##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark one) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 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
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 595 Shrewsbury AvenueShrewsbury, New Jersey
    
    07702(Address of principal executive offices)
    
    (Zip Code)
 Registrant s telephone number, including area code: (732) 212-3300 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o As of July 30, 2004, there were 32,014,147 shares of the registrants
Class A common stock, $.001 par value, outstanding and no shares of Class B
common stock outstanding.    1




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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, 2004 and 2003
    
    
    3Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 (Audited)
    
    
    4Condensed
Consolidated Statements of Stockholders Equity -
For the six months ended June 30, 2004 and the year ended December 31, 2003
(Audited)
    
    
    5Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16ITEM 3 - Quantitative and Qualitative Disclosure About Market Risk
    
    
    25ITEM 4 - Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONITEM 1 - Legal Proceedings
    
    
    26ITEM 4 - Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 6 - Exhibits and Reports on Form 8-K
    
    
    28SIGNATURES30Ex-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.1 Certification of CEO re: Section 906Ex-32.2 Certification of CFO re: Section 906
  2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS 
 WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In millions, except per share data) Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    329.0
    
    
    $
    285.3
    
    
    $
    622.8
    
    
    $
    572.6Cost of sales
    
    
    305.7
    
    
    
    262.0
    
    
    
    582.1
    
    
    
    519.1Gross profit
    
    
    23.3
    
    
    
    23.3
    
    
    
    40.7
    
    
    
    53.5Selling, general and administrative expenses
    
    
    13.8
    
    
    
    17.3
    
    
    
    28.3
    
    
    
    34.6Non-capitalizable financing costs
    
    
    
    
    
    
    
    
    
    
    40.2
    
    
    
    Provision for uncollectible accounts
    
    
    
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1Restructuring charges
    
    
    0.8
    
    
    
    0.1
    
    
    
    1.1
    
    
    
    1.3Other expense, net
    
    
    1.1
    
    
    
    3.0
    
    
    
    2.3
    
    
    
    4.2Operating income (loss)
    
    
    7.6
    
    
    
    2.8
    
    
    
    (31.5
    )
    
    
    13.3Interest expense, net
    
    
    10.1
    
    
    
    2.3
    
    
    
    17.6
    
    
    
    4.3Earnings (loss) from continuing operations before income
taxes
    
    
    (2.5
    )
    
    
    0.5
    
    
    
    (49.1
    )
    
    
    9.0Income tax expense (benefit)
    
    
    (1.0
    )
    
    
    0.2
    
    
    
    (19.4
    )
    
    
    3.0Earnings (loss) from continuing operations
    
    
    (1.5
    )
    
    
    0.3
    
    
    
    (29.7
    )
    
    
    6.0Earnings from discontinued operations, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Net earnings (loss)
    
    $
    (1.5
    )
    
    $
    0.3
    
    
    $
    (29.7
    )
    
    $
    6.1Net earnings (loss) attributable to common stockholders:Net earnings (loss)
    
    $
    (1.5
    )
    
    $
    0.3
    
    
    $
    (29.7
    )
    
    $
    6.1Accretion of preferred stock
    
    
    (3.0
    )
    
    
    (0.1
    )
    
    
    (6.0
    )
    
    
    (0.1
    )Net earnings (loss) attributable to common stockholders
    
    $
    (4.5
    )
    
    $
    0.2
    
    
    $
    (35.7
    )
    
    $
    6.0Basic and diluted net earnings (loss) per common share:Net earnings (loss) attributable to common stockholders
    
    $
    (0.14
    )
    
    $
    0.01
    
    
    $
    (1.13
    )
    
    $
    0.19Dividends per common share
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    0.18
 See Notes to Condensed Consolidated Financial Statements. 3




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WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data) June 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETS:Current assets:Cash and cash equivalents
    
    $
    13.3
    
    
    $
    205.5Accounts receivable, less allowance of $2.6 in 2004 and $3.8 in 2003
    
    
    172.0
    
    
    
    137.5Inventories
    
    
    130.1
    
    
    
    121.1Prepaid expenses and other current assets
    
    
    21.6
    
    
    
    12.1Total current assets
    
    
    337.0
    
    
    
    476.2Property, plant and equipment, at cost:Land, buildings and improvements
    
    
    138.4
    
    
    
    138.4Machinery and equipment
    
    
    1,083.8
    
    
    
    933.2Construction in progress
    
    
    6.1
    
    
    
    7.21,228.3
    
    
    
    1,078.8Less accumulated depreciation
    
    
    560.4
    
    
    
    535.8Property, plant and equipment, net
    
    
    667.9
    
    
    
    543.0Goodwill, net
    
    
    37.0
    
    
    
    37.3Other assets, net
    
    
    107.9
    
    
    
    60.6$
    1,149.8
    
    
    $
    1,117.1LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    95.7
    
    
    $
    90.6Accrued liabilities
    
    
    31.9
    
    
    
    41.1Total current liabilities
    
    
    127.6
    
    
    
    131.7Long-term debt
    
    
    486.3
    
    
    
    371.0Deferred income taxes and other liabilities
    
    
    108.4
    
    
    
    148.8Total liabilities
    
    
    722.3
    
    
    
    651.5Stockholders equity:Series A preferred stock, $0.001 par value, 5,000,000 shares authorized, 4,502,143
shares issued and outstanding
    
    
    53.4
    
    
    
    51.0Series B preferred stock, $0.001 par value; 6,700,000 shares authorized, issued and
outstanding
    
    
    79.6
    
    
    
    76.0Class A
common stock, $0.001 par value; 100,000,000 shares authorized,
34,389,147 shares issued
    
    
    
    
    
    
    Class B common stock, $0.001 par value, 5,500,000 shares authorized, no shares
issued
    
    
    
    
    
    
    Paid-in capital
    
    
    245.3
    
    
    
    245.3Common stock warrants
    
    
    4.9
    
    
    
    4.9Accumulated other comprehensive income
    
    
    20.0
    
    
    
    25.2Retained earnings
    
    
    73.8
    
    
    
    112.7Less common stock in treasury at cost: 2,500,000 shares
    
    
    (49.5
    )
    
    
    (49.5
    )Total stockholders equity
    
    
    427.5
    
    
    
    465.6$
    1,149.8
    
    
    $
    1,117.1
 See Notes to Condensed Consolidated Financial Statements. 4




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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AccumulatedSeries A
    
    Series B
    
    Class A
    
    
    
    
    
    Common
    
    OtherPreferred
    
    Preferred
    
    Common
    
    Paid-In
    
    Stock
    
    Comprehensive
    
    Retained
    
    TreasuryStock Issued
    
    Stock Issued
    
    Stock Issued
    
    Capital
    
    Warrants
    
    Income/(Loss)
    
    Earnings
    
    Stock
    
    Total(in millions)
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34.4
    
    
    $
    
    
    
    $
    248.5
    
    
    
    
    
    
    $
    (3.2
    )
    
    $
    230.9
    
    
    $
    (49.5
    )
    
    $
    426.7Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96.6
    )
    
    
    
    
    
    
    (96.6
    )Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27.3
    
    
    
    
    
    
    
    
    
    
    
    27.3Minimum pension liability
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.9Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68.2
    )Cash dividends ($0.36 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.5
    )
    
    
    
    
    
    
    (11.5
    )Issuance of Series A preferred
stock
    
    
    4.5
    
    
    $
    48.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48.7Issuance of Series B preferred
stock
    
    
    
    
    
    
    
    
    
    
    6.7
    
    
    $
    72.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72.4Equity transaction costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.0
    )Accretion of preferred stock
    
    
    
    
    
    
    2.3
    
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.9
    )
    
    
    
    
    
    
    Beneficial conversion charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    (4.2
    )
    
    
    
    
    
