UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-15899
WELLMAN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-1671740
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Broad Street, Shrewsbury, NJ 07702
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(Address of principal executive offices)
(908) 542-7300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of August 4, 1997, there were 31,113,143 shares of the registrant's
common stock, $.001 par value, outstanding and no shares of Class B common
stock outstanding.
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WELLMAN, INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Statements of Income -
For the three and six months ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 . . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity. . . 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 1997 and 1996 . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . 7 - 8
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 9 - 14
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders. . . . 15
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $279,211 $283,850 $534,359 $584,851
Cost of sales 237,123 238,509 452,332 494,863
-------- -------- -------- --------
Gross profit 42,088 45,341 82,027 89,988
Selling, general and
administrative expenses 21,397 22,739 42,750 44,696
Restructuring charges 7,469 -- 7,469 --
-------- -------- -------- --------
Operating income 13,222 22,602 31,808 45,292
Interest expense, net 3,922 3,064 7,197 7,002
-------- -------- --------- -------
Earnings before income taxes 9,300 19,538 24,611 38,290
Income taxes 3,999 7,809 10,583 14,857
-------- -------- -------- --------
Net earnings $ 5,301 $ 11,729 $ 14,028 $ 23,433
======== ======== ======== ========
Net earnings per common share $ 0.17 $ 0.35 $ 0.45 $ 0.69
======== ======== ======== ========
Weighted average common shares 31,129 33,779 31,137 33,741
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ 2,120
Accounts receivable, less allowance of $ 4,327
in 1997 and $ 2,611 in 1996 138,854 132,296
Inventories 144,969 158,685
Prepaid expenses and other current assets 2,342 3,947
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Total current assets 286,165 297,048
Property, plant and equipment, at cost:
Land, buildings and improvements 124,745 122,047
Machinery and equipment 846,867 771,624
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971,612 893,671
Less accumulated depreciation 313,312 296,043
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Property, plant and equipment, net 658,300 597,628
Cost in excess of net assets acquired, net 284,033 290,450
Other assets, net 11,967 18,823
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$1,240,465 $1,203,949
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 65,713 $ 64,019
Accrued liabilities 33,200 41,320
Current portion of long-term debt 159 159
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Total current liabilities 99,072 105,498
Long-term debt 349,996 319,407
Deferred income taxes and other liabilities 164,519 155,116
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Total liabilities 613,587 580,021
Stockholders' equity:
Common stock, $0.001 par value; 55,000,000
shares authorized, 33,612,464 shares issued
in 1997, 33,612,464 in 1996 34 34
Class B common stock, $0.001 par value; 5,500,000
shares authorized; no shares issued -- --
Paid-in capital 233,665 233,665
Foreign currency translation adjustments 4,058 9,853
Retained earnings 438,645 429,900
Less common stock in treasury at cost:
2,500,000 shares (49,524) (49,524)
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Total stockholders' equity 626,878 623,928
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$1,240,465 $1,203,949
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
COMMON STOCK ISSUED CURRENCY
--------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS STOCK TOTAL
------ ------ ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 33,441 $33 $230,008 $6,849 $413,456 $ -- $650,346
Net earnings 26,529 26,529
Cash dividends ($0.31 per share) (10,085) (10,085)
Exercise of stock options 49 861 861
Issuance of common stock to
employee benefit plans 121 1 2,669 2,670
Issuance of restricted stock 1 26 26
Tax effect of exercise of
stock options 101 101
Currency translation adjustments 3,004 3,004
Purchase of treasury stock (49,524) (49,524)
------ --- --------- ------ --------- ------- --------
Balance at December 31, 1996 33,612 34 233,665 9,853 429,900 (49,524) 623,928
Net earnings 14,028 14,028
Cash dividends ($0.17 per share) (5,283) (5,283)
Currency translation adjustments (5,795) (5,795)
------ --- -------- ------ -------- -------- --------
Balance at June 30, 1997 33,612 $34 $233,665 $4,058 $438,645 $(49,524) $626,878
====== === ======== ====== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(In thousands)
<CAPTION>
1997 1996
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $14,028 $23,433
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 29,841 28,814
Amortization 5,600 6,439
Deferred income taxes 4,540 4,348
Common stock issued for stock plans -- 2,670
Changes in assets and liabilities (3,774) (8,593)
------- -------
Net cash provided by operating activities 50,235 57,111
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (84,787) (67,186)
Other investing activities 5,016 4,645
------- -------
Net cash used in investing activities (79,771) (62,541)
------- -------
Cash flows from financing activities:
Net borrowings of long-term debt 32,905 31,747
Net decrease in line of credit with bank -- (6,216)
Dividends paid on common stock (5,283) (5,030)
Exercise of stock options -- 935
Purchase of treasury stock -- (3,955)
------- -------
Net cash provided by financing
activities 27,622 17,481
------- -------
Effect of exchange rate changes on cash
and cash equivalents (206) (328)
------- -------
Increase (decrease) in cash and cash equivalents (2,120) 11,723
Cash and cash equivalents at beginning of period 2,120 3,893
------- -------
Cash and cash equivalents at end of period $ -0- $15,616
======= =======
Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 8,311 $ 7,080
Income taxes $13,616 $ 2,566
</TABLE>
See notes to condensed consolidated financial statements.
