UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 1-10033

WELLMAN, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(803) 835-2000

Securities registered pursuant to Section 12(b) of the Act:

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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K (Section 229.405 of this chapter) 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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      Aggregate market value of the voting stock held by non-affiliates of the registrant, computed on the basis of $8.13 per share (the closing price of such stock on June 30, 2004 on the New York Stock Exchange), as of the last day of the registrant’s most recently completed second fiscal quarter: $253,499,563.

      The number of shares of the registrant’s Class A Common Stock, $0.001 par value, and Class B Common Stock, $0.001 par value, outstanding as of March 1, 2005 was 32,029,547 and 0, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

      1. Proxy Statement for the 2005 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission on or before April 30, 2005) is incorporated by reference in Parts II and III hereof.

PART I

      We are principally engaged in the manufacturing and marketing of high-quality PermaClear® brand PET (polyethylene terephthalate) packaging resins, Fortrel® brand polyester staple fibers and Wellamid® engineering resins. We believe we are the world’s largest PET plastics recycler, utilizing a significant amount of recycled raw materials in our manufacturing operations.

PRODUCTS AND MARKETS

      Our operations are classified into two reportable operating segments: the Packaging Products Group (or PPG) and the Fibers and Recycled Products Group (or FRPG).

      The following table presents the combined net sales and percentage of net sales for our reportable operating segments for each of the three years ending December 31. In the table, intersegment sales, which are not material, have been eliminated and historical exchange rates have been applied to the data.

      The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements. The following table presents the operating profit (loss) and percentage of operating profit (loss) for our reportable operating segments for each of the three years ending December 31. In the table, intersegment transactions, which are not material, have been eliminated and historical exchange rates have been applied to the data.

      See Note 15 to the Consolidated Financial Statements for reconciliations to corresponding totals in the Consolidated Financial Statements and additional information with regard to our reportable operating segments.

Packaging Products Group

      The PPG manufactures:

      These resins are produced at our facilities in Palmetto, South Carolina, Hancock County, Mississippi, and Emmen, the Netherlands.

      We sell our solid-stated PET resin primarily under the PermaClear® and PermaClear HP® brands.

      Customers include North American, South American and European-based manufacturers of various types of plastic containers. Five customers represented approximately 51% of PPG’s total net sales for 2004. The unexpected loss of any of these customers may result in a temporary reduction in sales and profitability of the PPG.

Fibers and Recycled Products Group

      The FRPG manufactures:

      Polyester staple fiber, FRPG’s primary product, 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 our customers. We market these products under the Fortrel® brand.

      Our chemical-based polyester staple fibers are manufactured at our Palmetto facility in Darlington, SC. Customers include integrated textile mills, yarn spinners, and non-woven operations that process polyester staple into yarn and/or fabric for a variety of applications, including apparel, non-woven, home furnishing and industrial products.

      Domestically, we manufacture polyester staple fiber and nylon products from recycled raw materials at our facility in Johnsonville, SC. These fibers are primarily used in home furnishing, non-woven and industrial products. Our recycling operation in Johnsonville procures these materials and processes them into usable raw materials for our fiber and engineering resins businesses.

      In Europe, we primarily manufacture polyester staple fiber from recycled raw materials at our production facility in Mullagh, Republic of Ireland. These fibers, used principally in home furnishing, non-woven and industrial products, are exported primarily to the United Kingdom and continental Europe.

      Our Engineering Resins Division, located in Johnsonville, SC, primarily manufactures and markets nylon engineering resins under the Wellamid® and EcoLon® brands to the injection molding industry. We produce these resins using post-industrial, post-consumer, and virgin nylon compounded with various additives (glass, minerals, fire retardant, etc.) to impart desired performance characteristics. These resins are used primarily in automotive applications.

      No single customer accounted for 10% of FRPG’s sales in 2004.

Raw Materials

      Our Permaclear® PET resins and our chemical-based polyester staple fibers are produced from purified terephthalic acid (PTA) and monoethylene glycol (MEG). Domestically, we purchase PTA produced by BP Amoco Chemical Company, the primary domestic supplier, pursuant to long-term supply contracts. Domestic MEG is purchased under long-term supply contracts with Lyondell (parent of Equistar Chemicals), and MEGlobal Americas, Inc. (a joint venture between Dow Chemical Co. and Kuwait Petrochemical Co.). In Europe, we purchase PTA primarily from BP Amoco Chemical Company and MEG from Diolen Industrial Fibers (formerly a part of Acordis). The prices of PTA and MEG are determined by crude oil prices, natural gas prices, and worldwide supply and demand and have fluctuated in the past and are expected to continue to do so in the future. We have long-term, market-based supply contracts in place at December 31, 2004 that we believe will provide us with sufficient raw materials for our existing and planned future production requirements through 2007.

      Our recycling-based fibers utilize two categories of recycled PET raw materials: post-consumer containers and post-industrial materials including some under long-term supply contracts. We have entered into

multiple raw material purchase agreements in the ordinary course of our business. We purchase a portion of these materials from manufacturers that compete with us in the sale of fibers and resins. Post-industrial materials include off-quality or off-spec production, trim and other materials generated from fiber, resin, or film manufacturing processes. We obtain our post-consumer PET bottles primarily from curbside recycling and deposit return programs. These post-consumer containers are processed initially at our recycling facilities in Johnsonville, S.C., Spijk, the Netherlands, or Verdun, France. The prices of recycled raw materials fluctuate, and the raw material mix for our Johnsonville and European fiber operations can be varied depending upon market conditions for the various raw materials.

      We believe that we are the world’s largest producer of polyester staple fiber made from recycled feedstocks and one of the world’s largest post-consumer PET bottle recyclers.

      For additional information on our raw materials, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements; Risks and Uncertainties.”

Capital Investment Program

      In conjunction with the February 2004 Financing, investing activities in 2004 included $150.0 for the purchase of assets subject to the sale and leaseback transaction and $77.1 for the pre-payment of a raw material contract. Our capital expenditures in 2004 were approximately $15.1, compared to $15.5 and $21.7 for 2003 and 2002, respectively. In 2002, our capital expenditures included approximately $4.7 of costs to convert fiber grade chip lines at our Palmetto facility to amorphous PET resin. The following table provides a breakdown of our capital expenditures:

Capital Expenditures Breakdown

      For additional information on capital expenditures expected in 2005, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Outlook.”

Sales and Marketing

      Our markets have historically displayed price and volume cyclicality. We sell to a diverse group of customers. Although no single customer represented more than 10% of our total net sales, five customers represented approximately 29% of our total net sales in 2004.

      Approximately 52 employees market the majority of our products. We also utilize representatives or agents for certain sales.

      Our PET resins are promoted through various activities, including advertising, sales promotions and market development, into a variety of packaging markets whose end products include carbonated soft drinks, juices, water, and food. We are actively involved with our customers in joint end-use product development efforts to meet the future needs of the food and beverage packaging markets.

      Both North American and global PET resins demand continues to grow, driven by new product applications for PET and conversions from other packaging materials to PET. Numerous factors affect the demand for PET resins, including substitution of packaging products from glass, aluminum, paper board and other plastics into PET, consumer preferences and spending, general economic conditions, weather, and the export/import trade balance of PET resin into the North American Free Trade Agreement (NAFTA) region.

      Our polyester staple fibers are also promoted through various activities directed to our customers and to organizations downstream from our customers. These activities include advertising, sales promotion, market analysis and product development. As part of this effort, we encourage downstream purchasers of apparel, home furnishing and other products to specify to their suppliers the use of Fortrel® brand polyester staple fiber in their products.

      Numerous factors affect the demand for polyester staple fiber in our markets, including textile product imports, consumer preferences and spending, and retail sales patterns, which are driven by general economic conditions. Imports of products throughout the textile chain continue to impact the United States and European fiber markets, particularly the commodity textile fiber markets, adversely affecting operating results. A downturn in the U.S., European, or global economy or an increase in imports of textiles or polyester staple fiber products into the U.S. and Europe could adversely affect our business. Polyester textile fiber demand also may be influenced by the relative price of substitute fibers, most notably cotton.

      For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General” and “Forward-Looking Statements; Risks and Uncertainties.”