    
    Issuance of restricted stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Amortization of deferred
compensation, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4Issuance of common stock
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.9Balance at December 31, 2003
    
    
    4.5
    
    
    
    51.0
    
    
    
    6.7
    
    
    
    76.0
    
    
    
    34.4
    
    
    
    
    
    
    
    245.3
    
    
    
    4.9
    
    
    
    25.2
    
    
    
    112.7
    
    
    
    (49.5
    )
    
    
    465.6Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29.7
    )
    
    
    
    
    
    
    (29.7
    )Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (3.0
    )Fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    
    
    
    
    (2.2
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.9
    )Cash dividends ($0.10 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    (3.2
    )Accretion of preferred stock
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.0
    )
    
    
    
    
    
    
    Balance at June 30, 2004
    
    
    4.5
    
    
    $
    53.4
    
    
    
    6.7
    
    
    $
    79.6
    
    
    
    34.4
    
    
    $
    
    
    
    $
    245.3
    
    
    $
    4.9
    
    
    $
    20.0
    
    
    $
    73.8
    
    
    $
    (49.5
    )
    
    $
    427.5(unaudited)
 See Notes to Condensed Consolidated Financial Statements. 5




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WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(In millions) 2004
    
    2003Cash flows from operating activities:Net earnings (loss)
    
    $
    (29.7
    )
    
    $
    6.1Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:Depreciation
    
    
    27.8
    
    
    
    23.1Amortization
    
    
    7.0
    
    
    
    1.5Amortization in interest expense, net
    
    
    1.9
    
    
    
    0.6Deferred income taxes and other
    
    
    (20.9
    )
    
    
    (5.1
    )Gain on sale of business
    
    
    
    
    
    
    (0.5
    )Non-capitalizable financing costs
    
    
    21.0
    
    
    
    Changes in operating assets and liabilities
    
    
    (50.1
    )
    
    
    (53.6
    )Net cash used in operating activities
    
    
    (43.0
    )
    
    
    (27.9
    )Cash flows from investing activities:Additions to property, plant and equipment
    
    
    (4.3
    )
    
    
    (6.1
    )Purchase of sale-leaseback assets
    
    
    (150.0
    )
    
    
    Pre-payment of raw material contract
    
    
    (77.1
    )
    
    
    Proceeds from sale of business
    
    
    
    
    
    
    1.1Net cash used in investing activities
    
    
    (231.4
    )
    
    
    (5.0
    )Cash flows from financing activities:Borrowings (repayments) under long-term debt, net
    
    
    115.0
    
    
    
    (71.5
    )Termination of swaps
    
    
    (11.9
    )
    
    
    Dividends paid on common stock
    
    
    (3.2
    )
    
    
    (5.7
    )Debt issuance costs
    
    
    (18.0
    )
    
    
    (16.0
    )Issuance of restricted stock
    
    
    
    
    
    
    0.2Issuance of preferred stock (Series A & B) and warrants
    
    
    
    
    
    
    126.0Net cash provided by financing activities
    
    
    81.9
    
    
    
    33.0Effect of exchange rate changes on cash and cash equivalents
    
    
    0.3
    
    
    
    (0.1
    )Increase (decrease) in cash and cash equivalents
    
    
    (192.2
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    205.5
    
    
    
    Cash and cash equivalents at end of period
    
    $
    13.3
    
    
    $
    0Supplemental cash flow data:Cash paid during the period for:Interest (net of amounts capitalized)
    
    $
    13.9
    
    
    $
    5.2Income taxes
    
    $
    0.5
    
    
    $
    0.6
 See Notes to Condensed Consolidated Financial Statements. 6




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##### Table of Contents



WELLMAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In millions, except per share data) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
six-month period ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. The Condensed Consolidated Balance Sheet (Balance Sheet) at December 31,
2003 has been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Wellman, Inc.s (which, together with its
subsidiaries, is herein referred to as the Company ) annual report on Form
10-K for the year ended December 31, 2003. Certain 2003 amounts have been reclassified to conform to the 2004
presentation. 2. DISCONTINUED OPERATIONS In March 2003, the Company sold the assets of its small recycled fine
denier polyester staple fiber business with a manufacturing facility in Marion,
South Carolina, which was previously reported as a discontinued operation in
the Companys financial statements. For the three months ended March 31, 2003,
the Company reported net sales from discontinued operations of $0.7 and a loss
from discontinued operations before income tax benefit of $0.3 ($0.2 after
taxes). The net cash proceeds totaled $1.1, which resulted in a gain of $0.5
($0.3 after taxes). The gain was recognized during the first quarter of 2003
and included in discontinued operations in the Companys Condensed Consolidated
Statement of Operations (Statement of Operations). 3. INVENTORIES Inventories consisted of the following: June 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    40.8
    
    
    $
    35.3Finished and semi-finished goods
    
    
    81.9
    
    
    
    77.9Supplies
    
    
    7.4
    
    
    
    7.9$
    130.1
    
    
    $
    121.1
 7




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4. RESTRUCTURING CHARGES During 2003, the Company announced various cost reduction plans in order
to improve operating results and enhance stockholder value. These cost
reduction efforts were in response to reduced profitability as a result of
increased raw material costs, declines in PET resin selling prices in the
Packaging Products Group (PPG) and a continuing decline in the Fibers and
Recycled Products Group (FRPG) operating results. January 2003 In January 2003, the FRPG commenced a plan to restructure its operations,
which included a reduction in the number of employees and other cost savings
initiatives at the Companys three fiber manufacturing facilities. During the
first half of 2003, the Company recorded termination costs of $1.3 and paid
$1.2 in its FRPG segment related to this plan. These costs were reflected in
operating income (loss) in the Statements of Operations. An additional $0.6 of
severance costs was accrued and paid during the remainder of 2003. The plan
was fully implemented in 2003. November 2003 In November 2003, the Company announced a plan with Company-wide cost
reduction initiatives that included eliminating levels of management, reducing
the number of employees, and other organizational and administrative
consolidations and changes. During the first half of 2004, the Company
incurred severance costs of $1.1 associated with this plan, of which $0.1
related to the PPG and $1.0 related to the FRPG. These costs were reflected in
operating income (loss) in the Statements of Operations. The following
represents changes in the accruals since the plan was adopted. SeveranceCostsAccruals during 2003
    
    $
    8.1Cash payments in 2003
    
    
    (2.0
    )Accrual balances at December 31, 2003
    
    
    6.1Accruals during the first half of 2004
    
    
    1.1Cash payments
    
    
    (6.2
    )Currency translation adjustments
    
    
    (0.1
    )Accrual balances at June 30, 2004
    
    $
    0.9
 The remaining accrual should be fully paid out during the remainder of
2004. In addition, pension expense of $0.2 was recorded as a restructuring
charge in the FRPG during the fourth quarter of 2003 due to the termination of
employees. 5. OTHER EXPENSE Other expense consisted of legal costs related to the Department of
Justice investigation of the polyester staple fiber industry and expense in
2003 associated with the acceleration of stock option vesting. Legal costs
totaled $1.1 and $2.3 for the three and six-month periods ended June 30, 2004,
respectively, and $1.8 and $3.0 for the three and six-month periods ended June
30, 2003, respectively. Expense associated with the accelerated stock option
vesting totaled $1.2 in both the three and six-month periods ended June 30,
2003. 8




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##### Table of Contents



6. NET EARNINGS (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted net
earnings (loss) attributable to common stockholders per common share for the
periods indicated: Three Months Ended
June 30,
    
    Six Months Ended
June 30,2004
    
    2003
    
    2004
    
    2003Numerator for basic and diluted net earnings (loss) attributable to
common stockholders per common share:Net earnings (loss) attributable to common stockholders
from continuing operations
    
    $
    (4.5
    )
    
    $
    0.2
    
    
    $
    (35.7
    )
    