6
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WELLMAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and six months ended
June 30, 1997 and 1996 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
The results of operations for the three and six month periods are not
necessarily indicative of those for the full year.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements are presented on a basis consistent with
the audited statements, and all adjustments, which consist only of normal
recurring adjustments necessary to present fairly the financial position and
the results of operations for the periods indicated, have been reflected.
2. NET EARNINGS PER COMMON SHARE
Net earnings per common share is based on the weighted average number of
common and common equivalent shares (i.e., stock options) outstanding during
the period. In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share," which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact is not expected to result in any change in primary
earnings per share as reported herein for the three months ended June 30,
1997 and 1996. The impact is not expected to result in any change in
primary earnings per share for the six months ended June 30, 1997, but is
expected to result in an increase of $0.01 for the six months ended June 30,
1996.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
Raw materials $ 53,265 $ 65,552
Finished and semi-finished goods 77,802 78,280
Supplies 13,902 14,853
-------- --------
$144,969 $158,685
======== ========
</TABLE>
4. 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. The Company's policy is to accrue
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 $12,400 and
$28,400. In connection with these expenditures, the Company has accrued
7
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an amount at June 30, 1997 within this range representing management's best
estimate of probable non-capital environmental expenditures. In addition,
future capital expenditures aggregating approximately $9,000 to $29,400 may
be required related to environmental matters. These non-capital and capital
expenditures are estimated to be incurred over the next 10 to 20 years. The
Company believes that it is entitled to recover a portion of these
expenditures under indemnification and escrow agreements.
5. RESTRUCTURING CHARGES
During the second quarter of 1997, the Company implemented a
restructuring plan designed to reduce costs and enhance the overall
competitiveness of its European operations, resulting in a pre-tax
restructuring charge of $7,469. This charge reduced net earnings for the
three months ended June 30, 1997 by approximately $4,300 or $0.14 per
share. Approximately $4,600 of the restructuring charge is estimated costs
for the modification and reduction of certain supply and service agreements
at the Company's Netherlands-based PET resin business. This includes the
modification of its take-or-pay supply arrangement, reducing the number of
pounds required to be purchased during the period from 1997 to 2000 from
134,000 pounds to an immaterial amount. Also at June 30, 1997, the Company
had accrued approximately $1,200 as its best estimate for probable future
losses on the take-or-pay supply arrangement with respect to the remaining
period prior to October 1, 1997 when the contract modification takes effect.
The restructuring charge also includes $2,400 in termination benefits for 61
employees at its recycled fiber operation in Ireland. Approximately $2,400
has been paid-out against the restructuring accrual at June 30, 1997.
8
<PAGE>
WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The primary business of Wellman, Inc. is the manufacture and marketing of high-
quality polyester products, including Fortrel brand polyester textile fibers,
polyester fibers made from recycled raw materials and PermaClear brand PET
(polyethylene terephthalate) packaging resin. In the second quarter, the
Company had annual capacity to manufacture approximately 1.1 billion pounds of
fiber and over 400 million pounds of resin worldwide at five major production
facilities in the United States and Europe. The Company commenced operation of
an additional 200 million pounds per year of resin production capacity in April
1997. The Company is also the world's largest plastics recycler, utilizing a
significant amount of recycled raw materials in its manufacturing operations.
The Fibers Group produces Fortrel textile fibers, which represent approximately
60% of the Company's fiber production. These fibers, which are used in apparel
and home furnishings, are produced from two chemical raw materials, purified
terephthalic acid (PTA) and monoethylene glycol (MEG). The other 40% of fiber
production, primarily fiberfill and carpet fibers, is manufactured by the
Recycled Products Group from recycled raw materials, including producer wastes
and postconsumer PET soft drink bottles. The Company's PET resins, produced by
the Packaging Products Group from PTA and MEG, are primarily used in the
manufacture of clear plastic soft drink bottles and other food and beverage
packaging.
The Company's markets are highly competitive. It competes in these markets
primarily on the basis of product quality, customer service, brand identity and
price. It believes it is the second-largest polyester staple and third-largest
POY producer in the United States and the fourth-largest PET resin producer in
North America. Several of the Company's competitors are substantially larger
than the Company and have substantially greater economic resources.
Demand for polyester fiber historically has been cyclical, as it is subject to
changes in consumer preferences and spending, retail sales patterns, and fiber
or textile product imports, all of which are driven primarily by general
economic conditions. Global PET resin demand continues to grow, driven by new
product applications for PET and conversion from other packaging materials to
PET.
Several factors significantly affect the Company's profitability: raw material
margins, or the difference (or spread) between product selling prices and raw
material costs; supply and demand for its products; the prices of competing
materials, such as cotton and aluminum, which can affect demand for its
products; and economic and market conditions in the United States, Europe and
other regions of the world. Prices of PTA and MEG, primary determinants of
polyester fiber and PET resin selling prices, are cyclical. Changes in PTA and
MEG prices are driven by worldwide supply and demand.
Raw material margins for the chemical-based fiber and PET resin businesses have
generally been influenced by supply and demand factors. Despite growing demand
for PET resin, worldwide supply is currently undergoing significant expansion
which has adversely affected profitability, and is expected to continue to do
so. Both fiber and resin margins experience increases or decreases due to
timing of price changes and market conditions.
