Download SECURITIES AND EXCHANGE COMMISSION Washington, D.C.

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 0-22572
OM GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
52-1736882
(I.R.S. Employer
Identification No.)
50 PUBLIC SQUARE,
3500 TERMINAL TOWER,
CLEVELAND, OHIO
(Address of principal executive offices)
44113-2204
(Zip Code)
216-781-0083
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
-------------------
NAME OF EACH EXCHANGE ON WHICH REGISTERED
-----------------------------------------
Common Stock, par value $0.01 per share
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark if the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X]
No [ ]
The aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates (based upon the closing sale price on the NYSE) on March 14, 2003
and June 30, 2002 was approximately $226 million and $1.75 billion,
respectively.
As of March 10, 2003 there were 28,354,804 shares of Common Stock, par value
$.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be
held on May 6, 2003 are incorporated by reference.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1.
Business....................................................
2
Item 2.
Properties..................................................
6
Item 3.
Legal Proceedings...........................................
7
Item 4.
Submission of Matters to a Vote of Security Holders.........
8
PART II
Item 5.
Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
Item 6.
8
Selected Financial Data.....................................
9
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
10
Item 7a.
Quantitative and Qualitative Disclosures about Market
Risk........................................................
20
Item 8.
Financial Statements and Supplementary Data
Report of Independent Auditors............................
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................
Statements of Consolidated Operations for the years ended
December 31, 2002, 2001 and 2000.......................
Statements of Consolidated Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000...........
Statements of Consolidated Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................
Notes to Consolidated Financial Statements................
21
22
23
24
25
26
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................
56
PART III
Item 10.
Directors and Executive Officers of the Registrant..........
57
Item 11.
Executive Compensation......................................
57
Item 12.
Security Ownership of Certain Beneficial Owners and
Management..................................................
57
Item 13.
Certain Relationships and Related Transactions..............
57
Item 14.
Controls and Procedures.....................................
57
PART IV
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form
8-K.........................................................
58
Signatures..................................................
62
Management Certification -- Principal Executive Officer.....
63
Management Certification -- Principal Financial Officer.....
64
1
PART I
ITEM 1. BUSINESS
GENERAL
OM Group, Inc. (the Company), through its operating subsidiaries, is a leading,
vertically integrated international producer and marketer of value-added,
metal-based specialty chemicals and related materials. More than 625 different
product offerings are supplied for diverse applications to more than 30 major
industries. Typically, the Company's products represent a small portion of the
customer's total cost of manufacturing or processing, but are critical to the
customer's product performance. The Company operates in three business segments:
base metal chemistry, precious metal chemistry and metal management.
Base metal chemistry products are predominantly produced from cobalt, nickel and
copper and are generally categorized as organics, inorganics, powders and
metals. Organics are essential components in numerous complex chemical and
industrial processes, and are used in many end markets, such as coatings, custom
catalysts, liquid detergents, lubricants and fuel additives, plastic
stabilizers, polyester promoters and adhesion promoters for rubber tires.
Inorganics are used in a wide variety of end products including catalysts,
colorants, rechargeable batteries, petroleum additives, magnetic media and metal
finishing agents. High specification metal powders have several important
characteristics that make them essential components in cemented carbides for
mining and machine tools, diamond tools used in construction, rechargeable
batteries, and alloyed materials for automotive, electronics, transportation and
catalyst applications. Metal products are important components in stainless
steel, alloy and plating applications.
Precious metal chemistry products are predominantly produced from platinum,
palladium, rhodium (collectively platinum group metals), gold and silver and are
used in a variety of applications for automotive catalysts, fuel cells, fuel
processing catalysts, chemical catalysts, electronics packaging, electroplating
products, jewelry products and glass manufacturing for high-definition
televisions.
The metal management segment acts as a metal sourcing operation for both the
Company's operations and customers, primarily procuring precious metals. The
metal management segment centrally manages metal purchases and sales by
providing the necessary precious metal liquidity, financing and hedging for the
Company's other businesses.
During the fourth quarter of 2002, the Company recorded restructuring and other
unusual charges related to its continuing operations of $209.1 million ($174.4
million after-tax, or $6.16 per diluted share). The primary objectives of the
restructuring plan are to de-leverage the balance sheet, focus on cash
generation and restore profitability in certain of the Company's businesses that
have been impacted by the weak economy as well as a sustained decline in the
market price of cobalt. Specific actions taken to date to accomplish these
objectives include development of plans to sell certain non-core businesses;
closure of certain non-core facilities; headcount reductions of approximately
550 positions worldwide; review and renegotiation of certain raw material and
other contracts to reduce costs in light of changing metal prices and business
conditions; liquidation of certain inventories in the fourth quarter to generate
cash; reduction of base metal inventory levels and production; and a
re-alignment of the management team. The Company will incur additional charges
of $5-$10 million related to this program in the first quarter of 2003 as these
actions are completed. In connection with the restructuring plan, the Company
also recorded charges of $120.6 million, with no tax benefit ($4.30 per diluted
share), in discontinued operations primarily associated with the planned
disposal of these assets.
Also during the fourth quarter, in connection with the restructuring program,
the Company amended the terms and conditions of its senior credit facilities.
The amendment modifies certain financial covenants, converts $100 million of the
$325 million revolving credit facility to a term loan maturing in 2006, and
outlines cash proceeds that the Company is required to generate from asset sales
in 2003 (See Note G).
On November 14, 2002, the Company announced that, in connection with its
restructuring program, it is seeking a financial partner or partners for its
precious metal chemistry business. The process of identifying an appropriate
partner has continued into 2003.
2
At September 30, 2002, the Company recorded a non-cash charge of $108.2 million
($93.7 million after-tax, or $3.31 per diluted share) to write-down inventories
to the lower of cost or market in accordance with generally accepted accounting
principles. The charge was taken due to the following factors: (1) based upon
the sustained low level of cobalt market pricing, the Company's outlook for the
market price of cobalt changed from a range of $9.00-$10.00 per pound by the end
of 2002, to a range of $6.00-$7.00 per pound through 2003; (2) the decision to
reduce cobalt production in the fourth quarter of 2002, which was driven in part
by a major supplier's (Luiswishi) announcement in late October that they would
shut-down their cobalt mine indefinitely; and (3) the Company's corresponding
decision to start liquidating cobalt inventories to generate cash.
On August 10, 2001, the Company acquired dmc2 Degussa Metals Catalysts Cerdec
(dmc2) for a purchase price of approximately $1.102 billion, including cash
acquired and related transaction costs. dmc2 is a worldwide provider of
metal-based functional materials for a wide variety of end markets. The
acquisition of dmc2 was financed through a combination of debt and equity and
the sale of certain assets. On September 7, 2001 the Company completed the
disposition of the electronic materials, performance pigments, glass systems and
Cerdec ceramics divisions of dmc2 for a cash purchase price of $525.5 million,
including interest.
Business information, including reportable segment and geographic data, is
contained in Note Q on pages 43 through 46 of this report.
COMPETITION
The Company encounters a variety of competitors in each of its product lines,
but no single company competes with the Company across all of its existing
product lines. The Company believes that its focus on metal-based specialty
chemicals and related materials as a core business is an important competitive
advantage. Competition in these markets is based primarily on product quality,
supply reliability, price, service and technical support capabilities.
The Company is generally able to pass through to its customers increases and
decreases in raw material prices by increasing or decreasing, respectively, the
prices of its products. The degree of profitability of the Company depends, in
part, on the Company's ability to maintain the differential between its product
prices and raw material prices. The timing and amount of such adjustments in its
product prices depends upon the type of product sold, market demand and the
inventories and market share positions of the Company and its competitors. The
Company also undertakes to offset the effect on profitability of changes in
prices of metals used through various hedging activities.
CUSTOMERS
The Company serves over 1,700 customers. During 2002, approximately 62% of the
Company's net sales were to customers in Europe, 28% were to customers in the
Americas and 10% were to customers in Asia-Pacific.
While customer demand for the Company's products is generally non-seasonal,
supply/demand and price perception dynamics of key raw materials do periodically
cause customers to either accelerate or delay purchases of the Company's
products, generating short-term results that may not be indicative of
longer-term trends. Sales to one customer in the base metal chemistry segment
were approximately 13% of segment net sales in 2002. Sales to three customers in
the precious metal chemistry segment were approximately 41% of segment net sales
in 2002.
RAW MATERIALS
The primary raw materials used by the Company in manufacturing its products are
cobalt, nickel, copper, platinum, palladium, rhodium, gold and silver, which are
either purchased, leased or provided by its customers on consignment for
processing. The cost of the Company's raw materials fluctuates due to actual or
perceived changes in supply and demand and changes in availability from
suppliers.
The Company's supply of cobalt historically has been sourced primarily from the
Democratic Republic of Congo (DRC), Australia, Finland and Zambia. During 2002,
the market price of cobalt remained at extremely low levels
3
of $6.00-$7.00 per pound relative to historically higher prices of $10.00-$30.00
per pound, due primarily to excess worldwide supply relative to declining demand
for cobalt metal caused by weak business conditions worldwide. This sustained
depression in the cobalt market price has led to a deterioration in the
profitability of the Company's cobalt business. During the fourth quarter of
2002, as noted above, one of the Company's main cobalt suppliers announced that
it would shut-down its refinery indefinitely.
Nickel historically has been sourced primarily from Australia and Brazil. In
December 2001, the Company purchased a nickel refining facility in Australia,
which provides the Company with direct access to 8,000 tons of nickel per year.
The market price of nickel has increased during 2002, with prices ranging from
$2.63 to $3.35 per pound during the year. The Company currently has supply
arrangements in place for approximately 90% of its projected nickel raw material
needs for 2003 and 2004.
Platinum group metals used by the Company (primarily platinum, palladium and
rhodium) historically have been sourced from South Africa and, to a lesser
extent, from Russia and Canada. Gold and silver are worldwide commodities with
diverse supply sources. Market prices for platinum and gold increased
significantly during 2002, while market prices for palladium and rhodium have
declined.
Although the Company has never experienced a significant shortage of raw
materials, production problems and political and civil instability in certain
supplier countries may in the future affect their supply and market price. The
Company attempts to mitigate changes in prices and availability by entering into
long-term supply contracts with a variety of producers. The Company does not
anticipate any substantial interruption in its raw materials supply that would
have a material adverse effect on the Company's operations.
RESEARCH AND DEVELOPMENT
The Company's research and new product development program is an integral part
of its business. Research and development focuses on adapting proprietary
technologies to develop new products and working with customers to meet their
specific requirements, including joint development arrangements with customers
that involve innovative products. New products include new chemical
formulations, metal-containing compounds, and concentrations of various
components and product forms. Research and development, applied technology and
technical service expenses of continuing operations were approximately $56.7
million for 2002, $23.7 million for 2001 and $7.6 million for 2000. Expenses for
research and development have increased due primarily to the acquisition of the
precious metals operations. In connection with the Company's restructuring
program, expenditures for research and development are expected to decline
slightly in 2003.
The Company's research staff of approximately 420 full time persons conducts
research and development for its continuing operations at its laboratories
located in Cleveland, Ohio; Westlake, Ohio; Auburn Hills, Michigan; Kokkola,
Finland; Hanau, Germany; Schwabisch-Gmund, Germany; and Himeji, Japan. The
Company's Kokkola facility also maintains a research agreement with Outokumpu
Research Oy.
PATENTS AND TRADEMARKS
The Company holds approximately 1,292 patents and in addition has 969 pending
patent applications relating to the manufacturing, processing and use of
metal-organic and metal-based compounds. Specifically, the majority of these
patents cover proprietary technology for base and precious metal refining,
automotive catalysts, fuel cells, metal and metal oxide powders, catalysts and
metal-organic compounds. In addition, the Company has the right to use, and in
certain instances license and sell, technology covered by approximately 55
patents in related areas. The Company does not consider any single patent or
group of patents to be material to its business as a whole.
ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of environmental laws and regulations
in the United States and in foreign countries as a result of its operations and
use of certain substances that are, or have been, used, produced or discharged
by its plants. In addition, soil and/or groundwater contamination presently
exists and may in the future be discovered at levels that require remediation
under environmental laws at properties now or previously owned, operated or used
by the Company.
4
Environmental compliance costs related to continuing and discontinued operations
were approximately $12.0 million and $1.1 million in 2002, respectively. Ongoing
expenses include costs relating to waste water analysis and disposal, hazardous
and non-hazardous solid waste analysis and disposal, sea water control, air
emissions control, soil and groundwater clean-up and monitoring and related
staff costs. The Company anticipates that it will continue to incur costs and
make expenditures at moderately increasing levels for the foreseeable future as
environmental laws and regulations are becoming increasingly stringent.
The Company also incurred capital expenditures of approximately $9.8 million at
its continuing operations in 2002 in connection with environmental compliance.
The Company anticipates that capital expenditure levels for these purposes will
increase to approximately $11.3 million in 2003, as it continues to modify
certain processes that may have an environmental impact.
Due to the ongoing development and understanding of facts and remedial options
and due to the possibility of unanticipated regulatory developments, the amount
and timing of future environmental expenditures could vary significantly from
those currently anticipated. Although it is difficult to quantify the potential
impact of compliance with or liability under environmental protection laws,
based on presently available information, the Company believes that its ultimate
aggregate cost of environmental remediation as well as other legal proceedings
arising in the normal course of business, will not result in a material adverse
effect upon its financial condition or results of operations.
EMPLOYEES
At December 31, 2002, the Company had 4,592 full-time employees, of which 1,120
were located in the Americas, 2,577 in Europe, 538 in Africa and 357 in
Asia-Pacific. The Company believes relations with its employees are good.
Africa. Employees at the Company's production facilities in Lubumbashi, DRC are
non-unionized. Employees at the Port Elizabeth, South Africa facility are
members of the Chemical Energy Paper and Printing Allied Workers' Union and the
applicable union agreement has an indefinite term.
Americas. Employees at the Company's production facilities in Burlington,
Canada; South Plainfield, New Jersey; and Franklin, Pennsylvania are
non-unionized. Employees at the Belleville, Canada facility are members of the
Communications, Energy and Paperworkers Union of Canada. The current Belleville
union agreement has a term of five years expiring in May 2003. Hourly employees
at the Calvert City facility are members of the Paper, Allied Industrial,
Chemical, Energy Workers' International Union. The current Calvert City union
agreement expires in January 2004. Salaried employees at that facility are
non-unionized. Employees at the facilities in Guarulhos, Americana and Manaus,
Brazil are members of either the Metalworkers' Union or of the Chemical Workers'
Union. The terms of these agreements are valid for one year and expire in
October 2003 in Guarulhos and Americana, and in August 2003 in Manaus. Employees
at the facility in Buenos Aires, Argentina are members of the Union Obrera
Metalurgica. The terms of the Buenos Aires agreement do not provide for an
expiration date and the agreement may be terminated by the Company at any time.
Asia Pacific. Employees at the Company's production facilities in Himeji,
Japan; Onsan, Korea; Kuching, Malaysia; Bangkok, Thailand; and Kalgoorlie,
Australia are non-unionized.
Europe. Employees at the Company's production facilities in Vienna, Austria;
Vincenza, Italy; and Amsterdam, Netherlands are non-unionized. Employees at the
Company's facilities in Harjavalta, Finland and Kokkola, Finland are members of
several national workers' unions under various union agreements. Generally,
these union agreements have two-year terms. Employees at the Karlskoga, Sweden
facility are members of industrial employees' and workers' unions with
three-year terms, expiring in March 2004. Employees at the Company's Hanau,
Rheinfelden, Pforzheim and Schwabisch-Gmund, Germany, are members of several
national workers' unions. At these facilities, general working conditions are
set forth in long-term agreements, whereas wage agreements usually are
negotiated annually between the unions and the employers' associations.
Employees at our
5
facilities in Manchester, England are members of various trade unions under a
recognition agreement. This recognition agreement has an indefinite term.
ITEM 2. PROPERTIES
The Company believes that its plants and facilities, which are of varying ages
and of different construction types, have been satisfactorily maintained, are in
good condition, are suitable for the Company's operations and generally provide
sufficient capacity to meet the Company's production requirements. The land on
which the Kokkola, Finland; Harjavalta, Finland; Hanau, Germany; Singapore; and
Karlskoga, Sweden plants are located is leased under agreements with varying
expiration dates. Otherwise, the land associated with the Company's
manufacturing facilities is owned by the Company.
The Company's Kokkola, Finland production facility (KCO) is situated on property
owned by Outokumpu Zinc Oy. KCO and Outokumpu Zinc Oy share certain physical
facilities, services and utilities under agreements with varying expiration
dates. Utilities and raw material purchase assistance contracts provide that KCO
jointly purchase with, or pay a fee to, affiliates of Outokumpu Oy for
assistance in negotiating contracts and securing bulk quantity discounts. The
Company's Harjavalta, Finland production facility is situated on land owned by
Outokumpu Harjavalta Metals Oy. The Harjavalta, Finland facility also shares
certain physical facilities and has contracts in place for waste disposal,
tolling, utilities, laboratory services and raw material supply with varying
expiration dates.
Information regarding the Company's primary offices, research and product
development and manufacturing facilities, excluding discontinued operations, is
set forth below:
FACILITY
LOCATION
--------
APPROXIMATE
AFRICA:
Lubumbashi, DRC
Port Elizabeth, South Africa
AMERICAS:
Cleveland, Ohio
Westlake, Ohio
Belleville, Ontario
Franklin, Pennsylvania
Burlington, Canada
South Plainfield, NJ
Metal Management
Auburn Hills, MI
Calvert City, Kentucky
Manaus, Brazil
Americana, Brazil
Sao Paulo, Brazil
6
SEGMENT
-------
FUNCTION*
---------
SQUARE FEET
-----------
LEASED/OWNED
-------------------
Base Metal
Precious Metal
M
M
116,000
181,800
joint venture (55%)
joint venture (55%)
Base Metal
Base Metal
Base Metal
Base Metal
Precious Metal
Precious Metal;
A, R, W
A, R
M
M
M
M
51,400
35,200
38,000
331,500
165,000
71,400
leased
owned
owned
owned
owned
owned/leased
Precious
Precious
Precious
Precious
Precious
R, A
M
M
M
M
138,400
30,900
132,500
290,600
215,400
owned
joint venture (50%)
owned
owned
owned/leased
Metal
Metal
Metal
Metal
Metal
FACILITY
LOCATION
--------
APPROXIMATE
ASIA-PACIFIC:
Kalgoorlie, Australia
Tokyo, Japan
Kuching, Malaysia
Taipei, Taiwan
Bangkok, Thailand
Bangkok, Thailand
Singapore
Precious Metal
Himeji, Japan
Onsan, Korea
EUROPE:
Manchester, England
Espoo, Finland
Harjavalta, Finland
Kokkola, Finland
Hanau, Germany
Metal Management
Pforzheim, Germany
Rheinfelden, Germany
Schwabisch-Gmund, Germany
Karlskoga, Sweden
Amsterdam, Netherlands
Vienna, Austria
Vincenza, Italy
SEGMENT
-------
FUNCTION*
---------
SQUARE FEET
-----------
Base Metal
Base Metal
Base Metal
Base Metal
Base Metal
Precious Metal
Base Metal;
M
A
M, A
A
M, A
M
M, A
294,400
2,300
25,000
4,000
107,400
18,200
4,700
Precious Metal
Precious Metal
M, R
M
48,200
89,500
Base Metal
Base Metal
Base Metal
Base Metal
Precious Metal;
M
A
M, A
M, A, R
M, A, R
Precious
Precious
Precious
Precious
Precious
Precious
Precious
M, A
M
M, R
M
M
M
M
Metal
Metal
Metal
Metal
Metal
Metal
Metal
LEASED/OWNED
------------------owned
leased
owned
leased
owned
leased
leased
joint venture (50%)
joint venture (50%)
73,300
3,000
591,000
470,000
1,643,400
owned
leased
owned
owned
owned/leased
196,300
131,200
276,200
123,700
38,900
107,900
31,900
owned/leased
owned
owned
leased
owned
owned
owned
* M -- Manufacturing; A -- Administrative; R -- Research and Development;
W -- Warehouse
ITEM 3. LEGAL PROCEEDINGS
Manufacturers of specialty chemical products, including the Company, are subject
to various legal and administrative proceedings incidental to such business. In
the opinion of the Company, disposition of all suits and claims should not in
the aggregate have a material adverse effect on the Company's business or
financial position.
In November 2002, the Company received notice that shareholder class action
lawsuits (Sheth v. OM Group, Inc., et al., United States District Court,
Northern District of Ohio, Eastern Division, No. 1:02CV2163, Filed November 1,
2002; Rischitelli v. OM Group, Inc., et al., United States District Court,
Northern District of Ohio, Eastern Division, No. 1:02CV2189, Filed November 7,
2002) were filed against it related to a decline in the Company's stock price
after the third quarter 2002 earnings announcement. The lawsuits allege
virtually identical claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5 against the Company, its Chairman and
Chief Executive Officer, its Chief Financial Officer and its Board of Directors.
Plaintiffs seek damages in an unspecified amount to compensate persons who
purchased the Company's stock at various dates between November 2001 and October
2002 at allegedly inflated market prices. While the ultimate outcome of this
litigation cannot be determined at this time, management believes that these
matters will not have a material adverse effect upon the Company's financial
condition or results of operations. In addition, the named executive officers,
the Board of Directors and the Company have Directors & Officers and Corporate
Liability Insurance available for such matters.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 2002 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
There is set forth below the name, age, positions and offices held by each of
the Company's executive officers as of March 10, 2003, as well as their business
experience during the past five years. Years indicate the year the individual
was named to the indicated position.
