WLM Wellman

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-10033

 

Registrant’s telephone number, including area code: (803) 835-2000

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

     Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of October 31, 2007, there were 32,874,382 shares of the registrant’s Class A common stock, $0.001 par value, outstanding and no shares of Class B common stock outstanding.

 

 

WELLMAN, INC.
INDEX

		Page No.
PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements (Unaudited, except where noted)
Condensed Consolidated Statements of Operations — For the three and nine months ended September 30, 2007 and 2006			3
Condensed Consolidated Balance Sheets — September 30, 2007 and December 31, 2006 (Audited)			4
Condensed Consolidated Statements of Stockholders ‘ Equity — For the nine months ended September 30, 2007 and the year ended December 31, 2006 (Audited)			5
Condensed Consolidated Statements of Cash Flows — For the nine months ended September 30, 2007 and 2006			6
Notes to Condensed Consolidated Financial Statements			7
ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
ITEM 3 — Quantitative and Qualitative Disclosure of Market Risk			30
ITEM 4 — Controls and Procedures			30
PART II — OTHER INFORMATION
ITEM 1 — Legal Proceedings			31
ITEM 1A — Risk Factors			31
ITEM 6 — Exhibits and Reports on Form 8-K			32
SIGNATURES			33
EX-10.2 Wellman, Inc. Fifth Amended and Restated Management Incentive Compensation Plan
EX-18 Preferability Letter from Ernst & Young LLP regarding a change in accounting method
EX-31.1 Certification of the Chief Executive Officer pursuant to Section 302
EX-31.2 Certification of the Chief Financial Officer pursuant to Section 302
EX-32.1 Certification of the Chief Executive Officer pursuant to Section 906
EX-32.2 Certification of the Chief Financial Officer pursuant to Section 906

ITEM 1. FINANCIAL STATEMENTS

WELLMAN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
Net sales		$	270.8			$	307.6			$	889.9			$	919.2
Cost of sales			271.2				297.6				878.5				888.7
Gross profit			(0.4	)			10.0				11.4				30.5
Selling, general and administrative expenses			10.9				12.3				32.5				35.5
Restructuring charges			—				—				3.1				—
Provision for uncollectible accounts			0.2				—				0.5				0.1
Other (income) expense, net			(1.6	)			35.2				(12.8	)			42.4
Operating loss			(9.9	)			(37.5	)			(11.9	)			(47.5	)
Interest expense, net			16.0				15.7				46.3				41.9
Loss from continuing operations before income taxes			(25.9	)			(53.2	)			(58.2	)			(89.4	)
Income tax benefit			(3.6	)			(18.9	)			(3.6	)			(31.3	)
Loss from continuing operations			(22.3	)			(34.3	)			(54.6	)			(58.1	)
Earnings (loss) from discontinued operations, net of income taxes (benefit)			4.3				(1.3	)			0.9				(5.2	)
Net loss		$	(18.0	)		$	(35.6	)		$	(53.7	)		$	(63.3	)
Net loss attributable to common stockholders:
Net loss		$	(18.0	)		$	(35.6	)		$	(53.7	)		$	(63.3	)
Accretion			(4.0	)			(3.6	)			(11.5	)			(10.6	)
Net loss attributable to common stockholders		$	(22.0	)		$	(39.2	)		$	(65.2	)		$	(73.9	)
Basic and diluted net loss per common share:
Net loss attributable to common stockholders from continuing operations		$	(0.81	)		$	(1.19	)		$	(2.05	)		$	(2.15	)
Net earnings (loss) attributable to common stockholders from discontinued operations			0.13				(0.04	)			0.03				(0.17	)
Net loss attributable to common stockholders		$	(0.68	)		$	(1.23	)		$	(2.02	)		$	(2.32	)
Dividends per common share		$	0.02			$	0.02			$	0.06			$	0.12

See Notes to Condensed Consolidated Financial Statements.

See Notes to Condensed Consolidated Financial Statements.

See Notes to Condensed Consolidated Financial Statements.

WELLMAN, INC.

