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 September 30, 1998
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)
(732) 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 November 4, 1998, there were 31,302,039 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.
--------
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Statements of Income -
For the three and nine months ended September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 . . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity . . . 5
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1998 and 1997. . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . 7 - 9
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . .10 - 17
PART II - OTHER INFORMATION
ITEM 5 - Other Information . . . . . . . . . . . . . . . . . . . . 18
ITEM 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . $237,025 $264,682 $761,373 $799,041
Cost of sales. . . . . . . . . . . 205,252 226,641 643,989 680,593
-------- -------- -------- --------
Gross profit . . . . . . . . . . . 31,773 38,041 117,384 118,448
Selling, general and
administrative expenses . . . . . 17,683 19,002 55,940 60,133
Restructuring charges. . . . . . . -- -- -- 7,469
-------- -------- -------- --------
Operating income . . . . . . . . . 14,090 19,039 61,444 50,846
Interest expense, net . . . . . . 1,978 3,015 6,610 10,211
-------- -------- -------- --------
Earnings before income taxes . . . 12,112 16,024 54,834 40,635
Income taxes . . . . . . . . . . . 4,424 6,249 20,014 16,831
-------- -------- -------- --------
Net earnings . . . . . . . . . . . $ 7,688 $ 9,775 $ 34,820 $ 23,804
======== ======== ======== ========
Basic net earnings per
common share . . . . . . . . . . $ 0.25 $ 0.31 $ 1.12 $ 0.77
======== ======== ======== ========
Diluted net earnings per
common share. . . . . . . . . . . $ 0.25 $ 0.31 $ 1.11 $ 0.76
======== ======== ======== ========
</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>
September 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ -- $ --
Accounts receivable, less allowance of $4,985
in 1998 and $ 5,229 in 1997 . . . . . . . . . 115,705 126,106
Inventories. . . . . . . . . . . . . . . . . . 186,306 154,133
Prepaid expenses and other current assets. . . 4,056 3,366
---------- ----------
Total current assets. . . . . . . . . . . . 306,067 283,605
Property, plant and equipment, at cost:
Land, buildings and improvements . . . . . . . 107,140 104,073
Machinery and equipment. . . . . . . . . . . . 753,561 735,144
Construction in progress . . . . . . . . . . . 395,699 251,493
---------- ----------
1,256,400 1,090,710
Less accumulated depreciation. . . . . . . . . (382,558) (336,230)
---------- ----------
Property, plant and equipment, net. . . . . 873,842 754,480
Cost in excess of net assets acquired, net . . . 264,252 269,756
Other assets, net. . . . . . . . . . . . . . . . 10,927 11,384
---------- ----------
$1,455,088 $1,319,225
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 60,058 $ 73,070
Accrued liabilities. . . . . . . . . . . . . . 43,912 39,590
Current portion of long-term debt. . . . . . . 51,082 208
---------- ----------
Total current liabilities . . . . . . . . . 155,052 112,868
Long-term debt . . . . . . . . . . . . . . . . . 449,639 394,545
Deferred income taxes and other liabilities. . . 180,930 177,378
---------- ----------
Total liabilities . . . . . . . . . . . . . 785,621 684,791
Stockholders' equity:
Common stock, $0.001 par value; 55,000,000
shares authorized, 33,797,228 shares issued
in 1998, 33,638,193 in 1997 . . . . . . . . . 34 34
Class B common stock, $0.001 par value; 5,500,000
shares authorized; no shares issued . . . . . -- --
Paid-in capital. . . . . . . . . . . . . . . . 237,416 234,179
Accumulated other comprehensive income . . . . 5,777 372
Retained earnings. . . . . . . . . . . . . . . 475,764 449,373
Less common stock in treasury at cost:
2,500,000 shares. . . . . . . . . . . . . . . (49,524) (49,524)
---------- ----------
Total stockholders' equity. . . . . . . . . 669,467 634,434
---------- ----------
$1,455,088 $1,319,225
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
COMMON ACCUMULATED
STOCK ISSUED OTHER
--------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL
------ ------ ------- ---------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 . 33,612 $34 $233,665 $ 9,853 $429,900 $(49,524) $623,928
Net earnings . . . . . . . . . 30,355 30,355
Currency translation
adjustment. . . . . . . . . (9,481) (9,481)
Cash dividends ($0.35
per share) . . . . . . . . . (10,882) (10,882)
Exercise of stock options. . . 25 453 453
Issuance of restricted stock . 1 16 16
Tax effect of exercise of
stock options . . . . . . . . 45 45
------ --- -------- ------- -------- -------- --------
Balance at December 31, 1997 . 33,638 34 234,179 372 449,373 (49,524) 634,434
Net earnings . . . . . . . . . 34,820 34,820
Currency translation
adjustment. . . . . . . . . 5,405 5,405
Cash dividends ($0.27 per
share). . . . . . . . . . . . (8,429) (8,429)
Exercise of stock options. . . 65 1,136 1,136
Issuance of restricted stock . 94 1,958 1,958
Tax effect of exercise of
stock options . . . . . . . . 143 143
------ --- -------- ------- -------- -------- --------
Balance at September 30, 1998. 33,797 $34 $237,416 $ 5,777 $475,764 $(49,524) $669,467
====== === ======== ======= ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . $ 34,820 $ 23,804
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . 47,020 45,653
Amortization . . . . . . . . . . . . . . . . . 6,556 8,433
Deferred income taxes. . . . . . . . . . . . . 8,008 6,545
Restricted stock issued for compensation . . . 746 --
Changes in assets and liabilities. . . . . . . (31,851) 2,009
-------- -------
Net cash provided by operating activities . . . . 65,299 86,444
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment. . . . (163,161) (144,115)
Other investing activities. . . . . . . . . . . . -- 5,016
-------- -------
Net cash used in investing activities . . . . . . (163,161) (139,099)
------- -------
Cash flows from financing activities:
Net borrowings of long-term debt. . . . . . . . . 105,167 68,861
Dividends paid on common stock. . . . . . . . . . (8,429) (8,082)
Exercise of stock options . . . . . . . . . . . . 1,136 255
------- -------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . . . 97,874 61,034
------- -------
Effect of exchange rate changes on cash
and cash equivalents. . . . . . . . . . . . . . . (12) (445)
------- -------
Increase (decrease) in cash and cash equivalents. . -- 7,934
Cash and cash equivalents at beginning of period. . -- 2,120
------- -------
Cash and cash equivalents at end of period. . . . . $ -- $ 10,054
======== ========
Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized) . . . . . $ 7,447 $ 9,922
Income taxes. . . . . . . . . . . . . . . . . . $ 9,144 $ 13,318
Non-cash investing activities financed
through government grants. . . . . . . . . . . . $ 7,335 $ 20,295
Non-cash settlement of deferred compensation
liability financed through the issuance of
restricted stock . . . . . . . . . . . . . . . . $ 1,216 $ --
See notes to condensed consolidated financial statements.
</TABLE>
6
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WELLMAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and nine months ended
September 30, 1998 and 1997 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
The results of operations for the three and nine 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.