    $
    5.9Net earnings (loss) attributable to common stockholders
from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Net earnings (loss) attributable to common stockholders
    
    $
    (4.5
    )
    
    $
    0.2
    
    
    $
    (35.7
    )
    
    $
    6.0Denominator:Denominator for basic net earnings (loss) attributable to
common stockholders per common shareweighted
average shares
    
    
    31.6
    
    
    
    31.6
    
    
    
    31.6
    
    
    
    31.6Effect of dilutive securities:Employee stock options and restricted stock
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Denominator for diluted net earnings (loss) attributable to
common stockholders per common shareadjusted weighted
average shares
    
    
    31.6
    
    
    
    31.9
    
    
    
    31.6
    
    
    
    31.9
 7. DEFINED BENEFIT PLANS The components of the Companys net periodic pension cost are as follows
for the periods indicated: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Domestic
    
    Foreign
    
    Domestic
    
    Foreign
    
    Domestic
    
    Foreign
    
    Domestic
    
    ForeignService cost
    
    $
    0.1
    
    
    $
    0.6
    
    
    $
    0.1
    
    
    $
    0.5
    
    
    $
    0.3
    
    
    $
    1.1
    
    
    $
    0.2
    
    
    $
    0.9Interest cost
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    1.6
    
    
    
    1.7
    
    
    
    1.6
    
    
    
    1.4Expected return on assets
    
    
    (0.8
    )
    
    
    (1.4
    )
    
    
    (0.8
    )
    
    
    (1.1
    )
    
    
    (1.7
    )
    
    
    (2.8
    )
    
    
    (1.5
    )
    
    
    (2.2
    )Net amortization
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.3Total
estimated net periodic pension expense
    
    $
    0.3
    
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.3
    
    
    $
    0.9
    
    
    $
    0.4
 Employer contributions In 2004, the Company
expects to contribute $3.9 to its
domestic defined benefit plans and $1.6 to its foreign plans. During the first half of 2004, the
Company contributed $1.4 to its domestic plans and $1.4 to its foreign plans. 9




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##### Table of Contents



8. BORROWING ARRANGEMENTS On February 10, 2004, the Company closed on $625.0 of new debt financings
(the February 2004 Financing). This financing consisted of a five-year,
$175.0 Revolving Credit Facility with an initial annual interest rate of either
LIBOR plus 250 basis points or Prime plus 125 basis points, at the Companys
option, on outstanding borrowings, a five-year, $185.0 First Lien Term Loan
with an annual interest rate of LIBOR plus 400 basis points, and a six-year,
$265.0 Second Lien Term Loan with an annual interest rate of LIBOR plus 675
basis points. The First and Second Lien Term Loans have a LIBOR floor of 200
basis points. The Company may elect to pre-pay the First Lien Term Loan for
102% and 101% of its face amount in the first and second year after its
issuance, respectively, and at par thereafter. The Second Lien Term Loan was
issued at a 2% discount, and in certain circumstances, the Company may elect to
pre-pay this loan at 105% and 103% of its face amount in the third and fourth
years after its issuance, respectively, and at par thereafter. The net proceeds from this financing of approximately $489.5 plus $206.4
in cash ($695.9 in total) were used to: Pay Balance Sheet Debt
    
    $
    370.0Purchase PET Resin Assets (Sale and Leaseback)
    
    
    150.0Pre-pay Raw Material Contract
    
    
    77.1Purchase Accounts Receivable
    
    
    51.4Pay February 2004 Financing Costs
    
    
    18.0Pay Pre-payment Penalties
    
    
    13.9Terminate Certain Swap Agreements
    
    
    11.9Pay Interest and Fees
    
    
    3.6$
    695.9
 In 2004, the Company incurred the following expenses (including non-cash charges)
as a part of this financing: Termination of Swap Agreements
    
    $
    14.4Pre-payment Penalties
    
    
    13.9Write-Off of Debt Issuance Costs
    
    
    6.6Other Expenses
    
    
    5.3Non-Capitalizable Financing Costs
    
    $
    40.2
 As part of the restructuring of the sale and leaseback transaction in June
of 2003, the Company entered into three swaps, each with a notional amount of
$50.0 that were designated as cash flow hedges. These swaps hedged the
Companys exposure to variability in cash flows attributable to rent expense
paid in relation to the sale and leaseback transaction. In February 2004, as
part of the financing, the Company terminated two of the three swaps and
redesignated the third as a cash flow hedge against the new debt entered into
in the first quarter of 2004. The termination, redesignation and refinancing
resulted in an overall cost of $14.4, which was net of $3.8 that was previously
included in other comprehensive income (loss). In July 2004, the Company entered into three interest rate hedging
agreements with financial institutions for a total notional amount of $100.0 as
follows: a three year fixed-rate swap whereby the Company will receive 3-Month
Libor and pay 3.608% quarterly on $25.0; a three year fixed-rate swap whereby the
Company will receive 3-Month Libor and pay 3.69% quarterly on $25.0; and a three
year 6% cap whereby, for quarterly periods when 3-Month Libor exceeds 6% on its
reset date, the Company will receive the difference between 3-Month Libor and
6% on $50.0 for such periods. 10




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##### Table of Contents



The Revolving Credit Facility is collateralized by a first lien on the
Companys domestic accounts receivable, inventory, and related intangibles.
Availability under the Revolving Credit Facility is determined by the amount of
eligible accounts receivable and inventory. Borrowings under the First Lien
Term Loan are primarily collateralized by a first priority security interest in
the Companys domestic real property, plant and equipment. Borrowings under
the Second Lien Term Loan are collateralized by a second priority security
interest in substantially all of the Companys domestic assets. These debt agreements contain financial and restrictive covenants. The
terms of the Revolving Credit Facility require that the Company maintain
available liquidity (as defined in the Revolving Credit Facility) of at least
$55.0 or maintain a Fixed Charge Coverage Ratio of at least 1.0:1.0 at the
present time. This ratio increases to 1.05:1.0 beginning with the four
quarters ending December 31, 2006 and further increases to 1.10:1.0 beginning
with the four quarters ending March 31, 2008. The Fixed Charge Coverage Ratio,
as defined in the Revolving Credit Facility, is earnings before interest,
taxes, depreciation and amortization divided by the sum of cash taxes, cash
interest expense, capital expenditures and certain payments related to the
Companys equity for the same period. There are certain liquidity thresholds
which must be met in order for the Company to make certain capital expenditures
or to settle lawsuits or pay judgments. There are other restrictions which
include limitations on capital expenditures, asset sales and dispositions, the
incurrence or guarantee of additional debt, acquisitions, certain payments and
investments, affiliate and subsidiary transactions, payment of dividends,
repurchase of stock, and excess cash. The Company is in compliance with all
debt covenants. 9. STOCK OPTIONS 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 SFAS No. 123, Accounting
for Stock-Based Compensation, requires use of option valuation models for
determining compensation expense. The following table illustrates the effect
on net earnings (loss) attributable to common stockholders and net earnings
(loss) attributable to common stockholders per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation. Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net earnings (loss) attributable to common stockholders,
as reported
    
    $
    (4.5
    )
    
    $
    0.2
    
    
    $
    (35.7
    )
    
    $
    6.0Add: Stock-based employee compensation expense
included in reported net earnings (loss), net of related
tax effects
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    0.9Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (0.1
    )
    
    
    (4.7
    )
    
    
    (0.1
    )
    
    
    (5.3
    )Pro forma net earnings (loss) attributable to common stockholders
    
    $
    (4.6
    )
    
    $
    (3.7
    )
    
    $
    (35.8
    )
    
    $
    1.6
 11




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##### Table of Contents



Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net earnings (loss) attributable to common stockholders
per basic and diluted share:As reported
    
