also may be influenced by the relative price of substitute fibers, most notably cotton. Major factors affecting the PET resins market include producer supply and capacity utilization rates and demand for PET containers, primarily for soft drinks and other beverages which may be influenced by weather and the relative price of aluminum cans. Worldwide PET resins supply has recently undergone significant expansion. Demand for PET resins is also driven by new product applications and conversion from other materials. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - General." 6 Competitors - ----------- Each of the Company's major fiber markets is highly competitive. The Company competes primarily on the basis of product quality, customer service, brand identity and price. Several competitors are substantially larger than the Company and have substantially greater economic resources. The Company's primary competitors are E.I. DuPont de Nemours & Co., the Hoechst Celanese Corp. (HCC) subsidiary of Hoechst A.G. and Nan Ya Plastics Corp. (Nan Ya). The Company believes it is currently the second-largest producer of polyester staple in the United States, representing approximately 28% of U.S. production capacity. Primary competitors in the PET packaging resins business, which the Company entered in 1994, are Eastman Chemical Co., Shell Chemical Co., HCC and Nan Ya. The Company competes primarily on the basis of resin quality, customer service and price. The Company's competitors are substantially larger than the Company and have substantially greater economic resources. Research and Development - ------------------------ The Company has approximately 85 employees devoted to research, development and technical service activities in the fiber, recycling and resins businesses. The Company has entered into technology sharing arrangements from time to time with various parties. Research and development costs were approximately $19.6 million, $18.5 million and $16.9 million for 1997, 1996 and 1995, respectively. Foreign Activities - ------------------ The Company operates in international markets, primarily through WIL and PET Resins-Europe. Since most of the sales are in different currencies, changes in exchange rates may affect profit margins and sales levels of these operations. In addition, fluctuations between currencies may also affect the Company's reported financial results. Foreign exchange contracts and borrowings in local currencies are utilized by the Company to manage its foreign currency exposure. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and notes 2 and 14 to the consolidated financial statements. The Company's foreign businesses are subject to certain risks customarily attendant to foreign operations and investments in foreign countries, including restrictive action by local governments, limitations on repatriating funds and changes in currency exchange rates. See note 15 to the consolidated financial statements for additional information relating to the Company's foreign activities. Employees - --------- As of December 31, 1997, the Company employed a total of approximately 3,100 persons in the United States and Europe. At December 31, 1997, the Union of Needletrades, Industrial and Textile Employees (UNITE) represented 983 employees at the Company's Johnsonville, SC operations. Approximately 560 of these employees were members of UNITE, whose contract with the Company expires in July 1999. At WIL, 295 out of 435 total employees were represented by four unions at year-end 1997. The wage agreements with these unions each expire on April 30, 2000. Employees at the PET Resins-Europe operation total 67, with 49 represented by three unions whose contracts expire in May 1999. The Company believes relations with its employees are satisfactory. 7 Environmental Matters - --------------------- The Company's plants are subject to numerous existing and proposed laws and regulations designed to protect the environment from wastes, emissions and hazardous substances. The Company believes it is either in material compliance with all currently applicable regulations or is operating in accordance with the appropriate variances and compliance schedules or similar arrangements. For additional information relating to environmental matters, see Item 7. "Management's Discussion and Analysis of Financial Position and Results of Operations - Environmental Matters" and note 9 to the consolidated financial statements. Executive Officers of the Registrant - ------------------------------------ The current executive officers of the Company are as follows: Name and Age Position - ------------ -------- Thomas M. Duff, 50 President, Chief Executive Officer and Director Clifford J. Christenson, 48 Executive Vice President, Chief Operating Officer and Director Keith R. Phillips, 43 Vice President, Chief Financial Officer and Treasurer James P. Casey, 57 Vice President; President, Fibers Group John R. Hobson, 57 Vice President, Recycled Products Group Mark J. Rosenblum, 44 Vice President, Chief Accounting Officer and Controller Ernest G. Taylor, 47 Vice President, Chief Administrative Officer Joseph C. Tucker, 50 Vice President, Corporate Development Officers are elected annually by the Board of Directors. Set forth below is certain information with respect to the Company's executive officers. Thomas M. Duff. Mr. Duff has been President and CEO of the Company since its inception in 1985. Clifford J. Christenson. Mr. Christenson has been Executive Vice President since October 1993 and Chief Operating Officer since June 1995. Prior to October 1993 he was Chief Financial Officer and Treasurer since joining the Company in 1985 and Vice President since 1986. Keith R. Phillips. Mr. Phillips has been Vice President, Chief Financial Officer and Treasurer since October 1993. Prior to October 1993 he was a partner in Ernst & Young LLP. Mr. Phillips is a certified public accountant. James P. Casey. Mr. Casey has been President of the Fibers Group since October 1993. Prior to such time he was Vice President, Marketing since March 1991. John R. Hobson. Mr. Hobson has been Vice President, Recycled Products Group since July 1995. Prior to such time, he served as Vice President of 8 various divisions from January 1992 to July 1995. Prior to 1992, he was Director of International Sales and (chemical) Raw Material Purchasing. Mark J. Rosenblum. Mr. Rosenblum has been Vice President, Controller since September 1989, Chief Accounting Officer since August 1996 and Controller since he joined the Company in 1985. Mr. Rosenblum is a certified public accountant. Ernest G. Taylor. Mr. Taylor has been Vice President, Administration since January 1991. In November 1997 he became Vice President, Chief Administrative Officer. Joseph C. Tucker. Dr. Tucker has been Vice President, Corporate Development since December 1997. Prior to such time, he served as Vice President and General Manager of PET Resins-Europe from 1995 to 1997 and Vice President of Manufacturing and Technology from 1993 to 1995. Item 2. Properties - ------ ---------- The location and general description of the principal manufacturing properties owned by the Company are set forth in the table below: Principal Square Location Functions Footage - -------- --------- ------- Johnsonville, SC Fiber, Engineering Resins and 2.3 million Wool Manufacturing, Recycling Operations and Warehouse Darlington, SC Fiber and Resins Manufacturing 1.1 million (Palmetto) and Warehouse Mullagh, Ireland (1) Fiber Manufacturing and Warehouse .4 million Fayetteville, NC Fiber Manufacturing and Warehouse .3 million Emmen, the Netherlands Resins Manufacturing and Warehouse .1 million - -------------------- (1) WIL's credit facilities are secured by the assets of WIL. The Company also has manufacturing, marketing and administrative facilities in Marion, SC, Charlotte, NC, New York, NY, Bridgeport, NJ, Spijk, the Netherlands, Yorkshire, England, Dortmund, Germany and Verdun, France. The corporate office is located in Shrewsbury, NJ. The Company is constructing a new plant in Hancock County, MS (Pearl River Plant). See Item 1. "Business-Recent Developments" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Item 3. Legal Proceedings - ------ ----------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- Not applicable. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------ ------------------------------------------------------------------- The Company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol WLM. The following table shows the high, low and closing sales prices as reported by the NYSE and cash dividends paid per share of common stock for the last two fiscal years.
Year High Low Close Dividend - ---- ---- --- ----- -------- 1997 - ---- Fourth Quarter $24.56 $17.94 $19.50 $0.09 Third Quarter $24.19 $17.38 $23.19 $0.09 Second Quarter $18.63 $15.13 $17.38 $0.09 First Quarter $18.38 $16.00 $17.50 $0.08 1996 - ---- Fourth Quarter $19.25 $15.88 $17.13 $0.08 Third Quarter $23.50 $17.00 $17.50 $0.08 Second Quarter $24.88 $22.13 $23.38 $0.08 First Quarter $24.38 $18.00 $23.50 $0.07
The Company had approximately 900 holders of record and, to its knowledge, approximately 15,000 beneficial owners of its common stock as of March 20, 1998. See note 11 to the consolidated financial statements for information regarding common stock rights associated with the common stock. 10 Item 6. Selected Consolidated Financial Data - ------- ------------------------------------
(In thousands, except Years Ended December 31, per share data) 1997(1) 1996 1995 1994 1993(2) - ----------------------------------------------------------------------------- Income Statement Data: Net sales . . . . . . . . $1,083,188 $1,098,804 $1,109,398 $936,133 $842,064 Cost of sales. . . . . . 923,278 941,693 886,817 724,874 679,182 ---------- ---------- ---------- -------- -------- Gross profit. . . . . . . 159,910 157,111 222,581 211,259 162,882 Selling, general and administrative expenses. 83,128 88,987 89,704 89,518 86,511 Restructuring charge. . . 7,469 -- -- -- -- Interest expense, net . . 12,160 13,975 11,666 13,741 15,736 Gain (loss) on divestitures and other, net . . . . . (5,963) -- (5,500) -- 12,386 ---------- ---------- ---------- -------- -------- Earnings before income taxes and cumulative effect of changes in accounting principles . . . . . . . 51,190 54,149 115,711 108,000 73,021 Income taxes. . . . . . . 20,835 27,620 41,657 43,200 32,567 ---------- ---------- ---------- -------- -------- Earnings before cumulative effect of changes in accounting principles. . 30,355 26,529 74,054 64,800 40,454 Cumulative effect of changes in accounting principles, net of income taxes. . . -- -- -- -- (9,010) ---------- ---------- ---------- -------- -------- Net earnings. . . . . . . $ 30,355 $ 26,529 $ 74,054 $ 64,800 $ 31,444 ========== ========== ========== ======== ======== Basic earnings per common share: Before cumulative effect of changes in accounting principles . . . . . . $ 0.98 $ 0.81 $ 2.22 $ 1.96 $ 1.24 Cumulative effect of changes in accounting principles, net of income taxes. . -- -- -- -- (0.28) ---------- ---------- ---------- -------- -------- Basic net earnings per share. . . . . . . $ 0.98 $ 0.81 $ 2.22 $ 1.96 $ 0.96 ========== ========== ========== ======== ======== Average common shares-basic . . . . . 31,120 32,649 33,322 32,985 32,682 Diluted earnings per common share: Before cumulative effect of changes in accounting principles . . . . . . $ 0.97 $ 0.81 $ 2.20 $ 1.94 $ 1.23 Cumulative effect of changes in accounting principles, net of income taxes. . -- -- -- -- (0.27) ---------- ---------- ---------- -------- -------- Diluted net earnings per share. . . . . . . $ 0.97 $ 0.81 $ 2.20 $ 1.94 $ 0.96 ========== ========== ========== ======== ======== Average common shares-diluted . . . . 31,269 32,774 33,699 33,417 32,857 Dividends (3) . . . . . . $ 10,882 $ 10,085 $ 9,003 $ 7,593 $ 5,885 11 Pro forma amounts assuming the effects of the changes in accounting principles are applied retroactively: Net earnings. . . . . NA NA NA NA $ 40,454 Basic net earnings per share. . . . . . NA NA NA NA $ 1.24 Diluted net earnings per share. . . . . . NA NA NA NA $ 1.23
December 31, 1997 1996 1995 1994 1993 Balance Sheet Data: --------------------------------------------------- Total assets. . . . . .$1,319,225 $1,203,949 $1,210,673 $1,044,462 $1,015,247 Total debt. . . . . . .$ 394,753 $ 319,566 $ 279,230 $ 256,531 $ 312,767 Stockholders' equity. .$ 634,434 $ 623,928 $ 650,346 $ 577,573 $ 506,506
(1) 1997 net earnings reflect a charge of $8.1 million ($0.26 per diluted share) of unusual and nonrecurring items. (2) 1993 net earnings reflect a charge of $15.9 million ($0.48 per diluted share) of accounting changes and unusual and nonrecurring items. (3) Dividends paid were $0.35 per share in 1997, $0.31 per share in 1996, $0.27 per share in 1995,$0.23 per share in 1994 and $0.18 per share in 1993. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------- ----------------------------------------------------------------- GENERAL The Company's primary business is the manufacture and marketing of high- quality polyester products, including Fortrel(R) brand polyester textile fibers, polyester fibers made from recycled raw materials and PermaClear(R) brand PET (polyethylene terephthalate) packaging resins. The Company currently has annual capacity to manufacture approximately 1.1 billion pounds of fiber and 610 million pounds of resins worldwide at five major production facilities in the United States and Europe. The Company is also the world's largest PET plastics recycler, utilizing a significant amount of recycled raw materials in its manufacturing operations. The Company plans to substantially increase its polyester fiber and PET resins production capacity through the construction of its new, state-of-the- art Pearl River Plant in Mississippi. This facility commences operation in three phases beginning in late 1998. By the year 2001, this facility is expected to have annual capacity to manufacture 570 million pounds of resins and 230 million pounds of fiber. As a result, the Company's production mix is expected to be approximately 50% fibers and 50% PET resins. The Fibers Group produces Fortrel(R) textile fibers, which currently represent approximately 60% of the Company's fiber production. These fibers are used in apparel and home furnishings and are produced from two chemical raw materials, purified terephthalic acid (PTA) and monoethylene glycol (MEG). The other 40% of fiber production, primarily fiberfill and carpet fibers, is manufactured by the Recycled Products Group from recycled raw materials, including postindustrial fiber, resin and film materials and postconsumer PET soft drink bottles. The Company's PET resins, produced by the Packaging Products Group from PTA and MEG, are primarily used in the manufacture of clear plastic soft drink bottles and other food and beverage packaging. The Company's markets are highly competitive. It competes in these markets primarily on the basis of product quality, customer service, brand identity and price. It believes it is the second-largest polyester staple and third-largest POY producer in the United States and the fourth-largest PET resins producer in North America. Several of the Company's competitors are substantially larger than the Company and have substantially greater economic resources. Demand for polyester fiber historically has been cyclical, as it is subject to changes in consumer preferences and spending, retail sales patterns, and fiber or textile product imports, all of which are driven primarily by general economic conditions. Global PET resins demand continues to grow, driven by new product applications for PET and conversion from other packaging materials to PET. Several factors significantly affect the Company's profitability: raw material margins, which are the difference (or spread) between product selling prices and raw material costs; supply and demand for its products; the prices of competing materials, such as cotton and aluminum, which can affect demand for its products; and economic and market conditions in the United States, Europe and other regions of the world. Prices of PTA and MEG, primary determinants of polyester fiber and PET resins selling prices, are cyclical. Changes in PTA and MEG prices are driven by worldwide supply and demand. 13 Raw material margins for the chemical-based fiber and PET resins businesses have generally been influenced by supply and demand factors. Despite growing demand for PET resins, worldwide supply has recently undergone significant expansion which has adversely affected profitability. Both fiber and resins margins experience increases or decreases due to timing of price changes and market conditions. Raw material margins for the recycled fiber operation tend to be more variable than those for the chemical-based businesses, primarily because changes in recycled raw material costs do not cause changes in fiber prices. Recycled raw material costs are primarily dependent upon worldwide supply and demand for waste materials. The Company's sales are neither materially dependent upon a single customer nor seasonal in nature. Sales for PET resins, primarily for soft drink bottles and other beverages, may be influenced by weather and the relative price of aluminum cans. Demand, prices and raw material costs for both fiber and PET resins may be affected by global economic conditions, supply and demand balances, the prices of competing materials, such as cotton, and export activity. RESULTS OF OPERATIONS - 1997 COMPARED TO 1996 Net sales for 1997 remained unchanged as compared to 1996 at $1.1 billion primarily as a result of higher sales volumes offsetting lower selling prices. Sales for the Fibers Group decreased 6.9% to $419.4 million in 1997 from $450.6 million in 1996 due to significantly lower polyester fiber selling prices which more than offset slightly higher sales volumes. Sales for the Recycled Products Group (RPG) increased 3.6% to $386.2 million in 1997 from $372.9 million in 1996 due to increased polyester fiber sales volumes and higher sales in other divisions which offset worldwide declines in polyester fiber selling prices. Sales volumes in 1996 were negatively impacted by a 12-week strike at the Company's Irish fiber operation, which kept the facility closed from mid-July through early October. Despite substantially higher domestic sales volumes, sales for the Packaging Products Group (PPG) increased only slightly to $277.6 million in 1997 from $275.3 in 1996 as a result of significantly lower worldwide PET resins selling prices. In the second quarter of 1997, the Company commenced operation of an additional 200 million pounds per year PET resins production line at its Darlington, S.C. plant. Gross profit increased 1.8% to $159.9 million in 1997 from $157.1 million in 1996. The gross profit margin for 1997 was 14.7% compared to 14.3% for 1996. This was primarily the result of increased profitability in the RPG which offset lower profitability in the Fibers Group and PPG. The Company's gross profit in 1996 was negatively impacted by a charge of $7 million to establish an inventory reserve resulting from large declines in raw material costs and a 12-week strike at the Company's Irish fiber operation. Gross profit for the Fibers Group decreased primarily as a result of significantly lower polyester fiber selling prices offsetting lower overall costs. Gross profit for the RPG increased significantly in 1997 due in part to increased sales volumes at the Company's Irish fiber operation as a result of the 1996 period being negatively impacted by the aforementioned strike. In addition, the increase is attributable to substantially lower worldwide raw material costs and higher domestic sales volumes for fiber, and increased gross profit in other divisions. Despite higher domestic sales volumes resulting from the aforementioned capacity expansion and lower raw material costs, gross profit for the PPG decreased significantly in 1997 principally due to significantly lower worldwide PET resins selling prices. 14 Selling, general and administrative expenses amounted to $83.1 million in 1997, or 7.7% of sales, compared to $89.0 million in 1996, or 8.1% of sales. The decrease is due to reduced costs at the Company's European operations resulting from the restructuring plan implemented in the second quarter of 1997 (see below) as well as the Company's continued efforts to reduce overall spending. During the second quarter of 1997, the Company implemented a restructuring plan to reduce costs and enhance the competitive position of its European operations, resulting in a pretax charge of approximately $7.5 million. The primary components of the restructuring charge relate to the modification of certain supply and service agreements at the Company's Netherlands-based PET resins business and termination benefits related to a workforce reduction at the Company's Irish fiber operation. See note 6 to the consolidated financial statements. As a result of the foregoing, operating income was $69.3 million in 1997, or $76.8 million excluding the restructuring charge, compared to $68.1 million in 1996. Net interest expense decreased to $12.2 million in 1997 from $14.0 million in 1996. The decrease in interest expense was due principally to higher interest capitalization resulting from the Company's ongoing capacity expansion program. See note 7 to the consolidated financial statements. In the fourth quarter of 1997, the Company recorded a pretax loss of $6.0 million which decreased net earnings by $3.8 million, or $0.12 per diluted share. The loss is comprised of two parts: a loss on the sale of a subsidiary and a gain from an insurance reimbursement related to a warehouse fire at the Company's Irish fiber operation in July 1997. See note 3 to the consolidated financial statements. The effective income tax rate was 40.7% in 1997 compared to 51% in 1996. The rate decreased primarily as a result of increased earnings at the Company's Irish fiber operation, which is subject to significantly lower tax rates than the U.S. operations, and the reduction in foreign operating losses for which no tax benefit had been provided. As a result of the foregoing, net earnings for 1997 were $30.4 million, or $0.97 per diluted share. Excluding the one-time charges, net earnings for 1997 were $38.5 million, or $1.23 per diluted share, compared to $26.5 million, or $0.81 per diluted share in 1996. OUTLOOK Demand for the Company's polyester fibers is expected to remain healthy in 1998. However, domestic fiber profit margins remain at historically low levels primarily due to continued downward pressure on selling prices, which may continue in 1998. Domestic PET resins sales volumes are expected to increase in 1998 primarily due to the completion of a domestic expansion in the second quarter of 1997 and the scheduled start-up of the first PET resins production line at the Company's Pearl River Plant in late 1998. The Company believes that profit margins in this business will continue to recover in 1998 over the historically low levels in 1997. Operating profit in 1998 is expected to benefit from a restructuring plan the Company implemented at its European operations in the second quarter of 15 1997 through which it modified a PET resins take-or-pay supply agreement at the Netherlands facility and reduced staffing at the Irish fiber operation. To date, the Company has experienced little effect from the financial troubles of the Far East which began in 1997. However, the Company is uncertain what effect the present situation will have on future operations. RESULTS OF OPERATIONS - 1996 COMPARED TO 1995 Net sales for 1996 remained unchanged as compared to 1995 at $1.1 billion. This was generally the result of increased sales volumes and lower selling prices. Sales for the Fibers Group decreased 6.9% to $450.6 million in 1996 from $483.9 million in 1995 due to significantly lower polyester fiber selling prices which more than offset improved fiber sales volumes during the latter part of 1996. Sales for the RPG decreased 22.3% to $372.9 million from $479.7 million due primarily to a 12-week strike at the Company's Irish fiber operation, which kept the facility closed from mid-July through early October; and the disposition of certain businesses which had sales in 1995 of $47.5 million. In addition, the decline in RPG's sales was a result of lower polyester fiber selling prices for the domestic and Irish fiber operations. Sales for the PPG increased 88.8% to $275.3 million in 1996 from $145.8 million in 1995 due to higher sales volumes resulting from the December 31, 1995 acquisition of a Netherlands-based PET resins business and the mid-1995 expansion of domestic PET resins capacity. This increased volume more than offset significantly lower worldwide PET resins selling prices. Gross profit decreased 29.4% to $157.1 million in 1996 from $222.6 million in 1995. The gross profit margin for 1996 was 14.3% compared to 20.1% for 1995. Gross profit for the Fibers Group decreased primarily as a result of significantly lower fiber selling prices due to weak textile demand in the first half of the year which more than offset lower chemical raw material costs. Gross profit for the RPG also decreased in 1996 from 1995 primarily due to reduced profit at the Company's Irish fiber operation stemming from weak business conditions compounded by the strike, and the discontinuance of gross profit from divested businesses. This more than offset increased profits for the domestic recycled fiber business as a result of lower raw material costs. Despite higher sales volumes resulting from the aforementioned acquisition of the Netherlands-based PET resins business and domestic PET resins expansion, the gross profit for the PPG decreased in 1996 due to significantly lower worldwide PET resins selling prices, which more than offset lower raw material costs. These factors contributed to a loss at the Netherlands-based PET resins operation. The Company's gross profit for 1996 was also negatively impacted by a $7 million inventory charge resulting from large declines in raw material costs and selling prices, including a $3 million charge related to the PET resins take-or-pay arrangement. Selling, general and administrative expenses amounted to $89.0 million in 1996, or 8.1% of sales, compared to $89.7 million in 1995, or 8.1% of sales. As a result of the foregoing, operating income decreased to $68.1 million in 1996 compared to $132.9 million in 1995. Net interest expense for 1996 increased to $14.0 million from $11.7 million for 1995. Interest expense increased as a result of higher average outstanding borrowings which were partially offset by higher interest capitalization resulting from the Company's long-term capital investment program. 