January 1, 2007, after adopting FIN 48, we had uncertain tax liabilities of approximately $24.0 million which have been considered in determining the future utilization of tax carry-forwards. We recorded approximately $24.0 million to reflect the benefit of net operating losses and other tax carry-forwards and a corresponding $24.0 million of uncertain tax liabilities. If the tax positions that give rise to these uncertain tax liabilities were favorably resolved, then in our current situation, we would not record any tax benefit in our Statement of Operations unless we received a cash refund because of the corresponding reduction in our valuation allowance. There are an additional $2.0 million of uncertain tax benefits, which, if favorably resolved, would result in a tax benefit in our Statement of Operations. Our policy is to reflect any required interest expense and penalties under FIN 48 as a component of tax expense, and we had $0.3 million accrued for these liabilities at September 30, 2007. Our federal net operating loss carry-forward commenced in 1999 and may be adjusted until it is utilized. Our major state and certain foreign jurisdictions have the potential for adjustments for periods after 2001.

     In February 2007, we elected to participate in the Internal Revenue Service’s FIN 48 Initiative to expedite resolution of an uncertain tax position regarding our repatriation of foreign earnings. In September 2007, our settlement with the Internal Revenue Service was finalized after approval by the Joint Committee on Taxation, resulting in a tax benefit of $3.1 million, including interest. The effect is recorded in our Condensed Consolidated Statements of Operations as a discrete tax item benefit. The refund was received in October 2007. Our net deferred tax position remains unchanged as a result of the settlement; Other assets and deferred income taxes, net both decreased by approximately $20 million.

New Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. It will be effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of SFAS No.157 on our financial condition and results of operations.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This Statement permits entities to measure certain financial instruments and other items at fair value. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings (loss) at each subsequent reporting date. This Statement will be effective for fiscal years beginning after November 15, 2007. Any adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative effect adjustment to our accumulated deficit as of the date of initial adoption. We are currently evaluating the impact of the adoption of SFAS No. 159 on our financial condition and results of operations.

3. INVENTORIES

     Inventories consisted of the following:

4. JOHNSONVILLE FIBERS CLOSURE

     During the third quarter of 2006, we announced a plan to close our Johnsonville fibers operation. In the fourth quarter of 2006, we closed 160 million pounds of polyester staple fiber capacity at our Johnsonville, South Carolina facility and consolidated all of our U.S. polyester staple fiber production into our Palmetto facility, located in Darlington, South Carolina. In the second and third quarters of 2007, certain other assets located at our Johnsonville facility were sold.

     During the year ended December 31, 2006, we recorded total charges related to the Johnsonville fibers closure of $33.3 million, approximately $29 million of which had no cash impact. In the first nine months of 2007, we reduced our accruals associated with the Johnsonville fibers closure and recorded income of approximately $3.1 million, resulting primarily from our ability to sell some of the equipment and remaining inventory at prices greater than originally expected.

     Included in the total charges of $33.3 million was an employee restructuring charge of $4.1 million, which related primarily to termination notifications given to approximately 360 union hourly and salaried positions on September 26, 2006. The following represents changes to the employee restructuring charges since the plan was adopted:

5. RESTRUCTURING CHARGES

     During the first quarter of 2007, we restructured our organization to improve our ability to deliver high-quality, value added products to our customers and to operate with a more efficient cost structure. By combining our chemical-based operations into one segment, we were able to eliminate duplicate costs. As part of this reorganization, our chemical-based segment recorded a severance accrual of $2.9 million, which was reflected in Operating loss in our Condensed Consolidated Statements of Operations during the first quarter of 2007. The following represents changes to this accrual since the plan was adopted:

     The remaining accrual of $0.1 million is expected to be paid out during the remainder of 2007.

6. DISCONTINUED OPERATIONS

     On July 26, 2007, we disposed of our European recycled-based fibers business (“WIL”). These assets, which were previously included in our recycled-based segment, met the criteria for, and were classified as “held for sale” in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” We received net proceeds of approximately $38 million for the sale of WIL to an affiliate of AURELIUS AG. We recognized a $2.6 million net gain on the sale, which was included in discontinued operations in our Condensed Consolidated Statements of Operations.

     In the fourth quarter of 2006, we made a decision to dispose of our European PET resins business. These assets, which were previously included in our chemical-based segment, met the criteria for, and were classified as “held for sale” in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” An impairment loss of $19.1 million and an expected net loss on disposal of $7.1 million were recorded in the fourth quarter of 2006, which resulted in an after tax loss of $25.6 million. On May 31, 2007, we sold our European PET resins business and an additional net loss of $1.5 million was recorded in the nine months ended September 30, 2007. The $27.1 million total net loss attributable to the sale was included in discontinued operations in our Condensed Consolidated Statements of Operations.