    $
    (0.14
    )
    
    $
    0.01
    
    
    $
    (1.13
    )
    
    $
    0.19Pro forma
    
    $
    (0.14
    )
    
    $
    (0.12
    )
    
    $
    (1.13
    )
    
    $
    0.05
 10. COMMITMENTS AND CONTINGENCIES The Company has commitments and contingent liabilities, including legal
proceedings, environmental liabilities, commitments relating to certain state
incentives, and various operating lease commitments. The Companys operations are subject to extensive laws and regulations
governing air emissions, wastewater discharges and solid and hazardous waste
management activities. The Company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 $2.9 and $13.7 on an
undiscounted basis. In connection with these expenditures, the Company has
accrued undiscounted liabilities of approximately $6.5 at June 30, 2004 and
December 31, 2003, which are reflected as other noncurrent liabilities in the
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 $4.3 to $13.4. These non-capital and capital expenditures are
expected to be incurred over the next 10 to 20 years. 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: Six Months EndedJune 30,2004
    
    2003Balance at beginning of year
    
    $
    6.5
    
    
    $
    9.3Changes in estimated remediation costs
    
    
    0.1
    
    
    
    (1.4
    )Expenditures
    
    
    (0.1
    )
    
    
    (0.2
    )Balance at end of period
    
    $
    6.5
    
    
    $
    7.7
 The changes in estimated remediation costs during 2003 are the result of
more current information related to groundwater contamination. There are no environmental matters where a material loss is probable other
than matters for which amounts have been accrued. 12




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##### Table of Contents



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. All of these conditions were satisfied by the end of the
first quarter of 2003. The Company recognized grant income of $1.5 in the
first quarter of 2003. In January 2001, the Company received a document subpoena in connection
with a federal grand jury investigation of pricing practices in the polyester
staple fiber industry. The Company cooperated with the investigation by
producing documents in response to this subpoena. In September 2002, the U.S.
Department of Justice (DOJ) 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 fiber beginning in September 1999 and
ending in January 2001. On October 31, 2002, the DOJ 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 fiber industry.
On October 2, 2003, the trial of the former sales manager of one of the
Companys competitors concluded with a verdict of not guilty on all charges.
On July 6, 2004, the Company received a letter from the DOJ identifying it as a
target in the grand jury investigation. According to the letter, lawyers from
the Dallas Field Office of the Antitrust Division of the DOJ are seeking
authority to present an indictment to the grand jury to charge the Company in
connection with an alleged price-fixing conspiracy. Two of the Companys
employees received similar target letters. Neither the Company nor any of its
employees has been charged with any wrongdoing, and the Company 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, 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 65 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 staple 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 consolidated financial position
and results of operations may be adversely impacted. The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of this ordinary course litigation will not have a material adverse
effect, if any, on the Companys consolidated financial position or results of
operations.  11.
    FOREIGN CURRENCY TRANSLATION AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) The financial statements of foreign subsidiaries have been translated into
U.S. dollar equivalents in accordance with SFAS 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 13




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##### Table of Contents



exchange rates from period to period have been reported in other comprehensive
income (loss). The effect on the Statements of Operations of transaction gains
and losses is insignificant for all periods presented. Accumulated other comprehensive income (loss) is comprised of foreign
currency translation, 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.
Comprehensive income (loss) was $1.6 and $9.4 for the three months ended June
30, 2004 and 2003, respectively, and $(34.9) and $20.6 for the six months ended
June 30, 2004 and 2003, respectively. 12. SEGMENT INFORMATION The Companys operations are classified into two reportable operating
segments: the Packaging Products Group (PPG) and Fibers and Recycled Products
Group (FRPG). The PPG manufactures:  
    
    solid-stated and amorphous PET resin for use in the manufacture of
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. The FRPG manufactures:  
    
    chemical-based polyester staple fibers for use in apparel, non-woven,
home furnishing, and industrial products,  
    
    recycled-based polyester and nylon staple fibers for use in home
furnishing, non-woven and industrial products, and  
    
    recycled-based nylon and polyester 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 are the same as those described in the Companys annual
report on Form 10-K for the year ended December 31, 2003. As discussed in note 2, the Company sold the assets of its small recycled
fine denier polyester staple fiber business during the first quarter of 2003.
These assets, which were previously reported as part of the Companys FRPG,
were reported as discontinued operations in the Companys financial statements. 14




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##### Table of Contents



Fibers andPackaging Products
    
    Recycled ProductsThree months ended June 30, 2004
    
    Group
    
    Group
    
    TotalRevenues
    
    $
    189.9
    
    
    $
    139.1
    
    
    $
    329.0Segment profit
    
    
    8.0
    
    
    
    1.5
    
    
    
    9.5Assets
    
    
    759.1
    
    
    
    312.4
    
    
    
    1,071.5
 Three months ended June 30, 2003Revenues
    
    $
    166.7
    
    
    $
    118.6
    
    
    $
    285.3Segment profit (loss)
    
    
    7.2
    
    
    
    (1.2
    )
    
    
    6.0Assets
    
    
    458.4
    
    
    
    520.5
    
    
    
    978.9
 Six months ended June 30, 2004Revenues
    
    $
    352.2
    
    
    $
    270.6
    
    
    $
    622.8Segment profit
    
    
    11.9
    
    
    
    0.5
    
    
    
    12.4
 Six months ended June 30, 2003Revenues
    
    $
    333.8
    
    
    $
    238.8
    
    
    $
    572.6Segment profit (loss)
    
    
    20.8
    
    
    
    (1.9
    )
    
    
    18.9
 Following are reconciliations to corresponding totals in the accompanying
Condensed Consolidated Financial Statements: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Segment ProfitTotal for reportable segments
    
    $
    9.5
    
    
    $
    6.0
    
    
    $
    12.4
    
    
    $
    18.9Non-capitalizable financing costs (See note 8)
    
    
    
    
    
    
    
    
    
    
    (40.2
    )
    
    
    Provision for uncollectible accounts
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.1
    )Restructuring charges (See note 4)
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    (1.1
    )
    
    
    (1.3
    )Other expense, net (See note 5)
    
    
    (1.1
    )
    
    
    (3.0
    )
    
    
    (2.3
    )
    
    
    (4.2
    )Interest expense, net
    
    
    (10.1
    )
    
    
    (2.3
    )
    
    
    (17.6
    )
    
    
    (4.3
    )Earnings (loss) from continuing operations before income taxes
    
    $
    (2.5
    )
    
    $
    0.5
    
    
    $
    (49.1
    )
    
    $
    9.0AssetsTotal for reportable segments
    
    $
    1,071.5
    
    
    $
    978.9Corporate assets(1)
    
    
    78.3
    
    
    
    63.4$
    1,149.8
    
    
    $
    1,042.3
   (1)
    
    Corporate assets include cash, prepaid expenses, construction in progress, and certain other
assets not allocated to the segments. 15