Competitors

      Each of our major markets is highly competitive. We compete in these markets primarily on the basis of product quality, price, customer service, and brand identity.

      In North America, our primary competitors in the PET resins business are Voridian (a division of Eastman Chemical Co.), Invista (formerly known as Kosa), Gruppo Mossi and Ghisolfi (M&G), Nan Ya Plastics Corp. (Nan Ya), and DAK Americas (a subsidiary of the Alfa Group). As of December 31, 2004, we are the second-largest producer of PET resins in the United States, representing approximately 19% of the United States production capacity. In Europe, our main competitors in the PET resins business are Voridian, Invista, ADVANSA (formerly DuPontSA), M&G, and Equipolymers Global (a Dow/PIC joint venture). Our share of the European PET resins market is less than 5%.

      Our primary domestic polyester staple fiber competitors are DAK Americas, Nan Ya, and Invista. Our main European polyester staple fiber competitors are ADVANSA and Trevira. We believe we are currently the largest producer of polyester staple fiber in the United States and in the European Union, with approximately 31% of the production capacity in the U.S. and 16% of the production capacity in the European Union. We are the largest supplier of polyester staple fibers made from recycled materials and the largest supplier of polyester staple fiber for home furnishing and non-woven products in the U.S. and the European Union.

      For additional information on competitors, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements; Risks and Uncertainties.”

Research and Development

      We have approximately 69 employees devoted to research, development and technical service activities in our fibers and resins businesses. Research and development costs were approximately $13.0, $14.9 and $17.3 for 2004, 2003 and 2002, respectively. During 2004 and 2003, we have reduced our spending related to the development of new specialty fiber products.

Foreign Activities

      We operate in international markets. Since large portions of our non-U.S. sales are in different currencies, changes in exchange rates may affect profitability and sales levels of these operations. In addition, fluctuations between currencies may also affect our reported financial results. Foreign exchange contracts and borrowings in local currencies are utilized to manage our foreign currency exposure. For additional information on these exposures, see Item 7A. “Quantitative and Qualitative Disclosure about Market Risk” and Note 14 to the Consolidated Financial Statements.

      Our foreign businesses are subject to certain risks common to foreign operations and investments in foreign countries, including restrictive action by local governments, limitations on repatriating funds and changes in currency exchange rates. See Note 15 to the Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements; Risks and Uncertainties” for additional information relating to our foreign activities.

Employees

      The following table provides our approximate number of employees and long-term, independent contractors, at December 31, by year, in the U.S. and Europe:

      At December 31, 2004, the Union of Needle Trades, Industrial and Textile Employees, Hotel Employees and Restaurant Employees represented 490 employees, of which 278 were union members, at our Johnsonville, SC operations. This contract expires on July 29, 2005. In our European fiber business, four unions represented 197 of the 389 total employees at year-end 2004. The wage agreements with these unions expire on April 30, 2006. Under an agreement with the unions at our European fiber business, reached in December 2003, 57 union members accepted voluntary termination during 2004. We employ 68 people at our European PET resins operation, with 45 represented by two unions whose contracts expired on December 31, 2004. We are currently in negotiations for a new contract. We believe that relations with our employees are satisfactory. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements; Risks and Uncertainties.”

Environmental Matters

      Our facilities are subject to numerous existing and proposed laws and regulations designed to protect the environment from wastes, emissions and hazardous substances. We believe we are either in material compliance with all currently applicable regulations or are 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,” “Forward-Looking Statements; Risks and Uncertainties,” and Note 9 to the Consolidated Financial Statements.

Executive Officers of the Registrant

      Our current executive officers are as follows:

      Officers are elected annually by our Board of Directors. Set forth below is certain information with respect to our executive officers.

      Thomas M. Duff. Mr. Duff was elected Chairman in December 1999. Prior to December 1999, he was President and has been CEO since 1985.

      Keith R. Phillips. Mr. Phillips has been Vice President and Chief Financial Officer since October 1993. He was also Treasurer from October 1993 to March 2001. Mr. Phillips is a certified public accountant.

      Michael E. Dewsbury. Mr. Dewsbury has been Vice President, PET Resins Division — U.S. since April 1999. Prior to that he was Business Manager — PET Resins Division since joining us in September 1991.

      Audrey L. Goodman. Ms. Goodman has been Vice President, Treasurer since March 2001. She was Assistant Treasurer from May 1990 to March 2001.

      Mark J. Ruday. Mr. Ruday has been Vice President, Chief Accounting Officer and Controller since May 2003. Prior to that, he was the Business Operations Manager for the PET Resins Division-U.S. from March 1998 to May 2003 and was the PPG Controller from November 1995 through March 1998.

      Joseph C. Tucker. Dr. Tucker has been Vice President, Fibers and Recycled Products Group since November 2003. Prior to that, he was Vice President, Corporate Development since December 1997 and Vice President and General Manager of PET Resins-Europe from 1995 to 1997.

Available Information

      We make available free of charge, through the “Investor Relations — SEC Documents” section of our Internet website (www.wellmaninc.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form  8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission (the “SEC”). Once filed with the SEC, such documents may be read and/or copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including Wellman, Inc., that electronically file with the SEC at http://www.sec.gov.

      The location, principal products produced and stated annual production capacity of our major manufacturing facilities at December 31, 2004, are set forth in the table below. Domestically, we have economic ownership of the properties and either own the properties or can acquire title for nominal consideration. We own all of our international properties listed below.

      In January 2001, we received a document subpoena in connection with a federal grand jury investigation of pricing practices in the polyester staple fiber industry. We cooperated with the investigation by producing documents in response to this subpoena. On September 22, 2004, the Department of Justice (“DOJ”) informed us that it will not seek indictments either of Wellman or any of its employees in connection with this investigation. On October 5, 2004, the judge presiding over the federal civil cases discussed below announced on the record that he had been informed by DOJ that there would be no further criminal prosecution in connection with the investigation.

      Following the public disclosure of the investigation in September 2002, numerous producers of polyester staple fiber, including Wellman, have been named in various civil actions asserting claims based on alleged price fixing and market allocation in the polyester staple industry. These proceedings are summarized below.

      Wellman and certain other companies are named as defendants in twenty-four (24) federal actions brought by direct purchasers of polyester staple fiber for alleged violation of U.S. antitrust laws. In each lawsuit, the plaintiffs allege that the defendants engaged in a conspiracy to fix the price of polyester staple fiber in violation of the Sherman Act. In ten of the cases, the plaintiff purports to represent a class of all persons who directly purchased polyester staple fiber and were similarly affected by such alleged conduct. Fourteen of the cases are brought by plaintiffs who do not purport to represent a class. Certain of these cases name employees of Wellman and other companies as defendants.

      All of the federal plaintiffs seek damages of unspecified amounts, attorney’s fees and costs and unspecified relief. In addition, certain of the actions claim restitution, injunction against alleged illegal conduct and other equitable relief. The federal suits were originally filed in the U.S. District Court for the Middle District of Alabama, U.S. District Court for the Northern District of California, U.S. District Court for the Middle District of Georgia, U.S. District Court for the District of New Jersey, U.S. District Court for the Middle District of North Carolina, U.S. District Court for the Western District of North Carolina, U.S. District Court for the District of South Carolina and U.S. District Court for the Western District of Virginia. The Judicial Panel on Multi-District Litigation ruled on April 22, 2003 to transfer all the federal cases to the Western District of North Carolina for coordinated or consolidated pretrial proceedings.

      In addition to the direct purchaser actions discussed above, forty-one purported class actions alleging violations of federal antitrust laws, state antitrust or unfair competition laws and certain state consumer protection acts have been filed in one federal court and various state courts on behalf of purported classes of indirect purchasers of polyester staple fiber products. In each lawsuit, the plaintiffs allege that the defendants engaged in a conspiracy to fix prices of polyester staple fiber products. In addition, certain of the actions claim restitution, injunction against alleged illegal conduct and other equitable relief. One indirect purchaser case is pending in the U.S. District Court for the Western District of North Carolina and is subject to the order issued by the Judicial Panel on Multi-District Litigation for coordination or consolidation with the other federal cases. The rest of the indirect purchaser cases were filed in Arizona, California, the District of Columbia, Florida, Kansas, Massachusetts, Michigan, New Mexico, North Carolina, South Dakota, Tennessee, West Virginia and Wisconsin. In all of these cases, the plaintiffs seek damages of unspecified amounts, attorney’s fees and costs and unspecified relief.