     During the third quarter of 2007, we have provided tax expense for the earnings of our foreign subsidiaries, which is offset by the recognition of a tax benefit for federal net operating losses. Foreign earnings were previously considered to be permanently reinvested outside the United States.

     After the 2007 reclassification for discontinued operations, total assets held for sale at December 31, 2006, were as follows:

     Assets held for sale at December 31, 2006, were comprised of the following:

     After the 2007 reclassification for discontinued operations, liabilities associated with assets held for sale at December 31, 2006, were as follows:

     Liabilities associated with assets held for sale at December 31, 2006, were comprised of the following:

     Results for discontinued operations for the three months ended September 30, 2007 and 2006, respectively, consisted of the following:

     Results for discontinued operations for the nine months ended September 30, 2007 and 2006, respectively, consisted of the following:

7. BORROWINGS

     During 2006 and the first five months of 2007, we had a total of $150.0 million in interest rate hedging agreements, which were entered into to reduce our exposure to floating rate debt. These matured in June and July 2007.

     We entered into the following interest rate hedging agreements:

In June 2007, we purchased a three year $50.0 million interest rate cap which provides that for quarterly periods when three-month LIBOR exceeds 6.50% on its reset date, we will receive the difference between the three-month LIBOR and 6.50% for such periods;

In July 2007, we entered into a two year $50.0 million interest rate swap where we receive three-month LIBOR and pay 5.255% quarterly;

In July 2007, we entered into a two year $50.0 million interest rate collar which provides that for quarterly periods when three-month LIBOR exceeds 6.00% on its reset date, we will receive the difference between the three-month LIBOR and 6.00%, and for quarterly periods when three-month LIBOR is less than 3.61% on its reset date, we will pay the difference between the three-month LIBOR and 3.61%.

8. OTHER (INCOME) EXPENSE, NET

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

     On August 27, 2005, we shut down our Pearl River facility in Hancock County, Mississippi, in anticipation of hurricane Katrina. The damages caused by the hurricane extended the temporary shutdown of the entire facility. The actual damages included direct damage to the plant site; fixed costs incurred during the shutdown period; incremental freight costs above our normal freight expense due to the disruption in rail service; infrastructure support to maintain an adequate living environment for both our employees and contract workers; inventory spoilage; rail car damage; and monthly lease cost related to rail cars that were damaged and inoperable. The facility re-started production in two phases. One production line, with an annual capacity of 280 million pounds, resumed production the week of October 31, 2005. The second production line, with the same annual capacity, restarted at the end of November, 2005. As of September 30, 2007, we incurred total costs of $32.1 million. We received $6.0 million of insurance proceeds in the second quarter of 2007 and $6.6 million of proceeds in the fourth quarter of 2006, attributable to hurricane Katrina, resulting in net cash costs of $19.5 million. These proceeds, which were included in net cash used in operating activities in our Consolidated Statement of Cash Flows for the respective periods, were used to pay down debt.

     In addition to the costs listed above, hurricane Katrina also delayed the completion of our PET resin expansion at our Pearl River facility. As a result of this delay and 2 ¹ / 2 months of lost production from the existing lines at this facility, we incurred a substantial amount of lost profits.

     We have insurance that covers substantially all of the costs described above as well as certain lost profits, based on the expected production of the facility, resulting from hurricane Katrina in excess of our $20 million deductible.

     Legal costs consisted of fees and other expenses in connection with an investigation by the Department of Justice (which it has since abandoned) and related civil litigation. During the first quarter of 2007, we reduced our accrual related to this accrued legal and settlement liability by $1.9 million. For additional information, see Note 11 and Part II. Item 1. “Legal Proceedings.”

     In the second quarter of 2007, we sold the fiber assets at our Pearl River facility and recorded a net gain of approximately $1.4 million.

     In October 2000, the U.S. Congress enacted the Continued Dumping and Subsidy Offset Act of 2000 (the “CDO”). Under the CDO, any anti-dumping duties collected are generally distributed in the fourth quarter to the injured companies who file claims to that effect.

