##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    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.
  
 Delaware
    
    04-1671740(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1041 521 Corporate Center DriveFort Mill, South Carolina
    
    29715(Address of principal executive offices)
    
    (Zip Code)
 (803) 835-2000
 þ o
  o þ o
 o þ




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##### Table of Contents



WELLMAN, INC.
INDEX
 Page No.PART I  FINANCIAL INFORMATIONITEM 1  Financial Statements (Unaudited, except where noted)Condensed Consolidated Statements of Operations  For the three and six months ended June 30, 2006 and 2005
    
    
    3Condensed Consolidated Balance Sheets  June 30, 2006 and December 31, 2005 (Audited)
    
    
    4Condensed Consolidated Statements of Stockholders Equity  For the six months ended June 30, 2006 and the year ended December 31, 2005
(Audited)
    
    
    5Condensed Consolidated Statements of Cash Flows  For the six months ended June 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17ITEM 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    25ITEM 4  Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONITEM 1  Legal Proceedings
    
    
    25ITEM 4  Submission of Matters to a Vote of Security Holders
    
    
    25ITEM 6  Exhibits and Reports on Form 8-K
    
    
    26SIGNATURES
    
    
    28EX-31.1 Section 302 Certification of C.E.O.EX-31.2 Section 302 Certificaton of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.
 2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 WELLMAN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    362.6
    
    
    $
    345.0
    
    
    $
    705.3
    
    
    $
    731.3Cost of sales
    
    
    349.2
    
    
    
    325.7
    
    
    
    682.5
    
    
    
    665.8Gross profit
    
    
    13.4
    
    
    
    19.3
    
    
    
    22.8
    
    
    
    65.5Selling, general and administrative expenses
    
    
    14.0
    
    
    
    13.6
    
    
    
    29.0
    
    
    
    31.6Restructuring charges
    
    
    1.1
    
    
    
    0.6
    
    
    
    1.5
    
    
    
    0.6Provision for uncollectible accounts
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Other expense, net
    
    
    1.1
    
    
    
    26.0
    
    
    
    7.2
    
    
    
    27.8Operating income (loss)
    
    
    (2.8
    )
    
    
    (20.9
    )
    
    
    (15.0
    )
    
    
    5.5Interest expense, net
    
    
    14.0
    
    
    
    11.2
    
    
    
    26.6
    
    
    
    21.6Loss before income tax benefit
    
    
    (16.8
    )
    
    
    (32.1
    )
    
    
    (41.6
    )
    
    
    (16.1
    )Income tax benefit
    
    
    (5.1
    )
    
    
    (10.1
    )
    
    
    (13.9
    )
    
    
    (5.7
    )Net loss
    
    $
    (11.7
    )
    
    $
    (22.0
    )
    
    $
    (27.7
    )
    
    $
    (10.4
    )Net loss attributable to common stockholders:Net loss
    
    $
    (11.7
    )
    
    $
    (22.0
    )
    
    $
    (27.7
    )
    
    $
    (10.4
    )Accretion
    
    
    (3.6
    )
    
    
    (3.4
    )
    
    
    (7.0
    )
    
    
    (7.4
    )Net loss attributable to common stockholders
    
    $
    (15.3
    )
    
    $
    (25.4
    )
    
    $
    (34.7
    )
    
    $
    (17.8
    )Basic and diluted net loss per common share:Net loss attributable to common stockholders
    
    $
    (0.48
    )
    
    $
    (0.80
    )
    
    $
    (1.09
    )
    
    $
    (0.56
    )Dividends per common share
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.10
  3




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##### Table of Contents



WELLMAN, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETS:Current assets:Cash and cash equivalents
    
    $
    
    
    
    $
    Accounts receivable, less allowance of $2.1 in 2006 and 2005
    
    
    214.5
    
    
    
    160.3Inventories
    
    
    175.6
    
    
    
    162.3Prepaid expenses and other current assets
    
    
    22.1
    
    
    
    21.7Total current assets
    
    
    412.2
    
    
    
    344.3Property, plant and equipment, at cost:Land, buildings and improvements
    
    
    139.7
    
    
    
    138.0Machinery and equipment
    
    
    1,152.3
    
    
    
    1,085.5Construction in progress
    
    
    7.5
    
    
    
    45.81,299.5
    
    
    
    1,269.3Less accumulated depreciation
    
    
    653.8
    
    
    