      Wellman and certain other companies were named in an action filed in the Superior Court of Justice for Ontario, Canada, by a plaintiff purporting to represent a class of direct and indirect purchasers of polyester staple fiber. This complaint asserts claims under Canadian law. It contains three counts that ask for compensatory damages of Cdn. $50 each. The extent to which these three counts are duplicative and

overlapping is unclear. The complaint also contains one count asking for punitive damages of Cdn. $10. Additionally, Wellman and certain other companies were also named in an action filed in the Supreme Court of British Columbia, Canada, by a plaintiff purporting to represent a class of direct and indirect purchasers of polyester staple fiber. This complaint also asserts claims under Canadian law and requests compensatory, punitive and special damages, but does not allege a specific dollar amount in damages. Finally, Wellman and certain other corporations were named in an action filed in the Superior Court for Quebec, Canada. This complaint asserts claims under Canadian law seeking compensatory damages of Cdn. $15 and punitive damages of Cdn. $5.

      We deny that we or any of our employees engaged in price fixing or customer allocation and we intend to vigorously defend against any existing civil claims and any civil claims or proceedings that may be brought against us in the future. Because of the uncertainties and complexity of these civil claims, we have not formed an opinion about these proceedings or their impact, if any, on our consolidated financial position or results of operations.

      In addition to the foregoing, we may become subject to additional proceedings and lawsuits under federal and state antitrust and unfair competition laws.

      None.

PART II

      Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol WLM. The following table shows the high and low sales prices as reported by the NYSE and cash dividends paid per share of common stock for the last two fiscal years.

      We had 838 holders of record as of March 1, 2005.

      See Note 11 to the Consolidated Financial Statements for information regarding common stock rights associated with our common stock.

      Beginning with the dividend payable in March 2004, our quarterly dividend rate was $0.05 per share. We determined that this reduced dividend rate is appropriate considering our operating performance, our current debt level, our capital expenditures, and the dividend levels of other companies. Our current financing agreements permit a quarterly dividend rate of up to $0.09 per share and, at our current earnings levels, an amount not to exceed $15.0 in aggregate over the life of the financings. From the inception of the current financings through December 31, 2004, total dividends paid were approximately $6.3. The limitation on the

total amount of dividends that can be distributed is eliminated during periods when certain earnings levels are achieved.

Securities Authorized for Issuance Under Equity Compensation Plans

      “Securities Authorized for Issuance Under Equity Compensation Plans” in our Proxy Statement for the 2005 Annual Meeting of Stockholders will be filed with the Securities and Exchange Commission on or before April 30, 2005 and is incorporated by reference.

GENERAL

      We are principally engaged in the manufacturing and marketing of high-quality PermaClear® brand PET (polyethylene terephthalate) packaging resins, Fortrel® brand polyester staple fibers and Wellamid® engineering resins. We believe we are the world’s largest PET plastics recycler, utilizing a significant amount of recycled raw materials in our manufacturing operations. At December 31, 2004, we had annual operating capacity to manufacture approximately 1.4 billion pounds of PET resins and 0.9 billion pounds of polyester staple fiber at five major production facilities in the United States and Europe.

      Our operations are classified into two reportable operating segments: the Packaging Products Group (or PPG) and the Fibers and Recycled Products Group (or FRPG). Our PermaClear® PET resins are produced by the PPG from purified terephtalic acid (PTA) and monoethylene glycol (MEG), and EcoClear® PET resins are produced from a combination of chemical and recycled raw materials. These resins are primarily used in the manufacturing of plastic soft drink bottles and other food and beverage packaging. The FRPG produces Fortrel® polyester staple fiber and other polyester and nylon staple fibers that are primarily used in apparel, non-woven, home furnishing and industrial products. These fibers are also produced from PTA and MEG and recycled raw materials.

      Demand for both North American and global PET resins continues to grow, driven by new product applications for PET and conversions from other packaging materials to PET. Demand for polyester staple fiber in the United States is subject to changes in consumer preferences and spending, retail sales patterns, and fiber and textile product imports. Imports of products throughout the textile chain continue to negatively impact the United States and European fiber markets, adversely affecting our operating results.

      Our profitability is primarily determined by our sales volume and our raw material margin, which is the difference between net selling price and raw material cost. Both PET resin and polyester staple fiber volume and raw material margins increase or decrease as a result of supply and demand factors and competitive conditions. Given our substantial unit volumes, the impact on profitability of changes in raw material margins is significant. A one-cent per pound change in raw material margin on approximately 2.2 billion pounds of resin and fiber sales volume results in an annual change of approximately $22.0 in pretax earnings.

      Volumes, selling prices and raw material costs each may be affected by actions of our competitors, global economic and market conditions, export and import activity, and the prices and availability of competing materials.

      Seasonal factors, such as weather and the vacation and holiday closings of our facilities or those of our customers, may also affect our operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      Our accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions about future events that affect the amounts reported in financial statements and accompanying notes.

      We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements; therefore, we consider these to be our critical accounting estimates. Actual results could differ significantly from those estimates.

Allowance for Doubtful Accounts

      We perform periodic credit evaluations of our customers’ financial condition. We have established an allowance for doubtful accounts based on our evaluation of the credit-worthiness of our customers and the potential risks inherent in their businesses. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, especially in light of the difficult economic conditions facing our

FRPG customers. These judgments could vary significantly from actual amounts realized, resulting in changes in bad debt expense and allowances. The allowance for doubtful accounts will increase or decrease based on circumstances or specific events impacting specific customers. Specific events include bankruptcy filings, changes in the customers’ credit ratings and/or other information. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventory Valuation

      Inventories are stated at the lower of cost or market. Cost is principally determined by the first-in, first-out method. The physical condition (i.e., quality) of the inventories is also considered in establishing the valuation. These judgments are estimates, which could vary significantly, either favorably or unfavorably, from actual results for various reasons, including changes in future economic conditions, customer inventory levels, or competitive conditions that differ from our expectations. Changes in our inventory valuation resulting from such variances would affect our cost of sales.

Property, Plant and Equipment

      Property, plant and equipment are carried at cost. Depreciation for assets is provided based on their estimated useful lives and is computed using the straight-line method and the units of production method. Changes in circumstances such as technological advances, changes to our capital strategy, or changes to our business model could result in the actual lives differing from our estimates, in which case our earnings could be affected.

      When events or circumstances indicate that the carrying value of a fixed asset group may not be recoverable, we will test the fixed asset group for impairment. If any of the impairment indicators are present or if other circumstances indicate impairment may exist, we then determine whether an impairment loss should be recognized. We estimate the future undiscounted cash flows to be derived from the fixed asset group to determine its fair market value and whether or not a potential impairment exists. Our fixed asset group is defined as an entire facility or site. If the carrying value exceeds the estimate of future undiscounted cash flows, we then calculate and record the impairment, which is equal to the excess of the carrying value of the asset over the estimate of its fair market value.

Goodwill and Other Intangible Assets

      Through December 31, 2001, we amortized goodwill on a straight-line method over periods ranging from 30 to 40 years. Effective January 1, 2002, we were required to adopt SFAS No. 142 “Goodwill and Other Intangible Assets.” Based on this standard, goodwill is no longer amortized, but is tested at least annually at the reporting unit level for impairment. Goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. The fair value is determined based on the present value of estimated future discounted cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired. A comparison is then made between the implied fair value of the goodwill, as defined by SFAS No. 142, and the carrying value of the goodwill. If the implied fair value is less, an impairment loss equal to the difference is recognized. This implied fair value then becomes the new carrying value of the goodwill for future impairment tests.

      The estimate of future discounted cash flows is based upon, among other things, certain assumptions about future operating performance. Our estimates of future discounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, our business model, or our operating performance.

Deferred Tax Assets

      We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and

feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize the recorded value of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax assets would increase earnings in the period such determination was made.