9. NET LOSS PER COMMON SHARE

     The following table sets forth the computation of basic and diluted net loss attributable to common stockholders per common share for the periods indicated:

10. DEFINED BENEFIT PLANS

     The components of our net periodic pension cost are as follows for the periods indicated:

Employer contributions

     Contributions to our defined benefit plans in 2007 are expected to be $7.5 million. We expect to contribute $6.7 million to our domestic defined benefit plans, and we have contributed $0.8 million to our foreign plans during 2007. As of September 30, 2007, $5.4 million has been contributed to our domestic plans. As a result of the sale of our foreign operations during the nine months ended September 30, 2007, we do not expect to make any future contributions to these foreign plans. For additional information on the sale of the foreign operations, see Note 6.

11. COMMITMENTS AND CONTINGENCIES

     We have commitments and contingent liabilities, including legal proceedings, environmental liabilities, and various operating lease commitments.

     Our operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. Our policy is to expense environmental remediation costs when it is both probable that a liability has been incurred and the amount can be reasonably estimated. While it is often difficult to reasonably quantify future environmental-related expenditures, we currently estimate our future non-capital expenditures related to environmental matters to range between approximately $2.9 million and $7.4 million on an undiscounted basis. In connection with these expenditures, we have accrued undiscounted liabilities of approximately $5.6 million at September 30, 2007 and $5.1 million at December 31, 2006, which are reflected as other noncurrent liabilities in our Condensed Consolidated Balance Sheets. These accruals represent our best estimate of probable non-capital environmental expenditures. These non-capital expenditures are expected to be incurred over the next 6 to 30 years. We do not expect to incur any significant future capital expenditures related to environmental matters.

     The final resolution of these contingencies could result in actual expenses that are different than current accruals, and, therefore, could have an impact on our consolidated financial results in a future reporting period. However, we believe the ultimate outcome will not have a significant effect on our consolidated results of operations and financial position.

     The following represents changes in accrued undiscounted liabilities for environmental remediation costs:

     The changes in remediation cost estimates were primarily the result of more current information as to expected costs associated with groundwater remediation at our two South Carolina plants. These costs were included in Operating loss in our Condensed Consolidated Statements of Operations.

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

     We have entered into multiple raw material purchase agreements in the ordinary course of business, which may require a notice period for cancellation.

     In January 2001, we received a document subpoena in connection with a federal grand jury investigation of pricing practices in the polyester staple fiber industry. We cooperated with the investigation by producing documents in response to this subpoena. In September 2004, the Department of Justice informed us that it abandoned the investigation and would not seek indictments against Wellman or any of its employees in connection with this investigation.

     Following the public disclosure of the investigation, numerous producers of polyester staple fiber, including Wellman, were named in 24 federal actions brought by direct purchasers of polyester staple fiber asserting claims of violations of U.S. antitrust laws due to alleged price fixing and market allocation in the polyester staple fiber industry. Ten of these cases were brought as class actions. Direct and indirect purchasers also brought a class action against Wellman and certain other companies in Canada under Canadian law. All of these cases have been settled.

     In addition to the cases discussed above, indirect purchasers of polyester staple fiber products filed 41 purported class actions alleging violations of federal antitrust laws, state antirust or unfair competition laws and certain state consumer protection acts in one federal court and various state courts. Each lawsuit alleged a conspiracy to fix prices of polyester staple fiber products. In addition, certain of the actions claim restitution, injunction against alleged illegal conduct and other equitable relief. These cases were filed in Arizona, California, the District of Columbia, Florida, Kansas, Massachusetts, Michigan, New Mexico, North Carolina South Dakota, Tennessee, West Virginia and Wisconsin and sought damages of unspecified amounts, attorneys’ fees and costs and other, unspecified relief. All of these cases have been settled, and the respective courts have approved the settlements. These settlements are now final and the Company has been dismissed from all but one of the settled cases. A joint motion to dismiss the final case with prejudice will shortly be presented to the court.

     We vehemently deny that we or our employees engaged in price fixing or customer allocation.

     The following represents changes in accrued legal and settlement liabilities related to the above-mentioned federal and class action lawsuits:

     We are involved in various claims and legal actions arising in the ordinary course of business. We do not believe the ultimate disposition of this litigation will have a material adverse effect on our consolidated financial position or results of operations.

12.