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##### Table of Contents



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollars in millions, except per share data) GENERAL We are principally engaged in the manufacture and marketing of
high-quality PermaClear® and EcoClear® brand PET packaging resins, Fortrel®
brand polyester staple fibers and Wellamid® engineering resins. We believe we
are the worlds largest PET plastics recycler, utilizing a significant amount
of recycled raw materials in our manufacturing operations. At June 30, 2004,
we had annual operating capacity to manufacture approximately 1.4 billion
pounds of PET resins and 0.9 billion pounds of polyester staple fiber at five
major production facilities in the United States and Europe. Our operations are classified into two reportable operating segments: the
Packaging Products Group (or PPG) and the Fibers and Recycled Products Group
(or FRPG). Our PermaClear® PET resins are produced by the PPG from purified
terephtalic acid (PTA) and monoethylene glycol (MEG), and EcoClear® PET resins
are produced from a combination of chemical and recycled raw materials. These
resins are primarily used in the manufacture of plastic soft drink bottles and
other food and beverage packaging. The FRPG produces Fortrel® polyester staple
fibers and other polyester and nylon staple fibers that are primarily used in
apparel, non-woven, home furnishing and industrial products. These fibers are
produced from PTA and MEG and recycled raw materials. Demand for both North American and global PET resins continues to grow,
driven by new product applications for PET and conversions from other packaging
materials to PET. Global demand for polyester staple fiber continues to grow.
Demand for polyester staple fiber in the United States is subject to changes in consumer
preferences and spending, retail sales patterns, and fiber and textile product
imports. Imports of products throughout the textile chain continue to
negatively impact the United States fiber markets, adversely affecting our
operating results. Our profitability is primarily determined by our raw material margins,
which is the difference between net selling prices and raw material costs.
Both PET resin and polyester staple 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 $0.01 change in raw material margin on
approximately 2.2 billion pounds of resin and fiber volume results in an annual
change of approximately $22.0 in pre-tax earnings. 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. CLOSING OF THE FEBRUARY 2004 FINANCING On February 10, 2004, we closed on $625.0 of new debt financings (the
February 2004 Financing). This financing consisted of a five-year, $175.0
Revolving Credit Facility with an initial annual interest rate of either LIBOR
plus 250 basis points or Prime plus 125 basis points, at our option, on
outstanding borrowings, a five-year $185.0 First Lien Term Loan with an annual
interest rate of LIBOR plus 400 basis points, and a six-year $265.0, Second
Lien Term Loan with an annual interest rate of LIBOR plus 675 basis points.
The term 16




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##### Table of Contents



loans have a LIBOR floor of 200 basis points. This financing is secured
primarily by our domestic assets. The net proceeds from these credit
facilities were used to repay substantially all of our existing indebtedness,
to satisfy contractual obligations, to pay related costs and provide working
capital. We incurred $42.4 in pre-tax charges, of which $40.2 occurred in the first
quarter of 2004, resulting from costs associated with our previous financings
that were repaid. These charges are principally the result of pre-payment
penalties associated with repayment of our private placement notes, waiver fees
and other expenses related to financings that were repaid, charges associated
with the termination of the sale and leaseback transaction, and the write-off
of unamortized financing costs. On June 30, 2004, we had $486.3 in total
outstanding long-term debt, net of the original issue discount on the Second
Lien Term Loan of $5.0. For additional information related to the new
financing, see Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations  Capital Resources and Liquidity and note
8 to the Condensed Consolidated Financial Statements (Financial Statements). RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Total net sales from continuing operations for the three months ended June
30, 2004 increased $43.7, or 15.3%, to $329.0 from $285.3 for the corresponding
period in 2003 due to the following: PPG
    
    FRPG
    
    TOTALSales volumes
    
    $
    20.1
    
    
    $
    19.2
    
    
    $
    39.3Net selling prices
    
    
    1.9
    
    
    
    (1.0
    )
    
    
    0.9Foreign currency translation
    
    
    1.3
    
    
    
    2.2
    
    
    
    3.5$
    23.3
    
    
    $
    20.4
    
    
    $
    43.7
 Sales volumes increased during the second quarter of 2004 in both our PPG
and FRPG primarily as a result of improved supply/demand fundamentals and a
decrease in imported products. Total cost of sales from continuing operations for the three months ended
June 30, 2004 increased $43.7, or 16.7%, to $305.7 from $262.0 for the
corresponding period in 2003 due to the following: PPG
    
    FRPG
    
    TOTALRaw material costs
    
    $
    17.8
    
    
    $
    18.0
    
    
    $
    35.8Plant added costs
    
    
    3.8
    
    
    
    1.4
    
    
    
    5.2Foreign currency translation
    
    
    1.2
    
    
    
    1.5
    
    
    
    2.7$
    22.8
    
    
    $
    20.9
    
    
    $
    43.7
 The higher raw material costs are due to both increased sales volumes and
increased unit costs in both our chemical and recycled-based businesses.
Factors contributing to this unit cost increase are a tight supply/demand
balance for both chemical and recycled-based raw materials and higher crude oil
and natural gas prices for our chemical-based businesses. Plant added costs were higher for both PPG and FPRG compared to the same
period last year due to increased sales volumes. Our cost reduction programs
contributed to a lower unit cost. For additional information on our cost
reduction programs, see Cost Reduction Programs below. 17




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As a result of the foregoing, gross profit remained flat at $23.3 in both
the 2004 and 2003 periods. The gross profit margin was 7.1% in the 2004 period
compared to 8.2% in the 2003 period. Selling, general and administrative expenses were $13.8, or 4.2% of net
sales, in the 2004 period compared to $17.3, or 6.1% of net sales, in the 2003
period. The decrease was primarily due to our on-going cost reduction efforts.
For additional information on our cost reduction programs, see Cost Reduction
Programs below. We incurred charges for uncollectible accounts of $0.1 during the second
quarter of 2003. We incurred restructuring charges of $0.8 and $0.1 for the three months
ended June 30, 2004 and 2003, respectively. For information on our cost
reduction programs, see Cost Reduction Programs below. Other expense for the three months ended June 30, 2004 and 2003 consisted
of legal costs related to the Department of Justice investigation of the
polyester staple fiber industry and expense in 2003 associated with the
acceleration of stock option vesting. Legal costs totaled $1.1 and $1.8 for
the three months ended June 30, 2004 and 2003, respectively. Expense
associated with the accelerated stock option vesting totaled $1.2 in the
three-month period ended June 30, 2003. For additional information on the
legal proceedings, see Item 1. Legal Proceedings and note 10 to the Financial
Statements. As a result of the foregoing, we reported an operating income of $7.6 in
the 2004 period compared to operating income of $2.8 in the 2003 period. Interest
expense, net was $10.1 in the 2004 period compared to $2.3 in the
2003 period. This was the result of increased long-term debt and higher credit
spreads because of the February 2004 Financing, higher overall short-term
interest rates and increased amortization in interest expense, net. See
Outlook below for expected interest expense for the remainder of 2004. Our effective tax rate for the three months ended June 30, 2004 on
earnings (loss) from continuing operations was 39.5% compared to 33.0% for the
three months ended June 30, 2003. Our tax rate increased due to the relative
proportion of U.S. to foreign earnings. Foreign earnings are taxed at rates
lower than U.S. rates. As a result of the foregoing, we reported a net loss from continuing
operations of $1.5 for the three months ended June 30, 2004, compared to net
earnings from continuing operations of $0.3 for the three months ended June 30,
2003. As a result of the private equity investment, we recorded accretion of the
preferred stock liquidation preference, including the amortization of the
discount related to the valuation of the common stock warrants, of $3.0 and
$0.1 in the three months ended June 30, 2004 and 2003, respectively. As a result of the foregoing, we reported a net loss attributable to
common stockholders of $4.5, or $0.14 per diluted share, for the three months
ended June 30, 2004, compared to net earnings attributable to common
stockholders of $0.2, or $0.01 per diluted share, for the three months ended
June 30, 2003. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 Total net sales from continuing operations for the six months ended June
30, 2004 increased $50.2, or 8.8%, to $622.8 from $572.6 million for the
corresponding period in 2003 due to the following: 18




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PPG
    
    FRPG
    
    TOTALSales volumes
    
    $
    8.5
    
    
    $
    24.9
    
    
    $
    33.4Net selling prices
    
    
    5.9
    
    
    
    0.5
    
    
    
    6.4Foreign currency translation
    
    
    4.0
    
    
    
    6.4
    
    
    