    622.0Property, plant and equipment, net
    
    
    645.7
    
    
    
    647.3Goodwill, net
    
    
    33.4
    
    
    
    33.4Other assets, net
    
    
    44.6
    
    
    
    51.5$
    1,135.9
    
    
    $
    1,076.5LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    118.6
    
    
    $
    102.4Accrued liabilities
    
    
    39.5
    
    
    
    45.8Current portion of long-term debt
    
    
    0.2
    
    
    
    0.2Total current liabilities
    
    
    158.3
    
    
    
    148.4Long-term debt
    
    
    588.7
    
    
    
    498.4Deferred income taxes and other liabilities
    
    
    97.6
    
    
    
    112.9Total liabilities
    
    
    844.6
    
    
    
    759.7Stockholders equity:Series A preferred stock, $0.001 par value, 5,000,000 shares authorized, 4,502,143
shares issued and outstanding
    
    
    64.5
    
    
    
    61.7Series B preferred stock, $0.001 par value; 6,700,000 shares authorized, issued and
outstanding
    
    
    96.0
    
    
    
    91.8Class A common stock, $0.001 par value; 100,000,000 shares authorized,
35,206,944 shares issued in 2006 and 34,946,722 in 2005
    
    
    
    
    
    
    Class B common stock, $0.001 par value, 5,500,000 shares authorized, no shares
issued
    
    
    
    
    
    
    Paid-in capital
    
    
    247.9
    
    
    
    247.2Common stock warrants
    
    
    4.9
    
    
    
    4.9Accumulated other comprehensive income
    
    
    27.0
    
    
    
    22.2Accumulated deficit
    
    
    (99.5
    )
    
    
    (61.5
    )Less common stock in treasury at cost: 2,500,000 shares
    
    
    (49.5
    )
    
    
    (49.5
    )Total stockholders equity
    
    
    291.3
    
    
    
    316.8$
    1,135.9
    
    
    $
    1,076.5
  4




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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedSeries A
    
    
    Series B
    
    
    Class A
    
    
    
    
    
    
    Common
    
    
    Other
    
    
    AccumulatedPreferred
    
    
    Preferred
    
    
    Common
    
    
    Paid-In
    
    
    Stock
    
    
    Comprehensive
    
    
    Earnings/
    
    
    TreasuryStock Issued
    
    
    Stock Issued
    
    
    Stock Issued
    
    
    Capital
    
    
    Warrants
    
    
    Income
    
    
    (Deficit)
    
    
    Stock
    
    
    Total(in millions)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 2004
    
    
    4.5
    
    
    $
    56.0
    
    
    
    6.7
    
    
    $
    83.3
    
    
    
    34.5
    
    
    $
    
    
    
    $
    245.5
    
    
    $
    4.9
    
    
    $
    37.0
    
    
    $
    19.1
    
    
    $
    (49.5
    )
    
    $
    396.3Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59.9
    )
    
    
    
    
    
    
    (59.9
    )Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.7
    )
    
    
    
    
    
    
    
    
    
    
    (15.7
    )Fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.9Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74.7
    )Cash dividends ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.5
    )
    
    
    
    
    
    
    (6.5
    )Accretion
    
    
    
    
    
    
    5.7
    
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14.2
    )
    
    
    
    
    
    
    Issuance of restricted stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.7Balance at December 31, 2005
    
    
    4.5
    
    
    
    61.7
    
    
    
    6.7
    
    
    
    91.8
    
    
    
    34.9
    
    
    
    
    
    
    
    247.2
    
    
    
    4.9
    
    
    
    22.2
    
    
    
    (61.5
    )
    
    
    (49.5
    )
    
    
    316.8Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27.7
    )
    
    
    
    
    
    
    (27.7
    )Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.8
    
    
    
    
    
    
    
    
    
    
    
    4.8Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22.9
    )Cash dividends ($0.10 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.3
    )
    
    
    
    
    
    
    (3.3
    )Accretion
    
    
    
    
    
    
    2.8
    
    
    
    
    
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.0
    )
    
    
    
    
    
    
    Issuance of restricted stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7Balance at June 30, 2006
    
    
    4.5
    
    
    $
    64.5
    
    
    
    6.7
    
    
    $
    96.0
    
    
    
    35.2
    
    
    $
    
    
    
    $
    247.9
    
    
    $
    4.9
    
    
    $
    27.0
    
    
    $
    (99.5
    )
    