9
<PAGE>
Raw material margins for the recycled fiber operation tend to be more variable
than those for the chemical-based businesses, primarily because recycled raw
material costs do not cause changes in fiber prices. Recycled raw material
costs are primarily dependent upon worldwide supply and demand for waste
materials.
The Company's sales are neither materially dependent upon a single customer
nor seasonal in nature. Demand, prices and raw material costs for both fibers
and PET resins may be affected by global economic conditions, supply and demand
balances and export activity.
The Company plans to substantially increase its PET resin and polyester fiber
production capacity through the construction of a new, state-of-the-art
production facility in Mississippi expected to be operational in phases
beginning in late 1998. As a result, the Company's production mix is expected
to be approximately 50% fibers and 50% PET resins.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
Net sales for the three months ended June 30, 1997 decreased 1.6% to $279.2
million from $283.9 million for the three months ended June 30, 1996. Sales for
the Fibers Group declined 6.7% to $107.1 million in the 1997 period from $114.7
million in the 1996 period due to significantly lower polyester fiber selling
prices. Sales for the Recycled Products Group (RPG) increased 3.0% to $98.1
million in the 1997 period from $95.2 million in the year-ago period due to
higher domestic fiber sales volume and increased sales in other divisions which
more than offset worldwide declines in polyester fiber selling prices. Sales
for the Packaging Products Group (PPG) increased slightly to $74.0 million in
1997 from $73.9 million in 1996 due to higher worldwide PET resin sales volumes
which offset significantly lower worldwide selling prices. In April 1997, the
Company commenced operation of an additional 200 million pounds per year PET
resin production line at its Darlington, S.C. plant.
Gross profit for the three months ended June 30, 1997 decreased 7.2% to
$42.1 million in 1997 from $45.3 million for the comparable 1996 period. The
gross profit margin for the 1997 period was 15.1% compared to 16.0% in the 1996
period. Gross profit for the Fibers Group increased in the 1997 period compared
to the 1996 period due to continued lower overall costs which more than offset
lower polyester fiber selling prices. The second quarter of 1996 was negatively
impacted by higher production costs associated with a curtailed production line.
Gross profit for the RPG also increased in the 1997 period compared to the 1996
period as a result of significantly lower raw material costs and higher sales
volume. Gross profit for the PPG decreased significantly in the 1997 period
compared to the same period in 1996 as weak global market conditions caused
lower worldwide resin selling prices which outpaced lower raw material costs.
Selling, general and administrative expenses amounted to $21.4 million, or
7.7% of sales, for 1997 compared to $22.7 million, or 8.0% of sales, for 1996.
During the second quarter of 1997, the Company implemented a restructuring
plan designed to reduce costs and enhance the competitive position of its
European operations, resulting in a pre-tax restructuring charge of
approximately $7.5 million. The primary components of the restructuring charge
relate to the modification and reduction of certain supply and service
agreements at the Company's Netherlands-based PET resin business and
termination benefits related to a workforce reduction at the recycled fiber
operation in Ireland. See Note 5 of the Notes to Condensed Consolidated
Financial Statements. The restructuring plan is expected to result in
approximately $5 to $7 million in annual savings for 1998.
10
<PAGE>
As a result of the foregoing, operating income was $13.2 million for the
second quarter of 1997, or $20.7 million excluding the restructuring charge,
compared to $22.6 million for the second quarter of 1996.
Net interest expense was $3.9 million in 1997 compared to $3.1 million in
1996. Interest expense increased because outstanding borrowings unrelated to
the construction of new facilities increased. Interest related to such
construction is currently being capitalized.
The effective income tax rate was 43.0% in the second quarter of 1997 versus
40.0% in the comparable 1996 period. The Company's effective tax rate is
determined based on projected annual earnings at the end of each quarter and is
impacted by the relationship to pre-tax income of certain nondeductible items
and foreign income. The increase resulted from a change in the components of
projected earnings for 1997 as compared to 1996.
As a result of the foregoing, net earnings in the three months ended June
30, 1997 were $5.3 million, or $0.17 per share. Excluding the restructuring
charge, net earnings for this period were $9.6 million, or $0.31 per share,
compared to $11.7 million, or $0.35 per share, for the three months ended June
30, 1996. During the second half of 1996, the Company repurchased 2.5 million
shares of its common stock in the open market. This repurchase had no material
impact on earnings per share as reported for the 1997 period.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales for the six months ended June 30, 1997 decreased approximately
8.6% to $534.4 million from $584.9 million for the six months ended June 30,
1996. Sales for the Fibers Group decreased 6.9% to $212.5 million in the 1997
period from $228.3 million in the 1996 period due to significantly lower
polyester fiber selling prices. Sales for the RPG decreased 4.8% to $192.8
million in the first half of 1997 from $202.6 million in the first half of 1996
primarily as a result of continued worldwide declines in polyester fiber selling
prices, with the Company's fiber operation in Ireland experiencing the most
significant decreases. The selling price declines, along with the disposition
of certain businesses which had sales in the first half of 1996 of $3.3 million,
offset modest improvements in sales volumes and increased sales in other
divisions. Sales for the PPG decreased 16.2% to $129.0 million in the first six
months of 1997 from $154.0 million for the comparable period in 1996 as a result
of significantly lower worldwide PET resin selling prices, which more than
offset a substantial increase in PET resin sales volumes. In April 1997, the
Company commenced operation of an additional 200 million pounds per year PET
resin production line at its Darlington, S.C. plant.