Pension Benefits

      We have defined benefit plans and defined contribution pension plans that cover substantially all employees. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability (asset) related to the defined benefit plans. Key factors include assumptions about the expected rates of return on plan assets and discount rates as determined by management within certain guidelines. We consider market conditions, including changes in investment returns and interest rates, in making these assumptions.

      In determining our long-term rate of return on plan assets, our objective is to obtain the highest possible return over the long-term commensurate with the appropriate level of assumed risk. In order to moderate the investment portfolio’s risk and volatility, we forecast financial market returns over a wide range of potential future economic trends. The expected rate of return on plan assets is a long-term assumption and is reviewed annually. The discount rate reflects the market rate for high-quality fixed income debt instruments at December 31 and is subject to change each year. Holding all other assumptions constant, a one-percentage-point decrease in the assumed rate of return on plan assets for one year would result in an actuarial loss in 2005 of approximately $1.2. Likewise, a one-percentage-point decrease in the discount rate would increase our projected benefit obligations by approximately $21.

      Unrecognized actuarial gains or losses are amortized using the “corridor method” as defined by SFAS No. 87 for our domestic defined benefit plans and Dutch plan. For the Irish plans, we separately identify actuarial gains and losses and use an amortization method, which spreads the entire gain or loss each year, without regard to the corridor over a period of five years, subject to the minimum amortization requirements of SFAS No. 87. Unrecognized actuarial gains and losses arise from several factors including experience and assumption changes in the obligations and from the difference between expected returns and actual returns on plan assets.

      The actuarial assumptions we used in determining our pension benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.

Environmental Liability

      Our operations are subject to extensive laws and regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities. Our 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. The accruals represent our best estimate of probable non-capital environmental expenditures. The final resolution of these contingencies could result in expenses different than current accruals, and therefore may have an impact on our consolidated financial results in a future reporting period.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (or FIN 46), “Consolidation of Variable Interest Entities,” which requires a variable interest entity to be consolidated by the primary beneficiary which is the entity subject to a majority of the risk of loss from the

variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. We do not currently have any variable interest entities. The adoption of this statement did not have a significant impact on our financial statements.

      In December 2003, the FASB issued a revision to SFAS No. 132, “Employers Disclosure about Pensions and Other Postretirement Benefits, an Amendment to FASB Statements No. 87, 88, and 106 and a revision of FASB Statement No. 132” (or SFAS 132R). This statement requires additional disclosure in relation to the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized during interim periods. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures are effective for interim periods beginning after December 15, 2003. The Company adopted SFAS 132R in December 2003.

      In December 2003, the FASB issued an Exposure Draft, “Earnings Per Share, An Amendment of FASB Statement No. 128.” In December 2004, the FASB decided to defer the issuance of their final standard. The final standard will be effective in 2005 and will require retrospective application of all prior periods presented. This statement will amend the computational guidance of SFAS No. 128, where the number of incremental shares included in the year-to-date diluted EPS would be computed using the average market price of common shares for the year-to-date period. This statement also requires that shares to be issued upon conversion of a mandatorily convertible security be included in the computation of basic EPS from the date that conversion becomes mandatory.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, An Amendment of ARB No. 43, Chapter 4, Inventory Pricing.” This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and waster spoilage. Such abnormal expenses must be recognized in the period in which they are incurred. In addition, this statement requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overhead must be recognized as an expense in the period in which it is incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June  15, 2005. We do not expect the adoption of this new accounting pronouncement to have a material impact on our financial statements.

      In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment (or SFAS 123R). This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure is no longer an alternative. The provisions of this statement are effective for interim or annual periods beginning after June 15, 2005. We expect to adopt SFAS 123R on July 1, 2005, using the standard’s “modified prospective” method. As permitted by Statement No. 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method, and, as such, generally recognize compensation expense only when there is a difference between the exercise price of the stock options and the fair market value of the underlying stock on the date of grant. Had we expensed the fair value of employee stock options under SFAS No. 123 for the year ended December 31, 2004, our net loss and diluted EPS would have increased by $0.2, or $0.01 per diluted share (See Note 11 to the Consolidated Financial Statements). As the number of stock options issued fluctuates each year, the future impact to our financial statements upon adoption of the statement cannot be predicted with certainty. Under SFAS No. 123R, the fair value would be amortized into compensation expense over the vesting period of the stock options.

CONTINUED DUMPING AND SUBSIDY OFFSET ACT (CDO) OF 2000

      In April 1999, a coalition of three polyester fiberfill producers, including us, filed an anti-dumping suit against polyester fiberfill producers located in Korea and Taiwan. These polyester fiberfill producers located in Korea and Taiwan were selling fiberfill in the U.S. at prices lower than their own domestic market prices,

resulting in material injury to U.S. polyester fiberfill producers. In March 2000, the Commerce Department determined that companies in both countries were dumping polyester fiberfill into the U.S. In May 2000, the International Trade Commission unanimously ruled that polyester fiberfill imports from Korea and Taiwan materially injured the United States domestic polyester fiberfill industry. As a result of this determination and ruling, anti-dumping duties ranging from 5.7% to 9.5% were imposed on all Taiwanese polyester fiberfill producers, and duties ranging from 8.0% to 14.0% were imposed on most Korean polyester fiberfill producers. These duties are estimates based upon the producers’ past pricing histories. The actual duties are determined retroactively for each fiscal year, based upon the pricing during that year. Importers of polyester fiberfill from covered producers in these two countries are required to post cash deposits equal to their estimated anti-dumping duties. The actual import duty rates can be adjusted annually and the total amount of import duties actually owed will depend upon the actual rates and the price and amount of goods imported.

      Import duties are normally retained by the government. However, in October 2000 the U.S. Congress enacted the Continued Dumping and Subsidy Offset Act of 2000 (the “CDO”). Under the CDO, any anti-dumping duties collected are paid to the injured companies who file claims to that effect. We received $8.6, $3.4, and $4.4 of anti-dumping payments pursuant to the CDO in 2004, 2003, and 2002, respectively.

      In January 2003, the World Trade Organization (WTO) declared that the CDO is inconsistent with certain provisions of the WTO agreement on anti-dumping and subsidies. This declaration is merely advisory, however, and has no legal effect. The only body that can alter the CDO is the U.S. Congress. To date, the Congress has taken no action to do so. There is no action that Korea, Taiwan or the WTO could take that would require us to repay any of the import duties that were distributed to us in 2004, 2003, and 2002.

RESULTS OF OPERATIONS

2004 to 2003

      Total net sales from continuing operations for 2004 increased $195.7, or 17.6%, to $1,305.0 from $1,109.3 in 2003 due to the following:

      Net selling price increases were initiated in both segments during 2004 in response to higher raw material costs.

      Sales volumes increased during 2004 in both our PPG and FRPG primarily as a result of improved supply/demand fundamentals, and an improved trade balance for U.S. polyester staple fiber and NAFTA PET resin.

      Total cost of sales from continuing operations for 2004 increased $192.5, or 18.7%, to $1,221.2 from $1,028.7 in 2003 due to the following:

      The higher raw material costs are due to both increased sales volumes and higher purchase prices in both our chemical and recycled-based businesses. Factors contributing to the higher purchase prices in the 2004

period are a tight supply/demand balance for both chemical and recycled-based raw materials and higher crude oil prices for our chemical-based businesses.

      Plant added costs were lower overall compared to the same period last year as savings from our cost reduction programs more than offset higher depreciation and amortization, other non-cash items, energy costs, and increases in volume for both the PPG and the FRPG. This allowed for significant reductions in our per unit costs. The additional depreciation and amortization was principally a result of the February 2004 Financing. For additional information on the February 2004 Financing, see Note 7 to the Consolidated Financial Statements. For additional information on our cost reduction programs, see “Cost Reduction Programs” below and Note 6 to the Consolidated Financial Statements.

      As a result of the foregoing, gross profit increased $3.2, or 4.0%, to $83.8 in 2004 compared to $80.6 in 2003.

      Selling, general and administrative expenses were $59.8, or 4.6% of net sales, in 2004 compared to $66.6, or 6.0% of net sales, in 2003. The decrease was primarily due to our on-going cost reduction efforts. For additional information on our cost reduction programs, see “Cost Reduction Programs” below and Note 6 to the Consolidated Financial Statements.

