-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTfV+5X+mP7KDfIkIPj9I0YLU3n8g9xOVc+HnaQG5CB9sruO8xgIgUdG3Xg7aPcg 1W8Onvrzk5bahJpxjED+3A== 0000950135-03-002701.txt : 20030430 0000950135-03-002701.hdr.sgml : 20030430 20030430141841 ACCESSION NUMBER: 0000950135-03-002701 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLMAN INC CENTRAL INDEX KEY: 0000812708 STANDARD INDUSTRIAL CLASSIFICATION: PLASTIC MAIL, SYNTH RESIN/RUBBER, CELLULOS (NO GLASS) [2820] IRS NUMBER: 041671740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10033 FILM NUMBER: 03672165 BUSINESS ADDRESS: STREET 1: 595 SHREWSBURY AVENUE CITY: SHREWSBURY STATE: NJ ZIP: 07702 BUSINESS PHONE: (732)212-3300 MAIL ADDRESS: STREET 1: P.O. BOX 31331 CITY: CHARLOTTE STATE: NC ZIP: 28231 10-K/A 1 b46474kae10vkza.txt WELLMAN, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark one) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to_________________ Commission file number 1-10033 - -------------------------------------------------------------------------------- WELLMAN, INC. ------------- (Exact name of registrant as specified in its charter) Delaware 04-1671740 -------------------------------- ------------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 595 Shrewsbury Avenue Shrewsbury, New Jersey 07702 - --------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 212-3300 - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class On which registered - ----------------------------- ------------------------ Common Stock, $.001 par value New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or The information contained in this Item 9 is furnished pursuant to Item 12 of Form 8-K "Results of Operations and Financial Condition," in accordance with SEC Release No. 33-8216. This information and the exhibits hereto are being furnished and shall not be deemed to be "filed" for the purposes of Section 18 of, or otherwise regarded as filed under, the Securities Exchange Act of 1934, as amended. The information contained in this report shall not be incorporated by reference into any filing of Forrester Research, Inc. with the SEC, whether made before or after the date hereof, regardless of any general incorporation language in such filings. information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K----. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [X] No [ ]. Aggregate market value of the voting stock held by non-affiliates of the registrant, computed on the basis of $16.75 per share (the closing price of such stock on June 28, 2002 on the New York Stock Exchange), as of the last day of the registrant's most recently completed second fiscal quarter: $522,780,498. The number of shares of the registrant's Class A Common Stock, $.001 par value, and Class B Common Stock, $.001 par value, outstanding as of March 1, 2003 was 31,868,809 and 0, respectively. DOCUMENTS INCORPORATED BY REFERENCE None. 2 PART I ITEM 1. BUSINESS We are principally engaged in the manufacture and marketing of PermaClear(R) and EcoClear(R) brand PET (polyethylene terephthalate) packaging resins and high-quality polyester products including Fortrel(R) brand polyester fibers. We believe we are the world's largest PET plastics recycler, utilizing a significant amount of recycled raw materials in our manufacturing operations. RECENT DEVELOPMENTS PRIVATE EQUITY INVESTMENT In February 2003, we announced that we entered into an agreement with Warburg Pincus VIII, L.P. ("Warburg Pincus VIII"), a global private equity firm, to sell up to $125.4 million of perpetual convertible preferred stock. With the signing of this agreement, Warburg Pincus VIII invested $20.0 million in the form of a convertible subordinated note that will be automatically converted into preferred stock upon satisfaction of certain conditions, and received a warrant to purchase 1.25 million shares of our common stock at an exercise price of $11.25 per share. Proceeds from the transaction will be used primarily to pay down existing debt. We recognized that substantial amounts of our debt and other obligations would be maturing on or before July 31, 2004 and that the financial markets may continue to be volatile. As a result of an evaluation of our refinancing alternatives by financial advisors that began in April 2002, management and the board concluded that a private equity investment was needed to strengthen our balance sheet and improve our liquidity. After conducting a vigorous, competitive auction process, we entered into a non-binding letter of intent on November 4, 2002 with Warburg Pincus VIII that provided the basic economic framework for and the material terms of an investment valued at $11.25 per share for the initial portion of their investment and $11.25 per share, or if lower, 110% of the volume-weighted average closing price of our common stock over a specified 20 trading day period for the balance of their investment. The $11.25 per share price represented a $0.59 (5.5%) premium over the closing price of our common stock on that date. After the completion of due diligence and documentation, we entered into a definitive securities purchase agreement with Warburg Pincus VIII on February 12, 2003 on substantially the same terms agreed to in the letter of intent providing for the issuance of convertible notes in an aggregate initial principal amount of up to $49.95 million up to 5,000,000 shares of our Series A preferred stock, 6,700,000 shares of our Series B preferred stock and warrants to purchase 2,500,000 shares of common stock for up to $125.4 million in cash (exclusive of the exercise price of the warrants). Upon consummation of the transaction, which is subject to stockholder approval, and assuming exercise of all warrants by Warburg Pincus VIII for cash, Warburg Pincus VIII will own approximately 30% of our outstanding voting securities. This amount is subject to increase under certain conditions to a maximum of approximately 49% of our outstanding common stock during the next five years. At the time of signing the agreement, we issued to Warburg Pincus VIII the initial warrant to purchase 1,250,000 shares of our common stock at an exercise price of $11.25 per share and Warburg Pincus VIII purchased a note in an initial principal amount of $20 million at par. In addition, we appointed Oliver Goldstein, a vice president of Warburg Pincus LLC, to our board as a designee of Warburg Pincus VIII. When certain conditions are met, including stockholder approval of the transaction, and our obtaining a new $175 million senior revolving credit facility, the following will occur: 3 - the outstanding initial note will automatically convert into shares of Series A preferred stock and Warburg Pincus VIII will purchase for $30 million in cash an additional 2,666,666 shares of Series A preferred stock at $11.25 per share so that it will own an aggregate of approximately 4,500,000 shares of Series A preferred stock; - Warburg Pincus VIII will purchase 6,700,000 shares of Series B preferred stock at a price per share equal to the Series B purchase price, which is equal to the lower of $11.25 or 110% of the volume - weighted average closing price of our common stock over a 20-day period; - we will issue to Warburg Pincus VIII the additional warrant to purchase 1,250,000 shares of our common stock at an exercise price equal to the Series B purchase price; and - we will appoint a second director designated by Warburg Pincus VIII to our board. If shareholder approval and other conditions are not met, the preferred stock and, subject to certain exceptions, the additional warrant will not be issued to Warburg Pincus VIII. In such case, subject to certain conditions, including our obtaining a new $150 million senior revolving credit facility, Warburg Pincus VIII will purchase an additional note in the initial principal amount of $29.95 million at par and a second director designated by Warburg Pincus VIII will be appointed to our board. The resulting $49.95 million in initial aggregate principal amount of the notes then outstanding, by their terms, will not be convertible into Series A preferred stock but will instead be convertible only into our common stock at a conversion price of $11.25 per share. Warburg Pincus VIII will continue to hold the initial warrant. The amount of common stock issuable upon conversion or exercise of the $49.95 million in initial principal amount of notes and the warrants would be limited to 19.99% of the common stock outstanding on February 12, 2003. If more than that amount of common stock would otherwise be issuable upon conversion or exercise of the notes and warrants, the excess shares would not be issued. Instead, upon conversion, Warburg Pincus VIII would be entitled to receive the cash excess share payment in an amount equal to the excess of the current market value of our common stock over the conversion price in effect under the notes for the unissued excess shares. Since the number of shares issuable would be less than 20% of the number of shares of common stock outstanding on February 12, 2003, the issuance of the notes and warrants would not require stockholder approval under the New York Stock Exchange rules. This annual report on Form 10-K is not a solicitation of votes for the transactions referred to above. Such solicitation will occur by way of a proxy statement related to the special meeting of shareholders that will be held to consider approval of the transactions. CONTINUED DUMPING AND SUBSIDY OFFSET ACT (CDO) OF 2000 In April 1999, three polyester fiberfill producers, including us, filed an anti-dumping suit against Korea and Taiwan. The suit alleged that polyester fiberfill producers from these two countries were selling fiberfill in the U.S. at prices lower than in their own domestic market, resulting in material injury to U.S. polyester fiberfill producers. In March 2000, the Commerce Department determined that 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 4 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 year after year end 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, when determined on a retroactive basis, have been below the estimates for several Korean producers. The total amount of import duties actually owed will depend upon the actual rates and the 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 are paid to the injured companies and their workers who file claims to that effect. In December 2002, we received approximately $4.4 million of anti-dumping duties from Korean and Taiwanese producers pursuant to the CDO. 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. In February 2003, President Bush submitted his fiscal 2004 budget to the US Congress containing language recommending repeal of the CDO. Presently, Congress has taken no action on this matter. 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 2002. We cannot ascertain what amounts, if any, we will receive in 2003 and future years. DISCONTINUED OPERATIONS In January 2002, we announced plans to refocus the strategy of our polyester fibers business in order to be less dependent on commodity fibers. We plan to direct our production capacity toward more differentiated, higher value-added products, taking advantage of our unique production capabilities of polymer and extrusion fiber manufacturing and our chemical and recycled-based raw material sources. We believe that this new strategy will enable us to face the competitive challenges presented by the imports of textile and apparel fiber and finished goods that continue to adversely affect the domestic fibers market, particularly the domestic commodity textile fiber markets. As a result of our review of strategic alternatives, in March 2002 we decided to sell our POY business and our small recycled fine denier polyester staple fiber business with manufacturing facilities located in Fayetteville, North Carolina and Marion, South Carolina, respectively. These businesses are reported as discontinued operations in our financial statements. On June 18, 2002, we sold the property, plant and equipment and inventory of our POY business. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Discontinued Operations." The assets of our small recycled fine denier polyester staple fiber business are reported separately in our Consolidated Balance Sheet at December 31, 2002 and 2001. We expect to sell these assets by the end of first quarter 2003. IMPACT OF ACCOUNTING CHANGES Effective January 1, 2002 we were required to adopt SFAS No. 142, "Goodwill and Other Intangible Assets." See note 2 to the Consolidated Financial Statements. 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 5 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. We completed our initial assessment of goodwill for impairment using the two-step approach described in SFAS No. 142 and determined that goodwill related to our FRPG segment was impaired. As required by the Statement, the carrying value of this goodwill was reduced by $197.1 million to its implied fair value. The reduction was recorded as a cumulative effect of an accounting change in our first quarter 2002 financial statements. Application of the nonamortization provisions of SFAS No. 142 resulted in an increase in our 2002 net earnings of approximately $8.4 million, or $0.26 per diluted share, as compared to the years ending December 31, 2001 and 2000. Effective January 1, 2002, we were required to adopt SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." See note 2 to the Consolidated Financial Statements. SFAS 144 established criteria to determine when a long-lived asset is held for sale and whether the results of operations of a component of an entity that either has been disposed of or is classified as held for sale should be reported in discontinued operations. In accordance with SFAS No. 144, when an asset is held for sale, it is measured at the lower of its carrying amount or fair value less costs of disposal. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. Judgment is required in determining the fair value of assets and could differ from the actual amount received upon disposal. In accordance with SFAS No. 144, the net assets of our FRPG's POY business and our small recycled fine denier polyester staple fiber business were reported as asset disposal groups held for sale at March 31, 2002. See "Discontinued Operations" above. The net operating results reported for these businesses, including the loss on disposal of our POY business in June 2002, for the current year and prior years have been reflected as discontinued operations. PRODUCTS AND MARKETS Our operations are classified into two reportable operating segments: the Packaging Products Group (PPG) and the Fibers and Recycled Products Group (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 in the period ended December 31, 2002. In the table, we have eliminated intersegment sales and applied historical exchange rates to the data. These eliminations are not material. 6
2002 2001 2000 ---- ---- ---- NET SALES % OF TOTAL NET SALES % OF TOTAL NET SALES % OF TOTAL --------- ---------- --------- ---------- --------- ---------- ($ in millions) PPG $ 524.8 51.8% $ 533.2 52.8% $ 499.2 48.9% FRPG 489.2 48.2% 476.4 47.2% 522.3 51.1% -------- ----- -------- ----- --------- ----- Total $1,014.0 100.0% $1,009.6 100.0% $ 1,021.5 100.0% ======== ===== ======== ===== ========= =====
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 in the period ended December 31, 2002. In the table, we have eliminated intersegment transactions and applied historical exchange rates to the data. These eliminations are not material.
2002 2001 2000 ---- ---- ---- OPERATING OPERATING OPERATING PROFIT (LOSS) % PROFIT (LOSS) % PROFIT (LOSS) % ------------- ----- ------------- ------- ------------- ----- ($ in millions) PPG $ 50.1 109.6% $ 64.7 183.8% $ 62.9 94.0% FRPG (4.4) (9.6)% (29.5) (83.8)% 4.0 6.0% ------- ----- ------- ----- ------ ----- Total $ 45.7 100.0% $ 35.2 100.0% $ 66.9 100.0% ======= ===== ======= ===== ====== =====
See note 15 to the Consolidate Financial Statements for reconciliations to correspon ding totals in the Consolidated Financial Statements and additional information with regard to our reportable operating segments. PACKAGING PRODUCTS GROUP The PPG manufactures: - Solid-stated PET resin for use in the manufacture of soft drink bottles and other food and beverage packaging, - Amorphous resin for internal solid-stating (a process which upgrades and purifies the resin) and, to a lesser extent, for sale to external customers, and - EcoClear(R) PET resin, utilizing post-consumer beverage bottles to meet customers' recycled content PET resin requirements. These resins are produced domestically at our Palmetto, South Carolina and Pearl River, Mississippi facilities and internationally at our Emmen facility in the Netherlands (PET Resins - Europe). We sell our solid-stated PET resin under the PermaClear(R) and PermaClear HP(R) brands. Customers include United States, South American and European-based manufacturers of various types of plastic containers. Six PPG customers represented approximately 67% of the PPG's total net sales for 2002. The unexpected loss of any of these customers may result in a temporary reduction in sales and profitability of the PPG. 7 FIBERS AND RECYCLED PRODUCTS GROUP The FRPG manufactures: - chemical-based polyester staple fibers for use in apparel, non-wovens, home products, and industrial products, - recycled-based polyester and nylon staple fibers for use in furniture, pillows, comforters, industrial products, carpets and rugs, and - recycled-based polyester and nylon engineering resins for use in the injection molding industry. This discussion does not include information with respect to the two businesses that we decided to sell in March 2002. See "Recent Developments - Discontinued Operations" above. Staple, 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(R) brand. Our chemical-based polyester 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, home products and industrial uses. Domestically, we manufacture polyester and nylon products from recycled raw materials at our facility in Johnsonville, SC. 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 manufacture polyester and nylon staple fiber from recycled raw materials at our production facility in Mullagh, Republic of Ireland. These fibers, used primarily in fiberfill, carpets, non-wovens and industrial applications, are exported primarily to the United Kingdom and continental Europe. Our Engineering Resins Division, located in Johnsonville, SC, manufactures and markets nylon and PET engineering resins under the Wellamid(TM) , EcoLon(TM), and WELLPET(R) brands to the injection molding industry. We produce these resins using virgin, post-consumer and post-industrial nylon compounded with various additives (glass, minerals, fire retardant, etc.) to impart desired performance characteristics. These resins are used primarily in automotive and electrical applications. No single customer had a material effect on FRPG's sales in 2002. RAW MATERIALS Our Permaclear(R) PET resins are produced by the PPG from purified terephthalic acid (PTA) and monoethylene glycol (MEG). Ecoclear(R) PET resins are produced from a combination of chemical and post-consumer recycled raw materials. Our chemical-based polyester staple fibers are also manufactured from PTA and 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 supply contracts with Equistar Chemicals, LP, BASF Corporation, and Dow Chemical. In Europe, we purchase PTA primarily from BP Amoco Chemical Company and MEG from Acordis. The prices of PTA and MEG have fluctuated in the past and are likely to continue to do so in the future. 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 purchase a 8 portion of these materials from manufacturers that compete with us in the sale of fibers and resins. We obtain our domestic post-consumer PET bottles primarily from curbside recycling and deposit return programs. Post-industrial materials include off-quality or off-spec production, trim and other materials generated from fiber, resin, or film manufacturing processes. The raw material mix for our Johnsonville facility can be varied depending upon market conditions for the respective raw materials. Historically, the raw material mix has been approximately 50% post-consumer PET bottle flake and 50% post-industrial material. The prices of recycled raw materials are variable and determined by worldwide supply and demand. Our European operations purchase recycled raw materials in various forms throughout Europe. Post-consumer PET containers are purchased from collection programs. Post-consumer materials are processed initially at our recycling facilities near Arnhem, the Netherlands, or Verdun, France. We believe that we are the world's largest producer of polyester staple fiber made from recycled feedstocks and the world's largest post-consumer PET bottle recycler. For additional information on our raw materials, see "Forward Looking Statements; Risks and Uncertainties." CAPITAL INVESTMENT PROGRAM Our capital expenditures in 2002 were approximately $21.7 million, compared to $28.1 million and $39.4 million for 2001 and 2000, respectively. In 2002, our capital expenditures included approximately $4.7 million of costs to begin converting fiber grade chip lines at our Palmetto facility to amorphous resin lines. For additional information, including capital expenditures expected in 2003, 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 cyclically. We sell to a diverse group of customers. Although no single customer represented more than 10% of our total net sales, six customers represented approximately 34.7% of our total net sales in 2002. See "Forward-Looking Statements; Risks and Uncertainties." Approximately 48 employees market the majority of our products. We also utilize representatives or agents for certain sales outside the United States. Our PET resins are promoted through various activities, including advertising, sales promotions and market development, into a variety of markets, including 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 polyester resins, including substitution of packaging products from glass, aluminum, and paper into polyester, consumer preferences and spending, general economic conditions, weather, and the export/import trade balance of polyester resin into the North American Free Trade Agreement (NAFTA) region. We do not expect a significant increase in imports of polyester resins into NAFTA in 2003. Our polyester 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 9 analysis and product development. As part of this effort, we encourage downstream purchasers of apparel, home furnishings and other products to specify to their suppliers the use of Fortrel(R) brand polyester in their products. Numerous factors affect the demand for polyester fiber, including polyester fiber and/or 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 fiber markets, particularly the commodity textile fiber markets, adversely affecting profitability. A downturn in either the U.S., European, or global economy or an increase in imports of textile or polyester fiber products into the U.S. 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. Several competitors are substantially larger than we are and have substantially greater economic resources. In North America, our primary competitors in the PET resins business are Eastman Chemical Co., KoSa, Gruppo Mossi and Ghisolfi (M&G), Nan Ya Plastics Corp. (Nan Ya), and Dupont-Akra Americas (DAK Americas). We believe we are currently the third-largest producer of PET resins in North America, representing approximately 16% of North American production capacity. In Europe, our main competitors in the PET resins business are Eastman Chemical Co., KoSa, DuPontSA, M&G, and Dow Chemical Co. Our share of the European PET resins market is less than 5%. Our primary domestic polyester staple fiber competitors are DAK Americas, KoSa, and Nan Ya. We believe we are currently the largest producer of polyester staple in the United States with approximately 30% of U.S. production capacity. Our main European fiber competitors are MonteFibre, Trevira and DuPontSA. In Europe, we are the largest supplier of recycled fibers and the largest supplier of polyester fiber for fiberfill and non-woven applications. Our share of the total European polyester staple market is less than 15%. RESEARCH AND DEVELOPMENT We have approximately 77 employees devoted to research, development and technical service activities in our fibers and resins businesses. Research and development costs were approximately $17.3 million, $14.6 million and $15.5 million for 2002, 2001 and 2000, respectively. FOREIGN ACTIVITIES We operate in international markets. Since a large portion of our non-U.S. sales are in different currencies, changes in exchange rates may affect profit margins and sales levels of these operations. In addition, fluctuations between currencies may also affect 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 hedges, see Item 7A. "Quantitative and Qualitative Disclosure about Market Risk" and note 14 to the Consolidated Financial Statements. 10 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 "Forward-Looking Statements; Risks and Uncertainties" for additional information relating to our foreign activities. EMPLOYEES As of December 31, 2002, we employed approximately 2,200 people in the United States and Europe. At December 31, 2002, the Union of Needle Trades, Industrial and Textile Employees (UNITE) represented 599 employees, of which 360 were union members, at our Johnsonville, SC operations. This contract expires on May 1, 2005. At WIL, four unions represented 265 of the 478 total employees at year-end 2002. The wage agreements with these unions expire on May 1, 2003. We employ 74 people at our PET Resins-Europe operation, with 46 represented by two unions whose contracts expire on April 30, 2003. We believe that relations with our employees are satisfactory. 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. 11 EXECUTIVE OFFICERS OF THE REGISTRANT Our current executive officers are as follows:
NAME AND AGE POSITION - ---------------------------- ------------------------------------------------------- Thomas M. Duff, 55 Chairman, Chief Executive Officer, and Director Clifford J. Christenson, 53 President, Chief Operating Officer, and Director Keith R. Phillips, 48 Vice President, Chief Financial Officer Michael E. Dewsbury, 53 Vice President, PET Resins Division - U.S. Audrey L. Goodman, 49 Vice President, Treasurer John R. Hobson, 62 Vice President, Fibers and Recycled Products Group Mark J. Rosenblum, 49 Vice President, Chief Accounting Officer and Controller Ernest G. Taylor, 52 Vice President, Chief Administrative Officer Joseph C. Tucker, 55 Vice President, Corporate Development
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. CLIFFORD J. CHRISTENSON. Mr. Christenson was elected President in December 1999 and has been Chief Operating Officer since June 1995. 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. JOHN R. HOBSON. Mr. Hobson has been Vice President, Fibers and Recycled Products Group since May 1999. Prior to that, he was Vice President, Recycled Products Group since July 1995. MARK J. ROSENBLUM. Mr. Rosenblum has been Vice President, Controller since September 1989, and Chief Accounting Officer since August 1996. Mr. Rosenblum is a certified public accountant. ERNEST G. TAYLOR. Mr. Taylor has been Vice President, Administration since January 1991. In November 1997 he became Vice President, Chief Administrative Officer. JOSEPH C. TUCKER. Dr. Tucker has been Vice President, Corporate Development since December 1997. Prior to such time, he served as Vice President and General Manager of PET Resins-Europe from 1995 to 1997. 12 AVAILABLE INFORMATION We file electronically with the Securities and Exchange Commission (or SEC) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.wellmaninc.com contacting the Investor Relations Officer at our corporate offices by calling (732) 212-3321, or by sending an e-mail message to dennis.sabourin@wellmaninc.com. ITEM 2. PROPERTIES The location, principal products produced and stated annual production capacity of our major manufacturing facilities are set forth in the table below. We own each of these properties.