Gross profit for the six months ended June 30, 1997 decreased 8.8% to $82.0
million in the 1997 period compared to $90.0 million for the 1996 period. The
gross profit margin for the 1997 period remained unchanged at 15.4%. Gross
profit for the Fibers Group increased in the first six months of 1997 compared
to 1996 due to continued lower overall costs which more than offset lower
polyester fiber selling prices. The first half of 1996 was negatively impacted
by higher production costs associated with a curtailed production line. Gross
profit for the RPG increased in the first half of 1997 primarily as a result of
significantly lower raw material costs and higher sales volume. Gross profit
for the PPG decreased significantly in the first half of 1997 compared to the
year-ago period as continued weak global market conditions caused lower
worldwide resin selling prices which outpaced lower raw material costs.
Selling, general and administrative expenses amounted to $42.8 million, or
8.0% of sales, for the 1997 period compared to $44.7 million, or 7.6% of sales,
for the 1996 period.
11
<PAGE>
During the second quarter of 1997, the Company implemented a restructuring
plan designed to reduce costs and enhance the competitive position of its
European operations, resulting in a pre-tax restructuring charge of
approximately $7.5 million. The primary components of the restructuring charge
relate to the modification and reduction of certain supply and service
agreements at the Company's Netherlands-based PET resin business and termination
benefits related to a workforce reduction at the recycled fiber operation in
Ireland. See Note 5 of the Notes to Condensed Consolidated Financial
Statements. The restructuring plan is expected to result in approximately $5 to
$7 million in annual savings for 1998.
As a result of the foregoing, operating income was $31.8 million for the
first six months of 1997, or $39.3 million excluding the restructuring charge,
versus $45.3 million for the comparable 1996 period.
Net interest expense was $7.2 million for the first six months of 1997
compared to $7.0 million for the first six months of 1996. Interest expense
increased due to an increase in outstanding borrowings which was partially
offset by higher interest income and higher interest capitalization resulting
from the Company's ongoing capacity expansion.
The effective income tax rate was 43.0% in the first six months of 1997
compared to 38.8% in the comparable 1996 period. The Company's effective tax
rate is determined based on projected annual earnings at the end of each quarter
and is impacted by the relationship to pre-tax income of certain nondeductible
items and foreign income. The increase resulted from a change in the components
of projected earnings for 1997 as compared to 1996.
As a result of the foregoing, net earnings for the six months ended June 30,
1997 were $14.0 million, or $0.45 per share. Excluding the restructuring
charge, net earnings for this period were $18.3 million, or $0.59 per share,
compared to $23.4 million, or $0.69 per share, for the six months ended June 30,
1996. During the second half of 1996, the Company repurchased 2.5 million
shares of its common stock in the open market. This repurchase had no material
impact on earnings per share as reported for the 1997 period.
OUTLOOK
Total worldwide polyester fiber and PET resin sales volumes are expected to
improve in 1997 due to continued good demand and the April 1997 start-up of a
new, previously-announced 200 million pounds per year PET resin production line
at the Darlington, SC plant. A fire at the fiber plant in Ireland in late July
1997 is expected to modestly reduce sales volumes.
The higher sales volumes anticipated in 1997 are not expected to contribute
materially to the Company's net earnings due to lower selling prices and profit
margins for its products. After declining throughout 1996 and early 1997,
worldwide polyester fiber selling prices have recently stabilized and PET resin
selling prices have recently improved. However, global capacity oversupply and
expected U.S. industry capacity expansions are expected to continue to exert
downward pressure on selling prices for both products.
The Netherlands-based PET resins business is expected to incur an operating
loss in 1997. As part of the restructuring charge mentioned in Note 5 above,
the Company reduced the volume required to be purchased under a take-or-pay
supply arrangement. Although this will result in lower PET resin sales volumes
in Europe beginning in the fourth quarter of 1997, it is expected to benefit
operating profit in 1998.
12
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The statements above are forward-looking statements subject to the
qualifications set forth below in "Forward Looking Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $50.2 million for the six
months ended June 30, 1997 compared to $57.1 million for the six months ended
June 30, 1996. The decrease in cash from operations was primarily the result of
significantly lower net earnings.
Net cash used in investing activities totaled $79.8 million for the first
half of 1997 compared to $62.5 million in the first half of 1996. This was
primarily the result of additions to property, plant and equipment which totaled
$84.8 million in the 1997 period compared to $67.2 million in the 1996 period.
Net cash provided by financing activities totaled $27.6 million for the six
months ended June 30, 1997 compared to $17.5 million in the comparable period in
1996. In the 1997 period, net borrowings (line of credit with bank and long-
term debt) totaled $32.9 million compared to $25.5 million in the 1996 period.
In addition, the Company's purchase of treasury stock in the first half of 1996
totaled $4.0 million.
With the completion of a domestic PET resins capacity expansion in April
1997, the remainder of the Company's ongoing capital investment program
primarily includes the construction of a new domestic polyester production
facility in Mississippi expected to be operational in phases beginning in late
1998. The Company estimates that its capital expenditures through the end of
1998 could aggregate approximately $320 to $340 million. To receive certain
incentives provided by the state of Mississippi, the Company expects to issue
Rural Economic Development Bonds.