    $
    (49.5
    )
    
    $
    291.3(unaudited)
  5




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WELLMAN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 (UNAUDITED)
  2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (27.7
    )
    
    $
    (10.4
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Depreciation
    
    
    27.3
    
    
    
    27.2Amortization
    
    
    8.9
    
    
    
    8.7Amortization in interest expense, net
    
    
    2.1
    
    
    
    2.1Deferred income taxes and other
    
    
    (14.6
    )
    
    
    (6.9
    )Changes in operating assets and liabilities
    
    
    (58.2
    )
    
    
    (15.4
    )Net cash provided by (used in) operating activities
    
    
    (62.2
    )
    
    
    5.3Cash flows from investing activities:Additions to property, plant and equipment
    
    
    (22.0
    )
    
    
    (24.5
    )Net cash used in investing activities
    
    
    (22.0
    )
    
    
    (24.5
    )Cash flows from financing activities:Borrowings under long-term debt, net
    
    
    89.8
    
    
    
    20.9Dividends paid on common stock
    
    
    (3.3
    )
    
    
    (3.2
    )Debt issuance and financing costs
    
    
    (2.3
    )
    
    
    Net cash provided by financing activities
    
    
    84.2
    
    
    
    17.7Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    0.2Decrease in cash and cash equivalents
    
    
    
    
    
    
    (1.3
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    5.6Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    4.3Supplemental cash flow data:Cash paid during the period for:Interest, net
    
    $
    24.6
    
    
    $
    19.7Income taxes
    
    $
    0.4
    
    
    $
    0.8
  6




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##### Table of Contents



WELLMAN, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  1. BASIS OF PRESENTATION
   2. ACCOUNTING CHANGES
     7




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##### Table of Contents



Three Months Ended
    
    Six Months Ended(In millions, except per share data)
    
    June 30, 2005
    
    June 30, 2005As
    
    Effect of
    
    As
    
    As
    
    Effect of
    
    AsReported
    
    Change
    
    Adjusted
    
    Reported
    
    Change
    
    AdjustedOperating Income (Loss)
    
    $
    (21.7
    )
    
    $
    0.8
    
    
    $
    (20.9
    )
    
    $
    3.9
    
    
    $
    1.6
    
    
    $
    5.5Income Tax Benefit
    
    $
    (10.2
    )
    
    $
    0.1
    
    
    $
    (10.1
    )
    
    $
    (6.0
    )
    
    $
    0.3
    
    
    $
    (5.7
    )Net Loss Attributable to
Common Stockholders
    
    $
    (26.1
    )
    
    $
    0.7
    
    
    $
    (25.4
    )
    
    $
    (19.1
    )
    
    $
    1.3
    
    
    $
    (17.8
    )Basic and Diluted Net Loss Per
Common Share
    
    $
    (0.82
    )
    
    $
    0.02
    
    
    $
    (0.80
    )
    
    $
    (0.60
    )
    
    $
    0.04
    
    
    $
    (0.56
    )
 Three Months Ended
    
    Three Months Ended(In millions, except per share data)
    
    September 30, 2005
    
    December 31, 2005As
    
    Effect of
    
    As
    
    As
    
    Effect of
    
    AsReported
    
    Change
    
    Adjusted
    
    Reported
    
    Change
    
    AdjustedOperating Income (Loss)
    
    $
    1.3
    
    
    $
    0.9
    
    
    $
    2.2
    
    
    $
    (7.8
    )
    
    $
    (40.3
    )
    
    $
    (48.1
    )Income Tax Benefit
    
    $
    (4.1
    )
    
    $
    0.2
    
    
    $
    (3.9
    )
    
    $
    (7.9
    )
    
    $
    (8.4
    )
    
    $
    (16.3
    )Net Loss Attributable to
Common Stockholders
    
    $
    (9.6
    )
    
    $
    0.7
    
    
    $
    (8.9
    )
    
    $
    (15.5
    )
    
    $
    (31.9
    )
    
    $
    (47.4
    )Basic and Diluted Net Loss Per
Common Share
    
    $
    (0.30
    )
    
    $
    0.02
    
    
    $
    (0.28
    )
    
    $
    (0.49
    )
    
    $
    (1.01
    )
    