16 The effective income tax rate was 51% in 1996 compared to 36% in 1995. This resulted from lower pretax earnings, lower earnings at the Irish manufacturing operations which benefit from a favorable tax rate, and a pretax loss at the European PET resins operation which has no tax benefit. See note 8 to the consolidated financial statements. As a result of the foregoing, net earnings for 1996 were $26.5 million, or $0.81 per diluted share, compared to $74.1 million, or $2.20 per diluted share, in 1995. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. The Company takes a proactive approach in addressing the applicability of these laws and regulations as they relate to its manufacturing operations and in proposing and implementing any remedial plans that may be necessary. The Company has identified certain situations that will require future capital and non-capital expenditures to maintain or improve compliance with current environmental laws and regulations as well as to support planned future expansion. The majority of the identified situations are found at the Company's largest manufacturing facilities and primarily deal with groundwater remediation, quality of air emissions and wastewater treatment processes. The Company's policy is to expense environmental remediation costs when it is both probable that a liability has been incurred and the amount can be reasonably estimated. While it is often difficult to reasonably quantify future environmental-related expenditures, the Company currently estimates its future non-capital expenditures related to environmental matters to range between $9.8 million and $25.2 million. In connection with these expenditures, the Company has accrued management's best estimate of probable non-capital environmental expenditures. In addition, aggregate future capital expenditures related to environmental matters are expected to range from $9.3 million to $28.6 million. These non-capital and capital expenditures are expected to be incurred during the next 10 to 20 years. The Company believes that it is entitled to recover a portion of these expenditures under indemnification and escrow agreements. During 1997, 1996 and 1995, costs associated with environmental remediation and ongoing assessment were not significant. See notes 1 and 9 to the consolidated financial statements. The measurement of liability is based on an evaluation of currently available facts with respect to each individual situation and takes into consideration factors such as existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. As assessments and remediation progress at individual sites, these liabilities are reviewed periodically and adjusted to reflect additional technical and legal information which becomes available. The Company believes it is either in material compliance with all currently applicable regulations or is operating in accordance with the appropriate variances and compliance schedules or similar arrangements. Subject to the imprecision in estimating future environmental costs, the Company believes that compliance with current laws and regulations will not require significant capital expenditures or have a material adverse effect on its consolidated financial position or results of operations. See "Forward Looking Statements; Risks and Uncertainties." 17 YEAR 2000 The Year 2000 Issue is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a recent assessment, the Company determined that it will be required to modify certain portions of its software and process equipment so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications to existing software the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company expects to complete its Year 2000 project by mid 1999, which is prior to any anticipated impact on its operating systems. The total project cost, which will be expensed as incurred, is not expected to have a material effect on the results of operations. See "Forward Looking Statements; Risks and Uncertainties." LIQUIDITY AND CAPITAL RESOURCES The Company generated cash from operations of $128.1 million in 1997 compared to $151.9 million in 1996. Net cash used in investing activities amounted to $197.8 million in 1997 compared to $135.2 million in 1996. Capital spending amounted to $221.2 million in 1997 and $126.0 million in 1996, reflecting the Company's ongoing capital investment program. Proceeds from divestitures and other amounted to $18.3 million in 1997 and $4.2 million in 1996. Net cash provided by financing activities amounted to $67.9 million in 1997 compared to net cash used of $18.4 million in 1996. Net borrowings were $78.3 million in 1997 compared to $40.3 million in 1996. In 1996, the Company completed the repurchase of 2.5 million shares of its common stock in the open market at a cost of $49.5 million. With the completion of the PET resins capacity expansion at the Darlington, SC plant in the second quarter of 1997, the remainder of the Company's ongoing capital investment program consists primarily of the construction of its Pearl River Plant in Mississippi. The total capitalized cost of the facility is estimated to be approximately $450 million, consisting of approximately $400 million of construction costs plus Mississippi state grants and capitalized interest. This facility, approximately 50% completed, is expected to be operational in three phases beginning in late 1998. The Company's planned capital expenditures in 1998 are estimated to range between $210 and $230 million, with aggregate capital expenditures through the end of 1999 estimated at approximately $300 million. The exact amount and timing of the capital spending is difficult to predict since certain projects may extend into 1999 or beyond depending upon equipment delivery and construction schedules. To receive certain incentives provided by the state of Mississippi, the Company, in conjunction with the Mississippi Business Finance Corporation, expects to issue a series of taxable Rural Economic Development Bonds. 18 The Company's financing agreements contain normal financial and restrictive covenants. The most restrictive of these covenants permits a maximum leverage ratio of 55%, requires EBITDA to exceed 3.5 times interest expense and requires the Company to maintain a certain net worth. The financial resources available to the Company at December 31, 1997 include $310 million under its $330 million revolving credit facility, unused short-term uncommitted lines of credit aggregating approximately $250 million, and internally generated funds. The Company is pursuing other forms of financing including the issuance of public or private debt securities. The Company believes these financial resources and other credit arrangements will be sufficient to meet its foreseeable working capital, capital expenditure and dividend payment requirements. The Company has entered into two types of financial instruments to minimize its interest rate exposure. One instrument, with a notional amount of $150 million, was designed to provide a fixed 10 year interest rate of 6.42% (exclusive of corporate spreads) on $150 million of debt if issued on December 31, 1997 and approximately 6.51% (exclusive of corporate spreads) if issued on March 31, 1998. The Company has also entered into interest rate swaps to fix the interest rate on variable rate borrowings, thereby eliminating substantial interest rate risk. The agreements are for $200 million, $100 million of which were in effect at December 31, 1997, and $100 million with starting dates ranging between February and May 1998. Maturity dates are a minimum of 5 years and a maximum of 10 years after the starting date of the swaps. The swaps will effectively fix the rate of interest between 6.10% and 6.20% on $200 million of borrowings. In aggregate, the Company estimates it would have had to pay approximately $14.2 million to terminate these agreements at December 31, 1997. The Company has entered into forward foreign currency contracts to exchange Dutch guilders for U.S. dollars with an aggregate notional amount of $21.8 million at December 31, 1997 in order to reduce the related impact of foreign currency translation adjustments. This has the effect of converting a portion of U.S. debt to local currency (guilder) debt. The Company has designated these contracts as a hedge of a net investment in a foreign entity. At December 31, 1997, the Company estimates it would receive approximately $0.7 million, if these contracts were terminated. The Company has also entered into forward foreign currency contracts to exchange U.S. dollars for German marks with an aggregate notional amount of $12.6 million at December 31, 1997. These contracts are designed to reduce (hedge) the impact of foreign currency fluctuations relative to fixed asset purchase commitments and have maturity dates ranging from January 1998 through March 1999. At December 31, 1997, the Company would have had to pay approximately $1.4 million to terminate these contracts. The Company's European businesses utilize foreign currency debt and forward currency contracts to hedge certain of their accounts receivable and accounts payable denominated in other foreign currencies. At December 31, 1997, the notional amount of the forward foreign currency contracts was $15.5 million and the cost to terminate these contracts was not significant. The Company's estimates with respect to the values of its derivative instruments are based on readily available dealer quotes. 19 NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), effective for fiscal years beginning after December 15, 1997. FAS 131 requires that a public company report financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The financial information to be reported includes segment profit or loss, certain revenue and expense items and segment assets and reconciliations to corresponding amounts in the general purpose financial statements. FAS 131 also requires information about products and services, geographic areas of operation, and major customers. The Company has not completed its analysis of the effect of adoption of FAS 131 on its financial statement disclosure; however, the adoption of FAS 131 will not affect results of operations or financial position. FORWARD LOOKING STATEMENTS; RISKS AND UNCERTAINTIES Statements contained in this Form 10-K that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that a number of important factors could cause actual results for 1998 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Such statements contain a number of risks and uncertainties, including, but not limited to, demand and competition for polyester fiber and PET resins, availability and cost of raw materials, levels of production capacity and announced changes thereto, changes in interest rates and foreign currency exchange rates, work stoppages, natural disasters, U.S., European and global economic conditions and changes in laws and regulations, prices of competing products, such as cotton and aluminum, and the Company's ability to complete expansions and other capital projects on time and budget and to maintain the operations of its existing production facilities. The Company cannot assure that it will be able to anticipate or respond timely to changes which could adversely affect its operating results in one or more fiscal quarters. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of the Company's common stock. In addition to those described above, the more prominent risks and uncertainties inherent in the Company's business are set forth below. However, this section does not discuss all possible risks and uncertainties to which the Company is subject, nor can it be assumed necessarily that there are no other risks and uncertainties which may be more significant to the Company. Impact of Economic Conditions Capacity utilization, which is the demand for product divided by its supply, is a critical factor affecting the Company's financial performance. Demand for polyester fiber historically has been cyclical because it is subject to changes in consumer preferences and spending, retail sales patterns, and fiber or textile product imports, all of which are driven 20 primarily by general economic conditions. Demand, prices and raw material costs for both fiber and PET resins may be affected by global economic conditions. Supply is expanding for both fiber and resins in the United States. While expectations are that growth in demand will approximate growth in supply, any significant expansion in supply over demand could reduce profitability. A material change in demand, supply or in general economic conditions or uncertainties regarding future economic prospects could have a material adverse effect on the Company's results of operations. Impact of Far Eastern Financial Crisis In the fourth quarter of 1997, the Far Eastern economies, which are the largest and were, until recently, the fastest growing polyester market, experienced a significant economic and financial crisis. This crisis is expected to affect the size of the market and future expansions. Given the inherent uncertainties surrounding the Far Eastern polyester markets, it is unknown what effect the crisis will have on the U.S. polyester fiber and resins markets. However, given the size of the Far Eastern markets, the impact could be significant and this could have a material adverse effect on the Company's results of operations. Dependency on Availability of Raw Materials The Company's operations are substantially dependent on the availability of its two primary raw materials, PTA and MEG. The Company currently relies on a single source for the supply of PTA and a limited number of sources for MEG. The effect of the loss of any of such sources, of a disruption in their business or failure to meet the Company's product needs on a timely basis would depend primarily upon the length of time necessary to find a suitable alternative source. At a minimum, temporary shortages in needed raw materials could have a material adverse effect on the Company's results of operations. There can be no assurance that precautions taken by the Company would be adequate or that an alternative source of supply could be located or developed in a timely manner. Construction Program The Company is currently constructing a new PET resins and polyester fiber production facility in Mississippi at a total estimated capitalized cost of approximately $450 million. The facility, which is expected to commence operations in three phases beginning in late 1998, will have an initial annual capacity of approximately 470 million pounds of PET packaging resins and 230 million pounds of polyester fiber. However, there can be no assurance that the Company will be able to commence operations as scheduled, that it will not encounter significant disruptions in its operations, that the facility will operate as effectively as expected, or that the Company will be able to sell at acceptable prices the added volumes from this facility. Environmental Matters Actual costs to be incurred for identified environmental situations in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures due to unknown conditions, changing government regulations and legal standards regarding liability and evolving related technologies. 21 Year 2000 In addition to the Company's procedures relating to the Year 2000 (see "Year 2000" above), the Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The costs of the Company's Year 2000 project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Item 7A. Quantitative and Qualitative Disclosure about Market Risk. - ------- --------------------------------------------------------- Not applicable. 22 Item 8. Financial Statements and Supplementary Data - ------ ------------------------------------------- WELLMAN, INC. Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 24 Consolidated Balance Sheets as of December 31, 1997 and 1996 25 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 26 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 27 Notes to Consolidated Financial Statements 28 Report of Independent Auditors 44 Consolidated financial statement schedules for the years ended December 31, 1997, 1996 and 1995: II -- Valuation and qualifying accounts 45 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto. 23 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------ (In thousands, except per share data) 1997 1996 1995 - ---------------------------------------------------------------------------- Net sales. . . . . . . . . . . . . . . . . .$1,083,188 $1,098,804 $1,109,398 Cost of sales. . . . . . . . . . . . . . . . 923,278 941,693 886,817 --------- -------- --------- Gross profit . . . . . . . . . . . . . . . . 159,910 157,111 222,581 Selling, general and administrative expenses 83,128 88,987 89,704 Restructuring charges. . . . . . . . . . . . 7,469 -- -- ---------- ---------- --------- Operating income . . . . . . . . . . . . . . 69,313 68,124 132,877 Interest expense, net. . . . . . . . . . . . 12,160 13,975 11,666 Loss on divestitures and other, net. . . . . 5,963 -- 5,500 ---------- ---------- --------- Earnings before income taxes . . . . . . . . 51,190 54,149 115,711 Income taxes . . . . . . . . . . . . . . . . 20,835 27,620 41,657 ---------- ---------- --------- Net earnings . . . . . . . . . . . . . . . .$ 30,355 $ 26,529 $ 74,054 ========== ========== ========= Basic net earnings per common share. . . . .$ 0.98 $ 0.81 $ 2.22 ========== ========== ========= Weighted average common shares-basic . . . . 31,120 32,649 33,322 ========== ========== ========= Diluted net earnings per common share. . . .$ 0.97 $ 0.81 $ 2.20 ========== ========== ========= Weighted average common shares-diluted . . . 31,269 32,774 33,699 ========== ========== =========
See notes to consolidated financial statements. 24 CONSOLIDATED BALANCE SHEETS
December 31, In thousands, except share data) 1997 1996 - ---------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents. . . . . . . . . . . . $ -- $ 2,120 Accounts receivable, less allowance of $5,229 in 1997 and $2,611 in 1996. . . . . . . . . . . . . 126,106 132,296 Inventories. . . . . . . . . . . . . . . . . . . . . 154,133 158,685 Prepaid expenses and other current assets. . . . . . 3,366 3,947 ---------- ---------- Total current assets. . . . . . . . . . . . . . . 283,605 297,048 Property, plant and equipment, at cost: Land, buildings and improvements . . . . . . . . . . 104,073 102,093 Machinery and equipment. . . . . . . . . . . . . . . 735,144 696,995 Construction in progress . . . . . . . . . . . . . . 251,493 94,583 ---------- ---------- 1,090,710 893,671 Less accumulated depreciation. . . . . . . . . . . . 336,230 296,043 ---------- ---------- Property, plant and equipment, net. . . . . . . . 754,480 597,628 Cost in excess of net assets acquired, net . . . . . . 269,756 290,450 Other assets, net. . . . . . . . . . . . . . . . . . . 11,384 18,823 ---------- ---------- $1,319,225 $1,203,949 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . .$ 73,070 $ 64,019 Accrued liabilities. . . . . . . . . . . . . . . . . 39,590 41,320 Current portion of long-term debt. . . . . . . . . . 208 159 ---------- ---------- Total current liabilities . . . . . . . . . . . . 112,868 105,498 Long-term debt . . . . . . . . . . . . . . . . . . . . 394,545 319,407 Deferred income taxes and other liabilities. . . . . . 177,378 155,116 ---------- ---------- Total liabilities . . . . . . . . . . . . . . . . 684,791 580,021 Stockholders' equity: Common stock, $0.001 par value; 55,000,000 shares authorized, 33,638,193 shares issued in 1997, 33,612,464 in 1996 . . . . . . . . . . . . 34 34 Class B common stock, $0.001 par value; 5,500,000 shares authorized; no shares issued . . . . . . . . -- -- Paid-in capital. . . . . . . . . . . . . . . . . . . 234,179 233,665 Foreign currency translation adjustments . . . . . . 372 9,853 Retained earnings. . . . . . . . . . . . . . . . . . 449,373 429,900 Less common stock in treasury at cost: 2,500,000 shares. . . . . . . . . . . . . . . . . . (49,524) (49,524) ---------- ---------- Total stockholders' equity. . . . . . . . . . . . 634,434 623,928 ---------- ---------- $1,319,225 $1,203,949 ========== ==========
See notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
COMMON STOCK ISSUED CURRENCY --------------- PAID-IN TRANSLATION RETAINED TREASURY SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS STOCK TOTAL ------ ------ ------- ----------- -------- ----- -------- Balance at December 31, 1994. . 33,192 $ 33 $ 224,352 $ 4,783 $ 348,405 $ --- $ 577,573 Net earnings. . . . . . . . . . 74,054 74,054 Cash dividends ($0.27 per share) (9,003) (9,003) Exercise of stock options . . . 90 846 846 Issuance of common stock to employee benefit plans . . . . 158 4,190 4,190 Issuance of restricted stock. . 1 34 34 Tax effect of exercise of stock options. . . . . . . . . . . . 586 586 Currency translation adjustments 2,066 2,066 ------ ---- --------- ------- --------- -------- --------- Balance at December 31, 1995. . 33,441 $ 33 $ 230,008 $ 6,849 $ 413,456 $ --- $ 650,346 Net earnings. . . . . . . . . . 26,529 26,529 Cash dividends ($0.31 per share) (10,085) (10,085) Exercise of stock options . . . 49 861 861 Issuance of common stock to employee benefit plans . . . . 121 1 2,669 2,670 Issuance of restricted stock. . 1 26 26 Tax effect of exercise of stock options. . . . . . . . . . . . 101 101 Currency translation adjustments 3,004 3,004 Purchase of treasury stock. . . (49,524) (49,524) ------ ---- -------- ------- --------- -------- -------- Balance at December 31, 1996. . 33,612 $ 34 $ 233,665 $ 9,853 $429,900 $(49,524) $ 623,928 Net earnings. . . . . . . . . . 30,355 30,355 Cash dividends ($0.35 per share) (10,882) (10,882) Exercise of stock options . . . 25 453 453 Issuance of restricted stock. . 1 16 16 Tax effect of exercise of stock options. . . . . . . . . . . . 45 45 Currency translation adjustments (9,481) (9,481) ------ ---- -------- -------- ------- -------- --------- Balance at December 31, 1997. . 33,638 $ 34 $ 234,179 $ 372 $449,373 $(49,524) $ 634,434 ====== ==== ======== ======= ======== ======== =========