FOREIGN CURRENCY TRANSLATION AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     The financial statements of foreign subsidiaries have been translated into U.S. dollar equivalents in accordance with SFAS No. 52, “Foreign Currency Translation.” All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from period to period have been reported in other comprehensive income (loss). The effect on our Condensed Consolidated Statements of Operations of transaction gains and losses is insignificant for all periods presented.

     Accumulated other comprehensive income is comprised of foreign currency translation and the effective portion of the gain (loss) for derivatives designated and accounted for as cash flow hedges. The change in the

foreign currency translation is due to the sale of our foreign operations. For additional information on the sale of our European recycled-based fibers business, see Note 6. Comprehensive loss was $47.9 million and $36.5 million for the three months ended September 30, 2007 and 2006, respectively, and $82.7 million and $59.4 million for the nine months ended September 30, 2007 and 2006, respectively.

13. SEGMENT INFORMATION

     In the first quarter of 2007, we made the strategic decision to focus on our chemical-based PET resin and polyester staple fiber businesses. We changed our management organization and internal financial reporting structure to reflect and support our new strategy. We moved from a divisional product-based organization to a functional one, which allows us to better utilize our human resources, focus on serving our end markets, reduce operating and logistics costs, and improve efficiencies at our manufacturing facilities. As a result, our operations are now grouped into two reportable operating segments: a chemical-based segment and a recycled-based segment.

     Our chemical-based segment manufactures and markets:

PermaClear ^® , PermaClear HP ^® , and Thermaclear Ti ^® solid-stated PET resin from chemical-based raw materials for use in the manufacturing of plastic beverage bottles and other food packaging and Fortrel ^® chemical-based polyester staple fiber for use in home furnishing, non-woven, apparel, and industrial products.

     Our recycled-based segment manufactures and markets Wellamid ^® and Wellamid Ecolon ^® recycled-based nylon engineering resin in the U.S. for use in the injection molding industry.

     EBITDA, as defined, is the primary financial measure used by our Chief Operating Decision Maker (i.e., our Chief Executive Officer) to assess performance and allocate resources. As such, EBITDA, as defined, is the financial measurement under our internal financial reporting structure used to report segment profit (loss) under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Intersegment transactions, which are not material, have been eliminated and historical exchange rates have been applied to the data.

     On July 26, 2007, we sold our European recycled-based fibers businesses (“WIL”) to an affiliate of AURELIUS AG. The results of operations for this subsidiary, previously included in our recycled-based segment, have been reclassified to discontinued operations in all periods.

     Following are reconciliations to corresponding totals in the accompanying Condensed Consolidated Financial Statements:

14. SUBSEQUENT EVENT

     In October 2007, our Board of Directors decided to explore strategic alternatives for the Company. We have engaged Lazard Freres & Co. LLC, an investment bank with extensive experience in chemical mergers and acquisition transactions, to assist with the process.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

Strategic Alternatives

     In October 2007, our Board of Directors decided to explore strategic alternatives for the Company. We have engaged Lazard Freres & Co. LLC, an investment bank with extensive experience in chemical mergers and acquisition transactions, to assist with the process.

Sale of European Recycled-Based Fibers Business

     On July 26, 2007, we sold our European recycled-based fibers business for approximately $38.0 million to an affiliate of AURELIUS AG. For additional information, see Note 6 to the Condensed Consolidated Financial Statements.

GENERAL

     In the first quarter of 2007, we made the strategic decision to focus on our chemical-based PET resin and polyester staple fiber businesses. We changed our management organization and internal financial reporting structure to reflect and support our new strategy. We moved from a divisional product-based organization to a functional one, which allows us to better utilize our human resources, focus on serving our end markets, reduce operating and logistics costs, and improve efficiencies at our manufacturing facilities. As a result, our operations are now grouped into two reportable operating segments: a chemical-based segment and a recycled-based segment.

     Our chemical-based segment is principally engaged in the manufacturing and marketing of high-quality PermaClear ^® polyethylene terephthalate (“PET”) packaging resin and Fortrel ^® polyester staple fiber. This segment has stated annual operating capacity to manufacture approximately 1.9 billion pounds of polyester, consisting of 1.4 billion pounds of solid-stated PET resin and 0.5 billion pounds of polyester staple fiber. We manufacture these products at two production facilities in the United States.

     Our recycled-based segment is principally engaged in the manufacturing and marketing of Wellamid ^® and Wellamid Ecolon ^® recycled-based nylon engineering resin for use in the injection molding industry. This segment has stated annual operating capacity to manufacture approximately 70 million pounds of compounded resin at our Johnsonville, S.C. facility.