    $
    (1.50
    )
  (In millions)
 As
    
    Effect of
    
    AsAs of December 31, 2005
    
    Reported
    
    Change
    
    AdjustedOther assets, net
    
    $
    73.7
    
    
    $
    (22.2
    )
    
    $
    51.5Deferred income taxes and other
liabilities
    
    
    (102.5
    )
    
    
    (10.4
    )
    
    
    (112.9
    )Accumulated other comprehensive
income (loss)
    
    
    (11.3
    )
    
    
    33.5
    
    
    
    22.2Accumulated earnings (deficit)
    
    
    4.6
    
    
    
    (66.1
    )
    
    
    (61.5
    )Total stockholders equity
    
    
    349.4
    
    
    
    (32.6
    )
    
    
    316.8
   8




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##### Table of Contents



3. INVENTORIES
  June 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Raw materials
    
    $
    74.0
    
    
    $
    61.5Finished and semi-finished goods
    
    
    93.2
    
    
    
    92.2Supplies
    
    
    8.4
    
    
    
    8.6$
    175.6
    
    
    $
    162.3
 4. RESTRUCTURING CHARGES
  Severance(in millions)
    
    CostsAccruals recorded in first quarter 2006
    
    $
    0.4Accrual balance at March 31, 2006
    
    
    0.4Accruals recorded in second quarter 2006
    
    
    1.1Cash payments
    
    
    (0.4
    )Accrual balances at June 30, 2006
    
    $
    1.1
   5. BORROWINGS
  9




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##### Table of Contents



6. OTHER EXPENSE, NET
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Hurricane Katrina Costs
    
    $
    1.4
    
    
    $
    
    
    
    $
    7.1
    
    
    $
    Costs (Proceeds)
relating to
anti-dumping
activities, net
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.1
    )Legal Costs
    
    
    
    
    
    
    26.1
    
    
    
    
    
    
    
    27.9$
    1.1
    
    
    $
    26.0
    
    
    $
    7.2
    
    
    $
    27.8
  Direct damage to plant site -
    
    Costs incurred to repair and/or restore all
machinery, equipment, foundations, and
buildings to their normal operating
condition.Fixed costs 
    
    Salaries, wages, property insurance,
electricity, and waste water treatment costs
incurred during the shutdown period.Incremental freight costs 
    
    Additional freight costs incurred above our
normal freight expense, primarily due to the
disruption in rail service.
 10




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##### Table of Contents



Infrastructure support 
    
    Costs to maintain an adequate living
environment for both our employees and
contract workers starting with the initial
repair period and continuing in order to
maintain proper staffing levels to operate
the plant.Inventory spoilage 
    
    Costs representing the difference between
the inventory cost at the time of the
hurricane less the net realizable value of
inventory that was damaged or spoiled as a
result of the hurricane.Rail car damage 
    
    Costs of repairing all of our leased rail
cars that were damaged during the hurricane.Rail car leases 
    
    Monthly lease cost related to the rail cars
that were damaged and thus inoperable.
     7. NET LOSS PER COMMON SHARE
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator for basic and diluted net loss attributable to common
stockholders per common share:Net loss attributable to common stockholders
    
    $
    (15.3
    )
    
    $
    (25.4
    )
    
    $
    (34.7
    )
    
    $
    (17.8
    )Denominator:Denominator for basic and diluted net loss attributable to
common stockholders per common share  weighted-average shares
    
    
    31.9
    
    
    
    31.7
    
    
    
    31.9
    
    
    
    31.7
 11




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8. DEFINED BENEFIT PLANS
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Domestic
    
    
    Foreign
    
    
    Domestic
    
    
    Foreign
    
    
    Domestic
    
    
    Foreign
    
    
    Domestic
    
    
    ForeignService cost
    
    $
    0.2
    
    
    $
    1.1
    
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.4
    
    
    $
    2.2
    
    
    $
    0.3
    
    
    $
    1.4Interest cost
    
    
    0.9
    
    
    
    1.2
    
    
    
    0.8
    
    
    
    1.0
    
    
    
    1.7
    
    
    
    2.4
    
    
    
    1.6
    
    
    
    2.0Expected return on assets
    
    
    (0.8
    )
    
    
    (1.3
    )
    
    
    (0.9
    )
    
    
    (1.3
    )
    
    
    (1.6
    )
    
    
    (2.6
    )
    
    
    (1.8
    )
    
    
    (2.6
    )Curtailment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    Total net periodic
pension expense
    