James P. Mooney -- 55
- Chairman and Chief Executive Officer, 1994
Thomas R. Miklich -- 55
- Chief Financial Officer, May 2002
- Director, OM Group, Inc., 1993 - May 2002
- Chief Financial Officer, General Counsel and Corporate Secretary, Invacare
Corporation, 1993 - May 2002
Michael J. Scott -- 52
- Chief Administrative Officer, 2002
- Vice President, Secretary and General Counsel, 1991
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information relating to the recent price and dividend history of the
Company's Common Stock is contained in Note S on page 55 of this report.
Information relating to restrictions on dividends is contained in Note G on page
33 of this report. The Company's Common Stock is traded on the New York Stock
Exchange. As of March 10, 2003, the Company had approximately 1,900
shareholders.
The Company makes available free of charge, through its website (www.omgi.com),
its reports on Form 10-K, 10-Q and 8-K as soon as practicable after such
material is electronically filed with the Securities and Exchange Commission.
Equity Compensation Plan Information
The following table sets forth information concerning the Company's equity
compensation plans. The figures shown are for the year ended December 31, 2002.
NUMBER OF SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING OPTIONS
--------------------
NUMBER OF SECURITIES
OUTSTANDING OPTIONS
REMAINING AVAILABLE FOR
EXERCISE PRICE OF
FUTURE ISSUANCE UNDER
WEIGHTED-AVERAGE
EQUITY COMPENSATION PLANS
-------------------------------------------------
Equity Compensation Plans
Approved by the
Shareholders..................
Equity Compensation Plans Not
Approved by the
Shareholders..................
8
1,596,561
$40.31
1,317,300
0
0
0
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------2002
2001
2000
1999
1998
(in millions, except per share data)
--------
--------
INCOME STATEMENT DATA:
Net sales...................................... $4,909.4
Cost of products sold..........................
4,530.0
Cost of products sold -- write-down of
inventories..................................
108.2
---------------------------------Gross profit...................................
271.2
Selling, general and administrative expenses...
245.8
Restructuring and other unusual charges........
162.7
---------------------------------Income (loss) from operations..................
(137.3)
Other expense -- net...........................
(67.5)
Income (loss) from continuing operations.......
(198.3)
Income (loss) from discontinued operations.....
(129.6)
Extraordinary item.............................
Net income (loss).............................. $ (327.9)
BASIC EARNINGS PER COMMON SHARE:
Continuing operations........................ $ (7.07) $
Discontinued operations......................
(4.62)
Extraordinary item...........................
---------------------------------Net income (loss)............................ $ (11.69) $
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations........................ $ (7.07) $
Discontinued operations......................
(4.62)
Extraordinary item...........................
---------------------------------Net income (loss)............................ $ (11.69) $
Dividends declared and paid per common share... $
0.42
Ratio of Earnings to Fixed Charges.............
-BALANCE SHEET DATA:
Total assets................................... $2,339.1
Long-term debt (excluding current portion).....
1,187.7
--------
$2,236.9
1,919.8
$
$
--------
726.7
545.0
$
360.1
233.5
$388.5
279.5
317.1
136.7
181.7
47.7
126.6
39.3
109.0
38.7
180.4
(54.3)
90.4
(10.2)
(4.6)
75.6
134.0
(34.5)
72.9
(1.4)
87.3
(15.7)
52.0
3.8
70.3
(12.4)
41.6
6.8
$
71.5
$
55.8
$ 48.4
3.76
(0.42)
(0.19)
$
3.05
(0.06)
$
2.19
0.16
$ 1.82
0.29
3.15
$
2.99
$
2.35
$ 2.11
3.70
(0.42)
(0.19)
$
3.00
(0.05)
$
2.14
0.16
$ 1.77
0.28
$
3.09
$
2.95
$
2.30
$ 2.05
0.52
$
0.44
$
0.40
$ 0.36
2.5x
2.8x
3.7x
5.0x
$2,525.9
1,300.5
$1,357.5
551.1
In 2002, cost of products sold includes a restructuring charge of $46.4 million.
Also, in connection with its restructuring program, the Company recorded charges
of $120.6 million in discontinued operations primarily associated with the
planned disposal of these assets.
In 2002, earnings were inadequate to cover fixed charges by $209.4 million.
Net income for 1998 through 2001 includes goodwill amortization expense of
approximately $6 million per year, as discussed further in Note F. Goodwill
amortization ceased in 2002 in connection with the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142.
On August 10, 2001 the Company acquired dmc2 Degussa Metals Catalysts Cerdec
(dmc2) for a purchase price of approximately $1.102 billion, including cash
acquired and related transaction costs. On September 7, 2001 the Company
disposed of the electronic materials, performance pigments, glass systems and
Cerdec ceramics divisions of dmc2 for $525.5 million (See Note D).
On April 4, 2000 the Company acquired Outokumpu Nickel Oy (OKN) for a purchase
price of $204.6 million, including related financing and transaction costs (See
Note D).
9
------
$1,012.5
384.9
$870.7
310.0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements of the
Company and the notes thereto appearing elsewhere in this Annual Report.
Set forth below is summary consolidated information of the Company for the years
ended December 31, 2002, 2001 and 2000.
YEAR ENDED DECEMBER 31,
---------------------------2002
2001
2000
(Millions of dollars)
INCOME STATEMENT DATA:
Net sales.............................................
Cost of products sold.................................
Cost of products sold -- write-down of inventories....
-------------------Gross profit..........................................
Selling, general and administrative expenses..........
Restructuring and other unusual charges...............
-------------------Income (loss) from operations.........................
Other expense -- net..................................
Income (loss) from continuing operations..............
Income (loss) from discontinued operations............
Extraordinary item....................................
-------------------Net income (loss).....................................
========
========
======
--------
--------
------
$4,909.4
4,530.0
108.2
$2,236.9
1,919.8
$726.7
545.0
271.2
245.8
162.7
317.1
136.7
181.7
47.7
(137.3)
(67.5)
(198.3)
(129.6)
180.4
(54.3)
90.4
(10.2)
(4.6)
134.0
(34.5)
72.9
(1.4)
$ (327.9)
$
75.6
RESULTS OF OPERATIONS
Overview
During 2002, the markets served by the Company, and the price of certain key
metals used by the Company, weakened in comparison to prior year levels,
reflecting the overall softness in the global economy. Several key markets
served by the base metal chemistry segment were particularly weak, which has
also depressed the price of cobalt for an extended period of time. Accordingly,
at September 30, 2002, the Company recorded a charge to adjust its inventories
to the lower of cost or market, based primarily upon management's revised
expectation that the price of cobalt would remain depressed throughout 2003 and
the strategic decision to begin liquidating on-hand inventories during the
fourth quarter.
Further, during the fourth quarter of 2002, the Company recorded restructuring
and other unusual charges related to its continuing operations of $209.1
million. The primary objectives of the restructuring plan are to de-leverage the
balance sheet, focus on cash generation and create efficiencies within the
organization as a result of deterioration in certain of the Company's
businesses, primarily due to the sustained decline in the market price of cobalt
and its impact on profitability. Specific actions taken to date to accomplish
these objectives include development of plans to sell certain non-core
businesses; closure of certain non-core facilities; headcount reductions of
approximately 550 positions worldwide; review and renegotiation of certain raw
material and other contracts to reduce costs in light of changing metal prices
and business conditions; liquidation of certain inventories in the fourth
quarter to generate cash; reduction of base metal inventory levels and
production; and a re-alignment of the management team. The Company will incur
additional charges related to this program in the first quarter of 2003 as these
actions are completed.
In connection with the restructuring plan, certain businesses previously
associated with the base metal chemistry segment were identified as discontinued
operations. The Company plans on selling the copper powders business
10
$ 71.5
(SCM) located in Research Triangle Park, North Carolina and Johnstown,
Pennsylvania. The sale of this business is expected to be completed by June 30,
2003. In addition, manufacturing facilities in St. George, Utah (tungsten
reclamation/cobalt recycling); Midland, Michigan (tungsten carbide fine powders)
and Newark, New Jersey (electroless nickel) have been closed or discontinued.
These operations have been presented as discontinued operations for all periods
presented. The 2002 results for discontinued operations include a charge of
$120.6 million associated with the planned disposal of these assets.
2002 Compared to 2001 -- Continuing Operations
Net sales for 2002 were $4.9 billion compared to $2.2 billion in 2001 primarily
due to the acquisition of dmc2 in August 2001, higher physical volumes in the
base metal chemistry segment and an increase in the Company's nickel product
sales prices due to higher nickel market prices; all partially offset by a
decline in the Company's cobalt product sales prices due to lower cobalt market
prices.
During 2002, the Company recorded restructuring charges related to inventories
of $46.4 million as a result of decisions made in the fourth quarter to exit
certain product lines, decrease production throughput at several base metal
facilities, and the sale of a higher percentage of certain commodity products to
generate cash. These charges are included in Cost of Products Sold in the
Statement of Consolidated Operations. At September 30, 2002, the Company
recorded a non-cash charge of $108.2 million to write-down inventories to the
lower of cost or market in accordance with generally accepted accounting
principles. The charge was taken due to the following factors: (1) based upon
the sustained low level of cobalt market pricing, the Company's outlook for the
market price of cobalt changed from a range of $9.00-$10.00 per pound by the end
of 2002, to a range of $6.00-$7.00 per pound through 2003; (2) the decision to
reduce cobalt production in the fourth quarter of 2002, which was driven in part
by a major supplier's announcement in late October that they would shut-down
their cobalt mine indefinitely; and (3) the Company's corresponding decision to
start liquidating cobalt inventories to generate cash.
Before the inventory charges, gross profit increased to $425.8 million in 2002,
a 34.3% increase from 2001. The increase in gross profit was primarily the
result of the full year impact of the results of dmc2 in 2002 compared to five
months in 2001, and a $12.0 million reduction in raw material costs in the base
metal segment due to price concessions from a supplier and settlement of issues
related to the purchase of Outokumpu Nickel Oy in 2000. These positive factors
were partially offset by the negative impact of the low cobalt market price, and
a related shift in product mix to a higher percentage of commodity cobalt
products with lower profitability. During 2002, the sale of certain commodity
cobalt products generated losses. Cost of products sold increased to 92.3% of
net sales for the year ended 2002 from 85.8% of net sales in 2001 as a result of
the acquisition of dmc2 with its high cost of precious metals relative to
revenues, as well as the deterioration in profitability of the cobalt business
due to lower market prices and shift in product mix.
Selling, general and administrative expenses increased to $245.8 million in 2002
from $136.7 million in 2001, resulting primarily from the dmc(2) acquisition and
general increases in administrative costs due to the Company's growth. However,
during 2002, selling, general and administrative expenses decreased to 5.0% of
net sales compared to 6.1% in 2001 due to the impact of the precious metals
business with its proportionately lower expenses compared to revenues.
During 2002, the Company recorded restructuring and other unusual charges of
$162.7 million. These charges primarily related to headcount reductions, costs
associated with plant closings and asset write-downs, including goodwill
impairment.
Other expense-net was $67.5 million in 2002 compared to $54.3 million in 2001
due primarily to increased interest expense associated with the additional debt
to finance the dmc2 acquisition.
Before total unusual charges of $317.3 million ($268.1 million after-tax, or
$9.56 per diluted share), income taxes as a percentage of income before income
taxes increased to 27.9% in 2002 from 25.2% in 2001. The higher
11
effective tax rate was due primarily to losses in the United States with no
corresponding tax benefit. The Company's overall tax rate reflects the
relatively low statutory tax rate in Finland (29%), and the benefit of tax
holidays in Malaysia, Brazil and South Africa.
The extraordinary item of $4.6 million in 2001 is the after-tax write-off of
fees due to the retirement in December 2001 of the bridge loan used to finance
the acquisition of dmc2.
Net loss for 2002 was $327.9 million compared to net income of $75.6 million in
2001, primarily due to the aforementioned factors.
BASE METAL CHEMISTRY SEGMENT -- The base metal chemistry segment includes the
cobalt, nickel and other base metal chemistry manufacturing businesses, which
comprised the historical businesses of the Company prior to the acquisition of
dmc2, excluding the copper powders and other businesses now classified as
discontinued operations.
The following information summarizes market prices of the primary raw materials
used by the base metal chemistry segment:
MARKET PRICE RANGES PER POUND
YEAR ENDED DECEMBER 31,
--------------------------------2002
2001
---------------------------Cobalt -- 99.3% Grade..............................
Nickel.............................................
Copper.............................................
$6.10 TO $8.45
$2.63 TO $3.35
$0.66 TO $0.78
$6.54 to $12.35
$2.04 to $ 3.35
$0.61 to $ 0.85
The following information summarizes the physical volumes of products sold by
continuing operations of the base metal chemistry segment:
PERCENTAGE
2002
2001
---------
CHANGE
----------
PRODUCTS SOLD (millions of pounds):
Organics...............................................
Inorganics.............................................
Powders................................................
Metals.................................................
------------Total..................................................
=====
=====
=====
91.1
88.8
8.6
101.3
74.1
85.5
7.2
88.6
22.9%
3.9%
19.4%
14.3%
289.8
255.4
13.5%
Before restructuring and other unusual charges of $273.4 million, operating
profit for the year ended December 31, 2002 was $110.6 million compared to
$165.9 million in 2001. The decline was primarily the result of the negative
impact of the low cobalt market price, which principally impacts the refining
aspects of the base metal business, and a related shift in product mix to a
higher percentage of commodity cobalt products with low profitability. The
decline was also due to higher costs related to the Company's nickel operations.
In addition, sales of certain commodity products in 2002 resulted in operating
losses at the then-current market price. This negative impact was partially
offset by a $12.0 million reduction in raw material costs due to price
concessions from a supplier and settlement of issues related to the purchase of
Outokumpu Nickel Oy in 2000. Net sales were $717.3 million, an increase of 8.2%.
This increase resulted principally from the overall increase in physical sales
volumes of 13.5% and higher selling prices for nickel products due to the
increase in the nickel market price compared to 2001. This increase was
partially offset by lower selling prices for cobalt products due to the decline
in the cobalt market price compared to the same period in 2001.
PRECIOUS METAL CHEMISTRY SEGMENT -- The precious metal chemistry segment
includes the platinum group and other precious metals manufacturing businesses
that were acquired in the dmc2 acquisition in August 2001. This segment
develops, produces and markets a variety of products, predominantly from
platinum group metals such as platinum, palladium, rhodium, and other precious
metals such as gold and silver. This segment also offers a
12
variety of refining and processing services to users of precious metals. The
primary contributor to the profitability of this segment is the Company's
automotive catalyst business.
Before restructuring charges of $17.1 million, operating profit for the year
ended December 31, 2002 was $84.0 million, compared to $28.1 million in 2001.
The increase is due to a full year contribution of this segment in 2002 compared
to five months in 2001, increased profitability in the autocatalyst business and
the impact of the strengthening euro against the US dollar.
Net sales were $1.5 billion in 2002 compared to $584.9 million in 2001, due to a
full year contribution of this segment in 2002 compared to five months in 2001.
METAL MANAGEMENT SEGMENT -- The metal management segment also was acquired in
the dmc2 acquisition. This segment serves as a metal sourcing operation for the
Company's other segments and non-affiliated customers, primarily procuring
platinum group metals, and other precious metals such as gold and silver. Metal
management centrally manages metal purchases and sales by providing the
necessary precious metal liquidity, financing and hedging for the Company's
other businesses.
Operating profit for the year ended December 31, 2002 was $11.1 million,
compared to $10.1 million for the five-month period in 2001. On a comparative
basis considering the August 2001 acquisition, the decline in operating profit
is due primarily to the decision to allocate less capital to this unit for
trading activities, increased general and administrative costs and generally
lower volatility of precious metal prices during 2002 compared to the 2001
period.
Net sales were $2.9 billion in 2002 compared to $1.1 billion in 2001, due
primarily to a full year contribution of this segment in 2002 compared to five
months in 2001.
2001 Compared to 2000 -- Continuing Operations
The year 2001 was a transition year for the Company given that in August it
acquired dmc2, a company substantially larger than itself in terms of sales,
facilities, and personnel. The strong performance of dmc2's auto catalyst and
metal management businesses, particularly in Europe, offset weakness in the
Company's base metal business compared to 2000 in the second half of the year.
Net sales
primarily
Company's
and lower
for 2001 were $2.2 billion compared to $726.7 million in 2000
due to the acquisition of dmc2, partially offset by a decline in the
base metal chemistry segment due to weak global economic conditions
metal prices.
Gross profit increased to $317.1 million in 2001, a 74.5% increase from 2000.
The increase in gross profit was primarily the result of the acquisition of
dmc2, partially offset by a decline in the Company's base metal chemistry
segment due to weak global economic conditions and lower metal prices. Cost of
products sold increased to 85.8% of net sales for the year ended 2001 from 75.0%
of net sales in 2000 as a result of the acquisition of dmc2 with its high cost
of precious metals relative to revenues.
Selling, general and administrative expenses increased by $89.0 million in 2001
to $136.7 million, resulting primarily from the dmc2 acquisition and general
increases in administrative costs due to the Company's growth. Selling, general
and administrative expenses also includes $1.8 million of expense for closure
costs of the Ezanville, France carboxylate plant.
Other expense-net was $54.3 million in 2001 compared to $34.5 million in 2000
due primarily to increased interest expense on higher outstanding borrowings,
primarily as a result of the dmc2 acquisition.
Income taxes as a percentage of income before income taxes decreased to 25.2% in
2001 from 26.8% in 2000. The lower effective tax rate was due primarily to a tax
holiday in Brazil and South Africa, related to businesses purchased as part of
the dmc2 acquisition.
The extraordinary item of $4.6 million in 2001 is the after-tax write-off of
fees due to the retirement in December 2001 of the bridge loan used to finance
the acquisition of dmc2.
13
Net income for 2001 was $75.6 million, an increase of $4.1 million from 2000,
primarily due to the aforementioned factors.
BASE METAL CHEMISTRY SEGMENT -- The base metal chemistry segment includes the
cobalt, nickel and other base metal chemistry manufacturing businesses, which
comprised the historical businesses of the Company prior to the acquisition of
dmc2, excluding the copper powders and other businesses now classified as
discontinued operations.
The following information summarizes market prices of the primary raw materials
used by the base metal chemistry segment:
MARKET PRICE RANGES PER POUND
YEAR ENDED DECEMBER 31,
----------------------------------2001
2000
-----------------------------Cobalt -- 99.3% Grade............................
Nickel...........................................
Copper...........................................
$6.54 to $12.35
$ 2.04 to $3.35
$ 0.61 to $0.85
$10.68 to $15.25
$ 3.25 to $ 4.75
$ 0.75 to $ 0.92
The following information summarizes the physical volumes of products sold by
continuing operations of the base metal chemistry segment:
PERCENTAGE
2001
2000
---------
CHANGE
----------
PRODUCTS SOLD (millions of pounds):
Organics...............................................
Inorganics.............................................
Powders................................................
Metals.................................................
-------------Total..................................................
=====
=====
======
74.1
85.5
7.2
88.6
76.3
96.8
8.4
42.2
(2.9%)
(11.7%)
(14.3%)
110.0%
255.4
223.7
14.2%
Operating profit for the year ended December 31, 2001 was $165.9 million
compared to $154.0 million in 2000. The negative effects of global economic
weakness across many industries and lower metal prices resulting in lower cobalt
refinery profits were partially offset by the full impact in 2001 of the results
of the Harjavalta nickel refinery, which was acquired in April 2000. Net sales
were $662.6 million, a decline of 8.8%, resulting principally from lower prices,
as cobalt, nickel and copper raw material market prices decreased compared to
the same period in 2000. Physical sales volumes were up overall by 14.2% due to
the full year impact of the Harjavalta nickel refinery operations.
PRECIOUS METAL CHEMISTRY SEGMENT -- The precious metal chemistry segment
includes the platinum group and other precious metals manufacturing businesses
that were acquired in the dmc2 acquisition (the results of operations exclude
the businesses divested in September 2001). This segment develops, produces and
markets a variety of products, predominantly from platinum group metals such as
platinum, palladium, rhodium, and other precious metals such as gold and silver.
The primary contributor to the profitability of this segment is the Company's
automotive catalyst business.
Net sales, subsequent to the date of the acquisition, were $584.9 million and
were positively impacted by strong sales of auto catalysts in Europe. Operating
profit for that period was $28.1 million.
METAL MANAGEMENT SEGMENT -- The metal management segment also was acquired in
the dmc2 acquisition. This segment serves as a metal sourcing operation for both
the Company's other segments and nonaffiliated customers, primarily procuring
platinum group metals such as platinum, palladium, rhodium, and other precious
metals such as gold and silver. Metal management centrally manages metal
purchases and sales by providing the necessary precious metal liquidity,
financing and hedging for the Company's other businesses. Net sales,
14
subsequent to the date of the acquisition, were $1.1 billion. Operating profit
was $10.1 million for that period and was positively affected by the higher
volatility of precious metal pricing at certain times during that period.
LIQUIDITY AND CAPITAL RESOURCES
During December 2002, in connection with its restructuring program, the Company
amended its senior credit facilities, which were previously amended in June
2002. The amended facilities consist of a $225 million senior secured revolving
facility (including a $10 million letter of credit sublimit) and $698 million of
term loans. Utilization of the last $50 million of the revolving facility
requires approval of two-thirds of the lending group. The revolving facility and
the term loans bear interest at a rate of LIBOR plus 5% and mature on April 1,
2006, with a LIBOR floor of 1.75%. Unless net proceeds from asset sales are
greater than $425 million, the applicable interest rate margin will increase by
an additional 50 basis points at June 30, 2003, and by an additional 25 basis
points each subsequent quarter thereafter through and including December 31,
2003. In addition, the interest rate margin will increase an incremental 25
basis points if, by March 31, 2003, the Company has not entered into a letter of
intent for asset sales which would yield net proceeds of at least $350 million.
