-----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, RMXQMDQhmtBXj/2iZj8J2QrQL47rjqvUbitO+7DcvovsVoclS15ghBJrmZhqAI1f lM/CpIvmvwIRQ6O7NIIITw== 0000812708-99-000002.txt : 19990330 0000812708-99-000002.hdr.sgml : 19990330 ACCESSION NUMBER: 0000812708-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99576434 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 1998 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, 1998 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 $9.06 per share (the closing price of such stock on March 15, 1999 on the New York Stock Exchange): $278,452,849. The number of shares of the registrant's Class A Common Stock, $.001 par value, and Class B Common Stock, $.001 par value, outstanding as of March 15, 1999 was 31,325,962 and -0-, respectively. DOCUMENTS INCORPORATED BY REFERENCE 1. Proxy Statement for the 1999 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission on or before April 30, 1999) 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 - ------------------- Capital expenditures for the Company's new PET resins and polyester fiber production facility (Pearl River Plant) in Mississippi are approximately 85% completed. The total capitalized cost, which includes construction costs, capitalized interest, and certain grants (total capitalized costs) of the facility is estimated to range between $480 and $500 million. The Company commenced operation of a PET resin production line at this facility in January 1999. This was the first of three production lines scheduled to commence operation in 1999. Upon completion, the facility 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" below and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." In the fourth quarter of 1998, the Company incurred several unusual pre- tax charges totaling approximately $38.8 million or, on an after-tax basis, $24.6 million or $0.79 per diluted share. The charges included a loss on the termination of a fixed rate financial instrument of $23.3 million, a restructuring charge of $6.9 million to consolidate and lower the overall operating costs of the business units in the Recycled Products Group (RPG), and a lower-of-cost-or-market inventory adjustment totaling $8.6 million. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Restructuring Charges." PRODUCTS AND MARKETS - -------------------- The Company has three reportable operating segments: the Fibers Group, composed of the chemical-based polyester textile fiber manufacturing operations; the 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. The following table presents the combined net sales and percentage of net sales of the Company for its reportable operating segments for the periods indicated. In the table, intersegment sales, which are not material, have been eliminated and historical exchange rates have been applied to the data. 3
1998 1997 1996 -------------- -------------- -------------- Net % of Net % of Net % of Sales Total Sales Total Sales Total (in millions) ----- ----- ----- ----- ------ ----- Fibers Grp $ 355.4 36.7% $ 419.4 38.7% $ 450.6 41.0% RPG 365.5 37.8 386.2 35.7 372.9 33.9 PPG 247.1 25.5 277.6 25.6 275.3 25.1 ------- ----- ------- ------ ------ ----- TOTAL $ 968.0 100.0% $1,083.2 100.0% $1,098.8 100.0% ======== ===== ======== ===== ======== =====
Generally, the Company evaluates segment profit on the basis of operating profit less certain charges for research and development costs, administrative costs, and amortization expense. The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies in note 1 of the consolidated financial statements. The following table presents the combined operating profit (loss) and percentage of operating profit (loss) of the Company for its reportable operating segments for the periods indicated. In the table, intersegment transactions have been eliminated and historical exchange rates have been applied to the data.
1998 1997 1996 -------------- -------------- -------------- Profit Profit Profit % (Loss) % (Loss) % (in millions) ----- ----- ----- ----- ------ ----- Fibers Grp $28.0 51.6% $52.4 66.3% $62.5 89.3% RPG 18.4 34.0 40.2 50.7 13.6 19.4 PPG 7.8 14.4 (13.4) (17.0) (6.1) (8.7) ----- ----- ----- ------ ----- ------ TOTAL $54.1 100.0% $79.2 100.0% $70.0 100.0% ===== ===== ===== ===== ===== ======
See note 14 to the consolidated financial statements for reconciliations to corresponding totals in the accompanying consolidated financial section and additional information with regard to the Company's reportable operating segments. - ------------ 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. 4 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. 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 (together referred to as the Johnsonville Plant). 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 its domestic postconsumer PET bottles primarily from curbside recycling programs and deposit return. The Company's recycling operation at the Johnsonville Plant is responsible for the domestic procurement of these materials, which it processes into usable raw 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 Plant 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. 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. 5 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 and purifies the resin) and, to a lesser extent, sold to external customers. The Company also has a solid-stated PET packaging resin production facility in Emmen, the Netherlands (PET Resins-Europe). PTA and MEG are also used as raw materials at this facility. Virtually all of the resin is sold to PET bottle and packaging manufacturers in Europe. Raw Materials - ------------- The Company domestically obtains PTA from Amoco Chemical Corporation, the primary domestic supplier, pursuant to a supply contract. Domestic MEG is purchased under supply contracts with Equistar Chemicals, LP, BASF Corporation, and Union Carbide, Inc. 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. The Company's recycling operations purchase postindustrial and postconsumer raw materials from many different suppliers, some of which have signed supply contracts with the Company. The prices of recycled raw materials are variable and determined by worldwide supply and demand. See "Forward Looking Statements; Risks and Uncertainties." Capital Investment Program - -------------------------- Capital expenditures in 1998 were approximately $223 million. The 1998 expenditures consisted primarily of construction costs associated with the Pearl River Plant in Mississippi, which commenced operation of the first of three production lines in January 1999. Capital expenditures for 1999 are expected to approximate between $100 and $120 million. These expenditures primarily include the remaining construction costs of the Pearl River Plant, the total capitalized cost of which is estimated to range between $480 and $500 million, and to a lesser extent, a new production line in the Engineering Resins business. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources." The Company has identified PET resins process modifications and throughput improvements which could be completed at its Palmetto and Pearl River plants at a capital cost of less than $50 million. These improvements could increase the Company's total annual PET resins production capacity by an additional 250 million pounds. See "Forward Looking Statement; Risks and Uncertainties." Sales and Marketing - ------------------- The Company's markets have historically displayed price and volume cyclicality. The Company's sales are not dependent upon a single customer. Sales for PET resins, primarily for soft drink bottles and other beverages, may be influenced by weather. 6 Approximately 55 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 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. An economic and financial crisis in the Far East has led to reduced demand for fiber and textile products there and a significant increase in low-priced U.S. imports of these products, which has negatively impacted the U.S. textile markets. 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. 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, such as aluminum, glass and paper. Competitors - ----------- Each of the Company's major markets is highly competitive. The Company competes in these markets 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 polyester fiber competitors are E.I. DuPont de Nemours & Co., KoSa, which acquired certain polyester assets of the Hoechst Celanese Corp. in 1998, 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 26% of U.S. production capacity, and the fourth-largest POY producer in the United States representing approximately 10% of the 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., KoSa and Nan Ya. The Company believes it is currently the fourth largest producer of PET resins in North America, representing approximately 13% of U.S. production capacity. 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 7 development costs were approximately $16.2 million, $19.6 million and $18.5 million for 1998, 1997 and 1996, respectively. Foreign Activities - ------------------ The Company operates in international markets. 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 7A. "Quantitative and Qualitative Disclosure about Market Risk" and note 13 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 14 to the consolidated financial statements for additional information relating to the Company's foreign activities. For a discussion of the impact of the Euro on the Company's operations, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation - Transition to the Euro." Employees - --------- As of December 31, 1998, the Company employed a total of approximately 3,000 persons in the United States and Europe. At December 31, 1998, the Union of Needletrades, Industrial and Textile Employees (UNITE) represented 946 employees at the Company's Johnsonville, SC operations. Approximately 553 of these employees were members of UNITE, whose contract with the Company expires in July 1999. At WIL, 281 out of 397 total employees were represented by four unions at year-end 1998. The wage agreements with these unions each expire on July 31, 2000. Employees at the PET Resins-Europe operation total 71, with 53 represented by three unions whose contract expires in May 1999. The Company believes relations with its employees are satisfactory. 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 8 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, 51 President, Chief Executive Officer and Director 8 Clifford J. Christenson, 49 Executive Vice President, Chief Operating Officer and Director Keith R. Phillips, 44 Vice President, Chief Financial Officer and Treasurer James P. Casey, 58 Vice President; President, Fibers Group John R. Hobson, 58 Vice President, Recycled Products Group Mark J. Rosenblum, 45 Vice President, Chief Accounting Officer and Controller Ernest G. Taylor, 48 Vice President, Chief Administrative Officer Joseph C. Tucker, 51 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 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. 9 Item 2. Properties - ------ ---------- The location, principal products produced and annual capacity of the major manufacturing properties owned by the Company are set forth in the table below: Stated Annual Principal Production Capacity Location Products (in millions of pounds) - -------- --------- ------- Johnsonville, SC Polyester staple fiber 290 Darlington, SC Polyester staple fiber 500 (Palmetto) PET packaging resins 500 Mullagh, Ireland (1) Polyester staple fiber 174 Fayetteville, NC Polyester POY 130 Emmen, the Netherlands PET packaging resins 110 Hancock County, MS (2) PET packaging resins 235 (Pearl River) - -------------------- (1) WIL's credit facilities are secured by the assets of WIL. (2) The facility is under construction with one of three production lines currently in operation. Item 3. Legal Proceedings - ------ ----------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- Not applicable. 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 - ---- ---- --- ----- -------- 1998 - ---- Fourth Quarter $13.88 $9.00 $10.19 $0.09 Third Quarter $22.88 $10.63 $12.75 $0.09 Second Quarter $26.44 $20.50 $22.69 $0.09 First Quarter $22.38 $17.31 $21.63 $0.09
10
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
The Company had approximately 1,068 holders of record and, to its knowledge, approximately 15,000 beneficial owners of its common stock as of March 15, 1999. See note 10 to the consolidated financial statements for information regarding common stock rights associated with the common stock. 11 Item 6. Selected Consolidated Financial Data - ------- ------------------------------------
(In thousands, except Years Ended December 31, per share data) 1998(1) 1997(2) 1996 1995 1994 - --------------------------------------------------------------------------- Income Statement Data: Net sales . . . . . . . . $968,008 $1,083,188 $1,098,804 $1,109,398 $936,133 Cost of sales. . . . . . 837,718 926,518 945,191 891,111 729,061 -------- ---------- ---------- ---------- -------- Gross profit. . . . . . . 130,290 156,670 153,613 218,287 207,072 Selling, general and administrative expenses. 73,418 79,888 85,489 85,410 85,331 Restructuring charge. . . 6,861 7,469 -- -- -- Interest expense, net . . 8,302 12,160 13,975 11,666 13,741 Loss on cancellation of fixed rate financial instrument . . . . . . . 23,314 -- -- -- -- Loss on divestitures and other, net . . . . . -- 5,963 -- 5,500 -- ------- ---------- ---------- ---------- -------- Earnings before income taxes. . . . . . . . . . 18,395 51,190 54,149 115,711 108,000 Income taxes. . . . . . . 6,714 20,835 27,620 41,657 43,200 ------- ---------- ---------- ---------- -------- Net earnings. . . . . . . $ 11,681 $ 30,355 $ 26,529 $ 74,054 $ 64,800 ======== ========== ========== ========== ======== Basic net earnings per share. . . . . . . . $ 0.37 $ 0.98 $ 0.81 $ 2.22 $ 1.96 ======== ========== ========== ========== ======== Basic weighted-average common shares outstanding 31,178 31,120 32,649 33,322 32,985 ======== ========== ========== ========== ======== Diluted net earnings per share. . . . . . . . $ 0.37 $ 0.97 $ 0.81 $ 2.20 $ 1.94 ======== ========== ========== ========== ======== Diluted weighted-average common shares outstanding 31,391 31,269 32,774 33,699 33,417 ======== ========== ========== ========== ======== Dividends (3) . . . . . . $ 11,253 $ 10,882 $ 10,085 $ 9,003 $ 7,593 ======== ========== ========== ========== ========