Certain amounts in the 1997 financial statements have been reclassified
to conform with the 1998 presentation.
2. NET EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net Earnings. . . . . . . . . . . $ 7,688 $ 9,775 $34,820 $23,804
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share - weighted average shares. 31,198 31,121 31,170 31,115
Effect of dilutive securities:
Employee stock options and
restricted stock . . . . . . . 97 337 249 129
------- ------- ------- -------
Denominator for diluted earnings
per share-adjusted weighted
average shares . . . . . . . . . 31,295 31,458 31,419 31,244
======= ======= ======= =======
Basic earnings per share. . . . . . $ 0.25 $ 0.31 $ 1.12 $ 0.77
======= ======= ======= =======
Diluted earnings per share. . . . . $ 0.25 $ 0.31 $ 1.11 $ 0.76
======= ======= ======= =======
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- ---------
<S> <C> <C>
Raw materials. . . . . . . . . . . $ 67,191 $ 50,669
Finished and semi-finished goods . 105,744 90,210
Supplies . . . . . . . . . . . . . 13,371 13,254
-------- --------
$186,306 $154,133
======== ========
</TABLE>
7
<PAGE>
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 $10,000 and $24,600. In connection
with these expenditures, the Company has accrued approximately $17,400 at
September 30, 1998 representing management's best estimate of probable non-
capital environmental expenditures. In addition, future capital expenditures
aggregating approximately $8,500 to $26,900 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. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income for the
Company represents net income adjusted for foreign currency translation
adjustments. Comprehensive income was $14,108 and $8,031 for the three
months ended September 30, 1998 and 1997, respectively, and $40,225 and
$16,265 for the nine months ended September 30, 1998 and 1997, respectively.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be
expensed as incurred. SOP 98-5 is effective for financial statements for
fiscal years beginning after December 15, 1998. Initial application of SOP
98-5 should be as of the beginning of the fiscal year in which SOP 98-5 is
first adopted and should be reported as a cumulative effect of a change in
accounting principle.
The Company expects to adopt SOP 98-5 in the first quarter of 1999. The
estimated impact of the adoption of SOP 98-5 on the results of operations
will be an after tax charge of approximately $3,000 in the first quarter of
1999 for the cumulative effect of a change in accounting principle. In
addition, start-up costs to be incurred and expensed in 1999 are estimated to
be less than $5,000.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131), effective for fiscal years
beginning after December 15, 1997. FAS 131 requires that a public company
report financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined in FAS 131, are components of an enterprise
for which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The financial information to be
reported includes segment profit or loss, certain revenue and expense items
and segment assets and reconciliations to corresponding amounts in the
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general purpose financial statements. FAS 131 also requires information
about products and services, geographic areas of operation, and major
customers. The Company has not completed its analysis of the effect of
adoption of FAS 131 on its financial statement disclosure; however, the
adoption of FAS 131 will not affect results of operations or financial
position.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133), effective for fiscal years beginning after June 15, 1999. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Any portion of a
derivative's change in fair value which is not effective as a hedge of the
underlying assets, liabilities, or firm commitments will be immediately
recognized in earnings. The Company has not yet determined what the effect
of FAS 133 will be on its results of operations or financial position.
9
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WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's primary business is the manufacture and marketing of high-
quality polyester products, including Fortrel(R) brand polyester textile
fibers, polyester fibers made from recycled raw materials and PermaClear(R)
brand PET (polyethylene terephthalate) packaging resins. The Company
currently has annual capacity to manufacture approximately 1.1 billion pounds
of fiber and 610 million pounds of resins worldwide at five major production
facilities in the United States and Europe. The Company is also the world's
largest PET plastics recycler, utilizing a significant amount of recycled raw
materials in its manufacturing operations.
The Company plans to substantially increase its polyester fiber and PET
resins production capacity through the construction of its new, state-of-the-
art Pearl River Plant in Mississippi. This facility is expected to commence
operation in three phases beginning in late 1998 through the third quarter of
1999. By the year 2002, this facility is expected to have annual capacity to
manufacture approximately 570 million pounds of resins and 230 million pounds
of fiber. As a result, the Company's production mix is expected to be
approximately 50% fibers and 50% PET resins. See "Outlook" below.
The Fibers Group produces Fortrel(R) textile fibers, which currently
represent approximately 60% of the Company's fiber production. These fibers
are used in apparel and home furnishings and 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 postindustrial fiber, resin and film materials 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 fourth-largest POY (partially-oriented yarn) producer in the United
States and the fourth-largest PET resins 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. Since late 1997, the Far East has
been experiencing a significant economic and financial crisis. This crisis
has led to higher imports of polyester fiber, fabric and apparel, and fiber
price pressure in the United States and Europe, which has adversely affected
profitability. Global PET resins demand continues to grow, driven by new
product applications for PET and conversions from other packaging materials
to PET.
Several factors significantly affect the Company's profitability: raw
material margins, which are 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, which can affect demand
10
<PAGE>
for its products; and economic and market conditions in the United States,
Europe, the Far East and other regions of the world.
Raw material margins for the chemical-based fiber and PET resins
businesses have generally been influenced by supply and demand factors.
Worldwide supply of these products, as well as their raw materials, PTA and
MEG, continues to undergo significant expansion. Prices of PTA and MEG,
major determinants of polyester fiber and PET resins selling prices, are
cyclical. Changes in PTA and MEG prices are driven by worldwide supply and
demand. Both fiber and resins margins experience increases or decreases due
to timing of price changes and market conditions.
Raw material margins for the recycled fiber operation tend to be more
variable than those for the chemical-based businesses, primarily because
changes in recycled raw material costs generally move independently from
fiber prices. Recycled raw material costs are primarily dependent upon
worldwide supply and demand for recycled materials.
The Company's sales are not materially dependent upon a single customer.
Sales for PET resins, primarily for soft drink bottles and other beverages,
may be influenced by weather. Demand, prices and raw material costs for both
fiber and PET resins may be affected by global economic conditions, supply
and demand balances, the prices of competing materials, such as cotton, and
export activity.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales for the three months ended September 30, 1998 decreased 10.4%
to $237.0 million from $264.7 million for the three months ended September
30, 1997. This decrease was primarily the result of declines in worldwide
polyester fiber selling prices, as the crisis in the Far East continued to
exert intense price pressure on the worldwide markets, and the loss of sales
of Creative Forming, Inc. (CFI), which was sold in December 1997. Sales for
the Fibers Group decreased 13.9% to $88.0 million in the 1998 period from
$102.3 million in the comparable 1997 period due primarily to a 9.3% decrease
in the average selling price per pound for polyester fiber in the 1998
period as compared to the 1997 period. In addition, polyester fiber sales
volumes decreased 5.2% in the 1998 period as compared to the 1997 period.