The Company's planned capital expenditures in the remainder of 1997 are
approximately $130 to $150 million. The exact amount and timing of the capital
spending is difficult to predict since certain projects may extend into 1998 or
beyond depending upon equipment delivery and construction schedules.
The Company's financing agreements contain normal financial and restrictive
covenants. The Company believes that the financial resources available to it,
including $215 million available at June 30, 1997 under its $330 million
revolving credit facility, unused short-term uncommitted lines of credit
aggregating $135 million, internally generated funds, and other credit
arrangements will be sufficient to meet its foreseeable working capital, capital
expenditure and dividend payment requirements.
The Company has entered into forward interest rate swaps to reduce (hedge)
the impact of interest rate changes for variable rate borrowings associated with
planned capital expenditures over the next four years. The agreements include
an aggregate notional amount of $200 million at June 30, 1997. Of this amount,
$150 million have forward starting dates ranging from October 1997 to May 1998
and maturity dates of at least 5 years thereafter. The Company will pay fixed
rates of interest ranging from 6.10% to 6.20%. The Company estimates it would
have received approximately $1.3 million if it had to terminate these agreements
at June 30, 1997.
The Company has entered into forward foreign currency contracts to exchange
Dutch guilders for U.S. dollars with an aggregate notional amount of $21.8
million at June 30, 1997 in order to reduce the related impact of foreign
currency translation adjustments. This has the effect of converting a portion
of U.S. debt to local currency (guilder) debt. The Company has designated these
contracts as a hedge of a net investment in a foreign entity. At June 30, 1997,
13
<PAGE>
the Company estimates it would receive approximately $2.3 million if these
contracts were terminated.
The Company has also entered into forward foreign currency contracts to
exchange U.S. dollars for German marks with an aggregate notional amount of
$13.6 million at June 30, 1997. These contracts are designed to reduce (hedge)
the impact of foreign currency fluctuations relative to fixed asset purchase
commitments and have maturity dates ranging from July 1997 through November
1998. At June 30, 1997, the Company would have had to pay approximately $1.4
million to terminate these contracts.
The Company's European businesses utilize foreign currency debt and forward
currency contracts to hedge certain of their accounts receivable and accounts
payable denominated in other foreign currencies. At June 30, 1997, the
notional amount of such contracts was $12.4 million and the cost to terminate
these contracts was immaterial.
The Company's estimates with respect to the values of its derivative
instruments are based on readily available dealer quotes.
FORWARD LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, when used in
this Form 10-Q, words such as "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. The Company
cautions that a number of important factors could cause actual results for 1997
and beyond to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Such statements contain a
number of risks and uncertainties, including, but not limited to, demand and
competition for polyester fiber and PET resins, availability and cost of raw
materials, levels of production capacity and announced changes thereto, changes
in interest rates and foreign currency exchange rates, work stoppages, natural
disasters, U.S., European and global economic conditions and changes in laws and
regulations, prices of competing products, such as cotton and aluminum, and the
Company's ability to complete expansions and other capital projects on time and
budget and to maintain the operations of its existing production facilities.
The Company cannot assure that it will be able to anticipate or respond timely
to changes which could adversely affect its operating results in one or more
fiscal quarters. 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 the Company's
common stock.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 20, 1997.
(b) Not applicable.
(c) At the Annual Meeting of Stockholders, the stockholders voted on the
following matters:
1. The nominees for election as directors for the ensuing year, and
until their successors are elected and qualified, received the
following votes:
Name For Against/Withheld
---- --- ----------------
Thomas M. Duff 26,970,903 1,207,784
Clifford J. Christenson 26,961,018 1,217,669
James B. Baker 26,969,054 1,209,633
C. William Beckwith 26,953,816 1,224,871
Peter H. Conze 26,932,487 1,246,200
Allan R. Dragone 26,942,051 1,236,636
Richard F. Heitmiller 26,951,243 1,227,444
Jonathan M. Nelson 26,954,362 1,224,325
James E. Rogers 26,955,973 1,222,714
Raymond C. Tower 26,945,891 1,232,796
Roger A. Vandenberg 26,957,197 1,221,490
As a result, all of the above nominees were elected to the Board.
2. The proposal to ratify the selection by the Board of Directors of
Ernst & Young LLP as independent auditors to audit the Company's
books and accounts for the fiscal year ending December 31, 1997
received the following votes: 27,985,787 votes cast for, 121,747
votes cast against, 71,153 abstentions and no broker non-votes. As
a result, the Board's selection of Ernst & Young LLP was approved.
3. The proposal to ratify the adoption of the 1997 Stock Option Plan
received the following votes: 19,327,520 votes cast for, 2,676,141
votes cast against, 42,462 abstentions and 6,032,563 broker non-
votes. As a result, the adoption of the 1997 Stock Option Plan was
approved.
4. The stockholder proposal to request the Board of Directors to
redeem the shareholder rights issued on August 6, 1991 unless the
issue is approved by the majority of stockholders received the
following votes: 13,767,999 votes cast for, 7,871,286 votes
cast against, 506,839 abstentions and 6,032,564 broker
non-votes. As a result, the stockholder proposal was defeated.