December 31, 1998 1997 1996 1995 1994 Balance Sheet Data: --------------------------------------------------- Total assets. . . . . .$1,493,481 $1,319,225 $1,203,949 $1,210,673 $1,044,462 Total debt. . . . . . .$ 556,548 $ 394,753 $ 319,566 $ 279,230 $ 256,531 Stockholders' equity. .$ 643,254 $ 634,434 $ 623,928 $ 650,346 $ 577,573
(1) Net earnings for 1998 include the after-tax effects of a restructuring charge of $4,357, a loss of $14,804 on the termination of a fixed rate treasury lock commitment, and a lower-of-cost-or-market inventory adjustment of $5,486. Without these unusual items, net income would have been $36,328, or $1.16 per diluted share. (2) Net earnings for 1997 include the after-tax effects of a restructuring charge of $4,429, a loss of $6,204 on the sale of the Company's thermoformed packaging and extruded sheet operation in Ripon, WI, and a $2,533 gain from insurance proceeds received as a result of a fire at the 12 Company's Irish recycled fibers operations. Without these unusual items, net income would have been $38,455, or $1.23 per diluted share. (3) Dividends paid were $0.36 per share in 1998, $0.35 per share in 1997, $0.31 per share in 1996, $0.27 per share in 1995 and $0.23 per share in 1994. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------- ----------------------------------------------------------------- GENERAL The Company is principally engaged in 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 packaging resins. In 1998, the Company had 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 commenced operation of a PET resin production line in January 1999. This was the first of three production lines scheduled to commence operation in 1999. See "Recent Developments" above and "Outlook" below. 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, PTA and MEG. The other 40% of fiber production, primarily fiberfill and carpet fibers, is manufactured by the RPG 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 PPG 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 fourth-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. Since late 1997, the Far East has been experiencing a significant economic and financial crisis. This crisis has led to higher imports of polyester fiber, fabric and apparel, resulting in fiber price pressure in the United States and Europe, which has adversely affected profitability. Global PET resins demand continues to grow, driven by new product applications for PET and conversions from other packaging materials to PET. Sales for PET resins, primarily for soft drink bottles and other beverages, may be influenced by weather demand. 13 The Company's profitability is primarily determined by its raw material margins (the difference between reduced selling prices and raw material costs). Both fiber and resin raw material margins experience increases or decreases primarily based on selling price and raw material cost changes, which stem from supply and demand factors and competitive conditions. Given the Company's substantial unit volumes, the impact of selling price and raw material cost changes are significant. Raw material margins for both fibers and resins are currently at levels among the lowest in recent history, primarily due to reductions in selling prices which have occurred over the last few years. (See "Results of Operations 1998 Compared to 1997" below for explanation of selling price changes). The net cost of the Company's chemical raw materials, PTA and MEG, decreased in 1998, primarily due to worldwide oversupply. Lower chemical costs have partially offset lower selling prices. However, costs of domestic recycled raw materials, which are also dependent upon worldwide supply and demand, increased in 1998 compared to 1997. Worldwide supply of fibers and resins continues to undergo significant expansion. Supply, demand, prices and raw material costs, each may be affected by global economic and market conditions, export activity, and the prices of competing materials. Recent and contemplated changes in ownership of certain fiber and resin competitors have had a destabilizing influence in the Company's markets. RESTRUCTURING CHARGES In the fourth quarter of 1998, the Company adopted a restructuring plan to consolidate and lower the overall operating costs of the business units in the RPG. In connection with this plan, the Company will close operations of a leased manufacturing facility in New Jersey and a sales office in England in the first quarter of 1999. The Company recorded a pretax charge of approximately $6.9 million in its fourth quarter of 1998, primarily including a $3.7 million write-off of equipment and other assets to be sold or scrapped; a $1.5 million accrual for the removal and dismantling of the equipment and restoration of the leased facility to its original state; and a $1.4 million accrual for termination benefits of approximately 88 employees. There were no charges against the accruals during 1998. See note 5 to the consolidated financial statements. During the second quarter of 1997, the Company adopted a restructuring plan designed to reduce costs and enhance the overall competitiveness of its European operations. In connection with this plan, the Company recorded a pretax charge of approximately $7.5 million during its second quarter of 1997. This consisted of restructuring costs of approximately $10.5 million, less a previously recorded $3.0 million charge to cost of goods sold to provide for inventory losses related to the Company's take-or-pay supply arrangement entered into as part of the acquisition of its Netherlands-based PET resins business in 1995. Approximately $6.4 million of the restructuring charge was an accrual for estimated costs to modify certain supply and service agreements at the Company's Netherlands-based PET resins business. This included the modification of its take-or-pay supply contract that previously required the Company to purchase 134 million pounds of PET resin on a declining basis during the period from 1997 to 2000, to reduce the number of pounds to be purchased to an immaterial amount. The restructuring accrual also included approximately $3.6 million of termination benefits for 65 employees at its recycled fiber operation in Ireland and the PET resins business. The 1997 restructuring is expected to be completed during 1999. 14 See "Results of Operations - 1998 Compared to 1997" below for benefits derived from the 1997 restructuring. See note 5 of the consolidated financial statements for details of charges to the reserves since the plan was adopted. LOSS ON FIXED RATE TREASURY LOCK COMMITMENT In the fourth quarter of 1998, the Company incurred a one-time pre-tax charge of $23.3 million on the termination of a fixed rate financial instrument. This instrument was designed to provide a specified fixed 10- year interest rate on a planned issuance of $150 million of public fixed-rate debt. During the fourth quarter of 1998, the Company decided more favorable financing was available and postponed its plan for public debt issuance and terminated the financial instrument. RESULTS OF OPERATIONS - 1998 COMPARED TO 1997 Total net sales for 1998 declined 10.6% to $968.0 million from $1.1 billion in 1997. This decrease was primarily the result of reductions in worldwide polyester fiber selling prices, as the crisis in the Far East exerted intense price pressure on worldwide markets, the loss of sales of Creative Forming, Inc. (CFI), which was sold in December 1997, and a reduction in PET resin unit volumes in Europe due to the modification of a take-or-pay supply contract in 1997. Net sales for the Fibers Group decreased 15.3% to $355.4 million in 1998 from $419.4 million in 1997 primarily due to an 8.6% decline in the average selling price per pound of polyester fiber in 1998 compared to 1997. In addition, polyester fiber unit volumes declined 7.3% in 1998 compared to 1997. Net sales for the RPG decreased 5.3% to $365.5 million in 1998 from $386.2 million in 1997, primarily as a result of lower polyester fiber average selling prices, which declined 7.4% in 1998 compared to 1997, which was partially offset by a 1.2% increase in unit volume. In addition, in 1998, the RPG experienced a 2.3% decline in net sales at other divisions. Sales for the PPG decreased 11% to $247.1 million in 1998 from $277.6 million in 1997, primarily due to the divestiture of CFI, which had sales of $23.2 million in 1997, and a 26.6% decrease in net sales in the PET resins business in Europe, stemming from lower unit volumes in 1998 due to the modification of a take-or-pay supply contract in 1997. This decrease offset a 6.1% increase in U.S. PET resin unit volumes in 1998 compared to 1997. Cost of sales decreased 9.6% to $837.7 million in 1998 from $926.5 million in 1997, primarily due to lower worldwide chemical raw material costs. As a percentage of sales, however, cost of sales increased to 86.5% in 1998 from 85.5% in 1997. In addition, in the fourth quarter of 1998, a lower-of-cost- or-market inventory adjustment totaling $8.6 million unfavorably impacted the cost of sales for the Fibers Group and PPG in 1998. As a percentage of sales, cost of sales for the Fibers Group increased 3.5% in 1998 from 1997, primarily due to lower fiber selling prices and lower production volumes, which were partially offset by lower chemical costs. Cost of sales as a percentage of sales for the RPG increased 7.1% in 1998 compared to 1997 primarily due to higher U.S. recycled raw material costs and lower worldwide fiber selling prices. The Company experienced lower production costs in its European operations in 1998 compared to 1997 as a result of the aforementioned 1997 restructuring plan. Cost of sales as a percentage of sales for the PPG decreased 9.7% in 1998 from 1997, primarily due to lower chemical raw material costs, which more than offset lower selling prices. As a result of the foregoing, gross profit for the 1998 declined 16.8% to $130.3 million in 1998 from $156.7 million in 1997. The gross profit margin was 13.5% in 1998 compared to 14.5% in 1997. 15 Selling, general and administrative expenses amounted to $73.4 million, or 7.6% of sales, in 1998 compared to $79.9 million, or 7.4% of sales, in 1997. The decrease was primarily due to the divestiture of CFI and reduced costs at the Company's European operations as a result of the restructuring plan implemented in the second quarter of 1997 (see "Results of Operations - 1997 Compared to 1996" below). In the fourth quarter of 1998, the Company adopted a restructuring plan to consolidate and lower the overall operating costs of its recycling business. In connection with this plan, the Company recorded a pretax charge of approximately $6.9 million in 1998. See "Restructuring Charges" above. As a result of the foregoing, operating income declined 27.8% to $50.0 million in 1998 compared to $69.3 million in 1997. Interest expense was $8.3 million in 1998 compared to $12.1 million in 1997. The decrease in interest expense is due to higher interest capitalization resulting from the Company's ongoing capital investment program. See "Outlook" below for information with respect to the impact on interest expense expected in 1999 from the startup of the Pearl River Plant. The effective income tax rate was 36.5% for 1998 compared to 40.7% in 1997. The rate decreased primarily as a result of increased earnings at the Company's Irish recycled 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 were $11.7 million, or $0.37 per diluted share, in 1998 compared to $30.4 million, or $0.97 per diluted share, in 1997. Excluding the inventory adjustment, restructuring charges and loss on the fixed rate financial instrument, net earnings were $36.3 million, or $1.16 per diluted share, in 1998 compared to 1997 earnings (exclusive of one-time charges) of $38.5 million, or $1.23 per diluted share. 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 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 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. The cost of sales decreased 2.0% to $926.5 million in 1997 from $945.2 million in 1996. As a percentage of sales, the cost of sales was 85.5% in 1997 compared to 86.0% in 1996. The decrease in cost of sales was primarily the result of higher unit volumes and lower costs in the RPG, which more than offset lower worldwide fiber and resin selling prices. Cost of sales in 1996 16 was negatively impacted by a 12-week strike at the Company's Irish fiber operation and a charge of $7 million to establish an inventory reserve resulting from large declines in raw material costs. For the Fibers Group, cost of sales as a percentage of sales increased 1.3% in 1997 from 1996, primarily due to significantly lower polyester fiber selling prices, which more than offset lower chemical raw material and manufacturing costs. As a percentage of sales, cost of sales for the RPG declined 6.3% in 1997 from 1996 due 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. Also benefiting the RPG's cost of sales in 1997 were substantially lower recycled raw material costs and higher unit sales volumes in the domestic fibers business and lower costs at other divisions. Cost of sales as a percentage of sales for the PPG increased 2.7% in 1997 from 1996 primarily due to significantly lower worldwide PET resins selling prices, which more than offset higher domestic unit sales volumes resulting from the aforementioned capacity expansion and lower chemical raw material costs. As a result of the foregoing, gross profit for 1997 increased 2.0% to $156.7 million from $153.6 million in 1996. The gross profit margin in 1997 was 14.5% compared to 14.0% in 1996. Selling, general and administrative expenses amounted to $79.9 million in 1997, or 7.4% of sales, compared to $85.5 million in 1996, or 7.8% 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 "Restructuring Charges" above) 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 overall competitiveness of its European operations, resulting in a pretax charge of approximately $7.5 million. See "Restructuring Charges" above. 