See notes to consolidated financial statements. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (In thousands) 1997 1996 1995 Cash flows from operating activities: ----- ----- ---- Net earnings . . . . . . . . . . . . . . . .$ 30,355 $ 26,529 $ 74,054 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . 61,351 56,260 53,522 Amortization . . . . . . . . . . . . . . . 11,014 11,685 11,863 Deferred income taxes. . . . . . . . . . . 10,625 8,496 9,435 Common stock issued for stock plans. . . . 16 2,696 4,224 Loss on divestitures and other, net. . . . 5,963 -- 5,500 Changes in assets and liabilities, net of effects from businesses acquired and divested: Accounts receivable. . . . . . . . . . . (3,291) 15,760 (11,474) Inventories. . . . . . . . . . . . . . . (3,128) 32,783 (59,602) Prepaid expenses and other current assets 343 620 (7,200) Other assets . . . . . . . . . . . . . . 662 (2,347) (727) Accounts payable and accrued liabilities (10,845) (9,657) 35,444 Other liabilities. . . . . . . . . . . . 12,346 1,514 (138) Other. . . . . . . . . . . . . . . . . . 12,742 7,562 3,860 -------- -------- -------- Net cash provided by operating activities. 128,153 151,901 118,761 -------- -------- -------- Cash flows from investing activities: Additions to property, plant and equipment .(221,187) (126,009) (104,696) Decrease in restricted cash. . . . . . . . . 5,016 879 1,680 Businesses acquired. . . . . . . . . . . . . -- (14,250) (64,249) Proceeds from divestitures and other . . . . 18,321 4,184 16,230 -------- -------- -------- Net cash used in investing activities. . .(197,850) (135,196) (151,035) -------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt. . . . . . . 78,303 40,303 22,834 Repayments of long-term debt . . . . . . . . -- -- (200) Purchase of treasury stock . . . . . . . . . -- (49,524) Dividends paid on common stock . . . . . . . (10,882) (10,085) (9,003) Exercise of stock options. . . . . . . . . . 453 861 846 -------- -------- -------- Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . 67,874 (18,445) 14,477 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents. . . . . . . . . . . . . . . (297) (33) 134 -------- -------- -------- (Decrease) in cash and cash equivalents. . . . (2,120) (1,773) (17,663) Cash and cash equivalents at beginning of year 2,120 3,893 21,556 -------- -------- -------- Cash and cash equivalents at end of year . . .$ 0 $ 2,120 $ 3,893 ======== ======== ======== Supplemental cash flow data: Cash paid during the year for: Interest (net of amounts capitalized). . .$ 14,435 $ 15,273 $ 14,320 Income taxes . . . . . . . . . . . . . . . .$ 12,979 $ 8,994 $ 35,263 Non-cash investing activities financed through government grants . . . . . . . . .$ 24,454 $ 3,226 $ --
See notes to consolidated financial statements. 27 Notes to Consolidated Financial Statements (In thousands, except share and per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Wellman, Inc. (the Company) is an international manufacturing company operating primarily in the United States, Ireland and the Netherlands. The Company's principal line of business is the manufacture of high-quality polyester products, including Fortrel(R) brand polyester textile fibers, polyester fibers made from recycled raw materials and PermaClear(R) PET (polyethylene terephthalate) packaging resins. Total polyester fiber sales represented approximately 65% of the Company's 1997 sales. The principal markets for polyester fibers are apparel, home furnishings, carpet and industrial manufacturers in the United States and Europe. The principal markets for PET resins are United States and Europe-based manufacturers of various types of plastic containers. Basis of Presentation The consolidated financial statements include the accounts of Wellman, Inc. and its subsidiaries. All material intercompany transactions have been eliminated. Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Sales to customers are recorded when goods are shipped. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for approximately $110,036 and $98,000 of inventory at December 31, 1997 and 1996, respectively, and the first-in, first-out (FIFO) method for the remainder. For slow-moving and off-quality waste raw material which is valued using the LIFO dollar value method, the lower of cost or market is determined using the item-by-item method. Property, Plant and Equipment Property, plant and equipment is carried at cost. Depreciation is provided based on the estimated useful lives of the related assets and is computed on the straight-line method. Estimated useful lives for buildings and improvements are 15 to 30 years and 5 to 13 years for machinery and equipment. 28 Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired is amortized on the straight-line method over periods ranging from 30 to 40 years. Accumulated amortization amounted to approximately $70,947 and $64,391 at December 31, 1997 and 1996, respectively. The Company's accounting policy regarding the assessment of the recoverability of the carrying value of goodwill and other intangibles is to review the carrying value of goodwill and other intangibles if the facts and circumstances suggest that they may be impaired. If this review indicates that goodwill and other intangibles will not be recoverable, as determined based on undiscounted future cash flows of the Company, the carrying value of goodwill and other intangibles will be reduced to estimated fair value. No impairments were noted in 1997. Other Assets Other assets are comprised of deferred charges related to certain of the Company's debt agreements and other intangible assets that are amortized over periods ranging from one to 20 years. Additionally, other assets include cash restricted for use obtained from borrowings under economic development revenue bonds in the amount of approximately $0 and $5,000 at December 31, 1997 and 1996, respectively. Impairment of Long-lived Assets The Company accounts for the impairment of long-lived assets under FASB Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" (FAS 121). FAS 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Long-lived assets to be disposed of are carried at the lower of cost or fair value less cost to sell when the Company is committed to a plan of disposal. Income Taxes Income taxes have been provided using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred income taxes resulting from such differences are recorded based on the enacted tax rates that will be in effect when the differences are expected to reverse. Environmental Expenditures Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed or charged to the aforementioned liability. Derivative Financial Instruments The Company uses interest rate swaps and other financial instruments to synthetically manage the interest rate characteristics of its currently outstanding debt and future debt. These instruments generally fix floating 29 rate debt at specified interest rates and enable the Company to significantly eliminate the effect of a change in interest rates from the date it entered into these transactions. For the interest-rate swaps, the differential to be paid or received as interest rates change is recognized as an adjustment of interest expense related to the debt. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair value of the agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Gains and losses on terminations of interest-rate agreements are deferred as an adjustment to the carrying amount of the debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life. In the event of the early extinguishment of a designated current or anticipated debt obligation, any realized or unrealized gain or loss from the interest-rate agreements would be recognized in income coincident with the termination of the aforementioned obligation. The Company uses forward foreign exchange contracts for three purposes. First, to mitigate the translation exposure that results from investments in certain foreign subsidiaries; second, to minimize the effects of foreign currency fluctuations for certain purchase contracts which require payment in foreign currencies; and third, to minimize the effect changes in foreign currencies have on certain components of working capital. Realized and unrealized gains and losses related to forward foreign exchange contracts used to reduce the risk of certain designated foreign investments are included in the cumulative translation account in stockholders' equity. Forward points incurred in these contracts are recorded as an adjustment to interest expense amortized on a straight-line basis. Realized gains and losses related to forward foreign exchange contracts utilized to reduce the effect of foreign currency fluctuations on purchases are recorded as an adjustment to the cost of the asset. Realized and unrealized gains and losses related to forward foreign exchange contracts utilized to reduce the effect of foreign currency fluctuations on working capital are recognized and offset foreign exchange gains or losses on the underlying exposure. If the forward foreign exchange contract notional amounts exceed the amount of the designated foreign investment, purchase commitment, or working capital component, realized and unrealized gains or losses on the excess amount are recognized in earnings. The related amounts due to or from counterparties are included in other assets or liabilities. The Company also uses an equity-linked investment to hedge its exposure to compensation expense related to a Supplemental Employee Retirement Plan (SERP). This equity-linked investment, on which the value fluctuates based on the market price of the Company's stock, is marked to market and gains or losses are recognized as an offset to compensation expense related to the SERP. Foreign Currency Translation The financial statements of foreign entities have been translated into U.S. dollar equivalents in accordance with the Financial Accounting Standards Board's (FASB) Statement No. 52, "Foreign Currency Translation." Adjustments resulting from the translation of the financial statements of foreign entities are excluded from the determination of earnings and accumulated in a separate component of stockholders' equity. 30 Research and Development Costs Research and development costs are expensed as incurred. Such costs were approximately $19,600, $18,500 and $16,900 for 1997, 1996 and 1995, respectively. Grant Accounting The Company's Pearl River Plant under construction in Mississippi has received various grants, including capital and operating grants, from the state of Mississippi and other local authorities. The capital grants without stipulated operating requirements are recorded as a reduction of property, plant and equipment. The capital grants with stipulated operating requirements are recorded as deferred revenue and amortized into income as the requirements stipulated in the grant are satisfied. The operating grants are recorded as a reduction of operating expenses in the period the reduction occurs. The impact of grants on the 1997, 1996, and 1995 results of operations was immaterial. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Cash and Cash Equivalents The Company considers all short-term investments purchased with a maturity of three months or less to be cash equivalents for purposes of the consolidated statements of cash flows. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), effective for fiscal years beginning after December 15, 1997. FAS 131 requires that a public company report financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The financial information to be reported includes segment profit or loss, certain revenue and expense items and segment assets 31 and reconciliations to corresponding amounts in the general purpose financial statements. FAS 131 also requires information about products and services, geographic areas of operation, and major customers. The Company has not completed its analysis of the effect of adoption of FAS 131 on its financial statement disclosure; however, the adoption of FAS 131 will not affect results of operations or financial position. 2. ACQUISITION On December 31, 1995, the Company acquired the Netherlands-based PET Resins business (the Business) of Akzo Nobel (Akzo) for a purchase price of approximately $78,500. The acquisition has been accounted for under the purchase method and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated based on estimated fair values at the date of the acquisition. The excess of the purchase price over assets acquired (goodwill) is being amortized on a straight-line basis over 30 years. Although unlikely, the Company may be required to make contingent payments to Akzo based on contribution margin as defined in the agreement. The cost of any subsequent payments will be allocated to goodwill. The pro forma effects of the acquisition for 1995 have not been presented due to the immaterial impact of operations of the Business on the Company's consolidated financial statements. In connection with the acquisition, the Company entered into a contract to purchase PET resins under a take-or-pay arrangement. The contract required that 134,000 pounds be purchased on a declining basis during the period from 1997 to 2000. During the second quarter of 1997, the Company recorded a restructuring charge which included the estimated costs for the modification of this take-or-pay arrangement as well as certain supply and service agreements at its Netherlands-based operation. The modification reduced the number of pounds required to be purchased during the contract period to an immaterial amount (see note 6). Also, in conjunction with this acquisition, the Company has entered into forward foreign currency contracts to exchange Dutch guilders for U.S. dollars in order to reduce the related impact of foreign currency translation adjustments (see note 14). 3. DIVESTITURES AND OTHER On December 30, 1997, the Company sold its thermoformed packaging and extruded sheet operation located in Ripon, WI for approximately $15,900 resulting in a pretax loss of $8,384. This loss is reported net of a $2,421 gain from an insurance reimbursement related to a warehouse fire at the Company's Irish fiber operation in July 1997. Together, these events decreased net earnings by approximately $3,800, or $0.12 per diluted share. The Company plans to replace the destroyed buildings. In the first quarter of 1996, the Company sold its polyester bonded batting and needle-punched fabric operations located in Charlotte, NC and Commerce, CA for their approximate book value. In August 1995, the Company sold substantially all of the businesses of its New England CRInc. (CRInc.) subsidiary for approximately $16,230. The Company recorded a pretax loss on the sale of $5,500, which decreased 1995 net earnings by approximately $3,400, or $0.10 per diluted share. 32 The operating results of the divested businesses have not had a material impact on the Company's consolidated financial statements. 4. INVENTORIES Inventories consist of the following:
December 31, 1997 1996 ------ ------ Raw materials . . . . . . . . . . . $ 50,669 $ 65,552 Finished and semi-finished goods. . 90,210 78,280 Supplies. . . . . . . . . . . . . . 13,254 14,853 -------- -------- $154,133 $158,685 ======== ========
At December 31, 1997 and 1996, current replacement cost of inventories valued using the LIFO method was not in excess of their carrying value. 5. ACCRUED LIABILITIES Accrued liabilities consist of the following:
December 31, 1997 1996 ------ ------ Payroll and other compensation. . . $ 7,494 $ 7,573 Retirement plans. . . . . . . . . . 7,681 5,176 Property and other taxes. . . . . . 4,757 4,841 Interest. . . . . . . . . . . . . . 1,621 3,065 Other . . . . . . . . . . . . . . . 18,037 20,665 ------- ------- $39,590 $41,320 ======= =======
6. RESTRUCTURING CHARGES During the second quarter of 1997, the Company implemented a restructuring plan designed to reduce costs and enhance the overall competitiveness of its European operations, resulting in a pretax charge of $7,469. Approximately $4,600 of the restructuring charge is estimated costs for the modification of certain supply and service agreements at the Company's Netherlands-based PET resins business. This includes the modification of its take-or-pay supply arrangement, reducing the number of pounds required to be purchased during the period from 1997 to 2000 from 134,000 to an immaterial amount. The restructuring charge also includes $2,400 in termination benefits for 61 employees at its recycled fiber operation in Ireland. Approximately $5,600 was charged against the restructuring accrual during 1997. 33 7. BORROWING ARRANGEMENTS Long-term debt consists of the following:
December 31, 1997 1996 ------ ------ Revolving credit loan facility and competitive bid loans. . . . . . . . . . . . . $ 20,000 $ 75,000 Uncommitted lines of credit . . . . 214,865 59,699 Serialized senior unsecured notes, 9.18% - 9.26%, due 1998-1999 . . . 80,000 100,000 Economic development revenue bonds, at variable interest rates, due 2010-2022. . . 49,680 54,500 8.41% senior unsecured note, due 2000 30,000 30,000 Other . . . . . . . . . . . . . . . 208 367 -------- -------- 394,753 319,566 Less current portion . . . . . 208 159 -------- -------- $394,545 $319,407 ======== ========
On February 8, 1995, the Company entered into an unsecured $330,000 Revolving Credit Loan (the Facility) maturing in February 2000 that replaced a reducing revolving loan facility. The terms of the Facility provide the Company the ability to borrow under competitive bid loans (CBLs) which reduce the availability under the Facility and bear interest at the offering bank's prevailing interest rate. The Facility has no scheduled principal repayments and any borrowings under non-CBLs bear interest, at the Company's option, at (1) the higher of (a) the prime rate or (b) the federal funds rate plus 0.50%, (2) the LIBOR rate plus applicable margin or (3) the CD rate plus applicable margin. At December 31, 1997, the average interest rate on borrowings under the Facility was approximately 6.0% and the amount available to the Company was $310,000. Terms, rates and maturity dates for the uncommitted lines of credit are agreed upon by the Bank and the Borrower at each borrowing date. At December 31, 1997, the maturities on the domestic outstanding borrowings ranged from 15 to 86 days with interest rates ranging from 5.97% to 6.20%. At year-end, the Company had $250,000 available under these lines. The economic development revenue bonds (the Bonds) are tenderable by the holders and are secured by letters of credit aggregating approximately $50,895 at December 31, 1997. The average interest rate on the Bonds at December 31, 1997 was approximately 3.83%. The Bonds and borrowings under the Facility, serialized senior unsecured notes, CBLs and uncommitted lines of credit are classified as long-term in accordance with the Company's intention and ability to refinance such obligations on a long-term basis. The Company has entered into two types of financial instruments to minimize its interest rate exposure. One instrument, with a notional amount of $150,000, was designed to provide a fixed 10 year interest rate of 6.42% (exclusive of corporate spreads) on $150,000 of debt if issued on December 31, 1997 and approximately 6.51% if issued on March 31, 1998. The Company has also entered into interest rate swaps to fix the interest rate on variable rate borrowings thereby eliminating substantial interest rate risk. The agreements are for $200,000, $100,000 of which were in effect at December 31, 1997, and $100,000 with starting dates ranging between February and May 34 1998. Maturity dates are a minimum of 5 years and a maximum of 10 years after the starting date of the swaps. The swaps will effectively fix the rates of interest between 6.10% and 6.20% on $200,000 of borrowings. In aggregate, the Company estimates it would have had to pay approximately $14,200 to terminate these agreements at December 31, 1997. The Company's financing agreements contain normal financial and restrictive covenants. The most restrictive of these covenants permits a maximum leverage ratio of 55%, requires EBITDA to exceed 3.5 times interest expense and requires the Company to maintain a certain net worth. Aggregate maturities of long-term debt for the next five years are as follows: 1998 -- $208; 1999 -- $40,000; 2000 -- $304,865; 2001 -- $0 and 2002 -- $0. The carrying amounts of the Company's borrowings under its variable rate credit agreements approximate their fair value. The fair values of the Company's fixed rate credit agreements are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's fixed rate debt exceeded the carrying value by approximately $4,200 at December 31, 1997. Prepayment of the fixed rate debt could result in significant penalties. During 1997, 1996 and 1995, the Company capitalized interest of $9,820, $4,755, and $3,125, respectively, as part of the cost of capital projects under construction. Interest expense (net) includes interest income of $2,402, $2,935 and $2,563 for 1997, 1996 and 1995, respectively. 8. INCOME TAXES For financial reporting purposes, earnings (loss) before income taxes are as follows:
Years Ended December 31, 1997 1996 1995 ------ ------ ------ United States. . . . . . . . . . . . . $53,170 $68,463 $ 83,206 Foreign. . . . . . . . . . . . . . . . (1,980) (14,314) 32,505 ------- -------- -------- $51,190 $54,149 $115,711 ======= ======== ========
Significant components of the provision for income taxes are as follows:
Years Ended December 31, 1997 1996 1995 Current: ------ ------ ------ Federal. . . . . . . . . . . . . . . $ 8,630 $17,625 $24,900 State. . . . . . . . . . . . . . . . 419 955 3,847 Foreign. . . . . . . . . . . . . . . 1,161 544 3,475 ------- ------- ------- 10,210 19,124 32,222 ------- ------- ------- Deferred: Federal. . . . . . . . . . . . . . . $ 9,244 $ 7,846 $ 8,085 State. . . . . . . . . . . . . . . . 1,241 1,098 1,205 Foreign. . . . . . . . . . . . . . . 140 (448) 145 ------- ------- ------- 10,625 8,496 9,435 ------- ------- ------- $20,835 $27,620 $41,657 ======= ======= =======
35 The difference between the provision for income taxes and income taxes computed at the statutory income tax rate is explained as follows:
Years Ended December 31, 1997 1996 1995 ---- ---- ---- Computed at statutory rate. . . . . . . 35.0% 35.0% 35.0% State taxes, net of federal benefit . . 1.9 2.5 2.9 Differences in income tax rates between the United States and foreign countries (5.0) (1.2) (6.3) Amortization of cost in excess of net assets acquired. . . . . . . . . . . . 6.0 5.7 2.7 Foreign losses for which no tax benefit has been provided. . . . . . . . . . . 2.1 10.5 -- Other, net . . . . . . . . . . . . .. . .7 (1.5) 1.7 ---- ---- ---- Effective tax rate. . . . . . . . . . . 40.7% 51.0% 36.0% ==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of these differences are as follows:
December 31, 1997 1996 ---- ---- Inventory . . . . . . . . . . . . . . . $ 6,087 $ 5,170 Depreciation. . . . . . . . . . . . . . 109,670 100,872 Foreign . . . . . . . . . . . . . . . . 3,823 3,956 Other . . . . . . . . . . . . . . . . . 10,114 10,060 -------- ------- Total deferred tax liabilities. . . . . 129,694 120,058 -------- ------- Pension . . . . . . . . . . . . . . . . 2,686 3,009 State deferred benefits . . . . . . . . 5,274 4,695 Long-term liabilities . . . . . . . . . 5,642 7,277 Foreign net operating loss carryforward 6,776 5,693 Other . . . . . . . . . . . . . . . . . 9,505 9,115 -------- ------- Total deferred tax assets . . . . . . . 29,883 29,789 Valuation allowance . . . . . . . . . . 6,776 5,693 -------- ------- Net deferred tax assets . . . . . . . . 23,107 24,096 -------- ------- Net deferred tax liabilities. . . . . . $106,587 $ 95,962 ======== =======