The amendment requires the Company to generate a minimum amount of gross
proceeds from assets sales or additional equity offerings of $75 million by June
30, 2003 and additional net proceeds of $350 million by December 31, 2003. The
amendment prohibits payment of dividends and acquisitions of businesses, and
modifies certain financial covenants in the prior agreement to make them less
restrictive.
During the fourth quarter of 2002, the Company recorded restructuring charges of
$310.5 million pertaining to continuing and discontinued operations and other
unusual charges of $19.2 million to improve cash flow and profitability, and
strengthen the balance sheet - primarily through reducing operating costs;
closing unprofitable operations; selling non-core assets; reducing capital
expenditures; and re-aligning the management team. These charges principally
related to workforce reductions, plant closings, and asset write-downs,
including goodwill. The cash portion of the restructuring charges is estimated
to be approximately $38 million, with approximately $7 million paid out in 2002,
$26 million to be paid in 2003 and $5 million thereafter. The Company expects
that additional charges of $5-$10 million related to this program will be taken
in the first quarter of 2003 as these actions are completed.
During April 2002, the Company completed the registration of a $400 million
offering of 9.25% senior subordinated notes due 2011, originally issued on
December 12, 2001 pursuant to Rule 144A of the Securities Act of 1933.
The Company's credit facilities include covenants that require the Company to
reduce its debt in relation to total capital, and its debt in relation to
earnings before interest, taxes, depreciation and amortization. The Company is
in compliance with its debt covenants at December 31, 2002 and believes that it
will have sufficient cash generated by operations and from divestitures to meet
future covenant requirements through December 31, 2003. If the Company is unable
to generate sufficient cash from operations and divestitures during 2003, the
Company may be in default of its credit facilities, and the bank group may
choose not to provide additional funding to the Company under the credit
facilities. If that were the case, the Company might not have sufficient capital
to meet the needs of the business. Under the existing credit agreements, certain
financial covenants become more stringent each quarter, with the most stringent
covenants applicable in the first quarter of 2004. Unless the Company's results
of operations substantially improve during the next twelve months compared to
the second half of 2002, the Company may need to renegotiate these covenants
prior to March 31, 2004.
Cash provided by operations and through its credit facilities should also be
sufficient to provide for future working capital and capital expenditure
requirements. Subject to several limitations in its credit facilities, the
Company may incur additional borrowings to finance working capital and certain
capital expenditures, including, without limitation, the purchase of additional
raw materials.
In November 2002, the Company's Board of Directors voted to suspend the
quarterly cash dividend indefinitely.
15
The Company enters into precious metal leases (primarily gold and silver) that
are consignment inventory arrangements under which banks provide the Company
with precious metals for a specified period for which the Company pays a lease
fee. During the fourth quarter of 2002, certain metal lease lines were
cancelled; in January 2003, a portion of these lease lines were restored. The
Company also leases out metals under similar arrangements to customers. The
amounts of metal leases in and metal leases out at December 31 were $190.5
million and $50.8 million for 2002 and $276.1 million and $110.7 million for
2001, respectively.
Balance Sheet Review
During 2002, net working capital decreased due primarily to a reduction in
inventory values associated with lower of cost or market and restructuring
charges. Excluding the impact of these unusual charges, the Company's net
working capital increased by approximately $103 million during 2002. This
increase was primarily the result of the following:
- An increase in precious metal inventories of approximately $95 million due
principally to the following factors: (1) increases in on-hand precious metal
quantities; (2) an increase in the market price of gold and platinum, which
more than offset decreased prices for palladium and rhodium; (3) cancellation
of certain precious metal lease lines by financial institutions, which
necessitated the purchase of additional metals to operate the business; and
(4) the impact of the strengthening euro against the U.S. dollar during 2002.
The increases for the precious metals business more than offset declining
inventories at the Company's base metal chemistry facilities, as a result of
the Company's stated objectives to decrease cobalt and nickel inventories
during the fourth quarter of 2002 to raise cash and improve working capital.
Actual reductions achieved in 2002 were approximately 1,100 tons of cobalt and
5,500 tons of nickel inventory.
- An increase in accounts receivable of approximately $29 million, due
principally to increased sales in the fourth quarter of 2002 compared to the
fourth quarter of 2001.
- A decrease from the sale of marketable securities of $39 million during 2002,
the proceeds of which were used to repay outstanding long-term indebtedness.
Capital expenditures were $94 million in 2002 compared to $100 million in 2001.
2002 expenditures were primarily related to the construction of a nickel salts
plant in Finland and capacity expansions at various precious metal chemistry
locations. These capital expenditures were funded primarily through borrowings
under the Company's revolving credit facility. Property, plant and equipment
remained flat at $658 million during 2002, due primarily to capital expenditures
and the impact of the strengthening euro against the U.S. dollar during 2002,
offset by decreases due to depreciation expense and the finalization of the dmc2
purchase price, which resulted in negative goodwill and a corresponding
reduction in long-term assets (primarily property, plant and equipment). The
Company anticipates that capital spending will approximate $60 million in 2003.
Long-term debt excluding current portion decreased to $1.2 billion in 2002
compared to $1.3 billion in 2001, due primarily to the Company's secondary
equity offering of 4.025 million shares of common stock in January 2002, the net
proceeds ($225.8 million) of which were used to repay outstanding indebtedness
under the Company's credit facilities. This repayment was partially offset by
additional borrowing to fund certain needs of the business during 2002,
primarily related to capital expenditures and the purchase of raw materials.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financial activities, is
exposed to changes in metal prices, interest rates and foreign currency exchange
rates which may adversely affect its results of operations and financial
position. In seeking to minimize the risks and/or costs associated with such
activities, the Company manages exposures to changes in metal prices, interest
rates and foreign currency exchange rates through its regular operating and
financing activities, which include the use of derivative instruments.
The primary raw materials used by the Company in manufacturing its products are
cobalt, nickel, copper, platinum, palladium, rhodium, gold and silver. The
Company's supply of cobalt historically has been sourced primarily from the
Democratic Republic of Congo (DRC), Australia, Finland and Zambia. Although the
16
Company has never experienced a significant shortage of cobalt raw material,
production problems and political and civil instability in certain supplier
countries may in the future affect their supply and market price. Nickel
historically has been sourced primarily from Australia and Brazil. The Company
currently has supply arrangements in place for approximately 90% of its
projected nickel raw material needs for 2003 and 2004. Platinum group metals
historically have been sourced from South Africa and, to a lesser extent, from
Russia and Canada. Copper, gold and silver are worldwide commodities with
diverse supply sources. The Company does not anticipate any substantial
interruption in its raw materials supply that would have a material adverse
effect on the Company's operations. If a substantial interruption should occur
in supply from a primary source, there is no assurance that the Company would be
able to obtain as much from other sources as would be necessary to satisfy the
Company's requirements or at prices comparable to its current arrangements.
The Company is exposed to risks of metal price fluctuations with respect to its
metal inventory and with respect to metal trading activities. The Company's
metal inventories are partially protected from metal price fluctuations by
pricing agreements with customers or, if necessary, by economically hedging this
exposure through derivative financial instruments, such as forward and futures
contracts. All of the Company's metal trading activities are carried out
pursuant to defined exposure limits set by management.
The Company also attempts to mitigate changes in prices and availability by
maintaining adequate inventories and long-term supply relationships with a
variety of producers. The cost of raw materials fluctuates due to both actual
and perceived changes in supply and demand. Generally, the Company is able to
pass through to its customer's increases and decreases in raw material prices by
increasing or decreasing, respectively, the prices of its products. The degree
of profitability of the Company principally depends on the Company's ability to
maintain the differential between its product prices and product costs, which
principally impacts the refining aspects of the base metal business.
Substantial, sustained reductions in the price of raw materials could also
result in the Company's inventory carrying value being written down to a lower
market value.
The Company is exposed to interest rate risk primarily through its borrowing
activities. The Company predominantly utilizes U.S. dollar denominated
borrowings to fund its working capital and investment needs. The majority of the
Company's borrowings are in variable rate instruments. The Company enters into
interest rate swap agreements to convert a portion of the variable rate
instruments to fixed rate contracts over typically a three-year period. There is
an inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and business financing
requirements (see Note G). The following table presents principal cash flows and
related weighted-average interest rates by expected maturity dates of the
Company's long term-debt.
EXPECTED MATURITY DATE
----------------------------------------------------------------------------------------DECEMBER 31, 2002
----------------------------------------------------THEREFAIR
2003
2004
2005
2006
2007
AFTER
TOTAL
VALUE
(Thousands of dollars)
---------------------------------------Long-term debt,
including current portion
Fixed rate...............
Average interest rate....
Variable rate............
Average interest rate....
$ 6,750
6.8%
$ 7,000
6.8%
$ 7,000
6.8%
$773,650
6.7%
$
0
$400,000
9.25%
$
0
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------------DECEMBER 31, 2001
---------------------------------------------------THEREFAIR
2002
2003
2004
2005
2006
AFTER
TOTAL
VALUE
(Thousands of dollars)
--------------------------------------Long-term debt,
including current portion
Fixed rate................
Average interest rate.....
Variable rate.............
Average interest rate.....
17
$20,188
5.1%
$26,938
5.1%
$33,687
5.1%
$40,438
5.1%
$325,363
5.4%
$400,000
9.25%
$474,081
5.1%
--------
--------
$400,000
$225,000
$794,400
$794,400
--------
--------
$400,000
$400,000
$920,695
$920,695
In addition to the United States, the Company has manufacturing and other
facilities in Africa, Canada, Europe and Asia-Pacific, and markets its products
worldwide. Although most of the Company's raw material purchases and product
sales are based on the U.S. dollar, prices of certain raw materials, liabilities
for non-U.S. operating expenses and income taxes are denominated in local
currencies. As such, in periods when certain currencies (particularly the euro)
strengthen against the U.S. dollar, the Company's results of operations are
negatively impacted. In addition, fluctuations in exchange rates may affect
product demand and may adversely affect the profitability in U.S. dollars of
products and services provided by the Company in foreign markets where payments
for our products and services are made in the local currency. Accordingly,
fluctuations in currency prices may affect the Company's operating results and
net income. The acquisition of the operations of dmc2 increased our exposure to
fluctuations in foreign currency exchange rates, primarily the euro. In order to
partially hedge the Company's balance sheet and transaction exposure to
fluctuating rates, the Company enters into forward contracts to purchase and
sell various currencies. Such transactions cannot, however, eliminate all of the
risks associated with currency fluctuations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company's management to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements. In preparing
these financial statements, management has made their best estimates and
judgments of certain amounts included in the financial statements related to the
critical accounting policies described below. The application of these critical
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates.
Revenue Recognition -- Revenues are recognized when unaffiliated customers take
title and assume ownership of products specified in their purchase agreements
with the Company. Within the base metal and precious metal chemistry segments,
revenue recognition generally occurs upon shipment of product or usage of
consignment inventories. Metal management segment revenues are recognized upon
shipment of product or usage of consignment inventory in the case of sales
contracts; upon transfer of title under brokerage account transactions; and as
earned over the lives of the respective contracts in the case of leasing
arrangements. Sales and cost of products sold include the metal content of the
product sold to customers if the metal has been supplied by the Company. Also
included are purchases and sales of metal to third parties by the metal
management segment whether or not the metal has been processed into a product.
If a customer supplies the metal for processing, the metal content is not
included in sales or cost of products sold. In October 2002, the Emerging Issues
Task Force of the Financial Accounting Standards Board finalized Issue No.
02-03, which requires all gains and losses (realized and unrealized) on all
derivative contracts for trading purposes to be presented on a net basis in the
income statement. The Company has recorded certain metal trading activities on a
gross basis, as is currently acceptable under generally accepted accounting
principles. This consensus, which will be effective for the Company beginning
January 1, 2003, will have no impact on gross profit or income from operations.
Inventories -- The Company's inventories are principally stated at the lower of
cost or market and valued using the last-in, first-out (LIFO) method except for
precious metals trading inventory, which is carried at the current monetary
value. The Company uses the LIFO method to better match the price it currently
pays for its metal raw material with the selling prices it currently charges for
its products. The balance sheet amounts of inventory reflect the quantities of
metal in inventory, valued at purchased metal prices in the year LIFO was
adopted and any subsequent year in which there was an incremental increase in
quantities. In periods of sustained and significant raw material metal price
declines, the calculated LIFO inventory value may exceed the amount the Company
could realize on sale. In this case, the Company would record a lower of cost or
market adjustment. During 2002, the Company recorded a non-cash charge of $108.2
million to write-down inventories to the lower of cost or market in accordance
with generally accepted accounting principles. The charge was taken due to the
following factors: (1) based upon the sustained low level of cobalt market
pricing, the Company's outlook for the market price of cobalt changed from a
range of $9.00-$10.00 per pound by the end of 2002, to a range of $6.0018
$7.00 per pound through 2003; (2) the decision to reduce cobalt production in
the fourth quarter of 2002, which was driven in part by a major supplier's
announcement in late October that they would shut-down their cobalt mine
indefinitely; and (3) the Company's corresponding decision to start liquidating
cobalt inventories to generate cash.
Long-lived assets -- As a result of the adoption of SFAS No. 142 in 2002,
goodwill must be reviewed at least annually for impairment, in accordance with
the specified methodology. Further, goodwill, intangible and other long-lived
assets are assessed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The Company generally
invests in long-lived assets to secure raw material feedstocks, produce new
products, or increase production capacity or capability. Because market
conditions may change, future operating profits may be difficult to forecast.
Furthermore, the assets and related businesses may be in different stages of
development. If the Company determined that the future operating profits from
these investments were not expected to exceed the carrying value of the
investments, the Company would record an impairment charge. During 2002, in
connection with the deterioration of the profitability of the Company's base
metals business and the related restructuring actions, the Company determined
that goodwill was impaired by $30.2 million. This charge, with no tax benefit,
was recorded in the fourth quarter. In addition, at December 31, 2002, goodwill
of approximately $5 million has been allocated to discontinued operations in
accordance with SFAS No. 142.
Income taxes -- Deferred income taxes are provided to recognize the effect of
temporary differences between financial and tax reporting. Deferred income taxes
are not provided for undistributed earnings of foreign consolidated
subsidiaries, to the extent such earnings are reinvested for an indefinite
period of time. The Company has significant operations outside the United
States, where most of its pre-tax earnings are derived, and in jurisdictions
where the statutory tax rate is lower than in the United States. The Company
also has significant cash requirements in the United States to pay interest and
principal on borrowings. As a result, significant tax and treasury planning and
analysis of future operations are necessary to determine the proper amounts of
tax assets, liabilities, and tax expense. The Company's tax assets, liabilities,
and tax expense are supported by its best estimates and assumptions of its
global cash requirements, planned dividend repatriations, and expectations of
future earnings. Where the Company has determined that it is more likely than
not that deferred tax assets will not be realized, a valuation allowance has
been established. The valuation allowance pertains to the deferred tax assets
resulting principally from the net operating loss carryforwards of certain
subsidiaries in the United States.
Stock Options Granted to Employees -- In December 2002, SFAS No. 148, Accounting
for Stock-Based Compensation -- Transition and Disclosure, was issued. SFAS No.
148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative transition methods when a company voluntarily changes to the fair
value based method of recognizing expense in the income statement for
stock-based employee compensation, including stock options granted to employees.
As provided for by SFAS No. 123, the Company has adopted the disclosure-only
provisions of the Standard and does not recognize expense for stock options
granted to employees.
Pension and OPEB -- The measurement of liabilities related to pension plans and
other postretirement benefit plans is based on management's assumptions related
to future events including interest rates, return on pension plan assets, rate
of compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either reduce or increase unamortized pension losses,
which ultimately affects net income (loss). See Note J for information related
to key assumptions used to recognize expense for pension and other
postretirement benefit plans.
For 2003, certain key assumptions used to calculate pension and other
postretirement benefit expense have been modified, including the lowering of
both the assumed return on pension plan assets (from 9.00% to 8.75%) and the
discount rate related to pension plans in the United States (from 7.00% to
6.75%) and outside the United States (from 7.00% to 6.00%). The impact of these
changes on the results for 2003 is expected to be an increase in pension and
postretirement benefit expense of approximately $0.06 per diluted share.
19
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This report contains statements that the Company believes may be
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are not historical facts
and generally can be identified by use of statements that include phrases such
as "believe," "expect," "anticipate," "intend," "plan," "foresee" or other words
or phrases of similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that are
difficult to predict, may be beyond the Company's control and could cause actual
results to differ materially from those currently anticipated. Factors that
could materially affect these forward-looking statements can be found in this
report. You are urged to consider these factors carefully in evaluating the
forward-looking statements and are cautioned not to place undue reliance on the
forward-looking statements.
Important facts that may affect the Company's expectations, estimates or
projections include:
- the price and supply of raw materials, particularly cobalt, nickel, copper,
platinum, palladium, rhodium, gold and silver;
- the demand for metal-based specialty chemicals and products in the Company's
markets;
- the effect of non-currency risks of investing in and conducting operations in
foreign countries, including political, social, economic and regulatory
factors;
- the effects of the substantial debt we have incurred in connection with the
Company's acquisition of the operations of dmc2 and the Company's ability to
refinance or repay that debt;
- the effect of fluctuations in currency exchange rates on the Company's
international operations;
- the impact of the Company's restructuring program on its continuing
operations;
- the ability of the Company to identify potential buyers for its assets held
for sale, and a financial partner for its precious metal chemistry business,
which in turn may impact the Company's ability to meet its debt covenants with
respect to net proceeds from assets sales;
- the potential impact of the Company being named in a recent United Nations
panel report focusing on companies and individuals operating in the Democratic
Republic of Congo;
- the potential impact of an adverse result of the shareholder class action
lawsuits filed against the Company and the named executives.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures required under this item are included in Management's Discussion
and Analysis of Financial Condition and Results of Operations, on pages 16
through 18 of this report.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
OM Group, Inc.
We have audited the accompanying consolidated balance sheets of OM Group, Inc.
as of December 31, 2002 and 2001, and the related statements of consolidated
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of OM Group, Inc. at
December 31, 2002 and 2001, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note F, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 4, 2003
21
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------2002
2001
(Thousands of dollars, except share data)
----------
----------
ASSETS
Current assets:
Cash and cash equivalents................................. $
77,205
$
76,507
Marketable securities.....................................
38,667
Accounts receivable, less allowance of $10,730 in 2002 and
$7,445 in 2001..........................................
359,402
330,110
Inventories...............................................
685,602
732,043
Deferred income taxes and other current assets............
140,128
151,216
------------------TOTAL CURRENT ASSETS........................................
1,262,337
1,328,543
Property, plant and equipment:
Land......................................................
17,127
16,198
Buildings and improvements................................
195,497
201,340
Machinery and equipment...................................
612,733
570,130
Furniture and fixtures....................................
36,422
33,703
------------------861,779
821,371
Less accumulated depreciation.............................
207,621
163,795
------------------654,158
657,576
Other assets:
Goodwill..................................................
182,208
173,802
Other intangible assets...................................
15,806
35,270
Other assets..............................................
114,587
122,749
Assets of discontinued operations.........................
110,040
207,998
------------------TOTAL ASSETS................................................ $2,339,136
$2,525,938
==========
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $
6,750
$
20,188
Short-term debt...........................................
24,347
32,397
Accounts payable..........................................
170,150
168,939
Accrued income taxes......................................
37,532
23,495
Deferred income taxes.....................................
17,127
73,716
Accrued compensation......................................
32,422
30,327
Other accrued expenses....................................
125,685
47,182
------------------TOTAL CURRENT LIABILITIES...................................
414,013
396,244
Long-term debt............................................
1,187,650
1,300,507
Deferred income taxes.....................................
74,659
68,849
Minority interests and other long-term liabilities........
156,757
161,110
Liabilities of discontinued operations....................
36,172
29,695
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized 2,000,000 shares; no shares issued or
outstanding
Common stock, $.01 par value:
Authorized 60,000,000 shares; issued 28,402,163 shares
in 2002 and 24,208,267 shares in 2001..................
284
242
Capital in excess of par value............................
490,741
262,914
Retained earnings (deficit)...............................
(17,943)
316,796
Treasury stock (47,359 shares in 2002 and 2,359 shares in
2001, at cost)..........................................
(2,255)
(119)
Accumulated other comprehensive income (loss).............
2,008
(6,363)
Unearned compensation.....................................
(2,950)
(3,937)
------------------TOTAL STOCKHOLDERS' EQUITY..................................
469,885
569,533
------------------TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $2,339,136
$2,525,938
==========
==========
See accompanying notes to consolidated financial statements.
22
STATEMENTS OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31
-----------------------------------2002
2001
2000
(Thousands of dollars, except per share data)
----------
Net sales..............................................
Cost of products sold..................................
Cost of products sold -- write-down of inventories.....
-------------------------271,222
317,071
181,710
Selling, general and administrative expenses...........
Restructuring and other unusual charges................
-------------------------Income (loss) from operations..........................
Other income (expense)
Interest expense.......................................
Foreign exchange gain (loss)...........................
Investment and other income, net.......................
-------------------------(67,509)
(54,260)
(34,517)
-------------------------Income (loss) from continuing operations before income
taxes, minority interests, equity income and
extraordinary item...................................
Income tax (benefit) expense...........................
Minority interests.....................................
Equity in income of affiliates.........................
-------------------------Income (loss) from continuing operations...............
Income (loss) from discontinued operations, net of
tax..................................................
Extraordinary item (net of $2,500 tax benefit).........
-------------------------NET INCOME (LOSS)......................................
==========
==========
========
BASIC EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS................................ $
DISCONTINUED OPERATIONS..............................