STATED ANNUAL PRODUCTION CAPACITY LOCATION PRINCIPAL PRODUCTS (IN MILLIONS OF POUNDS) - ------------------------------- ------------------ ----------------------- Darlington, SC (Palmetto) PET resins (1) 720 Hancock County, MS (Pearl River) PET resins (2) 510 Emmen, the Netherlands PET resins 118 Darlington, SC (Palmetto) Polyester staple fiber 505 Johnsonville, SC Polyester staple fiber 242 Mullagh, Ireland Polyester staple fiber 174 Johnsonville, SC Engineering resins 62
- -------------------- (1) This includes 260 million pounds of amorphous resin capacity. (2) Staple fiber production assets at Pearl River Facility are currently idle. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Idle Assets." 13 ITEM 3. LEGAL PROCEEDINGS In January 2001, we received a document subpoena in connection with a federal grand jury investigation of pricing practices in the polyester staple industry. We have cooperated and continue to cooperate with the investigation by producing documents in response to this subpoena. In September 2002 the U.S. Department of Justice announced the indictment of a former sales manager of one of our competitors for conspiring to fix prices and allocate customers for polyester staple beginning in September 1999 and ending in January 2001. On October 31, 2002, the U.S. Department of Justice announced that it was filing informations against another competitor and one of its former officers as a result of their agreement to plead guilty to participating in a conspiracy to fix prices and allocate customers in the polyester staple industry. Neither we nor any of our employees have been charged with any wrongdoing, and we vehemently deny that we or any of our employees have engaged in price fixing or customer allocation. Following the disclosure of the investigation, the indictment of a competitor's employee and the informations and guilty pleas of another competitor and its employee, the producers of polyester fiber, including Wellman, have been named in various civil actions asserting claims substantially based on the indictment and informations. These proceedings are summarized below. Wellman and certain other companies have been named as defendants in nineteen 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 seventeen 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. Two of the cases are brought by plaintiffs who do not purport to represent a class. 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 are pending in the U.S. District Court for the Northern District of California, 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 and U.S. District Court for the District of South Carolina. 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, thirty-three 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. The case filed in West Virginia has been removed to federal court. A motion to remand is pending. If not remanded, this case will also be transferred to the Western District of North Carolina by the Judicial Panel on Multi-District Litigation for coordination or consolidation with the other federal cases. The case filed in Wisconsin was removed to federal court and subsequently remanded to the Circuit Court for Dane County, Wisconsin. In all of these cases, the plaintiffs seek damages of unspecified amounts, attorney's fees and costs and unspecified relief. 14 Recently, 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 $50 million (Canadian) 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 $10 million (Canadian). In addition to the foregoing, Wellman may become subject to additional proceedings and lawsuits under federal and state antitrust and unfair competition laws. Furthermore, the federal grand jury investigation is ongoing and additional indictments may result. We intend to vigorously defend against the civil claims and any civil or criminal claims or proceedings that may be brought against us in the future. Because of the early stage and complexity of the U.S. Department of Justice investigation and the related civil claims, we have not formed an opinion about whether these proceedings will have a material adverse effect on our consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION 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.
YEAR HIGH LOW DIVIDEND ---- ------ ------ -------- 2002 Fourth Quarter $13.99 $ 9.20 $0.09 Third Quarter $16.80 $13.05 $0.09 Second Quarter $18.22 $14.89 $0.09 First Quarter $16.98 $12.74 $0.09 2001 Fourth Quarter $15.49 $10.96 $0.09 Third Quarter $17.96 $10.57 $0.09 Second Quarter $19.50 $16.25 $0.09 First Quarter $19.99 $13.69 $0.09
We had 754 holders of record as of March 10, 2003. See note 11 to the Consolidated Financial Statements for information regarding common stock rights associated with our common stock. 15 RECENT SALES OF UNREGISTERED SECURITIES On February 12, 2003, we sold to Warburg Pincus VIII in a private placement a convertible subordinated note in the aggregate principal amount of $20.0 million that will be automatically converted into preferred stock upon shareholder approval and a warrant to purchase 1.25 million shares of our common stock at an exercise price of $11.25 per share. For additional information, see Item 1. "Recent Developments - Private Equity Investment." The offer and sale of these securities were exempt from the registrant requirements of the Securities Act of 1933 (the Act) pursuant to the exemption under Section 4(2). On September 17, 2002 and December 20, 2001, we sold to John Hancock Life Insurance Company in private placements senior unsecured notes in the principle amounts of $25.0 million and $40.0 million, respectively. These notes bear interest at 7.46% and 7.55%, respectively, and mature in 2009 and 2011, respectively. The offer and sale of these securities were exempt from the registrant requirements of the Act pursuant to the exemption under Section 4(2). On November 16, 2001, we sold to Metropolitan Life Insurance Company in a private placement a senior unsecured note in the principal amount of $35.0 million. This note bears interest at a floating rate based on LIBOR and matures in 2004. The offer and sale of this security was exempt for the registrant requirements of the Act pursuant to the exemption under Section 4(2). 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, (In thousands, except per share data) 2002 2001(1) 2000(1) ------------ ------------ ------------ Income Statement Data: Net sales $ 1,013,968 $ 1,009,560 $ 1,021,543 Cost of sales 898,745 901,539 887,183 ----------- ----------- ----------- Gross profit 115,223 108,021 134,360 Selling, general and administrative expenses 73,900 72,788 68,214 Restructuring charges (benefit) -- -- (793) Other Income 4,365 -- -- ----------- ----------- ----------- Operating income (loss) 45,688 35,233 66,939 Interest expense, net 10,254 17,957 17,959 Loss on cancellation of fixed-ratefinancial instrument -- -- -- ----------- ----------- ----------- Earnings (loss) from continuing operations before income taxes (benefit) 35,434 17,276 48,980 Income tax expense (benefit) 9,036 3,854 13,563 ----------- ----------- ----------- Earnings (loss) from continuing operations 26,398 13,422 35,417 Earnings (loss) from discontinued operations, net of income tax (23,651) (5,033) (2,649) ----------- ----------- ----------- Earnings (loss) before cumulative effect of accounting change 2,747 8,389 32,768 Cumulative effect of accounting change, net of tax (197,054) -- -- ----------- ----------- ----------- Net earnings (loss) $ (194,307)(2) $ 8,389(3) $ 32,768(4) =========== =========== =========== Basic net earnings (loss) per common share: Continuing operations $ 0.84 $ 0.43 $ 1.13 Discontinued operations (0.75) (0.16) (0.09) Cumulative effect of accounting change (6.24) -- -- ----------- ----------- ----------- Net earnings (loss) $ (6.15) $ 0.27 $ 1.04 =========== =========== =========== Basic weighted-average common shares outstanding 31,579 31,542 31,367 =========== ============ =========== Diluted net earnings (loss) per common share: Continuing operations $ 0.82 $ 0.42 $ 1.11 Discontinued operations (0.73) (0.16) (0.08) Cumulative effect of accounting change (6.16) -- -- ----------- ----------- ----------- Net earnings (loss) $ (6.07) $ 0.26 $ 1.03 =========== =========== =========== Diluted weighted-average common shares outstanding 32,015 32,031 31,884 =========== =========== =========== Dividends (7) $ 11,467 $ 11,461 $ 11,390 =========== =========== ===========
YEARS ENDED DECEMBER 31, (In thousands, except per share data) 1999(1) 1998(1) ------------ ----------- Income Statement Data: Net sales $ 849,416 $ 859,828 Cost of sales 766,303 740,302 ----------- ----------- Gross profit 83,113 119,526 Selling, general and administrative expenses 70,405 70,897 Restructuring charges (benefit) 17,382 6,861 Other Income -- -- ----------- ----------- Operating income (loss) (4,674) 41,768 Interest expense, net 13,281 8,302 Loss on cancellation of fixed-rate financial instrument -- 23,314 ----------- ----------- Earnings (loss) from continuing operations before income taxes (benefit) (17,955) 10,152 Income tax expense (benefit) (5,705) 3,869 ----------- ----------- Earnings (loss) from continuing operations (12,250) 6,283 Earnings (loss) from discontinued operations, net of income tax (946) 6,217 ----------- ----------- Earnings (loss) before cumulative effect of accounting change (13,196) 12,500 Cumulative effect of accounting change, net of tax (1,769) -- ----------- ----------- Net earnings (loss) $ (14,965)(5) $ 12,500(6) =========== ============ Basic net earnings (loss) per common share: Continuing operations $ (0.39) $ 0.20 Discontinued operations (0.03) 0.20 Cumulative effect of accounting change (0.06) -- ----------- ----------- Net earnings (loss) $ (0.48) $ 0.40 =========== =========== Basic weighted-average common shares outstanding 31,203 31,178 =========== =========== Diluted net earnings (loss) per common share: Continuing operations $ (0.39) $ 0.20 Discontinued operations (0.03) 0.20 Cumulative effect of accounting change (0.06) -- ----------- ----------- Net earnings (loss) $ (0.48) $ 0.40 =========== =========== Diluted weighted-average common shares outstanding 31,203 31,391 =========== =========== Dividends (7) $ 11,310 $ 11,253 =========== ===========
17
DECEMBER 31, 2002 2001 2000 1999 1998 --------- ---------- ---------- ---------- ---------- Balance Sheet Data: Total assets $ 965,210 $1,234,430 $1,332,184 $1,329,387 $1,482,898 Total debt $ 236,909 $ 333,144 $ 381,521 $ 405,974 $ 556,548 Stockholders' equity $ 426,698 $ 612,739 $ 625,525 $ 602,364 $ 638,128
(1) The income statement data for these periods have been reclassified to reflect separately the earnings (loss) from discontinued operations. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Discontinued Operations" and note 2 to the Consolidated Financial Statements. (2) Net earnings for 2002 include $2,837, or $0.09 per diluted share, in proceeds received under the Continued Dumping and Subsidy Offset Act of 2000, a charge of $2,600, or $0.08 per diluted share, for expected losses on accounts receivable, and a cumulative effect of an accounting change of ($197,054) or $(6.16) per diluted share. For additional information, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and note 2 to the Consolidated Financial Statements. (3) Net earnings for 2001 include the after-tax financial impact of the property damage and other costs associated with a production outage of $6,433, or $0.20 per diluted share, and income from property damage claims and business interruption insurance of $6,855, or $0.21 per diluted share. For additional information, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Production Outages." (4) Net earnings for 2000 include the after-tax effects of income from business interruption insurance of $3,290, or $0.10 per diluted share, a charge for the activities necessary to idle the Pearl River staple fiber production assets of $1,268, or $0.04 per diluted share, and a restructuring benefit of $554, or $0.02 per diluted share. (5) Net loss for 1999 includes the after-tax effects of a restructuring charge of $11,875, or $0.38 per diluted share, costs associated with production outages of $6,145, or $0.20 per diluted share, and the cumulative effect of an accounting change of $1,769, or $0.06 per diluted share. (6) Net earnings for 1998 include the after-tax effects of a loss of $14,804, or $0.47 per diluted share, on the termination of a fixed-rate treasury lock commitment, a lower-of-cost-or-market inventory adjustment of $5,486, or $0.17 per diluted share, and a restructuring charge of $4,357, or $0.14 per diluted share. (7) Dividends paid were $0.36 per share in 2002, 2001, 2000, 1999, and 1998. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are principally engaged in the manufacture and marketing of PermaClear(R) and EcoClear(R) brand PET resins and high-quality polyester products, including Fortrel(R) brand polyester fibers. 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, 2002, 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. See Item 1. "Business-Recent Developments" for information concerning businesses discontinued in the first quarter of 2002, and see "Outlook" below for information on our ability to convert certain fiber capacity to PET packaging resins. 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(R) PET and HP(R) resins are produced by the PPG from purified terephtalic acid (PTA) and monoethylene glycol (MEG) and EcoClear(R) PET resins are produced from a combination of chemical and post-consumer recycled raw materials. These resins are primarily used in the manufacture of plastic soft drink bottles and other food and beverage packaging. The FRPG produces Fortrel(R) fibers, which are primarily used in apparel, non-wovens, home products, and industrial products. These fibers are also produced from PTA and MEG. In addition, Fortrel(R) polyester and nylon for use primarily in furniture, pillows, comforters, industrial products, carpets and rugs, are manufactured from recycled PET raw materials, including post-consumer containers and post-industrial 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 fibers historically has been cyclical. It 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 impact the United States fiber markets, adversely affecting our profitability. Our profitability is primarily determined by our raw material margins, which is the difference between product selling prices and raw material costs. Both PET resin and fiber 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 $.01 change in raw material margin on approximately 2.0 billion pounds of resin and fiber volume results in an annual change of approximately $20 million in pretax income. See "Outlook" below for information on raw material prices in 2003. 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 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. 19 CRITICAL ACCOUNTING POLICIES Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are based on historical experience, information received from third parties and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates. Our significant accounting policies are described in note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. We believe the following critical accounting policies, among others, involve significant judgments and estimates used in the preparation of the consolidated financial statements. The critical accounting policies have been reviewed with our Audit Committee of the Board of Directors. ACCOUNTS RECEIVABLE We perform periodic credit evaluations of our customers' financial condition and generally do not require collateral. We have established a reserve for uncollectible accounts receivable 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 customers. These judgments could vary significantly from actual amounts realized, resulting in changes in bad debt expense and allowances. 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. We increased our reserve for uncollectible accounts by $4.0 million in the fourth quarter of 2002. 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 its valuation. These judgments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements 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 on 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. Effective January 1, 2002, we were required to adopt SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." See note 2 to the Consolidated Financial Statements. SFAS 144 established criteria to determine when a long-lived asset is held for sale and whether the results of operations of a component of an entity that either has been disposed of or is classified as held for sale should be reported in discontinued operations. In accordance with SFAS No. 144, when an asset is held for sale, it is measured at the lower of its carrying amount or fair value less costs of disposal. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. Judgment is required in determining the fair value of the assets and could differ from the actual amount received upon disposal. 20 GOODWILL AND OTHER INTANGIBLES 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." See note 2 to the Consolidated Financial Statements. 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 income in the period such determination was made. PENSION BENEFITS Our pension benefit costs and liabilities are calculated utilizing various actuarial assumptions and methodologies prescribed under SFAS No. 87, "Employers' Accounting for Pensions." We utilize certain assumptions, including, but not limited to, the selection of the discount rate, the expected rate of return on plan assets, projected salary increases, and mortality rates. The actuarial assumptions used in our pension reporting are reviewed annually and compared to external benchmarks to assure our pension obligations are fairly stated. Changes in assumptions and future investment returns could affect our pension expense and related funding requirements. 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 have an impact on our consolidated financial results in a future reporting period. 21 IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a parent company if that company is 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. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. These variable interest entities are commonly referred to as special-purpose entities or off-balance sheet financings. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The only contractual obligation that may be impacted by FIN 46 is a sale and leaseback transaction we entered into in 1999. We expect to restructure the sale and leaseback transaction prior to July 1, 2003. If we are successful, the sale and leaseback transaction will not be impacted by FIN 46. Otherwise, we will consolidate the transaction and either record the impact as a cumulative effect of an accounting change or restate the prior years' financial information. Other than normal financial risks, we do not have any exposure to risks as a result of this transaction. We do not expect the adoption of FIN 46 to affect our compliance with debt covenants. See Table II below and note 3 to the Consolidated Financial Statements. DISCONTINUED OPERATIONS In January 2002, we announced plans to refocus the strategy of our polyester fibers business in order to be less dependent on commodity fibers. We plan to direct our production capacity toward more differentiated, higher value-added products, taking advantage of our unique production capabilities of polymer and extrusion fiber manufacturing and our chemical and recycled-based raw material sources. We believe that this new strategy will enable us to face the competitive challenges presented by the imports of textile and apparel fiber and finished goods that continue to adversely affect the domestic fibers market, particularly the domestic commodity textile market. As a result of our review of strategic alternatives, in March 2002 we decided to sell our POY business and our small recycled fine denier polyester staple fiber business with manufacturing facilities located in Fayetteville, North Carolina and Marion, South Carolina, respectively. These businesses are reported as discontinued operations in our financial statements. On June 18, 2002, we sold the property, plant and equipment and inventory of our POY business. The aggregate sales price was $1.7 million in cash (including the reimbursement of certain business expenses) and the assumption of certain liabilities. The total loss on disposal of the assets of our POY business for the year ended December 31, 2002 was $16.2 million, net of taxes. The net loss is included in discontinued operations in our Consolidated Statements of Operations. The assets of our small recycled fine denier polyester staple fiber business are reported separately in our Consolidated Balance Sheet at December 31, 2002 and 2001. We recorded an impairment charge of $4.7 million, net of taxes, in the first quarter of 2002 to reflect the assets at their fair value less costs of disposal. We expect to sell these assets by the end of the first quarter of 2003. The net operating results for the POY and recycled fine denier polyester staple fiber businesses for the year ending December 31, 2002 have been reflected as discontinued operations in our Consolidated Statements 22 of Operations. In addition, information for all prior years presented has been reclassified in accordance with Statement of Financial Accounting Standards (SFAS) No. 144 to reflect separately the assets of the discontinued operations and the loss from discontinued operations. IDLE ASSETS We completed the construction of our Pearl River facility in 2000. This facility consists of two resin lines and one polyester staple fiber line. In December 2000, we idled the fiber line because of the expected over-supply of polyester staple fiber in the United States in 2001. Since this line is depreciated using the units of production depreciation method, no depreciation expense has been charged with respect to this line since December 2000. It has a net book value of approximately $192.0 million at December 31, 2002. In June 2002, Wellman announced plans to modify the fiber line to enable it to produce either PET resin or polyester fiber. This will allow us to take advantage of the expected growth in the PET resins industry, while maintaining our ability to respond to future fiber needs. In December 2002, we announced plans to delay the modification originally scheduled to begin in the first quarter 2004 until we are able to improve the project's economic return. For additional information on idle assets, see note 1 to the Consolidated Financial Statements. We performed an impairment analysis of the Pearl River facility and determined that the assets were not impaired at December 31, 2002. Our analysis demonstrated that we had no impairment because this facility is expected to generate sufficient cash flow during its useful life provided our average margins do not decline by more than 33% from today's levels. We expect the currently idled assets at this facility to begin generating additional cash flows beginning in early 2005. We assume the facility will operate at 85% of stated annual production capacity. RESULTS OF OPERATIONS 2002 COMPARED TO 2001 Total net sales from continuing operations for 2002 increased $4.4 million, or 0.4%, to $1,014.0 million from $1,009.6 million in 2001 due to the following:
PPG FRPG TOTAL ------- ------- ------- Net selling prices $ (61.9) $ (18.0) $ (79.9) Sales volumes 49.8 25.9 75.7 Foreign currency translation 3.7 4.9 8.6 ------- ------- ------- $ (8.4) $ 12.8 $ 4.4 ======= ======= =======
Total costs of sales from continuing operations for 2002 decreased $2.8 million, or 0.3%, to $898.7 million from $901.5 million due to the following:
PPG FRPG TOTAL ------- ------- ------- Raw material costs $ (13.9) $ (17.0) $ (30.9) Plant added costs 11.8 7.2 19.0 Foreign currency translation 4.8 4.3 9.1 ------- ------- ------- $ 2.7 $ (5.5) $ (2.8) ======= ======= =======