Sales for the Recycled Products Group (RPG) decreased 11.6% to $81.7 million
in the 1998 period compared to $92.4 million in the year-ago period due
primarily to lower worldwide recycled polyester sales volumes, which
decreased 6.8% in the 1998 period as compared to the 1997 period; lower
polyester fiber average selling prices, which decreased 5.6% in the 1998
period as compared to the 1997 period; and decreased sales in other
divisions. Sales for the Packaging Products Group (PPG) decreased 3.9% to
$67.4 million in the 1998 period from $70.1 million in the 1997 period
resulting from the divestiture of CFI, which had sales in the third quarter
of 1997 of $6.1 million. This decrease offset higher PET resins sales
volumes, which increased 5.0% in the 1998 period as compared to the 1997
period, and relatively stable domestic PET resins average selling prices.
Cost of sales for the three months ended September 30, 1998 decreased
9.4% to $205.3 million for the 1998 period from $226.6 for the comparable
1997 period. This decrease was primarily the result of lower worldwide
chemical raw material costs. Cost of sales for the PPG decreased 9.3% for
the 1998 period as compared to the 1997 period primarily due to lower
11
<PAGE>
worldwide raw material costs and the divestiture of CFI. Cost of sales for
the Fibers Group decreased 12.6% for the 1998 period as compared to the year-
ago period primarily due to lower raw material costs. Cost of sales for the
RPG decreased 4.5% for the 1998 quarter compared to 1997 quarter as a result
of lower sales volumes which offset higher domestic raw material costs.
As a result of the foregoing, gross profit for the three months ended
September 30, 1998 decreased 16.5% to $31.8 million for the 1998 period from
$38.0 for the comparable 1997 period. The gross profit margin for the 1998
period was 13.4% compared to 14.4% for the 1997 period.
Selling, general and administrative expense amounted to $17.7 million, or
7.5% of sales, for the 1998 period compared to $19.0 million, or 7.2% of
sales, for the 1997 period. The decrease was due primarily to the
divestiture of CFI.
As a result of the foregoing, operating income was $14.1 million for the
third quarter of 1998 compared to $19.0 million for the third quarter of
1997.
Interest expense was $2.0 million for the 1998 period compared to $3.0
million for the 1997 period. The decrease in interest expense is due to
higher interest capitalization resulting from the Company's ongoing capital
investment program.
The effective income tax rate was 36.5% in the third quarter of 1998
compared to 39.0% in the comparable 1997 period. The tax rate decreased
primarily as a result of increased earnings at the Company's Irish fiber
operation, which is subject to significantly lower tax rates than the U.S.
operations, and the reduction in foreign operating losses for which no tax
benefit had been provided.
As a result of the foregoing, net earnings in the three months ended
September 30, 1998 were $7.7 million, or $0.25 per diluted share, compared to
$9.8 million, or $0.31 per diluted share, for the three months ended
September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Net sales for the nine months ended September 30, 1998 decreased 4.7% to
$761.4 million from $799.0 million for the nine months ended September 30,
1997. This decrease was primarily the result of declines in worldwide
polyester fiber selling prices, as the crisis in the Far East continued to
exert intense price pressure on the worldwide markets, and the divestiture of
CFI. Sales for the Fibers Group decreased 11.1% to $279.9 million for the
1998 period from $314.8 million for the comparable 1997 period primarily due
to the average selling price per pound for polyester fiber decreasing 7.3%
in the 1998 period as compared to the 1997 period. In addition, polyester
fiber sales volumes decreased 4.1% in the 1998 period as compared to the 1997
period. Sales for the RPG remained essentially unchanged at $284.5 million
in the 1998 period compared to $285.2 million in the year-ago period
primarily as a result of higher worldwide recycled polyester fiber sales
volumes, which increased 6.6% in the 1998 period as compared to the 1997
period, offsetting lower worldwide polyester fiber average selling
prices, which decreased 6.9% in the 1998 period as compared to the 1997
period. Sales for the PPG decreased slightly in the 1998 period to $197.0
million from $199.1 million in the 1997 period due primarily to higher
domestic PET resins sales volumes being more than offset by the
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<PAGE>
divestiture of CFI, which had sales of $17.1 million in the first nine months
of 1997, and decreased sales volumes at the Company's European resins
operation due to the restructuring in the second quarter of 1997 (see below).
Average selling prices for the PPG increased 5.5% in the 1998 period as
compared to the 1997 period and sales volumes increased 2.5% in the 1998
period as compared to the year-ago period.
Cost of sales for the nine months ended September 30, 1998 decreased 5.2%
to $644.0 million from $680.6 million for the comparable 1997 period. This
decrease was primarily the result of lower worldwide chemical raw material
costs. Cost of sales for the PPG decreased 11.5% in the 1998 period compared
to the year-ago period due primarily to lower worldwide raw material costs,
lower plant operating costs and the divestiture of CFI. Cost of sales for
the Fibers Group decreased 9.3% in the 1998 period as compared to the 1997
period due to lower raw material costs. Cost of sales for the RPG increased
5.2% in the 1998 period as compared to the comparable 1997 period primarily
as a result of higher worldwide raw material costs.
As a result of the foregoing, gross profit for the nine months ended
September 30, 1998 decreased slightly to $117.4 million from $118.4 million
for the comparable 1997 period. The gross profit margin was 15.3% for the
1998 period compared to 14.8% for the 1997 period.
Selling, general and administrative expense amounted to $55.9 million, or
7.3% of sales, for the 1998 period compared to $60.1 million, or 7.5% of
sales, for the 1997 period. The decrease was due primarily to the
divestiture of CFI and reduced costs at the Company's European operations as
a result of the restructuring plan implemented in the second quarter of 1997
(see below).
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 charge of
approximately $7.5 million. The restructuring charge consisted of costs for
reducing the number of pounds required to be purchased under a take-or-pay
supply arrangement and the modification of certain service agreements at its
Netherlands-based PET resins business. The restructuring charge also
included termination benefits related to a workforce reduction at the
Company's Irish fiber operation.
As a result of the foregoing, operating income was $61.4 million for the
first nine months of 1998 compared to $50.8 million, or $58.3 million
excluding the restructuring charge, for the comparable 1997 period.
Interest expense was $6.6 million for the 1998 period compared to $10.2
million for the 1997 period. The decrease in interest expense is due to
higher interest capitalization resulting from the Company's ongoing capital
investment program.
The effective income tax rate was 36.5% in the first nine months of 1998
versus 41.4% in the comparable 1997 period. The rate decreased primarily as
a result of increased earnings at the Company's Irish recycled fiber
operation, which is subject to significantly lower tax rates than the U.S.
operations, and the reduction in foreign operating losses for which no tax
benefit had been provided.
As a result of the foregoing, net earnings in the nine months ended
September 30, 1998 were $34.8 million, or $1.11 per diluted share, compared
to $23.8 million, or $0.76 per diluted share for the nine months ended
September 30, 1997. Excluding the restructuring charge, net earnings for the
1997 period were $28.2 million, or $0.90 per diluted share.