EXTRAORDINARY ITEM...................................
-------------------------NET INCOME (LOSS).................................... $
==========
==========
========
DILUTED EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS................................ $
DISCONTINUED OPERATIONS..............................
EXTRAORDINARY ITEM...................................
-------------------------NET INCOME (LOSS).................................... $
==========
==========
========
CASH DIVIDENDS PAID PER COMMON SHARE...................
==========
==========
========
See accompanying notes to consolidated financial statements.
23
----------
--------
$4,909,423
4,529,979
108,222
$2,236,912
1,919,841
$726,676
544,966
245,828
162,695
136,681
47,650
(137,301)
180,390
134,060
(74,271)
2,279
4,483
(57,423)
(194)
3,357
(35,829)
(1,123)
2,435
(204,810)
(17,844)
12,846
(1,497)
126,130
31,745
5,820
(1,876)
(198,315)
90,441
(129,596)
72,854
(10,201)
(4,600)
$ (327,911)
$
99,543
26,689
$
(1,354)
75,640
$ 71,500
(7.07)
(4.62)
$
3.76
(0.42)
(0.19)
$
3.05
(0.06)
(11.69)
$
3.15
$
2.99
(7.07)
(4.62)
$
3.70
(0.42)
(0.19)
$
3.00
(0.05)
(11.69)
$
3.09
$
2.95
.42
$
.52
$
.44
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
CAPITAL
COMMON STOCK
IN EXCESS
---------------OF PAR
SHARES
DOLLARS
VALUE
(Thousands)
-----BALANCE AT JANUARY 1, 2000....
Net income....................
Other comprehensive loss......
---------
ACCUMULATED
RETAINED
EARNINGS
------23,959
TREASURY
STOCK
--------$240
OTHER
COMPREHENSIVE
UNEARNED
INCOME (LOSS)
COMPENSATION
TOTAL
--------------------------------------$258,815
$ 198,047
71,500
$(5,537)
Total comprehensive income....
Non-employee directors'
compensation................
98
Restricted stock
compensation................
Dividends paid................
(10,491)
Treasury stock purchased......
(9,650)
Issuance of shares under
benefit plans, including tax
benefit.....................
(2,873)
10,334
-----------------------------------------BALANCE AT DECEMBER 31,
2000........................ 23,959
240
258,913
256,183
(4,853)
Net income....................
75,640
Other comprehensive loss......
--------Total comprehensive income....
Non-employee directors'
compensation................
153
Restricted stock grants.......
65
3,848
Restricted stock
compensation................
Dividends paid................
(12,494)
Treasury stock purchased......
(5,331)
Issuance of shares under
benefit plans, including tax
benefit.....................
184
2
(2,533)
10,065
-----------------------------------------BALANCE AT DECEMBER 31,
2001........................ 24,208
242
262,914
316,796
(119)
Net loss......................
(327,911)
Other comprehensive income....
--------Total comprehensive loss......
Non-employee directors'
compensation................
179
Restricted stock grants.......
31
1,883
Restricted stock
forfeitures.................
(45)
(2,136)
Restricted stock
compensation................
Dividends paid................
(11,899)
Issuance of shares under
benefit plans, including tax
benefit.....................
183
2
5,071
Sale of common stock.......... 4,025
40
225,765
-----------------------------------------BALANCE AT DECEMBER 31,
2002........................ 28,402
$284
$490,741
$ (17,943) $(2,255)
======
====
========
=========
=======
=======
=======
See accompanying notes to consolidated financial statements.
24
$(1,837)
$
--------(500)
(2,130)
$ 449,228
71,500
(2,130)
69,370
98
114
114
(10,491)
(9,650)
7,461
--------(3,967)
(386)
(2,396)
506,130
75,640
(2,396)
73,244
153
(3,848)
297
297
(12,494)
(5,331)
7,534
--------(6,363)
(3,937)
8,371
569,533
(327,911)
8,371
(319,540)
179
(1,883)
2,136
734
734
(11,899)
5,073
225,805
--------$ 2,008
=========
$(2,950)
$ 469,885
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------2002
2001
2000
(Thousands of dollars)
---------
OPERATING ACTIVITIES
Income (loss) from continuing operations.................. $(198,315)
Items not affecting cash:
Depreciation and amortization...........................
58,943
Foreign exchange (gain) loss............................
(2,279)
Deferred income taxes...................................
(32,496)
Minority interest.......................................
12,846
Equity in income of affiliates..........................
(1,497)
Write-down of inventories -- lower of cost or market....
108,222
Restructuring and other unusual charges, less cash
spent................................................
202,023
Changes in operating assets and liabilities:
Accounts receivable.....................................
(29,311)
Inventories.............................................
(103,889)
Accounts payable and other accrued liabilities..........
12,213
Other...................................................
1,271
--------------------------NET CASH PROVIDED BY OPERATING ACTIVITIES.................
27,731
INVESTING ACTIVITIES
Expenditures for property, plant and equipment -- net.....
(94,017)
Acquisitions of businesses................................
(32,070)
Divestiture of business...................................
4,000
Sale of marketable securities.............................
37,624
Investments in nonconsolidated joint ventures.............
(3,566)
--------------------------NET CASH USED IN INVESTING ACTIVITIES.....................
(88,029)
FINANCING ACTIVITIES
Dividend payments.........................................
(11,899)
Long-term borrowings......................................
99,510
Payments of short-term debt, net..........................
(12,552)
Payments of long-term debt................................
(225,805)
Purchase of treasury stock................................
Proceeds from exercise of stock options...................
3,806
Proceeds from sale of common shares.......................
225,805
--------------------------NET CASH PROVIDED BY FINANCING ACTIVITIES.................
78,865
--------------------------Cash provided by continuing operations....................
18,567
Cash used in discontinued operations......................
(25,161)
Effect of exchange rate changes on cash and cash
equivalents.............................................
7,292
--------------------------INCREASE IN CASH AND CASH EQUIVALENTS.....................
698
Cash and cash equivalents at beginning of year............
76,507
--------------------------CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 77,205
=========
===========
=========
See accompanying notes to consolidated financial statements.
25
-----------
---------
$
$
90,441
72,854
51,433
194
8,813
5,820
(1,876)
29,266
1,123
(1,603)
82,462
(60,959)
(73,107)
(41,590)
42,734
5,907
(31,974)
(37,350)
61,631
80,957
(100,006)
(1,146,657)
525,473
(45,548)
(192,689)
(721,190)
(238,237)
(12,494)
1,648,751
(10,491)
223,750
(900,000)
(5,331)
6,435
(37,600)
(9,650)
6,811
737,361
172,820
77,802
(13,189)
(1,215)
15,540
(8,819)
(2,005)
63,398
13,109
$
76,507
4,716
8,393
$
13,109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars, except per share amounts)
A. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include the
accounts of OM Group, Inc. (the Company) and its majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Equity investees include the Company's precious metal chemistry
segment joint ventures in Japan (50% ownership), South Korea (50%) and the
United States (50%), and a base metal chemistry segment investment in Finland
(20%). The Company does not consolidate these investees since it owns 50% or
less of the equity interest and corresponding voting rights, and does therefore
does not have control over them.
Cash Equivalents -- For purposes of the statements of consolidated cash flows,
all highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Revenue Recognition -- Revenues are recognized when unaffiliated customers take
title and assume ownership of products specified in their purchase agreements
with the Company. Within the base metal and precious metal chemistry segments,
revenue recognition generally occurs upon shipment of product or usage of
consignment inventories. Metal management segment revenues are recognized upon
shipment of product or usage of consignment inventory in the case of sales
contracts; upon transfer of title under brokerage account transactions; and as
earned over the lives of the respective contracts in the case of leasing
arrangements.
In October 2002, the Emerging Issues Task Force of the Financial Accounting
Standards Board finalized Issue No. 02-03, which requires all gains and losses
(realized and unrealized) on all derivative contracts for trading purposes to be
presented on a net basis in the income statement. The Company has recorded
certain metal trading activities on a gross basis, as is currently acceptable
under generally accepted accounting principles. This consensus, which will be
effective for the Company beginning January 1, 2003, will have no impact on
gross profit or income from operations.
Sales and Cost of Products Sold -- Sales and cost of products sold include the
metal content of the product sold to customers if the metal has been supplied by
the Company. Also included are purchases and sales of metal to third parties by
the metal management segment whether or not the metal has been processed into a
product. If a customer supplies the metal for processing, the metal content is
not included in sales or cost of products sold. Shipping and handling are
included in cost of products sold and are included in the sales price when
billed to customers.
Inventories -- Inventories are principally stated at the lower of cost or market
and valued using the last-in, first-out (LIFO) method except for precious metals
trading inventory, which is carried at the current monetary value.
Depreciation and Amortization -- Property, plant and equipment is recorded at
historical cost less accumulated depreciation. Depreciation of plant and
equipment is provided by the straight-line method over the useful lives ranging
from 5 to 40 years for buildings and improvements and 3 to 15 years for other
depreciable assets. Intangible assets subject to amortization, principally
patents, trademarks, technology acquired and capitalized software, are being
amortized on a straight-line basis over 5 to 17 years.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets. The Statement addresses the conditions under which an impairment charge
should be recorded related to long-lived assets to be held and used, except
goodwill, and those to be disposed of by sale or otherwise. Long-lived assets,
except goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. Events or
circumstances that would result in an impairment review primarily include
operations reporting losses, a significant change in the use of an asset, or the
planned disposal or sale of the asset. The asset would be considered impaired
when the future net undiscounted cash flows generated by the asset are less than
its carrying value. An impairment loss would be recognized based on the amount
by which the carrying value of the asset exceeds its fair value. The Statement
also extends the reporting of a discontinued operation to a "component of an
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
entity." The adoption of this Statement resulted in the classification of
certain manufacturing facilities and businesses of the Company as discontinued
operations (see Note C).
Goodwill -- Effective January 1, 2002, the Company adopted SFAS No. 142 Goodwill
and Other Intangible Assets as further described further in Note F. Upon
adoption, the Company ceased the amortization of goodwill recorded in connection
with previous business acquisitions. SFAS No. 142 changes the accounting for
goodwill and indefinite life intangible assets from an amortization approach to
a non-amortization approach requiring periodic testing for impairment of the
asset. During the second quarter of 2002, the Company completed the initial
impairment test for goodwill as of January 1, 2002 and determined that no
impairment of goodwill existed as of that date. During the fourth quarter of
2002, the Company completed the required annual impairment test and determined
that the carrying value of goodwill exceeded the fair value, which resulted in a
goodwill impairment charge of $30.2 million. In addition, at December 31, 2002,
goodwill of approximately $5 million has been allocated to discontinued
operations in accordance with SFAS No. 142.
Research and Development -- Selling, general and administrative expenses include
research and development costs of $56.7 million, $23.7 million and $7.6 million
in 2002, 2001 and 2000, respectively.
Income Taxes -- Deferred income taxes are provided to recognize the effect of
temporary differences between financial and tax reporting. Deferred income taxes
are not provided for undistributed earnings of foreign consolidated
subsidiaries, to the extent such earnings are reinvested for an indefinite
period of time.
Foreign Currency Translation -- The functional currency for the Company's
Finnish subsidiaries and related African operations is the U.S. dollar since a
majority of their purchases and sales are denominated in U.S. dollars.
Accordingly, foreign exchange gains and losses related to assets, liabilities
and transactions which are denominated in other currencies (principally the
euro) are included in results of operations. The Company enters into forward
contracts to partially hedge its balance sheet exposure to other currencies, and
accordingly, gains or losses related to the forward contracts are also included
in results of operations.
The functional currency for the Company's other subsidiaries outside of the
United States is the applicable local currency. For those operations, financial
statements are translated into U.S. dollars at year-end exchange rates as to
assets and liabilities and weighted average exchange rates as to revenues and
expenses. The resulting translation adjustments are recorded as a component of
other comprehensive income in stockholders' equity.
Derivative Instruments -- The Company enters into derivative instruments and
hedging activities which are closely monitored and controlled in order to
manage, where possible and economically efficient, commodity price risk for base
and precious metals, interest rate risk related to borrowings, and foreign
currency risk associated with manufacturing and sales locations where
fluctuations in currency prices may affect the Company's operating results. The
use of forward and future contracts to hedge commodity price risk is discussed
in Note H, "Metals Financial Instruments." The use of interest rate swaps to
hedge interest rate risk on the Company's variable rate debt is discussed in
Note G, "Debt and Other Financial Instruments." The use of foreign exchange
contracts to hedge foreign currency risk associated with foreign operations is
also discussed in Note G.
The Company has designated certain derivative instruments as cash flow hedges.
For these hedges, the effective portion of the gain or loss from the financial
instrument is initially reported as a component of other comprehensive income
(loss) in stockholders' equity and subsequently reclassified to results of
operations when the hedged item affects results of operations. Any ineffective
portions of the cash flow hedges are recognized immediately in results of
operations.
The gain or loss related to financial instruments that are not designated as
hedges are recognized immediately in results of operations. These instruments
are entered into to economically hedge certain movements in currencies and metal
prices.
Stock Options and Compensation Plans -- The Company grants stock options for a
fixed number of shares to certain employees with an exercise price equal to the
fair value of the shares at the date of grant and accounts for
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
stock options using the intrinsic value method. Accordingly, compensation
expense is not recognized for the stock option grants.
In December 2002, SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure, was issued. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition when a company voluntarily changes to the fair value based method
of recognizing expense in results of operations for stock-based employee
compensation, including stock options granted to employees. As allowed by SFAS
No. 148, the Company has adopted the disclosure-only provisions of the Standard
and does not recognize expense for stock options granted to employees. If the
Company had elected to adopt the provisions of SFAS No. 148 and thereby record
compensation expense related to these grants, pro forma results of operations
would have been as follows, as described further in Note N, "Stock Plans."
YEAR ENDED DECEMBER 31
----------------------------2002
2001
2000
--------------------Net income (loss)
As reported.........................................
=========
=======
=======
Pro forma...........................................
=========
=======
=======
Basic net income (loss) per share
As reported.........................................
=========
=======
=======
Pro forma...........................................
=========
=======
=======
Diluted net income (loss) per share
As reported.........................................
=========
=======
=======
Pro forma...........................................
=========
=======
=======
$(327,911)
$75,640
$71,500
$(331,249)
$72,151
$68,974
$
(11.69)
$
3.15
$
2.99
$
(11.81)
$
3.00
$
2.89
$
(11.69)
$
3.09
$
2.95
$
(11.81)
$
2.95
$
2.84
Non-employee members of the Board of Directors are eligible to receive their
annual retainer in the form of cash, stock options, or restricted stock. If
stock options or restricted stock are elected, the acquisition price is 75% of
the fair market value and directors' cash compensation is utilized to acquire
the options or restricted stock. Also, directors electing to receive restricted
stock receive additional restricted stock equal to 5% of their applied cash
compensation. Accordingly, compensation expense is recognized for stock option
and restricted share grants elected by eligible directors.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions in certain circumstances that
affect the amounts reported in the accompanying consolidated financial
statements and notes. Actual results could differ from these estimates.
Recently Issued Accounting Pronouncements -- In May 2002, the FASB issued SFAS
No. 145, Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement 13 and Technical Corrections. The provisions of this Statement are
effective for the Company as of January 1, 2003. Upon adoption of the Statement,
the Company will be required to reclassify the extraordinary item of $4.6
million related to the early extinguishment of debt for the year ended December
31, 2001 to income from continuing operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and reporting
for costs associated with exit or disposal activities. SFAS No. 146 requires
liabilities for one-time termination benefits incurred over future service
periods be measured at fair value as of the termination date and recognized over
the future service period. The Statement also requires that liabilities
associated with disposal activities be recorded when incurred instead of when
probable as currently required by SFAS No. 5, Accounting for Contingencies.
These liabilities should be adjusted for subsequent changes
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
resulting from revisions to either the timing or amount of estimated cash flows,
discounted at the original credit-adjusted risk-free rate. Interest on the
liability would be accreted and charged to expense as an operating item. The
provisions of this Statement, which is effective for exit or disposal activities
that are initiated after December 31, 2002, are not expected to have a material
impact on the Company's financial position, results of operations or cash flows
upon adoption.
Financial Presentation Changes -- Certain amounts for prior years have been
reclassified to conform to the current year presentation.
B. RESTRUCTURING AND OTHER UNUSUAL CHARGES
During the fourth quarter of 2002, the Company recorded restructuring charges
related to continuing operations of $189.9 million and other unusual charges of
$19.2 million. The primary objectives of the restructuring plan are to
de-leverage the balance sheet, focus on cash generation and restore
profitability in certain of the Company's businesses that have been impacted by
the weak economy as well as a sustained decline in the market price of cobalt.
Specific actions taken to date to accomplish these objectives include
development of plans to sell certain non-core businesses; closure of certain
non-core facilities; headcount reductions worldwide; review and renegotiation of
certain raw material and other contracts to reduce costs in light of changing
metal prices and business conditions; liquidation of certain inventories in the
fourth quarter to generate cash; reduction of base metal inventory levels and
production; and a re-alignment of the management team. The Company expects that
additional charges of $5-$10 million related to this program will be taken in
the first quarter of 2003 as these actions are completed. Components of the
restructuring charges, which are included in Cost of Products Sold with respect
to inventory write-downs and Restructuring and Other Unusual Charges for all
other charges, are as follows (dollars in millions):
INVENTORY AND
NUMBER OF
WORKFORCE
EMPLOYEES
REDUCTIONS
------------------
OTHER ASSET
WRITE-DOWNS
-------------
2002 Charge.......................
Utilized in 2002..................
------------Balance at 12/31/02...............
===
=====
=======
FACILITY EXIT
AND OTHER
------------199
(50)
-----149
======
TOTAL
-------
$22.1
(1.8)
------$20.3
=======
$ 128.2
(128.2)
$ 39.6
(37.6)
$ 189.9
(167.6)
$
$
$
0
The cash portion of the amount utilized in 2002 was approximately $1.9 million,
with the remaining $22.3 million expected to be utilized in 2003.
The workforce reductions occurred worldwide and generally consisted of personnel
in all business units and in most job classifications. The remaining balance of
amounts associated with workforce reductions will be utilized in 2003 as
severance and related benefits are paid out under various severance plans, union
agreements and negotiated settlements with European Works Councils. Inventory
and other asset write-downs primarily reflect inventory write-downs of $46.4
million as a result of the Company's decisions to exit certain product lines,
liquidate inventories to generate cash and reduce production levels at several
facilities; goodwill impairment charges of $30.2 million; and the write-off of
the Company's investment in Weda Bay (see Note O) of $15.2 million. Facility
exit and other primarily reflects contractual commitments and other costs
related to the exit of certain product lines and impairment charges related to
fixed assets which the Company has permanently idled.
During 2002, the Company recorded other unusual charges of $19.2 million
primarily associated with an unfavorable product liability litigation summary
judgment, and fees related to credit agreement amendments.
C. DISCONTINUED OPERATIONS
During the fourth quarter of 2002, in connection with its restructuring program,
the Company committed to a plan to sell its copper powders business (SCM)
located in Research Triangle Park, North Carolina and
29
2.0
22.3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Johnstown, Pennsylvania. The sale of this business is expected to be completed
during the first half of 2003. In addition, the Company also ceased production
at, and closed or discontinued, its manufacturing facilities in St. George, Utah
(tungsten reclamation/cobalt recycling); Midland, Michigan (tungsten carbide
fine powders) and Newark, New Jersey (electroless nickel). These operations,
previously included in the base metal chemistry segment, have been classified as
discontinued operations for all periods presented.
In connection with the restructuring activities related to these discontinued
facilities, the Company recorded charges of $120.6 million in the fourth quarter
of 2002 primarily to adjust these asset groups to their estimated net realizable
value upon disposal. With respect to the expected sale of SCM, management
considered offers from third parties related to this business, which is expected
to be sold by June 30, 2003, in determining fair value less costs to sell.
Operating results for discontinued operations are summarized as follows (in
thousands):
2002
---------
2001
--------
2000
--------
Net sales...........................................
Income (loss) before income taxes...................
$ 124,563
(129,596)
$130,487
(14,231)
The operating results summarized above include an allocation of consolidated
interest expense, based on the estimated proceeds from the expected sale of SCM
required to be re-paid under the Company's bank agreement compared to average
debt outstanding. The allocated interest expense was $3.0 million, $3.2 million
and $4.0 million for each respective period.
The assets and liabilities of these businesses, which have been classified as
Assets of Discontinued Operations and Liabilities of Discontinued Operations in
the Consolidated Balance Sheet, consist of the following at December 31, 2002
and 2001 (in thousands):
2002
--------
2001
--------
Current assets..............................................
Property, plant and equipment...............................
Other long-term assets......................................
--------------Total Assets of Discontinued Operations.....................
========
========
Accounts payable and other accrued expenses.................
Long-term liabilities.......................................
--------------Total Liabilities of Discontinued Operations................
========
========
$ 60,926
38,778
10,336
$108,225
74,438
25,335
$110,040
$207,998
$ 14,066
22,106
$ 11,194
18,501
$ 36,172
$ 29,695
Current assets include primarily accounts receivable and inventories. Other
long-term assets include primarily intangible assets and goodwill. The goodwill
represents an allocation of a portion of the base metal reporting unit goodwill
in accordance with the provisions of SFAS No. 142. The amounts allocated were
$5.0 million and $6.9 million at December 31, 2002 and 2001, respectively.