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 6 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 2 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. 17 OUTLOOK The U.S. and European fiber markets have been severely impacted by the Far Eastern economic crisis and the resultant increase in imports of fiber, yarn, fabric and apparel from that region. In the United States, high levels of Asian imports are still present throughout the textile chain. As a result, demand for polyester fiber remains weak, with higher inventory levels, excess capacity and downward selling price pressure continuing to affect domestic fiber producers. Ongoing selling price pressure may further erode fiber profit margins, which ended 1998 at the lowest levels of the year. Demand for PET packaging resins remains relatively strong. The Company believes continued growing demand may improve both selling prices and profit margins in 1999. The Company is nearing completion of construction of its Pearl River Plant in Mississippi. The first of two 235 million-pound resin production lines at this facility came on-line in January 1999. The second resin line is scheduled to commence operation in the second quarter of 1999. As a result, resin unit volumes are expected to increase significantly in 1999. The plant's 230 million-pound fiber production line is scheduled to commence operation later in 1999. In line with the current start-up plan, the Company plans to perform previously delayed maintenance on various production lines at other fiber facilities in 1999. As a result, fiber volumes are initially expected to increase only modestly. The start-up of the Pearl River Plant and other worldwide fiber and resins capacity expansions may result in downward pressure on selling prices and profit margins. In 1999, the Company's results of operations will also be impacted by certain increased expenses associated with the start-up of the Pearl River Plant. Interest costs, previously capitalized during the construction of the facility, will be expensed as incurred. The Company will also begin depreciating the facility in phases as each production line commences operation. The estimated impact of the adoption of SOP 98-5 on the results of operations will be an after-tax charge of approximately $3.0 million in the first quarter of 1999 for the cumulative effect of a change in accounting principle (see note 1 to the consolidated financial statements). In addition, start-up costs to be incurred and expensed in 1999 are estimated to be in a range of $3.0 million to $5.0 million. As a result of the foregoing, net earnings from continuing operations are expected to be adversely affected during 1999. Certain of the Company's major competitors have engaged in and are contemplating changes in the ownership and management of their businesses. These activities have had and may continue to have a destabilizing influence on the Company's markets. 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 18 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 $11.0 million and $25.2 million. In connection with these expenditures, the Company has accrued undiscounted liabilities of approximately $16.0 million and $17.5 million at December 31, 1998 and 1997, respectively, which are reflected as other noncurrent liabilities in the Company's Consolidated Balance Sheet. These accruals represent 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 $8.4 million to $26.1 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 1998, 1997 and 1996, net expenses associated with environmental remediation and ongoing assessment were not significant. See notes 1 and 8 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." YEAR 2000 COMPUTER ISSUE Overview The "Year 2000 Computer Issue" is the result of computer programs being written using only two digits rather than four to refer to a year. If uncorrected, these computer programs may not be able to distinguish between the years 1900 and 2000 and may fail to operate or may produce unpredictable results. Wellman has been addressing the Year 2000 Computer Issue within its information technology and non-information technology systems through a Company-wide Year 2000 project. Non-information technology systems typically include embedded technology such as computer chips within manufacturing equipment and building security systems. The Company's Year 2000 Project formally commenced in December 1997 and is proceeding on schedule. The Company anticipates completing its Year 2000 project no later than June 30, 1999, which is prior to any anticipated impact on its operating systems. 19 Year 2000 Project The Company organized its Year 2000 Project into five broad phases: (1) development of a Company-wide inventory of both information technology and embedded systems; (2) Company-wide assessment, with focus on vital and critical items, which was completed in February 1998; (3) renovation/ remediation, which is targeted for completion by June 30, 1999; (4) validation and testing, which is targeted for completion by June 30, 1999; and (5) implementation. When a system passes the Company's established test criteria, it is certified as Year 2000 ready and cleared for implementation. The Company focuses on the following vital and critical items in its remediation efforts: (a) information systems portfolio, (b) embedded systems, (c) purchasing and trading partners, (d) end-user owned applications, and (e) network and personal computers. (a) Information systems portfolio: These have been divided into two categories: corporate systems and manufacturing systems. Corporate systems, which consist largely of third-party applications and, to a lesser degree, in-house written applications, include, but are not limited to, human resources/payroll, accounts payable, general ledger, order fulfillment (shipping, receiving, and invoicing), electronic data interchange (EDI), and phone/voice mail. The Company believes all of the vital and critical corporate systems are Year 2000 ready. Manufacturing systems are located at and support manufacturing processes at Company facilities. The Company is currently remediating three manufacturing systems, which are approximately 85% complete, with target completions in the second quarter of 1999. The remaining 44 systems that were classified by the Company as vital and critical have been remediated and are either currently being tested or are scheduled for testing with expected completion dates no later than June 30, 1999. (b) Embedded systems: These include items such as programmed logic controllers, drives, and process controllers. Based on its assessment, the Company believes that approximately 90% of its embedded systems have no date- related issues. The remaining 10% of the Company's embedded systems are in the process of being tested or remediated. Of the 10%, the Company has completed its testing of approximately 80%, and less than 5% of these tested required remediation. (c) Purchasing and trading partners: The Company has surveyed all of its vital and critical trading partners (suppliers and customers) concerning their Year 2000 efforts in general. EDI trading partners have been surveyed specifically with regards to the compliance of their software. The Company has received written responses to their surveys but is aware that these written responses may not accurately represent the Year 2000 compliance status of a trading partner. Certain targeted suppliers are being interviewed personally. As part of this project, contracts are being reviewed and rewritten where necessary to include Year 2000 clauses. (d) End-user owned applications: There are various end-user written desktop applications throughout the Company's locations. The vast majority of these applications are not vital and critical to the business. Of those that are vital and critical to operations, the Company believes that the majority have no Year 2000 date issues. For those that are vital and critical (with date issues), a desktop remediation tool has been selected and is being used as needed. (e) Network and personal computers: Approximately 99% of the Company's vital and critical local area network servers and personal computers are 20 believed to be Year 2000 ready. The remainder are being replaced with compliant hardware. Costs The total cost of the Company's Year 2000 Project is not expected to be material to the Company's financial position or results of operations. Risks Due to the numerous uncertainties inherent in the Year 2000 Computer Issue, the Company cannot ensure, despite its ongoing communications with its trading partners, that its most important suppliers and customers will be Year 2000 compliant on time. The failure of critical suppliers or customers to timely correct their Year 2000 computer problems could materially and adversely affect the Company's operations and financial condition, even resulting in interruption of normal business operations if a critical supplier is unable to meet contractual obligations in a timely way. The Company is in the process of preparing, but has not completed, contingency plans which will involve, among other actions, managing inventories and adjusting staffing strategies. The Company expects to complete its contingency plans during the second quarter of 1999. Based on current plans and efforts to date, the Company does not anticipate that the Year 2000 issue will have a material effect on results of operations or financial condition. However, the above expectations are subject to uncertainties. For example, if the Company is unsuccessful in identifying or remediating all year 2000 problems in its critical operations, or if it is affected by the inability of suppliers or major customers to continue operations due to such a problem, then the Company's results of operations or financial condition could be materially impacted. Forward-looking statements contained in this Year 2000 Computer Issue section should be read in conjunction with the Company's disclosures under the heading "Forward Looking Statements; Risks and Uncertainties" beginning on page 23. TRANSITION TO THE EURO Although the Euro was successfully introduced on January 1, 1999, the legacy currencies of those countries participating will continue to be used as legal tender through January 1, 2002. Thereafter, the legacy currencies will be cancelled and Euro bills and coins will be used in the eleven participating countries. Transition to the Euro creates a number of issues for the Company. Business issues that must be addressed include product pricing policies and ensuring the continuity of business and financial contracts. Finance and accounting issues include the conversion of accounting systems, statutory records, tax books and payroll systems to the Euro, as well as conversion of bank accounts and other treasury and cash management activities. The Company continues to address these transition issues and does not expect the transition to the Euro to have a significant effect on the results of operations or financial condition of the Company. At WIL, systems are compatible with the Euro, and beginning in 1999, the subsidiary will prepare its financial statements in Euros. The Company has not yet set conversion dates for its PET Resins-Europe accounting systems, statutory reporting and tax books, but will do so in 1999 in conjunction with its efforts to be Year 2000 compliant. 21 CAPITAL RESOURCES AND LIQUIDITY The Company's overall cash needs for 1998 were provided from operations and long-term borrowings. Net cash provided by operations was $70.7 million for 1998 compared to $128.1 million for 1997. The decrease in cash from operations was primarily the result of lower net income as discussed above in "Results of Operations - 1998 Compared to 1997" and increased inventory levels in preparation for the start-up of the Company's Pearl River Plant. Net cash used in investing activities amounted to $223.4 million in 1998 compared to $197.8 million in 1997. Capital spending amounted to $223.4 million in 1998 and $221.2 million in 1997, reflecting the Company's ongoing capital investment program. The major portion of the Company's ongoing capital investment program is the construction of its Pearl River Plant in Mississippi and, to a lesser extent, a new production line in the Engineering Resins business. The total capitalized cost of the facility is estimated to range between $480 and $500 million. This facility is scheduled to be operational in three phases, the first of which began in January 1999. The Company expects capital expenditures to approximate $100 to $120 million in 1999. Net cash provided by financing activities amounted to $152.6 million in 1998 compared to $67.9 million in 1997. Net borrowings amounted to $160.4 million in 1998 compared to $78.3 million in 1997 as a result of the Company's ongoing capital investment program. The Company's financing agreements contain normal financial and restrictive covenants. Certain subsidiaries have guaranteed substantially all of the Company's indebtedness for borrowed money. The financial resources available to the Company at December 31, 1998 include $160 million under its $330 million revolving credit facility, unused short-term uncommitted lines of credit aggregating approximately $244 million, and internally generated funds. At December 31, 1998 the Company could only borrow an additional $260 million without amending the terms of its revolving credit facility. The Company believes these financial resources and other credit arrangements will be sufficient to meet its foreseeable needs for working capital, capital expenditures and dividends. For information about the Company's derivative financial instruments, see Item 7A. "Quantitative and Qualitative Disclosure About Market Risk." During 1998, the SEC declared effective the Company's universal shelf registration statement covering the issuance of up to $400 million of debt and or equity securities. No securities have been sold from this shelf registration. In the fourth quarter of 1998, the Company incurred a one-time pretax charge of $23.3 million on the termination of a fixed rate financial instrument. See "Loss on Fixed Rate Treasury Lock Commitment" above. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the AICPA issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP No. 98-5, which is effective for financial statements for fiscal years beginning after December 15, 1998, will be adopted by the Company in its first quarter of 1999. The Company expects the adoption of SOP No. 98-5 to be an after-tax charge to the results of 22 operations of approximately $3.0 million, which will be accounted for as a cumulative effect of a change in accounting principle. Start-up costs to be incurred and expensed in 1999 are estimated to be in a range of $3.0 million to $5.0 million. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. The Company expects to adopt the Statement No. 133 in January 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at their fair value. The Company has not yet determined what the effect of Statement No. 133 will be on the earnings and financial position of the Company. 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 1999 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 financial markets, interest rates and foreign currency exchange rates; work stoppages; natural disasters; U.S., European, Far Eastern and global economic conditions and changes in laws and regulations; prices of competing products, 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. Demand, prices and raw material costs for both fiber and PET resins may be affected by global economic conditions. Worldwide supply is expanding for both fiber and resins. 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. 23 Impact of Far Eastern Financial Crisis Beginning in the fourth quarter of 1997, the Far Eastern economies have been experiencing a significant economic and financial crisis. This crisis has reduced demand in the Far East for polyester fiber and textile products and led to a significant increase in low-priced U.S. imports of these products, which has adversely affected the Company's results of operations and may continue to do so. 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 domestic 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 to range between $480 and $500 million. The facility commenced operation of a PET resin production line at this facility in January 1999. When completed, the facility 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 of the remaining two production lines 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. Year 2000 As part of the Company's procedures relating to the Year 2000 (see "Year 2000 Computer Issue" 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. 24 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. - ------- --------------------------------------------------------- Derivative Financial Instruments The Company does not hold or issue derivative financial instruments for trading purposes. The Company uses derivative financial instruments primarily to manage its exposure to fluctuations in interest rates and foreign exchange rates. The Company also utilizes a derivative financial instrument to manage its exposure to compensation expense under a Supplemental Employee Retirement Plan (SERP). For additional discussion of the Company's use of such instruments, see notes 1, 6 and 13 to the consolidated financial statements. Interest Rate Risk Because the Company's obligations under the revolving credit loan facility, competitive bid loans and uncommitted lines of credit bear interest at floating rates, the Company's earnings and cash flows are affected by changes in prevailing interest rates. However, due to its purchase of interest rate swaps, the effect of interest rate changes are limited. A 10% decrease in market interest rates from December 31, 1998 that affect the Company's financial instruments would reduce income before income taxes by approximately $1 million, and reduce cash flow from operations by $1 million. The potential decrease in fair value of all financial instruments with exposure to interest rate risk resulting from a hypothetical 10% shift in interest rate from December 31, 1998 would be approximately $5 million. These amounts are determined by considering the impact of hypothetical changes in interest rates on the Company's borrowing cost and interest rate swap agreements. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. Foreign Currency Risk The Company uses foreign currency debt and derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. These financial instruments (primarily denominated in Dutch guilders and Irish punts) are specifically used (1) to reduce the impact of foreign currency translation adjustments for its PET resins business in the Netherlands; (2) to reduce the impact of foreign currency fluctuations relative to fixed asset purchase commitments; and (3) to hedge certain accounts receivable and accounts payable denominated in foreign 25 currencies. If foreign currency exchange rates at December 31, 1998 adversely changed by 10%, the fair value of these financial instruments outstanding at December 31, 1998, would decline by approximately $6 million. However, such loss in fair value would be substantially offset by an increase in fair value of the Company's underlying exposure. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in any potential changes in sales levels affected by changes in local currency prices. Equity Risk The Company also uses an equity-linked investment to hedge its exposure to compensation expense to a 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. A 10% decrease in the market value of the Company's stock would not materially affect the fair value of the equity- linked investment. 26 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, 1998, 1997 and 1996 28 Consolidated Balance Sheets as of December 31, 1998 and 1997 29 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 30 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 31 Notes to Consolidated Financial Statements 32 Report of Independent Auditors 51 Consolidated financial statement schedules for the years ended December 31, 1998, 1997 and 1996: II -- Valuation and qualifying accounts 52 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. 27 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------ (In thousands, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------- Net sales. . . . . . . . . . . . . . . . . .$968,008 $1,083,188 $1,098,804 Cost of sales. . . . . . . . . . . . . . . . 837,718 926,518 945,191 -------- ---------- ---------- Gross profit . . . . . . . . . . . . . . . . 130,290 156,670 153,613 Selling, general and administrative expenses 73,418 79,888 85,489 Restructuring charges. . . . . . . . . . . . 6,861 7,469 -- -------- ---------- ---------- Operating income . . . . . . . . . . . . . . 50,011 69,313 68,124 Interest expense, net. . . . . . . . . . . . 8,302 12,160 13,975 Loss on cancellation of fixed rate financial instrument. . . . . . . . . . . . 23,314 -- -- Loss on divestitures and other, net. . . . . -- 5,963 -- -------- ---------- ---------- Earnings before income taxes . . . . . . . . 18,395 51,190 54,149 Income taxes . . . . . . . . . . . . . . . . 6,714 20,835 27,620 -------- ---------- ---------- Net earnings . . . . . . . . . . . . . . . .$ 11,681 $ 30,355 $ 26,529 ======== ========== ========== Basic net earnings per common share. . . . .$ 0.37 $ 0.98 $ 0.81 ======== ========== ========== Basic weighted-average common shares outstanding. . . . . . . . . . . . . 31,178 31,120 32,649 ======== ========== ========== Diluted net earnings per common share. . . .$ 0.37 $ 0.97 $ 0.81 ======== ========== ========== Diluted weighted-average common shares outstanding. . . . . . . . . . . . . 31,391 31,269 32,774 ======== ========== ==========
See notes to consolidated financial statements. 28 CONSOLIDATED BALANCE SHEETS
December 31, In thousands, except share data) 1998 1997 - ---------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents. . . . . . . . . . . . . .$ -- $ -- Accounts receivable, less allowance of $4,184 in 1998 and $5,229 in 1997. . . . . . . . . . . . . 101,420 126,106 Inventories. . . . . . . . . . . . . . . . . . . . . 183,883 154,133 Prepaid expenses and other current assets. . . . . . 18,959 3,366 ---------- ---------- Total current assets. . . . . . . . . . . . . . . 304,262 283,605 Property, plant and equipment, at cost: Land, buildings and improvements . . . . . . . . . . 107,730 104,073 Machinery and equipment. . . . . . . . . . . . . . . 768,469 735,144 Construction in progress . . . . . . . . . . . . . . 437,084 251,493 ---------- ---------- 1,313,283 1,090,710 Less accumulated depreciation. . . . . . . . . . . . 396,109 336,230 ---------- ---------- Property, plant and equipment, net. . . . . . . . 917,174 754,480 Cost in excess of net assets acquired, net . . . . . . 262,089 269,756 Other assets, net. . . . . . . . . . . . . . . . . . . 9,956 11,384 ---------- ---------- $1,493,481 $1,319,225 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . .$ 64,013 $ 73,070 Accrued liabilities. . . . . . . . . . . . . . . . . 43,211 39,590 Current portion of long-term debt. . . . . . . . . . 145,869 208 ---------- ---------- Total current liabilities . . . . . . . . . . . . 253,093 112,868 Long-term debt . . . . . . . . . . . . . . . . . . . . 410,679 394,545 Deferred income taxes and other liabilities. . . . . . 186,455 177,378 ---------- ---------- Total liabilities . . . . . . . . . . . . . . . . 850,227 684,791 Stockholders' equity: Common stock, $0.001 par value; 55,000,000 shares authorized, 33,816,212 shares issued in 1998, 33,638,193 in 1997 . . . . . . . . . . . . 34 34 Class B common stock, $0.001 par value; 5,500,000 shares authorized; no shares issued . . . . . . . . -- -- Paid-in capital. . . . . . . . . . . . . . . . . . . 237,810 234,179 Accumulated other comprehensive income . . . . . . . 5,133 372 Retained earnings. . . . . . . . . . . . . . . . . . 449,801 449,373 Less common stock in treasury at cost: 2,500,000 shares. . . . . . . . . . . . . . . . . . (49,524) (49,524) ---------- ---------- Total stockholders' equity. . . . . . . . . . . . 643,254 634,434 ---------- ---------- $1,493,481 $1,319,225 ========== ==========
See notes to consolidated financial statements. 29 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED ISSUED OTHER ---------- PAID-IN COMPREHENSIVE RETAINED TREASURY (In thousands) SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL ------ ------ ------- ---------- -------- ------- ----- Balance at December 31, 1995 . . . . . 33,441 $33 $230,008 $ 6,849 $413,456 $ -- $650,346 Net earnings . . . . . . . . . . . . . 26,529 26,529 Currency translation adjustment. . . . 3,004 3,004 -------- Total comprehensive income . . . . . . 29,533 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 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 Currency translation adjustment. . . . (9,481) (9,481) -------- Total comprehensive income . . . . . . 20,874 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 ------ --- -------- ------- -------- -------- -------- Balance at December 31, 1997 . . . . . 33,638 34 234,179 372 449,373 (49,524) 634,434 Net earnings . . . . . . . . . . . . . 11,681 11,681 Currency translation adjustment. . . . 4,761 4,761 -------- Total comprehensive income . . . . . . 16,442 Cash dividends ($0.36 per share) . . . (11,253) (11,253) Exercise of stock options. . . . . . . 65 1,136 1,136 Issuance of restricted stock . . . . . 113 2,352 2,352 Tax effect of exercise of stock options 143 143 ------ --- -------- ------- -------- -------- -------- Balance at December 31, 1998 . . . . . 33,816 $34 $237,810 $ 5,133 $449,801 $(49,524) $643,254 ====== === ======== ======= ======== ======== ========