    10.4$
    18.4
    
    
    $
    31.8
    
    
    $
    50.2
 Sales volumes increased during the first half of 2004 in both our PPG and
FRPG primarily as a result of improved supply/demand fundamentals and a
decrease in imported products. Total cost of sales from continuing operations for the six months ended
June 30, 2004 increased $63.0, or 12.1%, to $582.1 from $519.1 for the
corresponding period in 2003 due to the following: PPG
    
    FRPG
    
    TOTALRaw material costs
    
    $
    23.0
    
    
    $
    31.5
    
    
    $
    54.5Plant added costs
    
    
    1.1
    
    
    
    (1.0
    )
    
    
    0.1Foreign currency translation
    
    
    3.6
    
    
    
    4.8
    
    
    
    8.4$
    27.7
    
    
    $
    35.3
    
    
    $
    63.0
 The higher raw material costs are due to both increased sales volumes and
increased unit costs in both our chemical and recycled-based businesses.
Factors contributing to this unit cost increase are a tight supply/demand
balance for both chemical and recycled-based raw materials and higher crude oil
prices for our chemical-based businesses. As a result of the foregoing, gross profit decreased $12.8, or 23.9%, to
$40.7 in the 2004 period compared to $53.5 in the 2003 period. The gross
profit margin was 6.5% in the 2004 period compared to 9.3% in the 2003 period. Selling, general and administrative expenses were $28.3, or 4.5% of net
sales, in the 2004 period compared to $34.6, or 6.0% of net sales, in the 2003
period. The decrease was primarily due to our on-going cost reduction efforts.
For additional information on our cost reduction programs, see Cost Reduction
Programs below. We incurred $40.2 of non-capitalizable costs resulting from costs
associated with our previous financings that were repaid in the first quarter
of 2004. For additional information on the new financing, see Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Closing of the February 2004 Financing and note 8 to the
Financial Statements. We incurred restructuring charges of $1.1 and $1.3 for the six months
ended June 30, 2004 and 2003, respectively. For information on our cost
reduction programs, see Cost Reduction Programs below. Other expense for the six months ended June 30, 2004 and 2003 consisted of
legal costs related to the Department of Justice investigation of the polyester
staple fiber industry and expense in 2003 associated with the acceleration of
stock option vesting. Legal costs totaled $2.3 and $3.0 for the six months
ended June 30, 2004 and 2003, respectively. Expense associated with the
accelerated stock option vesting totaled $1.2 in the six-month period ended
June 30, 2003. For additional information on the legal proceedings, see Item
1. Legal Proceedings and note 10 to the Financial Statements. 19




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As a result of the foregoing, we reported an operating loss of $31.5 in
the 2004 period compared to operating income of $13.3 in the 2003 period. Interest expense,
net was $17.6 in the 2004 period compared to $4.3 in the
2003 period. This was the result of increased long-term debt and higher credit
spreads because of the February 2004 Financing and increased amortization in interest expense, net. See
Outlook below for expected interest expense for the remainder of 2004. Our effective tax rate for the six months ended June 30, 2004 on earnings
(loss) from continuing operations was 39.5% compared to 33.0% for the six
months ended June 30, 2003. Our tax rate increased due to the relative
proportion of U.S. to foreign earnings. Foreign earnings are taxed at rates
lower than U.S. rates. As a result of the foregoing, we reported a net loss from continuing
operations of $29.7 for the six months ended June 30, 2004, compared to net
earnings from continuing operations of $6.0 for the six months ended June 30,
2003. As a result of the private equity investment, we recorded accretion of the
preferred stock liquidation preference, including the amortization of the
discount related to the valuation of the common stock warrants, of $6.0 and
$0.1 in the six months ended June 30, 2004 and 2003, respectively. As a result of the foregoing, we reported a net loss attributable to
common stockholders of $35.7, or $1.13 per diluted share, for the six months
ended June 30, 2004, compared to net earnings attributable to common
stockholders of $6.0, or $0.19 per diluted share, for the six months ended June
30, 2003. BUSINESS TRENDS The following
analysis compares
the results from
the first quarter
2003 through the
second quarter
2004. We believe
an analysis of
the six quarters
ending with the
second quarter of
2004 helps in
understanding
recent trends in
our business.
Gross profit for
the six quarters
ending with the
second quarter of
2004 was as
follows: Gross ProfitFirst Quarter 2003
    
    $
    30.2Second Quarter 2003
    
    $
    23.3Third Quarter 2003
    
    $
    16.5Fourth Quarter 2003
    
    $
    10.6First Quarter 2004
    
    $
    17.4Second Quarter 2004
    
    $
    23.3
 Gross profit in the first
quarter 2003 benefited from
higher PET resins raw
material margins and higher
volumes. In the second
quarter of 2003, gross profit
decreased because PET resin
raw material margins and
volumes decreased compared to
the first quarter of 2003.
The gross profit was
significantly lower in the
second half of 2003 due to
the following:  (1)
    
    PET resin
capacity
additions
resulted in
reduced selling
prices and
reduced margins
as competitors
tried to sell
their capacity;(2)
    
    An unexpected
drop in demand
related to the
cool and rainy
summer weather in
the Eastern
United States and
a reduction in
customers
inventory levels;
and(3)
    
    A seasonal
weakness in the
fourth quarter
due to winter
buying patterns
of our North American beverage
packaging
customers, an
increase in
lower-margin
export sales, and
pricing pressure
associated with
annual contract
negotiations. 20




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These factors
resulted in our
experiencing
historically low
PET resin margins
in the fourth
quarter of 2003.
During the second
half of 2003, we
initiated
additional
company-wide cost
reduction
programs (see
Outlook and
Cost Reduction
Programs below).
Since
implementation of
these programs
started in August
2003, these
programs helped
partially offset
the decrease in
our gross profit
due to the
decrease in raw
material margins. Our gross profit
improved to $17.4
in the first
quarter of 2004
and $23.3 in the
second quarter
2004 primarily as
a result of
improved PET
resins margins,
improved volumes
in the PPG and
the FRPG, and the
effect of our
cost reductions
programs. COST REDUCTION PROGRAMS During 2003, we announced cost reduction plans as part of our on-going low
cost business strategy and in response to reduced profitability as a result of
increased raw material costs, declines in PET resin selling prices in the PPG,
and a continuing decline in the FRPG operating results. In January 2003, the FRPG commenced a plan to restructure its operations,
which included a reduction in the number of employees and other cost savings
initiatives at our three fiber manufacturing facilities. During the first half
of 2003, we recorded termination costs of $1.3 and paid $1.2 in our FRPG
segment related to this plan, which was fully implemented in 2003. In July 2003, we announced reductions in compensation and
benefit costs. These compensation and benefit reductions were implemented at
all levels, including senior management. As part of this cost reduction
effort, some employer contributions to our defined contribution plans were
suspended. In November 2003, we announced a third plan with cost reduction
initiatives that included eliminating levels of management, reducing the number
of employees, and other organizational and administrative consolidations and
changes. During the first half of 2004, we incurred severance costs of $1.1 associated with this plan, of which $0.1 related to
the PPG and $1.0 related to the FRPG. These last two cost reduction plans resulted in approximately $19 of
realized savings ($9 and $10 in the first and second quarters of 2004,
respectively) in controllable costs in the first half of 2004 compared to our
cost structure during the second quarter of 2003. Incremental cost savings
since the inception of the last two cost reduction plans are as follows: 21




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Second Half
    
    First Quarter of
    
    Second Quarterof 2003
    
    2004
    
    of 2004Incremental savings
achieved in second
half of 2003
    
    $
    4
    
    
    $
    2
    
    
    $
    2Incremental savings
achieved in first
quarter of 2004
    
    
    
    
    
    
    7
    
    
    
    7Incremental savings
achieved in second
quarter of 2004
    
    
    
    
    
    
    
    
    