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OUTLOOK
The U.S. and European polyester fiber markets are being severely impacted
by the Far Eastern economic crisis and the resultant increase in imports of
fiber yarn, fabric and apparel from that region. This has caused sluggish
demand, higher inventory levels and intense price competition for domestic
fiber producers. In addition, increased competition among domestic
producers, resulting from recent expansions in U.S. polyester staple and POY
(partially-oriented yarn) capacity, have contributed to selling price
pressure.
The Company continues to operate its production facilities and sell its
products at higher utilization rates than many of its competitors. The
Company expects its worldwide fiber sales volumes to remain relatively stable
in the near term. However, ongoing pressure on fiber selling prices will
continue to erode fiber profit margins.
The PET resins market has experienced little effect to date from the Far
Eastern economic problems. In the near term, increased competitive pressures
in the United States and Europe, combined with seasonal demand slowing, is
expected to adversely affect PET resins selling prices and profit margins.
The Company is nearing completion of construction of its Pearl River
Plant in Mississippi. Resin production at this facility is expected to come
on-line in phases beginning in late 1998 through the second quarter of 1999.
As a result, resins sales are expected to increase during the course of 1999.
The plant's fiber production line is expected to commence operation in the
third quarter of 1999. In line with the current start-up plan, the Company
plans to perform previously delayed maintenance on various production lines
at other facilities over the next 15 months. As a result, fiber volumes are
expected to increase only modestly during the latter part of 1999. The
start-up of the Pearl River Plant and other worldwide fiber and resins
capacity expansions in 1998 and 1999 may result in downward pressure on
selling prices and profit margins during the remainder of 1998 and in 1999.
In 1999, the Company's results of operations will also be impacted by
certain increased expenses associated with the start-up of the Pearl River
Plant. Interest costs, previously capitalized during the construction of the
facility, will be expensed as incurred. The Company will also begin
depreciating the facility in phases as each production line commences
operation. The estimated impact of the adoption of SOP 98-5 on the results
of operations will be an after tax charge of approximately $3 million in the
first quarter of 1999 for the cumulative effect of a change in accounting
principle (see note 6 to the condensed consolidated financial statements).
In addition, start-up costs to be incurred and expensed in 1999 are estimated
to be less than $5 million. As a result of the foregoing, net earnings from
continuing operations are expected to be adversely affected during 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $65.3 million for the nine months
ended September 30, 1998 compared to $86.4 million for the nine months ended
September 30, 1997. The decrease in cash from operations was primarily the
result of increased inventory levels in preparation for the start-up of the
Company's Pearl River Plant.
Net cash used in investing activities amounted to $163.2 million in the
first nine months of 1998 compared to $139.1 million in the first nine months
of 1997. Capital spending amounted to $163.2 in the 1998 period compared to
$144.1 million in the 1997 period reflecting the Company's ongoing capital
investment program.
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Net cash provided by financing activities amounted to $97.9 million in
the first nine months of 1998 compared to $61.0 million in the comparable
1997 period. Net borrowings amounted to $105.2 million in the 1998 period
compared to $68.9 million in the 1997 period as a result of the Company's
ongoing capital investment program.
In 1998, the Company adopted a policy that requires all outside members
of the Board of Directors and certain officers to achieve designated levels
of stock ownership over the next five years. Members of management must own
shares of stock valued at up to four times their annual base salary. In
addition, a restricted stock plan was approved by the stockholders at the
annual meeting in May 1998. During the first nine months of 1998, directors
and officers acquired approximately 94,000 shares of restricted stock.
With the completion of the PET resins capacity expansion at the
Darlington, SC plant in the second quarter of 1997, the major portion of the
Company's ongoing capital investment program is the construction of its Pearl
River Plant in Mississippi. The total capitalized cost of the facility is
estimated to range between $470 and $500 million. This facility is expected
to be operational in three phases beginning in late 1998 through the third
quarter of 1999. The Company's planned aggregate capital expenditures in the
remainder of 1998 and through the end of 1999 are estimated to range between
$150 and $190 million. The exact amount and timing of the capital spending
is difficult to predict due to equipment delivery and construction schedules.
The Company's financing agreements contain normal financial and
restrictive covenants. Certain subsidiaries have guaranteed substantially
all of the Company's indebtedness for borrowed money. The financial
resources available to the Company at September 30, 1998 include $265 million
under its $330 million revolving credit facility, unused short-term
uncommitted lines of credit aggregating approximately $139.8 million, and
internally generated funds. The Company is considering other forms of
financing including the issuance of public securities. On October 16, 1998,
the Company's shelf registration statement covering the issuance of up
to $400 million of debt and/or equity securities was declared effective by
the SEC. The Company believes these financial resources and other credit
arrangements will be sufficient to meet its foreseeable working capital,
capital expenditure and dividends.
The Company has entered into two types of financial instruments relating
to interest rate stabilization. One instrument, with a notional amount of
$150 million, was designed to provide a fixed 10-year interest rate on $150
million of debt of approximately 6.6% (exclusive of corporate spreads)
if issued by November 10, 1998. The Company has also entered into interest
rate swaps with an aggregate notional amount of $200 million at September 30,
1998 to fix the interest rate on variable rate borrowings. These agreements
have maturity dates which range from a minimum of 5 years to a maximum of 10
years from their inception dates (ranging from June 1997 to May 1998). The
swaps will effectively fix the rate of interest between 6.10% and 6.20%
(exclusive of corporate spreads) on $200 million of borrowings. In
aggregate, the Company estimates it would have had to pay approximately $42.1
million to terminate these agreements at September 30, 1998.
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 September 30, 1998 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
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entity. At September 30, 1998, the Company would have had to pay
approximately $1.3 million to terminate these contracts.
The Company has also entered into forward foreign currency contracts to
exchange U.S. dollars for German marks with an aggregate notional amount of
$2.7 million at September 30, 1998. 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 October 1998
through March 1999. At September 30, 1998, the cost to terminate these
contracts was immaterial.
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 September 30,
1998, the notional amount of such contracts was $9.9 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.
YEAR 2000
Based on a recent assessment, the Company determined that it will be
required to modify certain portions of its software and process equipment so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company presently believes that with
modifications to existing software the Year 2000 Issue will not pose
significant operational problems for its computer systems. In addition, the
Company has initiated formal communications with all of its significant
suppliers and larger customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company is currently preparing contingency
plans which will involve, among other actions, managing inventories and
adjusting staffing strategies. The Company expects to complete its Year 2000
project by mid 1999, which is prior to any anticipated impact on its operating
systems. The total project cost, which will be expensed as incurred, is not
expected to have a material effect on the results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). The Company expects to adopt
SOP 98-5 in the first quarter of 1999. The estimated impact of the adoption
of SOP 98-5 on the results of operations will be an after tax charge of
approximately $3 million in the first quarter of 1999 for the cumulative
effect of a change in accounting principle. In addition, start-up costs to
be incurred and expensed in 1999 are estimated to be less than $5 million.
See note 6 to the condensed consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131), effective for fiscal years
beginning after December 15, 1997. The Company has not completed its
analysis of the effect of adoption of FAS 131 on its financial statement
disclosure; however, the adoption of FAS 131 will not affect results of
operations or financial position. See note 6 to the condensed consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
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133), effective for fiscal years beginning after June 15, 1999. The Company
has not yet determined what the effect of FAS 133 will be on its results of
operations or financial position. See note 6 to the condensed consolidated
financial statements.
FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
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, 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 1998 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, Far Eastern and global economic conditions and
changes in laws and regulations; prices of competing products, such as
cotton; 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.
For a more complete description of the prominent risks and uncertainties
inherent in the Company's business, see the Company's Form 10-K for the year
ended December 31, 1997.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Stockholders who intend to submit proposals at the 1999 Annual Meeting of
Stockholders, currently scheduled to be held on May 18, 1999, without
including such proposals in the Proxy Statement for such meeting must notify
the Company of this intention no later than April 18, 1999.
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
4(b) Second Amendment to Loan Agreement dated September 22, 1998 by
and among the Company and Fleet National Bank, as agent, and
certain other financial institutions
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLMAN, INC.
Dated November 6, 1998 By /s/ Keith R. Phillips
------------- ------------------------
Keith R. Phillips
Chief Financial Officer,
Vice President and Treasurer
(Principal Financial Officer)
Dated November 6, 1998 By /s/ Mark J. Rosenblum
------------- ------------------------
Mark J. Rosenblum
Chief Accounting Officer,
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT 4(b)
AMENDMENT TO LOAN AGREEMENT AND GUARANTY
THIS AMENDMENT TO LOAN AGREEMENT AND GUARANTY is entered into as of
September 22, 1998 by and among Wellman, Inc., a Delaware corporation (the
"Borrower"), Prince, Inc., a Delaware corporation and wholly owned subsidiary
of the Borrower ("Prince"), Fleet National Bank, a national banking
association, in its capacity as agent for itself and the other Banks (the
"Agent") and the Banks.
RECITALS
WHEREAS, capitalized terms used in this Amendment to Loan Agreement and
Guaranty (the "Amendment") and not expressly defined herein shall have the
respective meanings assigned thereto in that certain Loan Agreement dated as
of February 8, 1995 among the Borrower, the Agent and the Banks, as amended
June 4, 1997 (the "Loan Agreement") or that certain Guaranty of Prince dated
as of February 8, 1995 whereby Prince guaranteed the Obligations of Borrower
under the Loan Agreement (the "Prince Guaranty"), whichever is applicable;
WHEREAS, the Borrower, Prince, the Banks and the Agent desire to amend
the Loan Agreement and the Prince Guaranty as provided in this Amendment.
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein and for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged by each of the parties hereto, the Borrower,
Prince, the Banks and the Agent hereby mutually agree as follows:
Section 1. Amendments. Effective as of the date hereof, the Loan
Agreement is hereby amended as follows:
(a) Section 1.01 of the Loan Agreement is amended by deleting the
definition of "Borrowed Money" and inserting the following definition in
substitution therefor:
"Borrowed Money" means with respect to any Person the aggregate
amount, without duplication, of the following items as and to the
extent reflected on such Person's consolidated balance sheet
(exclusive of any such item only required to be disclosed in a
note to such balance sheet) prepared in accordance with GAAP (any
such balance sheet of the Borrower being hereinafter referred to
as "Borrower's GAAP Balance Sheet"): (a) all obligations for
borrowed money; (b) all Capitalized Lease Obligations; and (c) all
obligations evidenced by bonds, debentures, the Notes, other
promissory notes or other similar instruments.
(b) Section 1.01 of the Loan Agreement is amended by deleting the
definition of "Lien" and inserting the following definition in
substitution therefor:
<PAGE>
"Lien" means any mortgage, lien, pledge, charge, security
interest, conditional sale or other title retention agreement or
other encumbrance of any nature whatsoever; however, Lien does
not include any encumbrance relating to any Tax Reduction
Agreement.
(c) Section 1.01 of the Loan Agreement is amended by deleting the
definition of "Material Subsidiary" and inserting the following
definition in substitution therefor:
"Material Subsidiary" means Fiber, Prince, Wellman of Mississippi,
Inc. and any Subsidiary of the Borrower, which owns a Principal
Property, or any Subsidiary in which Borrower's share of the total
Tangible Assets (after inter-company eliminations) of such
Subsidiary exceeds fifteen percent (15%) of the Consolidated
Tangible Assets of the Borrower as of the most recent quarter end.
(d) Section 1.01 of the Loan Agreement is amended by inserting the
following definitions immediately after the definition of "P.M.":
"Permitted Receivables Program" means any agreement of the
Borrower or any of the Subsidiaries providing for sales, transfers
or conveyances of accounts receivable purporting to be sales (and
considered sales under GAAP) that do not provide, directly or
indirectly, for recourse against the seller of such accounts
receivable (or against any of such seller's Subsidiaries or
Affiliates) by way of a guaranty or any other credit support
arrangement, with respect to the amount of such accounts
receivable (based on the financial condition or circumstances of
the obligor thereunder), other than such limited recourse as is
reasonable given market standards for transactions of a similar
type, taking into account such factors as historical bad debt loss
experience and obligor concentration levels.
"Permitted Sale/Leaseback Transactions" means any sale and
leaseback by the Borrower or any Subsidiary of any property if:
(1) within 120 days after the effective date of the lease the
Borrower or such Subsidiary, either (A) applies the net proceeds
to the acquisition of another property of equal or greater fair
market value or (B) applies the proceeds to the retirement of
Indebtedness for Borrowed Money in an amount equal to the greater
of (i) the net proceeds received by the Borrower and its
Subsidiaries for the sale of the property leased, or (ii) the fair
market value of the property leased within 90 days prior to the
effective date of the lease, or (C) any combination of (A) and
(B); (2) the lease has a term of not more than five years; (3) the
Lien on any such property subject to such sale and leaseback would
be permitted under Section 5.02(A); (4) the sale and leaseback is
of the properties in connection with any Tax Reduction Agreement;
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<PAGE>
(5) the sale and leaseback transaction is between the Borrower and
a Subsidiary or between Subsidiaries; or (6) such lease is entered
into within 360 days after the later of the acquisition,
completion of construction or commencement of operation of such
property; provided that any such sale and leaseback transaction
pursuant to subsections (2), (3) and (6) above are permitted only
if the amount of the net proceeds received in such transaction are
applied to reduce the Indebtedness for Borrowed Money within ten
(10) Business Days after the net proceeds are received; provided
further, that the foregoing restriction regarding the use of
proceeds for transactions pursuant to subsection (3) above shall
only apply to transactions which create Liens that are permitted
pursuant to Sections 5.02(A)(i), 5.02(A)(l) and 5.02(A)(p) of the
Loan Agreement, as amended.