     North American and global PET resin demand continues to grow, driven by new product applications, conversions from other packaging materials to PET, and overall growth in beverage and food consumption. Demand for polyester staple fiber is subject to changes in consumer preferences and spending and retail sales patterns. Imports continue to negatively impact the United States polyester staple fiber and PET resin markets, adversely affecting our operating results.

     Our financial results are primarily determined by our sales volume and raw material margins, which is the difference between net selling price and raw material cost. Both PET resin and polyester staple fiber volume and raw material margins increase or decrease as a result of supply and demand factors, competitive conditions, global economic and market conditions, export and import activity, and the prices of competing materials. Seasonal factors, such as weather and the vacation and holiday closings of our facilities or those of our customers, may also affect our operations. Given our substantial unit volumes, the impact on profitability of changes in raw material margins is significant. A one-cent per pound change in raw material margin on approximately 1.9 billion pounds of sales volume results in an annual change of approximately $19.0 million in pre-tax earnings.

IMPACT OF ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Changes

     In the third quarter of 2007, we changed our method of depreciation for all machinery and equipment that was depreciated using the straight-line method, with depreciation suspended for periods when assets were idled, to the units of production method, with a base depreciation amount when assets are idled. Machinery and equipment located at our Pearl River facility have been and continue to be depreciated using the units of production method. We believe that the units of production method is preferable, since it best matches the consumption of the assets (i.e., depreciation) with the expected benefits derived from those assets. Since this is a change in accounting estimate affected by a change in accounting principle, prior periods were not restated. As a result of this change, our Loss from continuing operations and Net loss for the three months ended September 30, 2007, decreased by $1.6 million, or $0.05 per diluted share. Had this change been made in the first quarter of 2007, our Loss from continuing operations and Net loss would have decreased by $2.2 million, or $0.07 per diluted share, for the nine months ended September 30, 2007.

     On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting and financial statement reporting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. A tax position that meets the recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The unrecognized tax benefit is defined as the difference between positions taken in the tax return and the recognized benefit in the financial statements. The effect of adoption was reported as a change in accounting principle. There was no effect on our accumulated deficit at January 1, 2007. We recorded a reduction of approximately $1.8 million in unrecognized tax benefits and an increase in our valuation allowance of approximately $1.8 million. As of January 1, 2007, after adopting FIN 48, we had uncertain tax liabilities of approximately $24.0 million which have been considered in determining the future utilization of tax carry-forwards. We recorded approximately $24.0 million to reflect the benefit of net operating losses and other tax carry-forwards and a corresponding $24.0 million of uncertain tax liabilities. If the tax positions that give rise to these uncertain tax liabilities were favorably resolved, then in our current situation, we would not record any tax benefit in our Statement of Operations unless we received a cash refund because of the corresponding reduction in our valuation allowance. There are an additional $2.0 million of uncertain tax benefits, which, if favorably resolved, would result in a tax benefit in our Statement of Operations. Our policy is to reflect any required interest expense and

penalties under FIN 48 as a component of tax expense, and we had $0.3 million accrued for these liabilities at September 30, 2007. Our federal net operating loss carry-forward commenced in 1999 and may be adjusted until it is utilized. Our major state and foreign jurisdictions have the potential for adjustments for periods after 2001.

     In February 2007, we elected to participate in the Internal Revenue Service’s FIN 48 Initiative to expedite resolution of an uncertain tax position regarding our repatriation of foreign earnings. In September 2007, our settlement with the Internal Revenue Service was finalized after approval by the Joint Committee on Taxation, resulting in a tax benefit of $3.1 million, including interest. The effect is recorded in our Condensed Consolidated Statements of Operations as a discrete tax item benefit. The refund was received in October 2007. Our net deferred tax position remains unchanged as a result of the settlement; Other assets and deferred income taxes, net both decreased by approximately $20 million.

New Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. It will be effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of SFAS No.157 on our financial condition and results of operations.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits entities to measure certain financial instruments and other items at fair value. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings (loss) at each subsequent reporting date. This Statement will be effective for fiscal years beginning after November 15, 2007. Any adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative effect adjustment to our accumulated deficit as of the date of initial adoption. We are currently evaluating the impact of the adoption of SFAS No. 159 on our financial condition and results of operations.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006

     The following table summarizes reasons for the changes in the third quarter of 2007 compared to the third quarter of 2006 for net sales, cost of sales, and gross profit.