    
    1Total impact per period
    
    $
    4
    
    
    $
    9
    
    
    $
    10
 For additional information on restructurings, see note 4 to the Financial
Statements. OUTLOOK The following statements are forward-looking statements and should
be read in conjunction with Forward-Looking Statements; Risks and
Uncertainties below. Our operating results for second half of 2004 compared to the
second quarter of 2004 will depend on raw material margins,
volumes, and maintaining the reduced level of controllable costs. In the United States, we have announced a $0.03 per pound increase
in PET resins selling prices with an effective date of September 1,
2004. Given the competitive nature of our business and other market
influences, there can be no assurance that the average selling
prices in the second half of 2004 will be higher than the average
selling prices in the second quarter of 2004. If raw material
costs increase more than the change in our selling price, our
margins will be reduced from current levels. Our cost reduction programs, initiated in third quarter of 2003,
and expected to continue into 2005, remain on target. We expect to
incrementally reduce annual controllable costs by $27.0 in 2004. This combined with
annualized cost savings of $8.0 achieved in 2003 and expected incremental savings
of $6.0$11.0 in 2005 provides a total expected controllable cost savings of $41.0$46.0 as
compared to second quarter 2003 levels. We believe that the improved industry demand for PET resins seen in
first half 2004, driven by strong domestic growth and an improved
trade balance, will continue. During 2005, NAFTA (North American Free Trade Agreement)
regional demand growth is expected to increase
more than NAFTA capacity growth, and this is expected to result in
higher average NAFTA capacity utilization, margins, and
profitability in 2005 when compared to 2004. We believe imports throughout the textile chain will continue to
adversely impact the textile market in the U.S. The impact of
textile and apparel imports from Asia, especially from China, may
increase starting in 2005. Quotas on all textile and apparel
imports into the United States are scheduled to be eliminated as of
January 1, 2005, pursuant to the GATT (now known as the World Trade
Organization Agreement) Uruguay Round Agreement enacted in 1994. 22




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##### Table of Contents



We expect to receive a payment under the Continued Dumping and
Subsidy Offset Act in the fourth quarter of 2004. While we expect
that the amount of the payment will be more than the amount we
received in 2003, there is no certainty that we will receive any
payment. We expect future interest and depreciation and amortization expense
to increase from the prior year primarily as a result of the
acquisition of assets relating to the February 2004 Financing. We
expect interest expense and depreciation and amortization to equal
$10.0 and $19.0, respectively, each quarter, for the remainder of
2004. CAPITAL RESOURCES AND LIQUIDITY Net cash used in operations was $43.0 for the six months ended June 30,
2004, compared to net cash used in operations of $27.9 for the six months ended
June 30, 2003. The change is primarily due to reduced earnings from continuing
operations in the 2004 period and the increase in accounts receivable in the
first quarter of 2004 associated with the termination of our asset
securitization program as part of the February 2004 Financing. Net cash used in investing activities amounted to $231.4 in the 2004
period compared to $5.0 in the 2003 period. Capital expenditures were $4.3 for
the six months ended June 30, 2004 compared to $6.1 for the six months ended
June 30, 2003. Investing activities in 2004 included $150.0 of additions from
the purchase of the assets of the sale and leaseback transaction and $77.1 for
the pre-payment of a raw material contract, both in conjunction with the
February 2004 Financing. For additional information, see Item 2. Managements
Discussion and Analysis  Closing of the February 2004 Financing. Net cash provided by financing activities amounted to $81.9 in the 2004
period compared to $33.0 in the 2003 period. On February 10, 2004, we closed
on $625.0 of new debt financings. For additional information see Item 2.
Managements Discussion and Analysis  Closing of the February 2004 Financing
and note 8 to the Financial Statements. The net proceeds from the February 2004 Financing of approximately $489.5
plus $206.4 in cash ($695.9 in total) were used to: Pay Balance Sheet Debt
    
    $
    370.0Purchase PET Resin Assets (Sale and Leaseback)
    
    
    150.0Pre-pay Raw Material Contract
    
    
    77.1Purchase Accounts Receivable
    
    
    51.4Pay February 2004 Financing Costs
    
    
    18.0Pay Pre-payment Penalties
    
    
    13.9Terminate Certain Swap Agreements
    
    
    11.9Pay Interest and Fees
    
    
    3.6$
    695.9
 23




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In 2004, we incurred the following expenses (including non-cash charges) as a part
of this financing: Termination of Swap Agreements
    
    $
    14.4Pre-payment Penalties
    
    
    13.9Write-Off of Debt Issuance Costs
    
    
    6.6Other Expenses
    
    
    5.3Non-Capitalizable Financing Costs
    
    $
    40.2
 As part of the restructuring of the sale and leaseback transaction in June
of 2003, we entered into three swaps, each with a notional amount of $50.0,
that were designated as cash flow hedges. These swaps hedged our exposure to
variability in cash flows attributable to rent expense paid in relation to the
sale and leaseback transaction. As part of the February 2004 Financing, we
terminated two of the three swaps and redesignated the third as a cash flow
hedge against the new debt entered into in the first quarter of 2004. The
termination, redesignation and refinancing resulted in an overall cost of
$14.4, which was net of $3.8 that was previously included in other
comprehensive income (loss). In July 2004, we entered into three interest rate hedging agreements with
financial institutions for a total notional amount of $100.0 as follows: a
three year fixed-rate swap whereby we will receive 3-Month Libor and pay 3.608%
quarterly on $25.0; a three year fixed-rate swap whereby we will receive 3-Month
Libor and pay 3.69% quarterly on $25.0; and a three year 6% cap whereby, for
quarterly periods when 3-Month Libor exceeds 6% on its reset date, we will
receive the difference between 3-Month Libor and 6% on $50.0 for such period. Since the completion of the February 2004 Financing, we do not have any
material relationships with unconsolidated entities or financial partnerships,
often referred to as special purpose entities, for the purpose of facilitating
off-balance sheet arrangements with contractually narrow or limited purposes. Our debt agreements contain financial and restrictive covenants. The terms
of the Revolving Credit Facility require that we maintain available liquidity
(as defined in the Revolving Credit Facility) of at least $55.0 or maintain a
Fixed Charge Coverage Ratio initially of at least 1.0:1.0 at the present time.
This ratio increases to 1.05:1.0 beginning with the four quarters ended
December 31, 2006 and further increases to 1:10:1.0 beginning with the four
quarters ending March 31, 2008. The Fixed Charge Coverage Ratio, as defined in
the Revolving Credit Facility, is earnings before interest, taxes, depreciation
and amortization divided by the sum of cash taxes, cash interest expense,
capital expenditures and certain payments related to our equity for the same
period. There are certain liquidity thresholds, which must be met in order for
us to make certain capital expenditures or to settle lawsuits or pay judgments.
There are other restrictions which include limitations on capital expenditures,
asset sales and dispositions, the incurrence or guarantee of additional debt,
acquisitions, certain payments and investments, affiliate and subsidiary
transactions, repurchase of stock, and excess cash. We are in compliance with
all debt covenants. We incurred pre-tax charges of $42.4, of which $40.2 occurred in the first
quarter of 2004, resulting from costs associated with the financings that were
repaid. These charges are principally the result of pre-payment penalties
associated with repayment of our private placement notes, waiver fees and other
expenses related to financings that were repaid, charges associated with the
termination of the sale and leaseback transaction, and the write-off of
unamortized financing costs. We recently
announced our Board of Directors decision to proceed with our plan to add 300 million pounds of
additional solid stating capacity to our Pearl River facility in the first quarter
of 2006 at an expected cost of approximately $50. 24




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##### Table of Contents



The financial resources available to us at June 30, 2004 included
approximately $115 available under our Revolving Credit Facility and internally
generated funds. We believe these financial resources will provide us with
sufficient liquidity to meet our foreseeable needs for working capital, capital
expenditures and dividends. FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES Statements contained in this Form 10-Q 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, anticipates, expects and similar expressions are intended to
identify forward-looking statements. These statements are made as of the date
of this report based upon current expectations, and we undertake no obligation
to update this information. These forward-looking statements involve certain
risks and uncertainties, including, but not limited to: reduced raw material
margins; the financial condition of our customers; fiber and textile imports
availability and cost of raw materials; 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; regulatory changes; tax risks;
U.S. European, Asian and global economic conditions; prices and volumes of
imports; work stoppages; levels of production capacity and profitable
operations of assets; prices of competing products; natural disasters and acts
of terrorism; and maintaining the operations of our existing production
facilities. Actual results may differ materially from those expressed herein.
Results of operations in any past period should not be considered indicative
of results to be expected in future periods. Fluctuations in operating results
may result in fluctuations in the price of our common stock. For a more complete description of the prominent risks and uncertainties
inherent in our business, see our Form 10-K for the year ended December 31,
2003. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK For information about our derivative financial instruments, see Item 7A.
Quantitative and Qualitative Disclosure About Market Risk of our Form 10-K
for the year ended December 31, 2003. 
 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,
2004, both the Chief Executive Officer and the Chief
Financial Officer of the Company concluded that there is a
reasonable assurance 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)
    
    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. 25




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PART II  OTHER INFORMATION 
 ITEM 1. 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
fiber industry. We cooperated with the investigation by producing documents in
response to this subpoena. In September 2002, the U.S. Department of Justice
(DOJ) announced the indictment of a former sales manager of one of our
competitors for conspiring to fix prices and allocate customers for polyester
staple fiber beginning in September 1999 and ending in January 2001. On
October 31, 2002, the DOJ 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 fiber industry. On October 2, 2003,
the trial of the former sales manager of one of our competitors concluded with
a verdict of not guilty on all charges. On July 6, 2004 we received a letter
from the DOJ identifying us as a target in the grand jury investigation.
According to the letter, lawyers from the Dallas Field Office of the Antitrust
Division of the DOJ are seeking authority to present an indictment to the grand
jury to charge Wellman in connection with an alleged price-fixing conspiracy.
Two of our employees have received similar target letters. Neither we nor our
employees have been charged with any wrongdoing, and we vehemently deny that we
or our employees have engaged in price fixing or customer allocation. Numerous producers of polyester staple fiber, including Wellman, have been
named in various civil actions asserting claims substantially based on the
indictment and informations described above. These proceedings are summarized
below. Wellman and certain other companies have been named as defendants in
thirty-two federal actions brought by direct purchasers of polyester staple
fiber for alleged violation of U.S. antitrust laws. The plaintiffs voluntarily
dismissed nine of those lawsuits on October 3, 2003. In each remaining
lawsuit, the plaintiffs allege that the defendants engaged in a conspiracy to
fix the price of polyester staple fiber in violation of the Sherman Act. In
ten of the cases, the plaintiff purports to represent a class of all persons
who directly purchased polyester staple fiber and were similarly affected by
such alleged conduct. Thirteen of the cases are brought by plaintiffs who do
not purport to represent a class. Certain of these cases name employees of
Wellman and other companies as defendants. All of the federal plaintiffs seek damages of unspecified amounts,
attorneys fees and costs and unspecified relief. In addition, certain of the
actions claim restitution, injunction against alleged illegal conduct and other
equitable relief. The federal suits were originally filed in the U.S. District
Court for the Middle District of Alabama, U.S. District Court for the Northern
District of California, U.S. District Court for the Middle District of Georgia,
U.S. District Court for the District of New Jersey, U.S. District Court for the
Middle District of North Carolina, U.S. District Court for the Western District
of North Carolina, U.S. District Court for the District of South Carolina and
U.S. District Court for the Western District of Virginia. The Judicial Panel
on Multi-District Litigation ruled on April 22, 2003 to transfer all the
federal cases to the Western District of North Carolina for coordinated or
consolidated pretrial proceedings. In addition to the direct purchaser actions discussed above, forty-one
purported class actions alleging violations of federal antitrust laws, state
antitrust or unfair competition laws and certain state consumer protection acts
have been filed in one federal court and various state courts on behalf of
purported classes of indirect purchasers of polyester staple fiber products.
In each lawsuit, the plaintiffs allege that the defendants engaged in a
conspiracy to fix prices of polyester staple fiber products. In addition,
certain of the actions claim 26




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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 was
removed to federal court and subsequently remanded to the Circuit Court of
Hancock County, West Virginia. 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. Wellman and certain other companies were named in an action filed in the
Superior Court of Justice for Ontario, Canada, by a plaintiff purporting to
represent a class of direct and indirect purchasers of polyester staple fiber.
This complaint asserts claims under Canadian law. It contains three counts that
ask for compensatory damages of Cdn. $50 million each. The extent to which
these three counts are duplicative and overlapping is unclear. The complaint
also contains one count asking for punitive damages of Cdn. $10 million.
Additionally, Wellman and certain other companies were also named in an action
filed in the Supreme Court of British Columbia, Canada, by a plaintiff
purporting to represent a class of direct and indirect purchasers of polyester
staple fiber. This complaint also asserts claims under Canadian law and
requests compensatory, punitive and special damages, but does not allege a
specific dollar amount in damages. Finally, Wellman and certain other
corporations were named in an action filed in the Superior Court for Quebec,
Canada. This complaint asserts claims under Canadian law seeking compensatory
damages of Cdn. $15 million and punitive damages of Cdn. $5 million. 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 uncertainties 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  (a)
    
    Our Annual Meeting of Stockholders was held on May 18, 2004.(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 2005
Annual Meeting of Stockholders, or until their successors are elected and qualified was as follows: Name
    
    For
    
    Against/WithheldThomas M. Duff
    
    
    27,707,539
    
    
    
    548,329James B. Baker
    
    
    27,653,878
    
    
    
    601,990Richard F. Heitmiller
    
    
    27,450,754
    
    
    
    805,114Gerard J. Kerins
    
    
    27,704,687
    
    
    
    551,181
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Name
    
    For
    
    Against/WithheldDavid J. McKittrick
    
    
    27,714,998
    
    
    
    540,870James E. Rogers
    
    
    27,732,685
    
    
    
    523,183Roger A. Vandenberg
    
    
    27,643,121
    
    
    
    612,747
 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 2005
Annual Meeting of Stockholders, or until their successors are elected and qualified was as follows: Name
    
    For
    
    Against/WithheldDavid A. Barr
    
    
    11,202,143
    
    
    
    0Oliver M. Goldstein
    
    
    11,202,143
    
    
    
    0
  3.
    
    The combined vote for the proposal to ratify the adoption of our Restricted Stock Plan: 28,651,302 votes cast for, 2,310,377
votes cast against, and 822,473 abstentions. As a result, the Restricted Stock Plan was ratified and approved.4.
    
    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, 2004: 38,661,277 votes cast for, 728,071
votes cast against, and 68,663 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
in favor of this matter even though they have not received instructions from the beneficial
owners. Broker non-votes had no effect on the outcome of these proposals.(d)
    
    Not applicable. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 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 2002
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32.2
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 (b) Reports on Form 8-K. (1)
    
    The Company filed a Form 8-K on May 4, 2004 for the purpose of disclosing its first quarter 2004 results,
historical adjusted EBITDA and Post Financing Adjusted EBITDA, and factors impacting 2004 results.
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SIGNATURES Pursuant to the requirements 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. WELLMAN, INC.By /s/ Keith R. PhillipsChief Financial Officer andDated August 9, 2004
    Vice President
(Principal Financial Officer)Dated August 9, 2004
    By /s/ Mark J. RudayChief Accounting Officer,Vice President and Controller
(Principal Accounting Officer) 30