D. ACQUISITIONS
On August 10, 2001, the Company acquired dmc2 Degussa Metals Catalysts Cerdec
(dmc2) for a purchase price of $1.102 billion, including cash acquired and
acquisition expenses. The acquisition was financed through a combination of debt
and equity and the sale of certain assets. On September 7, 2001, the Company
completed the disposition of the electronic materials, performance pigments,
glass systems and Cerdec ceramics divisions of dmc2 for a cash purchase price of
$525.5 million. In both transactions, the Company remains in negotiations with
the counterparties with respect to final working capital adjustments, the
resolution of which may ultimately impact the final purchase and sale price,
respectively.
30
$161,067
433
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The acquired businesses comprise the precious metal chemistry and metal
management segments. The assets acquired and liabilities assumed were recorded
at estimated fair values as determined by OM Group's management. During 2002,
the Company obtained final independent appraisals of the fair values of the
acquired property, plant and equipment, and identified intangible assets, and
their remaining useful lives. A summary of the final purchase price allocation
is as follows (in thousands):
Recorded fair values
Assets acquired...........................................
$ 854,310
Liabilities assumed.......................................
(278,128)
Fair value of assets sold.................................
525,473
---------Total aggregate purchase price....................
$1,101,655
==========
In connection with the finalization of the purchase price allocation during
2002, the Company determined that the fair value of the identifiable net assets
acquired exceeded the cost of the acquired business, resulting in negative
goodwill. In accordance with the provisions of SFAS No. 141, Business
Combinations, this negative goodwill reduced, on a pro-rata basis, amounts
assigned to the acquired long-term assets, primarily property, plant and
equipment.
In December 2001, the Company purchased the metal organics division of Rhodia
Holdings Limited and a nickel refining facility from Centaur Mining and
Exploration Limited for an aggregate purchase price of approximately $51
million. The businesses are included in the Company's base metal chemistry
segment. The combined sales of these entities in 2001 were approximately $75
million. In connection with the finalization of the purchase price allocations
for these businesses in 2002, the Company recorded goodwill of approximately $23
million related to the Rhodia transaction, none of which is expected to be
deductible for tax purposes.
In April 2000, the Company acquired Outokumpu Nickel Oy for a purchase price of
$204.6 million, including related financing and transaction costs. During 2002,
the Company resolved certain matters with the seller related to the net assets
acquired, the result of which was an increase in the original purchase price and
goodwill of approximately $16.5 million.
E. INVENTORIES
Inventories consist of the following:
DECEMBER 31
------------------2002
2001
--------------Raw materials and supplies..................................
Finished goods..............................................
--------------657,385
610,580
LIFO reserve................................................
--------------Total inventories................................. $685,602
========
========
$310,134
347,251
$314,495
296,085
28,217
121,463
$732,043
At September 30, 2002, the Company recorded a non-cash charge of $108.2 million
to write-down inventories to the lower of cost or market in accordance with
generally accepted accounting principles. The charge was taken due to the
following factors: (1) based upon the sustained low level of cobalt market
pricing, the Company's outlook for the market price of cobalt changed from a
range of $9.00-$10.00 per pound by the end of 2002, to a range of $6.00-$7.00
per pound through 2003; (2) the decision to reduce cobalt production in the
fourth quarter of 2002, which was driven in part by a major supplier's
announcement in late October that they would shut-down their cobalt mine
indefinitely; and (3) the Company's corresponding decision to start liquidating
cobalt inventories to generate cash.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
F. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142 Goodwill and Other
Intangible Assets. Upon adoption, the Company ceased the amortization of
goodwill recorded in connection with previous business combinations. A
reconciliation of net income (loss) and net income (loss) per common share for
the year ended December 31, 2001 and 2000, as if SFAS No. 142 had been adopted
as of the beginning of each year, follows (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------2002
2001
2000
--------------------Reported net income (loss)............................ $(327,911) $75,640
$71,500
Add back amortization of goodwill.....................
6,654
5,737
--------------------Adjusted net income (loss)............................ $(327,911) $82,294
$77,237
=========
=======
=======
Reported net income (loss) per common share --assuming
dilution............................................ $ (11.69) $ 3.09
$ 2.95
Add back amortization of goodwill.....................
0.27
0.24
--------------------Adjusted net income (loss) per common share --assuming
dilution............................................ $ (11.69) $ 3.36
$ 3.19
=========
=======
=======
Prior to the extraordinary item in 2001, adjusted net income and adjusted net
income per common share -- assuming dilution in 2001 would have been $86.9
million and $3.55.
SFAS No. 142 changes the accounting for goodwill and indefinite lived intangible
assets from an amortization approach to a non-amortization approach requiring
periodic testing for impairment of the asset. All of the Company's recorded
goodwill relates to the base metal chemistry segment. The Company completed the
required initial impairment test for goodwill as of January 1, 2002, which
indicated that there was no impairment of goodwill as of that date. Goodwill
also was tested for impairment in the fourth quarter of 2002 in accordance with
the provisions of SFAS No. 142. As a result of the adverse change in the
Company's business climate during the fourth quarter of 2002, the Company
determined that goodwill was impaired by approximately $30.2 million. For
purposes of this impairment test, the fair value of the base metal chemistry
reporting unit was estimated using the expected present value of future cash
flows. This amount has been recorded as an impairment loss, with no
corresponding tax benefit, in Restructuring and Other Unusual Charges in the
Statement of Operations.
A summary of other intangible assets follows (in thousands):
DECEMBER 31, 2002
------------------------HISTORICAL
ACCUMULATED
COST
AMORTIZATION
---------------------
DECEMBER 31, 2001
------------------------HISTORICAL
ACCUMULATED
COST
AMORTIZATION
---------------------
Amortized intangible assets, primarily
patents..............................
========
=======
========
$ 23,701
=======
$ 7,895
$ 42,488
The changes in the carrying amount of goodwill for the years ended December 31,
2002 and 2001 are as follows:
2002
--------
2001
--------
Balance at January 1........................................
Amortization................................................
Acquisitions of businesses..................................
Other, primarily finalization of purchase price allocations
of prior periods (See Note D).............................
Impairment loss.............................................
--------------Balance at December 31......................................
========
========
$173,802
$169,098
(521)
4,860
38,606
(30,200)
365
$182,208
$173,802
$ 7,218
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
All of the Company's other intangible assets have finite lives and will continue
to be amortized over their useful lives; the weighted average useful life was 13
years and 14 years at December 31, 2002 and 2001, respectively. Amortization
expense related to other intangible assets for the years ended December 31, 2002
and 2001 was approximately $1.5 million and $0.8 million, respectively.
Estimated annual pretax amortization expense for intangible assets amortization
for each of the next five years is approximately $1.3 million per year.
G. DEBT AND OTHER FINANCIAL INSTRUMENTS
Long-term debt consists of the following:
DECEMBER 31
----------------------2002
2001
------------------Notes payable to financial institutions..................... $
Senior Subordinated Notes...................................
------------------1,194,400
1,320,695
Less: Current portion.......................................
------------------Total long-term debt.............................. $1,187,650
==========
==========
794,400
400,000
6,750
$1,300,507
During December 2002, in connection with its restructuring program, the Company
amended its senior credit facilities, which were previously amended in June
2002. The amended facilities now consist of a $225 million senior secured
revolving facility (including a $10 million letter of credit sublimit) and $698
million of term loans. The revolving facility and the term loans bear interest
at a rate of LIBOR plus 5% and mature on April 1, 2006, with a LIBOR floor of
1.75%. Unless net proceeds from asset sales are greater than $425 million, the
applicable interest rate margin will increase by an additional 50 basis points
at June 30, 2003, and by an additional 25 basis points each subsequent quarter
thereafter through and including December 31, 2003. In addition, the interest
rate margin will increase an incremental 25 basis points if, by March 31, 2003,
the Company has not entered into a letter of intent for asset sales which would
yield net proceeds of $350 million. The amendment requires the Company to
generate a minimum amount of gross proceeds from assets sales or additional
equity offerings of $75 million by June 30, 2003 and additional net proceeds of
$350 million by December 31, 2003. The amendment prohibits payment of dividends
and acquisitions of businesses, and modifies certain financial covenants in the
prior agreement to make them less restrictive. These notes are fully
collateralized by a portion of the Company's assets. At December 31, 2002, the
Company had approximately $129 million available under its revolving credit
facility. At December 31, 2002, the carrying value of the Company's bank
borrowings approximated its fair value.
The Senior Subordinated Notes bear interest at 9.25% and mature in 2011. As
described in Note R, the Company's domestic subsidiaries are the guarantors of
the Senior Subordinated Notes (the Notes). Under the terms of the notes, the
Company must meet various financial covenants. At December 31, 2002, the fair
value of these Notes, based upon the quoted market price, approximated $225
million. At March 10, 2003, the fair value approximated $297 million
(unaudited).
The Company has interest rate swap agreements to convert the variable interest
rates on an aggregate contract amount of $40 million to an average fixed rate of
5.20% for the period ending February 14, 2003. The Company also has an interest
rate swap agreement to convert the variable interest rate on a contract amount
of $40 million to a fixed rate of 4.90% for the period ending April 25, 2003.
These interest rate swap agreements are designated as cash flow hedges.
In 2002, the Company completed the termination of, and settled for cash,
interest rate swap agreements for an aggregate amount of $125 million expiring
in 2011. These swap agreements converted fixed rate debt of 9.25% to a floating
rate. In addition, the Company completed the termination of, and settled for
cash, interest rate swap agreements for an aggregate amount of $55 million
expiring in 2003. These swap agreements converted floating
33
$
920,695
400,000
20,188
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
rate debt to a fixed rate. The combined pretax gain on the termination of the
swaps of $8.0 million has been deferred and is being amortized to interest
expense through the date on which the swaps were originally scheduled to mature.
At December 31, 2002, the combined effective rate of the Company's bank
borrowings and the related swap agreements was 7.1%. The net interest paid or
received on interest rate swaps is included in interest expense. The
counterparties to the interest rate swaps are international commercial banks. At
December 31, 2002, the fair values of the Company's interest rate swaps
approximated $1.1 million payable.
Aggregate annual maturities of long-term debt for the five years following
December 31, 2002 are as follows: 2003 -- $6.8 million; 2004 -- $7.0 million;
2005 -- $7.0 million; and 2006 -- $773.6 million. Interest paid on long-term
debt, net of capitalized amounts, was $70.7 million, $65.2 million, and $39.8
million for the years ended December 31, 2002, 2001 and 2000, respectively.
Interest capitalized as part of the acquisition or construction of major fixed
assets was $5.2 million in 2002, $10.3 million in 2001 and $11.0 million in
2000.
Short-term debt consists of arrangements with various banks worldwide under
which the Company is provided with precious metals for a specified period for a
fee. These arrangements, which generally range from short-term lines of credit
to loans expiring within one year, had interest rates ranging from 2.8% to 12.0%
as of December 31, 2002.
The Company enters into forward contracts to purchase and sell various
currencies to partially hedge its balance sheet exposure and other commitments
to rate fluctuations between various currencies and the euro. The following
table summarizes the Company's open foreign currency forward contracts:
NOTIONAL CONTRACT VALUE
------------------------------------DECEMBER 31, 2002
DECEMBER 31, 2001
--------------------------------BUY
SELL
BUY
SELL
-------------------------
MARKET VALUE(1)
------------------------------------DECEMBER 31, 2002
DECEMBER 31, 2001
--------------------------------BUY
SELL
BUY
SELL
-------------------------
U.S. Dollar.......... $ 2,629
$18,248
$25,850
$17,694
$ 2,618
$19,029
Canadian Dollar......
7,039
11,065
7,060
11,423
Other................
2,140
4,212
1,935
2,097
4,246
------------------------------------------------Total................ $11,808
$33,525
$27,785
$17,694
$11,775
$34,698
=======
=======
=======
=======
=======
=======
=======
=======
--------------(1) Market value is determined by financial institution counterparties.
H. METALS FINANCIAL INSTRUMENTS
The Company generally manages its price exposure to metals by passing through to
its customers increases or decreases in metal raw material prices by increasing
or decreasing, respectively, the price of its products. The Company also
undertakes to minimize the effect on profitability of changes in prices of
metals through various hedging activities.
The Company uses forward and future sales and purchase contracts to manage price
risk associated with its metal positions. The fair value of these contracts is
recorded in the Balance Sheet, with the resulting changes in the fair value due
to fluctuating metal prices recorded as a gain or loss in income from
operations.
34
$25,885
$19,089
1,907
$27,792
$19,089
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The tables below summarizes the open metals forwards/futures contracts at
December 31, 2002 and 2001, respectively:
NOTIONAL CONTRACT VALUE
MARKET VALUE(1)
----------------------------------------DECEMBER 31,
DECEMBER 31,
2002
2002
----------------------------------------BUY
SELL
BUY
SELL
--------------------------------Remaining term up to 1 year:
Forwards................................
$119,114
Futures.................................
Remaining term over 1 year:
Forwards................................
----------------------------Total.....................................
$119,114
========
========
========
========
$ 83,645
63,197
$118,926
$ 80,069
63,831
1,410
1,444
$148,252
$118,926
$145,344
NOTIONAL CONTRACT VALUE
MARKET VALUE(1)
----------------------------------------DECEMBER 31,
DECEMBER 31,
2001
2001
----------------------------------------BUY
SELL
BUY
SELL
--------------------------------Remaining term up to 1 year:
Forwards.................................
$144,442
Futures..................................
3,242
Remaining term over 1 year:
Forwards.................................
Futures..................................
----------------------------Total......................................
$147,684
========
========
========
========
$118,033
43,709
$145,866
3,306
133
1,227
$ 99,016
45,647
138
1,286
$163,102
$149,172
$146,087
--------------(1) Market value is determined by financial institution counterparties.
The Company also enters into forward contracts to hedge the purchase of nickel
raw material and the sales of nickel products. These contracts are designated
cash flow hedges. Therefore, realized gains and losses on these forward
contracts are included as a component of purchases and net sales, as
appropriate, and are recognized when the related raw material is purchased or
product is sold. At December 31, 2002 and 2001, the notional value of the open
contracts approximated $47,017 and $22,433, respectively. The fair value of the
unrealized gain/loss on those contracts, based on current settlement prices at
December 31, 2002 and 2001, approximated $1,294 and $279 receivable,
respectively.
I. INCOME TAXES
Income (loss) from continuing operations before income taxes, minority
interests, equity income and extraordinary item consists of the following:
YEAR ENDED DECEMBER 31
------------------------------2002
2001
2000
----------------------United States.......................................
Outside the United States...........................
----------------------$(204,810) $126,130
$ 99,543
=========
========
========
35
$(226,406)
21,596
$(61,417)
187,547
$(33,419)
132,962
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Income taxes are summarized as follows:
YEAR ENDED DECEMBER 31
----------------------------2002
2001
2000
--------------------Current:
United States:
Federal...........................................
State and local...................................
Outside the United States............................
--------------------14,652
22,932
28,292
Deferred:
United States........................................
Outside the United States............................
--------------------(32,496)
8,813
(1,603)
--------------------$(17,844) $31,745
$ 26,689
========
=======
========
$ 14,652
(32,496)
$22,932
$ 28,292
(2,590)
11,403
(13,201)
11,598
YEAR ENDED DECEMBER 31
--------------------------2002
2001
2000
----------Income taxes at the United States statutory rate............ (35.0)%
State income taxes, net of federal tax benefit..............
Effective tax rate differential of earnings outside of the
United States.............................................
(4.9)
Non-deductible goodwill.....................................
4.7
Losses without tax benefits.................................
25.7
Other -- net................................................
.8
----------(8.7)%
25.2%
26.8%
=====
====
====
35.0%
(1.8)
(8.3)
.1
Significant components of the Company's deferred income taxes are as follows:
DECEMBER 31
--------------------2002
2001
----------------Current asset -- operating accruals......................... $ 96,933
$ 23,802
Current liability -- inventories............................
(48,386)
(93,213)
Long-term asset -- benefit accruals.........................
15,422
21,940
Long-term asset -- operating loss carryforwards.............
72,825
46,715
Long-term liability -- accelerated depreciation.............
(118,744)
(131,046)
Valuation allowance.........................................
(71,089)
----------------Net deferred tax liability................................ $ (53,039) $(131,802)
=========
=========
36
.2
35.0%
(.9)
(7.1)
.1
(.3)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Deferred income taxes are recorded in the Consolidated Balance Sheet in the
following accounts:
DECEMBER 31
-------------------2002
2001
---------------Deferred income taxes and other current assets..............
Other assets................................................
Deferred income taxes -- current liabilities................
Deferred income taxes -- long-term liabilities..............
---------------$(53,039) $(131,802)
========
=========
$ 31,906
6,841
(17,127)
(74,659)
$
3,193
7,570
(73,716)
(68,849)
At December 31, 2002, the Company had operating loss carryforwards of
approximately $284 million, principally in the United States. These
carryforwards expire at various dates from 2007 through 2022.
Where the Company has determined that it is more likely than not that the
deferred tax assets will not be realized, a valuation allowance has been
established. The valuation allowance pertains to the deferred tax assets
resulting principally from the net operating loss carryforwards of certain
subsidiaries in the United States.
The Company has not provided additional United States income taxes on
approximately $553.2 of undistributed earnings of consolidated foreign
subsidiaries included in stockholders' equity. Such earnings could become
taxable upon the sale or liquidation of these foreign subsidiaries or upon
dividend repatriation. The Company's intent is for such earnings to be
reinvested by the subsidiaries or to be repatriated only when it would be tax
effective through the utilization of foreign tax credits. It is not practicable
to estimate the amount of unrecognized withholding taxes and deferred tax
liability on such earnings.
In connection with various investment incentive arrangements, the Company has a
"holiday" from income taxes in Malaysia, South Africa and Brazil. These
agreements, which expire in 2006, 2003, and 2005 respectively, reduced income
tax expense by $17.2 million, or $.61; $9.0 million or $.37; and $2.6 million or
$.11 per common share -- assuming dilution, in 2002, 2001 and 2000,
respectively.
Income tax payments were $8.4 million, $27.7 million and $15.3 million during
the years ended December 31, 2002, 2001 and 2000, respectively.
J. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined contribution plans covering certain
employees. Company contributions are determined by the Board of Directors based
upon participant compensation. The Company also sponsors a non-contributory,
non-qualified supplemental executive retirement plan for certain employees,
providing benefits beyond those covered in the defined contribution plans; the
Company also maintains a 401(k) plan for certain non-union employees. Aggregate
defined contribution plan expenses were $0.5 million, $3.1 million and $2.4
million in 2002, 2001 and 2000, respectively.
The Company has non-contributory defined benefit pension plans for certain
employees in Germany and other locations outside the United States, acquired in
connection with the acquisition of dmc2 in 2001. The Company also has other
postretirement benefit plans, primarily health care and life insurance for
certain employees in the
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
United States. Components of plan obligations and assets of continuing
operations at December 31 are as follows:
PENSION
OTHER
BENEFITS
------------------2002
2001
---------------
POSTRETIREMENT
BENEFITS
--------------------2002
2001
-----------------
Benefit obligation at beginning of year....... $(34,747) $
0
$(2,648)
$(1,937)
Service cost..................................
(1,596)
(491)
(166)
(111)
Interest cost.................................
(2,597)
(905)
(208)
(160)
Participant contributions.....................
(34)
(44)
Actuarial (loss) gain.........................
(9,524)
570
(435)
359
Benefits paid.................................
773
494
90
106
Plan amendments...............................
99
Curtailment...................................
399
Currency translation adjustments..............
(5,538)
Acquisitions..................................
(34,415)
(960)
--------------------------Benefit obligation at end of year.............
(53,229)
(34,747)
(3,002)
(2,648)
--------------------------Fair value of plan assets at beginning of
year........................................
4,643
0
0
0
Actual return on plan assets..................
(220)
(8)
Employer contributions........................
886
346
56
62
Participant contributions.....................
34
44
Acquisitions..................................
4,799
Benefits paid.................................
(773)
(494)
(90)
(106)
--------------------------Fair value of plan assets at end of year......
4,536
4,643
0
0
--------------------------Benefit obligations in excess of plan
assets......................................
(48,693)
(30,104)
(3,002)
(2,648)
Unamortized:
Net loss (gain).............................
10,845
(60)
846
394
Prior service cost..........................
(312)
82
197
270
--------------------------Accrued benefit cost.......................... $(38,160) $(30,082)
$(1,959)
$(1,984)
========
========
=======
=======
Amounts recorded in the balance sheet consist
of:
Accrued liability........................... $(42,248) $(30,082)
$(1,959)
$(1,984)
Accumulated other comprehensive income......
4,088
-----------------------------Total.................................... $(38,160) $(30,082)
$(1,959)
$(1,984)
========
========
=======
=======
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $52.4 million, $44.6 million and $3.4 million, respectively,
as of December 31, 2002 and $34.7 million, $28.2 million and $4.6 million,
respectively, as of December 31, 2001.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The components of net periodic benefit cost for the years ended December 31 are
as follows:
PENSION BENEFITS
----------------2002
2001
------------Service cost................................................
Interest cost...............................................
Amortization of unrecognized net (gain) loss................
Expected return on plan assets..............................
----------$3,961
$1,335
======
======
$1,596
2,597
(16)
(216)
$
491
905
13
(74)
OTHER POSTRETIREMENT
BENEFITS
---------------------2002
2001
2000
-------------Service cost................................................
Interest cost...............................................
Net amortization............................................
Curtailment gain............................................
----------$ 31
$270
$246
=====
====
====
$ 166
208
(2)
(341)
$111
160
(1)
$100
146
In 2002, as a result of workforce reductions in connection with its
restructuring program, the Company recorded a curtailment gain of $0.3 million
related to Other Postretirement Benefits.
Actuarial assumptions used in the calculation of the recorded amounts are as
follows:
2002
----
2001
----
Discount rate -- Plans in the United States.................
Discount rate -- Plans outside the United States............
Return on pension plan assets...............................
Rate of compensation increase...............................