      In December 2003, we abandoned the polyester staple fiber spinning and drawing equipment at our Pearl River facility. This decision was based on the determination that a conversion to PET resin production would be the most profitable use of the related polymerization assets. We recorded a non-cash impairment charge of $135.3 in the fourth quarter of 2003. We are proceeding with the conversion, adding 300 million pounds of additional solid stating capacity to our Pearl River facility, in the first quarter of 2006.

      We incurred restructuring charges of $2.6 and $10.2 in 2004 and 2003, respectively, related to our cost reduction programs (see “Cost Reduction Programs” below and Note 6 to the Consolidated Financial Statements).

      We recorded a charge for expected losses on accounts receivable of $0.8 and $3.5 in 2004 and 2003, respectively. Additional bad debt expense was recorded in 2003 primarily due to a bankruptcy where we were a sole-source supplier and not named as a critical vendor.

      We incurred non-capitalizable costs of $40.2 and $2.2 in 2004 and 2003, respectively, resulting from costs associated with our previous financings that were repaid in conjunction with the February 2004 Financing. For additional information on the February 2004 Financing, see Note 7 to the Consolidated Financial Statements.

      Other expense (income), net for 2004 and 2003 consisted of legal costs related to the Department of Justice investigation of the polyester staple fiber industry, rebates from anti-dumping duties, and expense in 2003 associated with the acceleration of stock option vesting. For additional information on other expense (income), see Item 6. “Selected Consolidated Financial Data.”

      As a result of the foregoing, we reported an operating loss of $16.4 in 2004 compared to $141.0 in 2003.

      Interest expense, net, was $38.1 in 2004 compared to $10.1 in 2003. This was the result of increased long-term debt, higher credit spreads, and increased amortization of debt issuance costs in interest expense due to the February 2004 Financing. See “Outlook” below for expected interest expense in 2005.

      Our effective tax rate for 2004 on earnings (loss) from continuing operations was 28.8% compared to 36.0% for 2003. We incurred tax expense of $6.1 relating to the repatriation of foreign cash at tax rates specified in the American Jobs Creation Act. Excluding the $6.1 of additional tax expense, our effective tax rate would have been 40%, which increased from 2003 due to the relative proportion of U.S. to foreign earnings.

      As a result of the foregoing, we reported a loss from continuing operations of $38.8 for 2004, compared to a loss from continuing operations of $96.7 for 2003.

      As a result of the June 2003 private equity investment, we recorded accretion of the preferred stock liquidation preference, including the amortization of the discount related to the valuation of the common stock

warrants, of $12.3 and $5.9 in 2004 and 2003, respectively. In addition, we incurred a non-cash beneficial conversion charge of $4.2 in the fourth quarter of 2003 as a result of the preferred stock becoming convertible into common stock.

      As a result of the foregoing, we reported a net loss attributable to common stockholders of $51.1, or $1.61 per diluted share, for 2004, compared to a net loss attributable to common stockholders of $106.7, or $3.38 per diluted share, for 2003.

2003 to 2002

      Total net sales from continuing operations for 2003 increased $95.3, or 9.4%, to $1,109.3 from $1,014.0 in 2002 due to the following:

      PPG sales volume increased due to the previously mentioned continued demand growth in the PET resin market. Sales volumes decreased in the FRPG due to the declining U.S. textile industry.

      Total cost of sales from continuing operations for 2003 increased $129.9, or 14.4%, to $1,028.7 from $898.8 in 2002 due to the following:

      Higher raw material costs for the PPG were the result of increased unit costs due to temporary supply pressures and higher crude oil and natural gas costs. The FRPG experienced the same higher unit costs for raw materials, but this effect was offset in part by lower production volumes. Total plant added costs for the FRPG were lower as a result of our on-going cost reduction efforts and lower production levels.

      As a result of the foregoing, gross profit decreased $34.6, or 30.0%, to $80.6 compared to $115.2 in 2002.

      Selling, general and administrative expenses were $66.6, or 6.0% of net sales, in 2003 compared to $64.6, or 6.4% of net sales, in 2002. The increase in 2003 is due primarily to consulting fees associated with our on-going cost reduction program ($1.7) and increased new product development costs in our FRPG ($0.7).

      In December 2003, we abandoned the polyester staple fiber spinning and drawing equipment at our Pearl River facility. We recorded a non-cash impairment charge of $135.3 in the fourth quarter of 2003. This charge represents a reduction in the carrying value of the abandoned polyester staple fiber spinning and drawing assets at our Pearl River facility to their estimated fair value. For additional information on the impairment charge, see Note 1 to the Consolidated Financial Statements.

      We have historically focused on continuous process improvements and have successfully implemented cost reduction initiatives. Since 1999, we have reduced domestic headcount by 29%, while increasing production by 13% and pounds per employee by 38% over the same period. During 2003, we announced additional cost reduction plans as part of our on-going low cost business strategy and in response to reduced profitability as a result of increased raw material costs, declines in PET resin prices in our PPG, and continuing declines in our FRPG business.

      In January 2003, the FRPG commenced a plan to restructure its operations, which included a reduction in the number of employees and other cost savings initiatives at our three fiber manufacturing facilities. We recorded termination costs of $1.8 in our FRPG segment related to this plan, which was fully implemented in 2003. This plan has resulted in approximately $7.0 of realized savings in controllable costs in 2003 compared to the prior year.

      In July 2003, we announced and implemented reductions in compensation and benefit costs. These compensation and benefit reductions were implemented at all levels of the Company, including senior management. As part of this cost reduction effort, some employer contributions to the Company’s defined contribution plans were suspended.

      In November 2003, we announced a third plan with Company-wide cost reduction initiatives that included eliminating levels of management, reducing the number of employees, and other organization and administrative consolidations and changes. We incurred severance and other termination costs of $8.3 in the fourth quarter of 2003 associated with this plan.

      These last two cost reduction plans resulted in approximately $8 of realized savings in controllable costs in the second half of 2003 compared to our cost structure during the second quarter of 2003. For additional information on restructurings in 2003, see Note 6 to the Consolidated Financial Statements.

      We recorded a charge for expected losses on accounts receivable of $3.5 and $4.2 in 2003 and 2002, respectively. Additional bad debt expense was recorded in 2003 primarily due to a bankruptcy where we were a sole-source supplier and not named as a critical vendor.

      Other expense (income), net for 2003 and 2002 consisted of legal costs related to the Department of Justice investigation of the polyester staple fiber industry, rebates from anti-dumping duties, and expense in 2003 associated with the acceleration of stock option vesting. For additional information on other expense (income), see Item 6. “Selected Consolidated Financial Data.”

      As a result of the foregoing, we reported an operating loss of $141.0 in 2003, compared to operating income of $45.7 in 2002.

      Net interest expense was $10.1 in 2003 compared to $10.3 in 2002.

      Our effective tax rate for 2003 on the loss from continuing operations was 36.0% compared to 25.5% on earnings from continuing operations in 2002. The principal items affecting our rate were foreign earnings, which are taxed at rates lower than U.S. rates, and the loss from continuing operations.

      As a result of the foregoing, the net loss attributable to common stockholders from continuing operations was $96.7 in 2003, compared to net earnings attributable to common stockholders of $26.4 in 2002.

      We reported net earnings attributable to common stockholders from discontinued operations of $0.1, or $0.0 per diluted share, in 2003, compared to a net loss attributable to common stockholders from discontinued operations of $23.7, or $0.73 per diluted share, in 2002. In March 2002, we adopted a plan to sell our partially oriented yarn (POY) business, which was sold in June 2002, and our small-recycled fine denier polyester staple fiber business, which was sold in March 2003. For additional information, see Note 2 to the Consolidated Financial Statements.

      In 2002, we completed our initial assessment of goodwill using the two-step approach described in SFAS No. 142, “Goodwill and Other Intangible Assets,” and determined that the goodwill related to our FRPG segment was impaired. As a result, the carrying value of this goodwill was reduced by $197.0 to its implied value. The reduction was recorded as a cumulative effect of an accounting change in our 2002 financial statements. For additional information, see Note 2 to the Consolidated Financial Statements.