(d) Not applicable. 15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4(a) Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant
has not filed herewith any instrument with respect to long-term
debt which does not exceed 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis. The
registrant hereby agrees to furnish a copy of any such instrument
to the Securities and Exchange Commission upon request.
10(a) Wellman, Inc. 1997 Stock Option Plan.
10(b) Amendment to PET Supply Agreement, dated December 28, 1995 by and
among Wellman B.V. and Akzo Nobel Fibers, B.V., as amended by
letter dated August 23, 1996.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLMAN, INC.
Dated August 12, 1997 By /s/ Keith R. Phillips
------------- ------------------------
Keith R. Phillips
Chief Financial Officer,
Vice President and Treasurer
(Principal Financial Officer)
Dated August 12, 1997 By /s/ Mark J. Rosenblum
------------- ------------------------
Mark J. Rosenblum
Chief Accounting Officer,
Vice President and Controller
(Principal Accounting Officer)
17
<PAGE>
Exhibit 10(a)
WELLMAN, INC.
1997 STOCK OPTION PLAN
1. Purpose
This 1997 Stock Option Plan (the "1997 Plan") is intended to provide a
favorable opportunity for certain key executive and managerial employees of
Wellman, Inc. (the "Company") and its subsidiaries to purchase shares of the
Company's Common Stock. Such opportunity should provide an increased
incentive for these employees to contribute to the Company's future success
and prosperity, thus enhancing the value of the stock for the benefit of the
stockholders, and increase the Company's ability to attract and retain
individuals of exceptional skill upon which, in large measure, its sustained
progress, growth and profitability depend.
The options granted pursuant to this 1997 Plan shall not be incentive
stock options and the terms of any options granted shall provide that it will
not be treated as an incentive stock option. Options granted pursuant to the
1997 Plan shall hereinafter be referred to as "Options".
2. Administration
The 1997 Plan shall be administered by the members of the Compensation
Committee of the Board of Directors of the Company (the "Committee"). The
Committee shall be comprised, in the discretion of the Board, of two or more
Directors, each of whom is a "non-employee director" within the meaning of
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended,
as then in effect. The Committee shall from time to time at its discretion
determine employees eligible for Options to be granted under the 1997 Plan,
the number of shares subject to each Option, and such other matters
specifically delegated to it under this 1997 Plan.
The Committee shall have the final authority to interpret and construe
the terms of the 1997 Plan and of any Option. No member of the Committee
shall be liable for any action, interpretation or construction made in good
faith with respect to the 1997 Plan or any Option.
3. Eligibility
Key executive and managerial employees (including officers, whether or
not they are directors) of the Company and its subsidiaries shall be eligible
to receive Options. A director of the Company who is not a full-time employee
of the Company shall not be eligible to receive Options. An eligible employee
holding stock options and Options may receive additional Options.
4. Stock
Subject to adjustment in accordance with the provisions of Article 5(h)
of the 1997 Plan, the maximum number of shares of Common Stock of the Company
("Shares") to be reserved for issuance upon the exercise of Options granted
under the 1997 Plan shall not exceed 2,000,000 shares of Common Stock. Any or
1
<PAGE>
all of the shares subject to Options under the 1997 Plan may be authorized but
unissued shares of Common Stock, or issued shares of Common Stock held by the
Company in its treasury, as the Committee shall determine.
In the event that an Option expires or is terminated, the Shares
allocable to the unexercised portion of such Option may again be subject to an
Option.
5. Terms and Conditions of Options
Options shall be evidenced by agreements in such form as the Committee
shall from time to time determine, which agreements shall comply with and be
subject to the following terms and conditions:
(a) Option Period
The vested and exercisable portion of the Option, as determined in
accordance with Article 5(e), may be exercised for a period of 11 years from
the date that the Option is granted; provided, however, that (i) in the event
that (A) an optionee voluntarily resigns from employment with the Company and
such optionee does not subsequently compete with the Company, or (B) an
optionee's employment with the Company is terminated without cause, the period
during which the vested and exercisable portion of the Option may be exercised
shall not exceed one year after such termination (but not subsequent to the
expiration of the Option); (ii) in the event that an optionee's employment is
terminated (Y) by reason of death or disability (as that term is defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended) or (Z) upon
retirement on or after 55 years of age, the period during which the vested and
exercisable portion of the Option may be exercised shall not exceed three
years after such death, disability or retirement (but not subsequent to the
expiration of the Option); and (iii) in the event that an optionee's
employment is terminated for cause (as hereinafter defined in subparagraph (k)
hereof), or if the optionee shall voluntarily resign and such optionee
subsequently competes with the Company, the Option shall not be exercisable at
any time.
(b) Number of Shares
Each Option shall state the number of Shares to which it pertains.
(c) Option Price
Each Option shall state the price at which the Option shall be
exercised ("Option Price"). The Option Price shall be equal to the average of
the highest and lowest sales prices of the Common Stock upon the national
securities exchange that the shares of Common Stock are traded on each of the
twenty (20) days that sales have been made prior to the grant of the Option.
(d) Medium and Time of Payment
The option price shall be payable in United States dollars upon the
exercise of the Option and may be paid in cash or by personal or certified
check, bank draft or postal or express money order.