See notes to consolidated financial statements. 30 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (In thousands) 1998 1997 1996 Cash flows from operating activities: ----- ----- ---- Net earnings . . . . . . . . . . . . . . . .$ 11,681 $ 30,355 $ 26,529 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . 62,002 61,351 56,260 Amortization . . . . . . . . . . . . . . . 8,750 11,014 11,685 Deferred income taxes. . . . . . . . . . . 7,374 10,625 8,496 Common stock issued for stock plans. . . . -- 16 2,696 Loss on divestitures and other, net. . . . -- 5,963 -- Changes in assets and liabilities, net of effects from businesses acquired and divested: Accounts receivable. . . . . . . . . . . 26,819 (3,291) 15,760 Inventories. . . . . . . . . . . . . . . (28,220) (3,128) 32,783 Prepaid expenses and other current assets(15,620) 343 620 Other assets . . . . . . . . . . . . . . 1,327 662 (2,347) Accounts payable and accrued liabilities (3,314) (10,845) (9,657) Other liabilities. . . . . . . . . . . . (6,164) 12,346 1,514 Other. . . . . . . . . . . . . . . . . . 6,059 12,742 7,562 -------- -------- -------- Net cash provided by operating activities. 70,694 128,153 151,901 -------- -------- -------- Cash flows from investing activities: Additions to property, plant and equipment .(223,376) (221,187) (126,009) Decrease in restricted cash. . . . . . . . . -- 5,016 879 Businesses acquired. . . . . . . . . . . . . -- -- (14,250) Proceeds from divestitures and other . . . . -- 18,321 4,184 -------- -------- -------- Net cash used in investing activities. . .(223,376) (197,850) (135,196) -------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt. . . . . . . 200,414 103,123 40,303 Repayments of long-term debt . . . . . . . . (40,000) (24,820) -- Purchase of treasury stock . . . . . . . . . -- -- (49,524) Issuance of restricted stock . . . . . . . . 2,352 -- -- Dividends paid on common stock . . . . . . . (11,253) (10,882) (10,085) Exercise of stock options. . . . . . . . . . 1,136 453 861 -------- -------- -------- Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . 152,649 67,874 (18,445) -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents. . . . . . . . . . . . . . . 33 (297) (33) -------- -------- -------- Decrease in cash and cash equivalents. . . . . 0 (2,120) (1,773) Cash and cash equivalents at beginning of year 0 2,120 3,893 -------- -------- -------- Cash and cash equivalents at end of year . . .$ 0 $ 0 $ 2,120 ======== ======== ======== Supplemental cash flow data: Cash paid during the year for: Interest (net of amounts capitalized). . .$ 9,381 $ 14,435 $ 15,273 Income taxes . . . . . . . . . . . . . . . .$ 9,215 $ 12,979 $ 8,994 Non-cash investing activities financed through government grants . . . . . . . . .$ 4,752 $ 24,454 $ 3,226
See notes to consolidated financial statements. 31 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 primarily manufactures 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 1998 and 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. Principles of Consolidation The consolidated financial statements include the accounts of Wellman, Inc. and its subsidiaries, all of which are wholly-owned. All material intercompany transactions have been eliminated. 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 $135,966 and $110,036 of inventory at December 31, 1998 and 1997, 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 20 years for machinery and equipment. In the fourth quarter of 1998, the Company extended the estimated useful lives of certain assets of its Palmetto facility to reflect time periods more consistent with actual historical experience and anticipated utilization of the assets. The effect of the change was a decrease in depreciation expense of approximately $1,300. 32 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 $79,691 and $70,947 at December 31, 1998 and 1997, 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 of goodwill and other intangibles were noted in 1998. 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 to synthetically manage the interest rate characteristics of its currently outstanding debt and future debt. These instruments generally fix floating-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. 33 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 accumulated other comprehensive income account in stockholders' equity. Forward points incurred in these contracts are recorded as an adjustment to interest expense and are 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 are offset against 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. The change in value of the equity-linked investment was not material in 1998 or 1997. Foreign Currency Translation and Other Comprehensive Income 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 other comprehensive income. Accumulated other comprehensive income is comprised solely of foreign currency translation. The earnings associated with the Company's investments in foreign entities are considered to be permanently invested, and no provision for U.S. federal and state income taxes on those earnings or translation adjustments has been provided. Research and Development Costs Research and development costs are expensed as incurred. Such costs were approximately $16,200, $19,600, and $18,500 for 1998, 1997 and 1996, 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 34 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 1998, 1997, and 1996 results of operations was immaterial. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees and directors. Prior to 1998, the exercise price was equal to or greater than the fair value of the shares at the date of grant. Beginning with options granted in 1998, the exercise price is equal to the average of the highest and lowest sales prices of the Company's common stock over a period of 20 days prior to the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes compensation expense over the vesting period for the difference between the exercise price and the fair value of the shares at the date of grant. The restricted stock awarded under the Deferred Compensation and Restricted Stock Plan is considered to be compensatory. The amount of non-cash compensation expense recognized in 1998 under these plans was not material. See note 10. 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. Reclassification Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. Impact of Recently Issued Accounting Pronouncements In April 1998, the AICPA issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP No. 98-5, which is effective for financial statements for fiscal years beginning after December 15, 1998, will be adopted by the Company in its first quarter of 1999. The Company expects the effect of the adoption of SOP No. 98-5 to be an after-tax charge to the results of operations of approximately $3,000, which will be accounted for as a cumulative effect of a change in accounting principle. Start-up costs to be incurred and expensed in 1999 are estimated to be in a range of $3,000 to $5,000. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. The Company expects to adopt Statement No. 133 in January 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at their fair value. The Company has not yet determined what the effect of Statement No. 133 will be on the earnings and financial position of the Company. However, the statement could increase volatility in earnings and comprehensive income. 2. 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 35 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. The operating results of the divested businesses did not have a material impact on the Company's consolidated financial statements. 3. INVENTORIES Inventories consist of the following:
December 31, 1998 1997 ------ ------ Raw materials . . . . . . . . . . . $ 66,580 $ 50,669 Finished and semi-finished goods. . 103,840 90,210 Supplies. . . . . . . . . . . . . . 13,463 13,254 -------- -------- $183,883 $154,133 ======== ========
At December 31, 1998 and 1997, aggregate current replacement costs of inventories valued using the LIFO method are not in excess of their carrying value. At December 31, 1998, certain inventories were valued at market, which was below cost. This resulted in a pretax charge to cost of goods sold of approximately $8.6 million in 1998. 4. ACCRUED LIABILITIES Accrued liabilities consist of the following:
December 31, 1998 1997 ------ ------ Payroll and other compensation. . . $ 6,001 $ 7,494 Retirement plans. . . . . . . . . . 10,703 7,681 Property and other taxes. . . . . . 5,262 4,757 Interest. . . . . . . . . . . . . . 2,378 1,621 Other . . . . . . . . . . . . . . . 18,867 18,037 ------- ------- $43,211 $39,590 ======= =======
5. RESTRUCTURING CHARGES 1998 Restructuring ------------------ In the fourth quarter of 1998, the Company adopted a restructuring plan to consolidate and lower the overall operating costs of the business units in the Recycled Products Group. In connection with this plan, the Company will close operations of a leased manufacturing facility in New Jersey and a sales office in England in the first quarter of 1999. The Company recorded a 36 pretax charge of $6,861 in its fourth quarter of 1998, primarily including a $3,738 write-off of equipment and other assets to be sold or scrapped; a $1,531 accrual for the removal and dismantling of the equipment and restoration of the leased facility to its original state; and a $1,406 accrual for termination benefits of approximately 88 employees. Total costs associated with the New Jersey facility and the sales office in England were $4,371 and $827, respectively. There were no charges against the accruals during 1998. 1997 Restructuring ------------------ During the second quarter of 1997, the Company adopted a restructuring plan designed to reduce costs and enhance the overall competitiveness of its European operations. In connection with this plan, the Company recorded a pretax charge of $7,469 during its second quarter of 1997. This consisted of restructuring costs of $10,469, less a previously recorded $3,000 charge to cost of goods sold to provide for inventory losses related to the Company's take-or-pay supply arrangement entered into as part of the acquisition of its Netherlands-based PET resins business in 1995. Approximately $6,375 of the restructuring charge was an accrual for estimated costs to modify certain supply and service agreements at the Company's Netherlands-based PET resins business. This included the modification of its take-or-pay supply contract, which previously required the Company to purchase 134,000 pounds of PET resin on a declining basis during the period from 1997 to 2000, to reduce the number of pounds to be purchased to an immaterial amount. The restructuring accrual also included $3,594 of termination benefits for 65 employees at its recycled fiber operation in Ireland and the PET resins business. The following represents changes in the accruals since the adoption of the plan:
Modification of Termination Agreements Benefits Other Total --------------- ------------ ------- ----- Original accrual in June 1997 $6,375 $3,594 $500 $10,469 Cash payments in 1997 (5,644) (2,474) (500) (8,618) ------ ------ ---- ------- Accrual balance on December 31, 1997 731 1,120 -0- 1,851 Cash payments in 1998 (568) (422) -- (990) ----- ------ ---- ------- Accrual balance on December 31, 1998 $ 163 $ 698 $-0- $ 861 ====== ====== ==== =======
The 1997 restructuring is expected to be completed during 1999. 37 6. BORROWING ARRANGEMENTS Long-term debt consists of the following:
December 31, 1998 1997 ------ ------ Revolving credit loan facility and competitive bid loans. . . . . . . . . . . . . $170,000 $ 20,000 Uncommitted lines of credit . . . . 265,853 214,865 Serialized senior unsecured notes, 9.26%, due May 1999. . . . . . . . 40,000 80,000 Economic development revenue bonds, at variable interest rates, due 2010-2022. . . 49,680 49,680 8.41% senior unsecured note, due July 2000 30,000 30,000 Other . . . . . . . . . . . . . . . 1,015 208 -------- -------- 556,548 394,753 Less current portion . . . . . 145,869 208 -------- -------- $410,679 $394,545 ======== ========
The revolving credit loan facility (the Facility) allows for borrowings on an unsecured basis of up to $330,000. The Facility matures in February 2000. 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, 1998, the average interest rate on borrowings under the Facility was approximately 5.5% and the amount available to the Company was $160,000. 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, 1998, the maturities on the domestic outstanding borrowings ranged from 12 to 95 days with interest rates ranging from 5.26% to 5.92%. At year-end, the Company had approximately $244,000 available under these lines. At December 31, 1998 the Company could only borrow an additional $260,000 without amending the terms of the Facility. 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, 1998. The average interest rate on the Bonds at December 31, 1998 was approximately 3.98%. The Bonds and borrowings under the Facility and a portion of the borrowings under the 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 interest rate swaps to fix the interest rate on variable rate borrowings thereby reducing substantial interest rate risk. Maturity dates are a minimum of 5 years and a maximum of 10 years after the inception dates of the swaps, which ranged from June 1997 to May 1998. 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 38 had to pay approximately $15,900 to terminate these agreements at December 31, 1998. In the fourth quarter of 1998, the Company incurred a one-time pretax charge of $23,314 on the termination of a fixed rate treasury lock commitment. The instrument was designed to provide a specified fixed 10-year interest rate on a planned issuance of $150 million of public fixed-rate debt. During the fourth quarter of 1998, the Company decided more favorable financing was available and postponed its plan for public debt issuance and terminated the financial instrument. 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. Scheduled annual maturities of debt are: 1999 - $145,869; 2000 - $360,000; 2001 - $0, 2002 - $0, 2003 - $0, and varying amounts thereafter through 2023. 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 $2,200 at December 31, 1998. During 1998, 1997 and 1996, the Company capitalized interest of $21,342, $9,820, and $4,755, respectively, as part of the cost of capital projects under construction. Interest expense (net) includes interest income of $2,452, $2,402, and $2,935 for 1998, 1997 and 1996, respectively. 7. INCOME TAXES For financial reporting purposes, earnings (loss) before income taxes are as follows:
Years Ended December 31, 1998 1997 1996 ------ ------ ------ United States. . . . . . . . . . . . . $ 5,645 $53,170 $68,463 Foreign. . . . . . . . . . . . . . . . 12,750 (1,980) (14,314) ------- -------- -------- $18,395 $51,190 $54,149 ======= ======= =======