(e) Section 1.01 of the Loan Agreement is amended by inserting the
following definition immediately after the definition of "Prince
Guaranty":
"Principal Property" means any manufacturing, processing,
distribution, research, research and development, warehousing or
principal administration facility (including, without limitation,
land, fixtures and equipment) owned or leased by the Borrower or
any Subsidiary (including any of the foregoing acquired or leased
after the date of the Loan Agreement) unless the Board of
Directors of the Borrower by Board Resolution and in good faith
declares that such facility is not of material importance to the
business conducted by the Borrower and its Subsidiaries taken as
an entirety; provided, however, the Board of Directors may not
make such a declaration regarding a facility and any such prior
declaration shall be ineffective for the purposes of this
definition if the net book value of the applicable facility is
greater than fifteen percent (15%) of the Consolidated Tangible
Assets of the Borrower as reflected on the consolidated balance
sheet of the Borrower at the most recent quarter end.
(f) Section 1.01 of the Loan Agreement is amended by inserting the
following language at the end of the definition of "Restricted
Guaranty":
"provided, further, that any guaranty or guaranties related to any
Tax Reduction Agreement are excluded from this definition."
(g) Section 1.01 of the Loan Agreement is amended by inserting the
following definition immediately after the definition of
"Syndication Agent":
"Synthetic Lease" means a transaction for the lease of property or
assets designed to permit the lessee (i) to claim depreciation on
such property or assets under U.S. tax law and (ii) to treat such
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lease as an operating lease or not to reflect the property or
assets on the lessee's balance sheet under GAAP.
(h) Section 1.01 of the Loan Agreement is amended by inserting the
following definition immediately after the definition of "Tangible
Assets":
"Tax Reduction Agreement" means (1) any Fee-in-Lieu-of-Tax
Agreement (as defined on Exhibit 1 to that certain Amendment to
Loan Agreement and Guaranty among Borrower, Prince and the Banks
named therein dated as of September 22, 1998 (the "Amendment")
attached hereto and made a part hereof) of Borrower or its
Subsidiaries as permitted under applicable state or municipal law
or any other arrangement providing similar benefits; or (2) any
Cross Border Lease Agreement (as defined on Exhibit 2 to the
Amendment attached hereto and made a part hereof) which is
designed to permit depreciation of the same property to be claimed
under the tax laws of two different countries.
(i) Section 5.02(A) of the Loan Agreement is hereby amended by
deleting "Borrower or any Subsidiary" at the end of subsection
5.02(A)(h) and by adding the following language to the end of such
subsection:
"Borrower and its Subsidiaries taken as a whole"
(j) Section 5.02(A)(i) of the Loan Agreement is hereby amended by
deleting the reference to "Consolidated Stockholders' Equity" and
inserting in its stead "Consolidated Tangible Assets":
(k) Section 5.02(A) of the Loan Agreement is hereby amended by adding
the following language after subsection 5.02(A)(j):
(k) any Liens existing on properties or assets prior to the
acquisition thereof by the Borrower or any Subsidiary
(including by way of merger or consolidation), provided
that (x) such Lien is not created in contemplation of
or in connection with such acquisition and (y) such
Lien does not apply to any other property or assets of
the Borrower or any Subsidiary;
(l) Liens upon any property acquired, constructed or
improved by the Borrower or any Subsidiary which are
created or incurred within 360 days of the later of the
acquisition, completion of construction or commencement
of operation of the property to secure or provide for
the payment of up to the purchase price of such
property or the cost of such construction or
improvement, including carrying costs (but no other
amounts), provided that any such Lien shall not
4
<PAGE>
apply to any other property of the Borrower or any
Material Subsidiary;
(m) Liens on the property or assets of any Subsidiary in
favor of the Borrower or any Material Subsidiary;
(n) extensions, renewals or replacements of Liens referred
to in clauses (a) through (m) above, provided that any
such extension, renewal or replacement Lien shall be
limited to the property or assets covered by the Lien
extended, renewed or replaced and that the obligations
secured by any such extension, renewal or replacement
Lien shall be in an amount not greater than the amount
of the obligations secured by the Lien extended,
renewed or replaced;
(o) Liens to the extent that they are less than
$100,000,000 in the aggregate arising in connection
with all Permitted Receivables Programs (to the extent
the sale by the Borrower or the applicable Material
Subsidiary of its accounts receivable is deemed to give
rise to a Lien in favor of the purchaser thereof in
such accounts receivable or the proceeds thereof); and
(p) Liens upon any property or assets of the Borrower and
its Subsidiaries on property subject to a Synthetic
Lease or any right of access or other non-financial
encumbrance relating thereto.
(l) Section 5.01(K) of the Loan Agreement is hereby amended to read as
follows:
(K) Leverage Ratio. Maintain at the end of each of Borrower's
fiscal quarters a Leverage Ratio of not greater than .55 to 1.0;
provided, that solely for purposes of calculating Borrower's
compliance with this covenant, Adjusted Indebtedness shall exclude
any Tax Reduction Agreement transactions entered into by the
Borrower or any Subsidiary except to the extent that any such
transaction is recorded as a liability on the consolidated balance
sheet of the Borrower and there shall be subtracted from Adjusted
Indebtedness the excess of (A) Borrower's Cash Equivalent
Investments at such date over (B) the sum of (i) $10,000,000 and
(ii) the amount of federal income taxes that would be payable (if
any) if Borrower's Cash Equivalent Investments held outside the
United States were repatriated to the United States at the end of
such quarter, and taxed at the Assumed Rate. For purposes of this
Section 5.01(K) the term "Assumed Rate" means the greater of zero
or the difference between (a) the highest federal income tax rate
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<PAGE>
in the United States applicable to domestic corporations and (b)
the highest income tax rate applicable to Borrower or its
Subsidiaries, as appropriate, on Cash Equivalent Investments in
the jurisdiction in which such Cash Equivalent Investments are
held at the end of such quarter.
(m) Section 5.02(B) of the Loan Agreement is hereby amended to read as
follows:
(B) Dissolution, etc. (i) Dissolve, liquidate, wind up, except
for dissolution of any Subsidiary other than a Material
Subsidiary, (ii) merge or consolidate with any Person if (a)
Borrower is not the surviving corporation or (b) after any merger
or consolidation, a Default or Event of Default shall have
occurred, (iii) except pursuant to a Tax Reduction Agreement or a
Permitted Sale/Leaseback Transaction, sell, assign, lease or
otherwise dispose of or permit the disposal of or turn over the
management of (whether in one transaction or in a series of
related transactions) all or substantially all of its assets
except to Borrower or to any Subsidiary, or (iv) except pursuant
to a Tax Reduction Agreement or a Permitted Sale/Leaseback
Transaction, sell (whether in one transaction or in a series of
related transactions) any asset material to the Borrower or to the
Borrower and the Subsidiaries taken as a whole (whether now owned
or hereafter acquired and whether any such asset is leased back on
an operating lease basis or as a Capitalized Lease Obligation but
excluding transactions of the type described in paragraph 2 of
Exhibit H); provided that such restriction shall not apply (x) to
any such assets which are promptly replaced with assets of
substantially like kind, value and usefulness which are owned by
the Borrower or a Subsidiary and (y) to any transaction to the
extent that the aggregate book value of Tangible Assets sold
(measured at the time of such transaction in question) of the
assets involved in any such transaction does not exceed ten
percent (10%) of Consolidated Tangible Assets.