Projected health care cost trend rate.......................
Ultimate health care trend rate.............................
Year ultimate health care trend rate is achieved............
6.75%
6.00%
9.00%
2.75%
7.00%
5.50%
2006
7.00%
7.00%
9.00%
2.75%
7.50%
5.50%
2006
For determination of 2003 expense, the expected return on plan assets has been
reduced to 8.75%.
Assumed health care cost trend rates have a significant effect on the amounts
reported for other postretirement benefits. A one percentage point change in the
assumed health care cost trend rate would have the following effect:
1% INCREASE
-----------
1% DECREASE
-----------
2002 benefit cost...........................................
Recorded liability at December 31, 2002.....................
$101
$648
K. STOCKHOLDERS' EQUITY
In 1996, the Company's Board of Directors adopted a Stockholder Rights
Agreement. Under this plan, rights were constructively distributed as a dividend
at the rate of one right for each outstanding share of common stock of the
Company. The rights become exercisable if a person or group (Acquiring Person)
acquires or attempts to acquire 15% or more of the outstanding shares of the
Company's common stock. In the event that the rights become exercisable, each
right (except for rights beneficially owned by the Acquiring Person, which
become null
39
$ 88
$491
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
and void) would entitle the holder to purchase one one-hundredth share of Series
A Participating Preferred Stock at an initial purchase price of $160 per share,
subject to adjustment.
If a person or group acquires the threshold percentage of common stock, each
right will entitle the holder, other than the acquiring party, to buy shares of
common stock or Preferred Stock having a market value of twice the exercise
price. If the Company is acquired in a merger or other business combination,
each right will entitle the holder, other than the acquiring person, to purchase
securities of the surviving company having a market value equal to twice the
exercise price of the rights.
The Rights may be redeemed by the Board of Directors in whole, but not in part,
at a price of $0.01 per Right. The Rights have no voting or dividend privileges
and are attached to, and do not trade separately from, the common stock. The
Rights expire on November 14, 2006.
On January 25, 2002, the Company completed its secondary offering of 4.025
million shares of common stock. The net offering proceeds of $225.8 million were
used to repay outstanding indebtedness under the Company's credit facilities.
L. OTHER COMPREHENSIVE LOSS
The following lists the beginning balance, yearly activity and ending balance of
each component of accumulated other comprehensive loss, net of related taxes:
ADDITIONAL
FOREIGN
CURRENCY
TRANSLATION
-----------
ACCUMULATED
FAIR VALUE
ADJUSTMENTS
-----------
MINIMUM
PENSION
LIABILITY
----------
OTHER
COMPREHENSIVE
LOSS
-------------
Balance January 1, 2000...............
$(1,837)
$
0
$
0
Foreign currency.................
(2,130)
------------------------Balance December 31, 2000.............
(3,967)
0
0
Cumulative effect of accounting
change -- SFAS No. 133.........
(1,558)
Unrealized gain on
available-for-sale
securities.....................
1,243
Cash flow hedges.................
(3,410)
Additional minimum pension
liability......................
(3,465)
Foreign currency.................
4,794
------------------------Balance December 31, 2001.............
827
(3,725)
(3,465)
Unrealized loss on
available-for-sale securities,
net of reclassification........
(1,243)
Cash flow hedges, net of
reclassification...............
10,348
Additional minimum pension
liability......................
(4,792)
Foreign currency.................
4,058
------------------------Balance December 31, 2002.............
$ 4,885
$ 5,380
$(8,257)
=======
=======
=======
=======
During 2002, losses of $5.5 million ($3.6 million after-tax) related to
available-for-sale securities were reclassified into results of operations upon
sale. Also during 2002, gains of $5.3 million ($3.4 million after-tax) related
to cash flow hedges were reclassified into results of operations.
40
$(1,837)
(2,130)
(3,967)
(1,558)
1,243
(3,410)
(3,465)
4,794
(6,363)
(1,243)
10,348
(4,792)
4,058
$ 2,008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
M. EARNINGS PER SHARE
The following table sets forth the computation of net income (loss) per common
share and net income (loss) per common share -- assuming dilution:
YEAR ENDED DECEMBER 31
------------------------------2002
2001
2000
--------------------Net income (loss).................................. $(327,911)
$75,640
=========
=======
=======
Weighted average shares outstanding................
28,037
24,021
Dilutive effect of stock options...................
-446
--------------------Weighted average shares outstanding -- assuming
dilution.........................................
28,037
24,467
=========
=======
=======
Net income (loss) per common share................. $ (11.69)
$ 3.15
=========
=======
=======
Net income (loss) per common share -- assuming
dilution......................................... $ (11.69)
$ 3.09
=========
=======
=======
$71,500
23,843
408
24,251
$
$
2.99
2.95
All outstanding stock options at December 31, 2002 (see Note N) are
antidilutive.
N. STOCK PLANS
The Company's 2002 Incentive Plan authorizes the grant of options to management
personnel of up to 1,400,000 shares, with a limit of 200,000 shares to a single
individual in any year. The Plan also limits the total number of shares subject
to the Plan that may be granted in the form of restricted stock. The Company's
1995 Non-Employee Directors' Equity Compensation Plan has also authorized the
grant of options to non-employee members of the Board of Directors for up to
250,000 shares of the Company's common stock. All options granted have 10-year
terms and vest and become fully exercisable at the end of the next fiscal year
following the year of grant.
A summary of the Company's stock option activity, and related information
follows:
2002
-------------------WEIGHTED
AVERAGE
EXERCISE
OPTIONS
PRICE
----------------
2001
-------------------WEIGHTED
AVERAGE
EXERCISE
OPTIONS
PRICE
----------------
2000
-------------------WEIGHTED
AVERAGE
EXERCISE
OPTIONS
PRICE
----------------
Outstanding at January 1..... 1,725,045
$37.53
1,850,263
$30.33
Granted....................
54,700
62.83
265,276
57.33
Exercised..................
(183,184)
20.81
(390,494)
16.48
---------------------------------------Outstanding at December 31... 1,596,561
$40.31
1,725,045
$37.53
Exercisable at end of year... 1,541,861
1,472,933
Weighted-average fair value
of options granted during
the year...................
$38.23
$15.69
1,725,862
398,251
(273,850)
$25.83
46.22
24.87
1,850,263
1,462,763
$30.33
$13.69
The weighted-average remaining contractual life of options outstanding is
approximately six years.
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2002:
OUTSTANDING
EXERCISABLE
----------------------------------------------------WEIGHTED
AVERAGE
WEIGHTED
WEIGHTED
REMAINING
AVERAGE
AVERAGE
NUMBER OF
CONTRACTUAL
EXERCISE
NUMBER OF
EXERCISE
SHARES
LIFE
PRICE
SHARES
PRICE
----------------------------------------Range of exercise prices:
$5.04 -- $13.00................
$17.31 -- $29.96...............
$35.06 -- $66.45...............
92,526
215,182
1,288,853
1.9
4.0
7.5
$12.82
$23.62
$45.08
92,526
215,182
1,234,153
$12.82
$23.62
$44.29
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, Accounting for Stock Based Compensation, and has been
determined as if the Company had accounted for its employee and non-employee
stock options under the fair value method of that Statement. The fair value of
these options was estimated at the date of grant using a Black-Scholes options
pricing model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31
---------------------2002
2001
2000
---------Risk-free interest rate.....................................
Dividend yield..............................................
Volatility factor of Company common stock...................
Weighted-average expected option life (years)...............
5.0%
-.67
5
5.0%
1.2%
.24
5
6.0%
1.2%
.25
5
During 2002, the Company granted 28,000 shares of restricted stock to a certain
executive officer. The restricted shares will vest in equal increments over a
seven-year period beginning on April 30, 2003. The market value of the
restricted stock award was $1.9 million and has been recorded as a separate
component of stockholders' equity. During 2001, the Company granted 65,000
shares of restricted stock to certain executive officers. The restricted shares
vest in equal increments over a three-year period beginning December 31, 2002.
The market value of the restricted stock award was $3.8 million and has been
recorded as a separate component of stockholders' equity. During 2002, 45,000
shares of restricted stock were forfeited. Results of operations include
compensation expense (after-tax) related to restricted stock grants of $0.5
million, $0.2 million and $0.1 million for the years ended December 31, 2002,
2001 and 2000, respectively.
O. COMMITMENTS AND CONTINGENCIES
The Company has a supply agreement with La Generale des Carriers et des Mines
(Gecamines) to purchase all of the concentrate produced by the Luiswishi mine in
Shaba, Democratic Republic of Congo (DRC). During December 2002, the Luiswishi
mine was shut-down indefinitely. Annual production capacity at this facility is
estimated to contain approximately 4,500 metric tons of cobalt and 4,500 metric
tons of copper. The cost of the cobalt and copper obtained is based upon the
prevailing market price as material is processed. While the length of the
shut-down period cannot be predicted, management does not believe that it will
lead to an inability of the Company to obtain sufficient feedstock from other
sources for its cobalt and copper operations.
The Company previously had an agreement with Weda Bay Minerals, Inc. (Weda)
which provided for the Company to contribute financing up to $18 million, to
complete a bankable feasibility study for the development of the Halmahera
Island, Indonesia (Halmera) nickel and cobalt laterite deposits. The Company had
agreed to purchase all future production at Halmera, which Weda estimated would
yield approximately 30,000 tons of nickel and 3,000 tons of cobalt annually. In
the fourth quarter of 2002, in connection with its restructuring program (see
Note B), the Company decided that it would no longer contribute to the financing
of this project and terminated its agreement with Weda. This action resulted in
an other-than-temporary decline in the value of this investment, and as a
result, the carrying value of Company's equity investment in Weda was
written-off in 2002 as part of the fourth quarter restructuring charge.
The Company is a party to various legal proceedings incidental to its business
and is subject to a variety of environmental and pollution control laws and
regulations in the jurisdictions in which it operates. As is the case with other
companies in similar industries, the Company faces exposure from actual or
potential claims and legal proceedings involving environmental matters. Although
it is difficult to quantify the potential impact of compliance with or liability
under environmental protection laws, management believes that the ultimate
aggregate cost to the Company of environmental remediation, as well as other
legal proceedings arising out of operations in the normal course of business,
will not result in a material adverse effect upon its financial condition or
results of operations.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
In October 2002, the Company was mentioned in a report issued by a United
Nations panel focusing on companies and individuals operating in the Democratic
Republic of Congo (DRC) and their alleged "exploitation of the natural resources
and other forms of wealth of the DRC". OM Group is not among the companies cited
for financial sanctions in the report. As noted in the report, the Company's
business in the DRC is comprised of a smelter plant, which is 55%-owned through
a joint venture (Groupement Pour Le Traitement Du Terril De Lubumbashi) with the
DRC state mining company (Gecamines) and a third party; as well as contractual
arrangements and discussions with Gecamines and the third party with respect to
the joint venture partners' rights to various feedstocks related to the smelter
project. While the ultimate impact of this report cannot be determined at this
time, management believes that this matter will not result in a material adverse
effect upon the Company's financial condition or results of operations.
In November 2002, the Company received notice that shareholder class action
lawsuits were filed against it related to the decline in the Company's stock
price after the third quarter 2002 earnings announcement. The lawsuits allege
virtually identical claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5 against the Company, certain executive
officers and the Board of Directors. Plaintiffs seek damages in an unspecified
amount to compensate persons who purchased the Company's stock between November
2001 and October 2002 at allegedly inflated market prices. While the ultimate
outcome of this litigation cannot be determined at this time, management
believes that these matters will not have a material adverse effect upon the
Company's financial condition or results of operations. In addition, the named
executive officers, the Board of Directors and the Company have Directors &
Officers and Corporate Liability Insurance available for such matters.
P. LEASE COMMITMENTS
The Company rents real property and equipment under long-term operating leases.
The Company's operating lease expense was $8.0 million in 2002, $4.1 million in
2001 and $3.5 million in 2000.
Future minimum payments under noncancellable operating leases at December 31,
2002 are as follows:
YEAR ENDING DECEMBER 31
----------------------2003........................................................
2004........................................................
2005........................................................
2006........................................................
2007........................................................
2008 and thereafter.........................................
------Total minimum lease payments................................
=======
$ 6,122
4,746
3,915
3,334
3,196
11,175
$32,488
The Company also enters into precious metal leases (primarily gold and silver)
which are consignment inventory arrangements under which banks provide the
Company with precious metals for a specified period for which the Company pays a
lease fee. The Company also leases out metals under similar arrangements to
customers. The amount of metal leases in at December 31, 2002 and 2001 was
$190.5 million and $276.1 million, respectively. The amount of metal leases out
at December 31, 2002 and 2001 was $50.8 million and $110.7 million,
respectively.
Q. REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in three segments: base metal chemistry, precious metal
chemistry and metal management. These industry segments correspond to
management's approach to aggregating products and business units, making
operating decisions and assessing performance. Major products included in each
segment and other information follows.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Base Metal Chemistry: Develops, processes, manufactures and markets specialty
chemicals, powders and related products from various base metals, with the most
widely used being cobalt, nickel and copper. The products produced are essential
components in chemical and industrial processes where they facilitate a chemical
or physical reaction and/or enhance the physical properties of end-products.
These products can be found in a variety of applications for catalysts,
coatings, colorants, hard metal tools, jet engines, lubricants, fuel and
petroleum additives, magnetic media, metal finishing agents, petrochemicals,
plastics, printed circuit boards, rechargeable batteries, stainless steel, super
alloys and tires. The products are sold in various forms such as solutions,
crystals, powders, cathodes and briquettes.
Precious Metal Chemistry: Develops, produces, and markets specialty chemicals
and related materials, predominantly from platinum group and precious metals
such as platinum, palladium, rhodium, gold and silver. This segment also offers
a variety of refining and processing services to users of precious metals. The
products of this segment are used in a variety of applications for automotive
catalysts, fuel cells and fuel processing catalysts, chemical catalysts,
electronics packaging, and electroplating products, jewelry and glass
manufacturing for high-definition televisions.
Metal Management: Operates as a metal sourcing operation for both the Company's
other segments and nonaffiliated customers, primarily procuring precious metals.
This segment centrally manages metal purchases and sales by providing the
necessary precious metal liquidity, financing and hedging for the Company's
other businesses.
Business segment information for continuing operations as of and for the years
ended December 31, 2002, 2001 and 2000 follows. In 2002, operating profit for
base metal chemistry and precious metal chemistry includes unusual charges of
$273.4 million and $17.1 million, respectively; Corporate expenses in 2002
include $26.8 million of unusual charges.
2002
2001
------------------(IN THOUSANDS)
2000
----------
BUSINESS SEGMENT INFORMATION
Net Sales
Base Metal Chemistry.................. $ 717,300
$ 662,642
$
Precious Metal Chemistry..............
1,527,437
584,861
Metal Management......................
2,865,318
1,110,516
Inter-segment.........................
(200,632)
(121,107)
---------------------------$4,909,423
$2,236,912
$ 726,676
==========
==========
==========
Operating profit (loss)
Base Metal Chemistry.................. $ (162,756)
$ 165,900
$
Precious Metal Chemistry..............
66,895
28,103
Metal Management......................
11,084
10,075
---------------------------(84,777)
204,078
154,003
Interest expense........................
(74,271)
(57,423)
Foreign exchange, investment income and
other, net............................
6,762
3,163
Corporate...............................
(52,524)
(23,688)
---------------------------Income (loss) from continuing operations
before income taxes, minority
interests, equity income and
extraordinary item.................... $ (204,810)
$ 126,130
$
==========
==========
==========
44
726,676
154,003
(35,829)
1,312
(19,943)
99,543
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31,
-----------------------2002
2001
------------------Total assets
Base Metal Chemistry.................. $1,139,906
Precious Metal Chemistry..............
920,948
Metal Management......................
117,797
Corporate.............................
50,445
Discontinued operations...............
110,040
------------------Total assets............................ $2,339,136
==========
==========
$1,354,525
842,841
101,718
18,856
207,998
$2,525,938
YEAR ENDED DECEMBER 31,
-------------------------------------2002
2001
2000
---------------------------Expenditures for property, plant &
equipment
Base Metal Chemistry.................. $
Precious Metal Chemistry..............
Corporate.............................
---------------------------Total expenditures for property, plant &
equipment............................. $
==========
==========
==========
Depreciation and amortization
Base Metal Chemistry.................. $
Precious Metal Chemistry..............
Metal Management......................
Corporate.............................
---------------------------Total depreciation and amortization..... $
==========
==========
==========
45
56,993
34,236
2,788
$
94,017
46,600
10,478
22
1,843
58,943
74,328
22,842
2,836
$
$
100,006
$
45,548
$
40,774
10,346
9
304
$
29,046
$
51,433
42,740
2,808
220
$
29,266
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
LONG-LIVED
NET SALES (1)
-------------
ASSETS
----------
GEOGRAPHIC REGION INFORMATION
2002
United States..........................................
Finland................................................
Germany................................................
Democratic Republic of the Congo.......................
Other..................................................
----------------$4,909,423
$654,158
==========
========
2001
United States..........................................
Finland................................................
Germany................................................
Democratic Republic of the Congo.......................
Other..................................................
----------------$2,236,912
$657,576
==========
========
2000
United States..........................................
Finland................................................
Other..................................................
---------$ 726,676
==========
$1,289,284
485,571
2,386,734
747,834
$
643,420
470,307
815,667
307,518
$
$ 52,029
293,546
87,993
122,351
98,239
$ 59,635
282,826
105,432
124,807
84,876
157,554
532,456
36,666
--------------(1) Net sales are attributed to the geographic area based on the location of the
manufacturing facility.
R. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
In December 2001, the Company issued $400 million in aggregate principal amount
of 9.25% Senior Subordinated Notes due 2011. These Notes are guaranteed by the
Company's wholly-owned domestic subsidiaries. The guarantees are full,
unconditional and joint and several.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The Company's foreign subsidiaries are not guarantors of these Notes. The
Company as presented below represents OM Group, Inc. exclusive of its guarantor
subsidiaries and its non-guarantor subsidiaries. Condensed consolidating
financial information for the Company, the guarantor subsidiaries, and the
non-guarantor subsidiaries is as follows:
DECEMBER 31, 2002
------------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
BALANCE SHEET DATA
---------------------------------
------------
Assets
Current assets:
Cash and cash
equivalents........... $
667
$
2,180
$
74,358
$
Accounts receivable......
752,800
103,417
649,618
$(1,146,433)
Inventories..............
70,538
615,064
Deferred income taxes and
other current
assets................
26,553
7,935
105,640
----------------------------------------------Total current assets.......
780,020
184,070
1,444,680
(1,146,433)
Property, plant and
equipment -- net.........
55,717
598,441
Goodwill and other
intangible assets........
136,099
61,915
Intercompany receivables...
300,768
1,146,191
(1,446,959)
Investment in
subsidiaries.............
655,822
544,000
1,247,474
(2,447,296)
Other assets...............
21,231
10,245
83,111
Assets of discontinued
operations...............
110,040
----------------------------------------------Total assets............... $1,757,841
$1,040,171
$4,581,812
$(5,040,688)
==========
==========
==========
===========
==========
Liabilities and
stockholders' equity
Current liabilities:
Current portion of longterm debt............. $
6,750
$
Short-term debt..........
$
24,347
Accounts payable.........
65,917
$ 392,588
439,303
$ (727,658)
Deferred income taxes....
(18,426)
(1,425)
36,978
Other accrued expenses...
10,745
10,481
174,413
----------------------------------------------Total current
liabilities..............
64,986
401,644
675,041
(727,658)
Long-term debt.............
1,187,650
Deferred income taxes......
35,320
(131)
39,470
Minority interests and
other long-term
liabilities..............
3,394
153,363
Intercompany payables......
557,894
1,230,175
(1,788,069)
Liabilities of discontinued
operations...............
36,172
Stockholders' equity.......
469,885
41,198
2,483,763
(2,524,961)
----------------------------------------------Total liabilities and
stockholders' equity..... $1,757,841
$1,040,171
$4,581,812
$(5,040,688)
==========
==========
==========
===========
==========
47
----------
77,205
359,402
685,602
140,128
1,262,337
654,158
198,014
114,587
110,040
$2,339,136
6,750
24,347
170,150
17,127
195,639
414,013
1,187,650
74,659
156,757
36,172
469,885
$2,339,136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2002
----------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
INCOME STATEMENT DATA
------------------------------Net sales....................
Cost of products sold........
Cost of goods
sold -- write-down of
inventories................
-------------------------(2,040)
273,262
Selling, general and
administrative expenses....
Restructuring and other
unusual charges............ $ 26,830
-------------------------Income (loss) from
operations.................
(26,830)
Interest expense.............
(77,271)
Foreign exchange gain........
819
Investment and other income,
net........................
15,024
-------------------------Income (loss) from continuing
operations before income
taxes, minority interests
and equity income..........
(88,258)
Income tax benefit...........
Minority interests...........
Equity in income of
affiliates.................
-------------------------Income (loss) from continuing
operations.................
(88,258)
Loss from discontinued
operations.................
-------------------------Net (loss) income............ $(88,258)
========
==========
==========
48
$1,432,745
1,378,702
$3,685,475
3,360,074
------------
----------
$(208,797)
(208,797)
$4,909,423
4,529,979
56,083
--------271,222
52,139
----------
108,222
54,760
191,068
245,828
45,007
---------
90,858
----------
162,695
(101,807)
(12,479)
8
(8,664)
(54,873)
1,452
99
---------
59,712
----------
(114,179)
--------(114,179)
(129,596)
--------$ (243,775)
=========
70,352
(70,352)
(137,301)
(74,271)
2,279
4,483
(2,373)
(17,844)
12,846
(204,810)
(17,844)
12,846
(1,497)
----------
(1,497)
4,122
(198,315)
(129,596)
---------$
4,122
==========
$
$ (327,911)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2002
--------------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
CASH FLOW DATA
---------------------------------Net cash (used in) provided
by operating
activities............... $
(59,752)
Investing activities:
Expenditures for property
plant and equipment -net...................