39 Significant components of the provision for income taxes are as follows:
Years Ended December 31, 1998 1997 1996 Current: ------ ------ ------ Federal. . . . . . . . . . . . . . . $(1,762) $ 8,630 $17,625 State. . . . . . . . . . . . . . . . (367) 419 955 Foreign. . . . . . . . . . . . . . . 1,469 1,161 544 ------- ------- ------- $ (660) 10,210 19,124 Deferred: ------- ------- ------- Federal. . . . . . . . . . . . . . . $ 6,924 $ 9,244 $ 7,846 State. . . . . . . . . . . . . . . . 442 1,241 1,098 Foreign. . . . . . . . . . . . . . . 8 140 (448) ------- ------- ------- 7,374 10,625 8,496 ------- ------- ------- $ 6,714 $20,835 $27,620 ======= ======= =======
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, 1998 1997 1996 ---- ---- ---- Computed at statutory rate. . . . . . . 35.0% 35.0% 35.0% State taxes, net of federal benefit . . 0.6 1.9 2.5 Differences in income tax rates between the United States and foreign countries (14.7) (5.0) (1.2) Amortization of cost in excess of net assets acquired. . . . . . . . . . . . 15.6 6.0 5.7 Foreign losses for which no tax benefit has been provided. . . . . . . . . . . 1.6 2.1 10.5 Credits . . . . . . . . . . . . . . . . (2.8) (0.9) (1.7) Other, net . . . . . . . . . . . . . . 1.2 1.6 0.2 ---- ---- ---- Effective tax rate. . . . . . . . . . . 36.5% 40.7% 51.0% ==== ==== ====
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: 40
December 31, 1998 1997 ---- ---- Inventory . . . . . . . . . . . . . . . $ 2,079 $ 6,087 Depreciation. . . . . . . . . . . . . . 120,691 109,670 Foreign . . . . . . . . . . . . . . . . 3,281 3,823 Other . . . . . . . . . . . . . . . . . 12,308 10,114 -------- ------- Total deferred tax liabilities. . . . . 138,359 129,694 -------- ------- Pension . . . . . . . . . . . . . . . . 2,217 2,686 State deferred benefits . . . . . . . . 5,417 5,274 Long-term liabilities . . . . . . . . . 4,673 5,642 Foreign net operating loss carryforward 7,065 6,776 Other . . . . . . . . . . . . . . . . . 12,091 9,505 -------- ------- Total deferred tax assets . . . . . . . 31,463 29,883 Valuation allowance . . . . . . . . . . 7,065 6,776 -------- ------- Net deferred tax assets . . . . . . . . 24,398 23,107 -------- ------- Net deferred tax liabilities. . . . . . $113,961 $106,587 ======== =======
Deferred taxes have not been provided for approximately $123,102 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, 1998, the Company had foreign net operating losses (NOLs) of approximately $20,187 for income tax purposes that may be carried forward indefinitely. The foreign NOLs resulted from operations of 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. 8. 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 $11,000 and $25,200 on an undiscounted basis. In connection with these expenditures, the Company has accrued undiscounted liabilities of approximately $16,000 and $17,500 at December 31, 1998 and 1997, respectively, which are reflected as other noncurrent liabilities in the Company's Consolidated Balance Sheet. These accruals represent 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 $8,400 to $26,100. These 41 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. 9. 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 $8,382, $8,014 and $7,481 for the years ended December 31, 1998, 1997 and 1996,respectively. Expense related to the ESOP amounted to approximately $2,279, $2,274 and $2,369 for the years ended December 31, 1998, 1997 and 1996, 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 following table summarizes information on the Company's domestic and foreign defined benefit plans:
Domestic Plans Foreign Plans 1998 1997 1998 1997 Change in benefit obligation: ------- ------- ------- ------- Benefit obligation at beginning of year $36,909 $36,669 $32,464 $34,079 Contributions . . . . . . . . . . -- -- 159 897 Service cost. . . . . . . . . . . (169) (431) 1,987 1,839 Interest cost . . . . . . . . . . 2,672 2,559 1,881 2,110 Actuarial (gain) loss . . . . . . 1,859 (885) (115) 919 Benefits paid . . . . . . . . . . (1,981) (1,003) (840) (2,382) Exchange gain (loss). . . . . . . -- -- 745 (4,964) Other . . . . . . . . . . . . . . -- -- (38) (34) ------- ------- ------- ------- Benefit obligation at end of year 39,290 36,909 36,243 32,464 ------- ------- ------- ------- Change in plan assets: Fair value of plan assets at beginning of year. . . . . . . . 38,288 32,027 48,872 43,719 Actual return on plan assets. . . 7,501 7,058 3,447 11,765 Contributions . . . . . . . . . . 70 206 528 2,398 Benefits paid . . . . . . . . . . (1,981) (1,003) (840) (2,382) Exchange gain (loss). . . . . . . -- -- 935 (6,594) Other . . . . . . . . . . . . . . -- -- (38) (34) ------- ------- ------- ------- Fair value of plan assets at end of year 43,878 38,288 52,904 48,872 ------- ------- ------- ------- Funded status . . . . . . . . . . . 4,588 1,379 16,661 16,408 Unrecognized net actuarial loss . . (9,103) (7,029) (11,462) (13,238) Unrecognized prior service cost . . (839) (954) -- -- Unrecognized transition obligation. 180 216 202 192 ------- ------- ------- ------- Prepaid (Accrued) pension cost. . . $(5,174) $(6,388) $ 5,401 $ 3,362 ======= ======= ======= =======
42
Domestic Plans Foreign Plans 1998 1997 1998 1997 Amounts recognized in the statement of financial position consist of: Prepaid benefit cost. . . . . . . $ -- $ -- $ 5,401 $ 3,362 Accrued benefit liability . . . . (5,174) (6,388) (340) -- Intangible asset. . . . . . . . . -- -- 340 -- ------- ------- ------- ------- Net amount recognized . . . . . . . ($ 5,174)($ 6,388) $ 5,401 $ 3,362 ======= ======= ======= ======= Weighted-average assumptions as of December 31: Domestic Plans Discount rate . . . . . . . . . . 7.00% 7.25% -- -- Expected return on plan assets. . 9.00% 9.00% -- -- Rate of compensation increase . . 3.25% 3.25% -- -- WIL Discount rate . . . . . . . . . . -- -- 5.00% 6.00% Expected return on plan assets. . -- -- 5.00% 6.00% Rate of compensation increase . . -- -- 3.50% 3.50% PET Resins - Europe Discount rate . . . . . . . . . . -- -- 5.50% 6.00% Expected return on plan assets. . -- -- 5.50% 6.00% Rate of compensation increase . . -- -- 3.00% 3.00% Components of net periodic benefit cost: Service cost. . . . . . . . . . . ($ 169)($ 431) $ 1,987 $ 1,839 Interest cost . . . . . . . . . . 2,672 2,559 1,881 2,110 Expected return on plan assets. . (3,390) (2,849) (2,160) (2,455) Net amortization and deferral . . (257) (90) (3,211) (965) ------- ------- ------- ------- Net periodic pension cost (benefit) ($ 1,144)($ 811)($ 1,503) $ 529 ======= ======= ======= =======
10. STOCKHOLDERS' EQUITY The Company has stock option plans (the Plans) which authorize the grant of non-qualified stock options (NQSOs). 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 exercise price for options granted prior to 1998 is equal to the fair value of the Company's common stock at the date of grant. For options granted after 1997, the exercise price is equal to the average of the highest and lowest sales prices of the Company's common stock over a period of 20 days prior to the date of the 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, any difference between the exercise price of the Company's employee stock options and the market price of the underlying stock on the date of grant is recognized as compensation expense over the vesting period of the options. 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 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 43 grant using a Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively: risk-free interest rate of 4.83%, 5.84% and 6.33%; a dividend yield of 1.05%, .95% and .84%; volatility factors of the expected market price of the Company's common stock of .453, .424 and .433; and a weighted-average expected life of the option of 7 years. The weighted-average fair value of options granted in 1998, 1997 and 1996 was $9.57, $9.21 and $8.62, 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:
1998 1997 1996 ----- ----- ------ Pro forma net earnings $10,397 $29,051 $25,889 Pro forma basic earnings per common share $ 0.33 $ 0.93 $ 0.79 Pro forma diluted earnings per common share $ 0.33 $ 0.93 $ 0.79
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until year 2000. A summary of the Company's stock option activity and related information for the three years ended December 31, 1998 follows:
Weighted Average Price Shares Per Share ------ --------- 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 Granted. . . . . . . . . . . . . . . . . . . . 447,000 18.81 Exercised. . . . . . . . . . . . . . . . . . . (64,840) 17.52 Cancelled. . . . . . . . . . . . . . . . . . . (111,685) 18.51 --------- ------ Outstanding December 31, 1998. . . . . . . . . . 2,720,803 $21.02 ========= ======
At December 31, 1998, 1997 and 1996, options for 1,742,675, 1,562,685 and 1,326,595 shares, respectively, were exercisable. At December 31, 1998, 44 1,593,625 shares were available for future option grants. The following summarizes information related to stock options outstanding at December 31, 1998:
Range of exercise prices $17.00 to $19.88 $20.63 to $34.38 ---------------- ---------------- Number outstanding at December 31, 1998 1,672,203 1,048,600 Weighted average remaining contractual life 7.5 years 6.2 years Weighted average exercise price of options outstanding $17.99 $25.86 Number exercisable at December 31, 1998 888,895 853,780 Weighted average exercise price of options exercisable $17.95 $26.10
In February 1998, the Company adopted and in May, 1998 the stockholders approved a deferred compensation and restricted stock plan ("Restricted Stock Plan"). Pursuant to the Restricted Stock Plan, certain officers, directors and managers of the Company are required to defer a certain portion of their compensation and may elect to defer additional compensation which is exchanged for restricted stock. Shares granted are subject to certain restrictions on transferability. The exercise price for restricted stock awards granted in 1998 was 85% of the average of the highest and lowest sales prices of the common stock on the date the Plan was approved by the stockholders and on each of the 15 business days before and after that date. A total of 1,000,000 shares of common stock are reserved for issuance under the Restricted Stock Plan. During 1998, participants purchased 53,738 shares of common stock at a price of approximately $20.81 per share. Also, upon termination of the Directors Retirement and Deferred Compensation Plans during 1998, directors elected to rollover amounts under these plans to the Restricted Stock Plan resulting in the issuance of 59,441 shares of common stock. The amount of non-cash compensation expense associated with purchases during 1998 was not material. 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. 45 11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share: 1998 1997 1996 ------ ------- ------ Numerator for basic and diluted earnings per share: Net Income $ 11,681 $ 30,355 $ 26,529 ======== ======== ======== Denominator: Denominator for basic earnings per share - weighted average shares 31,178 31,120 32,649 Effect of dilutive securities: Employee stock options 213 149 125 -------- -------- -------- Denominator for diluted earnings per share - adjusted weighted average share 31,391 31,269 32,774 ======== ======== ======== Basic earnings per share $ 0.37 $ 0.98 $ 0.81 ======== ======== ======== Diluted earnings per share $ 0.37 $ 0.97 $ 0.81 ======== ======== ========
12. 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: 1999 - $6,031; 2000 - $5,816; 2001 - $5,240; 2002 - $4,167; 2003 - $3,186 and thereafter - $3,699. Rent expense for cancelable and noncancelable operating leases was $8,282, $6,232 and $6,059 for the years ended December 31, 1998, 1997 and 1996, 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 operational in January 1999. The anticipated capitalized cost, including interest, to complete this facility at December 31, 1998, is approximately $70,000. See notes 6 and 8 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. 13. 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 at December 31, 1998 and 1997 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 $3,100 and $12,600 at December 31, 1998 and 1997, respectively. These contracts are 46 designed to reduce (hedge) the impact of foreign currency fluctuations relative to fixed asset purchase commitments and have maturity dates ranging from January 1999 through July 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 $17,800 and $15,500 at December 31, 1998 and 1997, 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 note 6 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 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 6. 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, 1998 and 1997: 47
1998 1997 ------------------ ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Nonderivatives Cash and cash equivalents $ 0 $ 0 $ 0 $ 0 Accounts receivable 101,420 101,420 126,106 126,106 Accounts payable 64,013 64,013 73,070 73,070 Borrowing arrangements 556,548 558,748 394,753 398,953 Derivatives-receive (pay): Interest rate instruments (275) (15,866) (91) (14,152) Forward foreign currency contracts (414) (489) 322 (893) Equity-linked investment 1,494 1,494 2,131 2,131
14. OPERATING SEGMENTS AND GEOGRAPHIC AREAS The Company's operations are classified into three principal reportable segments that provide different products or services. The Company's three reportable business segments are managed separately based on fundamental differences in their operations. 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, PTA and 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. Generally, the Company evaluates segment profit on the basis of operating profit less certain charges for research and development costs, administrative costs and amortization expense. The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies in note 1.