23 Lower raw material costs were the result of lower unit costs, partially offset by higher production volumes. Plant costs were higher in the aggregate as a result of higher production levels, but were lower on a unit-cost basis. During 2001, our operations were negatively impacted by a production outage that increased our costs by approximately $9.9 million, or $0.20 per diluted share, and lowered our volumes. These costs were offset by business interruption insurance of approximately $10.6 million. See note 6 to the Consolidated Financial Statements. Our lower raw material costs were partially offset by higher plant costs. These included higher net periodic pension costs, which are primarily due to the changes in net amortization and deferral for our foreign plans in 2002. Our Irish plans amortize annual actuarial gains (losses) over a five-year period (without regard to any corridor) provided the minimum GAAP amortization requirements are met each year. In 2002, our net amortization and deferral was recognized using the minimum amortization requirement that limited the recognition of the actuarial gain that year. This was the first year that the minimum amortization requirement reduced the recognition of previously realized actuarial gains that were being amortized over five years. Therefore, our net periodic pension cost was greater than the prior two years because of this requirement. We also expect to record pension expense for our Irish pension plan in 2003 in part because of the minimum amortization requirement. As a result of the foregoing, gross profit increased 6.7% to $115.2 million in 2002 compared to $108.0 million in 2001. The gross profit margin was 11.4% in 2002 compared to 10.7% in 2001. Selling, general and administrative expenses were $73.9 million, or 7.3% of sales, in 2002 compared to $72.8 million, or 7.2% of sales, in 2001. Expenses for 2001 included amortization of goodwill totaling $8.4 million. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill amortization be discontinued and replaced with annual tests of impairment. For additional information, see note 2 to the Consolidated Financial Statements. Excluding the amortization expense for goodwill from the prior year, selling, general and administrative expenses increased in 2002 by $9.5 million. The increase in 2002 was due primarily to bad debt expense of approximately $4.0 million for unexpected losses on accounts receivable, costs associated with new strategic initiatives of $3.2 million, and higher professional fees of $1.9 million due to the on-going Department of Justice investigation of the staple fiber industry. We increased our reserve for uncollectible accounts receivable by $4.0 million in the fourth quarter of 2002. Our textile customer base faces competitive challenges presented by the imports of textile and apparel finished goods that continue to adversely affect their profitability. Two of our FRPG customers filed unexpected bankruptcy proceedings in January 2003. Our trade accounts receivable balances from these customers were $5.6 million at December 31, 2002, of which $1.6 million was collected in January 2003. The reserve was established based on the expected uncollectibility of the trade accounts receivables. Other income for 2002 consisted of proceeds of $4.4 million received under the Continued Dumping and Subsidy Offset Act of 2000. For additional information, see Item 1. "Recent Developments - Continued Dumping and Subsidy Offset Act of 2000." As a result of the foregoing, we reported operating income of $45.7 million in 2002 compared to $35.2 million in 2001. Net interest expense was $10.3 million in 2002 compared to $18.0 million in 2001. The decrease was due to a lower average debt balance and lower average interest rates during 2002. Our effective tax rate for 2002 on income from continuing operations was 25.5% compared to 22.3% in 2001. The principal item affecting our rate was foreign earnings, which are taxed at rates lower than U.S. rates. The amount of foreign earnings declined in 2002 compared to 2001; however, this was offset by the elimination of the amortization of non-deductible goodwill. 24 As a result of the foregoing, net earnings from continuing operations were $26.4 million, or $0.82 per diluted share, for the 2002 period compared to $13.4 million, or $0.42 per diluted share, for 2001. We reported a net loss from discontinued operations of $(23.7) million, or $(0.73) per diluted share, and $(5.0) million, or $(0.16) per diluted share, for 2002 and 2001, respectively. We adopted a plan in March 2002 to sell our POY business and our small recycled fine denier polyester staple fiber business, the assets of which were previously reported as part of our FRPG. On June 18, 2002 we sold our POY business and reported a loss on disposal. For additional information, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Discontinued Operations" and note 2 to the Consolidated Financial Statements. As required by SFAS No. 142, we completed our initial assessment of goodwill using the two-step approach described in the Statement and determined that the goodwill related to our FRPG segment was impaired. As a result, the carrying value of this goodwill was reduced by $197.1 million to its implied value. The reduction was recorded as a cumulative effect of accounting change in our first quarter 2002 financial statements. For additional information, see note 2 to the Consolidated Financial Statements. As a result of the foregoing, we reported a net loss of $(194.3) million, or $(6.07) per diluted share, for 2002, compared to net earnings of $8.4 million, or $0.26 per diluted share, for 2001. 2001 COMPARED TO 2000 Total net sales from continuing operations for 2001 decreased $12.0 million, or 1.2%, to $1,009.6 million from $1,021.5 million in 2000 due to the following:
PPG FRPG TOTAL ------- -------- ------- Sales volumes $ 38.0 $ (42.2) $ (4.2) Net selling prices (2.0) (0.7) (2.7) Foreign currency translation (2.1) (3.0) (5.1) ------- ------- ------- $ 33.9 $ (45.9) $ (12.0) ======= ======= =======
Total costs of sales from continuing operations for 2001 increased $14.4 million, or 1.6%, to $901.5 million from $887.2 million due to the following:
PPG FRPG TOTAL ------- -------- ------- Raw material costs $ 22.5 $ ( 9.5) $ 13.0 Plant added costs 8.5 (3.0) 5.5 Foreign currency translation (1.4) (2.7) (4.1) ------- ------- ------- $ 29.6 $ (15.2) $ 14.4 ======= ======= =======
During 2001, our operations were negatively impacted by a production outage that increased our costs by approximately $9.9 million, or $0.20 per diluted share, and lowered our sales volumes. See note 6 to the Consolidated Financial Statements. As a result of the foregoing, gross profit decreased 19.6% to $108.0 million in 2001 compared to $134.4 million in 2000. The gross profit margin was 10.7% in 2001 compared to 13.2% in 2000. 25 Selling, general and administrative expenses were $72.8 million, or 7.2% of sales, in 2001 compared to $68.2 million, or 6.7% of sales, in 2000. This increase was partially due to increased selling costs of new products, wage increases, and increased professional fees due to the on-going Department of Justice investigation of the staple fiber industry. During the second quarter of 1999, we implemented an overall cost reduction and productivity improvement plan, which was completed in the fourth quarter of 2000. In 2000, we recognized restructuring income of $0.8 million ($0.5 million after tax), or $0.02 per diluted share, from over-accruals related to this plan. As a result of the foregoing, we reported operating income of $35.2 million in 2001 compared to $66.9 million in 2000. Net interest expense was $18.0 million in both 2001 and 2000. Our effective tax rate for 2001 on income from continuing operations was 22.3% compared to 27.7% in 2000. The principal items which affected our rate were foreign earnings, which are taxed at rates lower than U.S. rates, and amortization of nondeductible goodwill. The net effect of these two items was a reduction in the tax rate. As a result of the foregoing, net earnings from continuing operations were $13.4 million, or $0.42 per diluted share, for the 2001 period compared to $35.4 million, or $1.11 per diluted share, for 2000. We reported a net loss from discontinued operations of $(5.0) million, or $(0.16) per diluted share, and $(2.6) million, or (0.08) per diluted share, for 2001 and 2000, respectively. We adopted a plan in March 2002 to sell our POY business and our small recycled fine denier polyester staple fiber business, the assets of which were previously reported as part of our FRPG. On June 18, 2002 we sold our POY business and reported a loss on disposal. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we restated all prior years' information. For additional information, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Discontinued Operations" and note 2 to the Consolidated Financial Statements. As a result of the foregoing, we reported net earnings of $8.4 million, or $0.26 per diluted share, for 2001, compared to net earnings of $32.8 million, or $1.03 per diluted share, for 2000. OUTLOOK The following statements are forward-looking statements and should be read in conjunction with "Forward-Looking Statements; Risks and Uncertainties" below. We expect 2003 to be more profitable than 2002 due to expected increases in PET resin volumes and margins. We expect domestic PET resins capacity utilization to increase in future years because PET resins demand is expected to grow faster than announced capacity increases. We expect demand for PET resins to grow in traditional PET packaging markets, as well as in new markets and products. These new products include food products like spaghetti sauce, vegetables, and jellies that require higher filling temperatures. In addition, resin customers have indicated they expect to use more of our recycled content resin. Increased capacity utilization is expected to result in increased margins in the industry. 26 We successfully implemented two significant selling price increases in our domestic PET resins business on January 1, 2003 and March 1, 2003 and have announced an additional selling price increase of $0.08 per pound effective April 1, 2003. These increases are primarily to offset sharply higher chemical raw material costs. While we anticipate increasing PET resin margins in 2003, given the competitive nature of our business and other market influences, there can be no assurance that this will occur. We expect the poor economic conditions in the domestic fibers market to continue as imports throughout the textile chain, especially from China, continue to adversely impact this market. We successfully implemented a significant selling price increase in our domestic fibers business on March 2, 2003 and have announced additional selling price increases of 11% to 14% effective April 6, 2003. These increases are expected to offset sharply higher chemical raw material costs. However, there can be no assurance that we will maintain our raw material margins. To compete with imports of textile products, our Fibers Group continues to introduce differentiated high value-added products. We expect these products to have a small positive impact on raw material margins in 2003. In 2003, we expect to sell approximately 1.1 billion pounds of PET resins and 850 million pounds of polyester staple fibers. We intend to continue to focus on cost reductions and expect that these reductions will more than offset operating cost increases. We anticipate our depreciation and amortization to be between $45-$50 million and capital expenditures to be between $25-$30 million. In June 2002, we announced the delay in the conversion of a polyester staple fiber line at our Pearl River facility to a swing line. This line would allow the production of either polyester staple fiber or PET resin. While we do not plan to start this project in 2003, we expect to announce the timetable for construction by the end of 2003. In January 2003, Moody's Investors Service lowered our credit rating to Ba2 with a stable outlook. As a result, we are currently rated below investment grade by both Moody's and Standard & Poor's. In February 2003, we signed a securities purchase agreement that will permit the issuance and sale of up to $125.4 million of preferred stock and warrants to Warburg Pincus VIII if certain conditions are met, including shareholder approval of the proposal and our entering into a new 3-year $175 million senior revolving credit facility that retires our existing $275 million senior revolving credit facility. We expect the change in our credit rating to increase our financing costs, which would be offset by the expected reduction in interest expense as a result of lower debt if the equity investment is consummated. In February 2003, after the announcement of the private equity investment, Standard & Poor's improved our rating from BB+ with a negative outlook to BB+ with a stable outlook. CAPITAL RESOURCES AND LIQUIDITY Net cash provided by operations, including both continuing and discontinued operations, was $128.3 million, for 2002 compared to $91.3 million for 2001. Cash from operations in 2002 included a $20.2 million tax refund, approximately $20.2 million from decreases in working capital (exclusive of the current portion of long-term debt), and $4.4 million received under the Continued Dumping and Subsidy Offset Act of 2000. Net cash used in investing activities amounted to $20.1 million in 2002 compared to $28.1 million in 2001. Capital expenditures were $21.7 million in 2002 compared to $28.1 million in 2001. For information about expected capital expenditures in 2003, see "Outlook" above. 27 Net cash used in financing activities (principally related to debt repayments) amounted to $110.1 million in 2002 compared to $61.3 million in 2001. This resulted from lower capital expenditures and improved cash flow from operations in 2002. The following table describes our debt facilities, providing details as to the maturity of these facilities and amounts outstanding at December 31, 2002, as well as available funding from both committed and uncommitted facilities. TABLE I
DECEMBER 31, 2002 (IN MILLIONS) AMOUNTS AMOUNTS AVAILABLE AVAILABLE UNDER TOTAL AMOUNT UNDER ALL COMMITTED MATURITY FACILITY COMMITMENT OUTSTANDING FACILITIES FACILITIES -------- -------- ---------- ----------- ---------- ---------- Uncommitted Lines of Credit (1) N/A $ 75.0 N/A $ 25.5 $ 49.5 Prudential Note (2) Feb 2003 $ 50.0 $ 50.0 $ 50.0 Revolving Bank Facility (3) Sept 2003 $ 275.0 $ 275.0 $ 5.0 $ 270.0 $ 270.0 Metropolitan Note (4) Nov 2004 $ 35.0 $ 35.0 $ 35.0 Hancock Note (5) Dec 2011 $ 40.0 $ 40.0 $ 40.0 Hancock Note (6) Sept 2009 $ 25.0 $ 25.0 $ 25.0 Industrial Revenue Bonds (7) 2010+ $ 50.7 $ 50.7 $ 50.7 Financial Instruments and Other (8) N/A $ 5.7 N/A $ 5.7 ------- -------- -------- -------- Total $ 556.4 $ 236.9 $ 319.5 $ 270.0 ======= ======== ======== ========
(1) We have uncommitted lines of credit from banks. Gene rally these lines of credit can be terminated at any time as long as we have not borrowed against them. We use these lines to borrow at competitive rates on a short-term basis. (2) We borrowed $50.0 million from Prudential Insurance Company in February 2000 at an interest rate of 8.41% as senior unsecured indebtedness with a single principal payment due in February 2003. This debt was repaid on its maturity date. In conjunction with this financing, we entered into interest rate swaps, which effectively converted the total amount of this fixed-rate debt to floating-rate debt. These swaps were terminated during 2002, resulting in a gain of $1.5 million. This gain, $0.4 million at December 31, 2002, is included in "Financial Instruments and Other" in Table 1 and is being recognized as a reduction in interest expense over the remaining life of the debt. 28 (3) We initially entered into a 4-year $325.0 million unsecured revolving credit agreement in September 1999. In April 2000, we voluntarily reduced the commitment to $275.0 million. Amounts are borrowed under this facility at floating rates and normally have maturities of six months or less. This facility matures in September 2003. Management expects to enter into a new facility during the first half of 2003. (4) We borrowed $35.0 million from Metropolitan Life Insurance Company in November 2001 as senior unsecured indebtedness at a floating interest rate based on Libor, payable quarterly, with a single principal payment due in November 2004. (5) We borrowed $40.0 million from John Hancock Life Insurance Company in December 2001 as senior unsecured indebtedness at an interest rate of 7.55%, payable semi-annually, with a single principal payment due in December 2011. In conjunction with this financing, we entered into interest rate swaps, which effectively convert the total amount of this fixed-rate debt to floating-rate debt. See (8) below for more information on our derivative financial instruments. (6) We borrowed $25.0 million from John Hancock Life Insurance Company in September 2002 as senior unsecured indebtedness at an annual fixed rate of 7.46%, payable semi-annually, with a single principal payment due in September 2009. (7) We issued $50.7 million of Industrial Revenue Bonds in the 1990's. These are senior unsecured bonds. We intend to redeem $9.5 million of the Industrial Revenue Bonds in March 2003, in conjunction with the sale of our Marion facility. The remaining bonds mature on various dates beginning in 2010. These bonds bear interest at a floating rate and are supported by letters of credit that may be terminated upon 13 months notice. If a letter of credit is terminated, we would have to replace it, arrange for other security, or redeem the Bonds. (8) We have various financial instruments described below, in Item 7A. "Quantitative and Qualitative Disclosure about Market Risk" and in note 14 to the Consolidated Financial Statements. The financial instruments have a net value at December 31, 2002 of approximately $5.3 million that is accounted for as a reduction of our debt obligations. 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, 2002 under all debt agreements (see the Amounts Outstanding in the table above), commitments and other contractual obligations. The table indicates the years in which payments are due under the contractual obligations. This table includes commitments and other contractual obligations, including those with unconsolidated entities or financial partnerships (variable interest entities). In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" that establishes new criteria for determining if variable interest entities should be consolidated. For additional information, including the impact on our Consolidated Financial Statements, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Recently Issued Accounting Pronouncements." Historically, we have been able to pay, renew or refinance these contractual obligations in advance of their termination dates and expect to maintain this ability for the foreseeable future. See "Forward-Looking Statements; Risk and Uncertainties." 29 TABLE II
PAYMENTS DUE BY PERIOD (IN MILLIONS) CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 AFTER 2005 ----------- -------- -------- -------- -------- ----------- Debt Agreements (see Table I) $ 236.9 $ 70.4 $ 35.0 $ 131.5 Receivables Securitization (1) 64.2 64.2 Operating Leases including Sale and Leaseback (2) 187.6 17.9 161.5 5.3 2.9 Raw Material Purchase Obligations (3) 115.7 19.3 19.3 19.3 57.8 -------- -------- -------- -------- -------- Total $ 604.4 $ 171.8 $ 215.8 $ 24.6 $ 192.2 ======== ======== ======== ======== ========
(1) We replaced our existing receivables purchase agreement in September 2002. Under the new agreement, we may continue to sell without recourse up to $80.0 million in an undivided interest in certain of our domestic trade accounts receivable at a discount, on a revolving basis, through an unconsolidated receivables subsidiary. This type of funding permits us to obtain funds at a rate lower than the borrowing rates available on our uncommitted lines or our revolving credit agreement. The program was structured as a three-year facility; however, the program must be renewed annually. Although we expect to renew the program, if it is not renewed or replaced, we would not be able to sell our receivables in this manner and our receivables and debt as reflected on our Consolidated Financial Statements would each increase by the amount of the receivables that would otherwise have been sold at that time. (2) The resin assets at our Palmetto facility were sold in June 1999 in a sale and leaseback transaction. The equipment was purchased from us for its fair market value (as verified by an independent appraisal) of $150.0 million. Under the 5-year operating lease we entered into for this equipment, our rental payments as the lease is currently structured are expected to be approximately $10.3 million per annum for the remainder of the lease, which is lower than the financing cost we otherwise would have incurred if we had borrowed the fair market value of the equipment at the time of the transaction. In addition to this transaction, we have normal operating leases with aggregate rental payments approximating $7.6 million in 2003 and varying amounts thereafter. (3) We have entered into several contracts for varying terms of up to ten years to purchase raw materials. One raw material contract requires us to make unconditional minimum annual payments of $19.3 million per year through December 2008. The supplier used our contract to obtain financing that expires in March 2004. If the financing cannot be replaced, then in order for us to preserve our favorable raw material pricing under this contract we would pay the present value of the remaining minimum payments ($75 million as of March 2004). Any such accelerated payments would reduce our payments during the remaining term of the contract. We 30 anticipate that we will have sufficient liquidity, if necessary, to make this payment, including availability under our revolving credit facility. This contract represents less than one third of our annual raw material purchases. Except for certain of the contractual obligations discussed above, we did 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. Many of the contractual obligations in Table II contain provisions that change the costs of the obligations (e.g., interest rates) based on our credit ratings. As of January 2003, we were rated as non-investment grade by both rating agencies. We are currently rated BB+ with a stable outlook by Standard and Poor's (S&P) and Ba2 with a stable outlook by Moody's Investors Service (Moody's). As a result of Moody's changes to our rating in January 2003, we expect our interest costs under these contractual obligations to increase by approximately $3.0 million in 2003 compared to 2002. Substantially all of the contractual obligations in Table II contain normal financial and restrictive covenants. The principal financial covenants require that we maintain a debt to capital ratio of less than 55% and a ratio of EBITDA (earnings before charges for interest, taxes, depreciation and amortization) from continuing operations to our net interest expense (both for the previous four quarters) of greater than 3.5 to 1. At December 31, 2002, our debt to capital ratio was 35.7% and our ratio of EBITDA to net interest was 9.9: 1.0. These obligations also contain covenants that prohibit liens except in certain situations. Certain subsidiaries have guaranteed substantially all of our indebtedness for borrowed money. These obligations also contain cross acceleration and cross payment default provisions for amounts greater than $10.0 million. At December 31, 2002, we were in compliance with the covenants and expect to remain in compliance for the foreseeable future. See note 7 to the Consolidated Financial Statements. However, if current business conditions deteriorate or certain events occur (including those set forth in "Forward Looking Statements, Risks and Uncertainties" below), we may breach these covenants, in which case substantially all of these contractual obligations would immediately become due and payable. If this occurred, there is no certainty these obligations could be refinanced. If these obligations were refinanced under those circumstances, there is a high probability that we would incur increased costs and some or all of the contractual obligations would be classified as debt on our balance sheet. The financial resources available to us at December 31, 2002 included $319.5 million under our revolving credit facility and unused short-term uncommitted lines of credit, and internally generated funds. Based on our debt level as of December 31, 2002, we could have had an average of approximately $284.1 million of additional debt outstanding during the year without amending the terms of our debt agreements. Our current financing sources are primarily dependent on the bank and commercial paper markets since these are the lowest cost funds available. The availability and cost of these funds can change in a short period of time for a variety of reasons. As a result, we cannot be sure that low cost financing will continue to be available to us. However, we believe our financial resources will be sufficient to meet our foreseeable needs for working capital, capital expenditures and dividends. In addition, we have entered into an agreement to sell up to $125.4 million of perpetual convertible preferred stock to Warburg Pincus VIII. For additional information, see Item 1. "Recent Developments - Private Equity Investment." 31 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 $5.7 million and $20.2 million. In connection with these expenditures, we have accrued undiscounted liabilities of approximately $9.3 million and $10.5 million at December 31, 2002 and 2001, respectively, which are reflected as other noncurrent liabilities in our Consolidated Balance Sheet. 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 $6.5 million to $17.0 million. These non-capital and capital expenditures are expected to be incurred during the next 10 to 20 years. We believe that we are entitled to recover a portion of these expenditures under indemnification and escrow agreements. During 2002, 2001 and 2000, net expenses associated with environmental remediation and ongoing assessment were not significant. For additional information, 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. In February 2003, we received a notice from the South Carolina Department of Health and Environmental Controls of violations regarding air emissions and related record-keeping for our Palmetto and Johnsonville, SC facilities. No further action, other than a minor fine, is expected. 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: demand and competition for PET resins and polyester fiber; the financial condition of our customers; 32 availability and cost of raw materials; availability and cost of petrochemical feedstock necessary for the production process; the impact of a governmental investigation of pricing practices in the polyester staple fiber industry; availability of financing, changes in financial markets, interest rates, credit ratings, and foreign currency exchange rates; tax risks; U.S., European, Asian and global economic conditions; prices and volumes of imports; work stoppages; levels of production capacity and profitable operation of assets; changes in laws and regulations; 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. ECONOMIC CONDITIONS AFFECT THE SUPPLY AND DEMAND OF OUR PRODUCTS. Capacity utilization, which is the demand for product divided by its supply, is a critical factor affecting our financial performance. Demand for polyester fiber historically has been cyclical because it is subject to changes in consumer preferences and spending, retail sales patterns, and fiber or textile product imports. Demand, prices and raw material costs for both PET resins and fiber may be affected by global economic conditions. Worldwide supply is expanding for both resins and fiber. Any significant expansion in supply over demand could reduce our profitability. A material change in demand, supply or in general economic conditions or uncertainties regarding future economic prospects could have a material adverse effect on our profitability. THE FINANCIAL CONDITION OF OUR CUSTOMERS IMPACTS OUR PROFITABILITY. Our customers include the manufacturers of plastic containers and textile mills, yarn spinners, and the injection molding industry. The PPG has six customers that represented approximately 67.0% of the PPG's total net sales in 2002. The 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 profitability by decreasing our sales and/or resulting in the uncollectibility of accounts receivable. FIBER AND TEXTILE IMPORTS CONTINUE TO ADVERSELY IMPACT OUR MARGINS. The U.S. and European fiber and textile markets continue to be severely impacted by imports, principally from Asian countries. Imports of fiber and fiber products continue to cause an over-supply which decreases fiber margins. The price and volume of imports have and are expected to continue to significantly impact the profitability of our businesses. OUR OPERATIONS ARE DEPENDENT ON THE AVAILABILITY AND COST OF OUR RAW MATERIALS. Our operations are substantially dependent on the availability and cost of our two primary raw materials, PTA and MEG. We currently rely on a single producer for our domestic supply of PTA and a limited 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. At a minimum, 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. 