Acquisitions of
businesses............
(32,070)
Divestiture of
business..............
4,000
Sale of marketable
securities............
Investment in
nonconsolidated joint
ventures..............
(3,566)
------------------------Net cash used in investing
activities...............
(31,636)
Financing activities:
Dividend payments........
(11,899)
Long-term borrowings.....
99,510
Payments of short-term
debt..................
Payments of long-term
debt..................
(225,805)
Proceeds from exercise of
stock options.........
3,806
Proceeds from sale of
common shares.........
225,805
------------------------Net cash provided by (used
in) financing
activities...............
91,417
------------------------Cash provided by (used in)
continuing operations....
29
Cash used in discontinued
operations
Effect of exchange rate
changes on cash and cash
equivalents..............
------------------------Increase (decrease) in cash
and cash equivalents.....
29
Cash and cash equivalents
at beginning of the
year.....................
638
------------------------Cash and cash equivalents
at end of the year....... $
667
===========
========
========
49
$ 29,863
(5,528)
$ 57,620
(88,489)
------------
-----------
$
27,731
(94,017)
(32,070)
4,000
37,624
37,624
(3,566)
-------(5,528)
----------(50,865)
(88,029)
(11,899)
99,510
(12,552)
(12,552)
(225,805)
3,806
225,805
--------
-----------
--------
(12,552)
-----------
24,335
78,865
(5,797)
18,567
(25,161)
-------(826)
$
(25,161)
7,292
-----------
7,292
1,495
3,006
--------
72,863
-----------
2,180
========
$ 74,358
===========
698
76,507
$
77,205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2001
------------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
BALANCE SHEET DATA
---------------------------------
------------
Assets
Current assets:
Cash and cash
equivalents........... $
638
$
3,006
$
72,863
$
Marketable securities....
38,667
Accounts receivable......
710,495
80,508
482,816
$ (943,709)
Inventories..............
128,429
603,614
Deferred income taxes and
other current
assets................
23,265
22,380
105,571
----------------------------------------------Total current assets.......
734,398
234,323
1,303,531
(943,709)
Property, plant and
equipment -- net.........
61,234
596,342
Goodwill and other
intangible assets........
148,223
60,849
Intercompany receivables...
278,032
3,970
1,170,574
(1,452,576)
Investment in
subsidiaries.............
908,483
522,939
2,029,173
(3,460,595)
Other assets...............
18,127
20,357
84,265
Assets of discontinued
operations...............
207,998
----------------------------------------------Total assets............... $1,939,040
$1,199,044
$5,244,734
$(5,856,880)
==========
==========
==========
===========
==========
Liabilities and
Stockholders' Equity
Current liabilities:
Current portion of
long-term debt........ $
20,188
$
Short-term debt..........
$
32,397
Accounts payable.........
38,146
$ 357,363
359,124
$ (585,694)
Deferred income taxes....
46
1,208
72,462
Other accrued expenses...
11,071
15,345
74,588
----------------------------------------------Total current
liabilities..............
69,451
373,916
538,571
(585,694)
Long-term debt.............
1,300,507
Deferred income taxes......
(451)
(7,517)
76,817
Minority interests and
other long-term
liabilities..............
5,125
155,985
Intercompany payables......
514,121
2,035,655
(2,549,776)
Liabilities of discontinued
operations...............
29,695
Stockholders' equity.......
569,533
283,704
2,437,706
(2,721,410)
----------------------------------------------Total liabilities and
stockholders' equity..... $1,939,040
$1,199,044
$5,244,734
$(5,856,880)
==========
==========
==========
===========
==========
50
----------
76,507
38,667
330,110
732,043
151,216
1,328,543
657,576
209,072
122,749
207,998
$2,525,938
20,188
32,397
168,939
73,716
101,004
396,244
1,300,507
68,849
161,110
29,695
569,533
$2,525,938
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2001
------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
INCOME STATEMENT DATA
------------------------------Net sales.........................
$697,461
$1,940,514
Cost of products sold.............
650,038
1,670,866
----------------------------------------47,423
269,648
317,071
Selling, general and
administrative expenses.........
42,437
94,244
----------------------------------------Income from operations............
4,986
175,404
Interest expense.................. $(61,272)
(17,148)
(67,938)
Foreign exchange (loss) gain......
(289)
324
(229)
Investment and other income,
net.............................
21,873
903
69,516
----------------------------------------Income (loss) from continuing
operations before income taxes,
minority interests, equity
income and extraordinary item...
(39,688)
(10,935)
176,753
Income tax (benefit) expense......
(14,599)
12,297
34,047
Minority interests................
5,820
Equity in income of affiliates....
(1,876)
----------------------------------------Income (loss) from continuing
operations......................
(25,089)
(23,232)
138,762
Loss from discontinued
operations......................
(10,201)
Extraordinary item................
(4,600)
----------------------------------------Net (loss) income................. $(29,689)
$(33,433)
$ 138,762
========
========
==========
=========
==========
51
------------
----------
$(401,063)
(401,063)
$2,236,912
1,919,841
136,681
180,390
(57,423)
(194)
88,935
(88,935)
3,357
126,130
31,745
5,820
(1,876)
90,441
(10,201)
(4,600)
$
$
75,640
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2001
--------------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
CASH FLOW DATA
---------------------------------Net cash (used in) provided
by operating
activities............... $
(93,774)
Investing activities:
Expenditures for property
plant and equipment -net...................
Acquisitions of
businesses............
(1,168,423)
Divestiture of
businesses...............
525,473
------------------------Net cash used in investing
activities...............
(642,950)
Financing activities:
Dividend payments........
(12,494)
Long-term borrowings.....
1,648,751
Payments of long-term
debt..................
(900,000)
Purchase of treasury
stock.................
(5,331)
Proceeds from exercise of
stock options.........
6,435
------------------------Net cash provided by
financing activities.....
737,361
------------------------Cash provided by continuing
operations...............
637
Cash used in discontinued
operations...............
Effect of exchange rate
changes on cash and cash
equivalents..............
------------------------Increase in cash and cash
equivalents..............
637
Cash and cash equivalents
at beginning of the
year.....................
1
------------------------Cash and cash equivalents
at end of the year....... $
638
===========
========
========
52
$ 24,240
(9,317)
$131,165
(90,689)
21,766
------------
-----------
$
61,631
(100,006)
(1,146,657)
525,473
-------(9,317)
----------(68,923)
(721,190)
(12,494)
1,648,751
(900,000)
(5,331)
6,435
--------
-----------
--------
-----------
737,361
14,923
62,242
77,802
(13,189)
(49)
--------
$
(13,189)
(1,166)
-----------
(1,215)
1,685
61,076
63,398
1,321
--------
11,787
-----------
13,109
3,006
========
$ 72,863
===========
$
76,507
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2000
----------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
INCOME STATEMENT DATA
-------------------------------
------------
Net sales...........................
$185,811
$705,347
Cost of products sold...............
154,770
554,678
------------------------------------31,041
150,669
181,710
Selling, general and administrative
expenses..........................
26,933
20,717
------------------------------------Income from operations..............
4,108
129,952
Interest expense.................... $(37,352)
(15,966)
(28,095)
Foreign exchange (loss) gain........
(651)
(103)
(369)
Investment and other income, net....
22,630
212
25,177
------------------------------------Income (loss) from continuing
operations before income taxes....
(15,373)
(11,749)
126,665
Income tax (benefit) expense........
(5,795)
(7,063)
39,547
------------------------------------Income (loss) from continuing
operations........................
(9,578)
(4,686)
87,118
Loss from discontinued operations...
(1,354)
------------------------------------Net (loss) income................... $ (9,578)
$ (6,040)
$ 87,118
========
========
========
=========
========
53
--------
$(164,482)
(164,482)
$726,676
544,966
47,650
45,584
(45,584)
134,060
(35,829)
(1,123)
2,435
99,543
26,689
72,854
(1,354)
$
$ 71,500
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 2000
------------------------------------------------------------------COMBINED
COMBINED
THE
GUARANTOR
NON-GUARANTOR
COMPANY
SUBSIDIARIES
SUBSIDIARIES
ELIMINATIONS
TOTAL
CASH FLOW DATA
-------------------------------Net cash provided by operating
activities...................... $ 19,869
Investing activities:
Expenditures for property plant
and equipment -- net.........
Acquisitions of businesses......
(192,689)
---------------------Net cash (used in) provided by
investing activities............
(192,689)
Financing activities:
Dividend payments...............
(10,491)
Long-term borrowings............
223,750
Payments of long-term debt......
(37,600)
Purchase of treasury stock......
(9,650)
Proceeds from exercise of stock
options......................
6,811
---------------------Net cash provided by financing
activities......................
172,820
---------------------Cash provided by continuing
operations......................
Cash used in discontinued
operations......................
Effect of exchange rate changes on
cash and cash equivalents.......
---------------------Increase in cash and cash
equivalents.....................
Cash and cash equivalents at
beginning of the year...........
1
---------------------Cash and cash equivalents at end
of the year..................... $
1
=========
=======
========
54
$ 7,056
2,397
-----2,397
$ 54,032
(47,945)
------------
--------$
80,957
(45,548)
(192,689)
--------(47,945)
(238,237)
(10,491)
223,750
(37,600)
(9,650)
6,811
------
---------
------
---------
172,820
9,453
6,087
15,540
(8,819)
(89)
------
(8,819)
(1,916)
---------
(2,005)
545
4,171
4,716
776
------
7,616
---------
8,393
$ 1,321
======
$ 11,787
=========
$
13,109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
S. QUARTERLY DATA (UNAUDITED)
QUARTER ENDED
----------------------------------------------------------------------------MARCH 31
JUNE 30
SEPTEMBER 30
DECEMBER 31
----------------------------------------------------------------2002
Net sales..............
Gross profit...........
Income (loss) from
continuing
operations...........
Net income (loss)......
Basic net income (loss)
per common share:
Income (loss) from
continuing
operations........
Net income (loss)....
Diluted net income
(loss) per common
share:
Income (loss) from
continuing
operations........
Net income (loss)....
Market price:
high-low.............
Dividends paid per
share................
2001
Net sales..............
Gross profit...........
Income (loss) from
continuing
operations...........
Net income.............
Basic net income per
common share:
Income from
continuing
operations........
Net income...........
Diluted net income per
common share:
Income from
continuing
operations........
Net income...........
Market price:
high-low.............
Dividends paid per
share................
55
$1,159,152
110,989
$1,228,796
121,332
24,670
23,368
30,048
25,501
$1,324,845
9,251
(68,081)
(71,166)
$1,196,630
29,650
(184,952)
(305,614)
$0.91
$0.86
$1.06
$0.90
$(2.41)
$(2.52)
$(6.53)
$(10.78)
$0.89
$0.85
$1.05
$0.89
$(2.41)
$(2.52)
$(6.53)
$(10.78)
$61.000-$72.300
$61.860-$73.000
$42.600-$62.750
$43.500-$4.060
$0.14
$0.14
$0.14
$--
$197,244
53,252
$181,957
54,554
$803,542
97,024
$1,054,169
112,241
19,513
19,632
20,404
20,165
27,221
20,474
23,303
15,369
$0.82
$0.82
$0.85
$0.84
$1.13
$0.85
$0.97
$0.64
$0.80
$0.81
$0.83
$0.83
$1.11
$0.84
$0.95
$0.63
$55.200-$46.250
$63.980-$49.400
$66.700-$49.000
$67.000-$54.000
$0.13
$0.13
$0.13
$0.13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
In the fourth quarter of 2002, the Board of Directors voted to suspend the
Company's quarterly cash dividend indefinitely.
In the fourth quarter of 2002, the Company recorded restructuring and other
unusual charges related to continuing operations of $209.1 million. See Note B.
In the third quarter of 2002, the Company recorded a charge of $108.2 million to
write-down inventories to the lower of cost or market. See Note E.
In the fourth quarter of 2001, the Company recorded an extraordinary charge of
$4.6 million after-tax ($0.19 per diluted share) related to the early
extinguishment of debt.
In the third quarter of 2001, the Company acquired dmc2 for a purchase price of
$1.102 billion. See Note D.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no such changes or disagreements.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of the Company contained under the heading
"Election of Directors" in the Company's Proxy Statement for the annual meeting
of stockholders to be held on May 6, 2003, is incorporated herein by reference.
For information with respect to the executive officers of the Company, see
"Executive Officers of the Company" in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation contained under the headings
"Committees and Meetings of the Board of Directors" and "Executive Compensation"
in the Company's Proxy Statement for the annual meeting of stockholders to be
held on May 6, 2003, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership set forth under the heading
"Security Ownership of Directors, Officers and Certain Beneficial Owners" in the
Company's Proxy Statement for the annual meeting of stockholders to be held on
May 6, 2003, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to the related transactions set forth under the heading
"Related Party Transactions" in the Company's Proxy Statement for the annual
meeting of stockholders to be held on May 6, 2003, is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) within 90 days prior to the
filing date of this Form 10-K. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of the most recent evaluation, including corrective actions with regard to
significant deficiencies and material weaknesses.
57
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of the Company are included
in Part II Item 8:
(1) The following Consolidated Financial Statements of OM Group, Inc.
are filed as a separate section of this report:
Consolidated Balance Sheets at December 31, 2002 and
2001 -- page 22.
Statements of Consolidated Operations for the years ended
December 31, 2002, 2001 and 2000 -- page 23.
Statements of Consolidated Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 -- page 24.
Statements of Consolidated Cash Flows for the years ended
December 31, 2002, 2001 and 2000 -- page 25.
Notes to Consolidated Financial Statements -- pages 26 through
56.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are either not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3) Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Annual Report on Form
10-K:
(3) Articles of Incorporation and By-laws
3.1
Amended and Restated Certificate of Incorporation of the
Company
3.2
Amended and Restated Bylaws of the Company
++
++
(4) Instruments defining rights of security holders, including
indentures
4.1
Form of Common Stock Certificate of the Company
4.2
Stockholder Rights Agreement dated as of November 5, 1996
between OM Group, Inc. and National City Bank (incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 (No. 333-84128) filed on March 11,
2002).
4.3
Indenture, dated as of December 12, 2001, among OM Group,
Inc., the Guarantors (as defined therein) and The Bank of
New York, as Trustee (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1/A
(No. 333-74566) filed on January 14, 2002).
4.4
Purchase Agreement, dated as of December 7, 2001, among OM
Group, Inc., the Guarantors (as defined therein) and Credit
Suisse First Boston Corporation, as the representatives of
the Several Purchasers (as defined therein) (incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-1/A (No. 333-74566) filed on January 14,
2002).
4.5
Registration Rights Agreement, dated as of December 12,
2001, among OM Group, Inc., the Guarantors (as defined
therein) and Credit Suisse First Boston Corporation, as the
representatives of the Several Purchasers (as defined
therein) (incorporated by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-1/A (No.
333-74566) filed on January 14, 2002).
58
++
4.6
Amended and Restated Credit Agreement, dated as of August
10, 2001, among OM Group, Inc., and OMG AG & Co. KG as
borrowers; the lending institutions named therein as
lenders; Credit Suisse First Boston as a lender, the
syndication agent, joint book running manager and a joint
lead arranger; National City Bank as a lender, the swingline
lender, letter of credit issuer, administrative agent,
collateral agent, joint book running manager and a joint
lead arranger; and ABN Amro Bank N.V., Credit Lyonnais, New
York Branch, and KeyBank National Association, each as a
lender and documentation agent (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by
reference).
4.7
Second Amended and Restated Credit Agreement, dated as of
June 28, 2002, among OM Group, Inc., and OMG AG & Co. KG as
borrowers; the lending institutions named therein as
lenders; Credit Suisse First Boston as a lender, the
syndication agent, joint book running manager and a joint
lead arranger; National City Bank as a lender, the swingline
lender, letter of credit issuer, administrative agent,
collateral agent, joint book running manager and a joint
lead arranger; and ABN Amro Bank N.V., Credit Lyonnais, New
York Branch, and KeyBank National Association, each as a
lender and documentation agent (filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 and incorporated herein by reference).
4.8
Amendment No. 1 to Second Amended and Restated Credit
Agreement, dated as of December 9, 2002, among OM Group,
Inc., and OMG AG & Co. KG as borrowers; the lending
institutions named therein as lenders; Credit Suisse First
Boston as a lender, the syndication agent, joint book
running manager and a joint lead arranger; National City
Bank as a lender, the swingline lender, letter of credit
issuer, administrative agent, collateral agent, joint book
running manager and a joint lead arranger; and ABN Amro Bank
N.V., Credit Lyonnais, New York Branch, and KeyBank National
Association, each as a lender and documentation agent.
(10) Material Contracts
10.1
Technology Agreement among Outokumpu Oy, Outokumpu
++
Engineering Contractors Oy, Outokumpu Research Oy, Outokumpu
Harjavalta Metals Oy and Kokkola Chemicals Oy dated March
24, 1993.
*10.2
OM Group, Inc. Long-Term Incentive Compensation Plan.
++
*10.3
Amendment to OM Group, Inc. Long-Term Incentive Compensation
Plan (filed as Exhibit 99(b) to the Company's Registration
Statement on Form S-8 filed on February 1, 1994, and
incorporated herein by reference).
*10.4
Amendment to OM Group, Inc. Long-Term Incentive Compensation
Plan (filed as Exhibit 99 to the OM Group, Inc. Form S-8
Registration Statement filed on July 3, 1996, and
incorporated herein by reference).
*10.5
Mooney Chemicals, Inc. Welfare Benefit Plan.
++
*10.6
Mooney Chemicals, Inc. Profit Sharing Plan.
++
*10.7
Amendment to Mooney Chemicals, Inc. Profit Sharing Plan.
++
*10.8
OMG/Mooney Chemicals, Inc. Employee Profit Sharing Plan, as
amended (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-4 (No. 333-84128)
filed on March 11, 2002).
*10.9
OM Group, Inc. Benefit Restoration Plan, effective January
1, 1995 (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-4 (No. 333-84128)
filed on March 11, 2002).
*10.10
Trust under OM Group, Inc. Benefit Restoration Plan,
effective January 1, 1995 (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form S-4 (No. 333-84128) filed on March 11, 2002).
59
*10.11
Amendment to OMG Americas, Inc. Profit-Sharing Plan (filed
as Exhibit 99 to the OM Group, Inc. Form S-8 Registration
Statement filed on July 3, 1996, and incorporated herein by
reference).
10.12
OM Group, Inc. Non-employee Director's Equity Compensation
Plan (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-4 (No. 333-84128)
filed on March 11, 2002).
*10.13
OM Group, Inc. Bonus Program for Key Executives and Middle
Management.
*10.14
Employment Agreement between Mooney Acquisition Corporation
and James P. Mooney dated September 30, 1991.
*10.15
Amendment to Employment Agreement between OM Group, Inc. and
James P. Mooney dated August 19, 1992.
*10.16
Employment Agreement between OM Group, Inc. and Michael J.
Scott (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-4 (No. 333-84128)
filed on March 11, 2002).
+10.17
Joint Venture Agreement among OMG B.V., Groupe George
Forrest S.A., La Generale Des Carrieres Et Des Mines and OM
Group, Inc. to partially or totally process the slag located
in the site of Lubumbashi, Democratic Republic of the Congo
(filed as Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and
incorporated herein by reference).
+10.18
Agreement for Sale of concentrate production between Kokkola
Chemicals Oy and La Generale Des Carriers Et Des Mines dated
April 21, 1997 (filed as Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 and incorporated herein by reference).
+10.19
Long term Slag Sales Agreement between La Generale Des
Carriers Et Des Mines and J.V. Groupement Pour Le Traitement
Du Terril De Lubumbashi (filed as an annex to Exhibit 10.33
of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated herein by
reference).
+10.20
Long Term Cobalt Alloy Sales Agreement between J.V.
Groupement Pour Le Traitement Du Terril De Lubumbashi and
OMG Kokkola Chemicals Oy (filed as an annex to Exhibit 10.33
of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated herein by
reference).
+10.21
Tolling Agreement between Groupement Pour Le Traitement Du
Terril De Lubumbashi and Societe De Traitement Due Terril De
Lubumbashi (filed as an annex to Exhibit 10.33 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated herein by
reference).
*10.22
OM Group, Inc. 1998 Long-Term Incentive Compensation Plan
(filed as Exhibit 10.31 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).
*10.23
Employment Agreement between OM Group, Inc. and Edward W.
Kissel dated June 1, 1999 (filed as Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and incorporated herein by
reference).
10.24
Lease agreement between Outokumpu Harjavalta Metals Oy and
Outokumpu Nickel Oy (filed as Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 and incorporated herein by reference).
10.25
Purchase Agreement (as amended and restated) as of August
10, 2001 by and between dmc2 Degussa Metals Catalysts Cerdec
AG, Degussa AG and OM Group, Inc. (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on August 24, 2001).
60
++
++
++
10.26
Heads of Agreement as of April 23, 2001 between OM Group,
Inc. and Ferro Corporation (incorporated by reference to
Exhibit 2.2. to the Company's Current Report on Form 8-K
filed on August 24, 2001).
10.27
OMG-Ferro Purchase Agreement dated as of August 31, 2001 by
and between OM Group, Inc. and Ferro Corporation
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on September 21, 2001).
*10.28
Employment Agreement between OM Group, Inc. and Thomas R.
Miklich dated May 1, 2002 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 and incorporated herein by reference).
*10.29
Amendment to Employment Agreement between OM Group, Inc. and
James P. Mooney dated December 20, 2002.