Recycled Packaging Fibers Products Products 1998 Group Group Group Total ---- -------- -------- -------- -------- Revenues. . . . . . . . . . . $355,365 $365,540 $247,103 $ 968,008 Segment profit (1). . . . . . 27,960 18,395 7,776 54,131 Assets. . . . . . . . . . . . 432,550 306,479 287,438 1,026,467 Restructuring charge. . . . . 590 5,439 832 6,861 Amortization and depreciation 33,275 19,494 17,983 70,752 Capital Expenditures. . . . . 91,468 20,384 111,524 223,376 1997 ----- Revenues. . . . . . . . . . . 419,363 386,222 277,603 1,083,188 Segment profit (loss) (1) . . 52,438 40,160 (13,447) 79,151 Assets. . . . . . . . . . . . 473,643 286,396 292,465 1,052,504 Restructuring charges . . . . 0 2,894 4,575 7,469 Amortization and depreciation 33,048 19,796 19,521 72,365 Capital expenditures. . . . . 80,232 10,195 130,760 221,187
48
Recycled Packaging Fibers Products Products 1996 Group Group Group Total ---- -------- -------- -------- -------- Revenues. . . . . . . . . . . 450,577 372,883 275,344 1,098,804 Segment profit (loss) (1) . . 62,480 13,635 (6,087) 70,028 Assets. . . . . . . . . . . . 503,648 307,294 239,591 1,050,533 Amortization and depreciation 34,055 18,872 15,018 67,945 Capital expenditures. . . . . 26,976 12,287 86,746 126,009
(1) Segment profit (loss) includes administrative expenses, and corporate research and development costs. Following are reconciliations to corresponding totals in the accompanying consolidated financial statements:
1998 1997 1996 ---- ---- ---- Segment Profit Total for reportable segments. . . $ 54,131 $ 79,151 $ 70,028 Unallocated Corporate income (expense) 2,741 (2,369) (1,904) Interest Expense, Net. . . . . . . (8,302) (12,160) (13,975) Loss on Cancellation of Fixed Rate Financial Instrument. . . . . . . (23,314) -- -- Restructuring charge . . . . . . . (6,861) (7,469) -- Loss on Sales of Subsidiary. . . . -- (5,963) -- ---------- ---------- ---------- Earnings Before Income Taxes . . . $ 18,395 $ 51,190 $ 54,149 ========== ========== ========== Assets Total for reportable segments. . . $1,026,467 $1,052,504 $1,050,533 Corporate Assets (1) . . . . . . . 467,014 266,721 153,416 ---------- ---------- ---------- Total Assets . . . . . . . . . . . $1,493,481 $1,319,225 $1,203,949 ========== ========== ==========
(1) Corporate assets include prepaid expenses, construction in progress and other assets not allocated to the segments. Net sales and operating income (loss) for the years ended December 31, 1998, 1997 and 1996 and long-lived assets at the end of each year, classified by the major geographic areas in which the company operates, are as follows:
1998 1997 1996 ---- ---- ---- Net sales U.S. . . . . . . . . . . . . . . . $ 809,054 $ 898,787 $ 885,193 Europe . . . . . . . . . . . . . . 158,954 184,401 213,611 ---------- ---------- ---------- 968,008 1,083,188 1,098,804 Operating Income (Loss) U.S. . . . . . . . . . . . . . . . 37,837 74,389 83,390 Europe . . . . . . . . . . . . . . 12,174 (5,076) (15,266) ---------- ---------- ---------- 50,011 69,313 68,124 Long-lived Assets U.S. . . . . . . . . . . . . . . . 862,938 703,546 535,324 Europe . . . . . . . . . . . . . . 54,236 50,934 62,304 ---------- ---------- ---------- $ 917,174 $ 754,480 $ 597,628 ========== ========== ==========
49 Revenues are attributed to countries based on the location where the products were produced. 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial information for the years ended December 31, 1998 and 1997 is summarized as follows:
- ----------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, Total Quarter ended 1998 1998 1998 1998(1) 1998 - ----------------------------------------------------------------------------- Net sales $263,073 $261,268 $237,025 $206,642 $ 968,008 Gross profit 42,225 43,502 31,773 12,790 130,290 Net earnings (loss) 12,711 14,412 7,688 (23,130) 11,681 Basic net earnings (loss) per common share $ 0.41 $ 0.46 $ 0.25 $ (0.74) $ 0.37 Diluted net earnings (loss) per common share $ 0.41 $ 0.46 $ 0.25 $ (0.74) $ 0.37 - ----------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, Total Quarter ended 1997 1997(2) 1997 1997(3) 1997 - ----------------------------------------------------------------------------- Net sales $255,148 $279,211 $264,682 $284,147 $1,083,188 Gross profit 39,129 41,278 38,041 38,222 156,670 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
(1) Quarterly net earnings reflect a pretax restructuring charge of $6,861, a loss of $23,314 on the cancellation of a fixed rate financial instrument, and $8,639 of lower of cost or market inventory adjustments, which in total decreased net earnings by approximately $24,600 ($0.79 per diluted share). (2) Quarterly net earnings reflect a pretax restructuring charge of $7,469 which decreased net earnings by approximately $4,300 ($0.14 per diluted share). (3) 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). 50 REPORT OF INDEPENDENT AUDITORS Board of Directors Wellman, Inc. We have audited the accompanying consolidated balance sheets of Wellman, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 1998 and 1997 and total revenues constituting 11% in 1998, 10% in 1997 and 10% in 1996 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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 Charlotte, North Carolina February 15, 1999 51 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1998, 1997 and 1996 (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, 1998 $5,229 $ - $ (80) $ 965(b) $4,184 ====== ====== ====== ====== ====== 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 ====== ====== ====== ====== ======
(a) Purchase accounting adjustments of approximately ($930) in 1996 related to the acquisition of the Company's Netherlands-based PET Resins business. (b) Accounts written off. (c) Primarily recovery of accounts previously written off. 52 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 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1999 are hereby incorporated by reference herein. Item 11. Executive Compensation - ------- ---------------------- "Compensation of Directors and Officers" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1999 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 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1999 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 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1999 is hereby incorporated by reference herein. 53 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) 54 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) 55 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, as amended 10(h) Management Incentive Compensation Plan, as amended (Exhibit 10(h) of the Company's Form 10-K for the year ended December 31, 1997 incorporated by reference herein) 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) 56 10(m) Executive Retirement Restoration Plan (Exhibit 10(a) of the Company's Form 10-Q for the quarter ended June 30, 1998 incorporated by reference herein) 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, as amended Other Material Agreements - ------------------------- 10(p) 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(q) 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 27(c) Restated Financial Data Schedules 28(a) Report of KPMG (b) Reports on Form 8-K ------------------- The Company filed a Current Report on From 8-K pursuant to Item 5 "Other Events," dated October 28, 1998, containing a press release by the Company reporting its third-quarter and year-to-date 1998 earnings. 57 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 29, 1999. 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 29, 1999. 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/ Clifford J. Christenson Director - -------------------------- Clifford J. Christenson /s/ Allan R. Dragone Director - -------------------------- Allan R. Dragone /s/ Richard F. Heitmiller Director - -------------------------- Richard F. Heitmiller /s/ James E. Rogers Director - ------------------------- James E. Rogers /s/ Raymond C. Tower Director - ------------------------- Raymond C. Tower /s/ Roger A. Vandenberg Director - ------------------------- Roger A. Vandenberg 58 EX-10.G 2 EX 10(G) TO 10K EXHIBIT 10(g) WELLMAN, INC. DIRECTORS STOCK OPTION PLAN Amended and Restated as of February 17, 1998 1. Purpose: This Directors Stock Option Plan (the "Plan") is intended as an incentive to and to encourage stock ownership by the non-employee directors of Wellman, Inc. (the "Company") so that they may acquire or increase their proprietary interest in the success of the Company, and to encourage them to remain as directors of the Company. The options granted pursuant to the Plan shall not be incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as from time to time amended (the "Code"), and the terms of any options issued shall provide that it will not be treated as an incentive stock option. Hereinafter, options granted pursuant to the Plan shall be referred to as "Options". 2. Administration: The Plan shall be administered by the members of the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall from time to time at its discretion determine such matters specifically delegated to it under this Plan. The Committee shall have the final authority to interpret and construe the terms of the Plan and of any Option. No member of the Committee shall be liable for any action, interpretation or construction made in good faith with respect to the Plan or any Option. 3. Eligibility: Directors of the Company who are not full-time employees of the Company shall be eligible to receive Options. 4. Stock: The stock subject to options shall be the Company's Common Stock, $.001 par value (the "Shares"), which may be authorized but unissued or held by the Company in its treasury. The total amount of the Shares on which Options may be granted pursuant to this Plan may equal but shall not exceed in the aggregate 80,000 Shares. Such number of Shares shall be adjusted in accordance with the provisions of Article 5(h) hereof. In the event that an Option expires or is terminated, the Shares allocable to the unexercised portion of such Option may again be subjected to an Option. 5. Terms and Conditions of Options: Options shall be evidenced by agreements in such form as the Committee shall from time to time determine, which agreements shall comply with and be subject to the following terms and conditions: (a) Grant of Option: On the third Tuesday of February in each year during the term of this Plan, each eligible director on such date shall automatically, with no further action required by the Committee other than the issuance of a stock option agreement evidencing such Options, be granted an Option for 1,000 Shares. (b) Option Period: The vested and exercisable portion of the Option, as determined in accordance with Article 5(e) hereof, may be exercised for a period of 11 years from the date that the Option is granted, provided, however, that: (i) in the event that an optionee shall fail to be re-elected or voluntarily resign or an optionee's term as director is terminated without cause, or by reason of voluntary retirement on or after 65 years of age, the period during which the vested and exercisible portion of the Option may be exercised shall not exceed three months after such termination; (ii) in the event that an optionee's term of office is terminated by reason of death or disability (as that term is defined in Section 22(e)(3) of the Code), then the period during which the vested and exercisable portion of the Option may be exercised shall not exceed twelve months after such death; and (iii) in the event that an optionee's term of office is terminated for cause, then the Option shall not be exercisable at any time. (c) Option Price: Each Option shall state the option price per share, which shall be 100% of the fair market value per Share on the date of the granting of the Option. The fair market value on the date of the grant of the option shall be determined by the Committee. (d) Medium and Time of Payment: The option price shall be payable in United States dollars upon the exercise of the Option and may be paid in cash or by personal or certified check, bank draft or postal or express money order. (e) Vesting of option: Each Option shall be vested and exercisable to the extent of 100% of the total number of Shares to which it pertains beginning one year after the date it is granted, provided, however, that: (i) in the event that a director is terminated for cause, his option shall