Deferred taxes have not been provided for approximately $110,827 of undistributed earnings of foreign subsidiaries. The Company intends to reinvest such undistributed earnings for an indefinite period except for distributions upon which incremental taxes would not be material. If all such earnings were distributed, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. At December 31, 1997 the Company had foreign net operating loss carryforwards (NOLs) of approximately $19,361 for income tax purposes that may be carried forward indefinitely. The NOLs resulted from operations of 36 its European PET resins business. The use of the NOLs is limited to future taxable income of the European PET resins business. For financial reporting purposes, no tax benefit (a deferred tax asset) has been provided for these losses. 9. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. As discussed in note 1, the Company's policy is to expense environmental remediation costs when it is both probable that a liability has been incurred and the amount can be reasonably estimated. While it is often difficult to reasonably quantify future environmental- related expenditures, the Company currently estimates its future non-capital expenditures related to environmental matters to range between approximately $9,800 and $25,200 on an undiscounted basis. In connection with these expenditures, the Company has accrued management's best estimate of probable non-capital environmental expenditures. In addition, aggregate future capital expenditures related to environmental matters are expected to range from approximately $9,300 to $28,600. These non-capital and capital expenditures are expected to be incurred over the next 10 to 20 years. The Company believes that it is entitled to recover a portion of these expenditures under indemnification and escrow agreements. 10. RETIREMENT PLANS The Company has defined benefit plans and defined contribution pension plans that cover substantially all employees. The Company also has an employee stock ownership plan (ESOP) covering substantially all domestic employees. The defined contribution plan and the ESOP provide for Company contributions based on the earnings of eligible employees. Expense related to the defined contribution plan amounted to approximately $8,014, $7,481, and $8,351 for the years ended December 31, 1997, 1996 and 1995,respectively. Expense related to the ESOP amounted to approximately $2,274, $2,369 and $2,253 for the years ended December 31, 1997, 1996 and 1995, respectively. Benefits under the Wellman International Limited (WIL) and PET Resins- Europe defined benefit plans are based on employees' compensation and length of service, while benefits under defined benefit plans covering domestic employees are based on employees' compensation and length of service or at stated amounts based on length of service. The Company's policy is to fund amounts which are actuarially determined to provide the plans with sufficient assets to meet future benefit payment requirements. Assets of the domestic plans are invested primarily in equity securities, debt securities and money market instruments. For international plans, assets are invested in insured products. The pension costs (benefits) of the domestic and foreign defined benefit plans consist of the following:
Years Ended December 31, 1997 1996 1995 ------ ------ ------ Service cost. . . . . . . . . . . . . . $1,408 $ 598 $ 646 Interest cost on projected benefit obligations. . . . . . . . . . . . . . 4,669 4,761 4,659 Actual return on plan assets. . . . . . (9,513) (6,587) (9,772) Net amortization and deferral . . . . . 3,154 481 5,356 ------ ------ ------ $ (282) $ (747) $ 889 ====== ====== ======
37 The following table sets forth the funded status and amounts included in the Company's consolidated balance sheets at December 31, 1997 and 1996 for the domestic and foreign defined benefit pension plans:
1997 1996 Actuarial present value of benefit obligations: ---- ----- Vested benefit obligations. . . . . . $59,268 $62,039 ======= ======= Accumulated benefit obligations . . . $59,885 $62,338 ======= ======= Projected benefit obligations . . . . $69,373 $71,469 Plan assets at fair market value. . . . 87,161 75,745 ------- ------- Funded status . . . . . . . . . . . . . 17,788 4,276 Unrecognized net gain . . . . . . . . . (20,347) (8,940) Unrecognized net liability at transition 409 489 Unrecognized prior service cost . . . . (954) (1,070) ------- ------- Accrued pension costs . . . . . . . . . $(3,104) $(5,245) ======= =======
Assumptions used in determining the projected benefit obligation as of December 31 were as follows:
1997 1996 1995 Domestic plans ------ ------- ------ Discount rate 7.25% 7.25% 7.25% Future compensation increase 3.25% 4.25% 4.25% Rate of return on plan assets 9.0% 9.0% 9.0% WIL Discount rate 6.0% 7.0% 7.5% Future compensation increase 3.5% 4.5% 5.0% Rate of return on plan assets 6.0% 7.0% 7.5% PET Resins-Europe Discount rate 6.0% 6.0% -- Future compensation increase 3.0% 3.0% -- Rate of return on plan assets 6.0% 6.0% --
11. STOCKHOLDERS' EQUITY The Company has stock option plans (the Plans) which authorize the grant of non-qualified stock options (NQSOs). At December 31, 1997, the maximum number of common shares authorized for grant under the Plans is 2,029,000. For all options granted in connection with the Plans, the option period extends for 11 years from the date of grant with the shares vesting at 20% per year over the first five years. The option price for such options is equal to the fair value of the Company's common stock at the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options at least equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models for determining compensation expense. Pro forma information regarding net earnings and earnings per common share is required by Statement 123, which also requires that the information be 38 determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated as of the date of grant using a Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995, respectively: risk-free interest rate of 5.84%, 6.33% and 5.63%; a dividend yield of .95%, .84% and .75%; volatility factors of the expected market price of the Company's common stock of .424, .433 and .447; and a weighted-average expected life of the option of 7 years. The weighted-average fair value of options granted in 1997, 1996 and 1995 was $9.21, $8.62 and $11.59, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1997 1996 1995 ----- ----- ------ Pro forma net earnings $29,051 $25,889 $74,037 Pro forma basic earnings per common share $ 0.93 $ 0.79 $ 2.22 Pro forma diluted earnings per common share $ 0.93 $ 0.79 $ 2.20
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 2000. A summary of the Company's stock option activity and related information for the three years ended December 31, 1997 follows:
Weighted Average Price Shares Per Share ------ --------- Outstanding December 31, 1994. . . . . . . . . . 1,867,631 $21.89 Granted. . . . . . . . . . . . . . . . . . . . 428,000 22.75 Exercised. . . . . . . . . . . . . . . . . . . (89,597) 9.44 Cancelled. . . . . . . . . . . . . . . . . . . (57,560) 23.35 --------- ------ Outstanding December 31, 1995. . . . . . . . . . 2,148,474 22.54 Granted. . . . . . . . . . . . . . . . . . . . 643,900 17.00 Exercised. . . . . . . . . . . . . . . . . . . (49,386) 17.44 Cancelled. . . . . . . . . . . . . . . . . . . (31,490) 25.32 --------- ------ Outstanding December 31, 1996. . . . . . . . . . 2,711,498 21.28 Granted. . . . . . . . . . . . . . . . . . . . 8,000 18.94 Exercised. . . . . . . . . . . . . . . . . . . (25,050) 18.06 Cancelled. . . . . . . . . . . . . . . . . . . (244,120) 22.20 --------- ------ Outstanding December 31, 1997. . . . . . . . . . 2,450,328 $21.22 ========= ======
39 At December 31, 1997, 1996 and 1995, options for 1,562,685, 1,326,595 and 1,040,301 shares, respectively, were exercisable. At December 31, 1997, 2,029,000 shares were available for future option grants. The following summarizes information related to stock options outstanding at December 31, 1997:
Range of exercise prices $11.63 to $19.88 $20.63 to $34.38 ---------------- ---------------- Number outstanding at December 31, 1997 1,348,298 1,102,030 Weighted average remaining contractual life 7.3 years 7.2 years Weighted average exercise price of options outstanding $17.48 $25.79 Number exercisable at December 31, 1997 809,635 753,050 Weighted average exercise price of options exercisable $17.75 $26.06
On August 6, 1991, the Board of Directors declared a dividend of one common stock purchase right (a Right) for each outstanding share of common stock. Each Right, when exercisable, will entitle the registered holder to purchase from the Company one share of common stock at an exercise price of $90 per share (the Purchase Price), subject to certain adjustments. The Rights are not represented by separate certificates and are only exercisable when a person or group of affiliated or associated persons acquires or obtains the right to acquire 20% or more of the Company's outstanding common shares (an Acquiring Person) or announces a tender or exchange offer that would result in any person or group beneficially owning 20% or more of the Company's outstanding common shares. In the event any person becomes an Acquiring Person, the Rights would give holders the right to buy, for the Purchase Price, common stock with a market value of twice the Purchase Price. The Rights expire on August 5, 2001, unless extended by the Board of Directors or redeemed earlier by the Company at a redemption price of $0.01 per Right. Although the Rights should not interfere with a business combination approved by the Board of Directors, they may cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board, except pursuant to an offer conditioned on a substantial number of Rights being acquired. 12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share: 1997 1996 1995 ------ ------- ------ Numerator for basic and diluted earnings per share: Net Income $ 30,355 $ 26,529 $ 74,054 -------- -------- -------- Denominator: Denominator for basic earnings per share - weighted average shares 31,120 32,649 33,322 Effect of dilutive securities: Employee stock options 149 125 377 -------- -------- -------- Denominator for diluted earnings per share - adjusted weighted average share 31,269 32,774 33,699 ======== ======== ======== Basic earnings per share $ 0.98 $ 0.81 $ 2.22 ======== ======== ======== Diluted earnings per share $ 0.97 $ 0.81 $ 2.20 ======== ======== ========
40 13. COMMITMENTS AND CONTINGENCIES Approximate minimum rental commitments under noncancelable leases (principally for buildings and equipment) during each of the next five years and thereafter are as follows: 1998 -- $6,865; 1999 -$5,276; 2000 - $4,872; 2001 -- $4,538; 2002 -- $3,747 and thereafter -- $6,086. Rent expense for cancelable and noncancelable operating leases was $6,232 $6,059, and $5,778 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company has made certain commitments to expand its polyester production capacity, including the construction of its Pearl River Plant in Mississippi, with the first stage expected to be completed in late 1998. The anticipated construction cost to complete this facility at December 31, 1997 is approximately $190,000. See notes 7 and 9 for information related to the outstanding letters of credit and environmental matters, respectively. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of the matters will not have a material adverse effect, if any, on the Company's consolidated financial position or results of operations. 14. FINANCIAL INSTRUMENTS The Company has entered into forward foreign currency contracts to exchange Dutch guilders for U.S. dollars with an aggregate notional amount of $21,800 and $48,800 at December 31, 1997 and 1996, respectively, in order to reduce the related impact of foreign currency translation adjustments. The Company has designated these contracts as a hedge of a net investment in a foreign entity. The Company entered into forward foreign currency contracts to exchange U.S. dollars for German marks with an aggregate notional amount of $12,600 and $33,600 at December 31, 1997 and 1996, respectively. These contracts are designed to reduce (hedge) the impact of foreign currency fluctuations relative to fixed asset purchase commitments and have maturity dates ranging from January 1998 through March 1999. The Company's European businesses utilize foreign currency debt and forward currency contracts to hedge certain of their accounts receivable and accounts payable denominated in other foreign currencies. The notional amount of such contracts was $15,500 and $21,600 at December 31, 1997 and 1996, respectively. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of foreign currency and interest rate contracts described above and in notes 2 and 7 and temporary cash investments and trade accounts receivable. The counterparties to the contractual arrangements are a diverse group of major financial institutions with which the Company also has other financial relationships. The Company is exposed to credit loss in the event of nonperformance by these counterparties. However, the Company does not anticipate nonperformance by the other parties, and no material loss would be expected from nonperformance by any one of such counterparties. The Company places its temporary cash 41 investments with high credit quality institutions. Concentration of credit risk with respect to trade accounts receivable is managed by an in-house professional credit staff or is insured. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. Cash and cash equivalents, accounts receivable, accounts payable and equity-linked investment: The carrying amounts reported in the consolidated balance sheets approximate their fair value. Borrowing arrangements: See note 7. Interest rate instruments: The fair value of interest rate instruments is the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparties. All of the Company's estimates of fair value and termination cost/benefit for its derivative financial instruments are based on readily available dealer quotes as to the amounts the Company would receive or pay to terminate the contracts. The following table summarizes the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996 ------------------ ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Nonderivatives Cash and cash equivalents $ 0 $ 0 $ 2,120 $ 2,120 Accounts receivable 126,106 126,106 132,296 132,296 Accounts payable 73,070 73,070 64,019 64,019 Borrowing arrangements 394,753 398,953 319,566 325,325 Derivatives-receive (pay): Interest rate instruments (91) (14,152) -- (487) Forward foreign currency contracts 322 (893) -- 932 Equity-linked investment 2,131 2,131 -- --
15. BUSINESS SEGMENT AND GEOGRAPHIC AREAS The Company operates in one business segment: principally the manufacture and sale of polyester products, including Fortrel(R) brand polyester textile fibers, polyester fibers made from recycled raw materials and PermaClear(R) PET packaging resins. Net sales and operating income for the years ended December 31, 1997, 1996 and 1995 and identifiable assets at the end of each year, classified by the major geographic areas in which the Company operates, are as follows: 42
1997 1996 1995 Net sales ------ ------ ------ U.S. . . . . . . . . . . . . . . . . $ 898,787 $ 885,193 $ 952,663 Europe . . . . . . . . . . . . . . . 184,401 213,611 156,735 ---------- ---------- ---------- $1,083,188 $1,098,804 $1,109,398 ========== ========== ========== Operating income (loss) U.S. . . . . . . . . . . . . . . . . $ 74,389 $ 83,390 $ 101,623 Europe . . . . . . . . . . . . . . . (5,076) (15,266) 31,254 ---------- ---------- ---------- $ 69,313 $ 68,124 $ 132,877 ========== ========== ========== Identifiable assets U.S. . . . . . . . . . . . . . . . . $1,217,517 $1,082,077 $1,011,952 Europe . . . . . . . . . . . . . . . 101,708 121,872 198,721 ---------- ---------- ---------- $1,319,225 $1,203,949 $1,210,673 ========== ========== ==========
16. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial information for the years ended December 31, 1997 and 1996 is summarized as follows:
- ----------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, Total Quarter ended 1997 1997(1) 1997 1997(2) 1997 - ----------------------------------------------------------------------------- Net sales $255,148 $279,211 $264,682 $284,147 $1,083,188 Gross profit 39,939 42,088 38,851 39,032 159,910 Net earnings 8,727 5,301 9,775 6,552 30,355 Basic net earnings per common share $ 0.28 $ 0.17 $ 0.31 $ 0.21 $ 0.98 Diluted net earnings per common share $ 0.28 $ 0.17 $ 0.31 $ 0.21 $ 0.97 - ----------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, Total Quarter ended 1996 1996 1996(3) 1996 1996 - ----------------------------------------------------------------------------- Net sales $ 301,001 $ 283,850 $ 265,383 $ 248,570 $1,098,804 Gross profit 44,647 45,341 29,081 38,042 157,111 Net earnings (loss) 11,709 11,729 (2,830) 5,921 26,529 Basic net earnings (loss) per common share $0.35 $0.35 $(0.09) $0.19 $0.81 Diluted net earnings (loss) per common share $0.35 $0.35 $(0.09) $0.19 $0.81
(1) Quarterly net earnings reflect a pretax restructuring charge of $7,469 which decreased net earnings by approximately $4,300 ($0.14 per diluted share). (2) Quarterly net earnings reflect a pretax charge of $5,963 related to the sale of a subsidiary which was partially offset by a gain from an insurance reimbursement at the Company's Irish fiber operation. This charge decreased net earnings by approximately $3,800 ($0.12 per diluted share). (3) Quarterly net earnings reflect a pretax inventory charge of $7,000 resulting from declining raw material costs and selling prices which decreased net earnings by approximately $4,300 ($0.13 per diluted share), and an additional $4,400 ($0.14 per diluted share) in income taxes related to a change in estimate to reflect a higher than expected tax rate for the year. 43 REPORT OF INDEPENDENT AUDITORS Board of Directors Wellman, Inc. We have audited the accompanying consolidated balance sheets of Wellman, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 8. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We did not audit the financial statements and schedules of a wholly owned subsidiary of the Company, which statements reflect total assets constituting 6% in 1997 and 7% in 1996 and total revenues constituting 10% in 1997, 10% in 1996 and 14% in 1995 of the related consolidated totals. Those financial statements and schedules were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for such wholly owned subsidiary, is based solely on the report of other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellman, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the report of other auditors, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP February 12, 1998 44 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1997, 1996 and 1995 (In thousands)
Balance at Charged to Balance Beginning Costs and at End Description of Year Expenses Other Deductions of Year ----------- --------- -------- ----- ---------- ------- Allowance for doubtful accounts receivable: Year ended December 31, 1997 $2,611 $2,187 $ 824(c) $ 393(b) $5,229 ====== ====== ====== ====== ====== Year ended December 31, 1996 $5,335 $1,813 $ (961)(a) $3,576(b) $2,611 ====== ====== ======= ====== ====== Year ended December 31, 1995 $4,733 $1,391 $1,301(a) $2,090(b) $5,335 ====== ====== ====== ====== ======
(a) Primarily foreign currency translation adjustments, except for purchase accounting adjustments of approximately ($930) and $1,250 for 1996 and 1995, respectively, related to the acquisition discussed in note 2 to the consolidated financial statements. (b) Accounts written off. (c) Primarily recovered of accounts previously written off. 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------- --------------------------------------------------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance and Other Information" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1998 are hereby incorporated by reference herein. Item 11. Executive Compensation - ------- ---------------------- "Compensation of Directors and Officers" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1998 is hereby incorporated by reference herein. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- "Introduction" and "Election of Directors" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1998 are hereby incorporated by reference herein. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- "Compensation of Directors and Officers" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1998 is hereby incorporated by reference herein. 46 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------- ---------------------------------------------------------------- (a) 1. Financial Statements -------------------- The consolidated financial statements included in Item 8 are filed as part of this annual report. 2. Financial Statement Schedules ----------------------------- The consolidated financial statement schedule included in Item 8 is filed as part of this annual report. 3. Exhibits -------- Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has not filed herewith any instrument with respect to long-term debt which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. Exhibit Number Description - -------------- ----------- 3(a)(1) Restated Certificate of Incorporation (Exhibit 3.1 of the Company's Registration Statement on Form S-1, File No. 33-13458, refiled as Exhibit 3(a)(1) of the Company's Form 10-K for the year ended December 31, 1993 incorporated by reference herein) 3(a)(2) Certificate of Amendment to Restated Certificate of Incorporation (Exhibit 3(a)(2) of the Company's Registration Statement on Form S-4, File No. 33-31043, refiled as Exhibit 3(a)(2) of the Company's Form 10-K for the year ended December 31, 1993 incorporated by reference herein) 3(a)(3) Certificate of Amendment to Restated Certificate of Incorporation (Exhibit 28 of the Company's Registration Statement on Form S-8, File No. 33-38491, refiled as Exhibit 3(a)(3) of the Company's Form 10-K for the year ended December 31, 1993 incorporated by reference herein) 3(a)(4) Certificate of Amendment to Restated Certificate of Incorporation (Exhibit 3(a)(4) of the Company's Form 10-K for the year ended December 31, 1993 incorporated by reference herein) 3(b) By-laws, as amended (Exhibit 3(b) of the Company's Form 10-K for the year ended December 31, 1993 incorporated by reference herein) 4(a)(1) Loan Agreement dated February 8, 1995 by and between the Company and Fleet National Bank, as agent, and certain other financial institutions (Exhibit 4(a) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 47 4(a)(2) First Amendment to Loan Agreement dated June 4, 1997 by and among the Company and Fleet National Bank, as agent, and certain other financial institutions 4(b) Loan Agreement between South Carolina Jobs - Economic Development Authority (the "Authority") and the Company dated as of December 1, 1990 (Exhibit 4(n) of the Company's Form 10-K for the year ended December 31, 1990 incorporated by reference herein) 4(c) Registration Rights Agreement dated as of August 12, 1985 by and among the Company, Thomas M. Duff and others (Exhibit 4.7 of the Company's Registration Statement on Form S-1, File No. 33-13458, incorporated by reference herein) 4(d) Loan Agreement between the Authority and the Company, dated as of December 1, 1992 (Exhibit 4(w) of the Company's Form 10-K for the year ended December 31, 1992 incorporated by reference herein) 4(e) First Supplemental Loan Agreement between the Authority and the Company dated as of April 1, 1991 (Exhibit 4(a) of the Company's Form 10-Q for the quarter ended June 30, 1991 incorporated by reference herein) 4(f) Note Purchase Agreement dated as of June 14, 1991 between the Company and the Purchasers named in Schedule I thereto (Exhibit 4(b) of the Company's Form 10-Q for the quarter ended June 30, 1991 incorporated by reference herein) 4(g)(1) Rights Agreement dated as of August 6, 1991 between the Company and First Chicago Trust Company of New York, as Rights Agent (Exhibit 1 of the Company's Form 8-K dated as of August 6, 1991 incorporated by reference herein) 4(g)(2) Amendment to Rights Agreement dated February 26, 1996 between the Company and Continental Stock Transfer and Trust Company (Exhibit 4.1 of the Company's Form 8-K dated February 28, 1996 incorporated by reference herein) 4(h) Loan Agreement between the Authority and the Company dated as of June 1, 1992 (Exhibit 4(u) of the Company's Form 10-Q for the quarter ended June 30, 1992 incorporated by reference herein) 4(i) Note Purchase Agreement between the Company and Teachers Insurance and Annuity Association of America dated July 28, 1992 (Exhibit 4(v) of the Company's Form 10-Q for the quarter ended June 30, 1992 incorporated by reference herein) 4(j) Loan Agreement between the Company and Centric Capital Corporation dated as of November 19, 1997 48 Executive Compensation Plans and Arrangements - --------------------------------------------- 10(a) Wellman, Inc. 1985 Amended and Restated Incentive Stock Option Plan (Exhibit 4 of the Company's Registration Statement on Form S-8/S-3, File No. 33-54077, incorporated by reference herein) 10(b)(1) Employment Agreement dated as of January 1, 1990 between the Company and Thomas M. Duff (Exhibit 10(b)(1) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 10(b)(2) Third Amendment to Employment Agreement dated as of January 1, 1997 between the Company and Thomas M. Duff (Exhibit 10(a) of the Company's Form 10-Q for the quarter ended March 31, 1997 incorporated by reference herein) 10(c) Employment Agreement dated as of December 1, 1994 between the Company and Clifford J. Christenson (Exhibit 10(c) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 10(d) Employment Agreement dated as of December 1, 1994 between the Company and Keith R. Phillips (Exhibit 10(e) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 10(e) Employment Agreement dated as of December 1, 1994 between the Company and James P. Casey (Exhibit 10(f) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 10(f) Employment Agreement dated as of May 21, 1996 between the Company and John R. Hobson (Exhibit 10(a) of the Company's Form 10-Q for the period ended June 30, 1996 incorporated by reference herein) 10(g) Directors Stock Option Plan dated as of December 2, 1991 (Exhibit 4(a) of the Company's Registration Statement on Form S-8, File No. 33-44822, incorporated by reference herein) 10(h) Management Incentive Compensation Plan, as amended 10(i) Summary of Executive Life Insurance Plan (Exhibit 10.22 of the Company's Registration Statement on Form S-1, File No. 33-13458, incorporated by reference herein) 10(j) Description of Directors' Restricted Stock Plan (Exhibit 10(k) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 10(k) Directors Deferred Compensation Plan (Exhibit 10(l) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 10(l) Amended and Restated Directors' Retirement Plan (Exhibit 10(m) of the Company's Form 10-K for the year ended December 31, 1994 incorporated by reference herein) 49 10(m) Executive Retirement Restoration Plan, as amended 10(n) Wellman, Inc. 1997 Stock Option Plan (Exhibit 10(b) of the Company's Form 10-Q for the quarter ended June 30, 1997 incorporated by reference herein) 10(o) Deferred Compensation and Restricted Stock Plan Other Material Agreements - ------------------------- 10(p) Letter Agreement, relating to certain environmental matters, dated August 17, 1987, by and among Fiber Industries, Inc. (FI), Hoechst Celanese Corp. (HCC) and Celanese Fibers Inc. (Celanese) (Exhibit 10.3 of FI's Registration Statement on Form S-1, File No. 33-20626, incorporated herein by reference) 10(q) Trademark Assignment and License, dated January 28, 1988, by and among FI, HCC and Celanese (Exhibit 10.14 of FI's Registration Statement on Form S-1, File No. 33-20626, incorporated herein by reference) 10(r) Inducement Agreement dated April 16, 1996, by and among Wellman of Mississippi, Inc., the Mississippi Department of Economic and Community Development acting for and on behalf of the State of Mississippi, the Mississippi Business Financial Corporation and certain other parties (Exhibit 10(u) of the Company's Form 10-K for the year ended December 31, 1996 incorporated by reference herein) 21 Subsidiaries 23(a) Consent of Ernst & Young LLP 23(b) Consent of KPMG 27(a) Financial Data Schedule 27(b) Restated Financial Data Schedules 28(a) Report of KPMG (b) Reports on Form 8-K ------------------- None. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 1998. WELLMAN, INC. /s/ Thomas M. Duff ------------------------------ President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 25, 1998. Signatures Title ---------- ----- /s/ Thomas M. Duff - -------------------------- President, Chief Executive Officer and Thomas M. Duff Director (Principal Executive Officer) /s/ Keith R. Phillips - -------------------------- Vice President, Chief Financial Officer and Keith R. Phillips Treasurer (Principal Financial Officer) /s/ Mark J. Rosenblum - -------------------------- Vice President, Chief Accounting Officer and Mark J. Rosenblum Controller (Principal Accounting Officer) /s/ James B. Baker - -------------------------- Director James B. Baker /s/ C. William Beckwith Director - -------------------------- C. William Beckwith /s/ Clifford J. Christenson Director - -------------------------- Clifford J. Christenson /s/ Peter H. Conze Director - -------------------------- Peter H. Conze /s/ Allan R. Dragone Director - -------------------------- Allan R. Dragone /s/ Richard F. Heitmiller Director - -------------------------- Richard F. Heitmiller /s/ Jonathan M. Nelson Director - ------------------------- Jonathan M. Nelson 51 /s/ James E. Rogers Director - ------------------------- James E. Rogers /s/ Raymond C. Tower Director - ------------------------- Raymond C. Tower /s/ Roger A. Vandenberg Director - ------------------------- Roger A. Vandenberg 52 EX-4.A2 2 EX 4(A)(2) TO 10K 1997 EXHIBIT 4(a)(2) FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT is entered into as of June 4, 1997 by and among Wellman, Inc., a Delaware corporation (the "Borrower"), Fleet National Bank, a national banking association, in its capacity as agent for itself and the other Banks (the "Agent") and the Banks. RECITALS WHEREAS, capitalized terms used in this First Amendment to Loan Agreement (the "Amendment") and not expressly defined herein shall have the respective meanings assigned thereto in that certain Loan Agreement dated as of February 8, 1995 among the Borrower, the Agent and the Banks (the "Loan Agreement"). WHEREAS, the Borrower, the Banks and the Agent desire to amend the Loan Agreement as provided in this Amendment. NOW THEREFORE, in consideration of the terms and conditions set forth herein and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the Borrower, the Banks and the Agent hereby mutually agree as follows: 1. Effective as of the date hereof, the Loan Agreement is hereby amended as follows: (a) Section 1.01 of the Loan Agreement is amended by inserting the following definition immediately after the definition of "Capitalized Lease Obligations": "Cash Equivalent Investments" means any amount reflected on Borrower's consolidated balance sheet as cash or cash equivalent investments to the extent such Investments and other amounts are freely tradable. (b) Section 1.01 of the Loan Agreement is further amended by deleting the definition of "EBIT" and inserting the following definition in substitution therefor: "EBITDA" means, for any fiscal period of the Borrower, Borrower's Net Income from Continuing Operations for such fiscal period, plus the amount of income tax expense for such fiscal period, minus the amount of income tax benefit for such fiscal period, plus Interest Expense for such fiscal period, minus the amount of interest income for such fiscal period, plus the amount of depreciation and amortization for such fiscal period as reflected on Company's Consolidated Cash Flow, all the foregoing additions and subtractions being added or subtracted only to the extent included in the calculation of Borrower's Net Income from Continuing Operations for the Borrower fiscal period in question and all as determined on a consolidated basis for the Borrower in accordance with GAAP. (c) The term "EBIT" is amended to read "EBITDA" wherever such term appears in the Loan Agreement. (d) In Section 1.01 the definition of "Net Income from Continuing Operations" is amended by changing the word "...effective..." to "...effect..." in line 5 thereof. (e) Section 5.01(J) of the Loan Agreement is hereby amended to read as follows: "(J) Maintain EBITDA Coverage at the end of each fiscal quarter of the Borrower ending after March 31, 1997 of not less than 3.5 to 1.0; provided, however, that for purposes of calculating compliance with this Section 5.01(J) the computation of EBITDA shall exclude losses or gains from the operations of or discontinuation(s) of any business(es) of Borrower, or any portion(s) or unit(s) thereof (such business or portion or unit thereof being referred to as an "Affected Business") if (x) the Borrowers Board of Directors has committed or authorized the closure or disposition of such Affected Business and (y) the aggregate book value of the Affected Business' Tangible Assets as of the end of the quarter immediately prior to such loss was less than 10% of the Consolidated Tangible Assets as of the end of the quarter immediately prior to such loss and (z) that any loss or gain relating to the Affected Business or gain or loss on closure or disposition of such Affected Business is a separately stated line item on the Borrower's consolidated income statement and/or separately disclosed in the footnotes, all of the foregoing to be calculated in accordance with GAAP; provided that the aggregate amount of such losses net of such gains from all Affected Businesses that may be so excluded from and after April 1, 1997 shall not exceed twenty percent (20%) of Consolidated Stockholders' Equity as of the quarter ending immediately prior to the quarter for which compliance with this Section 5.01(J) is being determined." (f) Section 5.01(K) of the Loan Agreement is hereby amended to read as follows: "(K) Leverage Ratio. Maintain at the end of each of Borrower's fiscal quarters a Leverage Ratio of not greater than .55 to 1.0; provided, that solely for purposes of calculating Borrower's compliance with this covenant, there shall be subtracted from Adjusted Indebtedness the excess of (A) Borrower's Cash Equivalent Investments at such date over (B) the sum of (i) $10,000,000 and (ii) the amount of federal income taxes that would be payable (if any) if Borrower's Cash Equivalent Investments held outside the United States were repatriated to the United States at the end of such quarter, and taxed at the Assumed Rate. For purposes of this Section 5.01(K) the term "Assumed Rate" means the greater of zero or the difference between (a) the highest federal income tax rate in the United States applicable to domestic corporations and (b) the highest income tax rate applicable to Borrower or its Subsidiaries, as appropriate, on the Cash Equivalent Investments in the jurisdiction in which such Cash Equivalent Investments are held at the end of such quarter. (g) Exhibit D to the Loan Agreement will be appropriately modified to reflect the changes provided for in this Amendment. Section 2. Representations and Warranties. The Borrower hereby represents and warrants that (i) it has full power and authority to execute and deliver this Amendment and to perform its obligation hereunder, (ii) it 2 has taken all corporate action necessary for the execution and delivery by it of this Amendment and the performance by it of its obligations hereunder, and (iii) this Amendment constitutes its valid and binding obligation enforceable against it in accordance with its terms except to the extent enforceability may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting the rights of creditors generally or the application of principles of equity, whether in an action at law or proceeding in equity. Section 3. Reference to and Effect Upon the Loan Agreement. 3.1 The Loan Agreement, as specifically amended hereby, is hereby ratified, confirmed and approved and shall remain in full force and effect. 3.2 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent or any Bank under the Loan Agreement, nor constitute an amendment of any provision of the Loan Agreement, except as specifically set forth herein. Upon the effectiveness of this Amendment (i) each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment; and (ii) each reference in any Note or Related Document to the Loan Agreement shall mean and be a reference to the Loan Agreement as amended by this Amendment. Section 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without regard to its conflict of laws provisions. Section 5. Headings. Article and Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. Section 6. Counterparts. This Agreement may be executed and delivered in any number of counterparts each of which shall be deemed an original, and this Agreement shall be effective when at least one counterpart hereof has been executed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Loan Agreement to be executed as a sealed instrument by their respective officers thereunto duly authorized as of the date first written above. WELLMAN, INC. By: /s/ Audrey Goodman ----------------------- Name: Audrey Goodman Title: Assistant Treasurer FLEET NATIONAL BANK, as Agent and as a Bank By: ------------------------ Name: Title: 3 FLEET NATIONAL BANK, as successor to Natwest Bank N.A. By: ------------------------ Name: Title: FLEET NATIONAL BANK, as successor to Shawmut Bank, N.A. By: ------------------------ Name: Title: 4 EX-4.J 3 EX 4(J) TO 10K 1997 EXHIBIT 4(j) LOAN AGREEMENT November 19,1997 Wellman, Inc. 1040 Broad Street, Suite 302 Shrewsbury, New Jersey 07702 Ladies and Gentlemen: We are pleased to make available to you an uncommitted credit facility for general corporate purposes on tthe terms set forth in this letter. 1. We agree to consider from time to time, in our sole discretion, your requests that we make Aadvances (as hereafter defined) to you, on either an interest bearing or a discount basis, in an aggregate amount not to exceed at any one time outstanding the amount set forth on Schedule I hereto as the "Facility Amount," on the terms and conditions set forth below. This letter is not a commitment to lend but rather sets forth the procedures to be used in connection with your requests for our making of Advances to you from time to time on or prior to the termination hereof pursuant to paragraph 11 hereof and, in the event that we make Advances to you hereunder, your obligations to us with respect thereto. The Advances shall be evidenced by the "grid" promissory note executed by you in substantially the form of the promissory note attached hereto (the "Note"). 2. As used herein, the following terms shall have the following meanings (terms defined in the singular to have the corresponding meanings when used in the plural, and vice versa): "Advance" means any advance that we shall make to you hereunder pursuant to your request as provided herein. Unless otherwise required by the context, any reference herein or in the Note to the amount of an Advance shall be construed to refer to the Discounted Proceeds thereof actually remitted to you or to your account as proved herein. "Discounted Amount" of any Advance means the amount by which the Stated Amount of such Advance exceeds the Discounted Proceeds of such Advance. "Discounted Proceeds" of any Advance means the net proceeds of such Advance transferred or wired to you or to your account in accordance with the last sentence of Paragraph 3 hereof. "Stated Amount" of any Advance means the full stated or face amount of such Advance, which in all circumstances shall be equal to the sum of (x) the Discounted Proceeds of such Advance plus (y) the Discount Amount of such Advance. 3. The Stated Amount of each Advance shall be in an amount at least equal to the amount set forth on Schedule I hereto as the "Minimum Advance Amount", or any integral multiple of $1,000 in excess thereof. Each 1 Advance and shall be made upon (i) your request to us by telephone, telecopy, fax, or letter, given by any of the persons listed on Exhibit A hereto or otherwise designated by your Treasurer in writing ("Designated Persons") that you wish to borrow money on a specified date, in a specific amount and for a specified term (which shall, in no event, be longer than the number of days set forth on Schedule I hereto as the "Maximum Term"); and Discount Amount and Stated Amount applicable to any such Advance. On the date of any such Advance, we will make such Advance available to you in same day funds by directing our administrative agent to transfer or wire the net proceeds of such Advance to an account designated in writing by your Treasurer. 4. Our agreement and acceptance of this letter, together with your furnishing us certified copies of resolutions of your board of directors authorizing your Treasurer to execute this letter and any documents delivered pursuant hereto and allow Designated Persons to request Advances, together with specimen signatures of such Designated Persons, shall constitute a representation and warranty by you that (a) the execution, delivery and performance of this letter has been duly authorized by all necessary corporate action and does not contravene any law, or any contractual or legal restriction, applicable to you and (b) no authorization or approval or other action by, and no notice to or filing with, any government authority or regulatory body is required for such execution, delivery and performance or for the making of any Advance. 5. Each request by you for an Advance shall constitute a representation and warranty by you, as of the making of such Advance and giving effect to the application of the proceeds therefrom, that (ai) no payment default has occurred and is continuing under any agreement or instrument relating to any of your indebtedness in excess of $20 million relating to moneys borrowed, (b) such Advance when made will constitute your legal, valid and binding obligation, (c) such Advance is being incurred, and will be repaid at maturity, in its full Stated Amount, in the ordinary course of your business out of the cash flow generated in the normal day-to-day conduct, operations, and financing activities of your business (to include refinancings), and (d) no event has occurred and no circumstance exists as a result of which the information which you have provided to us in connection herewith would include an untrue statement of a material fact or omit to state any material fact or any fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. In no event shall an Advance be made if any of your representations in Paragraph 4 hereof, or in this Paragraph 5, shall fail to be true and correct in all respects on the date of such Advance. 6. You shall repay the full Stated Amount of each Advance, and in the case of an Advance made on an interest bearing basis shall pay interest on such Advances, in accordance with the terms hereof and of the Note. You shall have no right to prepay any portion of any Advance or unpaid principal amount of any Advance prior to its stated maturity. 7. You shall ensure that each payment hereunder and under the Notes is made before 2:00 p.m. (eastern time) on the day when due in lawful money of the United States of America to our account, The Centric Capital Corporation Commercial Paper Account, Account Number 55-46737, ABA Number 071000013, at The First National Bank of Chicago, One First National Plaza, Chicago, Illinois, 60670 in same day funds. All computations of 2 interest shall be made on the basis of a year of 360 days, for the actual number of days (including the first day but excluding the last day) elapsed. 8. Whenever any payment to be made hereunder shall be otherwise due on a Saturday, a Sunday or other day of the year on which banks are required or authorized to close in New York City, New York, Winston-Salem, North Carolina or Chicago, Illinois (any other day being a "Business Day"), such payment shall be made on the next succeeding Business Day. 9. You agree that you will not apply the proceeds of any Advance to purchase or carry margin stock within the meaning of Regulation G issued by the Board of Governors of the Federal Reserve System. 10. We shall incur no liability to you in acting upon any telephone, telecopy, telex, fax, or letter request or communication which we believe in the absence of gross negligence to have been given by a Designated Person or in otherwise acting in good faith under this letter. Further, all documents required to be executed in conjunction with Advances under this letter may be signed by any Designated Person. 11. This letter shall remain in effect until terminated by either you or us by giving prior written notice of termination hereof to the other party hereto, but no such termination shall affect your obligations with respect to the Advances hereunder outstanding at the time of such termination. 12. All communications hereunder shall be in writing (other than the communication provided for in the second sentence of Paragraph 14 and part (i) of paragraph 3 herein) and mailed, telecopied, telephoned, faxed, or delivered to the address specified on Schedule I hereto for you and for us, or as to each party, to such other address as may be designated by such party in a written notice to the other party. Written communication shall be effective upon receipt unless such communication is mailed in which case it shall be effective three Business Days after deposit in first class mail. 13. We may assign to one or more banks or other entities all or any part of, or may grant participations to one or more banks or other entities in or to all or any part of, any Advance or Advances hereunder and under the Note. You may not assign your rights or obligations hereunder or any interest herein. 14. You agree to pay on demand all reasonable costs, expenses including, but not limited to, outside legal fees and losses, if any, incurred by us in connection with the enforcement of this letter or the Note. 15. You agree to furnish us with such financial statements or other information as we may reasonably request. Any such information that is not generally available to the public shall be confidentially maintained by us and shall not be disseminated outside of our organization except as might be required by legal or regulatory bodies. You shall promptly notify us of any change in the short term or long term ratings assigned by any statistical rating organization to any of your outstanding indebtedness. 16. If any of the following events shall occur and be continuing: 3 (a) you shall fail to pay any amount due hereunder or under the Note when the same becomes due and payable; or (b) any representation or warranty made by you (or any of your officers) in connection with any Advance or otherwise in connection with the Note shall prove to have been incorrect in any material respect when made; or (c) you shall, without prior written notification, merge or consolidate with or into any person or entity and you are not the surviving entity to such transaction, or shall convey, transfer, lease or dispose of (whether in one transaction or in a series of transactions) all or substantially all of your assets other than sale of inventory in the ordinary course of business to, any person or entity; or (d) you shall fail to perform or observe, without prompt notification, any other material term, covenant or agreement in connection with any Advance or otherwise in connection with the Note on your part to be performed or observed; or (e) you shall fail to pay any principal of or premium or interest on any indebtedness for money borrowed, in excess of $20,000,000 (excluding indebtedness evidenced by the Note), when the same becomes due and payable (whether by scheduled maturity, required prepayments, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness; or any other event shall occur or condition shall exist under any agreement or instrument relating to such indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such condition is to accelerate the maturity of such indebtedness; or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (f) you shall generally not pay your debts as such debts become due, or shall admit in writing your inability to pay your debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against you seeking to adjudicate you as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of you or your debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for you or any substantial part of your property and such action is unresolved after 60 days; or you shall take any corporate action to authorize any of the actions set forth above in this subsection (f); then, and in any such event, we may declare the Note and all amounts payable thereunder to be forthwith due and payable, whereupon the Note and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind all of which you hereby expressly waive; provided however, that in the event of an actual or deemed entry of an order for relief with respect to you under the Federal Bankruptcy Code, the Note and all such other amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by you. 4 17. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 18. You agree that you will not institute against or join any other person in instituting against us any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and a day after the latest maturing commercial paper note issued by us is paid in full. 19. At our option, we may, upon notice that either Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or Moody's Investors Service, Inc. has (i) lowered or downgraded its short term commercial paper or corporate bond or other short term ratings of you, or (ii) placed your securities on a watch list of securities singled out for surveillance, with either negative or developing implications in a Rating Category, amend Schedule I hereof to provide for an amended "Facility Amount" and amended "Maximum Term." 20. The obligations under this Agreement are solely our corporate obligations. No recourse shall be had for the payment of any amount owing by you or us hereunder or any other obligation or claim of or against you or us arising out of or based upon this Agreement against any of our respective stockholders, employees, officers, directors or incorporators. 