33 The prices of PTA and MEG, purchased pursuant to long-term contracts, have fluctuated in the past and may 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 worldwide supply and demand. THE GOVERNMENTAL INVESTIGATION OF PRICING PRACTICES IN THE POLYESTER STAPLE FIBER INDUSTRY COULD ADVERSELY IMPACT OUR PROFITABILITY. In January 2001, we received a document subpoena in connection with a federal grand jury investigation of pricing practices in the polyester staple industry. We have cooperated and continue to cooperate with the investigation by producing documents in response to this subpoena. In September 2002 the U.S. Department of Justice announced the indictment of a former sales manager of one of our competitors for conspiring to fix prices and allocate customers for polyester staple beginning in September 1999 and ending in January 2001. On October 31, 2002, the U.S. Department of Justice announced that it was filing informations against another competitor and one of its former officers as a result of their agreement to plead guilty to participating in a conspiracy to fix prices and allocate customers in the polyester staple industry. Neither we nor any of our employees have been charged with any wrongdoing, and we vehemently deny that we or any of our employees have engaged in price fixing or customer allocation. Following the disclosure of the investigation, the indictment of a competitor's employee and the informations and guilty pleas of another competitor and its employee, the producers of polyester fiber, including Wellman, have been named in various civil actions asserting claims substantially based on the indictment and informations. These proceedings are summarized below. Wellman and certain other companies have been named as defendants in nineteen 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 seventeen 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. Two of the cases are brought by plaintiffs who do not purport to represent a class. 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 are pending in the U.S. District Court for the Northern District of California, 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 and U.S. District Court for the District of South Carolina. 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, thirty-three 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. The case filed in West Virginia has been removed to federal court. A motion to remand is pending. If not remanded, this case will also be transferred to the Western District of North Carolina by the Judicial Panel 34 on Multi-District Litigation for coordination or consolidation with the other federal cases. The case filed in Wisconsin was removed to federal court and subsequently remanded to the Circuit Court for Dane County, Wisconsin. In all of these cases, the plaintiffs seek damages of unspecified amounts, attorney's fees and costs and unspecified relief. Recently, 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 $50 million (Canadian) 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 $10 million (Canadian). In addition to the foregoing, Wellman may become subject to additional proceedings and lawsuits under federal and state antitrust and unfair competition laws. Furthermore, the federal grand jury investigation is ongoing and additional indictments may result. We intend to vigorously defend against the civil claims and any civil or criminal claims or proceedings that may be brought against us in the future. Because of the early stage and complexity of the U.S. Department of Justice investigation and the related civil claims, we have not formed an opinion about whether these proceedings will have a material adverse effect on our consolidated financial position or results of operations. THE AVAILABILITY AND COSTS OF OUR FINANCING COULD ADVERSELY AFFECT OUR PROFITABILITY. Certain events could reduce our access to financing and/or increase our financing costs. We are dependent on the banks and commercial paper markets for our financing. These markets are volatile and the availability of financing and interest rates fluctuate based on conditions in the markets and lenders' perception of our business. The bank markets can be influenced by the economy, by the general credit environment, by the credit environment of our industry, and by the performance of the individual financial institution. The commercial paper markets can be influenced by other financial markets. In addition, our ability to borrow at competitive costs is influenced by our public debt ratings. Significant disruptions in these markets or lowering of our credit ratings could reduce our access to funds and/or increase our cost of funds. In addition, if current business conditions deteriorated or other events occurred that resulted in a breach of our covenants under our debt and certain other contractual obligations, all amounts due under these obligations would immediately become due and payable. If this occurred, there is no certainty these obligations could be refinanced and, if they were, we would probably incur increased costs and some or all of the obligations would be classified as debt on our balance sheet. For additional information, see "Capital Resources and Liquidity" above. CHANGES IN FOREIGN CURRENCY EXCHANGE RATES COULD ADVERSELY AFFECT OUR PROFITABILITY. A large portion of our profitability is earned 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 affect our profitability. 35 REGULATORY CHANGES MAY AFFECT THE DEMAND FOR OUR PRODUCTS. Some of the end uses of our products are subject to federal and/or state regulations. Adverse changes in these regulations could affect the demand for our products and adversely affect our profitability. ADDITIONAL LIABILITIES MAY BE PROPOSED BY TAX AUTHORITIES. 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. INCREASES IN ENERGY COSTS COULD ADVERSELY AFFECT OUR PROFITABILITY. Increases in energy costs impact our profitability by increasing our raw materials costs and production costs. The prices of substantially all of our raw materials are impacted by changes in petrochemical costs. Our facilities utilize natural gas as their primary energy source, although some have the ability to switch a portion of their consumption to fuel oil. An increase in these costs could adversely affect our profitability. ACTUAL COSTS FOR ENVIRONMENTAL MATTERS MAY VARY FROM THE ESTIMATES. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 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, 2, 7 and 14 to the Consolidated Financial Statements. INTEREST RATE RISK Because our obligations under our bank facilities, bid loans and uncommitted lines of credit bear interest at floating rates, our earnings and cash flows are affected by changes in prevailing interest rates. A 10% increase in market interest rates from those at December 31, 2002 and 2001 would reduce income before income taxes by approximately $1.0 million and $1.8 million, respectively, and reduce cash flow from operations by $1.1 million and $1.9 million, respectively. Our interest rate financial instruments at December 31, 2002 exactly match the terms of the $40.0 million of fixed-rate debt. Any potential decrease in the fair value of our interest rate financial instruments will be offset by changes in the value of our fixed-rate debt. 36 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, 2002 and 2001 adversely changed by 10%, the fair value of these financial instruments outstanding at December 31, 2002 and 2001 would decline by approximately $4.1 million and $0.8 million, 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. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WELLMAN, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 39 Consolidated Balance Sheets as of December 31, 2002 and 2001 40 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 41 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 42 Notes to Consolidated Financial Statements 43 Report of Independent Auditors 72 Consolidated financial statement schedules for the years ended December 31, 2002, 2001 and 2000: II - Valuation and qualifying accounts 73
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. 38 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, (In thousands, except per share data) 2002 2001 2000 ---------- ---------- ---------- Net sales $1,013,968 $1,009,560 $1,021,543 Cost of sales 898,745 901,539 887,183 ---------- ---------- ---------- Gross profit 115,223 108,021 134,360 Selling, general and administrative expenses 73,900 72,788 68,214 Restructuring benefit -- -- 793 Other income 4,365 -- -- ---------- ---------- ---------- Operating income 45,688 35,233 66,939 Interest expense, net 10,254 17,957 17,959 ---------- ---------- ---------- Earnings from continuing operations before income taxes 35,434 17,276 48,980 Income tax expense 9,036 3,854 13,563 ---------- ---------- ---------- Earnings from continuing operations 26,398 13,422 35,417 Loss from discontinued operations, net of income tax (23,651) (5,033) (2,649) ---------- ---------- ---------- Earnings before cumulative effect of accounting change 2,747 8,389 32,768 Cumulative effect of accounting change (197,054) -- -- ---------- ---------- ---------- Net earnings (loss) $ (194,307) $ 8,389 $ 32,768 ========== ========== ========== Basic net earnings (loss) per common share: Continuing operations $ 0.84 $ 0.43 $ 1.13 Discontinued operations $ (0.75) $ (0.16) $ (0.09) Cumulative effect of accounting change (6.24) -- -- ---------- ---------- ---------- Net earnings (loss) $ (6.15) $ 0.27 $ 1.04 ========== ========== ========== Basic weighted-average common shares outstanding 31,579 31,542 31,367 ========== ========== ========== Diluted net earnings (loss) per common share: Continuing operations $ 0.82 $ 0.42 $ 1.11 Discontinued operations $ (0.73) $ (0.16) $ (0.08) Cumulative effect of accounting change (6.16) -- -- ---------- ---------- ---------- Net earnings (loss) $ (6.07) $ 0.26 $ 1.03 ========== ========== ========== Diluted weighted-average common shares outstanding 32,015 32,031 31,884 ========== ========== ==========
See Notes to Consolidated Financial Statements. 39 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (In thousands, except share data) 2002 2001 ---------- ---------- Assets: Current assets: Cash and cash equivalents $ -- $ 1,814 Accounts receivable, less allowance of $7,675 in 2002 and $3,871 in 2001 68,762 54,674 Inventories 113,306 137,290 Inventories, discontinued operations 949 8,774 Prepaid expenses and other current assets 7,245 5,631 ---------- ---------- Total current assets 190,262 208,183 Property, plant and equipment, at cost: Land, buildings and improvements 153,700 150,874 Machinery and equipment 1,020,401 994,284 Construction in progress 7,564 8,771 ---------- ---------- 1,181,665 1,153,929 Less accumulated depreciation 480,605 426,000 ---------- ---------- Property, plant and equipment, net 701,060 727,929 Property, plant and equipment discontinued operations, net 876 31,500 Goodwill, net 35,041 230,458 Other assets, net 37,971 36,360 ---------- ---------- $ 965,210 $1,234,430 ========== ========== Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 68,671 $ 57,398 Accrued liabilities 29,991 34,439 Current portion of long-term debt 70,405 -- Other 9,289 13,789 ---------- ---------- Total current liabilities 178,356 105,626 Long-term debt 166,504 333,144 Deferred income taxes and other liabilities 193,652 182,921 ---------- ---------- Total liabilities 538,512 621,691 ---------- ---------- Stockholders' equity: Common stock, $0.001 par value; 55,000,000 shares authorized, 34,368,809 shares issued in 2002 and 34,335,437 in 2001 34 34 Class B common stock, $0.001 par value; 5,500,000 shares authorized; no shares issued -- -- Paid-in capital 248,499 247,560 Accumulated other comprehensive loss (3,243) (22,037) Retained earnings 230,932 436,706 Less common stock in treasury at cost: 2,500,000 shares (49,524) (49,524) ---------- ---------- Total stockholders' equity 426,698 612,739 ---------- ---------- $ 965,210 $1,234,430 ========== ==========
See Notes to Consolidated Financial Statements. 40 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED COMMON OTHER STOCK ISSUED PAID-IN COMPREHENSIVE RETAINED TREASURY SHARES AMOUNT CAPITAL LOSS EARNINGS STOCK TOTAL -------- --------- -------- --------- ---------- --------- -------- (In thousands) Balance at December 31, 1999 33,939 $ 34 $239,473 $ (6,019) $ 418,400 $ (49,524) $602,364 Net earnings 32,768 32,768 Currency translation adjustments (3,184) (3,184) Minimum pension liability adjustment (1,460) (1,460) -------- Total comprehensive income 28,124 Cash dividends ($0.36 per share) (11,390) (11,390) Exercise of stock options, net 82 1,525 1,525 Contribution of common stock to employee benefit plan 192 3,797 3,797 Issuance of restricted stock, net 44 683 683 Amortization of deferred compensation, net 422 422 -------- --------- -------- --------- ---------- --------- -------- Balance at December 31, 2000 34,257 34 245,900 (10,663) 439,778 (49,524) 625,525 Net earnings 8,389 8,389 Currency translation adjustments (6,311) (6,311) Minimum pension liability adjustment (4,951) (4,951) Fair value of derivatives (112) (112) -------- Total comprehensive loss (2,985) Cash dividends ($0.36 per share) (11,461) (11,461) Exercise of stock options, net 44 775 775 Issuance of restricted stock, net 34 340 340 Amortization of deferred compensation, net 545 545 -------- --------- -------- --------- ---------- --------- -------- Balance at December 31, 2001 34,335 34 247,560 (22,037) 436,706 (49,524) 612,739 Net loss (194,307) (194,307) Currency translation adjustments 21,413 21,413 Minimum pension liability adjustment (3,751) (3,751) Fair value of derivatives 1,132 1,132 -------- Total comprehensive loss (175,513) Cash dividends ($0.36 per share) (11,467) (11,467) Exercise of stock options, net 2 15 15 Issuance of restricted stock, net 32 376 376 Amortization of deferred compensation, net 548 548 -------- --------- -------- --------- ---------- --------- -------- Balance at December 31, 2002 34,369 $ 34 $248,499 $ (3,243) $ 230,932 $ (49,524) $426,698 ======== ========= ======== ========= ========== ========= ========
See Notes to Consolidated Financial Statements. 41 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 2001 2000 -------- -------- ---------- (In thousands) Cash flows from operating activities: Net earnings (loss) $(194,307) $ 8,389 $ 32,768 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation 56,301 57,936 58,880 Amortization 1,279 9,886 9,849 Deferred income taxes and other 3,869 (11,175) 6,617 Contribution of common stock to employee benefit plan -- -- 3,797 Restructuring benefit -- -- (793) Cumulative effect of accounting change 197,054 -- -- Impairment loss, discontinued operations 29,407 -- -- Loss on sale of business 2,701 -- -- Changes in assets and liabilities: Accounts receivable (8,948) 33,090 (12,108) Inventories 34,887 30,003 (18,901) Prepaid expenses and other current assets (1,328) (1,151) (998) Other assets 2,261 (6,583) (10,267) Accounts payable, accrued liabilities, and other current liabilities 1,522 (27,136) 2,202 Other liabilities (114) (2,675) (3,547) Other 3,718 672 4,260 --------- -------- ---------- Net cash provided by operating activities 128,302 91,256 71,759 --------- -------- ---------- Cash flows from investing activities: Additions to property, plant and equipment (21,653) (28,084) (39,418) Proceeds from sale of assets 1,505 -- 321 --------- -------- ---------- Net cash used in investing activities (20,148) (28,084) (39,097) --------- -------- ---------- Cash flows from financing activities: Proceeds from debt 25,000 75,000 50,000 Repayments of debt (124,010) (125,932) (73,044) Issuance of restricted stock, net 376 340 683 Dividends paid on common stock (11,467) (11,461) (11,390) Exercise of stock options, net 15 775 1,525 --------- -------- ---------- Net cash used in financing activities (110,086) (61,278) (32,226) --------- -------- ---------- Effect of exchange rate changes on cash and cash equivalents 118 (80) 436 --------- -------- ---------- Change in cash and cash equivalents (1,814) 1,814 0 Cash and cash equivalents at beginning of year 1,814 0 0 --------- -------- ---------- Cash and cash equivalents at end of year $ 0 $ 1,814 $ 0 ========= ======== ========== Supplemental cash flow data: Cash paid (received) during the year for: Interest (net of amounts capitalized) $ 10,299 $ 19,344 $ 17,540 Income taxes $ (18,703) $ (40) $ (8,327)
See Notes to Consolidated Financial Statements. 42 Notes to Consolidated Financial Statements (In thousands, except share and per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Wellman, Inc. and its subsidiaries (the Company) is an international manufacturing company operating primarily in the United States, Ireland and the Netherlands. The Company primarily manufactures PermaClear(R) and EcoClear(R) PET (polyethylene terephthalate) packaging and HP resins and high-quality polyester products, including Fortrel(R) brand polyester fibers. The principal markets for PET resins are United States, South American, and European-based manufacturers of various types of plastic containers. The principal markets for polyester and nylon staple fibers are apparel, home furnishings, carpet and industrial manufacturers in the United States, Mexico, and Europe. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Wellman, Inc. and subsidiaries. All material intercompany transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue is recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred, the sales price is determinable, and collectibility is assured. Sales for the company's FRPG are recorded at the point of shipment (FOB shipping point), since both title and risk of loss have transferred to the customer. Sales for the Company's PPG that are shipped via common carrier (truck) are recognized at point of shipment (FOB shipping point). For railcar shipments, the Company recognizes revenue at the point of shipment (FOB shipping point) or at the time the product is delivered to the customer's premises (FOB destination) based on an agreement with the customer. CASH AND CASH EQUIVALENTS The Company considers all short-term investments purchased with a maturity of three months or less to be cash equivalents for purposes of the Consolidated Statements of Cash Flows. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company records all of its derivative instruments as either assets or liabilities on its balance sheet at their respective fair values. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. The Company formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. For those derivative instruments that qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as either a fair value 43 hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings, with the ineffective portion, if any, being recognized in current earnings during the period of the change. ALLOWANCES FOR DOUBTFUL ACCOUNTS The Company performs periodic credit evaluations of its customers and generally does not require collateral. A reserve for uncollectible accounts receivable is established based on the Company's evaluation of the credit-worthiness of its customers and the potential risks inherent in their businesses. INVENTORIES Inventories are stated at the lower of cost or market. Costs are determined for all inventories using the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at cost. Depreciation for assets is provided based on their estimated useful lives and is computed using the straight-line and units of production methods. Estimated useful lives are 30 to 40 years for buildings and improvements and 3 to 20 years for machinery and equipment. For idle equipment where the Company utilized the straight-line depreciation method, the Company either records depreciation at a reduced rate or does not record depreciation on the assets. The following table provides the amount of reduced depreciation for assets depreciated using the straight-line depreciation method during the periods noted and the net book value of the assets that were idle at the end of those periods:
Net Book Value at End of Pretax Impact of Reducing Period Depreciation ------ ------------ As of and for the year ending December 31, 2000 $ 7,883 $ 1,556 As of and for the year ending December 31,2001 $ 16,258 $ 1,313 As of and for the year ending December 31,2002 $ 9,019 $ 1,147
In addition, the Company has a staple fiber line at its Pearl River facility that was depreciated using the units of production method that has been idle since December 2000. As a result, no depreciation has been recorded on this asset since such date. This line has a net book value of approximately $192,000 at December 31, 2002. Expenditures which materially increase productivity, change capacities, or extend useful lives are capitalized in property, plant and equipment. Routine maintenance, repairs and replacement costs are charged to expense in the period incurred. The Company does not accrue for major maintenance and repairs. Periodically, 44 the Company conducts a complete shutdown and inspection of equipment (turnaround) at its facilities to perform necessary repairs and replacements. Costs associated with these turnarounds are capitalized and are generally amortized over the period until the next turnaround. Effective January 1, 2002, the Company was required to adopt SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with SFAS No. 144, when an asset is held for sale, it is measured at the lower of its carrying amount or fair value less costs of disposal. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. Judgment is required in determining the fair value of the assets, and the fair value could differ from the actual amount received upon disposal. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." With the adoption of SFAS No. 142, the Company no longer amortizes goodwill but instead tests goodwill for impairment at least annually at the reporting unit level. 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. Estimates of future discounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, the Company's business model, or the Company's operating performance. STOCK OPTION PLANS The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its employee stock options. Under APB 25, any difference between the exercise price of the Company's employee stock options and the market price of the underlying stock on the date of grant is recognized as compensation expense over the vesting period of the options (intrinsic value method). INCOME TAXES Income taxes have been provided using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred income taxes resulting from such differences are recorded based on the enacted tax rates that will be in effect when the differences are expected to reverse. ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed or charged to the aforementioned liability. 45 FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME (LOSS) The financial statements of foreign subsidiaries have been translated into U.S. dollar equivalents in accordance with FASB Statement No. 52, "Foreign Currency Translation." All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income (loss). The effect on the Consolidated Statements of Operations of transaction gains and losses is insignificant for all years presented. Accumulated other comprehensive loss is comprised of foreign currency translation adjustments, minimum pension liability adjustments, and the effective portion of the gain (loss) for derivatives designated and accounted for as cash flow hedges. Substantially all of the earnings associated with the Company's investments in foreign entities are considered to be permanently invested, and no provision for U.S. federal and state income taxes on those earnings or translation adjustments has been provided. The components of and changes in other comprehensive loss are as follows:
ACCUMULATED FOREIGN MINIMUM FAIR VALUE OTHER CURRENCY TRANSLATION PENSION OF COMPREHENSIVE ADJUSTMENTS LIABILITY DERIVATIVES LOSS ----------- --------- ----------- ---- Balance at December 31, 1999 $ (6,019) $ -- $ -- $ (6,019) Changes during year (net of taxes of $858) (3,184) (1,460) -- (4,644) ---------- --------- --------- ---------- Balance at December 31, 2000 (9,203) (1,460) -- (10,663) Changes during year (net of taxes of $2,569) (6,311) (4,951) (112) (11,374) ---------- --------- --------- ---------- Balance at December 31, 2001 (15,514) (6,411) (112) (22,037) Changes during year (net of taxes of $2,161) 21,413 (3,751) 1,132 18,794 ---------- --------- --------- ---------- Balance at December 31, 2002 $ 5,899 $ (10,162) $ 1,020 $ (3,243) ========== ========= ========= ==========