    $
    0.3
    
    
    $
    1.0
    
    
    $
    0.1
    
    
    $
    0.4
    
    
    $
    0.5
    
    
    $
    1.9
    
    
    $
    0.1
    
    
    $
    0.8
 Employer contributions
  9. STOCK OPTIONS
  12




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Three Months
    
    
    Six Months EndedEnded June 30,
    
    
    June 30,(In millions, except per share data)
    
    2005
    
    
    2005Net loss attributable to common stockholders, as
reported
    
    $
    (25.4
    )
    
    $
    (17.8
    )Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    
    
    
    
    (0.1
    )Pro forma net loss attributable to common stockholders
    
    $
    (25.4
    )
    
    $
    (17.9
    )Net loss attributable to common stockholders per basic
and diluted share:As reported
    
    $
    (0.80
    )
    
    $
    (0.56
    )Pro forma
    
    $
    (0.80
    )
    
    $
    (0.56
    )
 10. COMMITMENTS AND CONTINGENCIES
     13




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##### Table of Contents



Six Months EndedJune 30,(In millions)
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    6.6
    
    
    $
    7.0Changes in remediation costs
    
    
    (0.2
    )
    
    
    Expenditures
    
    
    (0.1
    )
    
    
    (0.3
    )Balance at end of period
    
    $
    6.3
    
    
    $
    6.7
     11. FOREIGN CURRENCY TRANSLATION AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
   14




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12. SEGMENT INFORMATION
   
    
    PermaClear® and PermaClear HP® solid-stated and amorphous PET
resin from chemical-based raw materials for use in the manufacturing of plastic soft drink
bottles and other food and beverage packaging and
    
    EcoClear® PET resin, utilizing recycled PET materials to meet customers
recycled content PET resin requirements.
  
    
    Fortrel® chemical-based polyester staple fiber for use in apparel, non-woven,
home furnishing, and industrial products,
    
    recycled-based polyester staple fiber for use in home furnishing, non-woven and
industrial products, and
    
    Wellamid Ecolon® and Wellamid® recycled-based nylon and polyester
engineering resin, primarily for use in the injection molding industry.
  Packaging
    
    Fibers andProducts
    
    Recycled Products(In millions)
    
    Group
    
    Group
    
    TotalThree months ended June 30, 2006Revenues
    
    $
    220.6
    
    
    $
    142.0
    
    
    $
    362.6Segment profit (loss)
    
    $
    (1.1
    )
    
    $
    0.5
    
    
    $
    (0.6
    )Assets
    
    $
    792.5
    
    
    $
    308.4
    
    
    $
    1,100.9Three months ended June 30, 2005Revenues
    
    $
    195.2
    
    
    $
    149.8
    
    
    $
    345.0Segment profit
    
    $
    3.8
    
    
    $
    1.9
    
    
    $
    5.7Assets
    
    $
    734.2
    
    
    $
    297.6
    
    
    $
    1,031.8Six months ended June 30, 2006Revenues
    
    $
    415.2
    
    
    $
    290.1
    
    
    $
    705.3Segment profit (loss)
    
    $
    (6.4
    )
    
    $
    0.2
    
    
    $
    (6.2
    )Six months ended June 30, 2005Revenues
    
    $
    424.0
    
    
    $
    307.3
    
    
    $
    731.3Segment profit
    
    $
    28.5
    
    
    $
    5.4
    
    
    $
    33.9
  15




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Segment Profit (Loss)Total for reportable segments
    
    $
    (0.6
    )
    
    $
    5.7
    
    
    $
    (6.2
    )
    
    $
    33.9Restructuring charges
    
    
    (1.1
    )
    
    
    (0.6
    )
    
    
    (1.5
    )
    
    
    (0.6
    )Provision for uncollectible accounts
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Other expense, net
    
    
    (1.1
    )
    
    
    (26.0
    )
    
    
    (7.2
    )
    
    
    (27.8
    )Interest expense, net
    
    
    (14.0
    )
    
    
    (11.2
    )
    
    
    (26.6
    )
    
    
    (21.6
    )Loss before income tax benefit
    
    $
    (16.8
    )
    
    $
    (32.1
    )
    
    $
    (41.6
    )
    
    $
    (16.1
    )AssetsTotal for reportable segments
    
    $
    1,100.9
    
    
    $
    1,031.8Corporate assets(1)
    