(n) Section 10 of the Prince Guaranty is hereby amended to read as
follows:
10. The Guarantor further covenants and agrees that during such
time as this Guaranty is in effect the Guarantor will not, without
the prior written consent of the Agent, incur any Indebtedness for
Borrowed Money to any third party except Indebtedness for Borrowed
Money which would be permitted to exist under the terms of the
Loan Agreement. In the event of any breach of said covenants and
agreements, all Obligations, regardless of their terms, shall at
the Agent's election be deemed for the purposes of this Guaranty
to have become matured, and, at the Agent's election, the
Guarantor shall promptly pay to the Agent the entire amount of the
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Obligations, and the Agent may take any action deemed necessary or
advisable to enforce this Guaranty.
(o) Section 15 of the Prince Guaranty is hereby amended to read as
follows:
15. The Guarantor hereby covenants and agrees to and with the
Agent and each of the Lenders and their successors and assigns
that the Guarantor shall not engage in any business other than (i)
holding of the equity interests of Fiber and other Persons, (ii)
receipt of dividends and distributions on such interests, (iii)
payment of dividends and/or making loans to the Principal Debtor,
(iv) collection of principal of and interest on such loans, (v)
engaging in intercompany loans and transactions, (vi) acquiring,
holding, managing and licensing intangible assets, and (vii)
intercompany money management transactions. The Guarantor shall
maintain its own books and records, its separate corporate
identity and conduct itself in all respects as a separate
corporation observing customary corporate formalities in
connection therewith.
Section 2. Representations and Warranties. The Borrower and Prince
hereby represent and warrant that (i) they have full power and authority to
execute and deliver this Amendment and to perform their respective
obligations hereunder, (ii) each has taken all corporate action necessary for
the execution and delivery by it of this Amendment and the performance by it
of its obligations hereunder, (iii) this Amendment constitutes a valid and
binding obligation of each enforceable against each in accordance with its
terms except to the extent enforceability may be subject to bankruptcy,
insolvency, moratorium and other similar law affecting the rights of
creditors generally or the application of principles of equity, whether in an
action at law or proceeding in equity, (iv) all of the representations and
warranties of the Borrower contained in the Loan Agreement, as amended, are
materially true and correct as of the date hereof, except to the extent (a)
they expressly relate to an earlier date, (b) they relate to the
representation contained in Section 4.01(O), or (c) as otherwise reflected in
the Borrower's most recent 10K, and (v) no Default or Event of Default has
occurred and is continuing on and as of the date hereof.
Section 3. Reference to and Effect Upon the Loan Agreement and Prince
Guaranty.
3.1 The Loan Agreement and Prince Guaranty, as specifically amended
hereby, is hereby ratified, confirmed and approved and shall remain in full
force and effect.
3.2 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Agent or any
Bank under the Loan Agreement, nor constitute an amendment of any provision
7
<PAGE>
of the Loan Agreement, except as specifically set forth herein. Upon the
effectiveness of this Amendment (i) each reference in the Loan Agreement to
"this Agreement", "hereunder", "hereof", "herein" or words of similar import
shall mean and be a reference to the Loan Agreement as amended by this
Amendment; (ii) each reference in any Note or Related Document to the Loan
Agreement shall mean and be a reference to the Loan Agreement as amended by
this Amendment, and (iii) each reference in the Prince Guaranty to "this
Guaranty", "hereunder", "hereof", "herein" or words of similar import shall
mean and be a reference to the Prince Guaranty as amended by this Amendment.
Section 4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York without regard
to its conflict of laws provisions.
Section 5. Headings. Article and Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
Section 6. Counterparts. This Agreement may be executed and delivered
in any number of counterparts each of which shall be deemed an original, and
this Agreement shall be effective when at least one counterpart hereof has
been executed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Loan
Agreement and Guaranty to be executed as a sealed instrument by their
respective officers thereunto duly authorized as of the date first written
above.
WELLMAN, INC.
By:
Name: Audrey Goodman
Title: Assistant Treasurer
PRINCE, INC.
By:
Name: Audrey Goodman
Title: Treasurer
FLEET NATIONAL BANK, as Agent and as a Bank
By:
Name:
Title:
8
<PAGE>
BANK OF AMERICA NT&SA, as successor by
merger to Bank of America Illinois
By:
Name:
Title:
WACHOVIA BANK OF GEORGIA, N.A., as Co-Lead
and as a Bank
By:
Name:
Title:
BANK OF NOVA SCOTIA
By:
Name:
Title:
THE BANK OF TOKYO TRUST COMPANY
By:
Name:
Title:
CIBC, INC.
By:
Name:
Title:
THE CHASE MANHATTAN BANK, as successor by
merger to The Chase Manhattan Bank, N.A.
By:
Name:
Title:
9
<PAGE>
THE CHASE MANHATTAN BANK, as successor by
merger to Chemical Bank New Jersey, N.A.
By:
Name:
Title:
FIRST UNION BANK, as successor to First
Fidelity Bank, N.A.
By:
Name:
Title:
THE FUJI BANK, LIMITED
By:
Name:
Title:
ISITUTO BANCARIO SAN PAULO DI TORINO SPA
By:
Name:
Title:
KREDIETBANK NV
By:
Name:
Title:
MELLON BANK, N.A.
By:
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION, successor by
merger to Midlantic Bank, N.A.
By:
Name:
Title:
10
<PAGE>
CITIBANK, N.A., as successor to Toronto
Dominion (New York), Inc.
By:
Name:
Title:
BANCA MONTE dei PASCHI di SIENA S.p.A.
By:
Name:
Title:
11
<PAGE>
Exhibit I
Fee-in-Lieu-of-Tax Agreements
-----------------------------
A "Fee in Lieu-of-Tax Agreement" means any transaction, agreement or
arrangement which:
(1) is between the Borrower and/or a Subsidiary of the Borrower and a
third party that reduces the tax obligation of such entity, other than
income tax obligations (i.e. property, sales, use, and contractor's)
which would have been payable without such transaction, agreement or
arrangement;
(2) does not increase the Borrower's Indebtedness for Borrowed Money,
except to the extent of the costs of entering into the transaction, on
the date the transaction, agreement or arrangement is executed; and
(3) does not provide additional funding (except for the tax savings)
whether in the form of a lease or otherwise for the Borrower's and/or a
Subsidiary's construction or use of an asset.