ADVERTISING COSTS Advertising costs are charged to expense as incurred. Such costs were approximately $1,200, $2,100, and $1,800 for 2002, 2001, and 2000, respectively. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. Such costs were approximately $17,300, $14,600 and $15,500 for 2002, 2001, and 2000, respectively. DEFERRED DEBT COSTS Debt issuance costs are amortized using the interest method over the life of the associated debt. 46 GRANT ACCOUNTING The Company has received various grants, including capital and operating grants, from the state of Mississippi and other local authorities in connection with the construction of its Pearl River facility. The capital grants without stipulated operating requirements have been recorded as a reduction of property, plant and equipment. The capital grants with stipulated operating requirements have been recorded as deferred revenue and are included in income as the requirements stipulated in the grant are satisfied. The operating grants are recorded as a reduction of operating expenses in the period the reduction occurs. See note 13. STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees and directors. Prior to 1998, the exercise price was equal to or greater than the fair value of the shares at the date of grant. Beginning with options granted in 1998, the exercise price is equal to the average of the highest and lowest sales prices of the Company's common stock over a period of 20 days prior to the date of the grant. Since the Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," it recognizes compensation expense over the vesting period for the difference between the exercise price and the fair value of the shares at the date of grant. The difference between the employee purchase price and the fair value of restricted stock awarded under the Deferred Compensation and Restricted Stock Plan is considered to be compensatory. The amount of non-cash compensation expense recognized in 2002, 2001, and 2000 under these plans was not material. See note 11. RECLASSIFICATION Certain 2001 and 2000 amounts have been reclassified to conform to the 2002 presentation. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a parent company if that company is 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. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. These variable interest entities are commonly referred to as special-purpose entities or off-balance sheet financing. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The only contractual obligation that may be impacted by FIN 46 is a sale and leaseback transaction the Company entered into in 1999. The Company expects to restructure the sale and leaseback transaction prior to July 1, 2003. If the Company is able to restructure the sale and leaseback transaction, it will not be impacted by FIN 46. Otherwise, the Company will be required to consolidate the transaction and either record the impact as a cumulative effect of an accounting change or restate the prior years' financial information. Other than normal financing risks, the Company does not have any exposure to risks as a result of this transaction. The Company does not expect the adoption of FIN 46 to affect its compliance with debt covenants. 47 2. ACCOUNTING CHANGES GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This accounting standard addresses financial accounting and reporting for goodwill and other intangible assets and requires that goodwill amortization be discontinued and replaced with annual tests of impairment. Other intangible assets continue to be amortized over their estimated useful lives, whereas intangibles with indefinite lives are not amortized, but are tested annually for impairment. In accordance with SFAS No. 142, goodwill amortization was discontinued as of January 1, 2002. In addition, the Company completed its initial assessment of goodwill using the two-step approach described in SFAS No. 142. Goodwill was tested for impairment by comparing the fair value of the reporting units to their carrying value, including goodwill. The fair value was determined based on the present value of estimated future discounted cash flows. Since the carrying value of the Fibers and Recycled Products Group (or FRPG) assets exceeded their fair value, a comparison was then made between the implied fair value of the goodwill, as defined by SFAS No. 142, and the carrying value of the goodwill. Goodwill related to the FRPG was determined to be impaired and, as required by this Statement, was reduced by $197,054 to its implied fair value. The reduction was recorded as a cumulative effect of an accounting change. Goodwill was previously evaluated for impairment by comparing the entity level unamortized goodwill balance to projected undiscounted cash flows, which did not result in an indicated impairment. The Company did not have any intangible assets with indefinite lives at December 31, 2002 or 2001. A reconciliation of previously reported financial statement information to adjusted amounts reflecting the elimination of goodwill amortization for the comparable periods prior to the adoption of SFAS No. 142 is as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- Net earnings as reported $ 8, 389 $ 32,768 Goodwill amortization 8, 444 8,455 --------- -------- $ 16,833 $ 41,223 ========= ======== Basic net earnings per common share as reported $ 0.27 $ 1.04 Adjusted basic net earnings per common share $ 0.53 $ 1.31 Diluted net earnings per common share as reported $ 0.26 $ 1.03 Adjusted diluted net earnings per common share $ 0.53 $ 1.29
48 The changes in the net carrying value of goodwill by reportable operating segments for the year ended December 31, 2002 are as follows:
FRPG PPG TOTAL --------- -------- --------- Goodwill, net at December 31, 2001 $ 197,054 $ 33,404 $ 230,458 Impairment loss, reported as a cumulative effect of an accounting change (197,054) -- (197,054) Currency translation adjustment -- 1,637 1,637 --------- --------- Goodwill, net at December 31, 2002 $ -0- $ 35,041 $ 35,041 ========= ======== =========
Other intangible assets and related amortization expense as of and for the year ended December 31, 2002 were not significant. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for a disposal of a segment of a business. In January 2002, the Company announced plans to refocus the strategy of its polyester fibers business in order to be less dependent on commodity fibers. As a result of its review of strategic alternatives, in March 2002, the Company adopted a plan to sell its partially oriented yarn (POY) business and its small recycled fine denier polyester staple fiber business with manufacturing facilities located in Fayetteville, North Carolina and Marion, South Carolina, respectively. These businesses are reported as discontinued operations in the Company's financial statements. On June 18, 2002, the Company sold the property, plant and equipment and inventory of its POY business. The aggregate sales price was $1,682 in cash (including the reimbursement of certain business expenses) and the assumption of certain liabilities. The total loss on disposal of the assets of the Company's POY business for the year ended December 31, 2002 was $16,237, net of taxes. The net loss is included in discontinued operations in the Company's Consolidated Statements of Operations. The assets of the Company's small recycled fine denier polyester staple fiber business with a manufacturing facility in Marion, South Carolina are reported separately in the Company's Consolidated Balance Sheet at December 31, 2002. The Company recorded an impairment charge of $4,698, net of taxes, in the first quarter of 2002 to reflect the assets at their estimated fair value less costs of disposal. The Company expects to sell its Marion assets by the end of the first quarter of 2003. The net operating results for the POY and recycled fine denier polyester staple fiber businesses for the year ending December 31, 2002 have been reflected as discontinued operations in the Company's Consolidated Statements of Operations. In addition, in accordance with SFAS No. 144, the prior year information has been reclassified to reflect separately the assets of the discontinued operations and the loss from discontinued operations. 49 Results for discontinued operations consist of the following:
YEAR ENDED DECEMBER 2002 2001 2000 ---- ---- ---- Net sales $ 29,285 $ 74,237 $ 97,780 ========= ========== ========= Loss from discontinued operations before tax benefit (4,177) (7,742) (4,075) Tax benefit (1,462) (2,710) (1,426) --------- ---------- --------- Net loss from discontinued operations (2,715) (5,032) (2,649) --------- ---------- --------- Loss on disposal of POY business and impairment loss to record remaining assets at fair value less cost of disposal (32,209) -- -- Tax benefit (11,273) -- -- --------- Net loss on disposal of POY business and impairment loss to record remaining assets at fair value less cost of disposal (20,936) -- -- --------- ---------- --------- Net loss from discontinued operations $ (23,651) $ (5,032) $ (2,649) ========= ========== =========
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement requires the Company to recognize all of its derivative instruments as either assets or liabilities on its balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. As described below, the Company utilized only two types of derivatives in 2002 and 2001, fair value hedges and cash flow hedges. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into income in the same period or periods during which the hedged transaction affects income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current income during the period of change. The Company utilizes interest rate swaps to manage the interest rate characteristics of certain debt. At January 1, 2001, the Company had interest rate swaps relating to $50,000 of its fixed-rate debt which exactly match the terms of the underlying debt instruments. These swaps, effectively converting the fixed-rate debt to floating-rate debt, qualify and are accounted for as fair value hedges. The Consolidated Balance Sheet at December 31, 2001 reflected $2,556 for the fair market value of the swaps in other assets, offset by a 50 corresponding change in the fair value of the underlying debt. These swaps were terminated during 2002, resulting in a gain of $1,464. This gain will be recognized as a reduction in interest expense over the remaining life of the debt. During 2002 the Company entered into interest rate swaps that effectively convert $40,000 of its fixed-rate debt to floating-rate debt at an effective interest rate of six-month Libor + 1.42% (approximately 3.5% at December 31, 2002). These swaps qualify as fair value hedges under SFAS 133. The Company estimates it would receive $5,331 if these agreements were terminated at December 31, 2002. In accordance with SFAS 133, the Company increased its debt at December 31, 2002 by this amount with a corresponding increase in other assets for the fair value of the swaps. The Company operates in international markets and utilizes derivatives to minimize the effect of changes in currency exchange rates. The Company's European businesses use foreign exchange contracts with maturities of less than twelve months to reduce the exchange risk associated with sales and accounts receivable denominated in other foreign currencies. Contracts that are identified as hedging underlying receivables are fair value hedges, whereas contracts that are identified as hedging future sales are cash flow hedges. The notional amount of the Company's fair value contracts was approximately $14,000 and $0 at January 1, 2001 and December 31, 2001, respectively, and the fair value of these contracts was $633 and $0, respectively. The changes in the fair value hedges were offset by changes in the fair value of the underlying receivables. There were no fair value hedge contracts at December 31, 2002. There were no cash flow hedge contracts at January 1, 2001. At December 31, 2002 and 2001, the notional amount of the cash flow hedges was approximately $31,657 and $11,883, respectively, and the fair value of these contracts was approximately $1,025 and $(137), respectively. At December 31, 2002 and 2001, these forward contracts resulted in an unrealized gain (loss) in accumulated other comprehensive loss of $1,020 and $(112), respectively, which will be realized when the underlying transaction gain or loss is recognized in income. There was no cumulative effect of adoption of Statement No. 133 at January 1, 2001, and the impact on net earnings in 2001 was not material. 3. VARIABLE INTEREST ENTITIES During 1999, the Company sold certain production equipment to a trust in connection with a sale and leaseback transaction. The lease meets the definition of a variable interest entity under FASB Interpretation No. 46 (or FIN 46), effective for quarters beginning after June 15, 2003. Under the new requirements of FIN 46, it is likely that the sale and leaseback transaction will qualify as a variable interest entity, whereby the Company, as the primary beneficiary, will be required to consolidate the entity. Alternatively, the Company may restructure this leasing obligation prior to its adoption of FIN 46 on July 1, 2003. The lease has been classified as an operating lease. The lease has a term of five years, contains purchase and lease renewal options at projected future fair market values and has a residual value guarantee of approximately $127,300. The net book value of the equipment sold totaled approximately $118,000. The gain realized from this sale, totaling approximately $32,000, has been deferred and is being credited to income as reductions in rental expense ratably over the lease term. The gross rent expense approximates the amount of interest expense incurred by the trust that owns the equipment. Interest expense for the trust is determined by indices that approximate LIBOR and/or commercial paper (which have a close correlation) and by a fee that is based on the Company's credit worthiness as determined by the rating agencies. The net rent expense is the gross rent expense reduced by the amortization of the deferred gain relating to the sale of the equipment. Gross rent expense totaled approximately $8,661 and $8,339 for 2002 and 2001, respectively. In September 2002, the Company replaced its existing receivables purchase agreement. Under the new agreement, the Company may sell without recourse up to $80,000 in an undivided interest in certain of its 51 domestic trade accounts receivable, on a revolving basis, through an unconsolidated receivables subsidiary. The Company does not expect FIN 46 to have any impact on the treatment of its asset securitization program. At December 31, 2002 and 2001, trade accounts receivable of approximately $64,200 and $76,000, respectively, were sold. The sales of trade accounts receivable have been reflected as a reduction of accounts receivable in the Company's Consolidated Balance Sheet. The discounts incurred by the Company on the sale of the trade accounts receivables during 2002 and 2001 of approximately $1,336 and $2,925, respectively, were charged to selling, general, and administrative expenses. 4. INVENTORIES Inventories related to continuing operations consist of the following:
DECEMBER 31, 2002 2001 -------- -------- Raw materials $ 38,142 $ 56,179 Finished and semi-finished goods 67,286 72,628 Supplies 7,878 8,483 -------- -------- $113,306 $137,290 ======== ========
5. ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, 2002 2001 -------- -------- Payroll and other compensation $ 4,740 $ 5,321 Retirement plans 5,868 6,431 Property and other taxes 5,367 6,021 Interest 2,222 1,912 Other 11,794 14,754 -------- -------- $ 29,991 $ 34,439 ======== ========
6. PRODUCTION OUTAGE In May 2001, the Company experienced a production outage at its Palmetto Plant in Darlington, South Carolina, which resulted in a temporary shutdown of the entire facility. The power outage caused lost production volumes of approximately 80 million pounds, split equally between its two reportable operating segments. Total costs and property damage associated with this outage was approximately $9,900 ($6,433 after tax), or $0.20 per diluted share. During the second quarter of 2001, the Company reduced its property damage expense for that portion of the insurance claim by approximately $3,400 ($2,185 after tax), or $0.07 per diluted share. In the fourth quarter of 2001, the Company settled its property damage and business interruption insurance claims and recorded additional income of approximately $7,200 ($4,697 after tax), or $0.15 per diluted share. These costs and the related income from business interruption insurance were reflected in cost of sales in 2001. 52 7. BORROWING ARRANGEMENTS Long-term debt consists of the following:
DECEMBER 31, 2002 2001 -------- -------- Revolving credit loan facility and bid loans $ 5,000 $114,908 Uncommitted lines of credit 25,508 40,000 8.41% senior unsecured note, due February 2003 50,390 52,556 7.55% senior unsecured note, due December 2011 45,331 40,000 Variable rate senior unsecured note, due November 2004 (3.3% at 12/31/02) 35,000 35,000 7.46% senior unsecured note, due September 2009 25,000 -- Economic development revenue bonds, at variable interest rates, due 2010-2023 50,680 50,680 -------- -------- 236,909 333,144 Less current portion 70,405 -- -------- -------- $166,504 $333,144 ======== ========
In September 2002, the Company borrowed $25,000 from John Hancock Life Insurance Company as senior unsecured indebtedness at an annual fixed rate of 7.46%, payable semi-annually. The principal is due in a single payment in September 2009. The proceeds were used to pay down other debt. In December 2001, the Company borrowed $40,000 pursuant to a 7.55% senior unsecured note due December 2011. The proceeds were used to pay down other debt. In conjunction with this financing, the Company entered into interest rate swaps that effectively converted the $40,000 of fixed-rate debt to floating-rate debt at an effective interest rate of six-month LIBOR + 1.42% (approximately 3.5% at December 31, 2002). These swaps have been designated and accounted for as fair value hedges under SFAS No. 133. The Company estimates it would receive $5,331 if these agreements were terminated at December 31, 2002. In accordance with SFAS No. 133, the Company increased its debt at December 31, 2002 by this amount with a corresponding increase in other assets for the fair value of these swaps. This debt approximated market at December 31, 2002. In November 2001, the Company borrowed $35,000 pursuant to a senior unsecured note. The note has a floating interest rate based on LIBOR with a single principal payment due in November 2004. The proceeds were used to pay down other debt. The Company borrowed $50,000 in February 2000 pursuant to an 8.41% senior unsecured note due February 2003. The proceeds were used to pay down other debt. In conjunction with this financing, the Company entered into interest rate swaps, which effectively convert the total amount of this fixed-rate debt to floating-rate debt. During 2002, the Company terminated these swaps, resulting in a gain of $1,464. This gain will be recognized as a reduction in interest expense over the remaining life of the debt. The debt was repaid on its maturity date. The Company elected not to renew its $125,000 364-day revolving credit facility upon its maturity in September 2002. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity." Terms, rates and maturity dates for the uncommitted lines of credit are agreed upon by the Bank and the Company at each borrowing date. At December 31, 2002, the remaining maturities on the domestic outstanding borrowings ranged from 2 to 60 days with interest rates averaging 2.1%. At year-end, the Company had 53 approximately $49,400 available under these lines. Based on its debt level as of December 31, 2002, the Company could have had an average of approximately $284,100 of additional debt outstanding during the year without amending the terms of its debt agreements. The economic development revenue bonds (the Bonds) are tenderable by the holders. The Bonds are secured by letters of credit aggregating approximately $51,000 at December 31, 2002. The average effective borrowing rate on these bonds at December 31, 2002 was approximately 1.33%. The Company's financing agreements contain normal financial and restrictive covenants. The most restrictive of these covenants permits a maximum leverage ratio of 55% and requires EBITDA to exceed 3.5 times interest expense. The Company is in compliance with these covenants. The Company has reclassified approximately $70,405 of its debt to current portion at December 31, 2002, since these amounts will either be repaid or refinanced within the next twelve months. Subsequent to year-end, the Company received $20,000 of proceeds from the sale of a convertible subordinated note, which is due in February 2009. These proceeds were used to pay the current portion of existing debt. As a result of this transaction, $20,000 of the Company's currently due debt was shown as long-term at December 31, 2002. For additional information, see Item 1. "Recent Developments - Private Equity Investment." Scheduled annual maturities of debt are: 2003 - $70,405; 2004 - $35,000; 2005 - $0; 2006 - $0; 2007 - $0, and varying amounts thereafter through 2023. The carrying amounts of the Company's borrowings under its variable rate credit agreements approximate their fair value at December 31, 2002 and 2001. The fair value of the Company's fixed-rate credit agreements has been obtained from the lender and calculated according to the terms of the agreement. The fair value of the Company's fixed-rate debt, including the related swaps, approximated its carrying value at December 31, 2002 and 2001. During 2002, 2001 and 2000, the Company capitalized interest of $303, $1,531 and $8,333, respectively, as part of the cost of capital projects under construction. Interest expense (net) includes interest income of $3,480, $1,563 and $3,310 for 2002, 2001 and 2000, respectively. 8. INCOME TAXES For financial reporting purposes, earnings from continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 -------- -------- -------- United States $ 28,522 $ 2,844 $ 23,579 Foreign 6,912 14,432 25,401 -------- -------- -------- $ 35,434 $ 17,276 $ 48,980 ======== ======== ========
54 Significant components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ---- ---- ---- Current: Federal $ (20,238) $ 1 $ (2,593) State 681 115 123 Foreign 377 199 568 ---------- ---------- ---------- (19,180) 315 (1,902) ---------- ---------- ---------- Deferred: Federal 28,887 3,443 13,342 State (727) (2) 886 Foreign 56 98 1,237 ---------- ---------- ---------- 28,216 3,539 15,465 ---------- ---------- ---------- $ 9,036 $ 3,854 $ 13,563 ========== ========== ==========
The current federal benefit of $20,238 is related to a net operating loss carryback attributable to the Job Creation and Worker Assistance Act enacted in March 2002. This Act increased the carryback period on net operating losses generated in 2001 from 2 years to 5 years, resulting in a refund of $20,238 in 2002. The difference between the provision for income taxes and income taxes computed at the statutory income tax rate on income from continuing operations is explained as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ---- ---- ---- Computed at statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit -- .6 .8 Differences in income tax rates between the United States and foreign countries (5.6) (27.7) (14.5) Amortization of goodwill -- 16.2 5.7 Credits (2.3) (2.9) (.4) Other, net (1.6) 1.1 1.1 ---- ---- ---- Effective tax rate 25.5% 22.3% 27.7% ==== ==== ====
As a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill is no longer amortized for book purposes. Therefore, this item no longer increases the effective tax rate. 55 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of these differences are as follows:
DECEMBER 31, ------------ 2002 2001 ---- ---- Depreciation $ 249,327 $ 235,948 Foreign 7,477 6,502 Other (2,089) 1,911 ---------- ---------- Total deferred tax liabilities 254,715 244,361 ---------- ---------- Domestic carry forward 131,406 135,382 Foreign carry forward 6,710 6,963 Other 11,848 11,518 ---------- ---------- Total deferred tax assets 149,964 153,863 Valuation allowance 32,270 32,814 ---------- ---------- Net deferred tax assets 117,694 121,049 ---------- ---------- Net deferred tax liabilities $ 137,021 $ 123,312 ========== ==========
At December 31, 2002, the Company had a federal net operating loss (NOL) of approximately $284,471 available for carryforward which begins to expire in 2019 and $3,971 of federal tax credit carryforwards which begin to expire in 2018. Additionally, the Company had approximately $503,884 of state NOLs available for carryforward which begin to expire in 2003. The Company also had foreign NOLs of approximately $19,171 that may be carried forward indefinitely. The valuation allowance, which is primarily attributable to state and foreign NOLs and federal tax credits, decreased by $544 during 2002, mainly due to the current and future expected utilization of foreign and state NOLs. Deferred taxes have not been provided for approximately $179,712 of undistributed earnings of foreign subsidiaries. The Company intends to reinvest such undistributed earnings for an indefinite period except for distributions upon which incremental taxes would not be material. If all such earnings were distributed, the Company would be subject to both U.S. income taxes (subject to a potential adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. 9. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. As discussed in note 1, the Company's policy is to expense environmental remediation costs when it is both probable that a liability has been incurred and the amount can be reasonably estimated. While it is often difficult to reasonably quantify future environmental-related expenditures, the Company currently estimates its future non-capital expenditures related to environmental matters to range between approximately $5,700 and $20,200 on an undiscounted basis. In connection with these expenditures, the Company has accrued undiscounted liabilities of approximately $9,250 and $10,500 at December 31, 2002 and 2001, respectively, which are reflected as other noncurrent liabilities in the Company's Consolidated Balance Sheets. These accruals represent management's best estimate of probable non-capital environmental expenditures. In addition, aggregate future capital expenditures related to environmental matters are expected to range from approximately $6,500 to $17,000. These non-capital and capital expenditures are expected to be incurred over the next 10 to 20 years. The Company believes that it is 56 entitled to recover a portion of these expenditures under indemnification and escrow agreements. The final resolution of these contingencies could result in expenses different than current accruals, and therefore could have an impact on the Company's consolidated financial results in a future reporting period. However, management believes the ultimate outcome will not have a significant effect on the Company's consolidated results of operations, financial position, or liquidity. The following represents changes in accrued undiscounted liabilities for environmental remediation costs:
2002 2001 2000 ---- ---- ---- (in thousands) Balance at beginning of year $ 10,462 $ 13,037 $ 15,283 Changes in remediation costs (752) (1,193) (1,753) Expenditures (489) (1,333) (403) Foreign currency translation adjustments 29 (49) (90) ---------- ---------- ---------- Balance at end of year $ 9,250 $ 10,462 $ 13,037 ========== ========== ==========