    
    35.0
    
    
    
    61.3$
    1,135.9
    
    
    $
    1,093.1
 
 (1)
    
    Corporate assets include cash, certain prepaid expenses, construction in progress, and certain other assets not
allocated to the segments. 16




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ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 GENERAL
 ® ® ®
 ® ® ®
   IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  17




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RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED
JUNE 30, 2005
  (In millions)
    
    PPG
    
    
    FRPG
    
    
    TOTALNet SalesSales volumes
    
    $
    27.1
    
    
    $
    (13.8
    )
    
    $
    13.3Net selling prices
    
    
    (2.0
    )
    
    
    5.6
    
    
    
    3.6Foreign currency translation
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.7Increase (decrease) in net sales
    
    
    25.4
    
    
    
    (7.8
    )
    
    
    17.6Cost of SalesVolume effect
    
    
    22.9
    
    
    
    (11.6
    )
    
    
    11.3Raw material unit costs
    
    
    5.3
    
    
    
    6.7
    
    
    
    12.0Plant added unit costs
    
    
    1.4
    
    
    
    (2.2
    )
    
    
    (0.8
    )Foreign currency translation
    
    
    0.3
    
    
    
    0.7
    
    
    
    1.0Increase (decrease) in cost of sales
    
    
    29.9
    
    
    
    (6.4
    )
    
    
    23.5Decrease in gross profit
    
    $
    (4.5
    )
    
    $
    (1.4
    )
    
    $
    (5.9
    )
 18




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19




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SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
  (In millions)
    
    PPG
    
    
    FRPG
    
    
    TOTALNet SalesSales volumes
    
    $
    11.5
    
    
    $
    (29.8
    )
    
    $
    (18.3
    )Net selling prices
    
    
    (18.9
    )
    
    
    15.4
    
    
    
    (3.5
    )Foreign currency translation
    
    
    (1.4
    )
    
    
    (2.8
    )
    
    
    (4.2
    )Decrease in net sales
    
    
    (8.8
    )
    
    
    (17.2
    )
    
    
    (26.0
    )Cost of SalesVolume effect
    
    
    10.1
    
    
    
    (25.9
    )
    
    
    (15.8
    )Raw material unit costs
    
    
    7.8
    
    
    
    14.5
    
    
    
    22.3Plant added unit costs
    
    
    10.7
    
    
    
    2.9
    
    
    
    13.6Foreign currency translation
    
    
    (1.3
    )
    
    
    (2.1
    )
    
    
    (3.4
    )Increase (decrease) in cost of sales
    
    
    27.3
    
    
    
    (10.6
    )
    
    
    16.7Decrease in gross profit
    
    $
    (36.1
    )
    
    $
    (6.6
    )
    
    $
    (42.7
    )
   20




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OUTLOOK
 21




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CAPITAL RESOURCES AND LIQUIDITY
  For the Six MonthsEnded June 30,(In millions)
    
    2006
    
    
    2005Changes in operating assets and liabilities:Accounts receivable
    
    
    ($51.9
    )
    
    $
    33.0Inventories
    
    
    (10.2
    )
    
    
    (23.6
    )Prepaid expenses and other current assets
    
    
    (0.1
    )
    
    
    3.0Accounts payable and accrued liabilities
    
    
    7.3
    
    
    
    (21.3
    )Other
    
    
    (3.3
    )
    
    
    (6.5
    )($58.2
    )
    
    
    ($15.4
    )
  22




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##### Table of Contents



For the Quarter EndedSep30,
    
    
    Dec. 31,
    
    
    Mar. 31,
    
    
    June 30,(In Millions)
    
    2005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    TotalFixed ChargesCash interest expense
    
    $
    10.5
    
    
    $
    10.9
    
    
    $
    11.9
    
    
    $
    12.7
    
    
    $
    46.0Capital expenditures
    
    
    16.2
    
    
    
    10.7
    
    
    
    9.3
    
    
    
    12.7
    
    
    
    48.9Cash payment of taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.6Dividend payments
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.7
    
    
    
    6.5Total Fixed Charges
    
    $
    28.5
    
    
    $
    23.2
    
    
    $
    23.1
    
    
    $
    27.2
    
    
    $
    102.0EBITDA, as definedNet loss
    
    $
    (5.5
    )
    
    $
    (44.0
    )
    
    $
    (16.0
    )
    
    $
    (11.7
    )
    