21. You irrevocably agree that any legal action, suit or proceeding against us arising out of this Agreement may be brought in the United States District Court for the State of New York, or in the courts of the State of New York and hereby irrevocably accept and submit to the non-exclusive jurisdiction of each of the aforesaid courts in personam, generally and unconditionally with respect to any action, suit or proceeding for you and in respect of your properties, assets and revenues. You further irrevocably agree to the service of any legal process, summons, notices and documents out of any of the aforesaid courts by mailing copies thereof by registered or certified air mail, postage prepaid, to you at your address designated pursuant to this Agreement. Nothing herein shall in any way be deemed to limit our ability to serve any such legal process, summons, notices and documents in any other manner, as may be permitted by applicable law or to obtain jurisdiction over you, or bring action, suits or proceedings against you in such other jurisdictions, and in such manner, as may be permitted by applicable law. If the terms of this letter are satisfactory to you, please indicate your agreement and acceptance thereof by signing a counterpart of this letter and returning it to us. Very truly yours, CENTRIC CAPITALFUNDING CORPORATION By: /s/ Jennifer Mooney ---------------------------- Wachovia Bank, N.A. Jennifer Mooney, Vice President Agreed and Accepted: Wellman, Inc. By: /s/ Keith R. Phillips ---------------------------- Name & Title: Keith R. Phillips, VP, Chief Financial Officer and Treasurer: 5 SCHEDULE I to Loan Agreement dated as of November 19, 1997 between Centric Capital Corporation and Wellman, Inc. amended promissory note dated 1/16/98 (i) For the purposes of Section 1 and 2 of this Loan Agreement: The "Facility Amount" is $200,000,000 The "Minimum Advance Amount" is $5,000,000 The "Maximum Term" is 270 days. The "Minimum Term" is 14 days. (ii) For the purpose of Section 11 of this Loan Agreement: The address for written communications to you is: Wellman, Inc. 1040 Broad Street, Suite 302 Shrewsbury, New Jersey 07702 Attention: Audrey Goodman Telephone Number: 732-935-7312 Fax Number: 732-935-7349 The address for written communications to us is: Centric Capital Corporation c/o Wachovia Bank of Bank of Georgia, N.A. 191 Peachtree Street, N.E. Atlanta, GA 30303 Attention: Jennifer A. Mooney Mail Code: GA-370 Telephone Number: 404-332-5104 Fax Number: 404-332-6898 (iii) For the purposes of this Loan Agreement, instructions for wire transfer of funds to you are: Name of Bank: Fleet National Bank, Providence, Rhode Island Bank ABA Number: 011 500 010 Account Name: WS Subsidiary Account Number: 10 691 1002 6 Exhibit A to Loan Agreement dated as of November 19, 1997 between Centric Funding Corporation and Wellman, Inc. For the purpose of Section 2 of this Loan Agreement, the "Designated Persons" are: Name Title ---- ----- Keith R. Phillips CFO and Treasurer Audrey Goodman Assistant Treasurer Mair Petracco Assistant Cash Manager Promissory Note DATE: January 16, 1998 $ 200,000,000.00 FOR VALUE RECEIVED, the undersigned (hereinafter called the "Borrower"), HEREBY PROMISES TO PAY to the order of Centric Funding Corporation (hereinafter called the "Lender") the entire State Amount (as such term is defined in the loan Agreement hereinafter referred to) of each Advanced (as defined below) on the date mutually agreed to by the Lender and the Borrower at the time of such Advance as the maturity date thereof. (a) in the case of an Advance made on an interest bearing basis, the principal amount of such Advance made by the Lender to the Borrower, on the date mutually agreed to by the Lender and the Borrower at the time of such Advance as the maturity date thereof, together with interest (computed on the basis of a year of 360 days for the actual number of days, including the first day but excluding the last day, elapsed) on the principal amount of each Advance outstanding from time to time from and including the date on which such Advance is made until the maturity date of such Advance at an interest rate per annum mutually agreed to by the Lender and the Borrower at the time of such Advance, payable on the maturity date of such Advance; and (b) in the case of each Advance made on a discount basis by the Lender to the Borrower, the stated or face amount of such Advance, on the date mutually agreed to by the Lender and the Borrower at the time of such Advance as the maturity date thereof. Any overdue principal amount and overdue amount of interest, reasonable fees or other amounts payable hereunder or under the Loan Agreement referred to below shall bear interest, payable on demand, at a fluctuating interest rate per annum equal to the Prime Rate plus 2%, but in no event greater than the highest rate allowed by applicable law. As used herein, "Prime Rate" shall mean the prime rate of U.S. money center commercial banks as published in the Wall Street Journal. Changes in the Prime Rate shall be effective as of the day of each such change. The Borrower shall have no right to prepay all or any portion of any unpaid principal amount of any Advance. The Borrower shall ensure that payment of principal and interest hereunder is made prior to 12:00 p.m. (eastern time) on the day when due in lawful money of the United States of America to the Lender's account, The Centric Funding Corporation Commercial Paper Account, Account Number 55- 46737, ABA Number 071000013 at The First National Bank of Chicago, One First National Plaza, Chicago, Illinois, 60670 in same day funds. Whenever any payment to be made hereunder shall be otherwise due on a day other than a Business Day (as defined in the Loan Agreement) such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. The Borrower hereby authorizes the Lender to endorse on the grid attached hereto the date and amount of each Advance made by the Lender to the Borrower hereunder, the maturity date thereof, the rate of discount applicable thereto, the Discounted Proceeds and the Discount Amount (as such terms are defined in the Loan Agreement referred to below) thereof and all payments made on account thereof, provided that the failure to do so shall not affect the obligation of the Borrower to the Lender. The Borrower also agrees to pay on demand all reasonable costs and expenses (including fees and expenses of counsel) incurred by the Lender in enforcing this Promissory Note. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. This Promissory Note is the "grid" promissory note referred to in, and is entitled to the benefits of, the Loan Agreement dated November 19, 1997 (the "Loan Agreement"), between the Borrower and the Lender, which Loan Agreement, among other things, sets forth procedures to be used in connection with the Borrower's periodic requests that the Lender make advances (the "Advances") to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the amount first above mentioned. Wellman, Inc. By: /s/ Keith R. Phillips ------------------------- Name & Title: Keith Phillips Chief Financial Officer EX-10.H 4 EX 10(H) TO 10K 1997 EXHIBIT 10(h) WELLMAN, INC. Amended and Restated Plan Summary Wellman, Inc. Management Incentive Compensation Plan for the Executive Group ARTICLE I NAME 1.1 The Plan shall be known as the "Wellman, Inc. Management Incentive Compensation Plan for the Executive Group." ARTICLE II STATEMENT OF PURPOSE 2.1 The purpose of the Plan is to provide a system of incentive compensation that will promote the maximization of shareholder value over the long-term. In order to align management incentives with shareholder interests, this Plan will tie incentive compensation to Modified Cash Flow Economic Value Added, as defined below, and, thereby, reward management for increasing shareholder value. ARTICLE III DEFINITIONS 3.1 Plan Year is the fiscal year of the Company which is the calendar year. 3.2 Effective Date is January 1, 1992. The Plan is amended January 1, 1997. 3.3 Committee means the Compensation Committee of the Board of Directors of Wellman, Inc. or any successor committee. 3.4 Participating Group means a business division or group of business divisions that is identified by the Committee for measuring performance and calculating the incentive bonus. An individual participant's incentive compensation may be determined based on the performance of any combination of Participating Groups as determined by the Committee. 3.5 Salary means the participant's weighted average base salary for the entire Plan Year. 3.6 Modified Cash Flow Economic Value Added or McFEVA means the amount calculated by subtracting a capital charge, which is the net assets employed in the Participating Group multiplied by the Participating Group's cost of employing that capital, from the modified cash flow (MCF) of the Participating Group. The MCF is the Participating Group's operating income appropriately modified for unusual events, as included in the consolidated income statement of the Company, plus its depreciation less its maintenance of business capital expenditures and its allocated Corporate administrative and R&D expenses. McFEVA = MCF - (Net Assets Employed X Cost of Capital) 3.7 McFEVA Target means the annual performance, as measured in McFEVA terms, that must be achieved by a given Participating Group in order for its participants to be eligible to earn the McFEVA portion of the Target Bonus. 3.8 Strategic Objective means an objective that has been assigned to a Plan participant for which a portion of the bonus will be earned if the objective is achieved. Strategic Objectives generally support longer term McFEVA performance and, along with the McFEVA Target, make up the two bonus measurement components. 3.9 Target Bonus Percentage is the percentage of Salary a participant will be eligible to earn in bonus if the McFEVA Target and Strategic Objectives are both met. A Target Bonus Percentage is assigned to each participant by the Committee based on the participant's relative job position. 3.10 Target Bonus means the amount of dollars eligible to be earned when the participant meets the McFEVA Target for the assigned Participating Group(s) and accomplishes his Strategic Objectives. Bonus amounts above and below the Target Bonus can be earned depending on McFEVA performance and the accomplishment of Strategic Objectives. 3.11 Allocation Percentage means the percentage split, assigned to each Plan participant by the Committee, of the Target Bonus between the two Plan measurement components, McFEVA Target and Strategic Objectives. 3.12 Management Incentive Plan Payment means the sum of the Strategic Objective portion of the Target Bonus, which is subject to review and modification by the Committee. 3.13 Cause in the context of a termination of employment means only one or more of the following: (i) the commission in the course of employment of any dishonest or fraudulent act; (ii) a conviction of a felony (from which, through lapse of time or otherwise, no successful appeal shall have been made) whether or not committed in the course of employment; (iii) the willful refusal to carry out reasonable instructions of the Board of Directors of Wellman, Inc. which has a material adverse effect upon the Company or any of its subsidiaries; and (iv) the willful disclosure of any trade secrets or material confidential corporate information to persons not authorized to know same. 3.14 Change of Control shall be deemed to have occurred when (i) any "person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) 2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company, any of its subsidiaries, or any employee benefit plan of the Company or of any subsidiary, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of the period. ARTICLE IV PLAN ADMINISTRATION 4.1 The Plan shall be administered by the Committee which shall have exclusive and absolute authority and discretion to interpret the Plan, to establish and modify rules for the administration of the Plan, to impose such conditions and restrictions as it determines appropriate with respect to the Plan and to take such other actions and make such other determinations as it may deem necessary or advisable for the implementation and administration of the Plan. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan. 4.2 This Plan may be amended, suspended or terminated any time at the sole discretion of the Board of Directors of Wellman, Inc., provided, however, that no such change in the Plan shall be effective to eliminate or diminish the distribution of any award earned by a participant before the date of such amendment, suspension or termination. Notice of any such amendment, suspension or termination shall be given promptly to each participant. ARTICLE V PARTICIPATION 5.1 The participants in the Plan consist of those employees who are Officers, Vice Presidents, and other senior executives identified by the Committee. 3 ARTICLE VI DESCRIPTION OF PLAN OPERATION 6.1 Each Plan participant will be assigned to a Participating Group(s) by the Committee as appropriate to their given job scope and responsibility. Annual McFEVA targets for the Participating Groups will be established by the Committee and will apply to all Plan participants in the Participating Group. Also, each Plan participant will be assigned Strategic Objectives by the Committee that they are personally responsible for achieving in order to maximize their Management Incentive Plan Payment hereunder. A Target Bonus Percentage will also be assigned to each Plan participant by the Committee that represents the percentages of Salary that will be eligible to be paid for meeting the McFEVA Target and achieving the Strategic Objectives. Each Plan participant will also be assigned by the Committee an Allocation Percentage that specifies the portion of the Target Bonus that is allocated to meeting the McFEVA Target and the portion that is allocated to achieving the Strategic Objectives. Strategic Objectives will have an Allocation Percentage less than or equal to 50 percent. Performance payment ranges will be created around the McFEVA Target for each Participating Group to allow amounts less than or greater than the Target Bonus amount to be paid for the McFEVA measurement component. The Committee will establish the performance payment ranges. At the conclusion of each Plan Year, each Plan participant's Management Incentive Plan Payment will be calculated by determining the extent that the McFEVA Target and Strategic Objectives were achieved and applying the Allocation Percentage for each of the two measurement components to the Target Bonus amount. The amount of the Management Incentive Plan Payment payable to each participant will be determined by the Committee. Following are the calculations for determining a participant's Management Incentive Plan Payment: Management Incentive Plan Payment = McFEVA Portion + Strategic Objectives Portion McFEVA Portion = Salary(Target Bonus %)(McFEVA Allocation %)(McFEVA Performance %) Strategic Objectives Portion = Salary (Target Bonus %) (Strategic Objectives Allocation %) ( Percent of Strategic Objectives Achieved) Management Incentive Plan Payments will be paid during the month of March following the Plan Year. 4 ARTICLE VII CHANGE IN STATUS DURING THE PLAN YEAR 7.1 Disability. A participant shall be deemed "permanently disabled" if, because of physical or mental condition, the participant is unable for a period of at least one year to perform the principal duties of his/her occupation as determined by a Company-approved physician. A participant shall receive a pro rata bonus based on the number of full months worked for the year in which the disability started. The payment shall be made at the regular time for making bonus payments (March following the Plan Year). 7.2 Death. A participant's beneficiary, as designated for the life insurance program, shall receive a pro rata bonus based on the number of full months worked for the Plan Year in which they die. The payment will be made at the regular time for making bonus payments (March following the Plan Year). 7.3 Retirement. A participant who retires from the Company upon or after reaching age 55 shall receive a pro rata bonus based on the number of full months worked for the Plan Year in which he/she retires. The payment will be made at the regular time for making bonus payments (March following the Plan Year). 7.4 Resignation or Termination for Cause. Termination of employment for Cause or voluntary termination by a participant results in the forfeiture of any award for the Plan Year in which employment terminates. 7.5 Termination without Cause. A participant who is terminated for reasons other than those described above will receive a pro rata portion of that Plan Year's award. The payment will be made at the regular time for making bonus payments (March following the Plan Year) or as mutually agreed by the Committee and the terminated participant. 7.6 No Guarantee. Participation in the Plan provides no guarantee that a bonus under the Plan will be paid in any year. Similarly, the payment of an Award under the Plan in one Plan Year or selection as a participant is no guarantee that a bonus under the Plan will be paid in any subsequent Plan Year. ARTICLE VIII GENERAL PROVISIONS 8.1 Withholding of Taxes. The Company shall have the right to withhold the amount of taxes which, in the determination of the Company, are required to be withheld under law with respect to any amount due or paid under the Plan. 8.2 Expenses. All expenses and costs in connection with the adoption and administration of the Plan shall be borne by the Company. 5 8.3 No prior Right or Offer. Except and until expressly granted pursuant to the Plan, nothing in the Plan shall be deemed to give any employee any contractual or other right to participate in the benefits of the Plan. 8.4 Disputed Claims for Benefits. In the event a participant (a "claimant") has a dispute with respect to any of the benefits provided hereunder, the claimant shall submit evidence satisfactory to the Committee of facts establishing his entitlement to a payment under the Plan. Any claim with respect to any of the benefits provided under the Plan shall be made in writing within ninety (90) days of the annual Plan payment date. Failure by the claimant to submit his or her claim within such ninety (90) day period shall bar the claimant from any claim for benefits under the Plan. In reaching its decision, the Committee shall have complete discretionary authority to determine all questions arising in the interpretation and administration of the Plan, to construe the terms of the Plan, including any doubtful or disputed terms and the eligibility of a participant for benefits. 8.5 Rights Personal to Employee. Any rights provided to an employee under the Plan shall be personal to such employee, shall not be transferable (except by will or pursuant to the laws of descent or distribution), and shall be exercisable, during his or her lifetime, only by such employee. 8.6 Confidentiality. Specific details of any calculations under the Plan must remain confidential and because of the individuality of the Awards, participants should not share information with each other. 8.7 Wellman, Inc. Profit Sharing Plan. Participants in the Wellman, Inc. Management Incentive Compensation Plan for the Executive Group are not eligible to participate in the Wellman, Inc. Profit Sharing Plan. 8.8 Change of Control. Upon any Change of Control, unless the Committee in its sole discretion determines otherwise prior to the Change of Control, the benefits of the Plan will be paid to all participants within 45 days of the Change of Control date. Plan payment will be based on the full Plan Year's forecasted results as defined in the most recent monthly financial forecast prior to the Change of Control date using the most recent annual base salary of each participant. 8.9 No Continued Employment. Neither the establishment of the Plan, the assignment of targets nor the grant of an award hereunder shall be deemed to constitute an express or implied contract of employment for any period of time or in any way abridge the rights of the Company to determine the terms and conditions of employment or to terminate the employment of any employee with or without cause at any time. 8.10 No Vested Rights. Except as otherwise provided herein, no employee or other person shall have any claim of right (legal, equitable, or otherwise) to any award, allocation, or distribution and no officer or employee of the Company or any other person shall have any authority to make representations 6 or agreements to the contrary. No interest conferred herein to a participant shall be assignable or subject to claim by a participant's creditors. 8.11 Not Part of Other Benefits. The benefits provided in this Plan shall not be deemed a part of any other benefit provided by the Company to its employees. The Company assumes no obligation to Plan participants except as specified herein. This is a complete statement of the terms and conditions of the Plan. Revised: January, 1997 EX-10.M 5 EX 10(M) TO 10K 1997 EXHIBIT 10(m) WELLMAN, INC. AMENDED AND RESTATED EXECUTIVE RETIREMENT RESTORATION PLAN Effective as of January 1, 1993, and as Amended, Effective as of April 1, 1998 TABLE OF CONTENTS SECTION TITLE PAGE - ------- ----- ---- PREAMBLE 1 I DEFINITIONS 1 1.1 Beneficiary 1 1.2 Code 1 1.3 Committee 1 1.4 Company 1 1.5 Company Contribution Credits 1 1.6 Company Contribution Credits Account 1 1.7 Compensation 1-2 1.8 Contribution Credits Account 2 1.9 Deferral Election Form 2 1.10 Disability 2 1.11 Employee Contribution Credits 2 1.12 Employee Contribution Credits Account 2 1.13 ESOP 2 1.14 IRS 2 1.15 Limited Compensation 2 1.16 Participant 2-3 1.17 Plan 3 1.19 Plan Year 3 1.19 Profit Sharing Plan 3 1.20 Qualified Retirement Plans 3 1.21 Retirement 3 1.22 Retirement Plan 3 2 TABLE OF CONTENTS (CONTTNUED) SECTION TITLE PAGE - ------- ----- ---- 1.23 Service 3 1.24 The Masculine Gender 3 II ELIGIBILITY FOR RETIREMENT BENEFITS 3 III CONTRIBUTIONS TO THE PLAN 4 3.1 Amount of Company Contribution Credits 4 3.2 Amount of Employee Contribution Credits 4 3.3 Crediting of Earnings 5 IV DISTRIBUTABLE EVENTS AND DISTRIBUTION OF AMOUNTS 6 4.1 Retirement 6 4.2 Death 6 4.3 Termination of Employment 6-7 4.4 Withdrawals/Loans Not Allowed 7 V MISCELLANEOUS 7-8 3 PREAMBLE The purpose of the Wellman, Inc. Executive Retirement Restoration Plan is to provide for a selected group of senior executives an unfunded, non-qualified defined contribution plan whose purposes are to (1) restore employer contributions which cannot be made to the Company's qualified retirement plans on behalf of these executives due to various IRS restrictions imposed on such plans and (2) provide a mechanism for these executives to defer compensation which cannot be contributed to the Company's qualified retirement plan due to similar and additional IRS restrictions. The Company plans whose employer contributions and employee deferral opportunities are restored within this Plan include the following: - the Wellman, Inc. Employee Stock Ownership Plan and Trust; and - the Wellman, Inc. Retirement Plan. The senior executives who are eligible to participate in this Plan will be nominated and confirmed by the Compensation Committee of the Board of Directors of Wellman, Inc. Each eligible executive must complete a Deferral Election Form prior to the beginning of the period for which such deferrals shall become effective. This Plan shall initially be effective January 1, 1993, and as amended, shall be effective as of April 1, 1998, with a proviso that any compensation deferred by the executive into this Plan shall not be taken out of compensation earned prior to the effective date of the executive's election. SECTION I DEFINITIONS 1.1 "Beneficiary" shall mean any person or persons last designated by the Participant to receive amounts payable in accordance with this Plan in the event of the Participant's death. In the absence of such designated person or persons, the Participant's beneficiary shall be deemed to be his estate. 1.2 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.3 "Committee" shall mean the Compensation Committee as appointed by the Board of Directors of the Company, which has been given authority by the Board of Directors to designate Participants and to administer the Plan. 1.4 "Company" means Wellman, Inc. and all affiliated employers participating in the Qualified Retirement Plans. 