- ---------------------------------------------------------
For illustrative purposes only and not as part of the definition of Fee-in-
Lieu-of-Tax Agreement, the form of fee-in-lieu-of-tax agreement, the "deemed"
cash transfers, and the steps taken at the different stages of the
transaction that the Borrower has in place currently in South Carolina are
summarized as follows:
South Carolina Fee-in-Lieu-of Tax Agreement Summary
- ---------------------------------------------------
"Deemed" Cash Transfers to Establish Fee-in-Lieu Assets with Darlington
County:
1. Borrower funds asset additions by Fiber;
2. Borrower borrows money to buy Darlington County Bonds. (Bond amount is
equal to annual fee-in-lieu asset additions by Fiber);
3. Darlington County issues Bonds;
4. Borrower buys Bonds;
5. Darlington County buys assets from Fiber with Bond money received from
Borrower;
6. Fiber transfers title to its "fee-in-lieu" assets to Darlington County
and enters into a leaseback agreement with Darlington County;
7. Fiber repays loan from Borrower, Inc. (see #1 above) with sale proceeds
from Darlington County;
8. Borrower repays bank borrowing associated with Bond purchase in #2 above.
12
<PAGE>
Exhibit 1: continued
--------------------
Actual and "Deemed" Annual Cash Transfers Associated with Lease and Bonds:
- --------------------------------------------------------------------------
Annually Fiber pays lease payments to Darlington County. The lease payments
include the following: (1) actual cash for an amount "in-lieu" of property
taxes (this amount is less than Fiber would have paid for property taxes if
it had not received this incentive); and (2) Fiber is "deemed" to pay
Borrower 6% interest on the assets covered under the "fee-in-lieu" (this is
equal to the Bond interest owed by Darlington County to Borrower and the
documents allow that this amount can be paid directly by Fiber to Borrower).
Since no cash is transferred between Fiber and Borrower there is a deemed
transfer by Borrower to Fiber which is either a loan or a contribution to
capital.
"Deemed" Cash Transfers at the End of the Fee-In-Lieu Agreement:
- ----------------------------------------------------------------
1. Borrower borrows funds from a bank and lends them to Fiber to enable
Fiber to buy back its "fee-in-lieu" assets;
2. Fiber buys back its "fee-in-lieu" assets from Darlington County with the
money Borrower has lent it;
3. Darlington County returns title to the "fee-in-lieu" assets to Fiber;
4. Darlington County pays Borrower the cash it receives from Fiber to buy
back its Bonds;
5. Borrower returns the Bonds to Darlington County for cancellation;
6. Borrower repays the bank for money it borrowed and lent to Fiber (see #1
above).
We are currently attempting to negotiate similar agreements in other states
and would expect that in principal they would reduce various taxes and not
subject the Borrower to any funding risk. In general, if these transactions
were terminated, the Borrower or its Subsidiaries would not be required to
borrow additional funds or enter into additional financing transactions.
13
<PAGE>
Exhibit 2
---------
Cross Border Lease Agreement
----------------------------
A "Cross Border Lease Agreement" is defined as an agreement, arrangement or
transaction (1) which is designed to permit depreciation of the same property
to be claimed under the tax laws of two or more different countries; and (2)
which at the date such agreements, arrangements or transactions are entered
into neither (a) increases the Indebtedness for Borrowed Money by more than
$10 million, nor (b) provides current funding from a transaction which is an
operating lease in accordance with GAAP by more than $10 million.
- ------------------------------------------------------------------
For illustrative purposes only, and not as part of the definition of Cross
Border Lease Agreement, the following outline describes the basic steps of
one type of generic Cross Border Lease transaction:
1) A U.S. entity enters into a transaction with a foreign investor. The
foreign investor generally creates a separate foreign entity to
participate in the transaction. The transaction involves the U.S entity
transferring property to the newly formed foreign entity and leasing it
back. Depending on the legal structure the transaction may be
characterized as a financing for GAAP and U.S. income tax purposes or as
a payment of an upfront cash benefit. Thus the U.S. entity is treated as
the owner of the property and is entitled to depreciation deductions.
The transaction is characterized as a purchase and lease for foreign tax
purposes. Therefore the foreign investor also claims depreciation on the
property. The net present value of the foreign investor's after tax cash
savings, a result of reduced foreign taxes due to depreciation
deductions, is divided between the U.S. entity and the foreign investor.
Note that in calculating the benefit to the foreign investor the upfront
tax benefits received must be reduced by taxes paid at the end of the
transaction when the foreign entity "sells" the property. This gain may
be subject to lower (capital gains) tax rates.
2) Assuming the transaction is not legally defeased and cash is paid for the
asset on inception, the basic payments associated with the transaction,
as well as their character, are as follows:
14
<PAGE>
Exhibit 2: continued
--------------------
Transaction U.S. Entity Foreign Entity
----------- ----------- ---------------
Beginning of Loan from foreign entity Purchase of property
transaction payment for GAAP and U.S. income from U.S. entity for
(cash from foreign tax purposes. income tax purposes.
entity to U.S. entity).
Periodic payments Interest payments on Lease payments for
(cash from U.S. loan for GAAP and U.S. income tax purposes
entity to foreign income tax purposes.
entity).
End of transaction Repayment of loan from Sale of property back
payment (generally foreign entity for GAAP to U.S. entity for
cash from U.S. entity and U.S. income tax income tax purposes.
to foreign entity). purposes.
Modifications of this structure as well as different forms of the transaction
may be utilized which impact the flow of funds.
3) Assuming the U.S. entity defeases some or all of its obligations under
the lease, as is often the case the U.S. entity will generally deposit
funds with a highly-rated financially sound bank operating in the foreign
investor's country. The total amount defeased will not be greater than
and will generally approximate the net present value of the U.S. entity's
periodic payments as well as the net present value of the end of
transaction payment. The defeasance may be legal or economic. On a
portion of the transaction which is defeased the U.S. entity may be
subject to secondary liability with respect to the defeased obligations
in the event of default by the defeasance bank.
4) In these transactions if the U.S. entity terminates the transaction
early, e.g. because of casualty in respect of the property involved in
the transaction, there is an obligation as of that date to restore the
foreign investor to its anticipated position. This contingent obligation
may require credit support such as a letter of credit or other
arrangements. Generally, both parties to the transaction bear the tax
risk of their respective jurisdictions.
5) As part of the documentation for the transaction, the U.S. entity will
generally be required to enter into certain agreements regarding the
operation of the assets subject to the lease as well as agreements
associated with various assets at the site that support the assets
subject to the lease. Additional agreements that may be executed include
access right agreements or service agreements.
15
<PAGE>
These transactions commonly involve transportation equipment and historically
provide benefits to both parties to the transaction. Any contingent
liabilities associated with these transactions are generally remote and no
liability is normally recorded in the U.S. entity's financial statements.
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS for third quarter 1998 10-q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 120,690
<ALLOWANCES> 4,985
<INVENTORY> 186,306
<CURRENT-ASSETS> 306,067
<PP&E> 1,256,400
<DEPRECIATION> 382,558
<TOTAL-ASSETS> 1,455,088
<CURRENT-LIABILITIES> 155,052
<BONDS> 500,721
0
0
<COMMON> 34
<OTHER-SE> 669,433
<TOTAL-LIABILITY-AND-EQUITY> 1,455,088
<SALES> 761,373
<TOTAL-REVENUES> 761,373
<CGS> 643,989
<TOTAL-COSTS> 643,989
<OTHER-EXPENSES> 55,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,610
<INCOME-PRETAX> 54,834
<INCOME-TAX> 20,014
<INCOME-CONTINUING> 34,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,820
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
</TABLE>