The changes in remediation costs for the period January 1, 2000 to December 31, 2002 were primarily the result of more current information reducing the expected costs associated with the Company's European environmental costs and the expected costs associated with groundwater remediation at one of the Company's South Carolina plants. There are no environmental matters from which a material loss is reasonably possible in addition to amounts currently accrued. 10. RETIREMENT PLANS The Company has defined benefit plans and defined contribution pension plans that cover substantially all employees. The Company also has an employee stock ownership plan (ESOP) covering substantially all domestic employees. The defined contribution plan and the ESOP provide for Company contributions based on the earnings of eligible employees. Expense related to the defined contribution plan amounted to $5,152, $6,019 and $6,021 for the years ended December 31, 2002, 2001 and 2000, respectively. Expense related to the ESOP amounted to $1,679, $2,647 and $2,551 for the years ended December 31, 2002, 2001 and 2000, respectively. All ESOP shares are considered outstanding for the Company's earnings per share computations. Dividends paid on ESOP shares are included in the overall dividends. Benefits under the European businesses' defined benefit plans are based on employees' compensation and length of service, while benefits under defined benefit plans covering domestic employees are based on employees' compensation and length of service or at stated amounts based on length of service. The Company's policy is to fund amounts which are actuarially determined to provide the plans with sufficient assets to meet future benefit payment requirements. Assets of the plans are invested in equity securities, debt securities, money market instruments, and insured products. Net periodic pension cost (benefit) is determined using assumptions as of the beginning of each year. Funding status of the plans is determined using assumptions as of the end of the year. Unrecognized net actuarial gains or losses are amortized using the "corridor method" as defined by SFAS No. 87, for the Company's domestic defined benefit plans and Dutch plan. As permitted by SFAS No. 87, a systematic method of amortization is used to amortize actuarial gains and losses for its Irish defined benefit plans. For the Irish 57 plans, the Company separately identifies gains and losses on the plan's assets and projected benefit obligations and uses an attribution 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. The following table summarizes information on the Company's domestic and foreign defined benefit plans:
DOMESTIC PLANS FOREIGN PLANS 2002 2001 2002 2001 ---- ---- ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $ 49,810 $ 46,262 $ 39,583 $ 34,796 Contributions -- -- 250 182 Service cost 376 345 1,636 1,316 Interest cost 3,482 3,412 2,504 1,973 Actuarial (gain) loss (1,293) 1,873 (461) 4,328 Benefits paid (2,404) (2,176) (1,792) (757) Exchange gain (loss) -- -- 7,391 (2,255) Change in plan provisions -- 94 -- -- ---------- ---------- ---------- ---------- Benefit obligation at end of year 49,971 49,810 49,111 39,583 ---------- ---------- ---------- ---------- Change in fair value of plan assets: Fair value of plan assets at beginning of year 39,818 44,120 51,611 57,333 Actual return on plan assets (4,335) (2,197) (7,648) (1,611) Contributions 208 71 1,729 182 Benefits paid (2,404) (2,176) (1,792) (757) Exchange gain (loss) -- -- 8,535 (3,536) ---------- ---------- ---------- ---------- Fair value of plan assets at end of year 33,287 39,818 52,435 51,611 ---------- ---------- ---------- ---------- Funded status (16,684) (9,992) 3,324 12,028 Unrecognized net actuarial loss 15,103 9,099 16,224 3,257 Unrecognized prior service cost 84 94 -- -- Unrecognized transition obligation 36 72 (166) (157) ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost $ (1,461) $ (727) $ 19,382 $ 15,128 ========== ========== ========== ========== Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ -- $ 364 $ 19,023 $ 15,623 Accrued benefit liability (16,684) (10,447) (419) (1,093) Intangible asset 120 94 -- -- Accumulated other comprehensive loss 15,103 9,262 778 598 ---------- ---------- ---------- ---------- Net amount recognized in the Consolidated Balance Sheet $ (1,461) $ (727) $ 19,382 $ 15,128 ========== ========== ========== ==========
The projected benefit obligation applicable to pension plans with accumulated benefit obligations in excess of plan assets was $50,536 and $49,371 at December 31, 2002 and 2001, respectively. The accumulated benefit obligation related to these plans was $49,123 and $48,109, while the fair value of plan assets was $32,877 and $36,568 at December 31, 2002 and 2001, respectively. 58 Components of net periodic cost (benefit) and significant weighted-average assumptions were as follows:
2002 2001 2000 ---- ---- ---- DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN PLANS PLANS PLANS PLANS PLANS PLANS ----- ----- ----- ----- ----- ----- Service Cost $ 376 $ 1,636 $ 345 $ 1,316 $ 287 $ 1,317 Interest Cost 3,482 2,504 3,412 1,973 3,291 2,126 Expected return on plan assets (3,471) (4,144) (3,856) (4,230) (4,026) (3,887) Net amortization and deferral 555 112 8 (4,145) (69) (4,272) ------- ------- ------- ------- ------- ------- Net periodic pension cost (benefit) $ 942 $ 108 $ (91) $(5,086) $ (517) $(4,716) ======= ======= ======= ======= ======= ======= Discount rate 6.75% 5.71% 7.25% 5.92% 7.50% 5.92% Expected return on plan assets 9.00% 8.25% 9.00% 7.39% 9.00% 7.41% Rate of compensation increase -- 3.21% -- 3.21% -- 3.00%
The assumptions used in computing the net periodic pension costs reflect current discount rates and anticipated future returns on plan assets and expected compensation increases. The discount rate is determined by reviewing the rates of return on high quality fixed income investments currently available with maturity dates corresponding with the maturity of the pension benefits. The expected return on plan assets is based on the expected long term rate of return on plan assets taking into account the plans' asset allocation (primarily between equity and debt securities), giving appropriate consideration to historical plan returns. The rate of compensation increase is determined by taking into consideration future economic conditions, such as inflation and the Company's expected future compensation levels when compared to historical performance. 11. STOCKHOLDER'S EQUITY The Company has stock option plans for employees (the Plans) that authorize the grant of non-qualified stock options (NQSOs). For all options granted in connection with the Plans, the option period extends for 11 years from the date of grant with the shares vesting at 20% per year over the first five years. The exercise price for options granted prior to 1998 is equal to the fair value of the Company's common stock at the date of grant. For options granted after 1997, the exercise price is equal to the average of the highest and lowest sales prices of the Company's common stock over a period of 20 days prior to the date of the grant. In addition, the Company has a Directors Stock Option Plan. Each year during the term of this Plan, each eligible director is granted an option for 1,000 shares on the eighth business day after the Company publicly announces its annual earnings. The option period extends for 11 years from the grant date with the shares being 100% vested one year after the grant date. The exercise price is equal to the average of the highest and lowest sales price of the Company's common stock over a period of 20 days prior to the date of the grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its employee stock options. Under APB 25, any difference between the exercise price of the Company's employee stock options and the market price of the underlying stock on the date of grant is recognized as compensation expense over the vesting period of the options. The alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models for determining compensation expense. 59 Pro forma information regarding net earnings (loss) and earnings (loss) per common share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated as of the date of grant using a Black-Scholes option pricing model with the following assumptions for 2002, 2001 and 2000, respectively: risk-free interest rate of 3.82%, 4.96% and 4.98%; a dividend yield of 1.36%, 1.29% and 1.23%; volatility factors of the expected market price of the Company's common stock of .470, .470 and .463; and a weighted-average expected life of the option of 8 years, 8 years and 7 years. The weighted-average fair value of options granted in 2002 was $8.29 for employees and $7.82 for directors, due to different grant dates, $10.26 and $9.06 for options granted in 2001 and 2000, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
2002 2001 2000 ---- ---- ---- Net earnings (loss), as reported $ (194,307) $ 8,389 $ 32,768 Pro forma compensation expense determined under fair value based method for all awards, net of related tax effects (2,299) (2,461) (2,173) ---------- ---------- ---------- Pro forma net earnings (loss) $ (196,606) $ 5,928 $ 30,595 ========== ========== ========== Earnings (loss) per share: Basic earnings per common share, as reported $ (6.15) $ 0.27 $ 1.04 Basic earnings per common share, pro forma $ (6.23) $ 0.19 $ 0.98 Diluted earnings per common share, as reported $ (6.07) $ 0.26 $ 1.03 Diluted earnings per common share, pro forma $ (6.14) $ 0.19 $ 0.96
60 A summary of the Company's stock option activity and related information for the three years ended December 31, 2002 follows:
WEIGHTED AVERAGE PRICE SHARES PER SHARE --------- ------------- Outstanding December 31, 1999 3,012,003 $ 19.07 Granted 563,950 17.53 Exercised (82,470) 17.18 Cancelled (246,450) 28.23 --------- ---------- Outstanding December 31, 2000 3,247,033 18.15 Granted 582,600 16.61 Exercised (44,490) 16.97 Cancelled (215,930) 18.27 --------- ---------- Outstanding December 31, 2001 3,569,213 17.91 Granted 313,200 15.24 Exercised (2,200) 9.55 Cancelled (214,445) 19.44 --------- ---------- Outstanding December 31, 2002 3,665,768 $ 17.59 ========= ==========
At December 31, 2002, 2001, and 2000, options for 2,334,636, 2,126,028 and 1,952,205 shares, respectively, were exercisable. At December 31, 2002, 1,032,715 shares were available for future option grants. The following summarizes information related to stock options outstanding at December 31, 2002:
Range of exercise prices $9.64 TO $18.94 $20.63 TO $29.25 --------------- ---------------- Number outstanding at December 31, 2002 2,965,418 700,350 Weighted-average remaining contractual life 7.2 years 2.9 years Weighted-average exercise price of options outstanding $15.94 $24.61 Number exercisable at December 31, 2002 1,634,286 700,350 Weighted-average exercise price of options exercisable $16.15 $24.61
The Company also has a deferred compensation and restricted stock plan (Restricted Stock Plan). Pursuant to the Restricted Stock Plan, certain officers, directors and managers of the Company are required to defer a certain portion of their compensation and may elect to defer additional compensation that is exchanged for restricted stock. Shares granted are subject to certain restrictions on transferability. The exercise price for restricted stock awards granted in 1998 was 85% of the average of the highest and lowest sales prices of the common stock on the date the Plan was approved by the stockholders and on each of the 15 business days before and after that date. The Plan was amended, effective as of December 1, 1998, whereby the exercise price for restricted stock awards granted after 1998 was 85% of the average of the highest and lowest sales prices of the common stock as reported on the New York Stock Exchange on the last day of the prior calendar quarter and on each of the 15 days before and after that date. A total of 1,000,000 shares of common stock are reserved for issuance under the Restricted Stock Plan. During 2002 and 2001, participants purchased 31,172 and 33,874 shares of common stock, respectively, at an average price of approximately $13.41 and $12.64 per share. Also, upon termination of the Directors Retirement and Deferred Compensation Plans during 1998, directors elected to rollover amounts under these plans to the Restricted Stock Plan resulting in the issuance of 59,441 shares of common stock. The amount of non-cash compensation expense associated with purchases during 2002 and 2001 was not material. 61 On August 31, 2001, the Board of Directors authorized and declared a dividend of one common stock purchase right for each outstanding share of common stock under the stockholder rights plan (the Plan). The Plan provides each stockholder of record one common stock purchase right for each share of common stock. The rights are represented by the common stock certificates and are not separately traded from the common stock and are not currently exercisable. The rights become exercisable only if a person acquires beneficial ownership of 20% or more of the Company's common stock or announces a tender offer or exchange offer that would result in beneficial ownership of 20% or more of the Company's common stock, at which time each right would enable the holder to buy shares of the common stock at a discount to the then market price. The Company may redeem the rights for $.01 per right, subject to adjustment, at any time before the acquisition by a person or group of 20% or more of the Company's common stock. The rights have a 10-year term. On February 12, 2003, the Board of Directors of the Company amended the terms of the Plan to provide that the rights are not exercisable in connection with the equity investment. See note 17. Although the Rights should not interfere with a business combination approved by the Board of Directors, they may cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board, except pursuant to an offer conditioned on a substantial number of Rights being acquired. 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share for the years indicated:
2002 2001 2000 ---- ---- ---- Numerator for basic and diluted net earnings (loss) per common share: Earnings from continuing operations $ 26,398 $ 13,422 $ 35,417 Loss from discontinued operations (23,651) (5,033) (2,649) Cumulative effect of accounting change (197,054) -- -- ---------- ---------- ---------- Net earnings (loss) $ (194,307) $ 8,389 $ 32,768 ========== ========== ========== Denominator: Denominator for basic net earnings (loss) per common share - weighted-average shares 31,579 31,542 31,367 Effect of dilutive securities: Employee stock options and restricted stock 436 489 517 ---------- ---------- ---------- Denominator for diluted net earnings (loss) per common share - adjusted weighted-average shares 32,015 32,031 31,884 ========== ========== ==========
13. COMMITMENTS AND CONTINGENCIES The Company has commitments and contingent liabilities, including legal proceedings, environmental liabilities (see note 9), letters of credit (see note 7), commitments relating to certain state incentives, raw material purchase commitments, and various operating lease commitments. In January 2001, the Company received a document subpoena in connection with a federal grand jury investigation of pricing practices in the polyester staple industry. The Company cooperated and continues to cooperate with the investigation by producing documents in response to this subpoena. In September 2002, the U.S. Department of Justice announced the indictment of a former sales manager of one of the Company's competitors for conspiring to fix prices and allocate customers for polyester staple beginning in September 1999 62 and ending in January 2001. On October 31, 2002, the U.S. Department of Justice announced that it was filing informations against another competitor and one of its former officers as a result of their agreement to plead guilty to participating in a conspiracy to fix prices and allocate customers in the polyester staple industry. Neither the Company nor any of its employees has been charged with any wrongdoing, and the Company vehemently denies that it or any of its employees have engaged in price fixing or customer allocation. Following the disclosure of the investigation, the indictment of a competitor's employee and the informations and guilty pleas of another competitor and its employee, the Company, along with certain other companies, has been named as a defendant in fifty-two actions brought by direct and indirect purchasers of polyester staple fiber for violations of federal, state and Canadian 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, state antitrust, state unfair competition and/or Canadian antitrust laws. Some of these actions seek certification of a class including all persons who directly or indirectly purchased polyester staple fiber similarly affected by such alleged conduct. The plaintiffs in most cases 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 producers of polyester fiber, including the Company, may become subject to additional proceedings and lawsuits under federal and state antitrust and unfair competition laws. Furthermore, the federal grand jury investigation is ongoing and additional indictments may result. The Company intends to vigorously defend against the civil claims and any civil or criminal claims or proceedings that may be brought against it in the future. If a material adverse judgment occurs, the Company's business, financial condition, profitability and cash flows may be adversely impacted. In order to receive certain state grants, the Company agreed to meet certain conditions, including capital expenditures and employment levels at its Pearl River facility. During 2002 and 2001, the Company recognized grant income of $6,000 and $6,250, respectively. The Company had deferred grant income of $1,500 and $7,500 at December 31, 2002 and 2001, respectively, which it expects to recognize as these conditions are satisfied. The deferred income is included in other current liabilities and other liabilities in the Company's Consolidated Balance Sheets. The Company has entered into commitments to purchase raw materials in the ordinary course of its trade or business. The minimum payments under these commitments approximate $19,300 per year. The commitments extend for varying periods up to 7 years, and the prices are not in excess of current market prices. During 1999, the Company sold certain production equipment in connection with a sale and leaseback transaction. This lease has been classified as an operating lease, has a lease term of five years, contains purchase and lease renewal options at projected future fair market values, and a residual value guarantee. See note 3. Approximate minimum rental commitments under noncancelable leases (including the sale and leaseback transaction and its residual value guarantee) during each of the next five years and thereafter are as follows: 2003 - $17,912; 2004 - $138,822; 2005 - $5,293; 2006 - $1,559; 2007 - $1,236; and thereafter - $57. Rent expense for cancelable and noncancelable operating leases was $10,182, $10,113 and $12,770 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company is responding to a subpoena issued by the U.S. Department of Justice in connection with an investigation of pricing practices in the polyester staple fiber industry and has been named in various civil claims and legal actions with respect to the alleged pricing practices and in other claims and actions arising in the ordinary course of business. 63 With respect to the claims and actions arising in the ordinary course of its business, the Company does not believe these will have a material adverse effect, if any, on its consolidated financial position or results of operations. Because of the early stage and complexity of the U.S. Department of Justice investigation and the related civil claims, the Company has not formed an opinion about whether these proceedings will have a material adverse effect on the Company's consolidated financial position or results of operations. 14. DERIVATIVES AND FINANCIAL INSTRUMENTS The Company utilizes derivative instruments, principally swap and forward contracts, to enhance its ability to manage risk, including interest rates and foreign currency fluctuations, which exist as part of its ongoing business. These contracts hedge transactions and balances for periods consistent with the related exposures. The Company does not utilize financial instruments for trading or other speculative purposes. The Company utilizes interest rate swap agreements to manage interest rate exposure and to achieve a desired proportion of variable and fixed-rate debt. At December 31, 2002, the Company had interest rate swaps that effectively converted $40,000 of fixed-rate debt to floating-rate debt at an effective interest rate of six-month LIBOR +1.42% (approximately 3.5% at December 31, 2002). In addition to the above swaps, at December 31, 2001, the Company had interest rate swaps that effectively converted $50,000 of fixed-rate debt to floating-rate debt. During 2002, these swaps were terminated, resulting in a gain of $1,464. This gain will be recognized as a reduction to interest expense over the remaining life of the debt. These swaps have been designated and accounted for as fair value hedges in accordance with SFAS No. 133. The estimated fair value of the interest rate swaps are calculated based on readily available dealer quotes. These values represent the estimated amounts that the Company would pay or receive to terminate the contracts. The Company estimates it would receive $5,331 if these agreements were terminated at December 31, 2002. In accordance with SFAS No. 133, the Company increased its debt at December 31, 2002 by this amount with a corresponding increase in other assets for the fair value of the interest rate swaps. The Company operates in international markets and use foreign exchange contracts with maturities of less than twelve months to hedge existing foreign exchange exposures. Foreign currency contracts require the Company at a future date to either buy or sell foreign currency in exchange for U.S. dollars and other currencies. The notional amounts of such contracts were $31,657 and $11,883 at December 31, 2002 and 2001, respectively. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of foreign currency and interest rate contracts described above and in note 7 and temporary cash investments and trade accounts receivable. The counterparties to the contractual arrangements are a diverse group of major financial institutions with which the Company also has other financial relationships. The Company is exposed to credit loss in the event of nonperformance by these counterparties. However, the Company does not anticipate nonperformance by the other parties, and no material loss would be expected from nonperformance by any one of such counterparties. The Company places its temporary cash investments with high credit quality institutions. Concentration of credit risk with respect to trade accounts receivable is managed by an in-house professional credit staff or is insured. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Seven of the Company's customers comprise approximately 36.5% of its total accounts receivable (including those receivables in the Company's asset securitization program). In addition, approximately 50.3%of our total accounts receivable (including those receivables in the Company's asset securitization program) are included in our FRPG customer base, which continues to face competitive challenges presented by the imports of textile and apparel fiber and finished goods. A down turn in the financial condition of any of these customers would have a negative impact on our financial results of operations. 64 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. Cash and cash equivalents, accounts receivable, accounts payable and equity-linked investment: The carrying amounts reported in the consolidated balance sheets approximate their fair value. Borrowing arrangements: See note 7. Interest rate instruments: The fair value of interest rate instruments is the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparties. All of the Company's estimates of fair value and termination cost/benefit for its derivative financial instruments are based on readily available dealer quotes as to the amounts the Company would receive or pay to terminate the contracts. The following table summarizes the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2002 and 2001:
2002 2001 ---- ---- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------ ---------- ------ ---------- Nonderivatives Cash and cash equivalents $ -- $ -- $ 1,814 $ 1,814 Accounts receivable 68,762 68,762 54,674 54,674 Accounts payable 68,671 68,671 57,398 57,398 Borrowing arrangements 236,909 236,909 333,144 333,144 Derivatives - receive (pay): Interest rate instruments 5,331 5,331 2,556 2,556 Forward foreign currency contracts 1,025 1,025 (137) (137)
15. OPERATING SEGMENT AND GEOGRAPHIC AREAS The Company's operations are classified into two reportable operating segments: the Packaging Products Group (PPG) and the Fibers and Recycled Products Group (FRPG). The PPG manufactures: - solid-stated PET resin for use in the manufacture of soft drink bottles and other food and beverage packaging, - EcoClear(R) PET resin, utilizing post-consumer beverage bottles to meet customers' recycled content PET resin requirements, and - amorphous resin for internal solid-stating (a process which upgrades and purifies the resin) and, to a lesser extent, for sale to external customers. 65 The FRPG manufactures: - chemical-based polyester staple fibers for use in apparel, non-wovens, home products, and industrial products, - recycled-based polyester and nylon staple fibers for use in furniture, pillows, comforters, industrial products, carpets and rugs, and - recycled-based polyester and nylon engineering resins for use in the injection molding industry. Generally, the Company evaluates segment profit (loss) on the basis of operating profit (loss) less certain charges for research and development costs, administrative costs, and amortization expenses in a manner consistent with how it allocates charges in its Management Incentive Compensation Plan for the Executive Group. Intersegment transactions, 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. As discussed in note 2, the Company sold its POY business during 2002. The assets of this business, which were previously reported as part of the Company's FRPG, were reported as discontinued operations in the Company's financial statements for the six months ending June 30, 2002. The assets of the Company's small recycled fine denier polyester staple fiber business are being reported as property, plant and equipment of discontinued operations, net in the Company's Consolidated Balance Sheet at December 31, 2002. The net operating results for this business for the current period has been reflected as discontinued operations in the Company's financial statements. In addition, in accordance with SFAS No. 144, the prior years' segment information has been restated to reflect segment profit (loss) from continuing operations and to include the assets of the discontinued operations as corporate assets.