1.5 "Company Contribution Credits" shall mean the amount of Company contributions allocated to a Participant's account for any Plan Year to restore lost Company contributions under the Qualified Retirement Plans in accordance with Section 3.1. 1.6 "Company Contribution Credits Account" shall mean the account that will be established by the Company to which shall be credited the Participant's Company Contribution Credits plus any earnings credited thereon in accordance with Section 3.3. 1.7 "Compensation" shall mean the base compensation paid to a Participant during a Plan Year with respect to services performed for the Company plus bonuses and payments made under the Profit Sharing Plan (other than such 1 bonuses and Profit Sharing Plan payments received after the Participant's termination of employment with the Company) plus any elective contributions made by the Company on behalf of the Participant with respect to such Plan Year which are not includible in his gross income under Sections 125 or 402(g) of the Code or as deferred under this Plan as Employee Contribution Credits plus any amounts deferred under the Wellman, Inc. Deferred Compensation and Restricted Stock Plan which are not includible in his gross income, determined without regard to any limitation imposed under Section 401(a)(17) of the Code. In no event shall Compensation include any compensation attributable to a Participant's receipt or exercise of any stock options. 1.8 "Contribution Credits Account" shall mean the sum of the Company Contribution Credits Account and Employee Contribution Credits Account. 1.9 "Deferral Election Form" shall mean the form made available by the Committee to a Participant which, when properly executed by the Participant, effects his participation in the Plan for the next following Plan Year. However, within the first year in which the Participant has become eligible for the Plan, the Participant may make a Deferral Election which effects his participation in the Plan with respect to Compensation earned following his election but within the same Plan Year. A Deferral Election, once made, shall continue in effect from Plan Year to Plan Year until it is modified or revoked. Such change shall only be effective as of the first day of the Plan Year following the Plan Year in which it is executed. 1.10 "Disability" shall mean total disability as determined by the Committee. 1.11 "Employee Contribution Credits" shall mean the amount of employee contributions allocated to a Participant's account for any Plan Year based on the Participant's election to defer Compensation in accordance with Section 3.2. 1.12 "Employee Contribution Credits Account" shall mean the account that will be established by the Company to which shall be credited the Participant's Employee Contribution Credits plus any earnings credited thereon in accordance with Section 3.3. 1.13 "ESOP" shall mean the Wellman, Inc. Employee Stock Ownership Plan and Trust. 1.14 "IRS" shall mean the Internal Revenue Service. 1.15 "Limited Compensation" shall mean a Participant's Compensation as defined in Section 1.7 but determined with regard to the limitation imposed under Section 40l(a)(17) of the Code. 1.16 "Participant" shall mean an individual who is in a select group of management or highly compensated employees of the Company designated as a Participant by the Committee. An employee shall become a Participant in the Plan once he is selected by, named, or identified in the resolutions of the Committee for inclusion in the Plan, and subsequently completes a Deferral Election Form which provides for amounts to be credited to this Plan in accordance with Section 3.2. A Participant shall have the right exercisable within thirty days prior to the beginning of any calendar year to elect to have Employee Contribution 2 Credits allocated to his Employee Contribution Credits Account for the ensuing Plan Year by so electing on a new Deferral Election Form. If a Participant does not execute and file a new Deferral Election Form with the Committee, the Deferral Election previously made by the Participant shall continue in effect. 1.17 "Plan" shall mean the Wellman, Inc. Executive Retirement Restoration Plan. 1.18 "Plan Year" shall mean the period from January 1, 1993 to December 31, 1993 and the twelve month period ending each December 31 thereafter. 1.19 "Profit Sharing Plan" shall mean the Wellman, Inc. Employee Profit Sharing Plan. 1.20 "Qualified Retirement Plans" shall mean the following basic retirement plans sponsored by Wellman, Inc. for its employees: (a) the ESOP and (b) the Retirement Plan. 1.21 "Retirement" shall mean the termination of a Participant's employment with the Company, and any member of the same controlled group of corporations, as defined in Section 1563(a) of the Code, on one of the retirement dates specified in Section II. 1.22 "Retirement Plan" shall mean the Wellman, Inc. Retirement Plan. 1.23 "Service" shall mean a Participant's Service as defined in the ESOP. 1.24 The masculine gender, where appearing in the Plan, will be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates the contrary. Wherever appropriate, terms used in this Plan shall have the meaning assigned to such terms under the Qualified Retirement Plans. SECTION II ELIGIBILITY FOR RETIREMENT BENEFITS Each Participant is eligible to retire and receive a benefit under this Plan upon his Retirement beginning on one of the following dates: (a) "Normal Retirement Date", which is the date the Participant attains his 65th birthday; (b) "Early Retirement Date", which is the date on or after the date the Participant attains his 55th birthday and completes 5 years of Service; (c) "Postponed Retirement Date", which is the date following the Participant's Normal Retirement Date on which the Participant terminates employment with the Company. To the extent permitted by law, the Company reserves the right to require that a Participant obtain written consent from the Committee to continue his employment beyond his Normal Retirement Date in accordance with this Section II; (d) "Disability Retirement Date", which is the date on which the Participant's employment is terminated due to Disability. 3 SECTION III CONTRIBUTIONS TO THE PLAN 3.1 Amount of Company Contribution Credits The Company Contribution Credits for a Participant under this Plan on behalf of each Plan Year shall equal the sum of the following: (a) the excess, if any, of (i) the amount of Pension Contributions and Performance Contributions under the Retirement Plan to which the Participant would have been entitled based on his Compensation and without regard to Code restrictions on contributions made by or on behalf of the Participant over (ii) the amount of Pension Contributions and Performance Contributions actually contributed by the Company to the Retirement Plan based on his Limited Compensation; (b) the excess, if any, of (i) the amount of Basic Contributions under the ESOP to which the Participant would have been entitled based on his Compensation and without regard to Code restrictions on contributions made by or on behalf of the Participant over (ii) the amount of Basic Contributions actually contributed by the Company to the ESOP based on his Limited Compensation; and (c) the excess, if any, of (i) the combined amount of Company matching contributions under the Retirement Plan and the ESOP to which the Participant would have been entitled without regard to Code restrictions on contributions made by or on behalf of the Participant based on (A) the sum of his Employee Contribution Credits as defined under this Plan and his Compensation Deferral Contributions under the Retirement Plan and under the ESOP and (B) the actual matching contribution percentages for the Plan Year over (ii) the combined amount of Company matching contributions actually contributed to the Retirement Plan and ESOP based on the Compensation Deferral Contributions made on behalf of the Participant to these plans and the actual matching contribution percentages for the Plan Year. With respect to a Participant whose date of employment occurs during the Plan Year in which he is first eligible to participate, the calculation of Company Contribution Credits under this Section 3.1 shall be made under the presumption that the Participant was eligible upon his date of employment with the Company to participate in the Retirement Plan and the ESOP, but without presuming contributions on his behalf. 3.2 Amount of Employee Contribution Credits The Employee Contribution Credits for a Participant under this Plan on behalf of each Plan Year shall equal the excess, if any, of (i) the Compensation Deferral Contributions which would have been made on behalf of the Participant under the Retirement Plan and under the ESOP based on his Compensation and without regard to Code restrictions on contributions made by or on behalf of the Participant over (ii) the amount of Compensation Deferral Contributions actually made on behalf of the Participant to the Retirement Plan and ESOP based on his Limited Compensation. With respect to a Participant whose date of employment occurs during the Plan Year in which he is first eligible to participate, the calculation of Employee Contribution Credits under this Section 3.2 shall be made under the presumption that the Participant was eligible upon his date of employment with the Company to participate in the Retirement Plan and the ESOP, but without presuming contributions on his behalf. The amount of Employee Contribution Credits for any Plan Year will be determined by a properly executed Deferral Election Form which requires the Employee to irrevocably agree to make the maximum Compensation Deferral Contributions for the applicable Plan Year as permitted under the Retirement Plan and ESOP. 4 3.3 Crediting of Earnings (A) Sub-Accounts Each Participant's Company Contribution Credits Account and Employee Contribution Credits Account shall be comprised of two sub-accounts: a Cash Account and a Stock Account. For Plan Years up to and including the earlier of the Plan Year in which a Participant attains age 55 or incurs a distributable event under Section IV, new Company Contribution Credits and Employee Contribution Credits shall be credited to the Stock Account. For Plan Years thereafter, new Company Contribution Credits and Employee Contribution Credits shall be credited to the Cash Account. As of December 31st of the earlier of the Plan Year in which the Participant attains age 55 or incurs a distributable event under Section IV, and as of December 31st of each Plan Year thereafter, a portion of the dollar value of the Participant's existing Stock Account shall be automatically transferred to the Cash Account. The portion so transferred shall be a ratio the numerator of which is the number of December 31sts that have occurred since the earlier of the date that the Participant attained age 55 or incurred a distributable event and the denominator of which is 10. For example, as of the first December 31st on or following a Participant's 55th birthday, 1/10th of the value of the Stock Account will be transferred to the Cash Account, as of the second December 31st, 2/10ths, and so on. (B) Stock Account The amount allocated as a credit to the Stock Account shall be converted to share units as follows: Amounts credited as of a date in any calendar month (or such other period not to exceed a year as may be specified by the Compensation Committee in a duly adopted resolution) shall be converted to a number of share units determined on the basis of the closing price of shares of common stock of Wellman, Inc. on the New York Stock Exchange on the last trading day of that month (or other period specified by the Compensation Committee), as reported by The Wall Street Journal. Share units shall be credited with dividend equivalents as and when dividends are declared on shares of common stock of Wellman, Inc. Such credits shall be converted to additional share units determined on the basis of the closing price of shares of common stock of Wellman, Inc. on the New York Stock Exchange on the last trading day of the year in which such dividends are paid, as reported by The Wall Street Journal. The value of share united credited to a Participant hereunder as of any relevant date shall equal the closing price of shares of common stock of Wellman, Inc. on the New York Stock Exchange on such date or the nearest preceding trading date, as reported by The Wall Street Journal. (C) Cash Account The amount allocated as a credit to the Cash Account shall be converted to a cash balance to be credited with interest as follows: Interest shall be credited on a monthly basis in each Cash Account and shall be determined by multiplying the beginning balance of such account less distributions for such month by the rate of interest equal to the total return earned by an index or investment fund specified by the Compensation Committee for such month. 5 SECTION IV DISTRIBUTABLE EVENTS AND DISTRIBUTION OF AMOUNTS 4.1 Retirement A Participant who reaches Retirement and retires from the Company shall receive his Contribution Credits Account in ten annual installments payable as of the beginning of each Plan Year following his Retirement date. Such installments shall equal the Contribution Credits Account as of the end of the Plan Year in which the Participant shall retire or terminate employment divided by the appropriate number of remaining annual installments. Payments to a Participant or Beneficiary shall be made first from the Participant's Cash Account and then from the Participant's Stock Account, as those sub- accounts are defined pursuant to Section 3.3 of the Plan. At the discretion of the Compensation Committee, the entire Contribution Credits Account may be payable in a single lump sum distribution based on market value of the Participant's account as of the end of a calendar quarter following the Participant's Retirement. Once a lump sum distribution is made to the Participant, there shall be no further benefits payable to the Participant or his Beneficiary from the Plan. All payments to Participants and Beneficiaries from the Plan shall be made in cash. 4.2 Death At the time that an Employee becomes a Participant, he shall designate in writing a Beneficiary to receive any payments to which he would have been entitled under the terms of the Plan. The Beneficiary referred to in this paragraph may be designated or changed by the Participant (without the consent of any prior Beneficiary) on a form provided by the Committee and delivered to the Committee before his death. If no such Beneficiary shall have been designated, or if no designated Beneficiary shall survive the Participant, payments shall be made to the Participant's estate. If the Participant's employment is terminated because of death, then the Company shall deem the Participant to be fully vested and make payments to his designated Beneficiary in the same manner and to the extent as provided in Section 4.1 as if the Participant had retired on the date of his death. 4.3 Termination of Employment In the event a Participant's employment with the Company terminates after five years of Service for reasons other than Retirement or death, the Company shall make payment to the Participant of the entire Contribution Credits Account in the same manner and to the extent provided in Section 4.1 as if the person retired on the date of termination. If the Participant's employment terminates prior to five years of Service, the entire Employee Contribution Credits Account and only the vested portion, if any, of the Company Contribution Credits Account will be available for payment to the Participant in the same manner and to the extent provided in Section 4.1 as if the person retired on the date of termination. The Company Contribution Credits Account shall become vested, or non-forfeitable, to the Participant in twenty percent (20%) increments based on the Participant's years of Service as follows: 6
Years of Service Percent Vested ---------------- -------------- Less than One 0% One 20% Two 40% Three 60% Four 80% Five 100%
4.4 Withdrawals/Loans Not Allowed No benefits shall be paid nor loans granted from this Plan while a Participant is an employee of the Company. Benefits from the Plan shall be paid solely in accordance with the provisions of Sections 4.1, 4.2 and 4.3 of the Plan. SECTION V MISCELLANEOUS 5.1 The Company may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part. Upon termination, the Company shall pay to each Participant the entire value of his Contribution Credits Account which would have been available had the Participant had a termination of Service after five years of Service. The Company will make payments in either installments or a single lump sum as soon as practicable after the effective date of the termination of the Plan. All payments to Participants pursuant to this Section 5.1 shall be made in cash. 5.2 Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company, nor will it interfere with the right of the Company to discharge or otherwise deal with Participants without regard to the existence of this Plan. 5.3 The Company's obligations under this Plan shall be unfunded and an unsecured promise to pay. The Company shall not be obligated under any circumstances to fund its financial obligations under this Plan. All assets which the Company may acquire to help cover its financial liabilities are and remain general assets of the Company subject to the claims of its creditors. The Company does not give, and the Plan does not give, any beneficial ownership interest in any asset of the Company to a Participant or his Beneficiary. All rights of ownership in any assets are and remain in the Company. The Company's liability for payment of benefits shall be determined only under the provisions of this Plan as it may be amended from time to time. Notwithstanding the above, the Company reserves the right to establish a Rabbi Trust for this Plan similar to the trust described in Revenue Procedure 92-64 or any successor thereto or as otherwise provided in the Code. 5.4 The rights of a Participant or any Beneficiary of the Participant shall be solely those of an unsecured general creditor of the Company. A Participant or Beneficiary of the Participant shall have the right to receive those payments specified under this Plan only from the Company. These parties have no right to look to any specific or special property separate from the Company to satisfy a claim for benefit payments. 7 A Participant agrees that neither he nor his Beneficiary shall have any right, claim, security interest, or any beneficial ownership interest whatsoever in any general asset that the Company may acquire or use to help support its financial obligations under this Plan. Any general asset used or acquired by the Company in connection with the liabilities it has assumed under this Plan shall not be deemed to be held under any trust for the benefit of the Participant or his Beneficiary, and no general asset shall be considered security for the performance of the obligations of the Company. Any such asset shall remain a general, unpledged and unrestricted asset of the Company. A Participant also understands and agrees that his participation in the acquisition of any general asset for the Company shall not constitute a representation to the Participant or his Beneficiary that any of them has a special or beneficial interest in any general asset. 5.5 To the maximum extent permitted by law, no benefit under this Plan shall be assignable or subject in any manner to alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind. 5.6 The Committee may adopt rules and regulations to assist it in the administration of the Plan. The Committee has sole and absolute discretion to interpret all provisions of the Plan and to determine entitlement to benefits under the Plan. The decision by the Committee regarding the Plan's provisions and benefits is final. 5.7 The Plan shall be binding upon the Company and any successor company through merger, acquisition or consolidation, and upon a Participant, his Beneficiary, heirs, executors and administrators. 5.8 The Company may, in its sole discretion, permit the Participant to take a leave of absence for a period determined by the Committee. During such leave, the Participant will still be considered to be in the continuous employment of the Company for purposes of this Plan. 5.9 Each Participant shall receive a copy of this Plan or any amendments thereto and the Committee will make available for inspection by any Participant a copy of any rules and regulations used by the Committee in administering the Plan. Each Participant shall also be notified of any suspension or termination of this Plan. 5.10 The Company reserves the right to indefinitely or permanently suspend the portion of the installment payouts with respect to the Company Contribution Credits Account should a Participant, upon his termination of employment or Retirement from the Company, begin working on a consulting basis or as an employee of a competing organization. The Participant will continue to receive the remaining installment payments with respect to his Employee Contribution Credits Account. The determination of whether the Participant is associated with the competing organization will be left solely up to the Committee and such determination will be final. 5.11 This Plan is established under and will be construed according to the laws of the State of Delaware, except to the extent preempted by ERISA or other federal regulations. 8 EX-10.O 6 EX 10(O) TO 10K 1997 EXHIBIT 10(o) WELLMAN, INC. DEFERRED COMPENSATION AND RESTRICTED STOCK PLAN SECTION I. PURPOSE OF THE PLAN - ------------------------------- 1.1 Purpose of the Plan. Wellman, Inc. (the "Company") has adopted a Statement of Policy with respect to Stock Ownership of Directors and Officers (the "Statement of Policy") to promote and create significant ownership of the Company's Common Stock by members of the Company's Board of Directors and senior management. The Statement of Policy is intended to promote the interests of the Company and its stockholders by increasing the ownership of Common Stock by the directors and senior management so that, as stockholders themselves, those individuals will be more likely to represent the views and interests of other stockholders and to motivate them to manage the Company for long-term growth and profitability. This Plan has been adopted to implement and promote the Statement of Policy and to enhance the Company's ability to attract and retain persons who will make substantial contributions to the Company's future success. 1.2 Effective Date. The Plan is effective on February 17, 1998 (the "Effective Date"), subject to approval and ratification by the Company's stockholders no later than September 30, 1998, and will continue in effect until terminated by the Board. Compensation may be deferred, Restricted Stock Awards granted and Restricted Stock may be purchased and issued under the Plan prior to stockholder approval, subject to the condition that such compensation shall be paid to Participants and grants and purchases shall be canceled and any shares shall be returned to the Company by the affected participants in the event that the stockholders have not approved the Plan by September 30, 1998. SECTION II. DEFINITIONS - ------------------------ 2.1 Annual Bonus means the cash portion of any Incentive Award. 2.2 Base Salary means the annual salary paid by the Company to a management Participant for performance of his job excluding any benefits, Incentive Award, bonuses or any component of pay other than the base amount. 2.3 Board means the Board of Directors of the Company. 2.4 Business Day means any day on which the New York Stock Exchange is open and the Common Stock is traded. 2.5 Cause in the context of a termination of employment means only one or more of the following: (i) the commission in the course of employment of any dishonest or fraudulent act; (ii) a conviction of a felony (from which, through lapse of time or otherwise, no successful appeal shall have been made) whether or not committed in the course of employment; (iii) the willful refusal to carry out reasonable instructions of the Board which has a material adverse affect upon the Company or any of its subsidiaries; and (iv) the willful disclosure of any trade secrets or material confidential corporate information to persons not authorized to know same. 1 2.6 Change in Control shall be deemed to have occurred when (i) any "person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company, any of its subsidiaries, or any employee benefit plan of the Company or of any subsidiary, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of the period. 