2
<PAGE>
(e) Vesting of Option
Each Option shall be vested and exercisable to the extent of 20% of
the total number of Shares to which it pertains beginning one year after the
date it is granted and as to an additional 20% beginning on each of the
second, third, fourth and fifth anniversaries of the date it is granted;
provided, however, that: (i) in the event that an employee is terminated for
cause (as hereinafter defined in subparagraph (k) of this paragraph), or an
employee voluntarily resigns and subsequently competes with the Company, his
Option shall not be deemed vested or exercisable to any extent; (ii) in the
event that an employee's employment is terminated because of death or
disability, any Option granted to him shall be deemed vested and exercisable
as if the termination date were the next succeeding anniversary of the date
the Option was granted; and (iii) all Options shall be exercisable in full
upon the occurrence of a Change in Control of the Company.
For purposes of this Article 5(e) and Article 5(a), termination of
employment shall be considered to occur when an employee is no longer a full-
time employee of the Company or of any parent or subsidiary corporation of the
Company; whether a leave of absence shall constitute termination of employment
for purposes of the 1997 Plan shall be determined by the Committee; and the
Committee shall determine whether a termination is with or without cause, or
whether an optionee subsequent to termination competes with the Company.
For purposes of this Article 5(e), a "Change in Control" shall be
deemed to have occurred if (a) any "person" or "group" (as such terms are used
in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than the
Company, any of its subsidiaries, any employee benefit plan of the Company or
of any subsidiary, is or becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities; or (b) during any period
of two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director was approved
by a vote of at least two-thirds of the directors of the Company then still in
office who were directors of the Company at the beginning of the period.
(f) Non-Transferability
An Option shall be exercisable during the optionee's lifetime only
by him or his Permitted Transferee (as hereinafter defined) and after his
death only by his personal representative or Permitted Transferee, and the
option shall not be assignable or transferable by him, otherwise (i) than by
will or the laws of descent or distribution, (ii) pursuant to a qualified
domestic relations order, as defined by the Internal Revenue Code or Title I
of the Employee Retirement Income Security Act, or the rules thereunder, or
(iii) to a Permitted Transferee if no consideration is received by the
optionee for such transfer.
For purposes of this Article 5(f), a "Permitted Transferee" shall be
a member of the immediate family (i.e., parent, spouse or child) of the
optionee. Once so transferred, it shall not be further transferable. Any
3
<PAGE>
transferee shall be required to provide evidence of transfer satisfactory to
the Committee. No transfer by the optionee by will or the laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished with written notice thereof and a copy of the will and/or
such other evidence as the Committee may deem necessary to establish the
validity of the transfer and the acceptance by the transferee or transferees
of the terms and conditions of the Option.
(g) Investment Representation
Each Option Agreement may provide that, upon demand by the Committee
for such a representation, the optionee (or any permissible transferee of the
option under Article 5(f)) shall deliver to the Committee at the time of any
exercise of an Option or portion thereof a written representation that the
Shares to be acquired upon such exercise are to be acquired for investment and
not for resale or with a view to the distribution thereof. Upon such demand,
delivery of such representation prior to the delivery of any Shares issued
upon exercise of an Option and prior to the expiration of the Option period
shall be a condition precedent to the right of the optionee or such other
transferee to purchase any Shares.
(h) Adjustments in Event of Change in Voting Shares
In the event of any change in the voting Shares of the Company by
reason of any stock dividend, recapitalization, reorganization, merger,
consolidation, split-up, combination, or exchange of voting Shares at a price
substantially below fair market value, or rights offering to purchase voting
Shares, or of any similar change affecting the voting Shares, the number and
kind of Shares which thereafter may be optioned and sold under the 1997 Plan
and the number and kind of Shares subject to option in outstanding option
agreements and the purchase price per share thereof shall be appropriately
adjusted consistent with such change in such manner as the Committee may deem
equitable in its discretion to prevent substantial dilution or enlargement of
the rights granted to, or available for, participants in the 1997 Plan.
(i) No Rights as a Shareholder
An optionee or a transferee of an Option shall have no rights as a
shareholder with respect to Shares covered by his Option until the date as of
which a stock certificate is issued to him for such Shares. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued.
(j) No Right to Continued Employment
The Option Agreement shall not confer upon the optionee any right
with respect to continuance of employment by the Company or a parent or
subsidiary corporation of the Company, nor shall it interfere in any way with
the right of his employer to terminate his employment at any time.
4
<PAGE>
(k) Definition of Cause
The term "cause" in the context of a termination of employment means
only one or more of the following: (i) the commission in the course of
employment of any dishonest or fraudulent act; (ii) conviction of a felony
(from which, through lapse of time or otherwise, no successful appeal shall
have been made) whether or not committed in the course of employment; (iii)
the willful refusal to carry out reasonable instructions of the Board of
Directors of the Company which has a material adverse affect upon the Company
or any of its subsidiaries; and (iv) the willful disclosure of any trade
secrets or material confidential corporate information to persons not
authorized to know same.
(l) Other Provisions
The Committee may, as a condition precedent to the exercise of any
Option, require the holder of the Option (including, in the event of his
death, his legal representatives, legatees or distributees) to enter into such
agreements or to make such representations as may be required to make lawful
under the laws of the U.S. or any foreign country the exercise of the Option
and the ultimate disposition of the Shares acquired by such exercise.