      As a result of the private equity investment, we recorded accretion of the preferred stock liquidation preference and of the discount related to the valuation of the common stock warrants of $5.9 in 2003. In addition, we incurred a non-cash beneficial conversion charge of $4.2 in the fourth quarter of 2003 as a result of the preferred stock becoming convertible into common stock.

      As a result of the foregoing, we reported a net loss attributable to common stockholders of $106.7, or $3.38 per diluted share, in 2003, compared to a net loss attributable to common stockholders of $194.3, or $6.07 per diluted share, in 2002.

COST REDUCTION PROGRAMS

      During 2003, we announced cost reduction plans as part of our on-going low cost business strategy and in response to reduced profitability as a result of increased raw material costs, declines in PET resin selling prices in the PPG, and a continuing decline in the FRPG operating results.

      In January 2003, the FRPG commenced a plan to restructure its operations, which included a reduction in the number of employees and other cost savings initiatives at our three fiber manufacturing facilities. In 2003, we recorded and paid termination costs of $1.8 in our FRPG segment related to this plan, which was fully implemented in 2003.

      In July 2003, we announced reductions in compensation and benefit costs. These compensation and benefit reductions were implemented at all levels, including senior management. As part of this cost reduction effort, some employer contributions to our defined contribution plans were suspended. Effective January 1, 2005, we reinstated certain compensation and benefits to their previous levels.

      In November 2003, we announced a third plan with cost reduction initiatives that included eliminating levels of management, reducing the number of employees, and other organizational and administrative consolidations and changes. During 2004, we incurred severance and contract termination costs of $2.7 associated with this plan, of which $0.8 related to the PPG and $1.9 related to the FRPG. Severance and contract termination costs of $8.1 were incurred in the fourth quarter of 2003 associated with this plan, of which $1.9 related to the PPG and $6.2 related to the FRPG.

      As a result of these cost reduction programs, we have reduced annual controllable costs by $36 for the year ended December 31, 2004, compared to the second quarter of 2003. Even with the 2005 reinstatement of certain compensation and benefits that were previously reduced, we expect to reduce annual controllable costs by approximately $41 to $46 (cumulative) by the end of 2005, compared to annualized second quarter 2003 levels,.

      For additional information on restructurings, see Note 6 to the Consolidated Financial Statements.

OUTLOOK

      The following statements are forward-looking statements and should be read in conjunction with “Forward-Looking Statements; Risks and Uncertainties” below.

      We expect that our operating results for 2005 will be better than our operating results for 2004. We believe this improvement will result primarily from improvements in PET resin and fiber raw material margins and the continuing effects of our cost reduction programs. We expect PET resin capacity utilization in the NAFTA region to remain strong in 2005 as demand is expected to grow 7-8% while capacity is expected to remain substantially the same. This will support improved raw material margins for the NAFTA PET resin industry in 2005. We have announced selling price increases in our U.S. PET resins business of $0.03 and $0.05 per pound effective March 1 and April 1, 2005, respectively. In addition, we have announced two $0.03 per pound selling price increases in our domestic fibers business effective January 2 and April 3, 2005. Given the competitive nature of our business and other market influences, there can be no assurance that these price increases will be realized.

      We expect that the domestic textile chain will continue to be adversely impacted by imports, especially from China, as all remaining quotas on all textile and apparel imports into the United States were eliminated as of January 1, 2005, pursuant to the GATT (now known as the World Trade Organization Agreement) Uruguay Round Agreement enacted in 1994. We expect to receive a payment, which we expect will be less than the amount we received in 2004, under the Continued Dumping and Subsidy Offset Act in the fourth quarter of 2005.

      We expect a continuation of a globally tight supply situation for polyester chemical raw materials in 2005. In a tight market, spot prices are generally higher then contract prices for polyester raw materials. Asian polyester producers, particularly China, are large spot purchasers, while U.S. and European polyester producers are primarily contract purchasers of polyester raw materials. Therefore, a tight polyester raw material market is expected to eliminate or reduce the cost advantage that Asian polyester producers have had in the past and should constrain PET resin and polyester fiber imports into the NAFTA region and European Union. This should improve our competitiveness in PET resin and fiber markets. In addition, we believe our long-term raw material supply contracts in place at December 31, 2004 provide us with sufficient raw materials for our existing and planned future production requirements through 2007.

      In 2003, we announced several cost reduction plans to reduce our annual controllable costs. As a result of these cost reduction programs, we have reduced annual controllable costs by $36 for the year ended December 31, 2004, compared to the second quarter of 2003. Even with the 2005 reinstatement of certain compensation and benefits that were previously reduced, we expect to reduce annual controllable costs by approximately $41 to $46 (cumulative) by the end of 2005, compared to annualized second quarter 2003 levels,.

BUSINESS AND FINANCIAL PROJECTIONS FOR 2005

CAPITAL RESOURCES AND LIQUIDITY

      Net cash used in operations was $21.7 for 2004, compared to net cash used in operations of $16.8 for 2003. The increase is due primarily to higher inventories in 2004 as a result of rising raw material costs.

      Net cash used in investing activities amounted to $242.2 in 2004 compared to $14.4 in 2003. Investing activities were comprised of capital expenditures, purchase of assets subject to the sale and leaseback transaction, the pre-payment of a raw material contract, and the proceeds from the sale of the Marion facility in 2003. Capital expenditures were $15.1 in 2004 compared to $15.5 in 2003. Investing activities in 2004 included $150.0 of additions from the purchase of assets subject to the sale and leaseback transaction and $77.1 for the pre-payment of a raw material contract, both in conjunction with the February 2004 Financing. For additional information, see Note 7 to the Consolidated Financial Statements. For information about expected capital expenditures in 2005, see “Outlook” above.

      Net cash provided by financing activities amounted to $63.6 in 2004 compared to net cash provided by financing activities of $236.8 in 2003.

      The net proceeds from the February 2004 Financing of approximately $489.5 plus $206.4 in cash ($695.9 in total) were used to:

      We incurred pre-tax charges of $40.2 in 2004, resulting from costs associated with the financings that were repaid. These 2004 expenses (including non-cash charges) consisted of the following:

      As part of the restructuring of the sale and leaseback transaction in June of 2003, we entered into three swaps, each with a notional amount of $50, which were designated as cash flow hedges. These swaps hedged our exposure to variability in cash flows attributable to rent expense paid in relation to the sale and leaseback transaction. As part of the February 2004 Financing, we terminated two of the three swaps and redesignated the third as a cash flow hedge against debt entered into in conjunction with the February 2004 Financing. This fixed-rate swap has a notional amount of $50, and we will receive three-month LIBOR and pay 6.17% quarterly. The termination, redesignation and refinancing resulted in an overall cost of $14.4, which was net of $3.8 that was previously included in other comprehensive income (loss).

      In July 2004, we entered into interest rate hedging agreements with financial institutions for a total notional amount of $100 as follows: two, 3-year fixed-rate swaps with a total notional amount of $50, where we will receive three-month LIBOR and pay 3.65% quarterly; and a three-year 6% cap where, for quarterly periods when three-month LIBOR exceeds 6% on its reset date, we will receive the difference between three-month LIBOR and 6% on $50 for such periods. The 3-year fixed rate swaps were designated as cash flow hedges against $50 of the Revolving Credit Facility entered into in the first quarter of 2004. At December 31, 2004, including the aforementioned redesignated swap, we have a total of $150 in hedging agreements.

      The following table describes our existing debt facilities at December 31, 2004:

TABLE I

      In addition to our debt commitments, we have entered into other commitments and contractual obligations that obligate us to make specified payments in the future. The following table summarizes the total amounts due as of December 31, 2004 under all debt agreements, commitments and other contractual obligations. The table indicates the years in which payments are due under the contractual obligations.

TABLE II

      Since entering into the February 2004 Financing, we do not have any material relationships with unconsolidated entities or financial partnerships, often referred to as special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually narrow or limited purposes.