     The decrease in volumes in the recycled-based segment is due to our strategic decision to close 160 million pounds of polyester staple fiber capacity at our Johnsonville, South Carolina facility in the fourth quarter of 2006.

     The decrease in the net selling prices for the chemical-based segment is due primarily to competitive pressures in the PET resins market.

     Total cost of sales decreased by $26.4 million for the three months ended September 30, 2007, compared to the three months ended September 30, 2006. Cost of sales in the chemical-based segment decreased due to lower raw material unit costs and lower sales volumes, offset in part by higher plant added unit costs due to lower volumes. Cost of sales in the recycled-based segment decreased primarily due to lower volumes attributable to our decision to close 160 million pounds of polyester staple fiber capacity at our Johnsonville, South Carolina facility in the fourth quarter of 2006.

     As a result of the foregoing, gross profit decreased $10.4 million to $(0.4) million in the 2007 period from $10.0 million in the 2006 period.

     Selling, general and administrative expenses decreased $1.4 million to $10.9 million, or 4.0% of net sales, in the 2007 period compared to $12.3 million, or 4.0% of net sales, in the 2006 period.

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

     The income in the other (income) expense, net for the three months ended September 30, 2007 is due primarily to $1.0 million of income from the reduction of accruals associated with our Johnsonville fibers closure, resulting primarily from our ability to sell some of the equipment and remaining inventory at prices greater than originally expected. Expense for the prior year included $34.1 million of costs related to our

Johnsonville fibers closure and $0.9 million of cost related to hurricane Katrina. For additional information on our Johnsonville fibers closure costs and hurricane Katrina costs, see Notes 4 and 8, respectively, to our Condensed Consolidated Financial Statements.

     As a result of the foregoing, we reported an operating loss of $9.9 million in the 2007 period compared to an operating loss of $37.5 million in the 2006 period.

     Interest expense, net was $16.0 million in the 2007 period compared to $15.7 million in the 2006 period. This increase was due to higher effective interest rates.

     Our effective tax rate, excluding discrete tax items, for the three months ending September 30, 2007 on the loss from continuing operations was 1.9% compared to 35.5% on the net loss from continuing operations for the three months ended September 30, 2006. The discrete tax item benefit resulted from the settlement of uncertain tax positions. The $3.1 million tax benefit associated with this discrete item, including interest, was recorded in the third quarter of 2007. We are unable to provide a tax benefit for federal net operating losses originating in the current year, which affected our tax rate.

     As a result of the foregoing, we reported a net loss from continuing operations of $22.3 million, or $0.81 per diluted share, for the three months ended September 30, 2007, compared to a net loss from continuing operations of $34.3 million, or $1.19 per diluted share, for the three months ended September 30, 2006.

     On July 26, 2007, we disposed of our European recycled-based fibers business (“WIL”). We received net proceeds of approximately $38 million for the sale of WIL to an affiliate of AURELIUS AG. We recognized a $2.6 million net gain on the sale, which was included in discontinued operations in our Condensed Consolidated Statements of Operations. We reported net earnings from discontinued operations of $4.3 million, or $0.13 per diluted share, for the three months ended September 30, 2007, compared to a net loss from discontinued operations of $1.3 million, or $0.04 per diluted share, for the three months ended September 30, 2006. For additional information, including a breakdown of the results for discontinued operations, see Note 6 to the Condensed Consolidated Financial Statements.

     On June 27, 2007, the conversion price for the Warburg Pincus preferred stock was set at $6.75. Accretion is the sum of (i) the greater of the stated increase in the liquidation preference or the fair market value of increase of the liquidation preference and (ii) the amortization of the reduction in book value of the preferred stock that resulted from the issuance of warrants. This amount was $4.0 million and $3.6 million for the three months ended September 30, 2007 and 2006, respectively.

     As a result of the foregoing, we reported a net loss attributable to common stockholders of $22.0 million, or $0.68 per diluted share, for the 2007 period, compared to a net loss attributable to common stockholders of $39.2 million, or $1.23 per diluted share, for the 2006 period.

NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

     The following table summarizes reasons for the changes in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 for net sales, cost of sales, and gross profit.