The Option Agreements authorized under the 1997 Plan shall contain
such other provisions, consistent with the 1997 Plan, as the Committee shall
deem advisable.
6. Term of 1997 Plan
Subject to Article 8, the 1997 Plan shall remain in effect until all
Shares subject or which may become subject to the 1997 Plan shall have been
purchased pursuant to Options.
7. Indemnification of Committee
To the full extent permitted by law, the Company shall indemnify each
person made or threatened to be made a party to any civil or criminal action
or proceeding by reason of the fact that he, or his testator or intestate, is
or was a member of the Committee.
8. Amendment of the Plan
The Board of Directors of the Company may from time to time amend,
suspend or discontinue the 1997 Plan, provided, however, that, subject to the
provisions of Article 5(h), no action of the Board of Directors or of the
Committee may: (i) increase the number of Shares subject to the 1997 Plan
pursuant to Article 4; (ii) permit the granting of any Option at a price less
than that determined in accordance with Article 5(c); or (iii) permit the
granting of Options which expire beyond the period provided for in Article
5(a). Without the written consent of an optionee, no amendment or suspension
of the 1997 Plan shall alter or impair any Option previously granted to him
under the 1997 Plan.
5
<PAGE>
9. Application of Funds
The proceeds received by the Company from the sale of Shares pursuant to
Options will be used for general corporate purposes.
10. No Obligation to Exercise Option
The granting of an Option shall impose no obligation upon the optionee to
exercise such Option.
6
<PAGE>
Exhibit 10(b)
11 June 1997
Akzo Nobel Fibers B.V.
Attn. Mr. M.A. Menalda
P.O. Box 9300
6800 SB ARNHEM
Dear Mr. Menalda,
PET Resins Supply Agreement between Akzo Nobel Fibers B.V. ("Akzo Nobel") and
Wellman B.V. ("Wellman") dated 28 December 1995, as amended by letters dated
9 July 1996 and 23 August 1996 (together the "Agreement")
We refer to our discussions regarding the Agreement on 2 June 1997. At the
end of these discussions it was agreed that the Agreement be amended as
follows:
1. With effect from 1 October 1997, subject to the payments of the amounts
described herein, the definition of "Product" in Article 1.1 shall be
altered so that it is the same as the definition of "Specialty Grade
Product".
2. With respect to Product delivered on and after 1 October 1997, the listed
Tons in Article 2.1 for the Years 1997, 1998, 1999 and 2000 shall be
deleted and replaced by the figure of 1,000 Tons for each of such Years,
with an option for Wellman to elect to take from Akzo Nobel up to 6,000
Tons in each such Year (as already stated in Article 2.2).
3. On 1 October 1997 Wellman or one of its affiliates shall pay Akzo Nobel
three million eight hundred and seventy-five thousand United States
Dollars (USD 3,875,000).
4. As from 1 October 1997 Akzo Nobel shall be free to sell products
manufactured on its batch polymerization units to packaging resins
markets other than:
1. rigid packaging such as bottles, jars, trays and thermoformed
applications, and
2. non-blocking resin (AX4-706) to Chemapol and Technoplast.
5. Within 7 days after the date on which Akzo Nobel countersigns this letter
Wellman or one of its affiliates shall pay Akzo Nobel seven hundred and
forty thousand and eighty-five Dutch Guilders (NLG 740,085) in full and
final settlement of the amounts due in respect of Raw Materials provided
to Wellman in the Year 1996.
1
<PAGE>
6. In all other respects, the Agreement will remain unchanged. For the
avoidance of doubt, except where specifically dealt with herein, this
letter shall not affect any of Akzo Nobel's or Wellman's rights under the
Agreement or any other agreement. In the event of any conflict between
the provisions of this letter and any provision of the Agreement or any
agreement made in furtherance thereof, the provisions of this letter
shall prevail.
Unless otherwise specified, capitalized terms used above shall have the
meanings assigned to them in the Agreement.
If you agree with the above, please have the enclosed copy of this letter
duly signed on behalf of Akzo Nobel.
Yours faithfully,
Wellman, B.V.
/s/ Keith R. Phillips
Name: Keith R. Phillips
Title: Wellman, BV - Authorized Representative
For agreement by Akzo Nobel Fibers B.V.:
/s/ L. Lourens /s/ M.A. Menalda
Name: L. Lourens Name: M.A. Menalda
Title: Authorized Representative Title: Authorized Representative
2
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS for second quarter 1997 10-q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 143,181
<ALLOWANCES> 4,327
<INVENTORY> 144,969
<CURRENT-ASSETS> 286,165
<PP&E> 971,612
<DEPRECIATION> 313,312
<TOTAL-ASSETS> 1,240,465
<CURRENT-LIABILITIES> 99,072
<BONDS> 349,996
<COMMON> 34
0
0
<OTHER-SE> 626,844
<TOTAL-LIABILITY-AND-EQUITY> 1,240,465
<SALES> 534,359
<TOTAL-REVENUES> 534,359
<CGS> 452,332
<TOTAL-COSTS> 452,332
<OTHER-EXPENSES> 50,219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,197
<INCOME-PRETAX> 24,611
<INCOME-TAX> 10,583
<INCOME-CONTINUING> 14,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,028
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