      Our debt agreements contain financial and restrictive covenants. The terms of the Revolving Credit Facility require that we maintain available liquidity (as defined in the Revolving Credit Facility) of at least $55.0 or maintain a Fixed Charge Coverage Ratio initially of at least 1.0:1.0. This ratio increases to 1.05:1.0 beginning with the four quarters ending December 31, 2006 and further increases to 1.10:1.0 beginning with the four quarters ending March 31, 2008. The Fixed Charge Coverage Ratio, as defined in the Revolving Credit Facility, is earnings before interest, taxes, depreciation and amortization divided by the sum of cash taxes, cash interest expense, capital expenditures and certain payments related to our equity for the same period. There are certain liquidity thresholds which must be met in order for us to settle lawsuits or pay judgments. There are other restrictions which include limitations on capital expenditures, payment of dividends, asset sales and dispositions, the incurrence or guarantee of additional debt, acquisitions, certain payments and investments, affiliate and subsidiary transactions, repurchase of stock, and excess cash. We are in compliance with all debt covenants.

      The financial resources available to us at December 31, 2004 included approximately $141.1 available under our revolving credit facility and internally generated funds. We believe these financial resources will provide us with sufficient liquidity to meet our foreseeable needs for working capital, capital expenditures and dividends. For additional information on the payment of dividends, see Item 5. “Market for Registrant’s Common Equity and Related Stockholder Matters.”

ENVIRONMENTAL MATTERS

      Our operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. We take a proactive approach in addressing the applicability of these laws and regulations as they relate to our manufacturing operations and in proposing and implementing any remedial plans that may be necessary. We have identified certain situations that will require future capital and non-capital expenditures to maintain or improve compliance with current environmental laws and regulations. The majority of the identified situations are found at our largest manufacturing facilities and primarily deal with groundwater remediation, quality of air emissions and wastewater treatment processes.

      Our 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, we currently estimate our future non-capital expenditures related to environmental matters to range between $3.4 and $14.1. In connection with these expenditures, we have accrued undiscounted liabilities of approximately $7.0 and $6.5 at December 31, 2004 and 2003, respectively, which are reflected as other noncurrent liabilities in our Consolidated Balance Sheets. These accruals represent our best estimate of probable non-capital environmental expenditures. In addition, aggregate future capital expenditures related to environmental matters are expected to range from $6.2 to $16.9. These non-capital and capital expenditures are expected to be incurred during the next 15 to 30 years. For additional information, including changes in the accrued undiscounted liabilities, see Notes 1 and 9 to the Consolidated Financial Statements.

      We base the measurement of liability on an evaluation of currently available facts with respect to each individual situation and take 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, we review these liabilities periodically and adjust them to reflect additional technical and legal information that becomes available.

      We believe we are either in material compliance with all currently applicable regulations or are operating in accordance with the appropriate variances and compliance schedules or similar arrangements. Subject to the imprecision in estimating future environmental costs, we believe that compliance with current laws and regulations will not require significant capital expenditures or have a material adverse effect on our consolidated financial position or results of operations. See “Forward Looking Statements; Risks and Uncertainties.”

FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES

      Statements contained in this Form 10-K that are not historical facts, including those made in the “Outlook” section above, 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,” “expects,” “anticipates,” and similar expressions are intended to identify forward-looking statements. These statements are made as of the date of this report based upon current expectations, and we undertake no obligation to update this information. These forward-looking statements involve certain risks and uncertainties, including, but not limited to: reduced raw material margins; reduced sales volumes; increases in costs; the financial condition of our customers; polyester staple fiber and textile imports; availability and cost of raw materials; the impact of litigation arising out of alleged pricing practices in the polyester staple fiber industry; the actions of our competitors; the effective implementation of our cost reduction programs; availability of financing, changes in financial markets, interest rates, credit ratings, and foreign currency exchange rates; regulatory changes; tax risks; U.S., European, Asian and global economic conditions; prices and volumes of PET resin imports; work stoppages; levels of production capacity and profitable operation of assets; prices of competing products; natural disasters and acts of terrorism; and maintaining the operations of our existing production facilities. Actual results may differ materially from those expressed herein. 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 our common stock.

      In addition to those described above, the more prominent risks and uncertainties inherent in our business are set forth below. However, this section does not discuss all possible risks and uncertainties to which we are subject, nor can it be assumed necessarily that there are no other risks and uncertainties, which may be more significant to us.

Risk Related to Our Business

      Raw material margin, which is the difference between our net selling price and the cost of our raw materials, is an extremely important factor in determining our operating results. Selling prices are influenced by competition and capacity utilization, which is the demand for product divided by total industry capacity. Demand for our product is determined principally by growth in end-use markets, substitution of our product for other products, economic conditions, imports, and our products’ competitive cost position. Worldwide capacity is expanding for both resins and fiber. Any reduction of selling prices, our not achieving announced selling price increases or any significant expansion in capacity over demand could reduce our operating results. Any increase in raw material costs (see “Our operations are dependent on the availability and cost of our raw materials” below) without a corresponding increase in selling price would reduce our operating results. A material change in demand, supply, general economic conditions or uncertainties regarding future economic prospects could have a material adverse affect on our operating results.

      Sales volume is another important factor in determining our operating results. Our sales volume is influenced by competition and capacity utilization. A material change in demand, supply, general economic conditions or uncertainties regarding future economic prospects could have a material adverse effect on our sales volume and negatively impact our operating results.

      Our inability to maintain our low cost position and efficiently operate our manufacturing facilities may reduce our operating results. Failure to achieve the balance of our announced controllable cost reductions or to maintain the cost reductions obtained to date, or our inability to efficiently operate our production facilities after implementation, may reduce our operating results. In addition, we have certain non-controllable costs where the expense we incur may change based on external factors and increases in these costs may reduce our operating results. Examples of these costs are energy, insurance and pension costs. Energy costs are impacted by changes in petrochemical costs and, as these increase, our cost of natural gas, electricity, steam and oil increases and may reduce our operating results by increasing our production costs. Insurance costs change depending on the market and our experience, and pension costs are impacted by the changes in the equity and debt markets.

      Our customers include manufacturers of plastic containers, textile mills, yarn spinners, manufacturers of non-woven fabrics, and the injection molding industry. Our Packaging Products Group (or PPG) has five customers that represented approximately 51% of its total net sales in 2004. Our Fiber and Recycled Products Group (or FRPG) does not have any single customer that has a material effect on the segment. If our customers have financial difficulties, this could affect our operating results by decreasing our sales and/or resulting in the uncollectibility of accounts receivable.

      The U.S. and European fiber and textile markets continue to be severely impacted by imports, principally from Asian countries. Imports of polyester staple fiber and textile products continue to cause an over-supply which decreases polyester staple fiber margins. The price and volume of imports have and are expected to continue to significantly impact our operating results.

      The impact of textile and apparel imports from Asia, especially from China, on our textile customers may further increase as all remaining quotas on all textile and apparel imports into the United States were eliminated as of January 1, 2005 pursuant to the GATT (now known as the World Trade Organization Agreement) Uruguay Round Agreement enacted in 1994.

      Our operations are substantially dependent on the availability and cost of our two primary raw materials, PTA and MEG, and to a lesser extent our recycled raw materials. We currently rely on a single producer for our domestic supply of PTA and a small number of sources for MEG. The effect of the loss of any producer, a disruption in their businesses or a failure to meet our product needs on a timely basis would depend primarily upon the length of time necessary to find a suitable alternative source. Temporary shortages in needed raw materials could have a material adverse effect on our results of operations. We cannot be sure that the precautions we have taken would be adequate or that an alternative source of supply could be located or developed in a timely manner.

      The prices of PTA and MEG, purchased pursuant to long-term contracts, have fluctuated in the past and are expected to fluctuate in the future. Recycled raw materials are purchased from many different suppliers, including some under long-term supply contracts. The prices of recycled raw materials are variable and determined by regional and worldwide supply and demand.

      In January 2001, we received a document subpoena in connection with a federal grand jury investigation of pricing practices in the polyester staple fiber industry. We cooperated with the investigation by producing documents in response to this subpoena. On September 22, 2004, the Department of Justice (or “DOJ”)

informed us that it will not seek indictments either of Wellman or any of its employees in connection with this investigation. On October 5, 2004, the judge presiding over the federal civil cases discussed below announced on the record that he had been informed by DOJ that there would be no further criminal prosecution in connection with the investigation.