FIBERS AND PACKAGING RECYCLED PRODUCTS PRODUCTS 2002 GROUP GROUP TOTAL ---- ----- ----- ----- Revenues $ 524,781 $ 489,187 $1,013,968 Segment profit (loss) 50,045 (4,357) 45,688 Assets 406,083 504,520 910,603 Amortization and depreciation from continuing operations 24,759 30,934 55,698 Capital expenditures for continuing operations 14,352 7,296 21,648 2001 ---- Revenues $ 533,210 $ 476,350 $1,009,560 Segment profit (loss) 64,699 (29,466) 35,233 Assets 384,335 757,920 1,142,255 Amortization and depreciation from continuing operations 21,831 39,301 61,132 Capital expenditures for continuing operations 15,800 12,284 28,084 2000 ---- Revenues $ 499,261 $ 522,282 $1,021,543 Segment profit , exclusive of restructuring benefit 62,643 3,503 66,146 Restructuring benefit 290 503 793 ---------- ---------- ---------- Segment profit 62,933 4,006 66,939 ---------- ---------- ---------- Assets 440,090 807,124 1,247,214 Amortization and depreciation from continuing operations 20,582 41,005 61,587 Capital expenditures for continuing operations 6,947 31,579 38,526
66 Following are reconciliations to corresponding totals in the accompanying consolidated financial statements:
2002 2001 2000 ---- ---- ---- Segment Profit Total for Reportable Segments $ 45,688 $ 35,233 $ 66,939 Interest Expense, Net (10,254) (17,957) (17,959) ---------- ---------- ---------- Earnings (Loss) Before Income Taxes and Cumulative Effect of Accounting Change $ 35,434 $ 17,276 $ 48,980 ========== ========== ========== Assets Total for Reportable Segments $ 910,603 $1,142,255 $1,247,214 Corporate Assets (1) 51,426 88,167 80,273 ---------- ---------- ---------- Total Assets $ 962,029 $1,230,422 $1,327,487 ========== ========== ==========
(1) Corporate assets include prepaid expenses, construction in progress and other assets not allocated to the segments. Net sales and operating income (loss) for the years ended December 31, 2002, 2001 and 2000 and long-lived assets at the end of each year, classified by the major geographic areas in which the company operates, are as follows:
2002 2001 2000 ---- ---- ---- Net sales U.S $ 861,559 $ 837,974 $ 859,943 Europe 152,409 171,586 161,600 ---------- ---------- ---------- $1,013,968 $1,009,560 $1,021,543 ========== ========== ========== Operating income U.S $ 31,650 $ 13,864 $ 38,967 Europe 14,038 21,369 27,972 ---------- ---------- ---------- $ 45,688 $ 35,233 $ 66,939 ========== ========== ========== Long-lived assets U.S $ 654,888 $ 686,750 $ 714,323 Europe 46,172 41,179 42,586 ---------- ---------- ---------- $ 701,060 $ 727,929 $ 756,909 ========== ========== ==========
Revenues are attributed to countries based on the location where the products were produced. 67 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial information for the years ended December 31, 2002 and 2001 is summarized as follows:
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, TOTAL QUARTER ENDED 2002(1)(3) 2002(1) 2002(1) 2002(2) 2002 ------------- ---------- ------- ------- ------- ---- Net sales $ 239,972 $ 268,026 $ 257,333 $ 248,637 $1,013,968 Gross profit 26,423 38,259 25,262 25,279 115,223 Earnings from continuing operations 5,618 12,769 4,708 3,303 26,398 Earnings (loss) from discontinued operations (20,173) (3,398) (161) 81 (23,651) Earnings (loss) before cumulative effect of accounting change (14,555) 9,371 4,547 3,384 2,747 Cumulative effect of accounting change (197,054) -- -- -- (197,054) Net earnings (loss) $ (211,609) $ 9,371 $ 4,547 $ 3,384 $ (194,307) Basic net earnings (loss) per common share: Continuing operations $ 0.18 $ 0.40 $ 0.15 $ 0.11 $ 0.84 Discontinued operations (0.64) (0.11) (0.01) 0.00 (0.75) Cumulative effect of accounting change (6.24) -- -- -- (6.24) ---------- --------- --------- --------- ---------- Net earnings (loss) $ (6.70) $ 0.29 $ 0.14 $ 0.11 $ (6.15) ========== ========= ========= ========= ========== Diluted net earnings (loss) per common share: Continuing operations $ 0.18 $ 0.40 $ 0.15 $ 0.11 $ 0.82 Discontinued operations (0.63) (0.11) (0.01) 0.00 (0.73) Cumulative effect of accounting change (6.16) -- -- -- (6.16) ---------- --------- --------- --------- ---------- Net earnings (loss) $ (6.61) $ 0.29 $ 0.14 $ 0.11 $ (6.07) ========== ========= ========= ========= ==========
68
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, TOTAL QUARTER ENDED 2001(1) 2001(1)(4) 2001(1) 2001(1)(5) 2001(1) ------------- ------- ---------- ------- ---------- ------- Net sales $ 269,042 $ 262,962 $ 253,259 $ 224,297 $1,009,560 Gross profit 28,674 29,473 28,657 21,217 108,021 Earnings from continuing operations 3,930 4,955 4,224 313 13,422 Loss from discontinued operations (1,070) (1,894) (1,178) (891) (5,033) Net earnings (loss) $ 2,860 $ 3,061 $ 3,046 $ (578) $ 8,389 Basic net earnings (loss)per common share: Continuing operations $ 0.12 $ 0.16 $ 0.14 $ 0.01 $ 0.43 Discontinued operations (0.03) (0.06) (0.04) (0.03) (0.16) ---------- --------- --------- --------- ---------- Net earnings (loss) $ 0.09 $ 0.10 $ 0.10 $ (0.02) $ 0.27 ========== ========= ========= ========= ========== Diluted net earnings (loss) per common share: Continuing operations $ 0.12 $ 0.16 $ 0.14 $ 0.01 $ 0.43 Discontinued operations (0.03) (0.06) (0.04) (0.03) (0.16) ---------- --------- --------- --------- ---------- Net earnings (loss) $ 0.09 $ 0.10 $ 0.10 $ (0.02) $ 0.26 ========== ========= ========= ========= ==========
(1) Certain amounts have been reclassified to conform to the 2002 full-year presentation. (2) Quarterly net earnings include proceeds of $4,365 ($2,837 after tax), or $0.09 per diluted share, received under the Continued Dumping and Subsidy Offset Act of 2000, and a charge of $4,000 ($2,600 after tax), or $0.08 per diluted share, for expected losses on accounts receivable. (3) Quarterly net earnings include a cumulative effect of an accounting change of $(197,054), or $(6.16) per diluted share, for the impairment of goodwill. For additional information, see note 2. (4) Quarterly net earnings include the after-tax financial impact of the property damage and other cost associated with the production outage of $9,896 ($6,433 after tax), or $0.20 per diluted share, and income from property damage claims of $3,361 ($2,185 after tax), or $0.07 per diluted share. (5) Quarterly net loss reflects income from property damage and business interruption insurance of $7,226 ($4,697 after tax), or $0.15 per diluted share. 69 17. SUBSEQUENT EVENT In February 2003, the Company entered into an agreement to sell up to $125,400 of perpetual convertible preferred stock with Warburg Pincus Private Equity, VIII, L.P. ("Warburg Pincus VIII"), a global private equity firm. With the signing of this agreement, Warburg Pincus VIII invested $20,000 in the form of a convertible subordinated note that will be automatically converted into preferred stock upon satisfaction of certain conditions, and received a warrant to purchase 1,250,000 shares of our common stock at an exercise price of $11.25 per share. Proceeds from this transaction will be used primarily to pay down existing debt. On November 4, 2002, the Company entered into a non-binding letter of intent Warburg Pincus VIII that provided the basic economic framework for and the material terms of a private equity investment valued at $11.25 per share for the initial portion of their investment and $11.25 per share, or if lower, 110% of the volume-weighted average closing price of its common stock over a specified 20 trading day period for the balance of their investment. The $11.25 per share price represented a $0.59 (5.5%) premium over the closing price of the Company's common stock on that date. After the completion of due diligence and documentation, the Company entered into a definitive securities purchase agreement with Warburg Pincus VIII on February 12, 2003 on substantially the same terms agreed to in the letter of intent providing for the issuance of the convertible notes in an aggregate initial principal amount of up to $49,950, up to 5,000,000 shares of the Company's Series A preferred stock, 6,700,000 shares of the Company's Series B preferred stock and warrants to purchase 2,500,000 shares of common stock for up to $125,400 in cash (exclusive of the exercise price of the warrants). Upon consummation of the transaction, which is subject to stockholder approval, and assuming exercise of all warrants by Warburg Pincus VIII for cash, Warburg Pincus VIII will own approximately 30% of the Company's outstanding voting securities. This amount is subject to increase under certain conditions to a maximum of approximately 49% of the Company's outstanding common stock during the next five years. At the time of signing the agreement, the Company issued to Warburg Pincus VIII the initial warrant to purchase 1,250,000 shares of its common stock at an exercise price of $11.25 per share and Warburg Pincus VIII purchased a note in an initial principal amount of $20,000 at par. In addition, the Company appointed Oliver Goldstein, a vice president of Warburg Pincus LLC, to its board as a designee of Warburg Pincus VIII. When certain conditions are met, including stockholder approval of the transaction, and the Company obtaining a new $175,000 senior revolving credit facility, the following will occur: - the outstanding initial note will automatically convert into shares of Series A preferred stock and Warburg Pincus VIII will purchase for $30,000 in cash an additional 2,666,666 shares of Series A preferred stock at $11.25 per share so that Warburg Pincus VIII will own an aggregate of approximately 4,500,000 shares of Series A preferred stock; - Warburg Pincus VIII will purchase 6,700,000 shares of Series B preferred stock at a price per share equal to the Series B purchase price, which is equal to the lower of $11.25 or 110% of the volume-weighted average closing price of the Company's common stock over a 20-day period; - the Company will issue to Warburg Pincus VIII the additional warrant to purchase 1,250,000 shares of its common stock at an exercise price equal to the Series B purchase price; and - the Company will appoint a second director designated by Warburg Pincus VIII to its board. If shareholder approval and other conditions are not met, the preferred stock and, subject to certain exceptions, the additional warrant will not be issued to Warburg Pincus VIII. In such case, subject to certain conditions, including the Company obtaining a new $150,000 senior revolving credit facility, Warburg Pincus VIII will purchase the additional note in the initial principal amount of $29,950 at par and a second director 70 designated by Warburg Pincus VIII will be appointed to the Company's board. The resulting $49,950 in initial aggregate principal amount of the notes then outstanding, by their terms, will not be convertible into Series A preferred stock but will instead be convertible only into the Company's common stock at a conversion price of $11.25 per share. Warburg Pincus VIII will continue to hold the initial warrant. The amount of common stock issuable upon conversion or exercise of the $49,950 in initial principal amount of notes and the warrants would be limited to 19.99% of the common stock outstanding on February 12, 2003. If more than that amount of common stock would otherwise be issuable upon conversion or exercise of the notes and warrants, the excess shares would not be issued. Instead, upon conversion, Warburg Pincus VIII would be entitled to receive the cash excess share payment in an amount equal to the excess of the current market value of the Company's common stock over the conversion price in effect under the notes for the unissued excess shares. Since the number of shares issuable would be less than 20% of the number of shares of common stock outstanding on February 12, 2003, the issuance of the notes and warrants would not require stockholder approval under the New York Stock Exchange rules. 71 REPORT OF INDEPENDENT AUDITORS Board of Directors Wellman, Inc. We have audited the accompanying consolidated balance sheets of Wellman, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements and schedules of a wholly owned subsidiary of the Company, which statements reflect total assets constituting 9% as of December 31, 2002 and 2001, and net sales of 9% for each of the three years in the period ended December 31, 2002 of the related consolidated totals. Those financial statements and schedules were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for such wholly owned subsidiary, is based solely on the report of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellman, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, based on our audits and the report of other auditors, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in note 2 to the Consolidated Financial Statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets and for the impairment or disposal of long-lived assets. In 2001, the Company changed its method of accounting for derivative instruments and hedging activities. ERNST & YOUNG LLP Charlotte, North Carolina February 12, 2003 72 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT DESCRIPTION YEAR EXPENSES OTHER DEDUCTIONS END OF YEAR ----------- ---- -------- ----- ---------- ----------- Allowance for doubtful accounts Receivable: Year ended December 31, 2002 $ 3,871 $ 4,212 $ 76 $ 484(a) $ 7,675 ======== ======== ======== ======== ======== Year ended December 31, 2001 $ 3,968 $ 112 $ (33) $ 176(a) $ 3,871 ======== ======== ======== ======== ======== Year ended December 31, 2000 $ 4,415 $ 148 $ (25) $ 570(a) $ 3,968 ======== ======== ======== ======== ========
(a) Accounts written off and reduction of allowance. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 73 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding our directors and executive officers as of March 31, 2003: 74
PRINCIPAL OCCUPATION DURING DIRECTOR NAME AND AGE THE PAST FIVE YEARS SINCE - ------------------------------- ------------------------------------------------------- -------------- Thomas M. Duff, 55............. Chairman since 1999 and Chief Executive Officer and August 1985 director of Wellman since its inception in 1985. President from 1985 to 1999. James B. Baker, 57............. Managing Partner of River Associates Investments, LLC August 1994 (private equity investment fund) since 2001 and partner of River Associates Investments, LLC from 1993 to 2001. Prior to 1993, President and Chief Operating Officer (1991-1992) and Senior Vice President (1987-1991) of CONSTAR International, Inc. (plastic container manufacturer). Chairman of the Finance and Audit Committee and member of the Governance Committee. Clifford J. Christenson, 53 President of Wellman since 1999, Executive Vice November 1995 President of Wellman from 1993 to 1999 and Chief Operating Officer since 1995. Oliver Goldstein, 31......... Vice President, Warburg Pincus L.L.C., a private equity February 2003 investment firm, since January 2001. Associate of Warburg Pincus L.L.C from July 1999 to December 2000. Prior to 1999, Mr. Goldstein served in various capacities at Fenway Partners, Inc. and Goldman, Sachs and Co. Director of Alliant Protection Services, Inc. and Customized Database Systems, Inc. Richard F. Heitmiller, 74...... President of Richard F. Heitmiller, Inc. (consulting November 1988 firm) since 1982. Chairmen of the Board of Radici Spandex from 2001 to March 31, 2002. Vice Chairman, Chief Executive Officer and President of Globe Manufacturing from 1998 to 2001. From 1971 until 1982, various executive positions with Arthur D. Little, Inc. (management consultants) and Vice President of its Decision Resources subsidiary. Chairmen of the Governance Committee and member of the Finance and Audit Committee. Gerard J. Kerins, 55........... Vice-Chairman of ICG Commerce, Inc., a procurement August 1999 services provider, since July 2002. Chairman of the Board, Insulair, Inc. (producer of paper packaging) since March 2000. President, CEO and director of Continental PET Technologies, Inc. (producer of PET containers from 1983 to 1998. Member of the Compensation Committee.
75
PRINCIPAL OCCUPATION DURING DIRECTOR NAME AND AGE THE PAST FIVE YEARS SINCE - ------------------------------- ------------------------------------------------------- -------------- James E. Rogers, 57............ President of SCI Investors, Inc. (investment company) September 1993 since 1993. From 1991 until 1993, President and Chief Executive Officer of Specialty Coatings International, Inc. (a manufacturer). Prior to 1991, Senior Vice President and Group Executive of James River Corporation (a paper manufacturer). Mr. Rogers is also a director and member of the Compensation Committee of Owens & Minor, Inc. (a medical and surgical supplies distributor), a director and member of the Compensation Committee of Chesapeake Corp. (a packaging manufacturer), and a director and member of the Compensation and Audit Committees of Cadmus Communications Corporation (an integrated graphic communications provider). Member of the Finance and Audit Committee and the Compensation Committee. Marvin O. Schlanger, 54........ Principal of Cherry Hill Chemical Investments, LLC (a January 1999 chemical and allied industries management services firm) since 1998. Chairman and CEO of Resolution Performance Products, Inc. (a specialty chemicals company) since 2000. President and Chief Executive Officer of ARCO Chemical Company in 1998: Executive Vice President and Chief Operating Officer of ARCO Chemical Company from 1994 to 1998: prior to 1994, Chief Financial Officer and director. Also a director, chairman of the Finance and Planning Committee and member of the Audit Committee of UGI Corporation (utility holding company). Chairman of the Compensation Committee and member of the Governance Committee. Roger A. Vandenberg, 55........ President of Cariad Capital, Inc. (investment advisor) August 1985 since its inception in 1992. Mr. Vandenberg is also a director, member of the Compensation Committee and chairman of the Audit Committee of Monaco Coach Corporation (a manufacturer of motor homes). Member of the Finance and Audit Committee.
76 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION COMMITTEE REPORT Our Compensation Committee of the Board of Directors (the "Committee") is composed entirely of non-employee directors. The Committee has responsibility for administering the annual Management Incentive Compensation Plan, the stock option plans and the Deferred Compensation and Restricted Stock Plan. The Committee is also responsible for making compensation recommendations to the Board with respect to the five executive officers whose fiscal 2002 compensation is disclosed on the Summary Compensation Table below. In this capacity, the Committee determines the salary, management incentive plan awards and stock option grants for those executive officers, following administrative policies and practices that it establishes from time to time in accordance with the terms and provisions of the plans. This Committee Report describes the executive compensation program strategy, the components of the compensation program, and the manner in which 2002 compensation determinations were made by the Committee with respect to the Chairman and Chief Executive Officer, Thomas M. Duff, whose compensation is determined by the Committee meeting in executive session without Mr. Duff or other members of management being present. Similar determinations were made by the Committee with respect to the other four executive officers, after taking into consideration the recommendations submitted by Mr. Duff. Stock Ownership Policy. In February 1998 the Board of Directors, at the recommendation of the Compensation Committee, adopted a Statement of Policy which requires directors and executive officers to beneficially own targeted levels of Wellman Common Stock based on their compensation levels. The Board believes that increasing management's ownership of the Common Stock will more closely align the interests of management and the stockholders and will motivate management to manage Wellman for long-term growth and profitability. In order to implement the Statement of Policy, Wellman adopted the Deferred Compensation and Restricted Stock Plan. Under this Plan, executives are required to defer any amounts payable under the Management Incentive Compensation Plan over their target percentage and may elect to defer up to 50% of any other cash compensation payable to them. Restricted stock awards are granted for such deferred compensation. The number of shares of restricted stock issued is equal to the cash value of the compensation earned divided by 85% of the average of the highest and lowest sales prices of Wellman Common Stock reported on the New York Stock Exchange for a specified 31 day period at the end of the quarter. Compensation Strategy. The Committee endeavors to maintain an officer compensation program which is competitive with the practices of public corporations of similar revenue size. The structure for the compensation of the executive officers consists of three primary components: base salary, the Management Incentive Plan and stock options. The Committee believes a substantial component of executive officer total compensation should be based on Wellman's financial performance. The Management Incentive Plan compensates executive officers commensurate with Wellman's financial performance and other strategic goals, and annual stock option grants ensure that longer-term incentive compensation is directly related to increases in the market value of Wellman's Common Stock. The remainder of this Committee Report describes the components of our officer compensation program and the manner in which these were administered in 2002. Base Salary. Base salary forms the foundation of the officer compensation program. The Committee has periodically engaged compensation consultants to survey market practices to ensure executive officer salaries remain competitive in a manner which properly reflects the performance of the incumbent officers. Mr. Duff's 2002 annual salary shown in the Summary Compensation Table falls within the second quartile of competitive practice for corporations with revenues of comparable size. The second quartile is defined as 77 above the 25(th) percentile and below the 50(th) percentile. The average 2002 salaries of the other executive officers approximated the second quartile of competitive practice for their peers in corporations with revenues of comparable size. Management Incentive Plan. Under the Management Incentive Plan ("MIP"), annual bonuses earned by the executive officers and other plan participants are directly related to achieving targets established for corporate and/or operating unit profit and achieving individual strategic expectations established early in the year. The Committee establishes for each participant in the MIP a maximum targeted award based on a percentage of base salary and the portion of that target award which is to be based upon achieving strategic goals. Our Chief Executive Officer's target MIP award for 2002 was 65% of base salary; 30% of the target award was based upon achieving strategic expectations and 70% was based upon achieving financial objectives. The target awards for the other executive officers ranged from 25% to 65% of base salary; 35% to 50% of the target awards were based upon achieving strategic expectations and 50% to 65% was based upon achieving financial objectives. Based on his performance in 2002, the Committee recommended the payment of an annual bonus of $369,000 to our CEO (which constitutes 51% of his base salary). Stock Options. Annual stock option grants represent the third component of Wellman's executive compensation program. All stock options are granted with exercise prices equal to the average of fair market value of the stock on the 20 days preceding the date of grant so that optionees share in the future growth in market value of Wellman's Common Stock. To ensure stock options provide a longer-term stockholder value-based incentive, 20% of the options granted in a year become exercisable (i.e., the optionee can purchase the option shares) on the first through fifth anniversaries of the grant date, provided the optionee remains an employee. The Chief Executive Officer submits proposed stock option grants for the executive officers (other than himself) to the Committee for approval. In making the final determination of option grants, the Committee considers the individual executive's scope of responsibility, individual performance, the levels of profits and return on assets of the corporation and of its operating divisions (with no specific target levels being established), competitive levels of option grants, and the aggregate number of options awarded to the executive to date. The Committee, in its discretion, assigns relative weights to these factors as it deems appropriate. The Option Grants Table below shows the terms and size of 2002 option grants made to the executive officers named in the Summary Compensation Table below. The values shown under the "Grant Date Value" column of this table represent an estimate of the potential value of these grants. These projections should not be construed as a forecast of future stock price or the compensation that will be realized from the actual exercise of these options. Unless the future price of Wellman's stock is higher than $15.24 per share, the exercise price of the 2002 options, these options will have no value. 78 The Committee believes that the compensation paid by the Corporation to the executive officers will be fully deductible. This report has been provided by the Compensation Committee. The Compensation Committee Marvin O. Schlanger, Chairman Gerard Kerins James E. Rogers Roger A. Vandenberg 79 COMPENSATION TABLES The following table summarizes the compensation for the years ended December 31, 2002, 2001 and 2000 of Wellman's chief executive officer and the four other most highly compensated executive officers. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS ------------------------------------------------------ ------------------------------------------- SECURITIES OTHER RESTRICTED UNDERLYING ALL OTHER NAME AND PRINCIPAL ANNUAL STOCK OPTIONS COMPENSATION POSITION YEAR SALARY(1) BONUS(1) COMPENSATION(2) AWARDS(1)(3) (4) (5) - ----------------------- ---- ----------- ---------- --------------- ------------ ---------- ------------ Thomas M. Duff Chairman, CEO 2002 $ 720,000 $ 369,000 $ 72,857 $ 0 0 $ 136,807 2001 $ 720,000 $ 200,043 $ 73,734 $ 0 86,000 $ 171,379 2000 $ 720,000 $ 154,160 $ 73,734 $ 0 85,000 $ 170,701 Clifford J. Christenson President, COO 2002 $ 435,000 $ 243,000 $ 42,991 $ 0 40,000 $ 78,866 2001 $ 431,250 $ 149,702 $ 42,635 $ 15,095 76,000 $ 102,137 2000 $ 413,125 $ 83,179 $ 41,402 $ 11,030 75,000 $ 101,318 John R. Hobson Vice President, Fibers and Recycled Products Group 2002 $ 275,000 $ 141,000 $ 27,600 $ 640 20,000 $ 53,772 2001 $ 273,750 $ 51,762 $ 27,600 $ 2,442 40,000 $ 66,761 2000 $ 270,000 $ 82,251 $ 27,600 $ 6,658 35,000 $ 65,856 Keith R. Phillips Vice President and Chief Financial Officer 2002 $ 265,000 $ 167,000 $ 25,833 $ 6,306 25,000 $ 50,731 2001 $ 261,250 $ 107,658 $ 25,476 $ 12,971 40,000 $ 55,859 2000 $ 244,375 $ 76,082 $ 23,915 $ 11,101 35,000 $ 54,881 Joseph C. Tucker Vice President Corporate Development 2002 $ 237,000 $ 102,000 $ 24,385 $ 4.207 20,000 $ 46,033 2001 $ 234,500 $ 75,676 $ 24,158 $ 7,094 35,000 $ 51,246 2000 $ 224,625 $ 73,627 $ 23,474 $ 7,399 30,000 $ 50,320
- ------------------ (1) Under the Deferred Compensation and Restricted Stock Plan, employees may elect to defer specified amounts of salary, bonus and other cash compensation. Restricted stock awards are granted for such deferred amounts for 2002. The amounts of salary and bonus set forth include the following deferred amounts: Mr. Duff, $0 and $0; Mr. Christenson, $0 and $0; Mr. Hobson, $0 and $3,500; Mr. Phillips, $0 and $34,500; and Mr. Tucker, $11,000 and $10,000. The shares of restricted stock issued in connection with these deferred amounts are reflected in the Restricted Stock Awards column above. (2) Includes Wellman's contributions to life insurance premiums or payments in lieu thereof (Mr. Duff, $72,857; Mr. Christenson, $42,991; Mr. Hobson, $27,600; Mr. Phillips, $25,833; and Mr. Tucker, $24,385 in 2002). (3) These amounts are the dollar values of restricted stock awards granted under the Deferred Compensation and Restricted Stock Plan. Each value is determined by multiplying the number of shares in each award by the closing market price of Wellman Common Stock on the date of grant and subtracting the consideration paid by the Named Executive Officer. Holders of restricted stock receive the same cash dividends as other stockholders owning Wellman Common Stock. (4) None of the options granted were options with tandem SARs and no free-standing SARs were granted. 80 (5) Consists of Wellman's contributions to employee retirement (Mr. Duff, $19,870; Mr. Christenson, $19,703; Mr. Hobson, $19,501; Mr. Phillips, $19,402; and Mr. Tucker, $19,444 in 2002), supplemental retirement (Mr. Duff, $113,762; Mr. Christenson, $56,110; Mr. Hobson, $30,790; Mr. Phillips, $27,764; and Mr. Tucker, $23,117 in 2002), and employee stock ownership plan (Mr. Duff, $3,175; Mr. Christenson, $3,052; Mr. Hobson, $3,481; Mr. Phillips, $3,565; and Mr. Tucker, $3,473 in 2002). The aggregate number of all restricted stock and net value at December 31, 2002 (determined by taking the number of shares issued at December 31, 2002 multiplied by the closing market price on December 31, 2002, net of any consideration paid) are shown below. The aggregate amount paid for these shares was $1,778,026. Amounts shown do not include the restricted shares issued in connection with the bonuses for 2002 since such bonuses were not paid until March 2003.
AGGREGATE RESTRICTED NET SHARES VALUE ---------- ----- Mr. Duff........................ 41,348 $ 0 Mr. Christenson................. 38,566 $ 0 Mr. Hobson...................... 11,597 $ 0 Mr. Phillips.................... 23,936 $ 0 Mr. Tucker...................... 19,213 $ 0
OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information relating to option grants pursuant to the Option Plan in the year ended December 31, 2002 to the individuals named in the Summary Compensation Table above.
OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS ------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS EXERCISE UNDERLYING GRANTED TO OR BASE OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE NAME GRANTED(1)(2) FISCAL YEAR ($/SH) DATE VALUE(3) ---- ------------- ------------ -------- ---------- --------- Thomas M. Duff............. 0 0% $ 15.24 3/21/13 $ 0 Clifford J. Christenson.... 40,000 13.0% $ 15.24 3/21/13 $ 331,600 John R. Hobson............. 20,000 6.5% $ 15.24 3/21/13 $ 165,800 Keith R. Phillips.......... 25,000 8.1% $ 15.24 3/21/13 $ 207,250 Joseph C. Tucker........... 20,000 6.5% $ 15.24 3/21/13 $ 165,800
- ------------------ (1) None of the options granted were options with tandem SARs and no free-standing SARs were granted. (2) All options granted to the named executives were granted on March 21, 2002 pursuant to the Option Plan. The options generally become exercisable in 20% increments on March 21, 2003, 2004, 2005, 2006 and 2007. If a Change of Control (as defined in the Option Plan) occurs, these options would immediately become exercisable. 81 (3) Based on the Black-Scholes option pricing model. The use of this model should not be construed as an endorsement of its accuracy at valuing options. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so there is no assurance the actual value realized will be at or near the value estimated by the Black-Scholes model. The estimated value ($8.29 per option) under that model are based on the following assumptions: Stock price at March 21, 2002......... $ 16.49 Exercise price........................ $ 15.24 Expected option term.................. 8 years Stock price volatility................ .470 Dividend yield........................ 1.36% Risk-free interest rate............... 3.82%
YEAR-END OPTION VALUES The following table sets forth certain information as of December 31, 2002 with respect to unexercised options to purchase Wellman Common Stock granted under the Option Plan to the individuals named in the Summary Compensation Table above. No options were exercised in 2002 by such individuals.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT YEAR-END OPTIONS AT YEAR-END ------------------------------ --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ------------- ----------- ------------- Thomas M. Duff............. 335,960 163,640 $ 195,426 $ 130,284 Clifford J. Christenson.... 248,360 172,240 $ 112,266 $ 74,844 John R. Hobson............. 141,440 89,760 $ 67,914 $ 45,276 Keith R. Phillips.......... 138,960 92,640 $ 61,446 $ 40,964 Joseph C. Tucker........... 111,640 79,760 $ 56,364 $ 37,576
DIRECTORS' COMPENSATION. In 2002, each non-employee director received fees of $35,000 per year, split equally between cash and restricted stock, plus $1,500 for each board or committee meeting attended in person and $750 for each telephonic meeting attended. Each chairperson of the Board committees also received an annual fee of $4,000. Each year, each non-employee director also receives options to acquire 1,000 shares of Wellman's Common Stock. Employee directors receive no compensation for their Board service. 82 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c) ----------------- ----------------- -------------------- Number of securities Number of remaining available securities to be Weighted- for future issuance issued upon average exercise under equity exercise of price of compensation plans outstanding outstanding (excluding securities options, warrants options, warrants reflected in column Plan category and rights and rights (a)) ------------- ---------- ---------- ---- Equity compensation plans approved by security holders..................... 3,665,768 $ 17.59 1,032,715 Equity compensation plans not approved by security holders.................. -- -- -- Total.......................... 3,665,768 $ 17.59 1,032,715 ========= ======= =========
Of the 3,665,768 securities to be issued upon exercise of outstanding options, 2,334,636 were options exercisable at December 31, 2002. For additional information concerning our equity compensation plans, see discussion in Note 11 to our consolidated financial statements. 83 The following table shows, as of March 31, 2003, our Common Stock owned beneficially by our directors and executive officers and all persons we know to be beneficial owners of more than five percent of our Common Stock. Unless indicated otherwise, all persons have sole voting and investment power over the shares listed. Of our directors and executive officers, only Messrs. Duff and Christenson beneficially own more than one percent of Wellman's outstanding shares of common stock.
AMOUNT PERCENTAGE BENEFICIALLY OF COMMON NAME OWNED (1) STOCK ---- ------------ ----------- Wellington Management Company, LLP 75 State Street Boston, MA 02109(2) 2,855,700 8.96% Dimensional Fund Advisors Inc 1299 Ocean Avenue Santa Monica, CA 90401(3) 2,498,100 7.84% Thomas M. Duff(5) 857,133 2.69% James B. Baker (4)(6) 42,505 - Clifford J. Christenson(5) 403,684 1.27% Oliver Goldstein(4) - - Richard F. Heitmiller(4) 26,748 - Gerard J. Kerins(4) 10,251 - James E. Rogers(4) 29,932 - Marvin O. Schlanger(4) 12,923 - Roger A. Vandenberg(4) 52,567 - John R. Hobson(5) 199,983 - Keith R. Phillips(5) 205,651 - Joseph C. Tucker(5) 173,669 - Ernest Taylor(5) 134,716 - Mark J. Rosenblum(5) 126,991 - Michael Dewsbury(5) 125,067 - Audrey L. Goodman (5)(7) 31,839 - All Directors and Executive Officers as a Group 2,433,659 7.6% (16 persons)
(1) "Beneficial ownership" is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. So, for example, a person "beneficially" owns our Common Stock not only if he holds it directly, but also if he indirectly (through a relationship, a position as a director or trustee, or a contract or understanding) has or shares the power to vote the stock, or to sell it, or has the right to acquire it within 60 days. (2) Wellington Management Company, LLP, an investment advisor registered under the Investment Advisors Act of 1940, has shared voting power over 1,389,500 shares and shared investment power over 2,855,700 shares. (3) Dimensional Fund Advisors Inc., an investment advisor registered under the Investment Advisors Act of 1940, has sole voting and investment power over the shares listed in its role as investment advisor or manager of various investment companies, commingled group trusts and separate accounts. Dimensional Fund Advisors, Inc. disclaims beneficial ownership of these securities. 84 (4) The number of shares shown for each non-employee director includes the following shares that may be acquired upon exercise of stock options that were exercisable as of March 31, 2003 or that will become exercisable within 60 days of that date: Mr. Baker, 8,000; Mr. Goldstein, 0; Mr. Heitmiller, 10,000; Mr. Kerins, 3,000; Mr. Rogers, 9,000; Mr. Schlanger, 4,000; and Mr. Vandenberg, 10,000. The number of shares shown for each non-employee director also includes the following restricted shares that were awarded under the Deferred Compensation and Restricted Stock Plan: Mr. Baker, 31,229; Mr. Goldstein, 0; Mr. Heitmiller, 12,414; Mr. Kerins, 4,251; Mr. Rogers, 15,932; Mr. Schlanger, 5,423; and Mr. Vandenberg, 38,591. (5) The number of shares shown for each executive officer includes the following shares that may be acquired upon exercise of stock options that were exercisable as of March 31, 2003 or that will become exercisable within 60 days of that date: Mr. Duff, 397,080; Mr. Christenson, 303,280; Mr. Hobson, 171,320; Mr. Phillips, 168,280; Dr. Tucker, 137,520; Mr. Taylor, 113,080; Mr. Rosenblum, 108,200; Mr. Dewsbury, 95,000; and Ms. Goodman, 28,600. The number of shares shown for each executive officer also includes the following restricted shares that were acquired under the Deferred Compensation and Restricted Stock Plan: Mr. Duff, 41,348; Mr. Christenson, 38,566; Mr. Hobson, 11,597; Mr. Phillips, 23,936; Dr. Tucker, 19,213; Mr. Taylor, 4,411; Mr. Rosenblum, 12,109; Mr. Dewsbury, 3,635; and Ms. Goodman, 0. The number of shares shown for each executive officer also includes the number of shares of our Common Stock beneficially owned indirectly as of March 31, 2003 by such officer in our Employee Stock Ownership Plan and our Retirement Plan, respectively: Mr. Duff, 4,837 and 34,868; Mr. Christenson, 4,736 and 57,102; Mr. Hobson, 5,300 and 11,766; Mr. Phillips, 4,011 and 9,424; Dr. Tucker, 4,990 and 11,055; Mr. Taylor, 4,879 and 7,501; Mr. Rosenblum, 4,976 and 194; Mr. Dewsbury, 4,431 and 17,701; and Ms. Goodman, 2,989 and 0. (6) Of the shares listed for Mr. Baker, 200 are owned by his wife. (7) Of the shares listed for Ms. Goodman, 250 are owned by her husband. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For Compensation of directors and officers, see Item 11. "Executive Compensation." ITEM 14. CONTROLS AND PROCEDURES (a) Based on an evaluation of the effectiveness of the Company's disclosure controls and procedures as of March 26, 2003, both the Chief Executive Officer and the Chief Financial Officer of the Company concluded that the Company's disclosure controls and procedures, as defined in Rules 13a--14(c) and 15d -- 14(c) promulgated under the Securities Exchange Act of 1934, are effective. (b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no corrective actions with regard to significant deficiencies and material weaknesses. 85 ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES The aggregate fees billed by Ernst & Young LLP for professional services rendered for the audit of Wellman's annual financial statements and for the reviews of the financial statements included in Wellman's Quarterly Reports on Form 10-Q were approximately $645,700 and $545,000 for the years ended December 31, 2002 and 2001, respectively. AUDIT-RELATED FEES The aggregate fees billed by Ernst and Young LLP for audit-related services, which principally include audits of employee benefit plans and accounting consultations, were approximately $182,600 and $120,000 in 2002 and 2001, respectively. TAX FEES The aggregate fees billed by Ernst and Young LLP for tax services, including tax compliance, tax advice, and tax planning, were approximately $366,300 and $200,000 in 2002 and 2001, respectively. ALL OTHER FEES Ernst & Young LLP did not render any services to Wellman in 2002 and 2001 which would be included in this category. 86 PART IV ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial Statements The consolidated financial statements included in Item 8 are filed as part of this annual report. 2. Financial Statement Schedules The consolidated financial statement schedules included in Item 8 is filed as part of this annual report. 3. Exhibits Pursuant to Item 601(b)(4)(iii) of Regulation S-K, we have not filed herewith any instrument with respect to long-term debt which does not exceed 10% of our consolidated assets. We hereby agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3(a)(1) Restated Certificate of Incorporation, dated June 1, 1987 (Exhibit 3(a)(1) of the Company's Form 10-Q for the quarter ended June 30, 2000 incorporated by reference herein) 3(a)(2) Certificate of Amendment to Restated Certificate of Incorporation, dated May 18, 1989 (Exhibit 3(a)(2) of the Company's Form 10-Q for the quarter ended June 30, 2000 incorporated by reference herein) 3(a)(3) Certificate of Amendment to Restated Certificate of Incorporation, dated May 30, 1990 (Exhibit 3(a)(3) of the Company's Form 10-Q for the quarter ended June 30, 2000 incorporated by reference herein) 3(a)(4) Certificate of Amendment to Restated Certificate of Incorporation, dated February 16, 1994 (Exhibit 3(a)(4) of the Company's Form 10-Q for the quarter ended June 30, 2000 incorporated by reference herein) 3(b) Restated By-Laws, as of May 18, 1999 (Exhibit 3(b) of the Company's Form 10-Q for the quarter ended June 30, 1999 incorporated by reference herein) 4(a)(1) Loan Agreement dated as of September 28, 1999 by and between the Company and Fleet National Bank, N.A., as administrative agent, and certain other financial institutions (Exhibit 4(a)(1) of the Company's Form 10-Q for the quarter ended September 30, 1999 incorporated by reference herein) 4(a)(2) Amendment to Loan Agreement, dated April 28, 2000, by and between the Company and Fleet National Bank, N.A., as administrative agent, and certain other financial institutions (Exhibit 4(b) of the Company's Form 10-Q for the quarter ended June 30, 2000 incorporated by reference herein)
87 4(a)(3) Second Amendment to Loan Agreement dated September 15, 2000, by and between the Company and Fleet National Bank, as administrative agent, and certain other financial institutions (Exhibit 4(c) of the Company's Form 10-Q for the quarter ended September 30, 2000 incorporated by reference herein) 4(a)(4) Third Amendment to Loan Agreement dated September 27, 2000, by and between the Company and Fleet National Bank, as administrative agent, and certain other financial institutions (Exhibit 4(d) of the Company's Form 10-Q for the quarter ended September 30, 2000 incorporated by reference herein) 4(a)(5) Fourth Amendment to Loan Agreement dated September 26, 2001, by and between the Company and Fleet National Bank, as administrative agent, and certain other financial institutions (Exhibit 4 (a)(5) of the Company's Form 10-Q for the quarter ended September 30, 2001 incorporated by reference herein) 4(a)(6) Guaranty Agreement executed as of September 29, 1999 by Fiber Industries, Inc. in favor of Fleet National Bank on behalf of Wellman, Inc. (Exhibit 4(a)(2) of the Company's Form 10-Q for the quarter ended September 30, 1999 incorporated by reference herein) 4(a)(7) Guaranty Agreement executed as of September 29, 1999 by Prince, Inc. (formerly known as Wellman Delaware Holding, Inc.) in favor of Fleet National Bank on behalf of Wellman, Inc. (Exhibit 4(a)(3) of the Company's Form 10-Q for the quarter ended September 30, 1999 incorporated by reference herein) 4(a)(8) Guaranty Agreement executed as of September 29, 1999 by Wellman of Mississippi, Inc. in favor of Fleet National Bank on behalf of Wellman, Inc. (Exhibit 4(a)(4) of the Company's Form 10-Q for the quarter ended September 30, 1999 incorporated by reference herein) 4(b) Registration Rights Agreement dated as of August 12, 1985 by and among the Company, Thomas M. Duff and others (Exhibit 4.7 of the Company's Registration Statement on Form S-1, File No. 33-13458, incorporated by reference herein) 4(c) Rights Agreement dated as of August 31, 2001 between the Company and First Union National Bank, as Rights Agent (Exhibit 4 of the Company's Registration Statement on Form 8-A, incorporated by reference herein) 4(d) Amendment to Rights Agreement dated as of February 12, 2003, by and between Wellman, Inc. and Wachovia Bank, N.A., f/k/a First Union National Bank, as Rights Agent (Exhibit 4.1 to the Company's Form 8-K dated February 27, 2003 incorporated by reference herein) 4(e) Convertible Subordinated Promissory Note dated February 12, 2003 (Exhibit 4(e) to the Company's Form 10-K for the year ended December 31, 2002 filed on March 28, 2002, incorporated by reference herein) 4(f) Common Stock Purchase Warrant dated as of February 12, 2003 for the purchase of 1,250,000 shares of common stock (Exhibit 4(f) to the Company's Form 10-K for the year ended December 31, 2002 filed on March 28, 2002, incorporated by reference herein)
88 4(g) Securities Purchase Agreement by and between Wellman, Inc. and Warburg Pincus Private Equity VIII, LP, dated as of February 12, 2003 (Exhibit 4(g) to the Company's Form 10-K for the year ended December 31, 2002 filed on March 28, 2002, incorporated by reference herein) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10(a) Employment Agreement dated as of January 1, 1990, as amended by the Third Agreement to said Employment Agreement dated as of January 1, 1997, between the Company and Thomas M. Duff (Exhibit 10(a) of the Company's Form 10-Q for the quarter ended March 31, 2000 incorporated by reference herein) 10(b) Employment Agreement dated as of December 1, 1994 between the Company and Clifford J. Christenson (Exhibit 10(b) of the Company's Form 10-Q for the quarter ended March 31, 2000 incorporated by reference herein) 10(c) Employment Agreement dated as of December 1, 1994 between the Company and Keith R. Phillips (Exhibit 10(c) of the Company's Form 10-Q for the quarter ended March 31, 2000 incorporated by reference herein) 10(d) Employment Agreement dated as of May 21, 1996 between the Company and John R. Hobson (Exhibit 10(a) of the Company's Form 10-Q for the quarter ended June 30, 1996 incorporated by reference herein) 10(e) Employment Agreement dated as of September 21, 1998 between the Company and Joseph C. Tucker (Exhibit 10(e) of the Company's Form 10-K for the year ended December 31, 2001 incorporated by reference herein) 10(f) Employment Agreement dated as of April 10, 2000 between the Company and Michael Dewsbury (Exhibit 10(d) of the Company's Form 10-Q for the quarter ended March 31, 2000 incorporated by reference herein) 10(g) Employment Agreement dated as of February 15, 2001 between the Company and Mark J. Rosenblum (Exhibit 10(f) of the Company's Form 10-K for the year ended December 31, 2000 incorporated by reference herein) 10(h) Employment Agreement dated as of February 15, 2002 between the Company and Ernest G. Taylor (Exhibit 10(h) of the Company's Form 10-K for the year ended December 31, 2001 incorporated by reference herein) 10(i) Employment Agreement dated as of March 20, 2002 between the Company and Audrey Goodman (Exhibit 10(i) of the Company's Form 10-K for the year-end December 31, 2001 incorporated by reference herein) 10(j) Wellman, Inc. Directors Stock Option Plan (Exhibit 10(g) of the Company's Form 10-Q for the quarter ended June 30, 2001 incorporated by reference herein)
89 10(k) Wellman, Inc. Second Amended and Restated Management Incentive Compensation Plan for the Executive Group (Exhibit 10(h) of the Company's Form 10-K for the year ended December 31, 2000 incorporated by reference herein) 10(l) Summary of Executive Life Insurance Plan (Exhibit 10.22 of the Company's Registration Statement on Form S-1, File No. 33-13458, incorporated by reference herein) 10(m) Amended and Restated Executive Retirement Restoration Plan, effective as of January 1, 1993, and as amended as of June 1, 1998 and May 31, 2001 (Exhibit 10(m) of the Company's Form 10-K for the year ended December 31, 2001 incorporated by reference herein) 10(n) Wellman, Inc. Amended and Restated 1997 Stock Option Plan (Exhibit 10(k) of the Company's Form 10-Q for the quarter ended June 30, 2001 incorporated by reference herein) 10(o) Wellman, Inc. Deferred Compensation and Restricted Stock Plan, effective as of February 17, 1998 and as amended as of December 1, 1998 and December 31, 2002 (Exhibit 10(o) to the Company's Form 10-K for the year ended December 31, 2002 filed on March 28, 2002, incorporated by reference herein) OTHER MATERIAL AGREEMENTS 10(p) Trademark Assignment and License, dated January 28, 1988, by and among Fiber Industries, Inc., Hoechst-Celanese Corporation and Celanese (Exhibit 10.14 of Fiber Industries, Inc.'s Registration Statement on Form S-1, File No. 33-20626, incorporated by reference herein) 10(q) Inducement Agreement dated April 16, 1996, by and among Wellman of Mississippi, Inc., the Mississippi Department of Economic and Community Development acting for and on behalf of the State of Mississippi, the Mississippi Business Financial Corporation and certain other parties (Exhibit 10(u) of the Company's Form 10-K for the year ended December 31, 1996 incorporated by reference herein) 10(q)(1) Supplement to Inducement Agreement dated June 30, 1999, by and among the Mississippi Department of Economic and Community Development acting for and on behalf of the State of Mississippi, the Mississippi Major Economic Impact Authority, the Mississippi Business Finance Corporation and certain other parties (Exhibit 10(n)(1) of the Company's Form 10-K for the year ended December 31, 1999 incorporated by reference herein) 21 Subsidiaries (Exhibit 21 to the Company's Form 10-K for the year ended December 31, 2002 filed on March 28, 2002, incorporated by reference herein) 23(a) Consent of Ernst & Young LLP 23(b) Consent of KPMG Chartered Accountants, Dublin, Ireland 28(a) Report of KPMG Chartered Accountants, Dublin, Ireland (Exhibit 28(a) to the Company's Form 10-K for the year ended December 31, 2002 filed on March 28, 2002, incorporated by reference herein)
90 99.1 Periodic Report Certification of CEO 99.2 Periodic Report Certification of CFO (b) Reports on Form 8-K None
91 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 29, 2003. WELLMAN, INC. /s/ Thomas M. Duff -------------------------------- Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on April 29, 2003.
SIGNATURES TITLE ---------- ----- /s/ Thomas M. Duff Chairman, Chief Executive Officer and Director - ------------------------------ (Principal Executive Officer) Thomas M. Duff /s/ Keith R. Phillips Vice President and Chief Financial Officer - ------------------------------ (Principal Financial Officer) Keith R. Phillips /s/ Mark J. Rosenblum Vice President, Chief Accounting Officer and - ------------------------------ Controller (Principal Accounting Officer) Mark J. Rosenblum /s/ James B. Baker Director - ------------------------------ James B. Baker /s/ Clifford J. Christenson President, Chief Operating Officer and Director - ------------------------------ Clifford J. Christenson /s/ Oliver M. Goldstein Director - ------------------------------ Oliver M. Goldstein /s/ Richard F. Heitmiller Director - ------------------------------ Richard F. Heitmiller /s/ Gerard J. Kerins Director - ------------------------------ Gerard J. Kerins /s/ James E. Rogers Director - ------------------------------ James E. Rogers /s/ Marvin O. Schlanger Director - ------------------------------ Marvin O. Schlanger /s/ Roger A. Vandenberg Director - ------------------------------ Roger A. Vandenberg
92 CERTIFICATIONS I, Thomas M. Duff, Chief Executive Officer of Wellman, Inc., certify that: 1. I have reviewed this annual report on Form 10-K/A of Wellman, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date April 29, 2003 /s/Thomas M. Duff ----------------- Thomas M. Duff Chief Executive Officer 93 CERTIFICATIONS I, Keith R. Phillips, Chief Financial Officer of Wellman, Inc., certify that: 1. I have reviewed this annual report on Form 10-K/A of Wellman, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date April 29, 2003 /s/Keith R. Phillips -------------------- Keith R. Phillips Chief Financial Officer 94 EX-23.(A) 3 b46474kaexv23wxay.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Form S-8, Nos. 33-17196, 33-44822, 33-44877, 33-44876, 33-22459, 33-38491, 33-54075, 33-54079, 33-54077, 333-47833, 333-28273, 333-38752, 333-62568, 333-62572, and Form S-3, Nos. 33-36001 and 333-60175) pertaining to various stock option, employee savings, deferred compensation and restricted stock plans and a universal shelf registration statement of Wellman, Inc. of our report dated February 12, 2003, with respect to the consolidated financial statements and financial statement schedules included in this Form 10-K/A of Wellman, Inc. for the year ended December 31, 2002. /s/ Ernst & Young LLP Charlotte, North Carolina April 29, 2003 EX-23.(B) 4 b46474kaexv23wxby.txt CONSENT OF KPMG EXHIBIT 23(b) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements (Nos. 33-17196, 33-44822, 33-44877, 33-44876, 33-22459, 33-38491, 33-54075, 33-54079, 33-54077, 333-47833, 333-28273, 333-38752, 333-62572, 333-62568) on Form S-8 and (Nos. 33-36001 and 333-60175) on Form S-3, of Wellman, Inc. of our report dated February 12, 2003, with respect to the consolidated balance sheets of Wellman International Limited and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 Annual Report on Form 10-K/A of Wellman, Inc. /s/ KPMG Chartered Accountants Registered Auditors Dublin, Ireland 29 April 2003 EX-99.1 5 b46474kaexv99w1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report of Wellman, Inc. (the "Company") on Form 10-K/A for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas M. Duff, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By /s/Thomas M. Duff ----------------------- Chief Executive Officer EX-99.2 6 b46474kaexv99w2.txt CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report of Wellman, Inc. (the "Company") on Form 10-K/A for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Keith R. Phillips, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By /s/Keith R. Phillips -------------------------- Chief Financial Officer and Vice President -----END PRIVACY-ENHANCED MESSAGE-----