2.7 Committee means the Compensation Committee of the Board or any successor committee. 2.8 Common Stock means the Common Stock, $.001 par value, of Wellman, Inc. 2.9 Company means Wellman, Inc. and its subsidiaries with domestic operations. 2.10 Disability shall have the meaning specified in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. 2.11 Effective Date shall have the meaning set forth in subsection 1.2 hereof. 2.12 Exercise Price means ( i ) for Restricted Stock Awards granted after 1998, 85% of the average of the highest and lowest sales prices of the Common Stock as reported on the New York Stock Exchange on the last Business Day of the prior calendar year and on each of the fifteen (15) Business Days before and after that date, and (ii) for Restricted Stock Awards granted in 1998, 85% of the average of the highest and lowest sales prices of the Common Stock as reported on the New York Stock Exchange on the date the Plan is approved by the stockholders and on each of the fifteen (15) Business Days before and after that date. 2.13 Fair Market Value means the average of the highest and lowest sales prices of the Common Stock as reported on the New York Stock Exchange on the date of termination of employment or service of a Participant and on each of the fifteen (15) Business Days before and after that date. 2.14 Incentive Award means an award under any incentive plan (other than a stock option plan and this Plan) designated by the Committee that entitles the recipient to shares of Common Stock, cash or a combination of Common Stock and cash. 2.15 Participant means a non-employee director of the Company, any domestic executive officer listed in the Company's most recent Annual Report on Form 10-K or otherwise designated by the Committee, any other member of management of the Company as designated by the Committee, or a consultant to the Company selected to participate in the Plan by the Committee. 2.16 Plan means this Wellman, Inc. Deferred Compensation and Restricted Stock Plan, as it may be amended from time to time. 2 2.17 Restricted Period means the three year period commencing on the January 1st of the year in which a Restricted Stock Award is granted pursuant to this Plan during which the restrictions imposed by Section V hereof shall apply; provided, however, that upon request of the Participant at least six months before the expiration of the Restricted Period (including any extended Restricted Period) and prior to termination of employment (regardless of the reason for termination), the Restricted Period may be extended for a period of not less than two years. 2.18 Restricted Stock means shares of Common Stock which are issued by the Company under this Plan subject to forfeiture, restrictions on transfer and such other restrictions as are set forth in Section V hereof or as the Committee may determine in accordance with the provisions of Section V of this Plan. 2.19 Restricted Stock Award means an award that provides for a Participant to acquire one share of Restricted Stock on the date compensation is deferred which is equal to the Exercise Price. 2.20 Retirement means retirement from the Company on or after 55 years of age. 2.21 Subsidiary means a domestic corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote is owned, directly or indirectly, by Wellman, Inc. Unless the context clearly requires otherwise, the masculine pronoun whenever used shall include the feminine and neuter pronouns, the singular shall include the plural and the plural shall include the singular. SECTION III. GENERAL TERMS - --------------------------- 3.1 Administration of the Plan. The Plan shall be administered by the Committee which shall have exclusive and absolute authority and discretion to interpret the Plan, to establish and modify rules for the administration of the Plan, to impose such conditions and restrictions as it determines appropriate with respect to the Plan and to take such other actions and make such other determinations as it may deem necessary or advisable for the implementation and administration of the Plan. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan. 3.2 Shares Subject to the Plan. The Common Stock to be issued as Restricted Stock under the Plan may be either authorized but unissued shares or treasury shares. The aggregate number of shares of Common Stock which may be issued under the Plan may not exceed one million (1,000,000) shares, subject, however, to the adjustments provided in subsection 3.3 in the event of stock splits, stock dividends, exchanges of shares or the like occurring after the Effective Date. No Restricted Stock may be issued under the Plan which would cause such maximum limit to be exceeded. 3.3 Adjustments. In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividend) of the Company assets to stockholders, or any other change affecting shares or the Company's 3 capitalization, such adjustments as the Committee in its discretion may deem appropriate to reflect such change or to fairly preserve the intended benefits of the Plan shall be made. In addition, any shares issued by the Company through the assumption or substitution of outstanding stock awards or award commitments from an acquired company or other entity shall not reduce the shares available for issuance under the Plan. SECTION IV. DEFERRED COMPENSATION AND RESTRICTED STOCK AWARDS - -------------------------------------------------------------- 4.1 Mandatory Deferred Compensation. (a) Participants are required to defer the following amounts of compensation earned after January 1, 1998: (i) Non-employee directors of the Company must defer 50% of their director's retainer fees; (ii) Employees who are participants in the Wellman, Inc. Management Incentive Compensation Plan must defer payment of any amounts earned over the target percentage defined therein; and (iii) At the discretion of the Committee and on terms determined by the Committee, consultants may contractually commit to defer full or partial payment of consulting fees. The Participants will be granted Restricted Stock Awards as follows: (i) Non-employee directors, on January 20th of each year, (ii) Participants in the Wellman, Inc. Management Incentive Compensation Plan, when the amount earned over the target percentage is determined; and (iii) Consultants, as determined by the Committee. (b) Each employee Participant who fails to achieve his targeted stock ownership as provided in the Statement of Policy as of December 31st of any year shall be required to defer his entire Annual Bonus earned in such year and his Base Salary increase (if any) for the next year. Each Director Participant who fails to achieve his targeted stock ownership as provided in the Statement of Policy as of December 31st of any year shall be required to defer the remainder of his director's retainer fees for the next year. The Participant will be granted a Restricted Stock Award within three months following the date he did not achieve his targeted stock ownership. 4.2 Voluntary Deferred Compensation. Not later than 45 days after a Participant first becomes a Participant in the Plan and not later than December 15 preceding the next full calendar year thereafter (i.e., December 15, 1998 for compensation earned in 1999), the Participant may make an irrevocable election on a form provided by the Company to defer a specified dollar amount of his Base Salary, Annual Bonus and any other cash remuneration. Participants may only defer the following amounts: (i) Participants who are employees may defer up to: (a) 100% of their Base Salary for the period from April 1, 1998 to December 31, 1998 and 100% of their Annual Bonus and any other cash remuneration earned in 1998 and (ii) 50% of their Base Salary, Annual Bonus and any other cash remuneration in all future years. (ii) Directors may defer up to 100% of their annual retainer, meeting fees and other cash remuneration for the period from April 1, 1998 to December 31, 1998 and in all future years. 4 The Participant will receive a Restricted Stock Award approximately 35 days after his election to defer compensation for 1998 and on January 20th of any year thereafter. 4.3 Termination of Directors Retirement and Deferred Compensation Plans. Subject to the discretion of the Committee, non-employee director Participants shall receive Restricted Stock as set forth below in satisfaction of any amounts payable to them in connection with the termination of the Wellman, Inc. Directors Retirement Plan and the Wellman, Inc. Directors Deferred Compensation Plan. In the case of the Directors Retirement Plan, the number of shares of Restricted Stock issued in exchange for the accrued benefit as of December 31, 1997 shall be equal to the accrued benefit divided by 85 % of the average of the highest and lowest sales prices of the Common Stock as reported on the New York Stock Exchange on the date the Plan is approved by the stockholders and on each of the fifteen (15) Business Days before and after that date. In the case of the Directors Deferred Compensation Plan, the number of shares of Restricted Stock issued in exchange for the accrued benefit on the date the plan is terminated shall be equal to the number of shares of phantom stock held in the Directors Deferred Compensation Plan on the date this Plan is approved by the stockholders. SECTION V. RIGHTS AND TERMS OF RESTRICTED STOCK - ------------------------------------------------ 5.1 Terms of Restricted Stock. (a) Each Restricted Stock Award granted pursuant to the Plan will provide for the exchange of the applicable Participant's deferred compensation for Restricted Stock within fifteen (15) months after the date of grant. The Restricted Stock shall be issued when a Participant's compensation is actually deferred and exchanged for Restricted Stock pursuant to a Restricted Stock Award. In the event a Participant is granted a Restricted Stock Award and compensation is not actually deferred for whatever reason, no Restricted Stock shall be issued. (b) Each grant of a Restricted Stock Award pursuant to subsections 4.1 and 4.2 and each issuance of Restricted Stock pursuant to subsection 4.3 shall be embodied in an agreement signed by the Participant and the Company (the "Agreement"). The Agreement (i) shall provide that the Restricted Stock Award and any Restricted Stock issuable thereunder or hereunder shall be subject to the provisions of the Plan, (ii) shall provide that Participants who received Restricted Stock Awards pursuant to subsections 4.1(b) and 4.2 shall not be able to sell stock (except shares acquired upon exercise of an option granted pursuant to a stock option plan of the Company and disposed of within 30 days of such exercise) during the period these Restricted Stock Awards are exercisable unless they receive permission of the Committee (which will generally be granted only if there are extenuating circumstances), and (iii) shall contain such other provisions as the Committee may prescribe not inconsistent with the Plan. (c) All Restricted Stock Awards granted and Restricted Stock issued pursuant to this Plan shall be subject to the following restrictions: (i) a Participant shall not be entitled to delivery of a certificate evidencing the shares of Restricted Stock until the expiration or termination of the Restricted Period and the satisfaction of any and all other conditions specified in the Agreement applicable to such shares of Restricted Stock; (ii) none of the Restricted Stock Awards or shares of Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of 5 during the Restricted Period and until the satisfaction of any and all other conditions specified in the Agreement applicable to such Restricted Stock; and (iii) any Restricted Stock Awards or shares of Restricted Stock which are forfeited shall be returned to the Company and all rights of the Participant with respect to such Restricted Stock Awards or shares of Restricted Stock shall terminate without further obligation on the part of the Company upon the occurrence of any of the events set forth below in subsection 5.4. 5.2 Custody of Shares of Restricted Stock; Rights with Respect to Stock. (a) Any certificates representing shares of Restricted Stock issued under the Plan shall be issued in the Participant's name but shall be held by the Company during the Restricted Period. The Company shall serve as attorney- in-fact for the Participant during the Restricted Period with full power and authority in the Participant's name to assign and convey to the Company any shares of Restricted Stock held by the Company for such Participant if the Participant forfeits the shares under the terms of the Restricted Stock. Each certificate representing shares of Restricted Stock may bear a legend referring to the Plan and the risk of forfeiture of the shares and stating that such shares are nontransferable until all restrictions have been satisfied and the legend has been removed. (b) Upon the purchase of Restricted Stock pursuant to the Plan and the issuance of a certificate or certificates representing such Restricted Stock, the Participant shall thereupon be a stockholder and have all the rights of a stockholder with respect to such shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such shares; provided, however, that such Restricted Stock and any new, additional or different securities the Participant may become entitled to receive with respect to such Restricted Stock by virtue of a stock split, dividend or other change in the corporate or capital structure of the Company, shall be subject to the restrictions described in subsection 5.1 hereof. 5.3 Distribution of Restricted Stock. If a Participant who receives shares of Restricted Stock under the Plan remains in the continuous employment or service of the Company during the entire Restricted Period and otherwise does not forfeit such shares pursuant to subsection 5.4 hereof, all restrictions applicable to the shares of Restricted Stock shall lapse upon expiration of the Restricted Period, and a certificate or certificates representing the shares of Common Stock that were granted to the Participant in the form of shares of Restricted Stock shall be delivered to the Participant. 5.4 Forfeiture. (a) If a Participant's service or employment is terminated before the expiration of the Restricted Period by the Company without Cause or by reason of Retirement, Disability or death of the Participant, the Committee shall determine when the restrictions applicable to the shares of Restricted Stock held by the Company for such Participant shall lapse, giving appropriate consideration to each individual situation, provided that in no event shall the restrictions continue longer than those in effect on the date of such termination. On each of the respective dates, the certificate or certificates representing the shares of Common Stock upon which the restrictions have lapsed shall be delivered to the Participant (or in the event of the Participant's death, to his estate). (b) If a Participant's service or employment is terminated before the expiration of the Restricted Period by the Company for Cause or by the 6 Participant at any time, the Participant shall forfeit all Restricted Stock and shall receive a cash payment equal to the lower of 85% of the Fair Market Value of the Restricted Stock or the deferred compensation used to acquire the Restricted Stock. (c) In the case of any consultant Participant, any events of forfeiture shall be determined by the Committee in its sole discretion (including but not limited to confidentiality and competitive issues) and shall be set forth in the Agreement with respect to the Restricted Stock Award granted to such consultant. (d) If a Participant's service is terminated for any reason before a Restricted Stock Award is exchanged for Restricted Stock, then the Participant shall forfeit all rights under the Restricted Stock Award. 5.5 Change of Control. Upon any Change of Control, unless the Committee in its sole discretion determines otherwise prior to the Change of Control, all restrictions applicable to shares of Restricted Stock shall immediately lapse and the certificate or certificates representing the shares of Common Stock that were granted to the Participants in the form of shares of Restricted Stock shall be delivered to the Participants. In addition, each Participant shall have the right to deliver to the Company cash and receive unrestricted Common Stock for any unexchanged Restricted Stock Award. 5.6 Waiver of Restrictions. The Committee, in its sole discretion, may at any time waive any or all restrictions with respect to any Restricted Stock Award or shares of Restricted Stock. SECTION VI. MISCELLANEOUS - -------------------------- 6.1 Termination and Amendment. The Board at any time may amend or terminate the Plan. Notwithstanding any expiration or termination of the Plan, unless otherwise determined by the Committee, the provisions relating to Restricted Stock Awards and Restricted Stock contained in Sections II, III, IV, V and VI shall continue to apply with respect to all Restricted Stock Awards or shares of Restricted Stock outstanding as of the date of expiration or termination. 6.2 Withholding. Each Participant shall pay to the Company any amount necessary to satisfy applicable federal, state or local tax withholding requirements attributable to the grant of a Restricted Stock Award, the issuance of Restricted Stock under the Plan, or upon the vesting of such Restricted Stock, promptly upon notification of the amount due. If these amounts are not paid when requested, then at the election of the Committee, these amounts may be withheld from the shares of Common Stock that otherwise would be distributed to such Participant pursuant to the Plan. 6.3 Legal and Other Requirements. The grant of Restricted Stock Awards and the distribution of shares of Restricted Stock shall be subject to the condition that if at any time the Company determines in its discretion that the satisfaction of withholding tax or other tax liabilities, or the listing, registration or qualification of any shares of Common Stock upon any securities exchange or under any federal or state law, or the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with such grant or distribution, then in any such event, such grant or distribution shall not be effective unless such liabilities have been satisfied or such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 7 6.4 Choice of Law. The Plan, its validity, interpretation and administration and the rights and obligations of all persons having an interest therein shall be governed by and construed in accordance with the laws of the State of Delaware, except to the extent that such laws may be preempted by federal law. 6.5 Fractional Shares. The Company shall not be required to issue or deliver any fractional share of Restricted Stock issuable under this Plan but shall round each issuance of shares of Restricted Stock hereunder up to the nearest whole share. 6.6 No Employment Contract. The Plan shall not confer upon any Participant any right to continued employment by the Company nor shall the Plan in any way interfere with the right of the Company to terminate the employment of any Participant at any time. 6.7 Section 83(b) Elections. A Participant who files an election with the Internal Revenue Service to include the fair market value of any shares of Restricted Stock in gross income during a Restricted Period shall promptly furnish the Company with a copy of such election together with the amount of any federal, state, local or other taxes required to be withheld (if any) to enable the Company to claim an income tax deduction with respect to such election. 8 EX-21 7 EX 21 TO 10K 1997 EXHIBIT 21 Subsidiaries ------------ Company Name Jurisdiction of Incorporation ------------ ----------------------------- ALG, Inc. Delaware Carpet Recycling of Georgia, Inc. Georgia CJC, Ltd. Bermuda CWB, Ltd. Bermuda DRS Holdings NV Netherlands Antilles Fiber Industries, Inc. Delaware JCT, Ltd. Bermuda Josdav, Inc. Delaware KRP, Ltd. Bermuda Materials Recovery of California, Inc. Massachusetts Middlewich Limited Ireland MRF, Inc. Delaware Pavebury, Ltd. d/b/a Wellman International Ireland Prince, Inc. Delaware Resins Finance BV Netherlands Shobara Limited Ireland Warehouse Associates, Inc. South Carolina Wellman BV Netherlands Wellman Exports VI, Inc. US Virgin Islands Wellman Fibres Ltd. United Kingdom Wellman Finance CV Netherlands Wellman France Recyclage Sarl France Wellman International Handelsgesellschaft Gmbh Germany Wellman International Investments, Limited Ireland Wellman International Limited Ireland Wellman of Mississippi, Inc. Delaware Wellman PAC New Jersey Wellman PET Resins Europe BV Netherlands Wellman Polymers, Ld. United Kingdom Wellman Resins LLC Delaware Wellman Scholarship Foundation, Inc. South Carolina Wellman UK Holdings Ltd. United Kingdom Wellman Voluntary Employees Benefit Association South Carolina EX-23.A 8 EX 23(A) TO 10K 1997 EXHIBIT 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Form S-8, Nos. 33-17196, 33-44822, 33-44877, 33-44876, 33-22459, 33-38491, 33-54075, 33-54079, 33-54077 333-47833, 333-28273 and Form S-3, No. 33-36001) pertaining to various stock option, employee savings, and deferred compensation and restricted stock plans of Wellman, Inc. of our report dated February 12, 1998, with respect to the consolidated financial statements and financial statement schedules included in this Annual Report (Form 10-K) of Wellman, Inc. Ernst & Young LLP Charlotte, North Carolina March 20, 1998 EX-23.B 9 EX 23(B) TO 10K 1997 EXHIBIT 23(b) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Form S-8, Nos. 33-17196, 33-44822, 33-44877, 33-44876, 33-22459, 33-38491, 33-54075, 33-54079, 33-54077, 333-47833, 333-28273 and Form S-3, No. 33-6001) pertaining to various stock option and employee savings plans of Wellman, Inc. of our report dated 29 January 1998, with respect to the consolidated financial statements of Wellman International Limited and Subsidiaries at 31 December 1997 and 1996 and for each of the three years in the period ended 31 December 1997, included in this Annual Report (Form 10-K) of Wellman, Inc. KPMG Chartered Accountants Registered Auditors Dublin, Ireland 23 March 1998 EX-27.A 10 EX 27(A) TO 10K 1997
5 ART. 5 FDS for fiscal year 10-K 1,000 12-MOS DEC-31-1997 DEC-31-1997 0 0 131,335 5,229 154,133 283,605 1,090,710 336,230 1,319,225 112,868 394,545 0 0 34 634,400 1,319,225 1,083,188 1,083,188 923,278 923,278 90,597 5,963 12,160 51,190 20,835 30,355 0 0 0 30,355 0.98 0.97
EX-27.B 11 EX 27(B) TO 10K 1997
5 ART. 5 FDS for Restated Years 1,000 12-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1997 DEC-31-1995 JUN-30-1996 SEP-30-1997 3,893 15,616 10,054 0 0 0 150,907 154,997 129,174 5,335 5,446 4,945 200,224 204,226 154,607 364,303 371,026 292,306 776,194 832,131 1,034,527 248,638 271,191 325,747 1,210,673 1,243,234 1,294,176 145,835 124,801 102,709 272,867 304,614 385,725 0 0 0 0 0 0 33 33 34 650,313 668,011 632,332 1,210,673 1,243,234 1,294,176 1,109,398 584,851 799,041 1,109,398 584,851 799,041 886,817 494,863 678,163 886,817 494,863 678,163 95,204 44,696 70,032 1,391 0 0 11,666 7,002 10,211 115,711 38,290 40,635 41,657 14,857 16,831 74,054 23,433 23,804 0 0 0 0 0 0 0 0 0 74,054 23,433 23,804 2.22 0.70 0.77 2.20 0.69 0.76
EX-28.A 12 EX 28(A) TO 19K 1997 EXHIBIT 28(a) REPORT OF INDEPENDENT AUDITORS TO THE MEMBERS OF WELLMAN INTERNATIONAL LIMITED - ----------------------------------------------------------------------------- We have audited the accompanying consolidated balance sheets of Wellman International Limited and subsidiaries at 31 December 1997 and 1996, and the related consolidated profit and loss accounts, retained earnings, and changes in financial position for each of the three years in the period ended 31 December 1997, all expressed in Irish pounds (not presented separately herewith). These financial statements are the responsibility of the company's directors. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, expressed in Irish pounds, present fairly, in all material respects, the consolidated financial position of Wellman International Limited and subsidiaries at 31 December 1997 and 1996, and the consolidated results of operations and changes in financial position for each of the three years in the period ended 31 December 1997 in conformity with accounting principles generally accepted in the United States of America. KPMG Chartered Accountants Registered Auditors Dublin, Ireland 29 January 1998 -----END PRIVACY-ENHANCED MESSAGE-----