      Following the public disclosure of the investigation in September 2002, numerous producers of polyester staple fiber, including Wellman, have been named in various civil actions asserting claims based on alleged price fixing and market allocation in the polyester staple industry. These proceedings are summarized below.

      Wellman and certain other companies are named as defendants in twenty-four (24) federal actions brought by direct purchasers of polyester staple fiber for alleged violation of U.S. antitrust laws. In each lawsuit, the plaintiffs allege that the defendants engaged in a conspiracy to fix the price of polyester staple fiber in violation of the Sherman Act. In ten of the cases, the plaintiff purports to represent a class of all persons who directly purchased polyester staple fiber and were similarly affected by such alleged conduct. Fourteen of the cases are brought by plaintiffs who do not purport to represent a class. Certain of these cases name employees of Wellman and other companies as defendants.

      All of the federal plaintiffs seek damages of unspecified amounts, attorney’s fees and costs and unspecified relief. In addition, certain of the actions claim restitution, injunction against alleged illegal conduct and other equitable relief. The federal suits were originally filed in the U.S. District Court for the Middle District of Alabama, U.S. District Court for the Northern District of California, U.S. District Court for the Middle District of Georgia, U.S. District Court for the District of New Jersey, U.S. District Court for the Middle District of North Carolina, U.S. District Court for the Western District of North Carolina, U.S. District Court for the District of South Carolina and U.S. District Court for the Western District of Virginia. The Judicial Panel on Multi-District Litigation ruled on April 22, 2003 to transfer all the federal cases to the Western District of North Carolina for coordinated or consolidated pretrial proceedings.

      In addition to the direct purchaser actions discussed above, forty-one purported class actions alleging violations of federal antitrust laws, state antitrust or unfair competition laws and certain state consumer protection acts have been filed in one federal court and various state courts on behalf of purported classes of indirect purchasers of polyester staple fiber products. In each lawsuit, the plaintiffs allege that the defendants engaged in a conspiracy to fix prices of polyester staple fiber products. In addition, certain of the actions claim restitution, injunction against alleged illegal conduct and other equitable relief. One indirect purchaser case is pending in the U.S. District Court for the Western District of North Carolina and is subject to the order issued by the Judicial Panel on Multi-District Litigation for coordination or consolidation with the other federal cases. The rest of the indirect purchaser cases were filed in Arizona, California, the District of Columbia, Florida, Kansas, Massachusetts, Michigan, New Mexico, North Carolina, South Dakota, Tennessee, West Virginia and Wisconsin. In all of these cases, the plaintiffs seek damages of unspecified amounts, attorney’s fees and costs and unspecified relief.

      Wellman and certain other companies were named in an action filed in the Superior Court of Justice for Ontario, Canada, by a plaintiff purporting to represent a class of direct and indirect purchasers of polyester staple fiber. This complaint asserts claims under Canadian law. It contains three counts that ask for compensatory damages of Cdn. $50 each. The extent to which these three counts are duplicative and overlapping is unclear. The complaint also contains one count asking for punitive damages of Cdn. $10. Additionally, Wellman and certain other companies were also named in an action filed in the Supreme Court of British Columbia, Canada, by a plaintiff purporting to represent a class of direct and indirect purchasers of polyester staple fiber. This complaint also asserts claims under Canadian law and requests compensatory, punitive and special damages, but does not allege a specific dollar amount in damages. Finally, Wellman and certain other corporations were named in an action filed in the Superior Court for Quebec, Canada. This complaint asserts claims under Canadian law seeking compensatory damages of Cdn. $15 and punitive damages of Cdn. $5.

      We deny that we or any of our employees engaged in price fixing or customer allocation and we intend to vigorously defend against any existing civil claims and any civil claims or proceedings that may be brought against us in the future. Because of the uncertainties and complexity of these civil claims, we have not formed

an opinion about these proceedings or their impact, if any, on our consolidated financial position or results of operations.

      In addition to the foregoing, we may become subject to additional proceedings and lawsuits under federal and state antitrust and unfair competition laws.

      Our businesses compete on a variety of factors such as price, product quality, performance or specifications, continuity of supply, customer service and breadth of product line. Major competitors include diversified industrial companies, some of which are larger or have greater financial resources. Changes in a competitor’s business behavior may adversely affect our financial performance.

      Certain events relating to us or the financial markets could reduce our access to financing and/or increase our financing costs. If current business conditions deteriorate or other events occur that result in a breach of our covenants, our lenders would have the right to cause all of our debt to become due and payable. If this occurs, there is no certainty the debt could be refinanced and, if it were refinanced, we would probably incur increased costs.

      For additional information, see “Capital Resources and Liquidity” above.

      A portion of our operating results occurs in entities where the functional currency is not the U.S. dollar. When these currencies weaken against the dollar, our profitability and the value of our investment in the foreign subsidiary decreases. In addition, our foreign subsidiaries conduct business in currencies other than their functional currency. Changes in the relative strength of these currencies can adversely affect the profitability of the foreign subsidiaries in their functional currency. A portion of the net assets of these subsidiaries is denominated in other than their functional currency. While we reduce our foreign currency exposure by using appropriate hedges, our foreign subsidiaries still have net assets denominated in currencies other than their functional currency and may experience foreign exchange losses. As a result, a material change in foreign currency exchange rates could adversely affect our operating results.

      Domestic producers of polyester staple fiber and PET resin produced in the United States and the European Union benefit from favorable rules and regulations that affect imports of selected products produced from certain countries. We have previously described the anti-dumping duties on polyester fiberfill imports into the United States from Korea and Taiwan (see “Continued Dumping and Subsidy Offset Act (CDO) of 2000”). Imports of polyester staple fiber into the European Union from Australia, India, Indonesia, Korea, Belarus and Thailand are subject to anti-dumping and countervailing duties. PET resin products imported into the European Union from Australia, China, India, Indonesia, Korea, Malaysia, Taiwan and Thailand currently have anti-dumping duties and for India, Malaysia and Thailand, countervailing duties. PET resin products imported into the United States from Thailand, Indonesia and India are currently subject to provisional anti-dumping duties and for India countervailing duties. In addition, some of the goods produced using our products benefit from favorable federal and/or state regulations. Adverse changes in any of these rules or anti-dumping or countervailing determinations could affect the demand and selling price for our products and adversely affect our operating results.

      We have entered into global tax planning initiatives in the normal course of our business. These initiatives are subject to normal review by tax authorities. It is possible that additional liabilities may be proposed by tax authorities as a result of these reviews and that some of the reviews could be resolved unfavorably.

      Actual costs and future estimated costs for identified environmental situations may change. Given the inherent uncertainties in evaluating environmental exposures due to unknown conditions, changing government regulations and legal standards regarding liability and evolving related technologies, we could have higher future environmental expenditures than we have estimated.

DERIVATIVE FINANCIAL INSTRUMENTS

      We do not hold or issue derivative financial instruments for trading purposes. We use derivative financial instruments to manage our exposure to fluctuations in interest rates and foreign exchange rates. For additional discussion of our use of such instruments, see Notes 1, 7 and 14 to the Consolidated Financial Statements.

INTEREST RATE RISK

      Because a portion of our debt obligations bear interest at floating rates, our earnings and cash flows are affected by changes in prevailing interest rates. Based on our debt level at December 31, 2004, and the assumption that LIBOR is between 2% and 6%, a 25 basis point increase in LIBOR would result in an annual increase in interest expense of $0.9.

FOREIGN CURRENCY RISK

      We use foreign currency debt and foreign currency purchase and sale contracts with terms of less than one year to hedge our exposure to changes in foreign currency exchange rates. These financial instruments are primarily used to hedge certain accounts receivable denominated in foreign currencies. If foreign currency exchange rates at December 31, 2004 and 2003 adversely changed by 10%, the fair value of these financial instruments outstanding at December 31, 2004 and 2003 would decline by approximately $1.0 and $1.2, respectively. However, such loss in fair value would be substantially offset by an increase in the fair value of our underlying exposure. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in any potential changes in any underlying hedged amount or changes in sales levels affected by changes in local currency prices.

WELLMAN, INC.

Index to Consolidated Financial Statements and Consolidated Financial Statement

Schedules

      All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY