##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                             
|          
|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



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Wellman, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                             |  |                                         
|-------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                     |  | 04-1671740                              
|(State or other jurisdiction of
    incorporation or organization)                           |  | (I.R.S. Employer
    Identification No.)
|                                                                                            
|595 Shrewsbury Avenue
    Shrewsbury, New Jersey(Address of principal executive
    offices) |  | 07702(Zip Code)                         

Registrants telephone number, including
area code:

(732) 212-3300




---

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

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange on Which Registered
|                              |  |                                          
|Common Stock, $.001 par value |  | New York Stock Exchange                  
|Common Stock Purchase Rights  |  | New York Stock Exchange                  

Securities registered pursuant to
Section 12(g) of the
Act:     None

Indicate
by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

Indicate
by check mark if disclosure of delinquent filers pursuant to
Rule 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     þ

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

Aggregate
market value of the voting stock held by non-affiliates of the
registrant, computed on the basis of $11.20 per share (the
closing price of such stock on June 30, 2003 on the
New York Stock Exchange), as of the last day of the
registrants most recently completed second fiscal
quarter:     $347,444,698.

The
number of shares of the registrants Class A Common
Stock, $.001 par value, and Class B Common Stock,
$.001 par value, outstanding as of March 1, 2004 was
31,889,147 and 0, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

1. Proxy
Statement for the 2004 Annual Meeting of Stockholders (to be
filed with the Securities and Exchange Commission on or before
April 29, 2004) is incorporated by reference in
Parts II and III hereof.



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TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                             
|                                                   | Item 2. Properties                                                                           
|                                                   | Item 3. Legal Proceedings                                                                    
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                           
|                                                   | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                   | Item 6. Selected Consolidated Financial Data                                                 
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 7A. Quantitative and Qualitative Disclosure about Market Risk                           
|                                                   | Item 8. Financial Statements and Supplementary Data                                          
|                                                   | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                   | Item 9A. Controls and Procedures                                                             
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                   | Item 11. Executive Compensation                                                              
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                   | Item 13. Certain Relationships and Related Transactions                                      
|                                                   | Item 14. Principal Accountant Fees and Services                                              
|PART IV                                           
|                                                   | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                        
|Ex-4.(A)(1) Credit Agreement dated as of 2/10/2004
|Ex-4.(A)(2) First Lien Senior Credit Agreement    
|Ex-4.(A)(3) Second Lien Senior Credit Agreement   
|Ex-21 Subsidiaries                                
|Ex-23.(A) Consent of Ernst & Young LLP            
|Ex-23.(B) Consent of KPMG Chartered Accountants   
|Ex-28.(A) Report of KPMG Chartered Accountants    
|Ex-31.1 Section 302 CEO Certification             
|Ex-31.2 Section 302 CEO Certification             
|Ex-32.1 Section 906 CEO Certification             
|Ex-32.2 Section 906 CFO Certification             



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##### Table of Contents






PART I






|        |         
|------- | --------
|Item 1. | Business

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

Recent Developments



| |                                                   
| | --------------------------------------------------
| | Closing of $625 Million Financing
    Arrangements

Subsequent to year-end, on February 10,
2004, we closed on $625 million of new debt financings.
This consisted of a five-year $175 million Revolving Credit
Facility with an annual interest rate of LIBOR plus
250 basis points on outstanding borrowings, a five-year
$185 million First Lien Term Loan with an annual interest
rate of LIBOR plus 400 basis points and a six-year
$265 million Second Lien Term Loan with an annual interest
rate of LIBOR plus 675 basis points. The term loans have a
LIBOR floor of 200 basis points. These financings are
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 to provide working capital.

We expect to incur approximately $47 million
in pre-tax charges, or approximately $0.95 per diluted
share after tax, in the first quarter of 2004, resulting from
costs associated with our prior financings that were repaid.
These charges are principally the result of prepayment 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 February 10, 2004 we had approximately
$490 million in total outstanding long-term debt, net of
original issue discount of approximately $5 million. For
additional information related to the new financings, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Capital Resources and Liquidity and note 10 to the
Consolidated Financial Statements.



| |                  
| | -----------------
| | Impairment Charge

In December 2003, based on managements
recommendation, our Board of Directors approved the abandonment
of the polyester staple fiber spinning and drawing equipment at
our Pearl River facility. This spinning and drawing equipment,
along with the related polymerization assets, was idled in
December 2000, principally because of the expected over-supply
of polyester staple fiber in the United States. The Board of
Directors decision to abandon the polyester staple fiber
spinning and drawing equipment was based on the determination
that a conversion to PET resin production would be the most
profitable use of the related polymerization assets that were
idled. Subject to final approval by our Board of Directors, we
plan to complete the conversion and begin production using the
converted assets in 2006.

As a result of this decision, we recorded a
non-cash impairment charge of $135 million
($88 million after tax or $2.79 per diluted share) in
the fourth quarter of 2003. This charge represents a reduction
in the carrying value of the abandoned polyester staple fiber
spinning and drawing assets at our Pearl River facility to their
estimated fair value. For additional information on the
impairment charge, see note 1 to the Consolidated Financial
Statements.

Restructuring and Other Cost
Reductions

We have historically focused on continuous
process improvements and have successfully implemented cost
reduction initiatives. Since 1999, we have reduced domestic
headcount by 29%, while increasing production by 13% and pounds
per employee by 38% over the same period. During 2003, we
announced additional cost reduction plans as part of our
on-going low cost business strategy and in response to reduced
profitability. For additional information on reduced
profitability, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The three plans announced in 2003 are as
follows:



| |             
| | ------------
| | 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 our
three fiber manufacturing facilities. We

1



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recorded termination costs of approximately
$2 million in our FRPG segment related to this plan, which
was fully implemented in 2003. This plan has resulted in
approximately $7 million of realized savings in
controllable costs in 2003 compared to the prior year.




| |          
| | ---------
| | July 2003

In July 2003, we announced and implemented
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.



| |              
| | -------------
| | November 2003

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. We
incurred severance and other termination costs of approximately
$8 million in the fourth quarter of 2003 associated with
this plan.

These last two cost reduction plans resulted in
approximately $8 million of realized savings in
controllable costs in the second half of 2003 as compared to our
cost structure during the second quarter of 2003. In addition,
we expect a reduction in controllable costs of approximately
$27 million in 2004 compared to 2003 levels, with an
additional $6 to $11 million of cost reductions in 2005. By
2005, we expect total cost savings annually of $41 to
$46 million as compared to our cost structure in the second
quarter of 2003. These plans will result in a total headcount
reduction of approximately 400 employees by the end of 2004. Of
these reductions, approximately 70% were implemented by the end
of 2003. For additional information, see note 8 to the
Consolidated Financial Statements.

Products and Markets

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

The following table presents the combined net
sales and percentage of net sales for our reportable operating
segments for each of the three years in the period ended
December 31, 2003. In the table, we have eliminated
intersegment sales and applied historical exchange rates to the
data. These eliminations are not material.

|      |  |                 |         |            |  |           |       |            |  |           |         |            |  |  |       |   |  |   |         |  |  |  |       |  
|----- |  | --------------- | ------- | ---------- |  | --------- | ----- | ---------- |  | --------- | ------- | ---------- |  |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|      |  |                 |         |            |  |          
|      |  | 2003            |         | 2002       |  | 2001     
|      |  |                 |         |            |  |          
|      |  | Net Sales       |         | % of Total |  | Net Sales |       | % of Total |  | Net Sales |         | % of Total
|      |  |                 |         |            |  |           |       |            |  |           |         |           
|      |  |                
|      |  | ($ in millions)
|PPG   |  | $               | 632.0   |            |  |           | 57.0  | %          |  | $         | 524.8   |            |  |  | 51.8  | % |  | $ | 533.2   |  |  |  | 52.8  | %
|FRPG  |  |                 | 477.3   |            |  |           | 43.0  |            |  |           | 489.2   |            |  |  | 48.2  |   |  |   | 476.4   |  |  |  | 47.2  |  
|      |  |                 |         |            |  |           |       |            |  |           |         |            |  |  |       |   |  |   |         |  |  |  |       |  
|Total |  | $               | 1,109.3 |            |  |           | 100.0 | %          |  | $         | 1,014.0 |            |  |  | 100.0 | % |  | $ | 1,009.6 |  |  |  | 100.0 | %
|      |  |                 |         |            |  |           |       |            |  |           |         |            |  |  |       |   |  |   |         |  |  |  |       |  

The accounting policies of the reportable
operating segments are the same as those described in the
summary of significant accounting policies in note 1 to the
Consolidated Financial Statements. The following table presents
the operating profit (loss) and percentage of operating profit
(loss) for our reportable operating segments for each of the
three years in the period ended December 31, 2003. In the
table, we have eliminated intersegment transactions and applied
historical exchange rates to the data. These eliminations are
not material.

|      |  |                 |        |      |  |               |        |   |  |               |      |   |  |  |       |   |  |   |       |   |  |  |       |  
|----- |  | --------------- | ------ | ---- |  | ------------- | ------ | - |  | ------------- | ---- | - |  |  | ----- | - |  | - | ----- | - |  |  | ----- | -
|      |  |                 |        |      |  |              
|      |  | 2003            |        | 2002 |  | 2001         
|      |  |                 |        |      |  |              
|      |  | Operating       |        |      |  | Operating     |        |   |  | Operating     |      |  
|      |  | Profit (Loss)   |        | %    |  | Profit (Loss) |        | % |  | Profit (Loss) |      | %
|      |  |                 |        |      |  |               |        |   |  |               |      |  
|      |  |                
|      |  | ($ in millions)
|PPG   |  | $               | 13.9   |      |  |               | 9.9    | % |  | $             | 50.1 |   |  |  | 109.6 | % |  | $ | 64.7  |   |  |  | 183.8 | %
|FRPG  |  |                 | (154.9 | )    |  |               | (109.9 | ) |  |               | (4.4 | ) |  |  | (9.6  | ) |  |   | (29.5 | ) |  |  | (83.8 | )
|      |  |                 |        |      |  |               |        |   |  |               |      |   |  |  |       |   |  |   |       |   |  |  |       |  
|Total |  | $               | (141.0 | )    |  |               | 100.0  | % |  | $             | 45.7 |   |  |  | 100.0 | % |  | $ | 35.2  |   |  |  | 100.0 | %
|      |  |                 |        |      |  |               |        |   |  |               |      |   |  |  |       |   |  |   |       |   |  |  |       |  

See note 18 to the Consolidated Financial
Statements for reconciliations to corresponding totals in the
Consolidated Financial Statements and additional information
with regard to our reportable operating segments.

2



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| |                         
| | ------------------------
| | Packaging Products Group

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 requirements.                            

These resins are produced domestically at our
Palmetto, South Carolina and Pearl River, Mississippi facilities
and internationally at our Emmen facility in the Netherlands.

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

Customers include North American, South American
and European-based manufacturers of various types of plastic
containers. Six PPG customers represented approximately 59% of
the PPGs total net sales for 2003. The unexpected loss of
any of these customers may result in a temporary reduction in
sales and profitability of the PPG.



| |                                       
| | --------------------------------------
| | Fibers and Recycled Products
    Group

The FRPG manufactures:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | 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.                        

Polyester staple fiber, FRPGs primary
product, is multi-strand fiber cut into short lengths to
simulate certain properties found in natural fibers, such as
cotton and wool, and/or to meet the end product needs of our
customers. We market these products under the Fortrel®
brand.

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

Domestically, we manufacture polyester staple
fiber and nylon products from recycled raw materials at our
facility in Johnsonville, SC. Our recycling operation in
Johnsonville procures these materials and processes them into
usable raw materials for our fiber and engineering resins
businesses.

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

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

No single customer accounted for 10% of
FRPGs sales in 2003.



| |              
| | -------------
| | Raw Materials

Our PermaClear® PET resins are produced by
the PPG from purified terephthalic acid (PTA) and
monoethylene glycol (MEG). EcoClear® PET resins are
produced from a combination of chemical and recycled raw
materials. Our chemical-based polyester staple fibers are also
manufactured from PTA and MEG. Domestically, we purchase PTA
produced by BP Amoco Chemicals Inc., the primary domestic
supplier, pursuant to long-term supply contracts. Domestic MEG
is purchased under supply contracts with Equistar Chemicals, LP,
BASF Corporation, and Dow Chemical. In Europe, we purchase PTA
primarily from BP Amoco Chemicals, Inc. and MEG from Diolen
Industrial Fibers (formerly Acordis). The prices of PTA and MEG
have fluctuated in the past and are likely to continue to do so
in the future.

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Our recycling-based fibers utilize two categories
of recycled PET raw materials: post-consumer containers and
post-industrial materials including some under long-term supply
contracts. We purchase a portion of these materials from
manufacturers that compete with us in the sale of fibers and
resins. We obtain our domestic post-consumer PET bottles
primarily from curbside recycling and deposit return programs.
Post-industrial materials include off-quality or off-spec
production, trim and other materials generated from fiber,
resin, or film manufacturing processes. The raw material mix for
our Johnsonville facility can be varied depending upon market
conditions for the respective raw materials. Historically, the
raw material mix has been approximately 50% post-consumer PET
bottle flake and 50% post-industrial material. The prices of
recycled raw materials are variable and determined by worldwide
supply and demand.

Our European operations purchase recycled raw
materials in various forms throughout Europe. Post-consumer PET
containers are primarily purchased from collection programs.
These post-consumer containers are processed initially at our
recycling facilities near Arnhem, the Netherlands, or Verdun,
France.

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

For additional information on our raw materials,
see Forward Looking Statements; Risks and
Uncertainties.



| |                           
| | --------------------------
| | Capital Investment Program

Our capital expenditures in 2003 were
approximately $15.5 million, compared to $21.7 million
and $28.1 million for 2002 and 2001, respectively. In 2002,
our capital expenditures included approximately
$4.7 million of costs to convert fiber grade chip lines at
our Palmetto facility to amorphous PET resin. Since completing
the construction of the Pearl River facility in early 2000, our
capital expenditures have declined significantly. The following
table provides a breakdown of our capital expenditures:

Capital Expenditures Breakdown

|                                               |  |                 |      |      |  |      |      |  |  |   |      | 
|---------------------------------------------- |  | --------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                               |  | 2003            |      | 2002 |  | 2001
|                                               |  |                 |      |      |  |     
|                                               |  |                
|                                               |  | ($ in millions)
|Maintenance of business capital                |  | $               | 13.2 |      |  | $    | 15.5 |  |  | $ | 15.1 | 
|Replacement of assets due to production outage |  |                 |     |      |  |      |     |  |  |   | 9.9  | 
|Environmental, health and safety               |  |                 | 0.6  |      |  |      | 0.9  |  |  |   | 1.2  | 
|Growth/new capacity                            |  |                 | 1.7  |      |  |      | 5.3  |  |  |   | 1.9  | 
|                                               |  |                 |      |      |  |      |      |  |  |   |      | 
|Total                                          |  | $               | 15.5 |      |  | $    | 21.7 |  |  | $ | 28.1 | 
|                                               |  |                 |      |      |  |      |      |  |  |   |      | 

For additional information on capital
expenditures expected in 2004, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Outlook.
For additional information on production outage, see note 9
to the Consolidated Financial Statements.



| |                    
| | -------------------
| | Sales and Marketing

Our markets have historically displayed price and
volume cyclicality. We sell to a diverse group of customers.
Although no single customer represented more than 10% of our
total net sales, six customers represented approximately 34% of
our total net sales in 2003.

Approximately 44 employees market the majority of
our products. We also utilize representatives or agents for
certain sales.

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

Both North American and global PET resins demand
continues to grow, driven by new product applications for PET
and conversions from other packaging materials to PET. Numerous
factors affect the demand for PET resins, including substitution
of packaging products from glass, aluminum, and paper into PET,
consumer preferences and spending, general economic conditions,
weather, and the export/ import trade balance of PET resin into
the North American Free Trade Agreement (NAFTA) region. We
do not expect a significant increase in imports of PET resins
into NAFTA in 2004.

4



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##### Table of Contents



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

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

For additional information, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations  General
and Forward-Looking Statements; Risks and
Uncertainties.



| |            
| | -----------
| | Competitors

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

In North America, our primary competitors in the
PET resins business are Eastman Chemical Co. (Voridian), KoSa,
Gruppo Mossi and Ghisolfi (M&G), Nan Ya Plastics Corp.
(Nan Ya), and DAK Americas. We believe we are currently the
fourth-largest producer of PET resins in North America,
representing approximately 15% of North American production
capacity. In Europe, our main competitors in the PET resins
business are Voridian, KoSa, DuPontSA, M&G, and Dow Chemical
Co. Our share of the European PET resins market is less than 5%.

Our primary domestic polyester staple fiber
competitors are DAK Americas, Nan Ya, and KoSa. We believe
we are currently the largest producer of polyester staple fiber
in the United States with approximately 30% of
U.S. production capacity. Our main European polyester
staple fiber competitors are MonteFibre, DuPontSA and Trevira.
We are the largest supplier of polyester staple fibers made from
recycled materials and the largest supplier of polyester staple
fiber for home furnishing and non-woven products. In 2003, we
had approximately 19% of EU produced polyester staple fiber
shipments.

For additional information on competitors, see
Item 7. Forward-Looking Statements; Risks and
Uncertainties.



| |                         
| | ------------------------
| | Research and Development

We have approximately 66 employees devoted to
research, development and technical service activities in our
fibers and resins businesses. Research and development costs
were approximately $14.9 million, $17.3 million and
$14.6 million for 2003, 2002 and 2001, respectively.



| |                   
| | ------------------
| | Foreign Activities

We operate in international markets. Since a
large portion of our non-U.S. sales are in different
currencies, changes in exchange rates may affect profitability
and sales levels of these operations. In addition, fluctuations
between currencies may also affect our reported financial
results. Foreign exchange contracts and borrowings in local
currencies are utilized to manage our foreign currency exposure.
For additional information on these hedges, see Item 7A.
Quantitative and Qualitative Disclosure about Market
Risk and note 17 to the Consolidated Financial
Statements.

Our foreign businesses are subject to certain
risks common to foreign operations and investments in foreign
countries, including restrictive action by local governments,
limitations on repatriating funds and changes in currency
exchange rates. See note 18 to the Consolidated Financial
Statements and Forward-Looking Statements; Risks and
Uncertainties for additional information relating to our
foreign activities.

5



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##### Table of Contents





| |          
| | ---------
| | Employees

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

|     |  |                   |       | 
|---- |  | ----------------- | ----- | 
|     |  | Total Approximate
|     |  | Number           
|Year |  | of Employees     
|     |  |                  
|2003 |  |                   | 1,900 | 
|2002 |  |                   | 2,200 | 
|2001 |  |                   | 2,500 | 
|2000 |  |                   | 2,600 | 
|1999 |  |                   | 2,700 | 

At December 31, 2003, the Union of Needle
Trades, Industrial and Textile Employees
(UNITE) represented 492 employees, of which 281 were union
members, at our Johnsonville, SC operations. This contract
expires on May 1, 2005. In our European fiber business,
four unions represented 252 of the 463 total employees at
year-end 2003. The wage agreements with these unions expire on
October 31, 2004. We have entered into an agreement with
the unions at our European fiber business at December 31,
2003, whereby approximately 60 persons have accepted voluntary
termination. These positions will be eliminated during the first
half of 2004. We employ 75 people in our European PET Resins
operation, with 50 represented by two unions whose contracts
expire on April 30, 2004. We believe that relations with
our employees are satisfactory. See Forward-Looking
Statements; Risks and Uncertainties.



| |                      
| | ---------------------
| | Environmental Matters

Our facilities are subject to numerous existing
and proposed laws and regulations designed to protect the
environment from wastes, emissions and hazardous substances. We
believe we are either in material compliance with all currently
applicable regulations or are operating in accordance with the
appropriate variances and compliance schedules or similar
arrangements.

For additional information relating to
environmental matters, see Item 7. Managements
Discussion and Analysis of Financial Position and Results of
Operations  Environmental Matters,
Forward-Looking Statements; Risks and Uncertainties,
and note 12 to the Consolidated Financial Statements.



| |                                         
| | ----------------------------------------
| | Executive Officers of the
    Registrant

Our current executive officers are as follows:

|                        |  |                                                            
|----------------------- |  | -----------------------------------------------------------
|Name and Age            |  | Position                                                   
|                        |  |                                                            
|Thomas M. Duff, 56      |  | Chairman, Chief Executive Officer, and Director            
|Keith R. Phillips, 49   |  | Vice President, Chief Financial Officer                    
|Michael E. Dewsbury, 54 |  | Vice President, PET Resins Division 
    U.S.             
|Audrey L. Goodman, 50   |  | Vice President, Treasurer                                  
|Mark J. Ruday, 38       |  | Vice President, Chief Accounting Officer and
    Controller
|Joseph C. Tucker, 56    |  | Vice President, Fibers and Recycled Products Group         

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

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

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

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

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

6



---



##### Table of Contents



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

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

Available Information

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






|        |           
|------- | ----------
|Item 2. | Properties

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

|                                 |  |                    |                        |                     |  |  |     | 
|-------------------------------- |  | ------------------ | ---------------------- | ------------------- |  |  | --- | 
|                                 |  |                    |                        | Stated Annual      
|Location                         |  | Principal Products |                        | Production Capacity
|                                 |  |                    |                        |                    
|                                 |  |                    |                        | (In millions of    
|                                 |  |                    |                        | pounds)            
|Darlington, SC (Palmetto)        |  |                    | PET resins(1)          |                     |  |  | 760 | 
|Hancock County, MS (Pearl River) |  |                    | PET resins(2)          |                     |  |  | 520 | 
|Emmen, the Netherlands           |  |                    | PET resins             |                     |  |  | 120 | 
|Darlington, SC (Palmetto)        |  |                    | Polyester staple fiber |                     |  |  | 500 | 
|Johnsonville, SC                 |  |                    | Polyester staple fiber |                     |  |  | 240 | 
|Mullagh, Ireland                 |  |                    | Polyester staple fiber |                     |  |  | 175 | 
|Johnsonville, SC                 |  |                    | Engineering resins     |                     |  |  | 60  | 



---



|    |                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This includes 200 million pounds of
    amorphous PET resin capacity for external sales.                                                                                                                                                             
|   
|(2) | Excludes 300 million pounds of
    polymerization and polyester staple fiber production capacity.
    The polyester staple fiber spinning and drawing equipment was
    abandoned in 2003. See Item 1. Recent
    Developments  Impairment Charge.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In January 2001, we received a document subpoena
in connection with a federal grand jury investigation of pricing
practices in the polyester staple fiber industry. We cooperated
with the investigation by producing documents in response to
this subpoena. In September 2002, the U.S. Department of
Justice announced the indictment of a former sales manager of
one of our competitors for conspiring to fix prices and allocate
customers for polyester staple fiber beginning in September 1999
and ending in January 2001. On October 31, 2002, the
U.S. Department of Justice announced that it was filing
informations against another competitor and one of its former
officers as a result of their agreement to plead guilty to
participating in a conspiracy to fix prices and allocate
customers in the polyester staple 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. Neither we nor any of our employees have been
charged with any wrongdoing, and we vehemently deny that we or
any of our employees have engaged in price fixing or customer
allocation.

Following the disclosure of the investigation,
the indictment of a competitors employee and the
informations and guilty pleas of another competitor and its
employee, the producers of polyester staple fiber,

7



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##### Table of Contents



including Wellman, have been named in various
civil actions asserting claims substantially based on the
indictment and informations. These proceedings are summarized
below.


Wellman and certain other companies have been
named as defendants in 32 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. Plaintiffs who do not purport
to represent a class have brought 13 of the cases. 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, injunctions
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, except for two recently filed cases, where
transfer has been requested, to the Western District of North
Carolina for coordinated or consolidated pretrial proceedings.

On January 20, 2004, a plaintiff who does
not purport to represent a class filed a motion seeking leave to
amend its complaint adding nine defendants. The proposed new
defendants are various corporate entities and individuals,
including two Wellman employees. The Court has yet to rule on
the matter. On January 30, 2004, another plaintiff who does
not purport to represent a class filed a lawsuit, which named as
defendants Wellman, certain other companies and a number of
individuals, including two Wellman employees.

In addition to the direct purchaser actions
discussed above, 38 purported class actions alleging
violations of federal antitrust laws, state antitrust or unfair
competition laws and certain state consumer protection acts have
been filed in one federal court and various state courts on
behalf of purported classes of indirect purchasers of polyester
staple fiber products. In each lawsuit, the plaintiffs allege
that the defendants engaged in a conspiracy to fix prices of
polyester staple fiber products. In addition, certain of the
actions claim restitution, injunction against alleged illegal
conduct and other equitable relief. One indirect purchaser case
is pending in the U.S. District Court for the Western District
of North Carolina and is subject to the order issued by the
Judicial Panel on Multi-District Litigation for coordination or
consolidation with the other federal cases. The rest of the
indirect purchaser cases were filed in Arizona, California, the
District of Columbia, Florida, Kansas, Massachusetts, Michigan,
New Mexico, North Carolina, South Dakota, Tennessee, West
Virginia and Wisconsin. The case filed in West Virginia 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, results
of operations, or cash flows.

8



---



##### Table of Contents








|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market
Information

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

|               |  |      |       |     |  |          |       |  |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | -------- | ----- |  |  | - | ---- | 
|Year           |  | High |       | Low |  | Dividend
|               |  |      |       |     |  |         
|2003           |  |      |       |     |  |          |       |  |  |   |      | 
|Fourth Quarter |  | $    | 10.56 |     |  | $        | 7.57  |  |  | $ | 0.09 | 
|Third Quarter  |  | $    | 11.55 |     |  | $        | 7.29  |  |  | $ | 0.09 | 
|Second Quarter |  | $    | 12.29 |     |  | $        | 9.47  |  |  | $ | 0.09 | 
|First Quarter  |  | $    | 14.07 |     |  | $        | 8.93  |  |  | $ | 0.09 | 
|2002           |  |      |       |     |  |          |       |  |  |   |      | 
|Fourth Quarter |  | $    | 13.99 |     |  | $        | 9.20  |  |  | $ | 0.09 | 
|Third Quarter  |  | $    | 16.80 |     |  | $        | 13.05 |  |  | $ | 0.09 | 
|Second Quarter |  | $    | 18.22 |     |  | $        | 14.89 |  |  | $ | 0.09 | 
|First Quarter  |  | $    | 16.98 |     |  | $        | 12.74 |  |  | $ | 0.09 | 

We had 866 holders of record as of March 1,
2004.

See note 14 to the Consolidated Financial
Statements for information regarding common stock rights
associated with our common stock.

In March 2004, we lowered our quarterly dividend
rate to $0.05 per share for the dividend payable on
March 15, 2004. We determined that this reduced dividend
rate is appropriate considering our operating performance in the
second half of 2003, our current debt level and focus on debt
reduction, and the dividend levels of other companies.



| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized for Issuance Under
    Equity Compensation Plans

Securities Authorized for Issuance Under
Equity Compensation Plans in our Proxy Statement for the
2004 Annual Meeting of Stockholders will be filed with the
Securities and Exchange Commission on or before April 29,
2004 and is incorporated by reference.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Recent Sales of Unregistered Securities and
    Revolving Credit Facilities

On February 10, 2004, we completed
$625 million of new debt financings. These financings
consist of a five-year $175 million Revolving Credit
Facility with an initial annual interest rate of LIBOR plus 250
basis points on outstanding borrowings, a five-year
$185 million First Lien Term Loan with an annual interest
rate of LIBOR plus 400 basis points, and a six-year $265 million
Second Lien Term Loan with an annual interest rate of LIBOR plus
675 basis points. For additional information, see note 10 to the
Consolidated Financial Statements.

On June 27, 2003, we issued to Warburg
Pincus Private Equity VIII, L.P. 11,202,143 shares of
perpetual convertible preferred stock and two warrants to
acquire a total of 2.5 million shares of our common stock
that vested on that date. For additional information on the
private equity investment, see note 3 to the Consolidated
Financial Statements. The offer and sale of these securities
were exempt from the registration requirements of the Securities
Act of 1933 pursuant to the exemption under Section 4(2).

On June 27, 2003, we entered into a
three-year $275 million revolving credit facility with an
annual interest rate of LIBOR plus 250 basis points on
outstanding borrowings. All borrowings were repaid and
commitments under this facility were terminated on
February 10, 2004.

9



---



##### Table of Contents



On September 17, 2002 and December 20,
2001, we sold to John Hancock Life Insurance Company in private
placements senior unsecured notes in the principal amounts of
$25.0 million and $40.0 million, respectively. These
notes had annual interest rates of 7.46% and 7.55%,
respectively, and had maturities in 2009 and 2011, respectively.
The offer and sale of these securities were exempt from the
registration requirements of the Act pursuant to the exemption
under Section 4(2). These notes were repaid in full on
February 10, 2004.

On November 16, 2001, we sold to
Metropolitan Life Insurance Company in a private placement a
senior unsecured note in the principal amount of
$35.0 million. This note had interest at a floating rate
based on LIBOR and had a maturity date in 2004. The offer and
sale of this security were exempt from the registration
requirements of the Act pursuant to the exemption under
Section 4(2). This note was repaid in full on
February 10, 2004.

10



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##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |         |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------- | --------- | -------- | - | ---- | --------- | -------- | - | ------- | --------- | ----- | - | - | --------- | ------ | - | - | ------- | ------- | -
|                                                                   |                                                                                          |                                      
|                                                                   |                                                                                          | Years Ended December 31,             
|                                                                   |                                                                                          |                                      
|                                                                   |                                                                                          | 2003                                  |           | 2002(2)  |   | 2001 |           | 2000     |   | 1999(3)
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |        
|                                                                   |                                                                                          |                                      
|                                                                   |                                                                                          | (In thousands, except per share data)
|Income Statement Data:                                             |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Net sales                                                          |                                                                                          | $                                     | 1,109,275 |          |   | $    | 1,013,968 |          |   | $       | 1,009,560 |       |   | $ | 1,021,543 |        |   | $ | 849,416 |        
|Cost of sales                                                      |                                                                                          |                                       | 1,028,672 |          |   |      | 898,745   |          |   |         | 902,239   |       |   |   | 890,341   |        |   |   | 757,524 |        
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Gross profit                                                       |                                                                                          |                                       | 80,603    |          |   |      | 115,223   |          |   |         | 107,321   |       |   |   | 131,202   |        |   |   | 91,892  |        
|Selling, general and administrative expenses                       |                                                                                          |                                       | 66,599    |          |   |      | 64,622    |          |   |         | 68,876    |       |   |   | 68,066    |        |   |   | 69,113  |        
|Impairment charge                                                  |                                                                                          |                                       | 135,307   |          |   |      |          |          |   |         |          |       |   |   |          |        |   |   |        |        
|Restructuring charges (benefit)                                    |                                                                                          |                                       | 10,162    |          |   |      |          |          |   |         |          |       |   |   | (793      | )      |   |   | 17,382  |        
|Provision for uncollectible accounts                               |                                                                                          |                                       | 3,520     |          |   |      | 4,212     |          |   |         | 112       |       |   |   | 148       |        |   |   | 1,292   |        
|Other expense (income), net(1)                                     |                                                                                          |                                       | 5,972     |          |   |      | 701       |          |   |         | 3,100     |       |   |   | (3,158    | )      |   |   | 8,779   |        
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Operating income (loss)                                            |                                                                                          |                                       | (140,957  | )        |   |      | 45,688    |          |   |         | 35,233    |       |   |   | 66,939    |        |   |   | (4,674  | )      
|Interest expense, net                                              |                                                                                          |                                       | 10,131    |          |   |      | 10,254    |          |   |         | 17,957    |       |   |   | 17,959    |        |   |   | 13,281  |        
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Earnings (loss) from continuing operations
    before income taxes |                                                                                          |                                       | (151,088  | )        |   |      | 35,434    |          |   |         | 17,276    |       |   |   | 48,980    |        |   |   | (17,955 | )      
|Income tax expense (benefit)                                       |                                                                                          |                                       | (54,391   | )        |   |      | 9,036     |          |   |         | 3,854     |       |   |   | 13,563    |        |   |   | (5,705  | )      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Earnings (loss) from continuing operations                         |                                                                                          |                                       | (96,697   | )        |   |      | 26,398    |          |   |         | 13,422    |       |   |   | 35,417    |        |   |   | (12,250 | )      
|Earnings (loss) from discontinued
    operations, net of tax       |                                                                                          |                                       | 112       |          |   |      | (23,651   | )        |   |         | (5,033    | )     |   |   | (2,649    | )      |   |   | (946    | )      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Earnings (loss) before cumulative effect of
    accounting change  |                                                                                          |                                       | (96,585   | )        |   |      | 2,747     |          |   |         | 8,389     |       |   |   | 32,768    |        |   |   | (13,196 | )      
|Cumulative effect of accounting change, net of tax                 |                                                                                          |                                       |          |          |   |      | (197,054  | )        |   |         |          |       |   |   |          |        |   |   | (1,769  | )      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Net earnings (loss)                                                |                                                                                          | $                                     | (96,585   | )        |   | $    | (194,307  | )        |   | $       | 8,389     |       |   | $ | 32,768    |        |   | $ | (14,965 | )      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Net earnings (loss) attributable to common
    stockholders:       |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|                                                                   | Net earnings (loss)                                                                      |                                       | $         | (96,585  | ) |      | $         | (194,307 | ) |         | $         | 8,389 |   |   | $         | 32,768 |   |   | $       | (14,965 | )
|                                                                   | Accretion of preferred stock and beneficial
    conversion charge                        |                                       |           | (10,112  | ) |      |           |         |   |         |           |      |   |   |           |       |   |   |         |        |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |                                       | $         | (106,697 | ) |      | $         | (194,307 | ) |         | $         | 8,389 |   |   | $         | 32,768 |   |   | $       | (14,965 | )
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Basic net earnings (loss) per common share:                        |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders from continuing operations   |                                       | $         | (3.38    | ) |      | $         | 0.84     |   |         | $         | 0.43  |   |   | $         | 1.13   |   |   | $       | (0.39   | )
|                                                                   | Net earnings (loss) attributable to common
    stockholders from discontinued operations |                                       |           |         |   |      |           | (0.75    | ) |         |           | (0.16 | ) |   |           | (0.09  | ) |   |         | (0.03   | )
|                                                                   | Cumulative effect of accounting change                                                   |                                       |           |         |   |      |           | (6.24    | ) |         |           |      |   |   |           |       |   |   |         | (0.06   | )
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |                                       | $         | (3.38    | ) |      | $         | (6.15    | ) |         | $         | 0.27  |   |   | $         | 1.04   |   |   | $       | (0.48   | )
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        
|Basic weighted-average common shares outstanding                   |                                                                                          |                                       | 31,580    |          |   |      | 31,579    |          |   |         | 31,542    |       |   |   | 31,367    |        |   |   | 31,203  |        
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |         |           |       |   |   |           |        |   |   |         |        

11



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##### Table of Contents



|                                                   |                                                                                          |                                       |        |         |   |      |        |       |   |         |        |       |   |   |        |       |   |   |        |       |  
|-------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------- | - | ---- | ------ | ----- | - | ------- | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                                   |                                                                                          |                                      
|                                                   |                                                                                          | Years Ended December 31,             
|                                                   |                                                                                          |                                      
|                                                   |                                                                                          | 2003                                  |        | 2002(2) |   | 2001 |        | 2000  |   | 1999(3)
|                                                   |                                                                                          |                                       |        |         |   |      |        |       |   |        
|                                                   |                                                                                          |                                      
|                                                   |                                                                                          | (In thousands, except per share data)
|Diluted net earnings (loss) per common share:      |                                                                                          |                                       |        |         |   |      |        |       |   |         |        |       |   |   |        |       |   |   |        |      
|                                                   | Net earnings (loss) attributable to common
    stockholders from continuing operations   |                                       | $      | (3.38   | ) |      | $      | 0.82  |   |         | $      | 0.42  |   |   | $      | 1.11  |   |   | $      | (0.39 | )
|                                                   | Net earnings (loss) attributable to common
    stockholders from discontinued operations |                                       |        |        |   |      |        | (0.73 | ) |         |        | (0.16 | ) |   |        | (0.08 | ) |   |        | (0.03 | )
|                                                   | Cumulative effect of accounting change                                                   |                                       |        |        |   |      |        | (6.16 | ) |         |        |      |   |   |        |      |   |   |        | (0.06 | )
|                                                   |                                                                                          |                                       |        |         |   |      |        |       |   |         |        |       |   |   |        |       |   |   |        |      
|                                                   | Net earnings (loss) attributable to common
    stockholders                              |                                       | $      | (3.38   | ) |      | $      | (6.07 | ) |         | $      | 0.26  |   |   | $      | 1.03  |   |   | $      | (0.48 | )
|                                                   |                                                                                          |                                       |        |         |   |      |        |       |   |         |        |       |   |   |        |       |   |   |        |      
|Diluted weighted-average common shares outstanding |                                                                                          |                                       | 31,580 |         |   |      | 32,015 |       |   |         | 32,031 |       |   |   | 31,884 |       |   |   | 31,203 |      
|                                                   |                                                                                          |                                       |        |         |   |      |        |       |   |         |        |       |   |   |        |       |   |   |        |      
|Dividends(4)                                       |                                                                                          | $                                     | 11,481 |         |   | $    | 11,467 |       |   | $       | 11,461 |       |   | $ | 11,390 |       |   | $ | 11,310 |      
|                                                   |                                                                                          |                                       |        |         |   |      |        |       |   |         |        |       |   |   |        |       |   |   |        |      

|                     |  |              |           |      |  |      |         |      |  |      |           |  |  |   |           |  |  |   |           | 
|-------------------- |  | ------------ | --------- | ---- |  | ---- | ------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2003         |           | 2002 |  | 2001 |         | 2000 |  | 1999
|                     |  |              |           |      |  |      |         |      |  |     
|Balance Sheet Data:  |  |              |           |      |  |      |         |      |  |      |           |  |  |   |           |  |  |   |           | 
|Total assets         |  | $            | 1,117,069 |      |  | $    | 965,210 |      |  | $    | 1,234,430 |  |  | $ | 1,332,184 |  |  | $ | 1,329,387 | 
|Total debt           |  | $            | 370,992   |      |  | $    | 236,909 |      |  | $    | 333,144   |  |  | $ | 381,521   |  |  | $ | 405,974   | 
|Stockholders equity |  | $            | 465,615   |      |  | $    | 426,698 |      |  | $    | 612,739   |  |  | $ | 625,525   |  |  | $ | 602,364   | 



---



|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(1) | Other expense (income), net consisted of the
    following amounts for the periods indicated:

|                                                                                                          |  |                                  |        |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |       | 
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ----- | 
|                                                                                                          |  |                                 
|                                                                                                          |  | For the Years Ended December 31,
|                                                                                                          |  |                                 
|                                                                                                          |  | 2003                             |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                                                                          |  |                                  |        |      |  |      |        |      |  |     
|Legal costs related to the Department of Justice
    investigation of the polyester staple fiber industry |  | $                                | 6,014  |      |  | $    | 5,066  |      |  | $    | 3,800   |   |  | $ |       |   |  |   |      | 
|Non-capitalizable financing costs                                                                         |  |                                  | 2,219  |      |  |      |       |      |  |      |        |   |  |   |       |   |  |   |      | 
|Accelerated stock option vesting                                                                          |  |                                  | 1,156  |      |  |      |       |      |  |      |        |   |  |   |       |   |  |   |      | 
|Rebates from anti-dumping duties(a)                                                                       |  |                                  | (3,417 | )    |  |      | (4,365 | )    |  |      |        |   |  |   |       |   |  |   |      | 
|Property damage and other costs associated with
    production outages                                    |  |                                  |       |      |  |      |       |      |  |      | 9,900   |   |  |   |       |   |  |   | 8,779 | 
|Income from property damage claims & business
    interruption insurance                                  |  |                                  |       |      |  |      |       |      |  |      | (10,600 | ) |  |   | (5,140 | ) |  |   |      | 
|Charge to idle Pearl River assets                                                                         |  |                                  |       |      |  |      |       |      |  |      |        |   |  |   | 1,982  |   |  |   |      | 
|                                                                                                          |  |                                  |        |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |       | 
|                                                                                                          |  | $                                | 5,972  |      |  | $    | 701    |      |  | $    | 3,100   |   |  | $ | (3,158 | ) |  | $ | 8,779 | 
|                                                                                                          |  |                                  |        |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |       | 





| |     |                                                                                                                                                                                                                                  | 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | For additional information on anti-dumping
    duties, see Item 7. Managements Discussion and
    Analysis of Financial Condition and Results of
    Operations  Continued Dumping and Subsidy Offset Act
    (CDO) of 2000. | 



|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Net loss for 2002 includes a cumulative effect of
    an accounting change of ($197,054) or $(6.16) per diluted share.
    For additional information, see Item 7.
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations and note 2 to the
    Consolidated Financial Statements.
|   
|(3) | Net loss for 1999 includes the cumulative effect
    of an accounting change of $(1,769), or $(0.06) per diluted
    share, relating to start-up activities.                                                                                                                                                               
|   
|(4) | Dividends paid were $0.36 per share in 2003,
    2002, 2001, 2000, and 1999.                                                                                                                                                                                                                                               

12



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

General

We are principally engaged in the manufacture and
marketing of 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 December 31, 2003, 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.
Demand for polyester staple fibers 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, resulting in a downward trend for
U.S. polyester staple fiber consumption, 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 $.01 change in raw material margin on approximately
2.2 billion pounds of resin and fiber sales volume results
in an annual change of approximately $22 million in pre-tax
income.

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.

Critical Accounting Policies and
Estimates

Our accounting policies are more fully described
in note 1 of the Consolidated Financial Statements. As disclosed
in note 1, the preparation of financial statements in conformity
with generally accepted accounting principles requires us to
make estimates and assumptions about future events that affect
the amounts reported in financial statements and accompanying
notes. Actual results could differ significantly from those
estimates. We believe the following discussion addresses our
most critical accounting policies, which are those that are most
important to the portrayal of our financial condition and
results of operations and require our most difficult, subjective
and complex judgments.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

We perform periodic credit evaluations of our
customers financial condition. We have established an
allowance for doubtful accounts based on our evaluation of the
credit-worthiness of our customers and the potential risks
inherent in their businesses. A considerable amount of judgment
is required in assessing the ultimate realization of these
receivables, especially in light of the difficult economic
conditions facing our customers. These judgments could vary
significantly from actual amounts realized, resulting in changes
in bad debt expense and allowances. The allowance for doubtful
accounts will increase or decrease based on changes in specific
events to specific customers. Specific events include bankruptcy
filings, changes in the customers credit ratings and/or
other information. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. We

13



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##### Table of Contents



incurred expenses for uncollectible accounts of
$3.5 million and $4.2 million in years ending
December 31, 2003 and 2002, respectively.




| |                    
| | -------------------
| | Inventory Valuation

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



| |                              
| | -----------------------------
| | Property, Plant and Equipment

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

In 2002, we recorded certain assets of our FRPG
segment as held for sale. When an asset is held for sale, it is
measured at the lower of its carrying amount or estimated fair
value less costs of disposal. The fair value of the assets could
differ from actual amounts received upon disposal. For
additional information on assets held for sale in 2002 and their
ultimate disposition, see note 2 to the Consolidated
Financial Statements.

In December of 2003, we recorded a pre-tax
impairment charge of $135.3 million, or $2.79 per diluted
share after tax, in order to reduce the carrying value of our
abandoned polyester staple fiber spinning and drawing equipment
at our Pearl River facility to its estimated fair value. For
additional information, see Item 1. Recent
Developments-Impairment Charge.



| |                                   
| | ----------------------------------
| | Goodwill and Other
    Intangibles

Through December 31, 2001, we amortized
goodwill on a straight-line method over periods ranging from 30
to 40 years. Effective January 1, 2002, we were
required to adopt SFAS No. 142 Goodwill and Other
Intangible Assets. See note 2 to the Consolidated
Financial Statements. Based on this standard, goodwill is no
longer amortized, but is tested at least annually at the
reporting unit level for impairment. Goodwill is tested for
impairment by comparing the fair value of the reporting unit to
its carrying value, including goodwill. The fair value is
determined based on the present value of estimated future
discounted cash flows. If the fair value exceeds the carrying
value, no impairment loss is recognized. If the carrying value
exceeds the fair value, the goodwill of the reporting unit is
potentially impaired. A comparison is then made between the
implied fair value of the goodwill, as defined by SFAS
No. 142, and the carrying value of the goodwill. If the
implied fair value is less, an impairment loss equal to the
difference is recognized. This implied fair value then becomes
the new carrying value of the goodwill for future impairment
tests.

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



| |                    
| | -------------------
| | Deferred Tax Assets

We record a valuation allowance to reduce our
deferred tax assets to the amount that we believe is more likely
than not to be realized. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event
we were to determine that we would not be able to realize the
recorded value of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income
in the period such determination was made. Likewise, should we
determine that we would be able to realize our deferred tax
assets in the future in excess of their net recorded amount, an
adjustment to the deferred tax assets would increase earnings in
the period such determination was made.

14



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##### Table of Contents





| |                 
| | ----------------
| | Pension Benefits

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

In determining our long-term rate of return on
plan assets, our objective is to obtain the highest possible
return over the long-term commensurate with the appropriate
level of assumed risk. In order to moderate the investment
portfolios risk and volatility, we forecast financial
market returns over a wide range of potential future economic
trends. A mix of assets is then selected, with equity securities
comprising approximately 50% of the total domestic assets and
fixed income securities comprising the other 50% of domestic
assets. The expected rate of return on plan assets is a
long-term assumption and is reviewed annually. The discount rate
reflects the market rate for high-quality fixed income debt
instruments at December 31 and is subject to change each
year. Holding all other assumptions constant, a
one-percentage-point decrease in the assumed rate of return on
plan assets would result in an actuarial loss in 2004 of
approximately $10 million. Likewise, a
one-quarter-percentage-point decrease in the discount rate would
increase our projected benefit obligations by approximately
$17 million.

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

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



| |                        
| | -----------------------
| | Environmental Liability

Our operations are subject to extensive laws and
regulations governing air emissions, wastewater discharges, and
solid and hazardous waste management activities. Our policy is
to expense environmental remediation costs when it is both
probable that a liability has been incurred and the amount can
be reasonably estimated. The accruals represent our best
estimate of probable non-capital environmental expenditures. The
final resolution of these contingencies could result in expenses
different than current accruals, and therefore have an impact on
our consolidated financial results in a future reporting period.

Continued Dumping and Subsidy Offset Act of
2000

In April 1999, a coalition of three polyester
fiberfill producers, including us, filed an anti-dumping suit
against Korea and Taiwan. The suit alleged that polyester
fiberfill producers from these two countries were selling
fiberfill in the U.S. at prices lower than their own domestic
market prices, resulting in material injury to U.S. polyester
fiberfill producers. In March 2000, the Commerce Department
determined that both countries were dumping polyester fiberfill
into the U.S. In May 2000, the International Trade Commission
unanimously ruled that polyester fiberfill imports from Korea
and Taiwan materially injured the United States domestic
polyester fiberfill industry. As a result of this determination
and ruling, anti-dumping duties ranging from 5.7% to 9.5% were
imposed on all Taiwanese polyester fiberfill producers, and
duties ranging from 8.0% to 14.0% were imposed on most Korean
polyester fiberfill producers. These duties are estimates based
upon the producers past pricing histories. The actual
duties are determined retroactively for each year, after
year-end, based upon the pricing during that year. Importers of
polyester fiberfill from covered producers in these two
countries are required to post cash deposits equal to their
estimated anti-dumping duties. The actual import duty rates,
when determined on a retroactive basis, have been below the
estimates for most Korean producers. The total amount of import
duties actually owed will depend upon the actual rates and the
amount of goods imported.

15



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##### Table of Contents



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

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

Impact of Recently Issued Accounting
Pronouncements and Accounting Changes

In 2001, a proposed Statement of Position,
Accounting for Certain Costs and Activities Related to
Property, Plant and Equipment, was issued. This Statement
of Position addresses accounting and disclosure issues related
to certain property, plant and equipment costs and activities.
Those costs include expenditures related to property, plant and
equipment, including those for initial acquisition,
construction, improvements, replacements, betterments,
additions, and repairs and maintenance (and terms similar to
those such as redevelopments, refurbishments, renovations,
rearrangements, planned major maintenance activities, turnaround
costs, overhauls, retrofits, and rehabilitations). This
Statement of Position, once issued, is expected to be applicable
for fiscal years beginning after December 15, 2004. As
currently written, the new Statement will require us to
write-off certain costs previously capitalized that would not be
considered under this Statement to be directly identifiable with
specific property, plant and equipment and begin charging all
such future costs to expense as incurred. This write-off,
totaling approximately $5.6 million ($3.6 million
after tax or $0.12 per diluted share) at December 31, 2003,
would be reported as a cumulative effect of a change in
accounting principle. This Statement of Position, as currently
written, would not have had a material effect on our 2003
results of operations or financial position.

In January 2003, the FASB issued Interpretation
No. 46 (or FIN 46), Consolidation of Variable
Interest Entities, which requires a variable interest
entity to be consolidated by the primary beneficiary which is
the entity subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements of
FIN 46 apply to older entities in the first fiscal year or
interim period beginning after December 15, 2003. Certain
of the disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of
FIN 46 did not have a significant impact on our financial
statements.

In November 2002, the FASB issued Interpretation
No. 45 (or FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation
requires certain guarantees to be recorded at fair value upon
origination versus when a loss becomes probable. The adoption of
FIN 45 had no impact on our financial statements.

Results of Operations



| |             
| | ------------
| | 2003 to 2002

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

|                             |  |     |       |      |  |       |       |   |  |   |      | 
|---------------------------- |  | --- | ----- | ---- |  | ----- | ----- | - |  | - | ---- | 
|                             |  | PPG |       | FRPG |  | TOTAL
|                             |  |     |       |      |  |      
|Net selling prices           |  | $   | 40.2  |      |  | $     | 6.8   |   |  | $ | 47.0 | 
|Foreign currency translation |  |     | 12.4  |      |  |       | 19.8  |   |  |   | 32.2 | 
|Sales volumes                |  |     | 54.6  |      |  |       | (38.5 | ) |  |   | 16.1 | 
|                             |  |     |       |      |  |       |       |   |  |   |      | 
|                             |  | $   | 107.2 |      |  | $     | (11.9 | ) |  | $ | 95.3 | 
|                             |  |     |       |      |  |       |       |   |  |   |      | 

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

16



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##### Table of Contents



Total cost of sales from continuing operations
for 2003 increased $130.0 million, or 14.4%, to
$1,028.7 million from $898.7 million in 2002 due to
the following:

|                             |  |     |       |      |  |       |       |   |  |   |       | 
|---------------------------- |  | --- | ----- | ---- |  | ----- | ----- | - |  | - | ----- | 
|                             |  | PPG |       | FRPG |  | TOTAL
|                             |  |     |       |      |  |      
|Raw material costs           |  | $   | 68.4  |      |  | $     | 25.0  |   |  | $ | 93.4  | 
|Plant added costs            |  |     | 60.3  |      |  |       | (48.2 | ) |  |   | 12.1  | 
|Foreign currency translation |  |     | 10.7  |      |  |       | 13.8  |   |  |   | 24.5  | 
|                             |  |     |       |      |  |       |       |   |  |   |       | 
|                             |  | $   | 139.4 |      |  | $     | (9.4  | ) |  | $ | 130.0 | 
|                             |  |     |       |      |  |       |       |   |  |   |       | 

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

As a result of the foregoing, gross profit
decreased $34.6 million, or 30.0%, to $80.6 million
compared to $115.2 million in 2002. The gross profit margin
was 7.3% in 2003 compared to 11.4% in 2002.

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

In December 2003, based on managements
recommendation, our Board of Directors approved the abandonment
of the polyester staple fiber spinning and drawing equipment at
our Pearl River facility. As a result of this decision, we
recorded a non-cash impairment charge of $135.3 million in
the fourth quarter of 2003. This charge represents a reduction
in the carrying value of the abandoned polyester staple fiber
spinning and drawing assets at our Pearl River facility to their
estimated fair value. For additional information on the
impairment charge, see note 1 to the Consolidated Financial
Statements.

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

In January 2003, the FRPG commenced a plan to
restructure its operations, which included a reduction in the
number of employees and other cost savings initiatives at our
three fiber manufacturing facilities. We recorded termination
costs of $1.8 million in our FRPG segment related to this
plan, which was fully implemented in 2003. This plan has
resulted in approximately $7 million of realized savings in
controllable costs in 2003 compared to the prior year.

In July 2003, we announced and implemented
reductions in compensation and benefit costs. These compensation
and benefit reductions were implemented at all levels, 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
organization and administrative consolidations and changes. We
incurred severance and other termination costs of
$8.3 million in the fourth quarter of 2003 associated with
this plan.

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

We recorded a charge for expected losses on
accounts receivable of $3.5 million and $4.2 million
in 2003 and 2002, respectively. Additional bad debt expense was
recorded in 2003 primarily due to a bankruptcy where we were a
sole source supplier and not named as a critical vendor. Our
textile customer base continues to face competitive challenges
from imports of textile and apparel finished goods that
adversely affect their profitability.

17



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Other expense (income) for 2003 consisted of
the following: legal costs related to the Department of Justice
investigation of the polyester staple fiber industry of
$6.0 million; non-capitalizable financing costs of
$2.2 million; accelerated stock option vesting of
$1.2 million; and proceeds received under the CDO of
$(3.4) million. For additional information on the legal
proceedings, see Item 3  Legal
Proceedings and note 16 to the Consolidated Financial
Statements. For additional information on the new financing
arrangements, see Item 1  Recent
Developments  Closing of $625 Million Financing
Arrangements and note 10 to the Consolidated
Financial Statements. For additional information on the private
equity investment, see note 3 to the Consolidated Financial
Statements. For additional information on the CDO, see
Continued Dumping and Subsidy Offset Act of 2000
above.

Other expense (income) for 2002 consisted of
legal costs related to the Department of Justice investigation
of the polyester staple fiber industry of $5.1 million and
proceeds received under the CDO of $(4.4) million.

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

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

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

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

We reported net earnings attributable to common
stockholders from discontinued operations of $0.1 million,
or $0.00 per diluted share, in 2003, compared to a net loss
attributable to common stockholders from discontinued operations
of $23.7 million, or $0.73 per diluted share, in 2002. In
March 2002, we adopted a plan to sell our partially oriented
yarn (POY) business, which was sold in June 2002, and our
small recycled fine denier polyester staple fiber business,
which was sold in March 2003. For additional information, see
note 2 to the Consolidated Financial Statements.

In 2002, we completed our initial assessment of
goodwill using the two-step approach described in
SFAS No. 142, Goodwill and Other Intangible
Assets, and determined that the goodwill related to our
FRPG segment was impaired. As a result, the carrying value of
this goodwill was reduced by $197.1 million to its implied
fair value. The reduction was recorded as a cumulative effect of
an accounting change in our 2002 financial statements. For
additional information, see note 2 to the Consolidated
Financial Statements.

As a result of the private equity investment, we
recorded accretion of the preferred stock liquidation preference
and of the discount related to the valuation of the common stock
warrants of $5.9 million in 2003. In addition, we incurred
a non-cash beneficial conversion charge of $4.2 million in
the fourth quarter of 2003 as a result of the preferred stock
becoming convertible into common stock. For additional
information on the private equity investment, see note 3 to
the Consolidated Financial Statements.

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



| |                      
| | ---------------------
| | 2002 Compared to 2001

Total net sales from continuing operations for
2002 increased $4.4 million, or 0.4%, to
$1,014.0 million from $1,009.6 million in 2001 due to
the following:

|                             |  |     |       |      |  |       |       |   |  |   |       |  
|---------------------------- |  | --- | ----- | ---- |  | ----- | ----- | - |  | - | ----- | -
|                             |  | PPG |       | FRPG |  | Total
|                             |  |     |       |      |  |      
|Net selling prices           |  | $   | (61.9 | )    |  | $     | (18.0 | ) |  | $ | (79.9 | )
|Sales volumes                |  |     | 49.8  |      |  |       | 25.9  |   |  |   | 75.7  |  
|Foreign currency translation |  |     | 3.7   |      |  |       | 4.9   |   |  |   | 8.6   |  
|                             |  |     |       |      |  |       |       |   |  |   |       |  
|                             |  | $   | (8.4  | )    |  | $     | 12.8  |   |  | $ | 4.4   |  
|                             |  |     |       |      |  |       |       |   |  |   |       |  

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Total costs of sales from continuing operations
for 2002 decreased $3.5 million, or 0.4%, to
$898.7 million from $902.2 million due to the
following:

|                             |  |     |       |      |  |       |       |   |  |   |       |  
|---------------------------- |  | --- | ----- | ---- |  | ----- | ----- | - |  | - | ----- | -
|                             |  | PPG |       | FRPG |  | Total
|                             |  |     |       |      |  |      
|Raw material costs           |  | $   | (13.9 | )    |  | $     | (17.0 | ) |  | $ | (30.9 | )
|Plant added costs            |  |     | 11.8  |      |  |       | 6.5   |   |  |   | 18.3  |  
|Foreign currency translation |  |     | 4.8   |      |  |       | 4.3   |   |  |   | 9.1   |  
|                             |  |     |       |      |  |       |       |   |  |   |       |  
|                             |  | $   | 2.7   |      |  | $     | (6.2  | ) |  | $ | (3.5  | )
|                             |  |     |       |      |  |       |       |   |  |   |       |  

Lower raw material costs were the result of lower
unit costs, partially offset by higher production volumes. Plant
costs were higher in the aggregate as a result of higher
production levels, but were lower on a unit-cost basis. During
2001, our operations were negatively impacted by a production
outage that increased our costs by approximately
$9.9 million, or $0.20 per diluted share, and lowered our
volumes. For additional information on the production outage,
see note 9 to the Consolidated Financial Statements.

As a result of the foregoing, gross profit
increased 7.4% to $115.2 million in 2002 compared to
$107.3 million in 2001. The gross profit margin was 11.4%
in 2002 compared to 10.6% in 2001.

Selling, general and administrative expenses were
$64.6 million, or 6.4% of sales, in 2002 compared to
$68.9 million, or 6.8% of sales, in 2001. Expenses for 2001
included amortization of goodwill totaling $8.4 million.
Effective January 1, 2002, we adopted
SFAS No. 142, Goodwill and Other Intangible
Assets, which requires that goodwill amortization be
discontinued and replaced with annual tests of impairment. For
additional information, see note 2 to the Consolidated
Financial Statements. Excluding the amortization expense for
goodwill from the prior year, selling, general and
administrative expenses increased in 2002 by $4.1 million.
The increase in 2002 was due primarily to costs associated with
new strategic initiatives of $3.2 million.

We recorded a charge for expected losses on
accounts receivable of $4.2 million in 2002. Our textile
customer base faces competitive challenges from imports of
textile and apparel finished goods that continue to adversely
affect their profitability. Two of our FRPG customers filed
unexpected bankruptcy proceedings in January 2003. Our trade
accounts receivable balances from these customers were
$5.6 million at December 31, 2002, of which
$1.6 million was collected in January 2003. The reserve was
established based on the expected uncollectibility of the trade
accounts receivables.

Other expense (income) for 2002 consisted of
legal costs related to the Department of Justice Investigation
of the polyester staple fiber industry of $5.1 million and
proceeds received under the CDO of $(4.4) million. For
additional information on the legal proceedings, see
Item 3  Legal Proceedings and
note 16 to the Consolidated Financial Statements. For
additional information, see Continued Dumping and Subsidy
Offset Act of 2000 above.

Other expense (income) for 2001 consisted of
the following: legal costs related to the Department of Justice
Investigation of the polyester staple fiber industry of
$3.8 million; property damage and other costs associated
with a production outage of $9.9 million; and income from
property damage claims and business interruption insurance of
($10.6) million. For additional information on the
production outage, see note 9 to the Consolidated Financial
Statements.

As a result of the foregoing, we reported
operating income of $45.7 million in 2002 compared to
$35.2 million in 2001.

Net interest expense was $10.3 million in
2002 compared to $18.0 million in 2001. The decrease was
due to a lower average debt balance and lower average interest
rates during 2002.

Our effective tax rate for 2002 on income from
continuing operations was 25.5% compared to 22.3% in 2001. The
principal item affecting our rate was foreign earnings, which
are taxed at rates lower than U.S. rates. The amount of
foreign earnings declined in 2002 compared to 2001; however,
this was offset by the elimination of the amortization of
non-deductible goodwill.

As a result of the foregoing, net earnings from
continuing operations were $26.4 million, or $0.82 per
diluted share, for the 2002 period compared to
$13.4 million, or $0.42 per diluted share, for 2001.

We reported a net loss from discontinued
operations of $23.7 million, or $0.73 per diluted share,
and $5.0 million, or $0.16 per diluted share, for 2002 and
2001, respectively. We adopted a plan in March 2002 to sell our
POY business and our small recycled fine denier polyester staple
fiber business, the assets of which

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were previously reported as part of our FRPG. On
June 18, 2002 we sold our POY business and reported a loss
on disposal. For additional information, see note 2 to the
Consolidated Financial Statements.


As required by SFAS No. 142, we
completed our initial assessment of goodwill using the two-step
approach described in the Statement and determined that the
goodwill related to our FRPG segment was impaired. As a result,
the carrying value of this goodwill was reduced by
$197.1 million to its implied fair value. The reduction was
recorded as a cumulative effect of accounting change in our
first quarter 2002 financial statements. For additional
information, see note 2 to the Consolidated Financial
Statements.

As a result of the foregoing, we reported a net
loss of $194.3 million, or $6.07 per diluted share, for
2002, compared to net earnings of $8.4 million, or $0.26
per diluted share, for 2001.



| |        
| | -------
| | Outlook

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

We expect that our operating results for the
first half of 2004 will be better than our operating results
from the last half of 2003, both excluding impairment charges,
charges related to our new financing, restructuring charges and
other income (loss). We believe this improvement will result
primarily from our cost reduction programs and improvements in
PET resin margins.

We reduced controllable costs by $8 million
in the second half of 2003 compared to our cost structure in the
second quarter of 2003. We expect that our cost reduction
programs will reduce our 2004 controllable costs by an
additional $27 million. Controllable costs in first quarter
of 2004 are expected to be $4 million lower than fourth
quarter of 2003. We expect the cost reduction programs we have
announced to result in cumulative annual savings of
$41 million to $46 million by the end of 2005 compared
to our cost structure in the second quarter of 2003.

We expect PET resins margins to improve in 2004
over the last half of 2003 since increased capacity utilization
is expected to result in increased margins in the industry.
Capacity utilization should improve because increased demand
should exceed the minimal capacity additions expected in 2004.
NAFTA PET resins demand is expected to grow at 8  10%
as a result of growth in both traditional markets and new
applications. We expect capacity utilization to continue to
increase in 2005 and 2006 since projected demand growth is
greater than announced capacity additions.

We successfully implemented two selling price
increases; one in our domestic PET resins business on
January 1, 2004 and one in our domestic fibers business on
February 15, 2004. We have announced two additional price
increases in PET resin; one on March 1, 2004 and one on
April 1, 2004, totaling nine cents per pound. These
increases are primarily in response to actual and projected
increases in raw material costs. Given the competitive nature of
our business and other market influences, there can be no
assurance that these increases will be fully realized.

We expect the poor economic conditions in the
domestic fibers market to continue as imports throughout the
textile chain, especially from China, continue to adversely
impact this market. The impact of textile and apparel imports
from Asia, especially from China, may increase starting in 2005
when quotas on all textile and apparel imports into the United
States will 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. We expect to receive a
payment under the Continued Dumping and Subsidy Offset Act in
the fourth quarter of 2004. We expect that the amount of the
payment will be less than the amount we received in 2003 and
there is no certainty that we will receive any payment.

We expect to incur approximately $47 million
in pre-tax charges in the first quarter of 2004, resulting from
costs associated with our prior financings that were repaid.
These charges are principally the result of prepayment penalties
associated with the 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.

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##### Table of Contents



BUSINESS AND FINANCIAL PROJECTIONS FOR
2004

|             |  |                   |       | 
|------------ |  | ----------------- | ----- | 
|             |  | Sales Volumes    
|Products     |  | (Millions Pounds)
|             |  |                  
|PET Resins   |  |                   | 1,400 | 
|Staple Fiber |  |                   | 750   | 

|                              |  |                       |                   | 
|----------------------------- |  | --------------------- | ----------------- | 
|Financial                     |  | (Dollars in Millions)
|                              |  |                      
|Depreciation and Amortization |  |                       | $67 to $73        | 
|Interest Expense              |  |                       | $43 to $47        | 
|Capital Expenditures          |  |                       | $13 to $17        | 
|Tax Rate                      |  |                       | Low-Mid 30% Range | 

On October 22, 2003, our preferred stock
became convertible to common stock. This means that our diluted
earnings per share (EPS) will be the lesser of
(a) earnings (loss) from continuing operations divided by
the weighted average shares outstanding on an if
converted basis, or (b) earnings (loss) from
continuing operations less the fair market value of the
accretion of the preferred stock divided by the weighted average
common shares outstanding. Assuming the fair market value of the
accretion equals the increase in the liquidation preference, we
expect accretion to be approximately $3.1 million per
quarter in 2004.

Capital Resources and Liquidity

Net cash used in operations, including both
continuing and discontinued operations, was $16.8 million
for 2003, compared to net cash provided by operations, including
both continuing and discontinued operations, of
$128.3 million for 2002. The change is primarily due to
reduced earnings from continuing operations in 2003, higher
accounts receivable in 2003, and an aggressive inventory
reduction program in 2002. The increase in accounts receivable
is due primarily to higher volumes in our PPG, increased net
selling prices in both the PPG and the FRPG, and a reduction in
the amounts sold under our receivables securitization program at
December 31, 2003.

Net cash used in investing activities amounted to
$14.4 million in 2003 compared to $20.1 million in
2002. Capital expenditures were $15.5 million in 2003
compared to $21.7 million in 2002. For information about
expected capital expenditures in 2004, see Outlook
above.

Net cash provided by financing activities
amounted to $236.8 million in 2003 compared to net cash
used in financing activities of $110.1 million in 2002. The
major components of the financing activities were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2003, there were additional borrowings
    principally under the revolving credit facility of
    $239.4 million, which was offset by $100.1 million of
    principal repayments of industrial revenue bonds and private
    placements. In 2002, we issued a private placement note for
    $25 million and repaid approximately $124 million in
    debt principally related to our revolving credit agreement.                                                                                                                                                                                                  
|
| |  | In 2003, we received approximately
    $126 million in gross proceeds from the sale of preferred
    stock and issuance of common stock warrants. For additional
    information, see note 3 to the Consolidated Financial
    Statements. In June 2003, simultaneously with the closing of the
    private equity investment, we refinanced our $275 million
    senior revolving credit facility. The new $275 million
    three-year floating rate facility, which was scheduled to mature
    in June 2006, had no scheduled principal payments. The cost of
    these facilities was approximately $17.3 million.
|
| |  | In each of 2003 and 2002, there were
    $11.5 million in dividend payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

On February 10, 2004, we completed
$625 million of new debt financings. These financings
consist of a five-year $175 million Revolving Credit
Facility with an initial annual interest rate of LIBOR plus
250 basis points on outstanding borrowings, a five-year
$185 million First Lien Term Loan with an annual interest
rate of LIBOR plus 400 basis points, and a six-year
$265 million Second Lien Term Loan with an annual interest
rate of LIBOR plus 675 basis points. The Term Loans have a
LIBOR floor of 200 basis points. These financings are
secured primarily by our domestic assets.

The net proceeds from these credit facilities
were used to repay substantially all of our balance sheet debt,
repurchase accounts receivable, purchase PET resin assets
located at our Palmetto facility, prepay a raw material
contract, terminate swap agreements, pay prepayment penalties,
pay expenses associated with the new financing transaction, and
provide working capital. On February 10, 2004, we had
approximately $490 million in total outstanding long-term
debt, net of original issue discount of approximately
$5 million.

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##### Table of Contents



The new financing provides us with substantial
financial flexibility, with approximately $100 million in
available liquidity at closing and no significant debt
maturities until 2009. For additional information related to the
new financings, see note 10 to the Consolidated Financial
Statements.

The following table describes our current debt
facilities:

Table I

|                             |  |                         |     |                   |       |                   |       |                 |       |            |     |            |       |   |       |   |       |   |       |   |       |   |       | 
|---------------------------- |  | ----------------------- | --- | ----------------- | ----- | ----------------- | ----- | --------------- | ----- | ---------- | --- | ---------- | ----- | - | ----- | - | ----- | - | ----- | - | ----- | - | ----- | 
|                             |  |                        
|                             |  | As of February 10, 2004
|                             |  |                        
|                             |  |                         |     | Amounts Available |       | Amounts Available
|                             |  |                         |     | Amount            |       | Under All         |       | Under Committed
|                             |  | Maturity                |     | Total Facility    |       | Commitment        |       | Outstanding     |       | Facilities |     | Facilities
|                             |  |                         |     |                   |       |                   |       |                 |       |            |     |           
|                             |  |                        
|                             |  | (In millions)          
|Revolving Credit Facility(1) |  | February 2009           |     | $                 | 175.0 |                   |       | $               | 175.0 |            |     | $          | 44.8  |   |       | $ | 100.0 |   |       | $ | 100.0 |  
|First Lien Term Loan(2)      |  | February 2009           |     | $                 | 185.0 |                   |       | $               | 185.0 |            |     | $          | 185.0 |   |       | $ |      |   |       | $ |      |  
|Second Lien Term Loan(3)     |  | February 2010           |     | $                 | 265.0 |                   |       | $               | 265.0 |            |     | $          | 259.7 |   |       | $ |      |   |       | $ |      |  
|Other                        |  |                         | N/A |                   |       | $                 | 1.1   |                 |       |            | N/A |            |       | $ | 1.1   |   |       | $ |      |   |       | $ |      | 
|                             |  |                         |     |                   |       |                   |       |                 |       |            |     |            |       |   |       |   |       |   |       |   |       |   |       | 
|Total                        |  |                         |     |                   |       | $                 | 626.1 |                 |       |            |     |            |       | $ | 490.6 |   |       | $ | 100.0 |   |       | $ | 100.0 | 
|                             |  |                         |     |                   |       |                   |       |                 |       |            |     |            |       |   |       |   |       |   |       |   |       |   |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In February 2004, we entered into a new
    $175 million five-year revolving credit facility secured by
    our domestic accounts receivables, domestic inventory and other
    related intangibles. Our borrowing capacity is based on our
    domestic accounts receivable and inventory, but can not exceed
    $175 million. Our initial annual interest rate for amounts
    drawn under the facility is LIBOR or the prime rate plus
    250 basis points. We terminated our $275 million
    unsecured senior revolving credit facility simultaneously with
    entering into the new facility.
|   
|(2) | In February 2004, we borrowed $185 million
    under a five-year First Lien Term Loan which is primarily
    secured by our domestic real property, plant and equipment. Our
    annual interest rate is LIBOR plus 400 basis points and is
    paid quarterly. There is a LIBOR floor of 200 basis points.
    Principal is due in a single principal payment on
    February 10, 2009.                                                                                                                                                                                                              
|   
|(3) | In February 2004, we borrowed $265 million
    under a six-year Second Lien Term Loan which is secured by a
    second priority interest in substantially all of our domestic
    assets. Our annual interest rate is LIBOR plus 675 basis
    points and is paid quarterly. There is a LIBOR floor of
    200 basis points. Principal is due in a single principal
    payment on February 10, 2010.                                                                                                                                                                                                 

In addition to our debt commitments, we have
entered into other commitments and contractual obligations that
obligated us to make specified payments in the future. The
following table summarizes the total amounts due as of
February 10, 2004 under all debt agreements, commitments
and other contractual obligations. The table indicates the years
in which payments are due under the contractual obligations.

Table II

|                                 |  |                        |       |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |       | 
|-------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | --- | ---- |  | ---------- | --- |  |  | - | --- |  |  | - | ----- | 
|                                 |  |                       
|                                 |  | Payments Due by Period
|Contractual                      |  |                       
|Obligations                      |  | Total                  |       | 2004 |  | 2005 |     | 2006 |  | After 2006
|                                 |  |                        |       |      |  |      |     |      |  |           
|                                 |  |                       
|                                 |  | (In millions)         
|Debt Agreements (see Table I)(4) |  | $                      | 495.9 |      |  | $    |    |      |  | $          |    |  |  | $ |    |  |  | $ | 495.9 | 
|Operating Leases(5)              |  |                        | 25.4  |      |  |      | 7.8 |      |  |            | 5.7 |  |  |   | 2.7 |  |  |   | 9.2   | 
|                                 |  |                        |       |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |       | 
|Total                            |  | $                      | 521.3 |      |  | $    | 7.8 |      |  | $          | 5.7 |  |  | $ | 2.7 |  |  | $ | 505.1 | 
|                                 |  |                        |       |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |       | 



---



|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | See Table I for details of the debt
    agreements, which indicates our long-term debt at
    February 10, 2004. The amounts relating to Debt Agreements
    in Table II include $5.3 million of original issue
    discount.
|   
|(5) | These amounts are as of December 31, 2003.                                                                                                                                                                                   

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##### Table of Contents



As of February 11, 2004, 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.

Our debt agreements contain financial and
restrictive covenants. The financial covenants require that we
maintain available liquidity of $55 million under the
revolving credit facility or maintain a Fixed Charge Coverage
Ratio currently of at least 1.0:1.0. The Fixed Charge Coverage
Ratio, as defined in the Revolving Credit Facility, is the
trailing four quarters earnings before interest, taxes,
depreciation and amortization compared to 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 maintained in order for us
to make certain capital expenditures over certain threshold
amounts or to settle lawsuits or pay judgments. Other
restrictions relate to the amount of capital expenditures, asset
sales, the incurrence or guarantee of additional debt,
acquisitions, sale or discount of receivables, certain payments
and investments, affiliate and subsidiary transactions, payment
of dividends and repurchase of stock, and excess cash.

We expect to incur approximately $47 million
in pre-tax charges, or $0.95 per diluted share after tax,
in the first quarter of 2004, resulting from costs associated
with the financings that were repaid. These charges are
principally the result of prepayment 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.

In March, 2004, we lowered our quarterly common
stock dividend to $0.05 per share for the dividend payable
on March 15, 2004. We determined that this reduced dividend
rate is appropriate considering our operating performance in the
second half of 2003, our current debt level and focus on debt
reduction, and the dividend levels of other companies.

The financial resources available to us at
February 10, 2004 included approximately $100 million
available under our revolving credit facility and internally
generated funds. We believe these financial resources and other
credit facilities will provide us with sufficient liquidity to
meet our foreseeable needs for working capital, capital
expenditures and dividends.

Environmental Matters

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

Our policy is to expense environmental
remediation costs when it is both probable that a liability has
been incurred and the amount can be reasonably estimated. While
it is often difficult to reasonably quantify future
environmental-related expenditures, we currently estimate our
future non-capital expenditures related to environmental matters
to range between $2.9 million and $13.7 million. In
connection with these expenditures, we have accrued undiscounted
liabilities of approximately $6.5 million and
$9.3 million at December 31, 2003 and 2002,
respectively, which are reflected as other noncurrent
liabilities in our Consolidated Balance Sheets. These accruals
represent our best estimate of probable non-capital
environmental expenditures. In addition, aggregate future
capital expenditures related to environmental matters are
expected to range from $3.6 million to $7.5 million.
These non-capital and capital expenditures are expected to be
incurred during the next 10 to 20 years. For additional
information, including changes in the accrued undiscounted
liabilities, see notes 1 and 12 to the Consolidated
Financial Statements.

We base the measurement of liability on an
evaluation of currently available facts with respect to each
individual situation and take into consideration factors such as
existing technology, presently enacted laws and regulations and
prior experience in remediation of contaminated sites. As
assessments and remediation progress at individual sites, we
review these liabilities periodically and adjust them to reflect
additional technical and legal information that becomes
available.

We believe we are either in material compliance
with all currently applicable regulations or are operating in
accordance with the appropriate variances and compliance
schedules or similar arrangements. Subject to

23



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the imprecision in estimating future
environmental costs, we believe that compliance with current
laws and regulations will not require significant capital
expenditures or have a material adverse effect on our
consolidated financial position or results of operations. See
Forward-Looking Statements; Risks and Uncertainties.


Forward-Looking Statements; Risks and
Uncertainties

Statements contained in this Form 10-K that
are not historical facts, including those made in the
Outlook section above, are forward-looking
statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition,
words such as believes, expects,
anticipates, and similar expressions are intended to
identify forward-looking statements. These statements are made
as of the date of this report based upon current expectations,
and we undertake no obligation to update this information. These
forward-looking statements involve certain risks and
uncertainties, including, but not limited to: reduced raw
material margins; 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 operation of
assets; prices of competing products; natural disasters and acts
of terrorism; and maintaining the operations of our existing
production facilities. Actual results may differ materially from
those expressed herein. Results of operations in any past period
should not be considered indicative of results to be expected in
future periods. Fluctuations in operating results may result in
fluctuations in the price of our common stock.

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



| |                                                                               
| | ------------------------------------------------------------------------------
| | Reduced raw material margins could
    adversely affect our operating results.

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



| |                                                                            
| | ---------------------------------------------------------------------------
| | The financial condition of our customers
    impacts our operating results.

Our customers include the manufacturers of
plastic containers and textile mills, yarn spinners, and the
injection molding industry. The PPG has six customers that
represented approximately 59% of the PPGs total net sales
in 2003. The FRPG does not have any single customer that has a
material effect on the segment. If our customers have financial
difficulties, this could affect our operating results by
decreasing our sales and/or resulting in the uncollectibility of
accounts receivable.



| |                                                                        
| | -----------------------------------------------------------------------
| | Fiber and textile imports continue to
    adversely impact our margins.

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

The impact of textile and apparel imports from
Asia, especially from China, may increase starting in 2005 when
quotas on all textile and apparel imports into the United States
will be eliminated as of January 1, 2005

24



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pursuant to the GATT (now known as the World
Trade Organization Agreement) Uruguay Round Agreement enacted in
1994.




| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Our operations are dependent on the
    availability and cost of our raw materials.

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

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



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The governmental investigation of pricing
    practices in the polyester stable fiber industry could adversely
    impact our operating results.

The U.S. Department of Justice is
investigating pricing practices in the polyester staple fiber
industry, and we have been named in various civil actions that
allege that we conspired to fix the price of polyester staple
fiber. See Item 3  Legal Proceedings.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | The availability and costs of our financing
    could adversely affect our operating results.

Certain events relating to the Company or the
bank markets could reduce our access to financing and/or
increase our financing costs.

If current business conditions deteriorated or
other events occurred that resulted in a breach of our
covenants, all of our debt would become due and payable. If the
institutions participating in the Revolving Credit Facility
could not fund due to a disruption in the bank market, we would
have to refinance our Revolving Credit Facility in other markets.

If any of these events occur, there is no
certainty the debt could be refinanced and, if it were
refinanced, we would probably incur increased costs. If this
occurred, our ability to borrow at competitive costs may be
influenced by our public debt ratings.

For additional information, see Capital
Resources and Liquidity above.



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Changes in foreign currency exchange rates
    could adversely affect our operating results.

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



| |                                                               
| | --------------------------------------------------------------
| | Regulatory changes may affect the demand
    for our products.

Domestic producers of polyester staple fiber
produced in the United States and the European Union; and PET
Resin produced in the European Union benefit from favorable
rules and regulations that affect imports of selected products
from certain countries. We have previously discussed the
imposition of anti-dumping duties on polyester fiberfill imports
into the United States from Korea and Taiwan (See
Continued Dumping and Subsidy Offset Act (CDO) of
2000 above). Imports of polyester staple fiber into the
European Union from India, Korea, Indonesia, Belarus, Thailand,
India, and Australia are subject to anti-dumping and
countervailing duties which may be as high as 35% of the selling
price of polyester staple fiber. PET Resin products being
imported into the European Union from Indonesia, Korea, India,
Taiwan, Malaysia, and Thailand

25



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##### Table of Contents



currently have anti-dumping and countervailing
duties of up to 223 euros/ton (approximately $.12/lb.). In
addition, some of the goods produced using our products benefit
from favorable federal and/or state regulations. Adverse changes
in any of these rules or regulations could affect the demand for
our products and adversely affect our operating results.




| |                                                               
| | --------------------------------------------------------------
| | Additional liabilities may be proposed by
    tax authorities.

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



| |                                                                     
| | --------------------------------------------------------------------
| | Increases in costs could adversely affect
    our operating results.

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



| |                                                                        
| | -----------------------------------------------------------------------
| | Actual costs for environmental matters may
    vary from the estimates.

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






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    about Market Risk

Derivative Financial Instruments

We do not hold or issue derivative financial
instruments for trading purposes. We use derivative financial
instruments to manage our exposure to fluctuations in interest
rates and foreign exchange rates. For additional discussion of
our use of such instruments, see notes 1, 2, 10 and 17 to
the Consolidated Financial Statements.

Interest Rate Risk

Because our obligations under our new revolving
credit facility and term loans bear interest at floating rates,
our earnings and cash flows are affected by changes in
prevailing interest rates. Our interest rate on our revolving
credit facility changes based on the amount borrowed and LIBOR.
Based on our borrowings at the start of the new facility, a 10%
increase in LIBOR would result in an increased interest cost of
$.05 million. Our term debt has a LIBOR floor of 2% so any
increase in LIBOR will have no effect until LIBOR exceeds 2%. A
10% (20 basis points) increase in LIBOR when it is 2% or
above increases our interest expense by approximately
$.9 million on the term loans. These changes in interest
rates would increase interest expense, reduce operating income
and reduce cash flow by the increase in the interest expense. To
reduce this exposure we have entered into a $50 million
swap that has been designated as a cash flow hedge, where we
have effectively fixed our interest rate on $50 million of
our new debt.

Foreign Currency Risk

We use foreign currency debt and foreign currency
purchase and sale contracts with terms of less than one year to
hedge our exposure to changes in foreign currency exchange
rates. These financial instruments are primarily used to hedge
certain accounts receivable denominated in foreign currencies.
If foreign currency exchange rates at December 31, 2003 and
2002 adversely changed by 10%, the fair value of these financial
instruments outstanding at December 31, 2003 and 2002 would
decline by approximately $1.2 million and
$4.1 million, respectively. However, such loss in fair
value would be substantially offset by an increase in the fair
value of our underlying exposure. Our sensitivity analysis of
the effects of changes in foreign currency exchange rates does
not factor in any potential changes in any underlying hedged
amount or changes in sales levels affected by changes in local
currency prices.

26



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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

WELLMAN, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND

CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES


|                                                                                                         |                                        |  |    |    | 
|-------------------------------------------------------------------------------------------------------- | -------------------------------------- |  | -- | -- | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001           |                                        |  | 28 |   
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                         |                                        |  | 29 |   
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001 |                                        |  | 30 |   
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001           |                                        |  | 32 |   
|Notes to Consolidated Financial Statements                                                               |                                        |  | 33 |   
|Report of Independent Auditors                                                                           |                                        |  | 63 |   
|Consolidated financial statement schedules for
    the years ended December 31, 2003, 2002 and 2001:     |                                        |  |    |   
|                                                                                                         | II  Valuation and qualifying accounts |  |    | 64 | 

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

27



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##### Table of Contents



CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |       |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------- | --------- | -------- | - | ---- | --------- | -------- | - | - | --------- | ----- | -
|                                                                   |                                                                                          |                                      
|                                                                   |                                                                                          | Years Ended December 31,             
|                                                                   |                                                                                          |                                      
|                                                                   |                                                                                          | 2003                                  |           | 2002     |   | 2001
|                                                                   |                                                                                          |                                       |           |          |   |     
|                                                                   |                                                                                          |                                      
|                                                                   |                                                                                          | (In thousands, except per share data)
|Net sales                                                          |                                                                                          | $                                     | 1,109,275 |          |   | $    | 1,013,968 |          |   | $ | 1,009,560 |      
|Cost of sales                                                      |                                                                                          |                                       | 1,028,672 |          |   |      | 898,745   |          |   |   | 902,239   |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Gross profit                                                       |                                                                                          |                                       | 80,603    |          |   |      | 115,223   |          |   |   | 107,321   |      
|Selling, general and administrative expenses                       |                                                                                          |                                       | 66,599    |          |   |      | 64,622    |          |   |   | 68,876    |      
|Impairment charge                                                  |                                                                                          |                                       | 135,307   |          |   |      |          |          |   |   |          |      
|Restructuring charges                                              |                                                                                          |                                       | 10,162    |          |   |      |          |          |   |   |          |      
|Provision for uncollectible accounts                               |                                                                                          |                                       | 3,520     |          |   |      | 4,212     |          |   |   | 112       |      
|Other expense, net                                                 |                                                                                          |                                       | 5,972     |          |   |      | 701       |          |   |   | 3,100     |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Operating income (loss)                                            |                                                                                          |                                       | (140,957  | )        |   |      | 45,688    |          |   |   | 35,233    |      
|Interest expense, net                                              |                                                                                          |                                       | 10,131    |          |   |      | 10,254    |          |   |   | 17,957    |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Earnings (loss) from continuing operations before
    income taxes |                                                                                          |                                       | (151,088  | )        |   |      | 35,434    |          |   |   | 17,276    |      
|Income tax expense (benefit)                                       |                                                                                          |                                       | (54,391   | )        |   |      | 9,036     |          |   |   | 3,854     |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Earnings (loss) from continuing operations                         |                                                                                          |                                       | (96,697   | )        |   |      | 26,398    |          |   |   | 13,422    |      
|Earnings (loss) from discontinued operations, net
    of tax       |                                                                                          |                                       | 112       |          |   |      | (23,651   | )        |   |   | (5,033    | )    
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Earnings (loss) before cumulative effect of
    accounting change  |                                                                                          |                                       | (96,585   | )        |   |      | 2,747     |          |   |   | 8,389     |      
|Cumulative effect of accounting change, net of tax                 |                                                                                          |                                       |          |          |   |      | (197,054  | )        |   |   |          |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Net earnings (loss)                                                |                                                                                          | $                                     | (96,585   | )        |   | $    | (194,307  | )        |   | $ | 8,389     |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Net earnings (loss) attributable to common
    stockholders:       |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|                                                                   | Net earnings (loss)                                                                      |                                       | $         | (96,585  | ) |      | $         | (194,307 | ) |   | $         | 8,389 |  
|                                                                   | Accretion of preferred stock and beneficial
    conversion charge                        |                                       |           | (10,112  | ) |      |           |         |   |   |           |      |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |                                       | $         | (106,697 | ) |      | $         | (194,307 | ) |   | $         | 8,389 |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Basic net earnings (loss) per common share:                        |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|                                                                   | Net earnings (loss) attributable to common
    stockholders from continuing operations   |                                       | $         | (3.38    | ) |      | $         | 0.84     |   |   | $         | 0.43  |  
|                                                                   | Net earnings (loss) attributable to common
    stockholders from discontinued operations |                                       |           |         |   |      |           | (0.75    | ) |   |           | (0.16 | )
|                                                                   | Cumulative effect of accounting change                                                   |                                       |           |         |   |      |           | (6.24    | ) |   |           |      |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |                                       | $         | (3.38    | ) |      | $         | (6.15    | ) |   | $         | 0.27  |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Basic weighted-average common shares outstanding                   |                                                                                          |                                       | 31,580    |          |   |      | 31,579    |          |   |   | 31,542    |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Diluted net earnings (loss) per common share:                      |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|                                                                   | Net earnings (loss) attributable to common
    stockholders from continuing operations   |                                       | $         | (3.38    | ) |      | $         | 0.82     |   |   | $         | 0.42  |  
|                                                                   | Net earnings (loss) attributable to common
    stockholders from discontinued operations |                                       |           |         |   |      |           | (0.73    | ) |   |           | (0.16 | )
|                                                                   | Cumulative effect of accounting change                                                   |                                       |           |         |   |      |           | (6.16    | ) |   |           |      |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |                                       | $         | (3.38    | ) |      | $         | (6.07    | ) |   | $         | 0.26  |  
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      
|Diluted weighted-average common shares outstanding                 |                                                                                          |                                       | 31,580    |          |   |      | 32,015    |          |   |   | 32,031    |      
|                                                                   |                                                                                          |                                       |           |          |   |      |           |          |   |   |           |      

See Notes to Consolidated Financial Statements.

28



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##### Table of Contents



CONSOLIDATED BALANCE SHEETS

|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |           |         | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | --------- | ------- | ------- | - | --------- | --------- | ------- | 
|                                                               |                                                                                                                                                                           |                                   
|                                                               |                                                                                                                                                                           | December 31,                      
|                                                               |                                                                                                                                                                           |                                   
|                                                               |                                                                                                                                                                           | 2003                               |           | 2002   
|                                                               |                                                                                                                                                                           |                                    |           |        
|                                                               |                                                                                                                                                                           |                                   
|                                                               |                                                                                                                                                                           | (In thousands,                    
|                                                               |                                                                                                                                                                           | except share data)                
|ASSETS                                                        
|Current assets:                                                |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               | Cash and cash equivalents                                                                                                                                                 |                                    | $         | 205,480 |         |   | $         |          |        
|                                                               | Accounts receivable, less allowance of $3,770 in
    2003 and $7,675 in 2002                                                                                              |                                    |           | 143,664 |         |   |           | 68,762    |        
|                                                               | Inventories                                                                                                                                                               |                                    |           | 121,092 |         |   |           | 113,306   |        
|                                                               | Inventories, discontinued operations                                                                                                                                      |                                    |           |        |         |   |           | 949       |        
|                                                               | Prepaid expenses and other current assets                                                                                                                                 |                                    |           | 12,111  |         |   |           | 7,245     |        
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | Total current assets               |           |         | 482,347 |   |           |           | 190,262 | 
|Property, plant and equipment, at cost:                        |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               | Land, buildings and improvements                                                                                                                                          |                                    |           | 138,411 |         |   |           | 153,700   |        
|                                                               | Machinery and equipment                                                                                                                                                   |                                    |           | 933,209 |         |   |           | 1,020,401 |        
|                                                               | Construction in progress                                                                                                                                                  |                                    |           | 7,153   |         |   |           | 7,564     |        
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           |                                    | 1,078,773 |         |         |   | 1,181,665 |          
|                                                               | Less accumulated depreciation                                                                                                                                             |                                    |           | 535,784 |         |   |           | 480,605   |        
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | Property, plant and equipment, net |           |         | 542,989 |   |           |           | 701,060 | 
|Property, plant and equipment discontinued
    operations, net |                                                                                                                                                                           |                                    |          |         |         |   | 876       |          
|Goodwill, net                                                  |                                                                                                                                                                           |                                    | 37,321    |         |         |   | 35,041    |          
|Other assets, net                                              |                                                                                                                                                                           |                                    | 54,412    |         |         |   | 37,971    |          
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | $                                  | 1,117,069 |         |         | $ | 965,210   |          
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                              
|LIABILITIES AND STOCKHOLDERS
    EQUITY                      
|Current liabilities:                                           |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               | Accounts payable                                                                                                                                                          |                                    | $         | 90,622  |         |   | $         | 68,671    |        
|                                                               | Accrued liabilities                                                                                                                                                       |                                    |           | 31,604  |         |   |           | 29,991    |        
|                                                               | Current portion of long-term debt                                                                                                                                         |                                    |           |        |         |   |           | 70,405    |        
|                                                               | Other                                                                                                                                                                     |                                    |           | 9,484   |         |   |           | 9,289     |        
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | Total current liabilities          |           |         | 131,710 |   |           |           | 178,356 | 
|Long-term debt                                                 |                                                                                                                                                                           |                                    | 370,992   |         |         |   | 166,504   |          
|Deferred income taxes and other liabilities                    |                                                                                                                                                                           |                                    | 148,752   |         |         |   | 193,652   |          
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | Total liabilities                  |           |         | 651,454 |   |           |           | 538,512 | 
|Stockholders equity:                                          |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               | Series A preferred stock, $0.001 par
    value, 5,000,000 shares authorized in 2003,
    4,502,143 shares issued and outstanding                                          |                                    |           | 51,049  |         |   |           |          |        
|                                                               | Series B preferred stock, $0.001 par
    value, 6,700,000 shares authorized, issued and outstanding
    in 2003                                                           |                                    |           | 75,974  |         |   |           |          |        
|                                                               | Class A common stock, $0.001 par value;
    100,000,000 shares authorized in 2003 and 55,000,000 in
    2002; 34,389,147 shares issued in 2003 and 34,368,809 in
    2002 |                                    |           | 34      |         |   |           | 34        |        
|                                                               | Class B common stock, $0.001 par value;
    5,500,000 shares authorized; no shares issued                                                                                 |                                    |           |        |         |   |           |          |        
|                                                               | Paid-in capital                                                                                                                                                           |                                    |           | 245,266 |         |   |           | 248,499   |        
|                                                               | Common stock warrants                                                                                                                                                     |                                    |           | 4,888   |         |   |           |          |        
|                                                               | Accumulated other comprehensive income (loss)                                                                                                                             |                                    |           | 25,173  |         |   |           | (3,243    | )      
|                                                               | Retained earnings                                                                                                                                                         |                                    |           | 112,755 |         |   |           | 230,932   |        
|                                                               | Less common stock in treasury at cost:
    2,500,000 shares                                                                                                               |                                    |           | (49,524 | )       |   |           | (49,524   | )      
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | Total stockholders equity         |           |         | 465,615 |   |           |           | 426,698 | 
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          
|                                                               |                                                                                                                                                                           | $                                  | 1,117,069 |         |         | $ | 965,210   |          
|                                                               |                                                                                                                                                                           |                                    |           |         |         |   |           |          

See Notes to Consolidated Financial Statements.

29



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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          |        |          |  
|------------------------------------------ | ------------------------ | ------------------------ |  | ------------------ |  | -------------- |  | ------- |  | ------ |  | ------------- |  | -------- |  | -------- |  | ------------- | ------ | -------- |  | ----- | -- | ----- |  | - | ------- |  |  |  |  |  |  | - | ------- | - |  | - | -------- | - |  | - | ------- | - |  | - | -------- | ------ | -------- | -
|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |              
|                                           |                          | Series A Preferred       |  | Series B Preferred |  | Class A Common |  |         |  |        |  | Accumulated   |  |          |  |          |  |              
|                                           |                          | Stock Issued             |  | Stock Issued       |  | Stock Issued   |  |         |  | Common |  | Other         |  |          |  |          |  |              
|                                           |                          |                          |  |                    |  |                |  | Paid-In |  | Stock  |  | Comprehensive |  | Retained |  | Treasury |  |              
|                                           |                          | Shares                   |  | Amount             |  | Shares         |  | Amount  |  | Shares |  | Amount        |  | Capital  |  | Warrants |  | Income/(Loss) |        | Earnings |  | Stock |    | Total
|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |      
|                                           |                          |                         
|                                           |                          | (In thousands)          
|Balance at December 31, 2000               |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 34,257 |          |  | $     | 34 |       |  | $ | 245,900 |  |  |  |  |  |  | $ | (10,663 | ) |  | $ | 439,778  |   |  | $ | (49,524 | ) |  | $ | 625,525  |       
|Net earnings                               |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   | 8,389    |   |  |   |         |   |  |   | 8,389    |       
|Currency translation adjustments           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   | (6,311  | ) |  |   |          |   |  |   |         |   |  |   | (6,311   | )     
|Minimum pension liability adjustments      |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   | (4,951  | ) |  |   |          |   |  |   |         |   |  |   | (4,951   | )     
|Fair value of derivatives                  |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   | (112    | ) |  |   |          |   |  |   |         |   |  |   | (112     | )     
|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          |       
|                                           | Total comprehensive loss |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          | (2,985 | )       
|Cash dividends ($0.36 per share)           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   | (11,461  | ) |  |   |         |   |  |   | (11,461  | )     
|Exercise of stock options, net             |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 44     |          |  |       |    |       |  |   | 775     |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   | 775      |       
|Issuance of restricted stock, net          |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 34     |          |  |       |    |       |  |   | 340     |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   | 340      |       
|Amortization of deferred compensation, net |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   | 545     |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   | 545      |       
|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          |       
|Balance at December 31, 2001               |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 34,335 |          |  |       | 34 |       |  |   | 247,560 |  |  |  |  |  |  |   | (22,037 | ) |  |   | 436,706  |   |  |   | (49,524 | ) |  |   | 612,739  |       
|Net loss                                   |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   | (194,307 | ) |  |   |         |   |  |   | (194,307 | )     
|Currency translation adjustments           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   | 21,413  |   |  |   |          |   |  |   |         |   |  |   | 21,413   |       
|Minimum pension liability adjustments      |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   | (3,751  | ) |  |   |          |   |  |   |         |   |  |   | (3,751   | )     
|Fair value of derivatives                  |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   | 1,132   |   |  |   |          |   |  |   |         |   |  |   | 1,132    |       
|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          |       
|                                           |                          | Total comprehensive loss |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          |        | (175,513 | )
|Cash dividends ($0.36 per share)           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   | (11,467  | ) |  |   |         |   |  |   | (11,467  | )     
|Exercise of stock options, net             |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 2      |          |  |       |    |       |  |   | 15      |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   | 15       |       
|Issuance of restricted stock, net          |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 32     |          |  |       |    |       |  |   | 376     |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   | 376      |       
|Amortization of deferred compensation, net |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   | 548     |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   | 548      |       
|                                           |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               |        |          |  |       |    |       |  |   |         |  |  |  |  |  |  |   |         |   |  |   |          |   |  |   |         |   |  |   |          |       
|Balance at December 31, 2002               |                          |                          |  |                    |  |                |  |         |  |        |  |               |  |          |  |          |  |               | 34,369 |          |  | $     | 34 |       |  | $ | 248,499 |  |  |  |  |  |  | $ | (3,243  | ) |  | $ | 230,932  |   |  | $ | (49,524 | ) |  | $ | 426,698  |       

Continued on next page

30



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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

|                                           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |         |  
|------------------------------------------ | ------------------------ | ------------------ | ----- | ------------------ |  | -------------- | ------ | ------- |  | ------ | ----- | ------------- |  | -------- | ------ | -------- |  | ------------- | ------ | -------- |  | ----- | -- | ----- |  | - | ------- | - |  | - | ----- |  |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | ------- | -
|                                           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |              
|                                           |                          | Series A Preferred |       | Series B Preferred |  | Class A Common |        |         |  |        |       | Accumulated   |  |          |        |          |  |              
|                                           |                          | Stock Issued       |       | Stock Issued       |  | Stock Issued   |        |         |  | Common |       | Other         |  |          |        |          |  |              
|                                           |                          |                    |       |                    |  |                |        | Paid-In |  | Stock  |       | Comprehensive |  | Retained |        | Treasury |  |              
|                                           |                          | Shares             |       | Amount             |  | Shares         |        | Amount  |  | Shares |       | Amount        |  | Capital  |        | Warrants |  | Income/(Loss) |        | Earnings |  | Stock |    | Total
|                                           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |      
|                                           |                          |                   
|                                           |                          | (In thousands)    
|Balance at December 31, 2002               |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               | 34,369 |          |  | $     | 34 |       |  | $ | 248,499 |   |  |   |       |  |  | $ | (3,243 | ) |  | $ | 230,932 |   |  | $ | (49,524 | ) |  | $ | 426,698 |        
|Net loss                                   |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   | (96,585 | ) |  |   |         |   |  |   | (96,585 | )      
|Currency translation adjustments           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   | 27,267 |   |  |   |         |   |  |   |         |   |  |   | 27,267  |        
|Minimum pension liability adjustments      |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   | (780   | ) |  |   |         |   |  |   |         |   |  |   | (780    | )      
|Fair value of derivatives                  |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   | 1,929  |   |  |   |         |   |  |   |         |   |  |   | 1,929   |        
|                                           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |        
|                                           | Total comprehensive loss |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         | (68,169 | )
|Cash dividends ($0.36 per share)           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   | (11,481 | ) |  |   |         |   |  |   | (11,481 | )      
|Issuance of Series A preferred stock       |                          |                    | 4,502 |                    |  |                | 48,694 |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | 48,694  |        
|Issuance of Series B preferred stock       |                          |                    |       |                    |  |                |        |         |  |        | 6,700 |               |  |          | 72,443 |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | 72,443  |        
|Equity transaction costs                   |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   | (9,094  | ) |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | (9,094  | )      
|Accretion of preferred stock               |                          |                    |       |                    |  |                | 2,355  |         |  |        |       |               |  |          | 3,531  |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   | (5,886  | ) |  |   |         |   |  |   |        |        
|Beneficial conversion charge               |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   | 4,225   |   |  |   |       |  |  |   |        |   |  |   | (4,225  | ) |  |   |         |   |  |   |        |        
|Exercise of stock options, net             |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               | 5      |          |  |       |    |       |  |   | 48      |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | 48      |        
|Issuance of restricted stock, net          |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               | 15     |          |  |       |    |       |  |   | 208     |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | 208     |        
|Amortization of deferred compensation, net |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   | 1,380   |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | 1,380   |        
|Issuance of common stock warrants          |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   | 4,888 |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   | 4,888   |        
|                                           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |        
|Balance at December 31, 2003               |                          |                    | 4,502 |                    |  | $              | 51,049 |         |  |        | 6,700 |               |  | $        | 75,974 |          |  |               | 34,389 |          |  | $     | 34 |       |  | $ | 245,266 |   |  | $ | 4,888 |  |  | $ | 25,173 |   |  | $ | 112,755 |   |  | $ | (49,524 | ) |  | $ | 465,615 |        
|                                           |                          |                    |       |                    |  |                |        |         |  |        |       |               |  |          |        |          |  |               |        |          |  |       |    |       |  |   |         |   |  |   |       |  |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |        

See Notes to Consolidated Financial Statements.

31



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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |          |         |         |         |  
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------- | ------- | ------- | ------- | -------- | ------- | ------- | -------- | -------- | ------- | ------- | ------- | -
|                                                                 |                                                                                                          |                                                                
|                                                                 |                                                                                                          | Years Ended December 31,                                       
|                                                                 |                                                                                                          |                                                                
|                                                                 |                                                                                                          | 2003                                                            |                                                                          | 2002                                                    |         | 2001   
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |        
|                                                                 |                                                                                                          |                                                                
|                                                                 |                                                                                                          | (In thousands)                                                 
|Cash flows from operating activities:                            |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 | Net earnings (loss)                                                                                      |                                                                 | $                                                                        | (96,585                                                 | )       |         | $       | (194,307 | )       |         | $        | 8,389    |        
|                                                                 | Adjustments to reconcile net earnings (loss) to
    net cash provided by (used in) operating activities: |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |          |        
|                                                                 |                                                                                                          | Depreciation                                                    |                                                                          |                                                         | 47,084  |         |         |          | 56,301  |         |          |          | 57,936  |        
|                                                                 |                                                                                                          | Amortization                                                    |                                                                          |                                                         | 7,598   |         |         |          | 1,279   |         |          |          | 9,886   |        
|                                                                 |                                                                                                          | Deferred income taxes and other                                 |                                                                          |                                                         | (69,872 | )       |         |          | 3,869   |         |          |          | (11,175 | )      
|                                                                 |                                                                                                          | Cumulative effect of accounting change                          |                                                                          |                                                         |        |         |         |          | 197,054 |         |          |          |        |        
|                                                                 |                                                                                                          | Loss on sale of discontinued business and
    impairment losses |                                                                          |                                                         | 134,785 |         |         |          | 32,108  |         |          |          |        |        
|                                                                 |                                                                                                          | Changes in assets and liabilities:                              |                                                                          |                                                         |         |         |         |          |         |         |          |          |         |        
|                                                                 |                                                                                                          |                                                                 | Accounts receivable                                                      |                                                         |         | (68,639 | )       |          |         | (8,948  | )        |          |         | 33,090  |        
|                                                                 |                                                                                                          |                                                                 | Inventories                                                              |                                                         |         | (962    | )       |          |         | 34,887  |          |          |         | 30,003  |        
|                                                                 |                                                                                                          |                                                                 | Prepaid expenses and other current assets                                |                                                         |         | (2,139  | )       |          |         | (1,328  | )        |          |         | (1,151  | )      
|                                                                 |                                                                                                          |                                                                 | Other assets                                                             |                                                         |         | 2,294   |         |          |         | 2,261   |          |          |         | (6,583  | )      
|                                                                 |                                                                                                          |                                                                 | Accounts payable, accrued liabilities, and other
    current liabilities |                                                         |         | 23,461  |         |          |         | 1,522   |          |          |         | (27,136 | )      
|                                                                 |                                                                                                          |                                                                 | Other liabilities                                                        |                                                         |         | (247    | )       |          |         | (114    | )        |          |         | (2,675  | )      
|                                                                 |                                                                                                          |                                                                 | Other                                                                    |                                                         |         | 6,406   |         |          |         | 3,718   |          |          |         | 672     |        
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 |                                                                                                          |                                                                 |                                                                          | Net cash provided by (used in) operating
    activities |         |         | (16,816 | )        |         |         | 128,302  |          |         |         | 91,256  |  
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|Cash flows from investing activities:                            |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 | Additions to property, plant and equipment                                                               |                                                                 |                                                                          | (15,516                                                 | )       |         |         | (21,653  | )       |         |          | (28,084  | )      
|                                                                 | Proceeds from sale of business                                                                           |                                                                 |                                                                          | 1,070                                                   |         |         |         | 1,505    |         |         |          |         |        
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 |                                                                                                          |                                                                 |                                                                          | Net cash used in investing activities                   |         |         | (14,446 | )        |         |         | (20,148  | )        |         |         | (28,084 | )
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|Cash flows from financing activities:                            |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 | Proceeds from debt                                                                                       |                                                                 |                                                                          | 239,399                                                 |         |         |         | 25,000   |         |         |          | 75,000   |        
|                                                                 | Repayments of debt                                                                                       |                                                                 |                                                                          | (100,070                                                | )       |         |         | (124,010 | )       |         |          | (125,932 | )      
|                                                                 | Issuance of preferred stock
    (Series A & B) and warrants                                              |                                                                 |                                                                          | 126,025                                                 |         |         |         |         |         |         |          |         |        
|                                                                 | Financing costs                                                                                          |                                                                 |                                                                          | (17,289                                                 | )       |         |         |         |         |         |          |         |        
|                                                                 | Issuance of restricted stock, net                                                                        |                                                                 |                                                                          | 208                                                     |         |         |         | 376      |         |         |          | 340      |        
|                                                                 | Dividends paid on common stock                                                                           |                                                                 |                                                                          | (11,481                                                 | )       |         |         | (11,467  | )       |         |          | (11,461  | )      
|                                                                 | Exercise of stock options, net                                                                           |                                                                 |                                                                          | 48                                                      |         |         |         | 15       |         |         |          | 775      |        
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 |                                                                                                          |                                                                 |                                                                          | Net cash provided by (used in) financing
    activities |         |         | 236,840 |          |         |         | (110,086 | )        |         |         | (61,278 | )
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                                          |                                                                 | (98                                                                      | )                                                       |         |         | 118     |          |         |         | (80      | )       
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|Increase (decrease) in cash and cash equivalents                 |                                                                                                          |                                                                 | 205,480                                                                  |                                                         |         |         | (1,814  | )        |         |         | 1,814    |         
|Cash and cash equivalents at beginning of year                   |                                                                                                          |                                                                 |                                                                         |                                                         |         |         | 1,814   |          |         |         |         |         
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|Cash and cash equivalents at end of year                         |                                                                                                          | $                                                               | 205,480                                                                  |                                                         |         | $       |        |          |         | $       | 1,814    |         
|                                                                 |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|Supplemental cash flow data:                                     |                                                                                                          |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |         
|                                                                 | Cash paid (received) during the year for:                                                                |                                                                 |                                                                          |                                                         |         |         |         |          |         |         |          |          |        
|                                                                 |                                                                                                          |                                                                 | Interest (net of amounts capitalized)                                    |                                                         | $       | 9,970   |         |          | $       | 10,299  |          |          | $       | 19,344  |        
|                                                                 |                                                                                                          |                                                                 | Income taxes                                                             |                                                         | $       | 1,037   |         |          | $       | (18,703 | )        |          | $       | (40     | )      

See Notes to Consolidated Financial Statements.

32



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except share and per share
data)




|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |             
| | ------------
| | Organization

Wellman, Inc. and its subsidiaries (the
Company) is an international manufacturing company operating
primarily in the United States, Ireland and the
Netherlands. The Company primarily manufactures high-quality
PermaClear® and EcoClear® brand PET (polyethylene
terephthalate) packaging resins, Fortrel® brand polyester
staple fibers and Wellamid® engineering resins. The
principal markets for PET resins are North American, South
American, and European-based manufacturers of various types of
plastic containers. The principal markets for polyester and
nylon staple fibers are apparel, home furnishings, carpet and
industrial manufacturers in the United States, Mexico, and
Europe.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Wellman, Inc. and subsidiaries. All material
intercompany transactions have been eliminated.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.



| |                    
| | -------------------
| | Revenue Recognition

Sales to customers are recorded when both title
and risk of ownership of the goods transfer to the customer.
Provisions for discounts and rebates to customers are recorded
at the time of sale. Shipping and handling costs are included in
cost of sales.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all short-term investments
purchased with a maturity of three months or less to be cash
equivalents for purposes of the Consolidated Statements of Cash
Flows.



| |                                                  
| | -------------------------------------------------
| | Derivative Instruments and Hedging
    Activities

The Company records all of its derivative
instruments as either assets or liabilities on its balance sheet
at their respective fair values. The accounting for changes in
the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and on the type of
hedging relationship. The Company formally assesses, both at the
hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. For those derivative instruments that qualify as
hedging instruments, the Company must designate the hedging
instrument, based on the exposure being hedged, as either a fair
value hedge, cash flow hedge or a hedge of a net investment in a
foreign operation. For fair value hedges, the gain or loss on
the derivative instrument as well as the offsetting loss or gain
on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change
in fair values. For cash flow hedges, the effective portion of
the gain or loss on the derivative instrument is reported as a
component of other comprehensive income (loss) and reclassified
into earnings (loss) in the same period or periods during which
the hedged transaction affects earnings (loss), with the
ineffective portion, if any, being recognized in current
earnings (loss) during the period of the change.

33



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                     
| | ------------------------------------
| | Allowances for Doubtful
    Accounts

The Company performs periodic credit evaluations
of its customers and generally does not require collateral. A
reserve for uncollectible accounts receivable is established
based on the Companys evaluation of the credit-worthiness
of its customers and the potential risks inherent in their
businesses.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Costs for inventories are principally determined using
the first-in, first-out (FIFO) method.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment is carried at cost.
Depreciation for assets is provided based on their estimated
useful lives and is computed using the straight-line and units
of production methods. Estimated useful lives are 30 to
40 years for buildings and improvements and 3 to
20 years for machinery and equipment.

For idle equipment where the Company utilizes the
straight-line depreciation method, the Company either records
depreciation at a reduced rate or does not record depreciation
on the assets. The following table provides the amount of
reduced depreciation for assets depreciated using the
straight-line depreciation method during the periods noted and
the net book value of the assets that were idle at the end of
those periods:

|                                                    |  |                  |        |                       |  |   |       | 
|--------------------------------------------------- |  | ---------------- | ------ | --------------------- |  | - | ----- | 
|                                                    |  | Net Book Value   |        | Pre-tax Impact of    
|                                                    |  | at End of Period |        | Reducing Depreciation
|                                                    |  |                  |        |                      
|As of and for the year ending December 31,
    2001 |  | $                | 16,258 |                       |  | $ | 1,313 | 
|As of and for the year ending December 31,
    2002 |  | $                | 9,019  |                       |  | $ | 1,147 | 
|As of and for the year ending December 31,
    2003 |  | $                | 3,638  |                       |  | $ | 1,618 | 

In December 2003, based on managements
recommendation, the Companys Board of Directors approved
the abandonment of the polyester staple fiber spinning and
drawing equipment at its Pearl River facility. This spinning and
drawing equipment, along with the related polymerization assets,
was idled in December 2000, principally because of the expected
over-supply of polyester staple fiber in the United States.
These assets were depreciated using the units of production
method, and as a result, no depreciation has been recorded
related to these assets since that date. The Board of
Directors decision to abandon the polyester staple fiber
spinning and drawing equipment was based on the determination
that a conversion to PET resin production would be the most
profitable use of the related polymerization assets with a net
book value of $43,267 at December 31, 2003 that were idled.
Subject to final approval by the Companys Board of
Directors, the Company plans to complete the conversion and
begin production using the converted assets in 2006.

As a result of this decision, the Company
recorded a non-cash impairment charge of $135.3 million
($87.9 million after tax or $2.79 per diluted share)
in the fourth quarter of 2003. This charge represents a
reduction in the carrying value of the abandoned polyester
staple fiber spinning and drawing assets at its Pearl River
facility to their estimated fair value. In accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, when an asset is abandoned and no
longer in use, it should be recorded at the lower of its
carrying amount or fair value.

Expenditures, which materially increase
productivity, change capacities, or extend useful lives are
capitalized in property, plant and equipment. Routine
maintenance, repairs and replacement costs are charged to
expense in the period incurred. The Company does not accrue for
major maintenance and repairs. Periodically, the Company
conducts a complete shutdown and inspection of equipment
(turnaround) at its facilities to perform necessary repairs and
replacements. Costs associated with these turnarounds are
capitalized and are generally amortized over the period until
the next turnaround.

Effective January 1, 2002, the Company was
required to adopt Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. In

34



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


accordance with SFAS No. 144, when an asset
is held for sale, it is measured at the lower of its carrying
amount or fair value less costs of disposal. The fair value of
an asset is the amount at which that asset could be bought or
sold in a current transaction between willing parties. Judgment
is required in determining the fair value of the assets, and the
fair value could differ from the actual amount received upon
disposal.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

Effective January 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible
Assets. With the adoption of SFAS No. 142, the
Company no longer amortizes goodwill but instead tests goodwill
for impairment at least annually at the reporting unit level.
Goodwill is tested for impairment by comparing the fair value of
the reporting unit to its carrying value, including goodwill.
The fair value is determined based on the present value of
estimated future discounted cash flows. If the fair value
exceeds the carrying value, no impairment loss is recognized. If
the carrying value exceeds the fair value, the goodwill of the
reporting unit is potentially impaired. A comparison is then
made between the implied fair value of the goodwill, as defined
by SFAS No. 142, and the carrying value of the goodwill. If
the implied fair value is less, an impairment loss equal to the
difference is recognized. This implied fair value then becomes
the new carrying value of the goodwill for future impairment
tests.

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



| |                   
| | ------------------
| | Stock Option Plans

The Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in
accounting for its employee stock options. Under APB 25,
any difference between the exercise price of the Companys
employee stock options and the market price of the underlying
stock on the date of grant is recognized as compensation expense
over the vesting period of the options (intrinsic value method).



| |             
| | ------------
| | Income Taxes

Income taxes have been provided using the
liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities.
Deferred income taxes resulting from such differences are
recorded based on the enacted tax rates that will be in effect
when the differences are expected to reverse.



| |                           
| | --------------------------
| | Environmental Expenditures

Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or
remedial efforts are probable and the costs can be reasonably
estimated. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current
or future revenue generation are expensed or charged to the
aforementioned liability.



| |                                                                       
| | ----------------------------------------------------------------------
| | Foreign Currency Translation and Other
    Comprehensive Income (Loss)

The financial statements of foreign subsidiaries
have been translated into U.S. dollar equivalents in
accordance with SFAS Statement No. 52, Foreign
Currency Translation. All balance sheet accounts have been
translated using the exchange rates in effect at the balance
sheet date. Income statement amounts have been translated using
the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year
have been reported in other comprehensive income (loss). The
effect on

35



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


the Consolidated Statements of Operations of
transaction gains and losses is insignificant for all years
presented.

Accumulated other comprehensive income (loss) is
comprised of foreign currency translation adjustments, minimum
pension liability adjustments, and the effective portion of the
gain (loss) for derivatives designated and accounted for as cash
flow hedges. Substantially all of the earnings associated with
the Companys investments in foreign entities are
considered to be permanently invested, and no provision for
U.S. federal and state income taxes on those earnings or
translation adjustments has been provided.

The components of and changes in other
comprehensive income (loss) are as follows:

|                             |                                              |                      |         |           |   |             |         |               |   |   |       |       |   |   |         |         |  
|---------------------------- | -------------------------------------------- | -------------------- | ------- | --------- | - | ----------- | ------- | ------------- | - | - | ----- | ----- | - | - | ------- | ------- | -
|                             |                                              |                      |         |           |   |             |         | Accumulated  
|                             |                                              | Foreign              |         | Minimum   |   | Fair Value  |         | Other        
|                             |                                              | Currency Translation |         | Pension   |   | of          |         | Comprehensive
|                             |                                              | Adjustments          |         | Liability |   | Derivatives |         | Income/(Loss)
|                             |                                              |                      |         |           |   |             |         |              
|Balance at December 31, 2000 |                                              | $                    | (9,203  | )         |   | $           | (1,460  | )             |   | $ |      |       |   | $ | (10,663 | )      
|                             | Changes during year (net of taxes of $2,569) |                      |         | (6,311    | ) |             |         | (4,951        | ) |   |       | (112  | ) |   |         | (11,374 | )
|                             |                                              |                      |         |           |   |             |         |               |   |   |       |       |   |   |         |        
|Balance at December 31, 2001 |                                              |                      | (15,514 | )         |   |             | (6,411  | )             |   |   | (112  | )     |   |   | (22,037 | )      
|                             | Changes during year (net of taxes of $2,161) |                      |         | 21,413    |   |             |         | (3,751        | ) |   |       | 1,132 |   |   |         | 18,794  |  
|                             |                                              |                      |         |           |   |             |         |               |   |   |       |       |   |   |         |        
|Balance at December 31, 2002 |                                              |                      | 5,899   |           |   |             | (10,162 | )             |   |   | 1,020 |       |   |   | (3,243  | )      
|                             | Changes during year (net of taxes of $1,658) |                      |         | 27,267    |   |             |         | (780          | ) |   |       | 1,929 |   |   |         | 28,416  |  
|                             |                                              |                      |         |           |   |             |         |               |   |   |       |       |   |   |         |        
|Balance at December 31, 2003 |                                              | $                    | 33,166  |           |   | $           | (10,942 | )             |   | $ | 2,949 |       |   | $ | 25,173  |        
|                             |                                              |                      |         |           |   |             |         |               |   |   |       |       |   |   |         |        



| |                  
| | -----------------
| | Advertising Costs

Advertising costs are charged to expense as
incurred. Such costs were approximately $1,066, $1,200, and
$2,100 for 2003, 2002, and 2001, respectively.



| |                                   
| | ----------------------------------
| | Research and Development
    Costs

Research and development costs are expensed as
incurred. Such costs were approximately $14,900, $17,300 and
$14,600 for 2003, 2002, and 2001, respectively.



| |                    
| | -------------------
| | Deferred Debt Costs

Debt issuance costs are amortized using the
interest method over the life of the associated debt.



| |                 
| | ----------------
| | Grant Accounting

The Company has received various grants,
including capital and operating grants, from the state of
Mississippi and other local authorities in connection with the
construction of its Pearl River facility. The capital grants
without stipulated operating requirements have been recorded as
a reduction of property, plant and equipment. The capital grants
with stipulated operating requirements have been recorded as
deferred revenue and are included in income as the requirements
stipulated in the grant are satisfied. The operating grants are
recorded as a reduction of operating expenses in the period the
reduction occurs. See note 16.



| |                         
| | ------------------------
| | Stock Based Compensation

The Company grants stock options for a fixed
number of shares to employees and directors. Prior to 1998, the
exercise price was equal to or greater than the fair value of
the shares at the date of grant. Beginning with options granted
in 1998, the exercise price is equal to the average of the
highest and lowest sales prices of the

36



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Companys common stock over a period of
20 days prior to the date of the grant. Since the Company
accounts for stock option grants in accordance with APB Opinion
No. 25, Accounting for Stock Issued to
Employees, it recognizes compensation expense over the
vesting period for the difference between the exercise price and
the fair value of the shares at the date of grant. The
difference between the employee purchase price and the fair
value of restricted stock awarded under the Deferred
Compensation and Restricted Stock Plan is considered to be
compensatory. The amount of non-cash compensation expense
recognized in 2003, 2002, and 2001 under these plans was not
material. See note 14.



| |                 
| | ----------------
| | Reclassification

Certain 2002 and 2001 amounts have been
reclassified to conform to the 2003 presentation.



|   |                   
|-- | ------------------
|2. | Accounting Changes

In January 2003, the FASB issued Interpretation
No. 46 (or FIN 46), Consolidation of Variable
Interest Entities which requires a variable interest
entity to be consolidated by the primary beneficiary which is
the entity subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements of
FIN 46 apply to older entities in the first fiscal year or
interim period beginning after December 15, 2003. Certain
of the disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of
FIN 46 did not have a significant impact on the
Companys financial statements.

During 1999, the Company sold certain production
equipment to a trust in connection with a sale and leaseback
transaction. The lease has been classified as an operating
lease. The lease, which would have expired in July 2004,
contains purchase and lease renewal options at projected future
fair market values and has a residual value guarantee. In June
2003, the Company amended its sale and leaseback transaction,
with substantially similar terms, such that the lessor is a
voting interest entity. In February 2004, in conjunction with
the refinancing of substantially all of its debt, the Company
exercised its option under the lease to purchase the assets. For
additional information related to the financing, see
note 10.

In November 2002, the FASB issued Interpretation
No. 45 (or FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This
interpretation requires certain guarantees to be recorded at
fair value upon origination versus when a loss becomes probable.
The adoption of FIN 45 had no impact on the Companys
financial statements.

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. This accounting standard addresses financial
accounting and reporting for goodwill and other intangible
assets and requires that goodwill amortization be discontinued
and replaced with annual tests of impairment. Other intangible
assets continue to be amortized over their estimated useful
lives, whereas intangibles with indefinite lives are not
amortized, but are tested annually for impairment. In accordance
with SFAS No. 142, goodwill amortization was
discontinued as of January 1, 2002. In addition, the
Company completed its initial assessment of goodwill using the
two-step approach described in SFAS No. 142. Goodwill
was tested for impairment by comparing the fair value of the
reporting units to their carrying value, including goodwill. The
fair value was determined based on the present value of
estimated future discounted cash flows. Since the carrying value
of the Fibers and Recycled Products Group (or FRPG) assets
exceeded their fair value, a comparison was then made between
the implied fair value of the goodwill, as defined by SFAS
No. 142, and the carrying value of the goodwill. Goodwill
related to the FRPG was determined to be impaired and, as
required by this Statement, was reduced by $197,054 to its
implied fair value. The reduction was recorded as a cumulative
effect of an accounting change. Goodwill was previously
evaluated for impairment by comparing the entity level
unamortized goodwill balance to projected

37



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


undiscounted cash flows, which did not result in
an indicated impairment. The Company did not have any intangible
assets with indefinite lives at December 31, 2003 or 2002.

A reconciliation of previously reported financial
statement information to adjusted amounts reflecting the
elimination of goodwill amortization for the comparable periods
prior to the adoption of SFAS No. 142 is as follows:

|                                                  |  |                   |        | 
|------------------------------------------------- |  | ----------------- | ------ | 
|                                                  |  | Year Ended       
|                                                  |  | December 31, 2001
|                                                  |  |                  
|Net earnings as reported                          |  | $                 | 8,389  | 
|Goodwill amortization                             |  |                   | 8,444  | 
|                                                  |  |                   |        | 
|                                                  |  | $                 | 16,833 | 
|                                                  |  |                   |        | 
|Basic net earnings per common share as reported   |  | $                 | 0.27   | 
|Adjusted basic net earnings per common share      |  | $                 | 0.53   | 
|Diluted net earnings per common share as reported |  | $                 | 0.26   | 
|Adjusted diluted net earnings per common share    |  | $                 | 0.53   | 

The changes in the net carrying value of goodwill
by reportable operating segments for the year ended
December 31, 2003 are as follows:

|                                   |  |      |   |     |  |       |        |  |  |   |        | 
|---------------------------------- |  | ---- | - | --- |  | ----- | ------ |  |  | - | ------ | 
|                                   |  | FRPG |   | PPG |  | Total
|                                   |  |      |   |     |  |      
|Goodwill, net at December 31, 2002 |  | $    |  |     |  | $     | 35,041 |  |  | $ | 35,041 | 
|Currency translation adjustment    |  |      |  |     |  |       | 2,280  |  |  |   | 2,280  | 
|                                   |  |      |   |     |  |       |        |  |  |   |        | 
|Goodwill, net at December 31, 2003 |  | $    |  |     |  | $     | 37,321 |  |  | $ | 37,321 | 
|                                   |  |      |   |     |  |       |        |  |  |   |        | 

Other intangible assets and related amortization
expense as of and for the year ended December 31, 2003 were
not significant.



| |                                           
| | ------------------------------------------
| | Accounting for Discontinued
    Operations

Effective January 1, 2002, the Company
adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for a
disposal of a segment of a business.

As a result of its review of strategic
alternatives, in March 2002, the Company adopted a plan to sell
its partially oriented yarn (POY) business and its small
recycled fine denier polyester staple fiber business with
manufacturing facilities located in Fayetteville, North Carolina
and Marion, South Carolina, respectively. These businesses are
reported as discontinued operations in the Companys
financial statements.

In June 2002, the Company sold the property,
plant and equipment and inventory of its POY business. The
aggregate sales price was $1,682 in cash (including the
reimbursement of certain business expenses) and the assumption
of certain liabilities. The total loss on disposal of the assets
of the Companys POY business for the year ended
December 31, 2002 was $16,237, net of taxes. The net loss
is included in discontinued operations in the Companys
Consolidated Statements of Operations.

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. The net cash
proceeds totaled $1,070. The total loss on disposal of assets
was $4,360, net of taxes. An impairment loss of $4,699, net of
taxes, was

38



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


recorded in the first quarter of 2002. A gain of
$339, net of taxes, was recognized during the first quarter of
2003 and included in discontinued operations in the
Companys Consolidated Statements of Operations.

Results for discontinued operations consist of
the following:

|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                                                            |  |                        
|                                                                                                                            |  | Year Ended December 31,
|                                                                                                                            |  |                        
|                                                                                                                            |  | 2003                    |      | 2002 |  | 2001
|                                                                                                                            |  |                         |      |      |  |     
|Net sales                                                                                                                   |  | $                       | 713  |      |  | $    | 29,285  |   |  | $ | 74,237 |  
|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  
|Loss from discontinued operations before income
    tax expense                                                             |  | $                       | (350 | )    |  | $    | (4,177  | ) |  | $ | (7,743 | )
|Income tax benefit                                                                                                          |  |                         | (123 | )    |  |      | (1,462  | ) |  |   | (2,710 | )
|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  
|Loss from discontinued operations, net                                                                                      |  |                         | (227 | )    |  |      | (2,715  | ) |  |   | (5,033 | )
|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  
|Gain (loss) on disposal of business and
    impairment charge to record assets at fair value less costs of
    disposal     |  |                         | 522  |      |  |      | (32,209 | ) |  |   |       |  
|Income tax expense (benefit)                                                                                                |  |                         | 183  |      |  |      | (11,273 | ) |  |   |       |  
|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  
|Net gain (loss) on disposal of businesses and
    impairment loss to record assets at fair value less costs of
    disposal |  |                         | 339  |      |  |      | (20,936 | ) |  |   |       |  
|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  
|Net gain (loss) from discontinued operations                                                                                |  | $                       | 112  |      |  | $    | (23,651 | ) |  | $ | (5,033 | )
|                                                                                                                            |  |                         |      |      |  |      |         |   |  |   |        |  



| |                                                                 
| | ----------------------------------------------------------------
| | Accounting for Derivative Instruments and
    Hedging Activities

Effective January 1, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. This
Statement required the Company to recognize all of its
derivative instruments as either assets or liabilities on its
balance sheet at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part
of a hedging relationship and on the type of hedging
relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must
designate the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge
of a net investment in a foreign operation.

As described below, the Company only utilized
fair value hedges at January 1, 2001. For derivative
instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value
of an asset or a liability or an identified portion thereof that
is attributable to a particular risk), the gain or loss on the
derivative instrument as well as the offsetting loss or gain on
the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the change in fair
values. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows that is attributable
to a particular risk), the effective portion of the gain or loss
on the derivative instrument is reported as a component of other
comprehensive income (loss) and reclassified into income in the
same period or periods during which the hedged transaction
affects income. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present
value of future cash flows of the hedged item, if any, is
recognized in current income during the period of change.

The Company utilizes interest rate swaps to
manage the interest rate characteristics of certain debt. At
January 1, 2001, the Company had interest rate swaps
relating to $50,000 of its fixed-rate debt, which exactly
matched the terms of the underlying debt instruments. These
swaps, effectively converted the fixed-rate debt to
floating-rate debt, qualified and were accounted for as fair
value hedges.

The Company operates in international markets and
utilizes derivatives to minimize the effect of changes in
currency exchange rates. The Companys European businesses
use foreign exchange contracts with maturities of less than
twelve months to reduce the exchange risk associated with sales
and accounts receivable denominated in other foreign currencies.
Contracts that are identified as hedging underlying receivables
are fair value hedges, whereas contracts that are identified as
hedging future sales are cash flow

39



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


hedges. The notional amount of the Companys
fair value contracts was approximately $14,000 at
January 1, 2001, and the fair value of these contracts was
$633. The changes in the fair value hedges were offset by
changes in the fair value of the underlying receivables. There
were no cash flow hedge contracts at January 1, 2001.

There was no cumulative effect of adoption of
Statement No. 133 at January 1, 2001, and the impact
on net earnings in 2001 was not material.



|   |                          
|-- | -------------------------
|3. | Private Equity Investment

On June 27, 2003, the Company received from
Warburg Pincus Private Equity VIII, L.P. (Warburg
Pincus VIII), a global private equity fund, $126,025
in proceeds from the issuance of 11,202,143 shares of
perpetual convertible preferred stock (the Preferred Stock) and
two warrants to acquire a total of 2,500,000 shares of the
Companys common stock that vested on that date. Based on a
quoted market price, the Company valued the preferred stock at
$121,137 and the warrants at $4,888. Net proceeds from this
transaction were used primarily to pay down existing debt.

The Company entered into a definitive securities
purchase agreement with Warburg Pincus VIII on
February 12, 2003 that provided for the issuance of these
securities. Upon execution of the securities purchase agreement,
Warburg Pincus VIII invested $20,000 in a convertible
subordinated note. From the date of its issuance, the note
accrued $649 of interest, and both the note and the accrued
interest were converted into preferred stock on June 27,
2003.

The initial liquidation preference of the
Preferred Stock is $126,025, increasing by 8.5% per year
compounded quarterly for the first five years unless the
Companys consolidated net income for 24 consecutive
quarters (excluding any changes in accounting principle after
September 30, 2002, any beneficial conversion charges and
any preferred stock dividends) is greater than $160,000. If that
occurs, the accretion rate will become 7.25% and the holders of
the Preferred Stock will participate with the common stock
dividend. After the fifth anniversary, the holders of the
Preferred Stock will be able to elect to receive cash dividends
or continue to increase their liquidation preference. The rate
will increase to 8.75% per year compounded quarterly at
that time. If the holders of the Preferred Stock are not
participating in the common stock dividend, or if the common
stock dividend is less than $0.045 per share per quarter,
then the rate will increase to 10% per year compounded
quarterly. The Preferred Stock is also entitled to participate
in any extraordinary dividends, and if there is a change of
control within the first five years, then the liquidation
preference of the Preferred Stock is adjusted as if it had been
owned for five years.

The conversion price of the Preferred Stock is
$11.25 per share. The conversion price will be reduced on
the fourth anniversary of the issuance of the Preferred Stock if
the volume-weighted average price of the Companys common
stock for the immediately preceding 60 consecutive trading days
does not equal or exceed $23.00. The reduction will be equal to
the excess of $23.00 over such average price, but the
conversion price will not be reduced by more than $4.50. The
Company can require conversion of the preferred stock at any
time after the fifth anniversary of the preferred stock if the
closing price of the Companys common stock exceeds 125% of
the conversion price for 30 consecutive trading days.

The Preferred Stock may be converted into shares
of the Companys common stock at any time. The Preferred
Stock became convertible in the fourth quarter of 2003 when the
Company publicly reported cash earnings per share, as defined in
the definitive securities purchase agreement, of less than
$1.50 for the trailing four calendar quarters ending
September 30, 2003, which is a conversion event, as defined
in the definitive securities purchase agreement.

One warrant to purchase 1,250,000 shares of
the Companys common stock expires on February 12,
2010 and another similar warrant to purchase the same number of
shares expires on June 27, 2010.

As a result of this investment, assuming exercise
of all warrants for cash, Warburg Pincus VIII owns
approximately 31% of the Companys outstanding voting
securities on an if-converted basis (assuming a

40



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


conversion price of $11.25 per share) and
has the right to appoint two members to the Companys Board
of Directors. This amount is subject to increase under certain
conditions to a maximum of approximately 49% of the
Companys outstanding common stock during the next five
years.

The Preferred Stock was initially reflected on
the financial statements of the Company at $121,137, which is a
discount of $4,888 from its initial liquidation value of
$126,025. Since, at the end of the seventh year, the holders of
the Preferred Stock can require the Company to remarket the
Preferred Stock by increasing its dividend rate until its market
value is its liquidation value, the discount will be accreted
and recorded as a reduction of earnings attributable to common
stockholders ratably for a period of seven years from the date
of issuance. The warrants are immediately included in the
computation of diluted earnings per share using the treasury
stock method, and therefore become dilutive only when the market
price of the Companys common stock is above their exercise
price.

The initial convertible subordinated investment
of $20,000 was issued with a conversion price per share less
than the closing price of the Companys common stock at the
date of issuance. As a result, the Company incurred a non-cash
beneficial conversion feature amount (BCF) of $1,867
in connection with the issuance of the note that was converted
to Preferred Stock. This is the difference between the market
price of the Companys common stock on the date of issuance
and the conversion price on that date multiplied by the number
of shares issued as if the note were converted on that date. The
Company also incurred a BCF of $2,359 as a result of issuing
9,366,667 shares of Preferred Stock since the effective
conversion price, after adjusting for the value assigned to the
warrants, was less than the market price on the date of
issuance. These BCF amounts totaling $4,226 resulted in a
non-cash increase in the loss attributable to common
stockholders in the fourth quarter of 2003 when the Preferred
Stock became convertible into common stock.



|   |                           
|-- | --------------------------
|4. | Variable Interest Entities

During 1999, the Company sold certain production
equipment to a trust in connection with a sale and leaseback
transaction. The lease has been classified as an operating
lease. The lease, which was scheduled to expire in July 2004,
contains purchase and lease renewal options at projected future
fair market values and has a residual value guarantee of
approximately $127,300. The net book value of the equipment sold
totaled approximately $118,000. The gain realized from this
sale, totaling approximately $32,000, has been deferred and is
being credited to income as reductions in rental expense ratably
over the lease term. The gross rent expense approximates the
amount of interest expense incurred by the trust that owns the
equipment. Interest expense for the trust is determined by
indices that approximate LIBOR and/or commercial paper (which
have a close correlation) and by a fee that is based on the
Companys credit worthiness as determined by the rating
agencies. The net rent expense is the gross rent expense reduced
by the amortization of the deferred gain relating to the sale of
the equipment. Gross rent expense totaled approximately $11,247
and $8,661 for 2003 and 2002, respectively. In June 2003, the
Company amended its sale and leaseback transaction with
substantially similar terms, such that the lessor is a voting
interest entity.

In September 2002, the Company replaced its
existing receivables purchase agreement. Under the new
agreement, the Company may sell without recourse up to $80,000
in an undivided interest in certain of its domestic trade
accounts receivable, on a revolving basis, through an
unconsolidated receivables subsidiary.

At December 31, 2003 and 2002, trade
accounts receivable of approximately $27,800 and $64,200,
respectively, were sold. The sales of trade accounts receivable
have been reflected as a reduction of accounts receivable in the
Companys Consolidated Balance Sheet. The discounts
incurred by the Company on the sale of the trade accounts
receivable during 2003 and 2002 of approximately $1,024 and
$1,336, respectively, were charged to selling, general, and
administrative expenses.

Subsequent to year-end, on February 10,
2004, the Company closed on $625,000 of new debt financings. As
part of this transaction, the Company exercised its option to
repurchase the assets of the sale and leaseback transaction. The
assets, with a fair value of approximately $150,000, will be
recorded at their fair market

41



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


values and depreciated over an estimated useful
life of 20 years. In addition, the Company terminated its
asset securitization program and repurchased the net receivables.



|   |            
|-- | -----------
|5. | Inventories

Inventories related to continuing operations
consist of the following:

|                                 |  |              |         |      |  |   |         | 
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2003         |         | 2002
|                                 |  |              |         |     
|Raw materials                    |  | $            | 35,320  |      |  | $ | 38,142  | 
|Finished and semi-finished goods |  |              | 77,859  |      |  |   | 67,286  | 
|Supplies                         |  |              | 7,913   |      |  |   | 7,878   | 
|                                 |  |              |         |      |  |   |         | 
|                                 |  | $            | 121,092 |      |  | $ | 113,306 | 
|                                 |  |              |         |      |  |   |         | 



|   |                    
|-- | -------------------
|6. | Accrued Liabilities

Accrued liabilities consist of the following:

|                               |  |              |        |      |  |   |        | 
|------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | 
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2003         |        | 2002
|                               |  |              |        |     
|Payroll and other compensation |  | $            | 2,707  |      |  | $ | 4,740  | 
|Retirement plans               |  |              | 3,716  |      |  |   | 5,868  | 
|Property and other taxes       |  |              | 7,189  |      |  |   | 5,367  | 
|Interest                       |  |              | 2,911  |      |  |   | 2,222  | 
|Other                          |  |              | 15,081 |      |  |   | 11,794 | 
|                               |  |              |        |      |  |   |        | 
|                               |  | $            | 31,604 |      |  | $ | 29,991 | 
|                               |  |              |        |      |  |   |        | 



|   |              
|-- | -------------
|7. | Other Expense

Other expense, net consisted of the following
amounts for the periods indicated:

|                                                                                                          |  |                                  |        |      |  |      |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                                          |  |                                 
|                                                                                                          |  | For the Years Ended December 31,
|                                                                                                          |  |                                 
|                                                                                                          |  | 2003                             |        | 2002 |  | 2001
|                                                                                                          |  |                                  |        |      |  |     
|Legal costs related to the Department of Justice
    investigation of the polyester staple fiber industry |  | $                                | 6,014  |      |  | $    | 5,066  |   |  | $ | 3,800   |  
|Non-capitalizable financing costs                                                                         |  |                                  | 2,219  |      |  |      |       |   |  |   |        |  
|Accelerated stock option vesting                                                                          |  |                                  | 1,156  |      |  |      |       |   |  |   |        |  
|Rebate from anti-dumping duties                                                                           |  |                                  | (3,417 | )    |  |      | (4,365 | ) |  |   |        |  
|Property damage and other costs associated with
    production outage                                     |  |                                  |       |      |  |      |       |   |  |   | 9,900   |  
|Income from property damage claims &
    business interruption insurance                                  |  |                                  |       |      |  |      |       |   |  |   | (10,600 | )
|                                                                                                          |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                                                          |  | $                                | 5,972  |      |  | $    | 701    |   |  | $ | 3,100   |  
|                                                                                                          |  |                                  |        |      |  |      |        |   |  |   |         |  



|   |                      
|-- | ---------------------
|8. | Restructuring Charges

During 2003, the Company announced various cost
reduction plans in order to improve profitability, reduce debt,
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 prices in our PPG, and
continuing declines in our FRPG businesses. The three plans
announced in 2003 are as follows.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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. The Company
recorded termination costs of $1,847 in its FRPG segment related
to this plan, which was fully implemented in 2003. These costs
were reflected in operating income (loss) in the Consolidated
Statements of Operations. The following represents changes in
the accruals since the plan was adopted.

|                                     |  |           |        |  
|------------------------------------ |  | --------- | ------ | -
|                                     |  | Severance
|                                     |  | Costs    
|                                     |  |          
|Accruals during 2003                 |  | $         | 1,847  |  
|Cash payments                        |  |           | (1,847 | )
|                                     |  |           |        |  
|Accrual balance at December 31, 2003 |  | $         |       |  
|                                     |  |           |        |  

July
2003

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

November
2003

In November 2003, the Company announced a third
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. The Company incurred severance and
contract termination costs of $8,086 in the fourth quarter of
2003 associated with this plan, of which $6,159 related to the
FRPG and $1,927 related to the PPG. In addition, a curtailment
loss of $232 was recorded as a restructuring charge in the FRPG.
This curtailment loss occurred in two of the Companys
foreign defined benefit plans associated with the early
terminations and was reflected in operating income (loss) in our
Consolidated Statements of Operations. The following represents
changes in the accruals since the plan was adopted.

|                                      |  |           |        |             |  |       |    |  |  |   |        |  
|------------------------------------- |  | --------- | ------ | ----------- |  | ----- | -- |  |  | - | ------ | -
|                                      |  |           |        | Contract    |  |      
|                                      |  | Severance |        | Termination |  |      
|                                      |  | Costs     |        | Costs       |  | Total
|                                      |  |           |        |             |  |      
|Accruals during 2003                  |  | $         | 8,067  |             |  | $     | 19 |  |  | $ | 8,086  |  
|Cash payments                         |  |           | (1,981 | )           |  |       |   |  |  |   | (1,981 | )
|                                      |  |           |        |             |  |       |    |  |  |   |        |  
|Accrual balances at December 31, 2003 |  | $         | 6,086  |             |  | $     | 19 |  |  | $ | 6,105  |  
|                                      |  |           |        |             |  |       |    |  |  |   |        |  

The above accrual balance at December 31,
2003 should be fully paid out during the first half of 2004. In
addition, the Company expects to incur approximately $1,500 of
additional severance costs in its FRPG related to this plan
through its completion in 2005.



|   |                  
|-- | -----------------
|9. | Production Outage

In May 2001, the Company experienced a production
outage at its Palmetto Plant in Darlington, South Carolina,
which resulted in a temporary shutdown of the entire facility.
The power outage caused lost production volumes of approximately
80 million pounds, split equally between its two reportable
operating segments. Total costs and property damage associated
with this outage was approximately $9,900 ($6,433 after tax or
$0.20 per diluted share). During the second quarter of
2001, the Company reduced its property damage expense for that
portion of the insurance claim by approximately $3,400 ($2,185
after tax or $0.07 per diluted share). In the fourth
quarter of 2001, the Company settled its property damage and
business interruption insurance claims and recorded additional
income of approximately $7,200 ($4,697 after tax or

43



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


$0.15 per diluted share). These costs and
the related income from business interruption insurance were
reflected in other expense, net in 2001.



|    |                       
|--- | ----------------------
|10. | Borrowing Arrangements

Long-term debt consists of the following:

|                                                                                       |                      |              |         |      |  |   |         |        | 
|-------------------------------------------------------------------------------------- | -------------------- | ------------ | ------- | ---- |  | - | ------- | ------ | 
|                                                                                       |                      |             
|                                                                                       |                      | December 31,
|                                                                                       |                      |             
|                                                                                       |                      | 2003         |         | 2002
|                                                                                       |                      |              |         |     
|Revolving credit loan facility and bid loans                                           |                      | $            | 270,000 |      |  | $ | 5,000   |       
|Uncommitted lines of credit                                                            |                      |              |        |      |  |   | 25,508  |       
|8.41% senior unsecured note, due February
    2003                                     |                      |              |        |      |  |   | 50,390  |       
|7.55% senior unsecured note, due December
    2011                                     |                      |              | 40,000  |      |  |   | 45,331  |       
|Variable rate senior unsecured note, due November
    2004 (3.2% at December 31, 2003) |                      |              | 35,000  |      |  |   | 35,000  |       
|7.46% senior unsecured note, due September
    2009                                    |                      |              | 25,000  |      |  |   | 25,000  |       
|Economic development revenue bonds, at variable
    interest rates, due 2010-2023      |                      |              |        |      |  |   | 49,680  |       
|Other                                                                                  |                      |              | 992     |      |  |   | 1,000   |       
|                                                                                       |                      |              |         |      |  |   |         |       
|                                                                                       |                      |              | 370,992 |      |  |   | 236,909 |       
|                                                                                       | Less current portion |              |         |     |  |   |         | 70,405 | 
|                                                                                       |                      |              |         |      |  |   |         |       
|                                                                                       |                      | $            | 370,992 |      |  | $ | 166,504 |       
|                                                                                       |                      |              |         |      |  |   |         |       

The table above provides the detail of the
Companys debt, which was unsecured as of December 31,
2003. Substantially all of this debt was repaid on
February 10, 2004. The terms of the new financings are
described following a summary of the terms of the debt existing
at December 31, 2003.

In June 2003, the Company refinanced its $275,000
senior revolving credit facility. The new $275,000 three-year
floating rate facility (the Credit Facility), which
was scheduled to mature in June 2006, had no scheduled principal
payments.

In February 2000, the Company borrowed $50,000
pursuant to an 8.41% senior note due February 2003. In
conjunction with this financing, the Company entered into
interest rate swaps, which effectively converted the total
amount of this fixed-rate debt to floating-rate debt. During
2002, the Company terminated these swaps which resulted in a
gain of $1,464. This gain was recognized as a reduction in
interest expense over the remaining life of the debt. The debt
was repaid on its maturity date.

In December 2001, the Company borrowed $40,000
pursuant to a 7.55% senior note due December 2011. In
conjunction with this financing, the Company entered into
interest rate swaps that effectively converted the $40,000 of
fixed-rate debt to floating-rate debt at an effective interest
rate of six-month LIBOR plus 1.42%. In October 2003, the Company
terminated these swaps, which resulted in a gain of $4,105 that
will be recognized as a reduction of interest expense over the
remaining life of the debt.

In November 2001, the Company borrowed $35,000
pursuant to a senior note. The note had a floating interest rate
based on LIBOR with a single principal payment due in November
2004.

In September 2002, the Company borrowed $25,000
pursuant to a 7.46% senior note due September 2009.

The Company redeemed $9,500 and $40,180 of its
Industrial Revenue Development Bonds in March 2003 and August
2003, respectively. Financing for these redemptions was provided
by cash from operations and the revolving credit facility.

44



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


On February 10, 2004, the Company completed
$625,000 of new debt financings. These financings consist of a
five-year, $175,000 Revolving Credit Facility with an initial
annual interest rate of either LIBOR or the prime rate plus
250 basis points on outstanding borrowings, a five-year,
$185,000 First Lien Term Loan with an annual interest rate of
LIBOR plus 400 basis points, and a six-year, $265,000
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 First Lien Term Loan
may be prepaid for 102% and 101% of its face amount in the first
and second year after its issuance, respectively. The Second
Lien Term Loan may be prepaid at 103%, 102% and 101% of its face
amount in the third, fourth and fifth years after its issuance,
respectively and was issued at 98% of its face value.

The net proceeds from these new credit facilities
were used to repay substantially all of the Companys
balance sheet debt, repurchase accounts receivable, purchase PET
resin assets located at its Palmetto facility, prepay a raw
material contract, terminate swap agreements, pay prepayment
penalties, pay expenses associated with the new financing
transaction, and provide working capital. At February 10,
2004, the Company had approximately $490,000 in total
outstanding long-term debt, net of $5,300 of original issue
discount.

The new 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 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 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 financial covenants require that the
Company maintain available liquidity of $55,000 under the
revolving credit facility or maintain a Fixed Charge Coverage
Ratio currently of at least 1.0:1.0. The Fixed Charge Coverage
Ratio, as defined in the Revolving Credit Facility, is the
trailing four quarters earnings before interest, taxes,
depreciation and amortization compared to 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 maintained in
order for the Company to make certain capital expenditures over
certain threshold amounts or to settle lawsuits or pay
judgments. Other restrictions relate to the amount of capital
expenditures, asset sales, the incurrence or guarantee of
additional debt, acquisitions, sale or discount of receivables,
certain payments and investments, affiliate and subsidiary
transactions, payment of dividends and repurchase of stock, and
excess cash.

During 2003, 2002 and 2001, the Company
capitalized interest of $214, $303 and $1,531, respectively, as
part of the cost of capital projects under construction.
Interest expense (net) includes interest income of $3,150,
$3,480 and $1,563 for 2003, 2002 and 2001, respectively.



|    |             
|--- | ------------
|11. | Income Taxes

For financial reporting purposes, earnings (loss)
from continuing operations before income taxes are as follows:

|              |  |                          |          |      |  |      |        |  |  |   |        | 
|------------- |  | ------------------------ | -------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|              |  |                         
|              |  | Years Ended December 31,
|              |  |                         
|              |  | 2003                     |          | 2002 |  | 2001
|              |  |                          |          |      |  |     
|United States |  | $                        | (152,872 | )    |  | $    | 28,522 |  |  | $ | 2,844  | 
|Foreign       |  |                          | 1,784    |      |  |      | 6,912  |  |  |   | 14,432 | 
|              |  |                          |          |      |  |      |        |  |  |   |        | 
|              |  | $                        | (151,088 | )    |  | $    | 35,434 |  |  | $ | 17,276 | 
|              |  |                          |          |      |  |      |        |  |  |   |        | 

45



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Significant components of the provision for
income taxes are as follows:

|          |         |                          |         |         |   |      |         |         |   |   |       |       |  
|--------- | ------- | ------------------------ | ------- | ------- | - | ---- | ------- | ------- | - | - | ----- | ----- | -
|          |         |                         
|          |         | Years Ended December 31,
|          |         |                         
|          |         | 2003                     |         | 2002    |   | 2001
|          |         |                          |         |         |   |     
|Current:  |         |                          |         |         |   |      |         |         |   |   |       |      
|          | Federal |                          | $       |        |   |      | $       | (20,238 | ) |   | $     | 1     |  
|          | State   |                          |         | 40      |   |      |         | 681     |   |   |       | 115   |  
|          | Foreign |                          |         | (183    | ) |      |         | 377     |   |   |       | 199   |  
|          |         |                          |         |         |   |      |         |         |   |   |       |      
|          |         |                          | (143    | )       |   |      | (19,180 | )       |   |   | 315   |      
|          |         |                          |         |         |   |      |         |         |   |   |       |      
|Deferred: |         |                          |         |         |   |      |         |         |   |   |       |      
|          | Federal |                          |         | (53,612 | ) |      |         | 28,887  |   |   |       | 3,443 |  
|          | State   |                          |         | (766    | ) |      |         | (727    | ) |   |       | (2    | )
|          | Foreign |                          |         | 130     |   |      |         | 56      |   |   |       | 98    |  
|          |         |                          |         |         |   |      |         |         |   |   |       |      
|          |         |                          | (54,248 | )       |   |      | 28,216  |         |   |   | 3,539 |      
|          |         |                          |         |         |   |      |         |         |   |   |       |      
|          |         | $                        | (54,391 | )       |   | $    | 9,036   |         |   | $ | 3,854 |      
|          |         |                          |         |         |   |      |         |         |   |   |       |      

The 2002 current federal benefit of $20,238 is
related to a net operating loss carryback attributable to the
Job Creation and Worker Assistance Act enacted in March 2002.
This Act increased the carryback period on net operating losses
generated in 2001 from 2 years to 5 years, resulting
in a refund of $20,238 in 2002.

The difference between the provision for income
taxes and income taxes computed at the statutory income tax rate
on income from continuing operations is explained as follows:

|                                                                                    |  |              |      |      |  |      |      |   |  |  |       |  
|----------------------------------------------------------------------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                                                                                    |  |             
|                                                                                    |  | Years Ended 
|                                                                                    |  | December 31,
|                                                                                    |  |             
|                                                                                    |  | 2003         |      | 2002 |  | 2001
|                                                                                    |  |              |      |      |  |     
|Computed at statutory rate                                                          |  |              | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0  | %
|State taxes, net of federal benefit                                                 |  |              | .3   |      |  |      |     |   |  |  | .6    |  
|Differences in income tax rates between the
    United States and foreign countries |  |              | .5   |      |  |      | (5.6 | ) |  |  | (27.7 | )
|Amortization of goodwill                                                            |  |              |     |      |  |      |     |   |  |  | 16.2  |  
|Credits                                                                             |  |              | .4   |      |  |      | (2.3 | ) |  |  | (2.9  | )
|Other, net                                                                          |  |              | (.2  | )    |  |      | (1.6 | ) |  |  | 1.1   |  
|                                                                                    |  |              |      |      |  |      |      |   |  |  |       |  
|Effective tax rate                                                                  |  |              | 36.0 | %    |  |      | 25.5 | % |  |  | 22.3  | %
|                                                                                    |  |              |      |      |  |      |      |   |  |  |       |  

As a result of the adoption of
SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is no longer amortized for book purposes.
Therefore, this item no longer increases the effective tax rate.

46



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The tax effects of these
differences are as follows:

|                               |  |              |         |      |  |   |         |  
|------------------------------ |  | ------------ | ------- | ---- |  | - | ------- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2003         |         | 2002
|                               |  |              |         |     
|Depreciation                   |  | $            | 210,315 |      |  | $ | 249,327 |  
|Foreign                        |  |              | 6,921   |      |  |   | 7,477   |  
|Other                          |  |              | 2,018   |      |  |   | (2,089  | )
|                               |  |              |         |      |  |   |         |  
|Total deferred tax liabilities |  |              | 219,254 |      |  |   | 254,715 |  
|                               |  |              |         |      |  |   |         |  
|Domestic carry forward         |  |              | 156,623 |      |  |   | 131,406 |  
|Foreign carry forward          |  |              | 5,955   |      |  |   | 6,710   |  
|Other                          |  |              | 6,842   |      |  |   | 11,848  |  
|                               |  |              |         |      |  |   |         |  
|Total deferred tax assets      |  |              | 169,420 |      |  |   | 149,964 |  
|Valuation allowance            |  |              | 34,529  |      |  |   | 32,270  |  
|                               |  |              |         |      |  |   |         |  
|Net deferred tax assets        |  |              | 134,891 |      |  |   | 117,694 |  
|                               |  |              |         |      |  |   |         |  
|Net deferred tax liabilities   |  | $            | 84,363  |      |  | $ | 137,021 |  
|                               |  |              |         |      |  |   |         |  

At December 31, 2003, the Company had a
federal net operating loss (NOL) of approximately $344,018
available for carryforward which begins to expire in 2019 and
$4,678 of federal tax credit carryforwards which begin to expire
in 2018. Additionally, the Company had approximately $563,777 of
state NOLs available for carryforward which begin to expire in
2004. The Company also had foreign NOLs of approximately $17,013
that may be carried forward indefinitely. The valuation
allowance, which is primarily attributable to state and foreign
NOLs and federal tax credits, increased by $2,259 during 2003.

Deferred taxes have not been provided for
approximately $180,584 of undistributed earnings of foreign
subsidiaries, which are permanently reinvested outside the
United States. The Company intends to reinvest such
undistributed earnings for an indefinite period except for
distributions upon which incremental taxes would not be
material. If all such earnings were distributed, the Company
would be subject to both U.S. income taxes (subject to a
potential adjustment for foreign tax credits) and foreign
withholding taxes. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical
calculation.



|    |                      
|--- | ---------------------
|12. | Environmental Matters

The Companys operations are subject to
extensive laws and regulations governing air emissions,
wastewater discharges and solid and hazardous waste management
activities. As discussed in note 1, the Companys
policy is to expense environmental remediation costs when it is
both probable that a liability has been incurred and the amount
can be reasonably estimated. While it is often difficult to
reasonably quantify future environmental-related expenditures,
the Company currently estimates its future non-capital
expenditures related to environmental matters to range between
approximately $2,935 and $13,680 on an undiscounted basis. In
connection with these expenditures, the Company has accrued
undiscounted liabilities of approximately $6,544 and $9,250 at
December 31, 2003 and 2002, respectively, which are
reflected as other noncurrent liabilities in the Companys
Consolidated Balance Sheets. These accruals represent
managements best estimate of probable non-capital
environmental expenditures. In addition, aggregate future
capital expenditures related to environmental matters are
expected to range from approximately $3,600 to $7,500. 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.

47



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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:

|                                         |  |                |        |      |  |      |        |   |  |   |        |  
|---------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |  | 2003           |        | 2002 |  | 2001
|                                         |  |                |        |      |  |     
|                                         |  |               
|                                         |  | (In thousands)
|Balance at beginning of year             |  | $              | 9,250  |      |  | $    | 10,462 |   |  | $ | 13,037 |  
|Changes in remediation costs             |  |                | (2,289 | )    |  |      | (752   | ) |  |   | (1,193 | )
|Expenditures                             |  |                | (427   | )    |  |      | (489   | ) |  |   | (1,333 | )
|Foreign currency translation adjustments |  |                | 10     |      |  |      | 29     |   |  |   | (49    | )
|                                         |  |                |        |      |  |      |        |   |  |   |        |  
|Balance at end of year                   |  | $              | 6,544  |      |  | $    | 9,250  |   |  | $ | 10,462 |  
|                                         |  |                |        |      |  |      |        |   |  |   |        |  

The changes in remediation costs for the period
January 1, 2001 to December 31, 2003 were primarily
the result of more current information reducing the expected
costs associated with the Companys European environmental
costs and the expected costs associated with groundwater
remediation at one of the Companys South Carolina plants.

There are no environmental matters from which a
material loss is reasonably possible in addition to amounts
currently accrued.



|    |                 
|--- | ----------------
|13. | Retirement Plans

The Company has defined benefit plans and defined
contribution pension plans that cover substantially all
employees. The Company also has an employee stock ownership plan
(ESOP) covering substantially all domestic employees. The
defined contribution plan and the ESOP provide for Company
contributions based on the earnings of eligible employees.
Expense related to the defined contribution plan amounted to
$3,814, $5,152 and $6,019 for the years ended December 31,
2003, 2002 and 2001, respectively. Expense related to the ESOP
amounted to $841, $1,679 and $2,647 for the years ended
December 31, 2003, 2002 and 2001, respectively. In
conjunction with the Companys cost reduction efforts,
certain company contributions were suspended in 2003. All ESOP
shares are considered outstanding for the Companys
earnings per share computations. Dividends paid on ESOP shares
are included in the overall dividends.

Benefits under the European businesses
defined benefit plans are based on employees compensation
and length of service, while benefits under defined benefit
plans covering domestic employees are based on employees
compensation and length of service or at stated amounts based on
length of service. The Companys policy is to fund amounts,
which are actuarially determined to provide the plans with
sufficient assets to meet future benefit payment requirements.
Substantially all of the assets of the plans are invested in
equity securities, debt securities, money market instruments,
and insured products.

Net periodic pension cost (benefit) is determined
using assumptions as of the beginning of each year. Funding
status of the plans is determined using assumptions as of the
end of the year. Unrecognized net actuarial gains or losses are
amortized using the corridor method as defined by
SFAS No. 87, Employers Accounting for
Pensions, for the Companys domestic defined benefit
plans and Dutch plan. As permitted by SFAS No. 87, a
systematic method of amortization is used to amortize actuarial
gains and losses for its Irish defined benefit plans. For the
Irish plans, the Company separately identifies actuarial gains
and losses on the plans assets and projected benefit
obligations and uses an amortization method, which spreads each
years actuarial gain or loss over a period of five years,
without regard to the corridor, subject to the minimum
amortization requirements of SFAS No. 87.

48



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table summarizes information on the
Companys domestic and foreign defined benefit plans:

|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------------- | ---------------------------------------------- | -------------- | ------- | ------------- | - | ---- | ------- | ------- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                |                                                |                |         |              
|                                                                                |                                                | Domestic Plans |         | Foreign Plans
|                                                                                |                                                |                |         |              
|                                                                                |                                                | 2003           |         | 2002          |   | 2003 |         | 2002   
|                                                                                |                                                |                |         |               |   |      |         |        
|Change in benefit obligation:                                                   |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|                                                                                | Benefit obligation at beginning of year        |                | $       | 49,971        |   |      | $       | 49,810  |   |   | $      | 49,111 |   |   | $      | 39,583 |  
|                                                                                | Contributions                                  |                |         |              |   |      |         |        |   |   |        | 299    |   |   |        | 250    |  
|                                                                                | Service cost                                   |                |         | 427           |   |      |         | 376     |   |   |        | 1,965  |   |   |        | 1,636  |  
|                                                                                | Interest cost                                  |                |         | 3,299         |   |      |         | 3,482   |   |   |        | 3,043  |   |   |        | 2,504  |  
|                                                                                | Actuarial (gain) loss                          |                |         | 3,401         |   |      |         | (1,293  | ) |   |        | 1,925  |   |   |        | (461   | )
|                                                                                | Benefits paid                                  |                |         | (3,033        | ) |      |         | (2,404  | ) |   |        | (1,577 | ) |   |        | (1,792 | )
|                                                                                | Exchange gain                                  |                |         |              |   |      |         |        |   |   |        | 10,777 |   |   |        | 7,391  |  
|                                                                                | Curtailment loss                               |                |         |              |   |      |         |        |   |   |        | 232    |   |   |        |       |  
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|                                                                                | Benefit obligation at end of year              |                |         | 54,065        |   |      |         | 49,971  |   |   |        | 65,775 |   |   |        | 49,111 |  
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Change in plan assets:                                                          |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|                                                                                | Fair value of plan assets at beginning of year |                |         | 33,287        |   |      |         | 39,818  |   |   |        | 52,435 |   |   |        | 51,611 |  
|                                                                                | Actual return on plan assets                   |                |         | 5,317         |   |      |         | (4,335  | ) |   |        | 6,665  |   |   |        | (7,648 | )
|                                                                                | Contributions                                  |                |         | 3,950         |   |      |         | 208     |   |   |        | 597    |   |   |        | 1,729  |  
|                                                                                | Benefits paid                                  |                |         | (3,033        | ) |      |         | (2,404  | ) |   |        | (1,577 | ) |   |        | (1,792 | )
|                                                                                | Exchange gain                                  |                |         |              |   |      |         |        |   |   |        | 11,462 |   |   |        | 8,535  |  
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Fair value of plan assets at end of year                                        |                                                |                | 39,521  |               |   |      | 33,287  |         |   |   | 69,582 |        |   |   | 52,435 |       
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Funded status                                                                   |                                                |                | (14,544 | )             |   |      | (16,684 | )       |   |   | 3,807  |        |   |   | 3,324  |       
|Unrecognized net actuarial loss                                                 |                                                |                | 15,164  |               |   |      | 15,103  |         |   |   | 18,877 |        |   |   | 16,224 |       
|Unrecognized prior service cost                                                 |                                                |                | 73      |               |   |      | 84      |         |   |   |       |        |   |   |       |       
|Unrecognized transition obligation                                              |                                                |                |        |               |   |      | 36      |         |   |   | (176   | )      |   |   | (166   | )     
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Accrued benefit cost                                                            |                                                | $              | 693     |               |   | $    | (1,461  | )       |   | $ | 22,508 |        |   | $ | 19,382 |       
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Amounts recognized in the statement of financial
    position consist of:       |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|                                                                                | Prepaid benefit cost                           |                | $       |              |   |      | $       |        |   |   | $      | 22,524 |   |   | $      | 19,023 |  
|                                                                                | Accrued benefit liability                      |                |         | (14,544       | ) |      |         | (16,684 | ) |   |        | (1,696 | ) |   |        | (419   | )
|                                                                                | Intangible asset                               |                |         | 73            |   |      |         | 120     |   |   |        |       |   |   |        |       |  
|                                                                                | Accumulated other comprehensive loss           |                |         | 15,164        |   |      |         | 15,103  |   |   |        | 1,680  |   |   |        | 778    |  
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Net amount recognized                                                           |                                                | $              | 693     |               |   | $    | (1,461  | )       |   | $ | 22,508 |        |   | $ | 19,382 |       
|                                                                                |                                                |                |         |               |   |      |         |         |   |   |        |        |   |   |        |       
|Increase in minimum liability included in other
    comprehensive income (loss) |                                                | $              | 61      |               |   | $    | 5,841   |         |   | $ | 902    |        |   | $ | 180    |       

In 2003, the Company recognized a curtailment
loss of $232 as a result of early terminations in two of the
Companys foreign defined benefit plans.

The accumulated benefit obligation for all
defined benefit pension plans was $104,838 and $86,507 at
December 31, 2003 and 2002, respectively.

49



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                                                       |                                 |                |   |               |   |      |   |        |   |  |   |        |   |  |   |       |  
|------------------------------------------------------------------------------------------------------ | ------------------------------- | -------------- | - | ------------- | - | ---- | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|                                                                                                       |                                 |                |   |              
|                                                                                                       |                                 | Domestic Plans |   | Foreign Plans
|                                                                                                       |                                 |                |   |              
|                                                                                                       |                                 | 2003           |   | 2002          |   | 2003 |   | 2002  
|                                                                                                       |                                 |                |   |               |   |      |   |       
|Assumptions                                                                                            |                                 |                |   |               |   |      |   |        |   |  |   |        |   |  |   |      
|Weighted-average assumptions used to determine
    benefit obligations at December 31                  |                                 |                |   |               |   |      |   |        |   |  |   |        |   |  |   |      
|                                                                                                       | Discount rate                   |                |   | 6.25          | % |      |   | 6.75   | % |  |   | 5.46   | % |  |   | 5.71  | %
|                                                                                                       | Rate of compensations increases |                |   |              |   |      |   |       |   |  |   | 3.00   | % |  |   | 3.21  | %
|Information for pension plans with an
    accumulated benefit obligation in excess of plan
    assets: |                                 |                |   |               |   |      |   |        |   |  |   |        |   |  |   |      
|                                                                                                       | Projected benefit obligation    |                | $ | 54,065        |   |      | $ | 49,971 |   |  | $ | 11,725 |   |  | $ | 8,347 |  
|                                                                                                       | Accumulated benefit obligation  |                | $ | 54,065        |   |      | $ | 49,971 |   |  | $ | 9,991  |   |  | $ | 6,935 |  
|                                                                                                       | Fair value of plan assets       |                | $ | 39,521        |   |      | $ | 33,287 |   |  | $ | 8,295  |   |  | $ | 6,515 |  

Components of net periodic cost (benefit) and
significant weighted-average assumptions were as follows:

|                                    |  |          |        |         |  |          |        |         |  |          |        |         |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------- |  | -------- | ------ | ------- |  | -------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                    |  |          |        |         |  |         
|                                    |  | 2003     |        | 2002    |  | 2001    
|                                    |  |          |        |         |  |         
|                                    |  | Domestic |        | Foreign |  | Domestic |        | Foreign |  | Domestic |        | Foreign
|                                    |  | Plans    |        | Plans   |  | Plans    |        | Plans   |  | Plans    |        | Plans  
|                                    |  |          |        |         |  |          |        |         |  |          |        |        
|Service Cost                        |  | $        | 427    |         |  | $        | 1,965  |         |  | $        | 376    |         |  | $ | 1,636  |   |  | $ | 345    |   |  | $ | 1,316  |  
|Interest Cost                       |  |          | 3,299  |         |  |          | 3,043  |         |  |          | 3,482  |         |  |   | 2,504  |   |  |   | 3,412  |   |  |   | 1,973  |  
|Expected return on plan assets      |  |          | (3,008 | )       |  |          | (4,696 | )       |  |          | (3,471 | )       |  |   | (4,144 | ) |  |   | (3,856 | ) |  |   | (4,230 | )
|Net amortization and deferral       |  |          | 1,078  |         |  |          | 563    |         |  |          | 555    |         |  |   | 112    |   |  |   | 8      |   |  |   | (4,145 | )
|Curtailment loss                    |  |          |       |         |  |          | 232    |         |  |          |       |         |  |   |       |   |  |   |       |   |  |   |       |  
|                                    |  |          |        |         |  |          |        |         |  |          |        |         |  |   |        |   |  |   |        |   |  |   |        |  
|Net periodic pension cost (benefit) |  | $        | 1,796  |         |  | $        | 1,107  |         |  | $        | 942    |         |  | $ | 108    |   |  | $ | (91    | ) |  | $ | (5,086 | )
|                                    |  |          |        |         |  |          |        |         |  |          |        |         |  |   |        |   |  |   |        |   |  |   |        |  
|Discount rate                       |  |          | 6.75   | %       |  |          | 5.71   | %       |  |          | 7.25   | %       |  |   | 5.92   | % |  |   | 7.50   | % |  |   | 5.92   | %
|Expected return on plan assets      |  |          | 9.00   | %       |  |          | 8.25   | %       |  |          | 9.00   | %       |  |   | 7.39   | % |  |   | 9.00   | % |  |   | 7.41   | %
|Rate of compensation increase       |  |          |       |         |  |          | 3.21   | %       |  |          |       |         |  |   | 3.21   | % |  |   |       |   |  |   | 3.00   | %

The assumptions used in computing the net
periodic pension costs reflect current discount rates and
anticipated future returns on plan assets and expected
compensation increases. The discount rate is determined by
reviewing the rates of return on high quality fixed income
investments currently available with maturity dates
corresponding with the maturity of the pension benefits. The
expected return on plan assets is based on the expected long
term rate of return on plan assets taking into account the
plans asset allocation (primarily between equity and debt
securities), giving appropriate consideration to historical plan
returns. The rate of compensation increase is determined by
taking into consideration future economic conditions, such as
inflation and the Companys expected future compensation
levels when compared to historical performance.

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STATEMENTS  (Continued)




| |            
| | -----------
| | Plan Assets

The Companys domestic pension plans
weighted-average asset allocations at December 31, 2003 and
2002, by asset category are as follows:

|                    |                   |                   |   |                   |  |         |  |            |   |  |   |        |  |  |  |       |  
|------------------- | ----------------- | ----------------- | - | ----------------- |  | ------- |  | ---------- | - |  | - | ------ |  |  |  | ----- | -
|                    |                   |                  
|                    |                   | Domestic Plans   
|                    |                   |                  
|                    |                   |                   |   |                  
|                    |                   | December 31, 2003 |   | December 31, 2002
|                    |                   |                   |   |                  
|                    |                   | Amounts           |   | % of Total        |  | Amounts |  | % of Total
|                    |                   |                   |   |                   |  |         |  |           
|Assets by Category: |                   |                   |   |                   |  |         |  |            |   |  |   |        |  |  |  |      
|                    | Equity securities |                   | $ | 23,345            |  |         |  | 59.1       | % |  | $ | 19,789 |  |  |  | 59.4  | %
|                    | Debt securities   |                   |   | 12,077            |  |         |  | 30.5       |   |  |   | 12,848 |  |  |  | 38.6  |  
|                    | Other             |                   |   | 4,099             |  |         |  | 10.4       |   |  |   | 650    |  |  |  | 2.0   |  
|                    |                   |                   |   |                   |  |         |  |            |   |  |   |        |  |  |  |      
|                    | Total             |                   | $ | 39,521            |  |         |  | 100.0      | % |  | $ | 33,287 |  |  |  | 100.0 | %
|                    |                   |                   |   |                   |  |         |  |            |   |  |   |        |  |  |  |      



| |                    
| | -------------------
| | Investment Policies

In determining the Companys long-term rate
of return on plan assets, managements objective is to
obtain the highest possible return over the long-term
commensurate with the appropriate level of assumed risk. In
order to moderate the investment portfolios risk and
volatility, the Company develops a forecast of financial market
returns over a wide range of potential future economic trends.



| |           
| | ----------
| | Cash Flows



| |              
| | -------------
| | Contributions

The Company contributed $3,950 to its domestic
defined benefit plans in 2003. The Company expects to contribute
$3,935 to its domestic defined benefit plans in 2004.



| |                                  
| | ---------------------------------
| | Estimated Future Benefit Payments

The following benefit payments for the
Companys domestic defined benefit plans, which reflect
expected future service, as appropriate, are expected to be paid:

|                |  |   |        | 
|--------------- |  | - | ------ | 
|2004            |  | $ | 2,873  | 
|2005            |  | $ | 2,912  | 
|2006            |  | $ | 2,939  | 
|2007            |  | $ | 2,940  | 
|2008            |  | $ | 2,984  | 
|Years 2009-2013 |  | $ | 17,401 | 

14.     Stockholders
Equity

The Company has stock option plans for employees
(the Plans) that authorize the grant of non-qualified stock
options (NQSOs). For all options granted in connection with the
Plans, the option period extends for 11 years from the date
of grant with the shares vesting at 20% per year over the
first five years. The exercise price for options granted prior
to 1998 is equal to the fair value of the Companys common
stock at the date of grant. For options granted after 1997, the
exercise price is equal to the average of the highest and lowest
sales prices of the Companys common stock over a period of
20 days prior to the date of the grant. In addition, the
Company has a Directors Stock Option Plan. Each year during the
term of this Plan, each eligible director is granted an option
for 1,000 shares on the eighth business day after the
Company publicly announces its annual earnings. The option
period extends for 11 years from the grant date with the
shares being 100% vested one

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


year after the grant date. The exercise price is
equal to the average of the highest and lowest sales price of
the Companys common stock over a period of 20 days
prior to the date of the grant.

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related
Interpretations in accounting for its employee stock options.
Under APB 25, any difference between the exercise price of
the Companys employee stock options and the market price
of the underlying stock on the date of grant is recognized as
compensation expense over the vesting period of the options. The
alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based
Compensation, requires use of option valuation models for
determining compensation expense.

Pro forma information regarding net earnings
(loss) and earnings (loss) per common share is required by
Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under
the fair value method of that Statement. The fair value for
these options was estimated as of the date of grant using a
Black-Scholes option pricing model with the following
assumptions for 2003, 2002 and 2001, respectively: risk-free
interest rate of 3.82%, 3.82% and 4.96%; a dividend yield of
1.36%, 1.36% and 1.29%; volatility factors of the expected
market price of the Companys common stock of .468, .470
and .470; and a weighted-average expected life of the option of
8 years. The weighted-average fair value of options granted
in 2003 was $4.05 for employees and $5.05 for directors, in 2002
it was $8.29 for employees and $7.82 for directors, and in 2001
it was $10.26 for both employees and directors. The differences
in weighted average fair values in 2003 and 2002 are
attributable to different grant dates.

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected
stock price volatility. Because the Companys employee
stock options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. The Companys pro forma
information follows:

|                                                                                                                                                    |  |      |          |      |  |      |          |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------ | -
|                                                                                                                                                    |  | 2003 |          | 2002 |  | 2001
|                                                                                                                                                    |  |      |          |      |  |     
|Net earnings (loss) attributable to common
    stockholders, as reported                                                                            |  | $    | (106,697 | )    |  | $    | (194,307 | ) |  | $ | 8,389  |  
|Add: Stock-based employee compensation expense
    included in reported net earnings (loss), net of related tax
    effects                         |  |      | 897      |      |  |      | 304      |   |  |   | 247    |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |      | (5,521   | )    |  |      | (2,299   | ) |  |   | (2,461 | )
|                                                                                                                                                    |  |      |          |      |  |      |          |   |  |   |        |  
|Pro forma net earnings (loss) attributable to
    common stockholders                                                                               |  | $    | (111,321 | )    |  | $    | (196,302 | ) |  | $ | 6,175  |  
|                                                                                                                                                    |  |      |          |      |  |      |          |   |  |   |        |  
|Net earnings (loss) attributable to common
    stockholders per share:                                                                              |  |      |          |      |  |      |          |   |  |   |        |  
|Basic net earnings (loss) per common share, as
    reported                                                                                         |  | $    | (3.38    | )    |  | $    | (6.15    | ) |  | $ | 0.27   |  
|Basic net earnings (loss) per common share, pro
    forma                                                                                           |  | $    | (3.53    | )    |  | $    | (6.22    | ) |  | $ | 0.20   |  
|Diluted net earnings (loss) per common share, as
    reported                                                                                       |  | $    | (3.38    | )    |  | $    | (6.07    | ) |  | $ | 0.26   |  
|Diluted net earnings (loss) per common share, pro
    forma                                                                                         |  | $    | (3.53    | )    |  | $    | (6.13    | ) |  | $ | 0.19   |  

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NOTES TO CONSOLIDATED FINANCIAL
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In June 2003, the Company recognized all of the
remaining deferred compensation associated with its employee
stock options. In accordance with the change in control
provisions of the Companys stock option plans, the stock
options became fully vested in June 2003 as a result of the
private equity investment. For additional information on the
private equity investment, see note 3. Deferred
compensation associated with stock options issued to employees
in August 2003 is reflected in the 2003 amounts above.

A summary of the Companys stock option
activity and related information for the three years ended
December 31, 2003 follows:

|                              |           |        |           |               |   |   |       |       | 
|----------------------------- | --------- | ------ | --------- | ------------- | - | - | ----- | ----- | 
|                              |           |        |           | Weighted     
|                              |           |        |           | Average Price
|                              |           | Shares |           | Per Share    
|                              |           |        |           |              
|Outstanding December 31, 2000 |           |        | 3,247,033 |               |   | $ | 18.15 |      
|                              | Granted   |        |           | 582,600       |   |   |       | 16.61 | 
|                              | Exercised |        |           | (44,490       | ) |   |       | 16.97 | 
|                              | Cancelled |        |           | (215,930      | ) |   |       | 18.27 | 
|                              |           |        |           |               |   |   |       |      
|Outstanding December 31, 2001 |           |        | 3,569,213 |               |   |   | 17.91 |      
|                              | Granted   |        |           | 313,200       |   |   |       | 15.24 | 
|                              | Exercised |        |           | (2,200        | ) |   |       | 9.64  | 
|                              | Cancelled |        |           | (214,445      | ) |   |       | 19.44 | 
|                              |           |        |           |               |   |   |       |      
|Outstanding December 31, 2002 |           |        | 3,665,768 |               |   |   | 17.59 |      
|                              | Granted   |        |           | 498,000       |   |   |       | 10.46 | 
|                              | Exercised |        |           | (4,800        | ) |   |       | 9.64  | 
|                              | Cancelled |        |           | (310,040      | ) |   |       | 17.85 | 
|                              |           |        |           |               |   |   |       |      
|Outstanding December 31, 2003 |           |        | 3,848,928 |               |   | $ | 16.66 |      
|                              |           |        |           |               |   |   |       |      

At December 31, 2003, 2002, and 2001,
options for 3,428,825, 2,334,636 and 2,126,028 shares,
respectively, were exercisable. At December 31, 2003,
629,455 shares were available for future option grants. The
following summarizes information related to stock options
outstanding at December 31, 2003:

|                                                           |  |   |                |  |  |   |                 | 
|---------------------------------------------------------- |  | - | -------------- |  |  | - | --------------- | 
|Range of exercise prices                                   |  | $ | 9.64 to $18.94 |  |  | $ | 22.75 to $29.25 | 
|                                                           |  |   |                |  |  |   |                 | 
|Number outstanding at December 31, 2003                    |  |   | 3,329,978      |  |  |   | 518,950         | 
|Weighted-average remaining contractual life                |  |   | 6.8 years      |  |  |   | 2.5 years       | 
|Weighted-average exercise price of options
    outstanding |  | $ | 15.24          |  |  | $ | 25.79           | 
|Number exercisable at December 31, 2003                    |  |   | 2,909,875      |  |  |   | 518,950         | 
|Weighted-average exercise price of options
    exercisable |  | $ | 15.92          |  |  | $ | 25.79           | 

The Company also has a deferred compensation and
restricted stock plan (Restricted Stock Plan). Pursuant to the
Restricted Stock Plan, (prior to December 31, 2002) certain
officers, directors and managers of the Company were required to
defer a certain portion of their compensation and could elect to
defer additional compensation that is exchanged for restricted
stock. The Restricted Stock Plan was amended effective
December 31, 2002 to no longer provide for either mandatory
or voluntary deferral by directors and mandatory and voluntary
deferrals with respect to officers and managers was limited to
bonus payments. Shares granted are subject to certain
restrictions on transferability. The exercise price for
restricted stock awards granted is 85% of the average of the
highest and lowest sales prices of the common stock as reported
on the New York Stock Exchange on the last day of the prior
calendar quarter and on each of the 15 days before and
after that date. A total of 1,000,000 shares of common
stock are reserved for issuance under the Restricted Stock Plan.
During 2003 and 2002, participants purchased 15,538 and
31,172 shares of common stock, respectively, at an average
price of approximately $11.29 and $12.44 per share. Also,
upon termination of the

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NOTES TO CONSOLIDATED FINANCIAL
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Directors Retirement and Deferred Compensation
Plans during 1998, directors elected to rollover amounts under
these plans to the Restricted Stock Plan resulting in the
issuance of 59,441 shares of common stock. The amount of
non-cash compensation expense associated with purchases during
2003 and 2002 was not material.

On August 31, 2001, the Board of Directors
authorized and declared a dividend of one common stock purchase
right for each outstanding share of common stock under the
stockholder rights plan (the Plan). The Plan provides each
stockholder of record one common stock purchase right for each
share of common stock. The rights are represented by the common
stock certificates and are not separately traded from the common
stock and are not currently exercisable. The rights become
exercisable only if a person acquires beneficial ownership of
20% or more of the Companys common stock or announces a
tender offer or exchange offer that would result in beneficial
ownership of 20% or more of the Companys common stock, at
which time each right would enable the holder to buy shares of
the common stock at a discount to the then market price. The
Company may redeem the rights for $.01 per right, subject
to adjustment, at any time before the acquisition by a person or
group of 20% or more of the Companys common stock. The
rights have a 10-year term. On February 12, 2003, the Board
of Directors of the Company amended the terms of the Plan to
provide that the rights are not exercisable in connection with
the private equity investment. For additional information on the
private equity investment, see note 3.

Although the Rights should not interfere with a
business combination approved by the Board of Directors, they
may cause substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the
Board, except pursuant to an offer conditioned on a substantial
number of Rights being acquired.

15.     Earnings
(Loss) Per Share

The following table sets forth the computation of
basic and diluted earnings (loss) attributable to common
stockholders per common share for the years indicated:

|                                                                                                                                 |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |        |     | 
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------- | ------ | - | ---- | -------- | ------ | --- | - | ------ | ------ | --- | 
|                                                                                                                                 |                                                                                                                                             | 2003                                        |          | 2002   |   | 2001
|                                                                                                                                 |                                                                                                                                             |                                             |          |        |   |     
|Numerator for basic and diluted net earnings
    (loss) attributable to common stockholders per common share:                    |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |       
|Net earnings (loss) attributable to common
    stockholders from continuing operations                                           |                                                                                                                                             | $                                           | (106,809 | )      |   | $    | 26,398   |        |     | $ | 13,422 |       
|Net earnings (loss) attributable to common
    stockholders from discontinued operations                                         |                                                                                                                                             |                                             | 112      |        |   |      | (23,651  | )      |     |   | (5,033 | )     
|Cumulative effect of accounting change                                                                                           |                                                                                                                                             |                                             |         |        |   |      | (197,054 | )      |     |   |       |       
|                                                                                                                                 |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |       
|Net earnings (loss) attributable to common
    stockholders                                                                      |                                                                                                                                             | $                                           | (106,697 | )      |   | $    | (194,307 | )      |     | $ | 8,389  |       
|                                                                                                                                 |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |       
|Denominator:                                                                                                                     |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |       
|Denominator for basic net earnings (loss)
    attributable to common stockholders per common share 
    weighted-average shares |                                                                                                                                             |                                             | 31,580   |        |   |      | 31,579   |        |     |   | 31,542 |       
|                                                                                                                                 | Effect of dilutive securities:                                                                                                              |                                             |          |        |   |      |          |        |     |   |        |        |    
|                                                                                                                                 |                                                                                                                                             | Employee stock options and restricted stock |          |        |  |      |          |        | 436 |   |        |        | 489 | 
|                                                                                                                                 |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |       
|                                                                                                                                 | Denominator for diluted net earnings (loss)
    attributable to common stockholders per common share 
    adjusted weighted-average shares |                                             |          | 31,580 |   |      |          | 32,015 |     |   |        | 32,031 |    
|                                                                                                                                 |                                                                                                                                             |                                             |          |        |   |      |          |        |     |   |        |       

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|    |                              
|--- | -----------------------------
|16. | Commitments and Contingencies

The Company has commitments and contingent
liabilities, including legal proceedings, environmental
liabilities (see note 12), commitments relating to certain
state incentives, and various operating lease commitments.

In January 2001, the Company received a document
subpoena in connection with a federal grand jury investigation
of pricing practices in the polyester staple 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 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 U.S. Department
of Justice announced that it was filing informations against
another competitor and one of its former officers as a result of
their agreement to plead guilty to participating in a conspiracy
to fix prices and allocate customers in the polyester staple
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. Neither the Company
nor any of its employees has been charged with any wrongdoing,
and the Company vehemently denies that it or any of its
employees have engaged in price fixing or customer allocation.

Following the disclosure of the investigation,
the indictment of a competitors employee, 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 64 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, injunctions 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, results of operations, and cash flows may be adversely
impacted.

In order to receive certain state grants, the
Company agreed to meet certain conditions, including capital
expenditures and employment levels at its Pearl River facility.
During 2003 and 2002, the Company recognized grant income of
$1,500 and $6,000, respectively. The Company had deferred grant
income of $1,500 at December 31, 2002. The deferred income
was included in other current liabilities in the Companys
Consolidated Balance Sheet at December 31, 2002.

Approximate minimum rental commitments under
noncancelable leases during each of the next five years and
thereafter are as follows: 2004  $7,756;
2005  $5,709; 2006  $2,742;
2007  $1,928; 2008  $1,722; and
thereafter  $5,529.

Rent expense for cancelable and noncancelable
operating leases was $11,567, $10,182 and $10,113 for the years
ended December 31, 2003, 2002 and 2001, respectively.

The Company is involved in various claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of this ordinary
course litigation will not have a material adverse effect, if
any, on the Companys consolidated financial position,
results of operations, and cash flows.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


17.     Derivatives
and Financial Instruments

The Company utilizes derivative instruments,
principally swap and forward contracts, to enhance its ability
to manage risk including interest rates and foreign currency
fluctuations, which exist as part of its ongoing business. These
contracts hedge transactions and balances for periods consistent
with the related exposures. The Company does not utilize
financial instruments for trading or other speculative purposes.

The Company utilizes interest rate swaps to
manage the interest rate characteristics of certain debt. At
January 1, 2001 the Company had interest rate swaps related
to $50,000 of its fixed-rate debt, which exactly matched the
terms of the underlying debt instruments. These swaps,
effectively converting the fixed-rate debt to floating-rate
debt, qualified and were accounted for as fair value hedges. The
Consolidated Balance Sheet at December 31, 2001 reflected
$2,556 for the fair market value of the swaps in other assets,
offset by a corresponding change in the fair value of the
underlying debt. These swaps were terminated during 2002,
resulting in a gain of $1,464. This gain was recognized as a
reduction in interest expense over the remaining life of the
debt. During 2002, the Company entered into interest rate swaps
that effectively converted $40,000 of its fixed-rate debt to
floating-rate debt at an effective interest rate of six-month
LIBOR + 1.42% (approximately 3.5% at December 31, 2002).
The Company estimated it would have received $5,331 if these
swaps had been terminated at December 31, 2002. These swaps
qualified as fair value hedges under SFAS 133. These swaps
were terminated during 2003, resulting in a gain of $4,105. This
gain will be recognized as a reduction in interest expense over
the remaining life of the debt. Subsequent to 2003, the Company
closed on $625,000 of new debt financings and used the net
proceeds to repay substantially all of its existing indebtedness
and certain contractual obligations. The remaining gain from the
termination of these swaps will be recognized in 2004 with the
repayment of the debt. For additional information on the
financing, see note 10.

As part of the restructuring of the sale
leaseback transaction in June of 2003, the Company entered into
three swaps, each with a notional amount of $50,000, 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
leaseback. The effective portion of the gain or loss related to
the swaps was reported as a component of other comprehensive
income (loss). The remaining ineffective portion of the gain or
loss on the hedges was reported in earnings in 2003 as a
reduction of rent expense. The Company reflected the payment
that it would be required to make to terminate these swaps as a
non current liability of $16,760 at December 31, 2003.
During the second half of 2003 the Companys loss was
reduced by $3,216 and equity (other comprehensive income) was
increased by $2,875.

In February 2004, the Company terminated two of
the three swaps and exercised its option to purchase the assets
under the sale leaseback transaction. The loss incurred upon
termination of the two swaps will be recognized in the
Companys earnings (loss) during the first quarter of 2004.
The remaining hedge with a notional amount of $50,000 was
redesignated as a cash flow hedge against the new debt entered
into in February 2004. For additional information on the
financing transaction, see note 10.

The Company operates in international markets and
uses foreign exchange contracts with maturities of less than
twelve months to hedge existing foreign exchange exposures.
Foreign currency contracts require the Company at a future date
to either buy or sell foreign currency in exchange for
U.S. dollars and other currencies. The Company had
contracts with notional amounts of $11,506 and $31,657 at
December 31, 2003 and 2002, respectively, that were
designated as cash flow hedges. The fair value of these
contracts was approximately $141 and $1,025 at December 31,
2003 and 2002, respectively. At December 31, 2003 and 2002,
these forward contracts resulted in an unrealized gain in
accumulated other comprehensive income (loss) of $74 and $1,020,
respectively, which will be realized when the underlying
transaction gain or loss is recognized in earnings.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of foreign currency and interest rate contracts described above
and in note 10 and temporary cash

56



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


investments and trade accounts receivable. The
counterparties to the contractual arrangements are a diverse
group of major financial institutions with which the Company
also has other financial relationships. The Company is exposed
to credit loss in the event of nonperformance by these
counterparties. However, the Company does not anticipate
nonperformance by the other parties, and no material loss would
be expected from nonperformance by any one of such
counterparties. The Company places its temporary cash
investments with high credit quality institutions. Concentration
of credit risk with respect to trade accounts receivable is
managed by an in-house professional credit staff or is insured.
The Company performs periodic credit evaluations of its
customers financial condition and generally does not
require collateral. Four of the Companys customers
comprise approximately 25% of its total accounts receivable. In
addition, approximately 46% of total accounts receivable are
included in the FRPG customer base. Approximately 25% of the
Companys total accounts receivable is in the
U.S. textile business, which continues to face competitive
challenges presented by the imports of textile and apparel fiber
and finished goods. A down turn in the financial condition of
any of these customers may have a negative impact on the
Companys results of operations.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The following methods and assumptions were used
by the Company in estimating its fair value disclosures for
financial instruments.

Cash and cash equivalents, accounts receivable
and accounts payable: The carrying amounts reported in the
consolidated balance sheets approximate their fair value.

Borrowing arrangements: See note 10.

Interest rate instruments: The fair value of
interest rate instruments is the estimated amount that the
Company would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and
the current creditworthiness of the counterparties.

All of the Companys estimates of fair value
and termination cost/benefit for its derivative financial
instruments are based on readily available dealer quotes as to
the amounts the Company would receive or pay to terminate the
contracts.

The following table summarizes the carrying
amounts and estimated fair values of the Companys
financial instruments at December 31, 2003 and 2002:

|                             |                                    |          |   |            |   |          |   |            |   |  |   |         |  |  |   |         | 
|---------------------------- | ---------------------------------- | -------- | - | ---------- | - | -------- | - | ---------- | - |  | - | ------- |  |  | - | ------- | 
|                             |                                    |          |   |           
|                             |                                    | 2003     |   | 2002      
|                             |                                    |          |   |           
|                             |                                    | Carrying |   |            |   | Carrying |   |           
|                             |                                    | Amount   |   | Fair Value |   | Amount   |   | Fair Value
|                             |                                    |          |   |            |   |          |   |           
|Nonderivatives               |                                    |          |   |            |   |          |   |            |   |  |   |         |  |  |   |        
|                             | Cash and cash equivalents          |          | $ | 205,480    |   |          | $ | 205,480    |   |  | $ |        |  |  | $ |        | 
|                             | Accounts receivable                |          |   | 143,664    |   |          |   | 143,664    |   |  |   | 68,762  |  |  |   | 68,762  | 
|                             | Accounts payable                   |          |   | 90,622     |   |          |   | 90,622     |   |  |   | 68,671  |  |  |   | 68,671  | 
|                             | Borrowing arrangements             |          |   | 370,992    |   |          |   | 370,992    |   |  |   | 236,909 |  |  |   | 236,909 | 
|Derivatives  receive (pay): |                                    |          |   |            |   |          |   |            |   |  |   |         |  |  |   |        
|                             | Cash flow hedges                   |          |   | (16,760    | ) |          |   | (16,760    | ) |  |   | 5,331   |  |  |   | 5,331   | 
|                             | Forward foreign currency contracts |          |   | 141        |   |          |   | 141        |   |  |   | 1,025   |  |  |   | 1,025   | 



|    |                                           
|--- | ------------------------------------------
|18. | Operating Segment and Geographic
    Areas

The Companys operations are classified into
two reportable operating segments: the Packaging Products Group
(PPG) and the Fibers and Recycled Products Group (FRPG).

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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 of
the reportable operating segments are the same as those
described in the Summary of Significant Accounting Policies in
note 1.

As discussed in note 2, the Company sold the
assets of its small recycled fine denier polyester staple fiber
business during the first quarter of 2003 and its POY business
during 2002. These assets, which were previously reported as
part of the Companys FRPG, were reported as discontinued
operations in the Companys financial statements.

|                                                             |  |           |         |                     |  |       |          |   |  |   |           |  
|------------------------------------------------------------ |  | --------- | ------- | ------------------- |  | ----- | -------- | - |  | - | --------- | -
|                                                             |  | Packaging |         |                     |  |      
|                                                             |  | Products  |         | Fibers and Recycled |  |      
|                                                             |  | Group     |         | Products Group      |  | Total
|                                                             |  |           |         |                     |  |      
|2003                                                         |  |           |         |                     |  |       |          |   |  |   |           |  
|Revenues                                                     |  | $         | 632,028 |                     |  | $     | 477,247  |   |  | $ | 1,109,275 |  
|Segment profit (loss)                                        |  |           | 13,894  |                     |  |       | (154,851 | ) |  |   | (140,957  | )
|Assets                                                       |  |           | 455,150 |                     |  |       | 382,763  |   |  |   | 837,913   |  
|Amortization and depreciation from continuing
    operations |  |           | 30,154  |                     |  |       | 24,528   |   |  |   | 54,682    |  
|Capital expenditures for continuing operations               |  |           | 7,561   |                     |  |       | 7,955    |   |  |   | 15,516    |  
|2002                                                         |  |           |         |                     |  |       |          |   |  |   |           |  
|Revenues                                                     |  | $         | 524,781 |                     |  | $     | 489,187  |   |  | $ | 1,013,968 |  
|Segment profit (loss)                                        |  |           | 50,045  |                     |  |       | (4,357   | ) |  |   | 45,688    |  
|Assets                                                       |  |           | 406,083 |                     |  |       | 504,520  |   |  |   | 910,603   |  
|Amortization and depreciation from continuing
    operations |  |           | 24,759  |                     |  |       | 30,934   |   |  |   | 55,693    |  
|Capital expenditures for continuing operations               |  |           | 14,352  |                     |  |       | 7,296    |   |  |   | 21,648    |  
|2001                                                         |  |           |         |                     |  |       |          |   |  |   |           |  
|Revenues                                                     |  | $         | 533,210 |                     |  | $     | 476,350  |   |  | $ | 1,009,560 |  
|Segment profit (loss)                                        |  |           | 64,699  |                     |  |       | (29,466  | ) |  |   | 35,233    |  
|Assets                                                       |  |           | 384,335 |                     |  |       | 757,920  |   |  |   | 1,142,255 |  
|Amortization and depreciation from continuing
    operations |  |           | 21,831  |                     |  |       | 39,301   |   |  |   | 61,132    |  
|Capital expenditures for continuing operations               |  |           | 15,800  |                     |  |       | 12,284   |   |  |   | 28,084    |  

58



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Following are reconciliations to corresponding
totals in the accompanying consolidated financial statements:

|                      |                                     |      |   |           |   |      |   |         |   |  |   |           |  
|--------------------- | ----------------------------------- | ---- | - | --------- | - | ---- | - | ------- | - |  | - | --------- | -
|                      |                                     | 2003 |   | 2002      |   | 2001
|                      |                                     |      |   |           |   |     
|Segment Profit (Loss) |                                     |      |   |           |   |      |   |         |   |  |   |          
|                      | Total for reportable segments       |      | $ | (140,957  | ) |      | $ | 45,688  |   |  | $ | 35,233    |  
|                      | Interest expense, net               |      |   | (10,131   | ) |      |   | (10,254 | ) |  |   | (17,957   | )
|                      |                                     |      |   |           |   |      |   |         |   |  |   |          
|                      | Earnings (loss) before income taxes |      | $ | (151,088  | ) |      | $ | 35,434  |   |  | $ | 17,276    |  
|                      |                                     |      |   |           |   |      |   |         |   |  |   |          
|Assets                |                                     |      |   |           |   |      |   |         |   |  |   |          
|                      | Total for reportable segments       |      | $ | 837,913   |   |      | $ | 910,603 |   |  | $ | 1,142,255 |  
|                      | Corporate assets(1)                 |      |   | 279,156   |   |      |   | 54,607  |   |  |   | 92,175    |  
|                      |                                     |      |   |           |   |      |   |         |   |  |   |          
|                      | Total Assets                        |      | $ | 1,117,069 |   |      | $ | 965,210 |   |  | $ | 1,234,430 |  
|                      |                                     |      |   |           |   |      |   |         |   |  |   |          



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Corporate assets include cash, prepaid expenses,
    construction in progress and other assets not allocated to the
    segments.

Net sales and operating income (loss) for the
years ended December 31, 2003, 2002 and 2001 and long-lived
assets at the end of each year, classified by the major
geographic areas in which the company operates, are as follows:

|                        |        |      |           |          |   |      |           |         |  |   |           |         | 
|----------------------- | ------ | ---- | --------- | -------- | - | ---- | --------- | ------- |  | - | --------- | ------- | 
|                        |        | 2003 |           | 2002     |   | 2001
|                        |        |      |           |          |   |     
|Net sales               |        |      |           |          |   |      |           |         |  |   |           |        
|                        | U.S.   |      | $         | 927,679  |   |      | $         | 861,559 |  |   | $         | 837,974 | 
|                        | Europe |      |           | 181,596  |   |      |           | 152,409 |  |   |           | 171,586 | 
|                        |        |      |           |          |   |      |           |         |  |   |           |        
|                        |        | $    | 1,109,275 |          |   | $    | 1,013,968 |         |  | $ | 1,009,560 |        
|                        |        |      |           |          |   |      |           |         |  |   |           |        
|Operating income (loss) |        |      |           |          |   |      |           |         |  |   |           |        
|                        | U.S.   |      | $         | (143,159 | ) |      | $         | 31,650  |  |   | $         | 13,864  | 
|                        | Europe |      |           | 2,202    |   |      |           | 14,038  |  |   |           | 21,369  | 
|                        |        |      |           |          |   |      |           |         |  |   |           |        
|                        |        | $    | (140,957  | )        |   | $    | 45,688    |         |  | $ | 35,233    |        
|                        |        |      |           |          |   |      |           |         |  |   |           |        
|Long-lived assets       |        |      |           |          |   |      |           |         |  |   |           |        
|                        | U.S.   |      | $         | 488,333  |   |      | $         | 654,888 |  |   | $         | 686,750 | 
|                        | Europe |      |           | 54,656   |   |      |           | 46,172  |  |   |           | 41,179  | 
|                        |        |      |           |          |   |      |           |         |  |   |           |        
|                        |        | $    | 542,989   |          |   | $    | 701,060   |         |  | $ | 727,929   |        
|                        |        |      |           |          |   |      |           |         |  |   |           |        

Revenues are attributed to countries based on the
location where the products were produced.

59



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                     
|--- | ------------------------------------
|19. | Quarterly Financial Data (Unaudited)

Quarterly financial information for the years
ended December 31, 2003 and 2002 is summarized as follows:

|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |         |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | --------- | ------- | -------- |  | --------- | ------- | ------- | - | ----- | ------- | ------ | - | - | -------- | ------- | - | - | --------- | ------- | -
|                                                                   |                                                                                          | March 31, |         | June 30, |  | Sept. 30, |         | Dec. 31 |   | Total
|                                                                   |                                                                                          | 2003      |         | 2003     |  | 2003      |         | 2003(3) |   | 2003 
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |      
|Income Statement Data:(1)                                          |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Net sales                                                          |                                                                                          | $         | 287,309 |          |  | $         | 285,282 |         |   | $     | 262,735 |        |   | $ | 273,949  |         |   | $ | 1,109,275 |        
|Cost of sales                                                      |                                                                                          |           | 257,120 |          |  |           | 261,996 |         |   |       | 246,186 |        |   |   | 263,370  |         |   |   | 1,028,672 |        
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Gross profit                                                       |                                                                                          |           | 30,189  |          |  |           | 23,286  |         |   |       | 16,549  |        |   |   | 10,579   |         |   |   | 80,603    |        
|Selling, general and administrative expenses                       |                                                                                          |           | 17,213  |          |  |           | 17,348  |         |   |       | 15,836  |        |   |   | 16,202   |         |   |   | 66,599    |        
|Impairment charge                                                  |                                                                                          |           |        |          |  |           |        |         |   |       |        |        |   |   | 135,307  |         |   |   | 135,307   |        
|Restructuring charges(4)                                           |                                                                                          |           | 1,234   |          |  |           | 86      |         |   |       | 317     |        |   |   | 8,525    |         |   |   | 10,162    |        
|Provision for uncollectible accounts                               |                                                                                          |           | 15      |          |  |           | 113     |         |   |       | 3,265   |        |   |   | 127      |         |   |   | 3,520     |        
|Other expense, net(2)                                              |                                                                                          |           | 1,200   |          |  |           | 2,967   |         |   |       | 1,227   |        |   |   | 578      |         |   |   | 5,972     |        
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Operating income (loss)                                            |                                                                                          |           | 10,527  |          |  |           | 2,772   |         |   |       | (4,096  | )      |   |   | (150,160 | )       |   |   | (140,957  | )      
|Interest expense, net                                              |                                                                                          |           | 2,030   |          |  |           | 2,322   |         |   |       | 2,377   |        |   |   | 3,402    |         |   |   | 10,131    |        
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Earnings (loss) from continuing operations before
    income taxes |                                                                                          |           | 8,497   |          |  |           | 450     |         |   |       | (6,473  | )      |   |   | (153,562 | )       |   |   | (151,088  | )      
|Income tax expense (benefit)                                       |                                                                                          |           | 2,804   |          |  |           | 149     |         |   |       | (1,851  | )      |   |   | (55,493  | )       |   |   | (54,391   | )      
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Earnings (loss) from continuing operations                         |                                                                                          |           | 5,693   |          |  |           | 301     |         |   |       | (4,622  | )      |   |   | (98,069  | )       |   |   | (96,697   | )      
|Earnings from discontinued operations, net of
    income tax       |                                                                                          |           | 112     |          |  |           |        |         |   |       |        |        |   |   |         |         |   |   | 112       |        
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Net earnings (loss)                                                |                                                                                          | $         | 5,805   |          |  | $         | 301     |         |   | $     | (4,622  | )      |   | $ | (98,069  | )       |   | $ | (96,585   | )      
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Net earnings (loss) attributable to common
    stockholders:       |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|                                                                   | Net earnings (loss)                                                                      |           | $       | 5,805    |  |           | $       | 301     |   |       | $       | (4,622 | ) |   | $        | (98,069 | ) |   | $         | (96,585 | )
|                                                                   | Accretion of preferred stock and beneficial
    conversion charge                        |           |         |         |  |           |         | (120    | ) |       |         | (2,855 | ) |   |          | (7,137  | ) |   |           | (10,112 | )
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Net earnings (loss) attributable to common
    stockholders        |                                                                                          | $         | 5,805   |          |  | $         | 181     |         |   | $     | (7,477  | )      |   | $ | (105,206 | )       |   | $ | (106,697  | )      
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Basic net earnings (loss) per common share:                        |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders from continuing operations   |           | $       | 0.18     |  |           | $       | 0.01    |   |       | $       | (0.24  | ) |   | $        | (3.33   | ) |   | $         | (3.38   | )
|                                                                   | Net earnings (loss) attributable to common
    stockholders from discontinued operations |           |         |         |  |           |         |        |   |       |         |       |   |   |          |        |   |   |           |        |  
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |           | $       | 0.18     |  |           | $       | 0.01    |   |       | $       | (0.24  | ) |   | $        | (3.33   | ) |   | $         | (3.38   | )
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Diluted net earnings (loss) per common share:                      |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders from continuing operations   |           | $       | 0.18     |  |           | $       | 0.01    |   |       | $       | (0.24  | ) |   | $        | (3.33   | ) |   | $         | (3.38   | )
|                                                                   | Net earnings (loss) attributable to common
    stockholders from discontinued operations |           |         |         |  |           |         |        |   |       |         |       |   |   |          |        |   |   |           |        |  
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|                                                                   | Net earnings (loss) attributable to common
    stockholders                              |           | $       | 0.18     |  |           | $       | 0.01    |   |       | $       | (0.24  | ) |   | $        | (3.33   | ) |   | $         | (3.38   | )
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Basic weighted-average common shares outstanding                   |                                                                                          |           | 31,582  |          |  |           | 31,578  |         |   |       | 31,582  |        |   |   | 31,578   |         |   |   | 31,580    |        
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        
|Diluted weighted-average common shares outstanding                 |                                                                                          |           | 31,931  |          |  |           | 31,943  |         |   |       | 31,582  |        |   |   | 31,582   |         |   |   | 31,580    |        
|                                                                   |                                                                                          |           |         |          |  |           |         |         |   |       |         |        |   |   |          |         |   |   |           |        

60



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |        |  
|----------------------------------------------------------------- | -------------------------------------- | --------- | -------- | -------- | - | --------- | ------- | ------- | - | ----- | ------- | ------ | - | - | ------- | ------ |  | - | --------- | ------ | -
|                                                                  |                                        | March 31, |          | June 30, |   | Sept. 30, |         | Dec. 31 |   | Total
|                                                                  |                                        | 2002(5)   |          | 2002     |   | 2002      |         | 2002    |   | 2002 
|                                                                  |                                        |           |          |          |   |           |         |         |   |      
|Income Statement Data:(1)                                         |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Net sales                                                         |                                        | $         | 239,972  |          |   | $         | 268,026 |         |   | $     | 257,333 |        |   | $ | 248,637 |        |  | $ | 1,013,968 |       
|Cost of sales                                                     |                                        |           | 213,549  |          |   |           | 229,767 |         |   |       | 232,071 |        |   |   | 223,358 |        |  |   | 898,745   |       
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Gross profit                                                      |                                        |           | 26,423   |          |   |           | 38,259  |         |   |       | 25,262  |        |   |   | 25,279  |        |  |   | 115,223   |       
|Selling, general and administrative expenses                      |                                        |           | 15,099   |          |   |           | 17,680  |         |   |       | 15,838  |        |   |   | 16,005  |        |  |   | 64,622    |       
|Provision for uncollectible accounts                              |                                        |           | 37       |          |   |           | 151     |         |   |       | 34      |        |   |   | 3,990   |        |  |   | 4,212     |       
|Other expense (income), net(2)                                    |                                        |           | 1,026    |          |   |           | 611     |         |   |       | 1,208   |        |   |   | (2,144  | )      |  |   | 701       |       
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Operating income                                                  |                                        |           | 10,261   |          |   |           | 19,817  |         |   |       | 8,182   |        |   |   | 7,428   |        |  |   | 45,688    |       
|Interest expense, net                                             |                                        |           | 2,771    |          |   |           | 2,292   |         |   |       | 2,403   |        |   |   | 2,788   |        |  |   | 10,254    |       
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Earnings from continuing operations before income
    taxes       |                                        |           | 7,490    |          |   |           | 17,525  |         |   |       | 5,779   |        |   |   | 4,640   |        |  |   | 35,434    |       
|Income tax expense                                                |                                        |           | 1,872    |          |   |           | 4,756   |         |   |       | 1,071   |        |   |   | 1,337   |        |  |   | 9,036     |       
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Earnings from continuing operations                               |                                        |           | 5,618    |          |   |           | 12,769  |         |   |       | 4,708   |        |   |   | 3,303   |        |  |   | 26,398    |       
|Earnings (loss) from discontinued operations                      |                                        |           | (31,034  | )        |   |           | (5,229  | )       |   |       | (248    | )      |   |   | 125     |        |  |   | (36,386   | )     
|Tax expense (benefit) from discontinued operations                |                                        |           | (10,861  | )        |   |           | (1,831  | )       |   |       | (87     | )      |   |   | 44      |        |  |   | (12,735   | )     
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Earnings (loss) before cumulative effect of
    accounting change |                                        |           | (14,555  | )        |   |           | 9,371   |         |   |       | 4,547   |        |   |   | 3,384   |        |  |   | 2,747     |       
|Cumulative effect of accounting change                            |                                        |           | (197,054 | )        |   |           |        |         |   |       |        |        |   |   |        |        |  |   | (197,054  | )     
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Net earnings (loss)                                               |                                        | $         | (211,609 | )        |   | $         | 9,371   |         |   | $     | 4,547   |        |   | $ | 3,384   |        |  | $ | (194,307  | )     
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Basic net earnings (loss) per common share:                       |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|                                                                  | Earnings from continuing operations    |           | $        | 0.18     |   |           | $       | 0.40    |   |       | $       | 0.15   |   |   | $       | 0.11   |  |   | $         | 0.84   |  
|                                                                  | Loss from discontinued operations      |           |          | (0.64    | ) |           |         | (0.11   | ) |       |         | (0.01  | ) |   |         |       |  |   |           | (0.75  | )
|                                                                  | Cumulative effect of accounting change |           |          | (6.24    | ) |           |         |        |   |       |         |       |   |   |         |       |  |   |           | (6.24  | )
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|                                                                  | Net earnings (loss)                    |           | $        | (6.70    | ) |           | $       | 0.29    |   |       | $       | 0.14   |   |   | $       | 0.11   |  |   | $         | (6.15  | )
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|Diluted net earnings (loss) per common share:                     |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|                                                                  | Earnings from continuing operations    |           | $        | 0.18     |   |           | $       | 0.40    |   |       | $       | 0.15   |   |   | $       | 0.11   |  |   | $         | 0.82   |  
|                                                                  | Loss from discontinued operations      |           |          | (0.63    | ) |           |         | (0.11   | ) |       |         | (0.01  | ) |   |         |       |  |   |           | (0.73  | )
|                                                                  | Cumulative effect of accounting change |           |          | (6.16    | ) |           |         |        |   |       |         |       |   |   |         |       |  |   |           | (6.16  | )
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|                                                                  | Net earnings (loss)                    |           | $        | (6.61    | ) |           | $       | 0.29    |   |       | $       | 0.14   |   |   | $       | 0.11   |  |   | $         | (6.07  | )
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|                                                                  | Basic weighted-average shares          |           |          | 31,578   |   |           |         | 31,580  |   |       |         | 31,581 |   |   |         | 31,575 |  |   |           | 31,579 |  
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       
|                                                                  | Diluted weighted-average shares        |           |          | 32,003   |   |           |         | 32,078  |   |       |         | 32,022 |   |   |         | 31,958 |  |   |           | 32,015 |  
|                                                                  |                                        |           |          |          |   |           |         |         |   |       |         |        |   |   |         |        |  |   |           |       



---



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | Certain amounts have been reclassified to conform
    to the 2003 full-year presentation.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(2) | Other expense (income), net consisted of the
    following amounts for the periods indicated:

|                                                                                                          |  |           |       |          |  |          |       |         |  |       |       |  |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | --------- | ----- | -------- |  | -------- | ----- | ------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | -
|                                                                                                          |  | March 31, |       | June 30, |  | Sept. 30 |       | Dec. 31 |  | Total
|                                                                                                          |  | 2003      |       | 2003     |  | 2003     |       | 2003    |  | 2003 
|                                                                                                          |  |           |       |          |  |          |       |         |  |      
|Legal costs related to the Department of Justice
    investigation of the polyester staple fiber industry |  | $         | 1,200 |          |  | $        | 1,811 |         |  | $     | 1,227 |  |  | $ | 1,776  |   |  | $ | 6,014  |  
|Non-capitalizable financing costs                                                                         |  |           |      |          |  |          |      |         |  |       |      |  |  |   | 2,219  |   |  |   | 2,219  |  
|Accelerated stock option vesting                                                                          |  |           |      |          |  |          | 1,156 |         |  |       |      |  |  |   |       |   |  |   | 1,156  |  
|Rebates from anti-dumping duties                                                                          |  |           |      |          |  |          |      |         |  |       |      |  |  |   | (3,417 | ) |  |   | (3,417 | )
|                                                                                                          |  |           |       |          |  |          |       |         |  |       |       |  |  |   |        |   |  |   |        |  
|                                                                                                          |  | $         | 1,200 |          |  | $        | 2,967 |         |  | $     | 1,227 |  |  | $ | 578    |   |  | $ | 5,972  |  
|                                                                                                          |  |           |       |          |  |          |       |         |  |       |       |  |  |   |        |   |  |   |        |  

|                                                                                                          |  |           |       |          |  |          |     |         |  |       |       |  |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | --------- | ----- | -------- |  | -------- | --- | ------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | -
|                                                                                                          |  | March 31, |       | June 30, |  | Sept. 30 |     | Dec. 31 |  | Total
|                                                                                                          |  | 2002      |       | 2002     |  | 2002     |     | 2002    |  | 2002 
|                                                                                                          |  |           |       |          |  |          |     |         |  |      
|Legal costs related to the Department of Justice
    investigation of the polyester staple fiber industry |  | $         | 1,026 |          |  | $        | 611 |         |  | $     | 1,208 |  |  | $ | 2,221  |   |  | $ | 5,066  |  
|Rebate from anti-dumping duties                                                                           |  |           |      |          |  |          |    |         |  |       |      |  |  |   | (4,365 | ) |  |   | (4,365 | )
|                                                                                                          |  |           |       |          |  |          |     |         |  |       |       |  |  |   |        |   |  |   |        |  
|                                                                                                          |  | $         | 1,026 |          |  | $        | 611 |         |  | $     | 1,208 |  |  | $ | (2,144 | ) |  | $ | 701    |  
|                                                                                                          |  |           |       |          |  |          |     |         |  |       |       |  |  |   |        |   |  |   |        |  



|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Quarterly net loss includes an impairment charge
    of $135,307 ($87,950 after tax). For additional information on
    the impairment charge, see note 1 to the Consolidated
    Financial Statements.
|   
|(4) | Quarterly net earnings (loss) includes
    restructuring charges. For additional information on
    restructuring charges in 2003, see note 8.                                                         
|   
|(5) | Quarterly net loss includes a cumulative effect
    of an accounting change of $197,054, or $6.16 per diluted
    share, for the impairment of goodwill. For additional
    information, see note 2.   

62



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REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of

Wellman, Inc.


We have audited the accompanying consolidated
balance sheets of Wellman, Inc. as of December 31,
2003 and 2002, and the related consolidated statements of
operations, stockholders equity and cash flows for each of
the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedules listed in
the Index at Item 8. These financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did
not audit the financial statements and schedules of a wholly
owned subsidiary of the Company, which statements reflect total
assets constituting 10% and 9% as of December 31, 2003 and
2002, respectively and net sales of 10%, 9% and 9% for each of
the three years in the period ended December 31, 2003 of
the related consolidated totals. Those financial statements and
schedules were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data
included for such wholly owned subsidiary, is based solely on
the report of other auditors.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits and
the report of other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and the
report of other auditors, the financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Wellman, Inc. at December 31,
2003 and 2002, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, based on our audits and the report of other auditors,
the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.

As discussed in note 2 to the Consolidated
Financial Statements, in 2002 the Company changed its method of
accounting for goodwill and other intangible assets and for the
impairment or disposal of long-lived assets. In 2001, the
Company changed its method of accounting for derivative
instruments and hedging activities.



| |     
| | ----
| | LOGO

Charlotte, North Carolina

February 20, 2004


63



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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS


Years Ended December 31, 2003, 2002 and
2001


|                                            |  |                |       |            |  |       |       |            |  |         |     |   |  |   |       |     |  |   |       | 
|------------------------------------------- |  | -------------- | ----- | ---------- |  | ----- | ----- | ---------- |  | ------- | --- | - |  | - | ----- | --- |  | - | ----- | 
|                                            |  | Balance at     |       | Charged to |  |       |       |            |  | Balance
|                                            |  | Beginning of   |       | Costs and  |  |       |       |            |  | at End 
|Description                                 |  | Year           |       | Expenses   |  | Other |       | Deductions |  | of Year
|                                            |  |                |       |            |  |       |       |            |  |        
|                                            |  |               
|                                            |  | (In thousands)
|Allowance for doubtful accounts Receivable: |  |                |       |            |  |       |       |            |  |         |     |   |  |   |       |     |  |   |       | 
|Year ended December 31, 2003                |  | $              | 7,675 |            |  | $     | 3,520 |            |  | $       | 98  |   |  | $ | 7,523 | (a) |  | $ | 3,770 | 
|                                            |  |                |       |            |  |       |       |            |  |         |     |   |  |   |       |     |  |   |       | 
|Year ended December 31, 2002                |  | $              | 3,871 |            |  | $     | 4,212 |            |  | $       | 76  |   |  | $ | 484   | (a) |  | $ | 7,675 | 
|                                            |  |                |       |            |  |       |       |            |  |         |     |   |  |   |       |     |  |   |       | 
|Year ended December 31, 2001                |  | $              | 3,968 |            |  | $     | 112   |            |  | $       | (33 | ) |  | $ | 176   | (a) |  | $ | 3,871 | 
|                                            |  |                |       |            |  |       |       |            |  |         |     |   |  |   |       |     |  |   |       | 

(a) Accounts written off and reduction of
allowance.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Based on an evaluation of the
effectiveness of the Companys disclosure controls and
procedures as of December 31, 2003, 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) There have been no significant changes
in the Companys internal controls or in other factors that
could significantly affect these controls subsequent to the date
of their evaluation. There were no corrective actions with
regard to significant deficiencies and material weaknesses.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Election of Directors and
Section 16(a) Beneficial Ownership Reporting
Compliance and Other Information in our Proxy Statement
for the 2004 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 29,
2004 are incorporated by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Compensation of Directors and
Officers in our Proxy Statement for the 2004 Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 29, 2004 is
incorporated by reference. Such incorporation by reference shall
not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of
Regulation S-K.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Introduction and Election of
Directors in our Proxy Statement for the 2004 Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 29, 2004 are
incorporated by reference.

64



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##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Compensation of Directors and
Officers in our Proxy Statement for the 2004 Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 29, 2004 is
incorporated by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Principal Accountant Fees and
Services in our Proxy Statement for the 2004 Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 29, 2004 are
incorporated by reference.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) 1. Financial Statements

The consolidated financial statements included in
Item 8 are filed as part of this annual report.

2. Financial Statement Schedules

The consolidated financial statement schedules
included in Item 8 is filed as part of this annual report.

3. Exhibits

Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, we have not filed herewith any instrument
with respect to long-term debt which does not exceed 10% of our
consolidated assets. We hereby agree to furnish a copy of any
such instrument to the Securities and Exchange Commission upon
request.

|        |         |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 3(a)    |             |  | Certificate of Amendment to Restated Certificate
    of Incorporation dated June 26, 2003 (Exhibit 3(a)(5)
    of the Companys Form 10-Q for the quarter ended
    June 30, 2003 incorporated by reference herein)                                                                                                                                                                                                                                        
|        | 3(b)    |             |  | Restated By-Laws, as of May 18, 1999
    (Exhibit 3(b) of the Companys Form 10-Q for the
    quarter ended June 30, 1999 incorporated by reference
    herein)                                                                                                                                                                                                                                                                                            
|        | 4(a)(1) |             |  | Credit agreement dated as of February 10,
    2004, between Wellman, Inc. and Deutsche Bank Trust Company
    Americas as administrative agent and collateral agent, Deutsche
    Bank Securities Inc., as lead arranger and bookrunner, JP Morgan
    Chase Bank as syndication agent and certain other financial
    institutions                                                                                                                        
|        | 4(a)(2) |             |  | First Lien Senior Credit Agreement dated as of
    February 10, 2004, between Wellman, Inc. and Deutsche
    Bank Trust Company Americas as administrative agent and
    collateral agent, JP Morgan Chase Bank as syndication agent,
    Deutsche Bank Securities Inc., as joint lead arranger and joint
    lead bookrunner, JP Morgan Securities Inc. as joint lead
    arranger and joint lead bookrunner and certain other financial
    institutions 
|        | 4(a)(3) |             |  | Second Lien Senior Credit Agreement dated as of
    February 10, 2004 between Wellman, Inc. and Deutsche
    Bank Trust Company Americas as administrative agent and
    collateral agent, JP Morgan Chase Bank as syndication agent,
    Deutsche Bank Securities Inc., as joint lead arranger and joint
    lead bookrunner, JP Morgan Securities Inc. as joint lead
    arranger and joint lead bookrunner, and certain other financial
    institutions
|        | 4(b)    |             |  | Rights Agreement dated as of August 31, 2001
    between the Company and First Union National Bank, as Rights
    Agent (Exhibit 4 of the Companys Registration
    Statement on Form 8-A, incorporated by reference herein)                                                                                                                                                                                                                              
|        | 4(c)    |             |  | Amendment to Rights Agreement dated as of
    February 12, 2003, by and between Wellman, Inc. and
    Wachovia Bank, N.A., f/k/a First Union National Bank, as Rights
    Agent (Exhibit 4.1 to the Companys Form 8-K
    dated February 27, 2003 incorporated by reference herein)                                                                                                                                                                       

65



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|                                                  |       |             |  |                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                                           |       |            
|Number                                            |       | Description
|                                                  |       |            
|                                                  | 4(d)  |             |  | Common Stock Purchase Warrant dated as of
    February 12, 2003 for the purchase of 1,250,000 shares
    of common stock (Exhibit 4(f) to the Companys
    Form 10-K for the year ended December 31, 2002,
    incorporated by reference herein)                                                                          
|                                                  | 4(e)  |             |  | Securities Purchase Agreement by and between
    Wellman, Inc. and Warburg Pincus Private Equity VIII, LP,
    dated as of February 12, 2003 (Exhibit 4(g) to the
    Companys Form 10-K for the year ended
    December 31, 2002, incorporated by reference herein)                                                      
|                                                  | 4(f)  |             |  | Common Stock Purchase Warrant dated as of
    June 27, 2003 for the purchase of 1,250,000 shares of
    common stock (Exhibit 4(h) of the Companys
    Form 10-Q for the quarter ended June 30, 2003
    incorporated by reference herein)                                                                                
|Executive Compensation Plans and
    Arrangements
|                                                  | 10(a) |             |  | Employment Agreement dated as of January 1,
    1990, as amended by the Third Agreement to said Employment
    Agreement dated as of January 1, 1997, between the Company
    and Thomas M. Duff (Exhibit 10(a) of the Companys
    Form 10-Q for the quarter ended March 31, 2000
    incorporated by reference herein)  
|                                                  | 10(b) |             |  | Employment Agreement dated as of December 1,
    1994 between the Company and Keith R. Phillips
    (Exhibit 10(c) of the Companys Form 10-Q for the
    quarter ended March 31, 2000 incorporated by reference
    herein)                                                                                               
|                                                  | 10(c) |             |  | Employment Agreement dated as of May 21,
    1996 between the Company and John R. Hobson (Exhibit 10(a)
    of the Companys Form 10-Q for the quarter ended
    June 30, 1996 incorporated by reference herein)                                                                                                           
|                                                  | 10(d) |             |  | Employment Agreement dated as of
    September 21, 1998 between the Company and Joseph C. Tucker
    (Exhibit 10(e) of the Companys Form 10-K for the
    year ended December 31, 2001 incorporated by reference
    herein)                                                                                              
|                                                  | 10(e) |             |  | Employment Agreement dated as of April 10,
    2000 between the Company and Michael Dewsbury
    (Exhibit 10(d) of the Companys Form 10-Q for the
    quarter ended March 31, 2000 incorporated by reference
    herein)                                                                                                  
|                                                  | 10(f) |             |  | Employment Agreement dated as of March 20,
    2002 between the Company and Audrey Goodman (Exhibit 10(i)
    of the Companys Form 10-K for the year-end
    December 31, 2001 incorporated by reference herein)                                                                                                          
|                                                  | 10(g) |             |  | Wellman, Inc. Directors Stock Option Plan
    (Exhibit 10(g) of the Companys Form 10-Q for the
    quarter ended June 30, 2001 incorporated by reference
    herein)                                                                                                                                                      
|                                                  | 10(h) |             |  | Wellman, Inc. Second Amended and Restated
    Management Incentive Compensation Plan for the Executive Group
    (Exhibit 10(h) of the Companys Form 10-K for the
    year ended December 31, 2000 incorporated by reference
    herein)                                                                                  
|                                                  | 10(i) |             |  | Summary of Executive Life Insurance Plan
    (Exhibit 10.22 of the Companys Registration Statement
    on Form S-1, File No. 33-13458, incorporated by
    reference herein)                                                                                                                                              
|                                                  | 10(j) |             |  | Amended and Restated Executive Retirement
    Restoration Plan, effective as of January 1, 1993, and as
    amended as of June 1, 1998 and May 31, 2001
    (Exhibit 10(m) of the Companys Form 10-K for the
    year ended December 31, 2001 incorporated by reference
    herein)                                       
|                                                  | 10(k) |             |  | Wellman, Inc. Amended and Restated 1997
    Stock Option Plan (Exhibit 10(k) of the Companys
    Form 10-Q for the quarter ended June 30, 2001
    incorporated by reference herein)                                                                                                                                      
|                                                  | 10(l) |             |  | Wellman, Inc. Deferred Compensation and
    Restricted Stock Plan, effective as of February 17, 1998
    and as amended as of December 1, 1998 and December 31,
    2002 (Exhibit 10(o) to the Companys Form 10-K
    for the year ended December 31, 2002, filed on
    March 28, 2002, incorporated by reference herein)

66



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|                          |       |             |  |                                                                                                                                                                                                                                                                                                 
|------------------------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                   |       |            
|Number                    |       | Description
|                          |       |            
|Other Material Agreements
|                          | 10(m) |             |  | Trademark Assignment and License, dated
    January 28, 1988, by and among Fiber Industries, Inc.,
    Hoechst-Celanese Corporation and Celanese (Exhibit 10.14 of
    Fiber Industries, Inc.s Registration Statement on
    Form S-1, File No. 33-20626, incorporated by reference
    herein)
|                          | 21    |             |  | Subsidiaries                                                                                                                                                                                                                                                                                    
|                          | 23(a) |             |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                    
|                          | 23(b) |             |  | Consent of KPMG Chartered Accountants,
    Dublin, Ireland                                                                                                                                                                                                                                      
|                          | 28(a) |             |  | Report of KPMG Chartered Accountants,
    Dublin, Ireland                                                                                                                                                                                                                                       
|                          | 31.1  |             |  | Certification of the Chief Executive Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                      
|                          | 31.2  |             |  | Certification of the Chief Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                      
|                          | 32.1  |             |  | Certification of the Chief Executive Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                      
|                          | 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
October 23, 2003 for the purpose of disclosing its
financial results for the third quarter of 2003.

(2) The Company filed a Form 8-K on
November 4, 2003 to furnish a press release, announcing
additional cost cutting actions and the postponement of the
modification of its Pearl River assets to enable these assets to
produce PET resins.

(3) The Company filed a Form 8-K on
December 19, 2003 which announced that it was in the
process of obtaining additional financing including the
refinancing of its synthetic lease and other obligations that
mature in the next year. A reconciliation of net earnings from
continuing operations to net earnings before interest, taxes,
depreciation and amortization, adjusted for certain items as
defined in the Companys Revolving Credit Facility, was
attached as Exhibit 99.1.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 15, 2004.



| |                        
| | -----------------------
| | WELLMAN, INC.          
|
| | /s/ THOMAS M. DUFF     
| |                        
| | Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities
indicated on March 15, 2004.

|                                               |  |                                                                                            |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | 
|                                               |  |                                                                                           
|Signatures                                     |  | Title                                                                                     
|                                               |  |                                                                                           
|                                              
|/s/ THOMAS M. DUFFThomas M. Duff               |  | Chairman, Chief Executive Officer and Director
    (Principal Executive Officer)          
|                                              
|/s/ KEITH R. PHILLIPSKeith R. Phillips         |  | Vice President and Chief Financial Officer
    (Principal Financial Officer)              
|                                              
|/s/ MARK J. RUDAYMark J. Ruday                 |  | Vice President, Chief Accounting Officer and
    Controller (Principal Accounting Officer)
|                                              
|/s/ JAMES B. BAKERJames B. Baker               |  | Director                                                                                  
|                                              
|/s/ DAVID A. BARRDavid A. Barr                 |  | Director                                                                                  
|                                              
|/s/ OLIVER M. GOLDSTEINOliver M. Goldstein     |  | Director                                                                                  
|                                              
|/s/ RICHARD F. HEITMILLERRichard F. Heitmiller |  | Director                                                                                  
|                                              
|/s/ GERARD J. KERINSGerard J. Kerins           |  | Director                                                                                  
|                                              
|/s/ JAMES E. ROGERSJames E. Rogers             |  | Director                                                                                  
|                                              
|/s/ MARVIN O. SCHLANGERMarvin O. Schlanger     |  | Director                                                                                  
|                                              
|/s/ ROGER A. VANDENBERGRoger A. Vandenberg     |  | Director                                                                                  

68