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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
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(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
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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