not be deemed vested or exercisible to any extent and (ii) all Options shall be exercisable in full upon the occurrence of a Change in Control of the Company. For purposes of this Article 5(e) and Article 5(b), termination of a director's term of office shall be determined by the Committee; and the Committee shall determine whether a termination is with or without cause, a voluntary retirement, or due to disability. For purposes of this Article 5(e), a "Change in Control" shall be deemed to have occurred if (a) any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Company is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, 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. (f) Non-Transferability: An Option shall be exercisible during the optionee's lifetime only by him and after his death only by his personal representative, and the Option 2 shall not be assignable or transferable by him, otherwise than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder (a "qualified domestic relations order"). Once so transferred, it shall not be further transferable. Any transferee shall be required to provide evidence of transfer satisfactory to the Committee. No transfer by the optionee by will or the laws of descent and distribution or pursuant to a qualified domestic relations order shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and/or such other evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of the Option. (g) Investment Representation: Each Option Agreement may provide that, upon demand by the Committee for such a representation, the optionee (or any permissible transferee of the option under Article 5(f)) shall deliver to the Committee at the time of any exercise of an Option or portion thereof a written representation that the Shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to the delivery of any Shares issued upon exercise of an Option and prior to the expiration of the Option period shall be a condition precedent to the right of the optionee or such other transferee to purchase any Shares. (h) Adjustments in Event of Change in Shares: In the event of any change in the Shares of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of Shares at a price substantially below fair market value, or rights offering to purchase Shares, or of any similar change affecting the Shares, the number and kind of Shares which thereafter may be optioned and sold under the Plan and the number and kind of Shares subject to option in outstanding option agreements and the purchase price per share thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable in its discretion to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. (i) Rights as a Shareholder: An optionee or a transferee of an Option shall have no rights as a shareholder with respect to Shares covered by his Option until the date as of which a stock certificate is issued to him for such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. (j) Other Provisions: The Committee may, as a condition precedent to the exercise of any Option, require the holder of the Option (including, in the event of his death, his legal representatives, legatees or distributees) to enter into such agreements or to make such representations as may be required to make lawful under the laws of the U.S. or any foreign country the exercise of the Option and the ultimate disposition of the Shares acquired by such exercise. The option agreements authorized under the Plan shall contain such other provisions, consistent with the Plan, as the Committee shall deem advisable. 3 6. Term of Plan: Subject to Article 8, the Plan shall remain in effect until all Shares subject or which may become subject to the Plan shall have been purchased pursuant to Options; provided that no grant shall be made under the Plan after December 31, 2001. 7. Indemnification of Committee: To the full extent permitted by law, the Company shall indemnify each person made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that he, or his testator or intestate, is or was a member of the Committee. 8. Amendment of the Plan: The Board of Directors of the Company may from time to time amend, suspend or discontinue the Plan, provided, however, that, subject to the provisions of Article 5(h), no action of the Board of Directors or of the Committee may: (i) increase the number of Shares subject to the Plan pursuant to Article 4; (ii) permit the granting of any Option at a price less than that determined in accordance with Articles 5(c); or (iii) permit the granting of Options which expire beyond the period provided for in Article 5(b). Without the written consent of an optionee, no amendment or suspension of the Plan shall alter or impair any Option previously granted to him under the Plan. 9. Application of Funds: The proceeds received by the Company from the sale of Shares pursuant to Options will be used for general corporate purposes. 10. No Obligation to Exercise Option: The granting of an Option shall impose no obligation upon the optionee to exercise such Option. 11. Shareholder Approval: Notwithstanding the foregoing, any Option granted hereunder prior to the date on which the Plan shall have been approved by the affirmative vote of the holders of a majority of the Shares, present in person or by proxy, and entitled to vote at a meeting duly held in accordance with Delaware law, shall be contingent upon and subject to such shareholder approval. 4 EX-10.O 3 EX 10(O) TO 10K EXHIBIT 10(o) WELLMAN, INC. DEFERRED COMPENSATION AND RESTRICTED STOCK PLAN Effective as of February 17, 1998, and As Amended, Effective as of December 1, 1998 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 as amended, shall be effective as of December 1, 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 Beneficiary means any person, estate or trust entitled to receive the certificate or certificates representing shares of Common Stock upon which the restrictions have lapsed upon the death of a Participant, including contingent Beneficiaries. 2.4 Board means the Board of Directors of the Company. 2.5 Business Day means any day on which the New York Stock Exchange is open and the Common Stock is traded. 2.6 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. 2.7 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. 2.8 Committee means the Compensation Committee of the Board or any successor committee. 2.9 Common Stock means the Common Stock, $.001 par value, of Wellman, Inc. 2.10 Company means Wellman, Inc. and its subsidiaries with domestic operations. 2.11 Disability shall have the meaning specified in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. 2.12 Effective Date shall have the meaning set forth in subsection 1.2 hereof. 2.13 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 day of the prior calendar quarter and on each of the fifteen (15) 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. 2.14 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. 2.15 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. 2.16 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 2.17 Plan means this Wellman, Inc. Deferred Compensation and Restricted Stock Plan, as it may be amended from time to time. 2.18 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. 2.19 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. 2.20 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. 2.21 Retirement means retirement from the Company on or after 55 years of age. 2.22 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 3 stockholders, or any other change affecting shares or the Company's 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. (a) 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. (b) For purposes of Section 4.1 and this Section 4.2, any Participant who receives a hardship withdrawal from the Wellman, Inc. Retirement Plan or the Wellman, Inc. Employee Stock Ownership Plan shall be prohibited from having any deferred compensation contributions made to this Plan and all others plans maintained by the Company for a twelve (12) month period beginning as of the first day of the month following receipt of the hardship withdrawal. 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 5 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 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 6 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 Beneficiary). (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 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 7 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. 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 4 EX 21 SUBSIDIARIES 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 Fibres Finance BV Netherlands 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 Trading Ltd. Ireland Perma Clear East, Inc. Delaware 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 5 EX 23(A) CONSENT 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 15, 1999, 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 26, 1999 EX-23.B 6 EX 23(B) CONSENT 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. 33-36001) pertaining to various stock option and employee savings plans of Wellman, Inc. of our report dated 28 January 1999, with respect to the consolidated financial statements of Wellman International Limited and Subsidiaries at 31 December 1998 and 1997 and for each of the three years in the period ended 31 December 1998, included in this Annual Report (Form 10-K) of Wellman, Inc. KPMG Chartered Accountants Registered Auditors Dublin, Ireland 26 March 1999 EX-27.A 7 EX 27(A)
5 FDS for fiscal year 10K 1,000 12-MOS DEC-31-1998 DEC-31-1998 0 0 105,604 4,184 183,883 304,262 1,313,283 396,109 1,493,481 253,093 410,679 0 0 34 643,220 1,493,481 968,008 968,008 837,718 837,718 0 0 8,302 18,395 6,714 11,681 0 0 0 11,681 0.37 0.37
EX-27.B 8 RESTATED FDS EX 27(B)
5 ART. 5 Restated FDS for fiscal year 10-K 1,000 12-MOS 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1994 DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1994 0 2,120 3,893 21,556 0 0 0 0 131,335 134,907 150,907 124,011 5,229 2,611 5,335 4,733 154,133 158,685 200,224 122,914 283,605 297,048 364,303 276,049 1,090,710 893,671 776,194 654,006 336,230 296,043 248,638 206,130 1,319,225 1,203,949 1,210,673 1,044,462 112,868 105,498 145,835 88,141 394,545 319,407 272,867 256,331 0 0 0 0 0 0 0 0 34 34 33 33 634,400 623,894 650,313 577,540 1,319,225 1,203,949 1,210,673 1,044,462 1,083,188 1,098,804 1,109,398 936,133 1,083,188 1,098,804 1,109,398 936,133 926,518 945,191 891,111 729,061 926,518 945,191 891,111 729,061 0 0 0 0 0 0 0 0 12,160 13,975 11,666 13,741 51,190 54,149 115,711 108,000 20,835 27,620 41,657 43,200 30,355 26,529 74,054 64,800 0 0 0 0 0 0 0 0 0 0 0 0 30,355 26,529 74,054 64,800 0.98 0.81 2.22 1.96 0.97 0.81 2.20 1.94
EX-27.C 9 RESTATED FDS EX 27(C)
5 ART. 5 Restated FDS for 1997 10-Q 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 10,054 0 1,034 0 0 0 129,174 143,181 134,372 4,945 4,327 3,771 154,607 144,969 150,135 292,306 286,165 284,581 1,034,527 971,612 923,901 325,747 313,312 307,271 1,294,176 1,240,465 1,206,166 102,709 99,072 94,684 385,725 349,996 326,596 0 0 0 0 0 0 34 34 34 632,332 626,844 626,703 1,294,176 1,240,465 1,206,166 799,041 534,359 255,148 799,041 534,359 255,148 680,593 453,952 216,019 680,593 453,952 216,019 0 0 0 0 0 0 10,211 7,197 3,275 40,635 24,611 15,311 16,831 10,583 6,584 23,804 14,028 8,727 0 0 0 0 0 0 0 0 0 23,804 14,028 8,727 0.77 0.45 0.28 0.76 0.45 0.28
EX-28.A 10 EX 28(A) TO 10K EXHIBIT 28(a) REPORT OF INDEPENDENT AUDITORS TO THE MEMBERS OF WELLMAN INTERNATIONAL LIMITED - ----------------------------------------------------------------------------- We have audited the accompanying non-statutory consolidated balance sheets of Wellman International Limited and subsidiaries at 31 December 1998 and 1997, and the related consolidated profit and loss accounts for each of the three years in the period ended 31 December 1998, 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 Ireland which do not differ significantly from generally accepted auditing standards 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 non-statutory 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 1998 and 1997, and the consolidated results of operations for each of the three years in the period ended 31 December 1998 in conformity with accounting principles generally accepted in the United States of America. KPMG Chartered Accountants Registered Auditors Dublin, Ireland 28 January 1999 -----END PRIVACY-ENHANCED MESSAGE-----