    $
    (77.2
    )Income tax benefit
    
    
    (3.9
    )
    
    
    (16.3
    )
    
    
    (8.8
    )
    
    
    (5.1
    )
    
    
    (34.1
    )Interest expense, net
    
    
    11.6
    
    
    
    12.2
    
    
    
    12.6
    
    
    
    14.0
    
    
    
    50.4Depreciation and amortization
    
    
    16.8
    
    
    
    15.9
    
    
    
    17.7
    
    
    
    18.5
    
    
    
    68.9Non-recurring
and non-operational charges
    
    
    16.2
    
    
    
    60.4
    
    
    
    6.2
    
    
    
    2.3
    
    
    
    85.1EBITDA, as defined
    
    $
    35.2
    
    
    $
    28.2
    
    
    $
    11.7
    
    
    $
    18.0
    
    
    $
    93.1Consolidated
Fixed Charge
Coverage Ratio
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .91:1.0
   23




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FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
   24




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 (a)
    
    Based on an evaluation of the effectiveness of the Companys
disclosure controls and procedures as of June 30, 2006, 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, were effective on that date.(b)
    
    Based upon an evaluation of whether any change in the Companys
internal control over financial reporting (as defined in Rule
13a-15(f) promulgated under the Exchange Act) that materially
affected, or is reasonably likely to materially affect, such internal
control occurred during the period covered by this Report, both the
Chief Executive Officer and the Chief Financial Officer of the Company
concluded that no such change occurred .
 
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 25




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##### Table of Contents



(a)
    
    Our Annual Meeting of Stockholders was held on May 16, 2006.(b)
    
    See (c) 1. below for the names of each director elected at the meeting.(c)
    
    At the Annual Meeting of Stockholders, the stockholders voted on the following matters:
 1.
    
    The vote for election of seven directors by
stockholders of common stock to serve for a term
of one year, expiring at the 2007 Annual Meeting
of Stockholders, or until their successors are
elected and qualified was as follows:
 Name
    
    For
    
    Against/WithheldThomas M. Duff
    
    
    27,890,278
    
    
    
    2,228,955James B. Baker
    
    
    27,875,696
    
    
    
    2,243,537Daniel K. Frierson
    
    
    25,058,195
    
    
    
    5,061,038Richard F. Heitmiller
    
    
    27,842,163
    
    
    
    2,277,070David J. McKittrick
    
    
    28,586,674
    
    
    
    1,532,559James E. Rogers
    
    
    23,640,290
    
    
    
    6,478,943Roger A. Vandenberg
    
    
    23,695,926
    
    
    
    6,423,307
 As a result, all of the above nominees were elected to the Board. (*)2.
    
    The vote for election of two directors by stockholders of Preferred
Stock to serve for a term of one year, expiring at the 2007 Annual
Meeting of Stockholders, or until their successors are elected and
qualified was as follows:
 Name
    
    For
    
    Against/WithheldDavid A. Barr
    
    
    11,202,143
    
    
    
    0Kevin Kruse
    
    
    11,202,143
    
    
    
    0
 3.
    
    The combined vote for the proposal to ratify the selection by the
Board of Directors of Ernst & Young LLP as independent auditors to
examine our consolidated financial statements for the fiscal year
ending December 31, 2006: 44,063,511 votes cast for, 135,500 votes
cast against, and 51,548 abstentions. As a result, the Boards
selection of Ernst & Young LLP was approved. (*)(*)
    
    Under the rules of the New York Stock Exchange, brokers holding shares
in street name have the authority to vote certain matters when they
have not received instructions from the beneficial owners. Brokers
that did not receive such instructions were entitled to vote on each
of the above proposals. As a result, broker non-votes had no effect
on the outcome of these proposals.(d)
    
    Not applicable.
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  26




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##### Table of Contents



4(a)
    
    Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has
not filed herewith any instrument with respect to long-term debt,
which does not exceed 10% of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant hereby
agrees to furnish a copy of any such instrument to the Securities and
Exchange Commission upon request.31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 27




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SIGNATURES
  WELLMAN, INC.Dated August 7, 2006
    
    By /s/ Keith R. PhillipsChief Financial Officer and 
Vice President(Principal Financial Officer)Dated August 7, 2006
    
    By /s/ Mark J. RudayChief Accounting Officer,
Vice President and Controller(Principal Accounting Officer)
 28