*10.30
Amendment to Employment Agreement between OM Group, Inc. and
Thomas R. Miklich dated December 1, 2002.
*
Indicates a management contract, executive compensation plan
or arrangement.
+
Portions of Exhibit have been omitted and filed separately
with the Securities and Exchange Commission in reliance on
Rule 24b-2 and the Company's request for confidential
treatment.
++
These documents were filed as exhibits to the Company's Form
S-1 Registration Statement (Registration No. 33-60444) which
became effective on October 12, 1993, and are incorporated
herein by reference.
(12) Computation of Ratio of Earnings to Fixed Charges
(21) List of Subsidiaries
(23) Consent of Ernst & Young LLP
(24) Powers of Attorney
(b) There were no reports on Form 8-K filed by the Company during the three
months ended December 31, 2002.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
OM GROUP, INC.
By: /s/ James P. Mooney
-----------------------------------James P. Mooney
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE
---------
TITLE
-----
DATE
----
/s/ James P. Mooney*
Chairman and Chief Executive Officer
-----------------------------------------James P. Mooney
March 24, 2003
/s/ Markku Toivanen*
Director
-----------------------------------------Markku Toivanen
March 24, 2003
/s/ Lee R. Brodeur*
Director
-----------------------------------------Lee R. Brodeur
March 24, 2003
/s/ William J. Reidy*
Director
-----------------------------------------William J. Reidy
March 24, 2003
/s/ John E. Mooney*
Director
-----------------------------------------John E. Mooney
March 24, 2003
/s/ Frank Butler*
Director
-----------------------------------------Frank Butler
March 24, 2003
/s/ Katharine L. Plourde*
Director
-----------------------------------------Katharine L. Plourde
March 24, 2003
/s/ Thomas R. Miklich*
Chief Financial Officer (Principal
-----------------------------------------Financial and Accounting Officer)
Thomas R. Miklich
March 24, 2003
/s/ James P. Mooney
-----------------------------------------James P. Mooney
Attorney-in-Fact
March 24, 2003
* James P. Mooney, by signing his name hereto signs this document on behalf of
each of the persons so indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
62
MANAGEMENT CERTIFICATION -- PRINCIPAL EXECUTIVE OFFICER
I, James P. Mooney, certify that:
1. I have reviewed this annual report on Form 10-K of OM Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
March 24, 2003
/s/ James P. Mooney
--------------------------------------------------------James P. Mooney
Chairman and Chief Executive Officer
63
MANAGEMENT CERTIFICATION -- PRINCIPAL FINANCIAL OFFICER
I, Thomas R. Miklich, certify that:
1. I have reviewed this annual report on Form 10-K of OM Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
March 24, 2003
/s/ Thomas R. Miklich
--------------------------------------------------------Thomas R. Miklich
Chief Financial Officer
64
Exhibit 4.8
AMENDMENT NO. 1 TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated
as of December 9, 2002, (this "AMENDMENT"), among the following:
(i) OM GROUP, INC., a Delaware corporation (herein, together with its
successors and assigns the "COMPANY" or a "BORROWER");
(ii) OMG AG & CO. KG, a partnership organized under the laws of the federal
Republic of Germany (herein, together with its successors and assigns, "OMG AG"
or a "BORROWER");
(iii) the Lenders party hereto; and
(iv) NATIONAL CITY BANK, as the administrative agent (in such capacity, the
"ADMINISTRATIVE AGENT"), and the collateral agent (in such capacity, the
"COLLATERAL AGENT") for the Lenders.
PRELIMINARY STATEMENTS:
(1) The Company, OMG AG, the Lenders named therein, the Administrative
Agent, the Collateral Agent and the other parties thereto entered into the
Second Amended and Restated Credit Agreement, dated as of June 28, 2002 (the
"CREDIT AGREEMENT"; with the terms defined therein being used herein as so
defined).
(2) The parties hereto desire to amend certain terms of the Credit
Agreement, as more fully set forth below.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. AMENDMENT TO DEFINITIONS.
1.1 AMENDMENT TO DEFINITIONS. Effective on the Amendment Effective
Date provided for in section 5 hereof, the following definitions in section 1.1
of the Credit Agreement are hereby amended and restated in their entirety to
read as follows:
"COMMITMENT" shall mean, with respect to any Lender, the aggregate of its
Term C Commitment, if any, its Incremental Term Loan Commitment, if any,
its Revolving Commitment, if any, and its Swing Line Commitment, if any.
"CONSOLIDATED EBITDA" shall mean, for any period, Consolidated Net Income
for such period; PLUS (A) the sum of the amounts for such period included
in determining such Consolidated Net Income of (i) Consolidated Interest
Expense, (ii) Consolidated Income Tax Expense, (iii) Consolidated
Depreciation Expense, (iv) Consolidated Amortization Expense, (v) non-cash
losses and charges which are properly classified as extraordinary or
non-recurring (including, without limitation, non-recurring fees, expenses
and costs relating to the Transaction), and
(vi) non-cash charges associated with FAS 142 and FAS 144 and restructuring
charges taken for the fiscal quarters of the Company ending December 31,
2002 and March 31, 2003 up to a maximum aggregate amount of $335,000,000
(provided that the cash component of such restructuring charges paid by the
Company and its Subsidiaries, whether paid in the fiscal quarter ending
December 31, 2002 or thereafter, shall not exceed $43,000,000); LESS (B)
gains on sales of assets and other extraordinary gains and other
non-recurring non-cash gains, EXCEPT that in computing Consolidated Net
Income for purposes of this definition, there shall be excluded therefrom
(x) the income (or loss) of any entity (other than Subsidiaries of the
Company) in which the Company or any of its Subsidiaries has a joint or
minority interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Subsidiaries
during such period, and (y) the income of any Subsidiary of the Company to
the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time
permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary.
"CONSOLIDATED NET WORTH" shall mean at any time for the determination
thereof all amounts which, in conformity with GAAP, would be included under
the caption "total stockholders' equity" (or any like caption) on a
consolidated balance sheet of the Company as at such date, PLUS non-cash
charges associated with FAS 142 and FAS 144 and restructuring charges taken
for the fiscal quarters of the Company ending December 31, 2002 and March
31, 2003, up to a maximum aggregate amount of $335,000,000 (provided that
the cash component of such restructuring charges paid by the Company and it
Subsidiaries, whether paid in the fiscal quarter ending December 31, 2002
or thereafter, shall not exceed $43,000,000) PROVIDED that in no event
shall Consolidated Net Worth include any amounts in respect of Redeemable
Stock.
"CREDIT DOCUMENTS" shall mean this Agreement, the Notes, the Subsidiary
Guaranty, the Security Documents, any Letter of Credit Document, any
Incremental Term Loan Assumption Agreement, any Additional Security
Document and any other security agreement, pledge agreement, guaranty
agreement or other agreement executed in connection with the Existing
Credit Agreement or this Agreement and each other agreement, certificate,
document or instrument delivered in connection with any Credit Document,
whether or not specifically mentioned therein or herein.
"EUROCURRENCY RATE" shall mean with respect to each Interest Period for a
Eurocurrency Loan, the greater of (1) 1.75% per annum or (2) the rate
determined by the following methods: (A) either (i) the rate per annum for
deposits in Dollars or in Euros for a maturity most nearly comparable to
such Interest Period which appears on page 3740 or 3750, as applicable, of
the Dow Jones Telerate Screen as of 11:00 A.M. (local time at the Notice
Office) on the date which is two Business Days prior to the commencement of
such Interest Period, or (ii) if such a rate does not appear on such a
page, an interest rate per annum equal to the average (rounded to the
nearest ten thousandth of 1% per annum, if such average
2
is not such a multiple) of the rate per annum at which deposits in Dollars
or in Euros are offered to each of the Reference Banks by prime banks in
the London interbank Eurocurrency market for deposits of amounts in same
day funds comparable to the outstanding principal amount of the
Eurocurrency Loan for which an interest rate is then being determined with
maturities comparable to the Interest Period to be applicable to such
Eurocurrency Loan, determined as of 11:00 A.M. (London time) on the date
which is two Business Days prior to the commencement of such Interest
Period, in each case divided (and rounded to the nearest ten thousandth of
1%) by (B) a percentage equal to 100% minus the then stated maximum rate of
all reserve requirements (including, without limitation, any marginal,
emergency, supplemental, special or other reserves) applicable to any
member bank of the Federal Reserve System in respect of Eurocurrency
liabilities as defined in Regulation D (or any successor category of
liabilities under Regulation D); PROVIDED, HOWEVER, that in the event that
the rate referred to in clause (i) above is not available at any such time
for any reason, then the rate referred to in clause (i) shall instead be
the average (rounded to the nearest ten thousandth of 1%) of the rates at
which U.S. dollar deposits of $5,000,000 are offered to the Reference Banks
in the London interbank market at approximately 11:00 a.m. (London time),
two Business Days prior to the commencement of such Interest Period, for
contracts which would be entered into at the commencement of such Interest
Period.
"INCREMENTAL TERM LOAN MATURITY DATE" shall mean April 1, 2006, or such
earlier date on which the Incremental Term Loan Commitment is terminated.
"INCREMENTAL TERM LOAN REPAYMENT DATE" shall mean each April 1, July 1,
October 1 or January 1, beginning on April 1, 2003, and ending on the
Incremental Term Loan Maturity Date.
"PERMITTED ACQUISITIONS" [Intentionally omitted]
"TERM C MATURITY DATE" shall mean April 1, 2006, or such earlier date on
which the Total Term C Commitment is terminated.
1.2 ADDITIONAL DEFINED TERMS. Effective on the Amendment Effective
Date, section 1.1 of the Credit Agreement is hereby amended by adding the
following defined terms in appropriate alphabetical order:
"ADDITIONAL SUBSIDIARY GUARANTORS" shall have the meaning provided in
Amendment No. 1.
"AMENDMENT NO. 1" shall mean Amendment No. 1 to Second Amended and Restated
Credit Agreement, dated as of December 9, 2002, among the Borrowers, the
Administrative Agent, the Collateral Agent and the Lenders party thereto.
"AMENDMENT EFFECTIVE DATE" shall have the meaning provided in Amendment No.
1.
3
"CONSOLIDATED TOTAL SENIOR DEBT" shall mean the sum (without duplication)
of all Indebtedness (other than Indebtedness described in clause (x) of the
definition thereof) of the Company and each of its Subsidiaries other than
(i) Subordinated Indebtedness and (ii) Indebtedness incurred pursuant to
section 9.4(g), all as determined on a consolidated basis, PLUS all
obligations of the Receivables Subsidiary under the Permitted Receivables
Program.
"INCREMENTAL TERM NOTE" shall have the meaning provided in Amendment No. 1.
"LIQUIDITY RESERVE" shall mean $50,000,000.
"NEW SECURITY AGREEMENT" shall have the meaning provided in Amendment
No. 1.
SECTION 2. AMENDMENT TO COMMITMENTS AND REPAYMENTS.
2.1 DECREASE IN REVOLVING COMMITMENTS; ESTABLISHMENT OF INCREMENTAL
TERM LOAN COMMITMENTS. Effective on the Amendment Effective Date, Annex I to the
Credit Agreement is hereby amended and restated in its entirety as set forth in
Annex I hereto. On the Amendment Effective Date, each Lender with an Incremental
Term Loan Commitment will make an Incremental Term Loan to the Company in an
amount equal to its Incremental Term Loan Commitment by converting an equal
principal amount of its outstanding Revolving Loans into Incremental Term Loans,
and the Revolving Commitment shall be permanently reduced by an equal amount.
The Company will execute and deliver to each Incremental Term Lender on the
Amendment Effective Date a promissory note (each, an "INCREMENTAL TERM NOTE")
evidencing such Lender's Incremental Term Loans to the Company and maturing on
the Incremental Term Loan Maturity Date. The Incremental Term Loans shall be
repayable in equal quarterly installments of $250,000 on each Incremental Term
Loan Repayment Date, with a final payment on the Incremental Term Loan Maturity
Date in an amount equal to the remaining principal amount of Incremental Term
Loans then outstanding. The Administrative Agent and each Incremental Term Loan
Lender agrees that this Amendment shall evidence an "INCREMENTAL TERM LOAN
ASSUMPTION AGREEMENT" as defined in the Credit Agreement.
2.2 REVOLVING FACILITY CHANGES. Effective on the Amendment Effective
Date, section 2.1(b) of the Credit Agreement is hereby amended and restated in
its entirety as follows:
(b) REVOLVING FACILITY. Prior to the Closing Date, Existing Lenders have
made loans to the Company which are outstanding as "Revolving Loans"
pursuant to the Existing Credit Agreement. Thereafter, all Loans under the
Revolving Facility (each a "REVOLVING LOAN" and, collectively, the
"REVOLVING LOANS"): (i) may be incurred by any Borrower, at any time and
from time to time on and after the Closing Date and prior to the date the
Total Revolving Commitment expires or is terminated; (ii) except as
otherwise provided, may, at the option of the applicable Borrower be
incurred and maintained, as, or Converted into, Revolving Loans which are
Prime Rate Loans or Eurocurrency Loans, in each case denominated in Dollars
or Euros, PROVIDED that all Revolving Loans made as part of the same
Revolving Borrowing shall, unless otherwise specifically
4
provided herein, consist of Revolving Loans of the same Type and currency,
and provided, further, that Foreign Borrowers may borrow Revolving Loans
denominated only in Euros, and provided, further, the aggregate principal
amount of Revolving Loans denominated in Euros shall not exceed at any time
outstanding the Alternative Currency Sublimit; (iii) may be repaid or
prepaid and reborrowed in accordance with the provisions hereof; (iv) may
only be made if after giving effect thereto the Unutilized Total Revolving
Commitment exceeds the outstanding Swing Line Loans; and (v) shall not
exceed for any Lender at any time outstanding that aggregate principal
amount which, when added to the sum of (i) such Lender's Swing Line
Exposure PLUS (2) the product at such time of (A) such Lender's Revolving
Facility Percentage, TIMES (B) the aggregate Letter of Credit Outstandings,
equals the Revolving Commitment of such Lender at such time, PROVIDED THAT
the Unutilized Total Revolving Commitment may not at any time be less than
the Liquidity Reserve without the consent of each of (x) Non-Defaulting
Lenders whose outstanding Revolving Loans and Unutilized Revolving
Commitments constitute at least 66-2/3% of the sum of the total outstanding
Revolving Loans and the Unutilized Revolving Commitments of Non-Defaulting
Lenders, (y) Non-Defaulting Lenders whose outstanding Term C Loans
constitute at least 66-2/3% of the sum of the total outstanding Term C
Loans of Non-Defaulting Lenders and (z) Non-Defaulting Lenders whose
outstanding Incremental Term Loans constitute at least 66-2/3% of the sum
of the total outstanding Incremental Term Loans of Non-Defaulting Lenders.
2.3 INCREMENTAL TERM LOANS. Effective on the Amendment Effective Date,
section 2.1(f)(i) of the Credit Agreement is hereby amended by amending and
restating the second and third sentences thereof in their entirety as follows:
Such notice shall set forth (i) the amount of the Incremental Term Loan
Commitments being requested (which shall be in minimum increments of
$5,000,000 and a minimum amount of $10,000,000 or equal to the remaining
Incremental Term Loan Amount), (ii) the date on which such Incremental Term
Loan Commitments are requested to become effective, (iii) whether such
Incremental Term Loan Commitments are to be Term C Commitments or
commitments to make Term Loans with terms different from the Term C Loans
("OTHER TERM LOANS"), and (iv) whether such Incremental Term Loan
Commitments may be funded by converting the outstanding principal amount of
any outstanding Loans into Other Term Loans. In the event that any Lender's
Commitment would be increased thereby, such Lender may in its sole
discretion agree or decline to provide Incremental Term Loan Commitments.
2.4 PRICING CHANGES. Effective on the Amendment Effective Date,
section 2.7(g) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
(g) INTEREST RATE MARGINS. As used herein the terms "APPLICABLE PRIME RATE
MARGIN" and "APPLICABLE EUROCURRENCY MARGIN" shall mean the applicable
rates determined in accordance with the following provisions. From and
after the Amendment Effective Date through June 30, 2003, (i) the
Applicable Prime Rate Margin for Term C Loans and Incremental Term Loans
will be 400 basis points
5
per annum, and the Applicable Eurocurrency Margin for Term C Loans and
Incremental Term Loans will be 500 basis points per annum and (ii) the
Applicable Prime Rate Margin for Revolving Loans and Swing Line Loans will
be 400 basis points per annum, and the Applicable Eurocurrency Margin for
Revolving Loans will be 500 basis points per annum. On March 31, 2003, the
Applicable Prime Rate Margin for all Loans and the Applicable Eurocurrency
Margin for all Loans will in each case increase by 25 basis points per
annum if by such date the Company has not delivered fully executed letters
of intent with respect to proposed Asset Sales which would result in Net
Cash Proceeds to the Company of at least $350,000,000. On July 1, 2003, the
Applicable Prime Rate Margin for all Loans and the Applicable Eurocurrency
Margin for all Loans will in each case increase by 50 basis points per
annum, and on the first day of each fiscal quarter of the Company
thereafter beginning on October 1, 2003, the Applicable Prime Rate Margin
for all Loans and the Applicable Eurocurrency Margin for all Loans will in
each case increase by an additional 25 basis points per annum, up to
maximum Applicable Prime Rate Margin of 500 basis points per annum and a
maximum Applicable Eurocurrency Margin of 600 basis points per annum;
PROVIDED, HOWEVER, that notwithstanding any of the foregoing to the
contrary, the Applicable Prime Rate Margin for all Loans will be 350 basis
points per annum and the Applicable Eurocurrency Margin for all Loans will
be 450 basis points per annum on and after the date the Company has
received Net Cash Proceeds from Asset Sales (cumulative from and after the
Amendment Effective Date) of at least $425,000,000 and such Net Cash
Proceeds have been applied to a prepayment of the Loans, allocated pursuant
to the provisions of section 5.2(g), but only if after giving effect to
such Asset Sales and such repayment the Company would be compliance with
each of the financial covenants contained in sections 9.7, 9.8, 9.9 and
9.10, inclusive, on a pro forma basis after giving effect thereto. The
Applicable Commitment Fee Rate for Revolving Loans will be 50 basis points
per annum at all times from and after the Amendment Effective Date.
2.5 LETTER OF CREDIT SUBLIMIT. Effective on the Amendment Effective
Date, section 3.1(b) of the Credit Agreement is hereby amended by deleting the
reference to "$50,000,000" in clause (i)(x) thereof and replacing it with
"$10,000,000".
SECTION 3. AMENDMENTS TO COVENANTS AND OTHER PROVISIONS.
3.1 REPORTING REQUIREMENTS; MONTHLY REPORTS. Effective on the
Amendment Effective Date, section 8.1(b) of the Credit Agreement is hereby
amended by inserting "(i)" immediately after "(b)" and before the title
"QUARTERLY FINANCIAL STATEMENTS" and by adding an additional subsection (ii) as
follows:
(ii) MONTHLY FINANCIAL STATEMENTS. (A) As soon as available and in any
event within 30 days after the close of each of the first two monthly
accounting periods in each fiscal quarter of the Company, the unaudited
consolidated balance sheets of the Company and its consolidated
Subsidiaries as at the end of such monthly period and the related unaudited
consolidated statements of income of cash flows and retained earnings for
such monthly period and/or for the fiscal year to date, and (B) within 30
days after the close of each of the monthly
6
accounting periods in each fiscal quarter of the Company: (1) a schedule of
all outstanding metal leases, detailing the maturity or expiration date of
each such metal lease and whether any lessor under such metal leases has
provided notice, written or otherwise, to the Company or any of its
Subsidiaries that it does not intend to renew or extend any metal lease at
the expiration of the current term and (2) a description of Asset Sales
completed and the individual and cumulative Net Cash Proceeds therefrom,
all in form and substance satisfactory to the Joint Lead Arrangers, and all
of which shall be certified on behalf of the Company by the Chief Financial
Officer or other Authorized Officer of the Company, subject to changes
resulting from normal year-end audit adjustments; PROVIDED, HOWEVER that no
Lender that is precluded from receiving any material non-public information
in respect of the Company pursuant to paragraph (b)(1) of the Regulation FD
under the Securities Act of 1933, as amended, shall be entitled to receive
such monthly financial statements, and any Lender accepting such monthly
financial statements shall be deemed to represent and warrant to the
Company and the Administrative Agent, by such acceptance, that it is not
precluded from receiving any material non-public information in respect of
the Company pursuant to paragraph (b)(1) of Regulation FD under the
Securities Act of 1933, as amended.
3.2 13-WEEK FORECASTS. Effective on the Amendment Effective Date,
section 8.1(d) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
(d) BUDGETS AND FORECASTS; 13-WEEK FORECASTS.
(i) BUDGETS AND FORECASTS. Not later than 60 days following the
commencement of any fiscal year of the Company and its Subsidiaries, a
consolidated budget in reasonable detail for each of the four fiscal
quarters of such fiscal year, as customarily prepared by management for its
internal use, setting forth the forecasted balance sheet, income statement,
operating cash flows and capital expenditures of the Company and its
Subsidiaries for the period covered thereby.
(ii) 13-WEEK FORECASTS. Not later than 5:00 p.m. on the first Business Day
of each second week, beginning on December 16, 2002, the Company's and its
Subsidiaries' forecast of cash receipts and disbursements for the ensuing
13-week period; PROVIDED, HOWEVER, that no Lender that is precluded from
receiving any material non-public information in respect of the Company
pursuant to paragraph (b)(1) of the Regulation FD under the Securities Act
of 1933, as amended, shall be entitled to receive such monthly financial
statements, and any Lender accepting such monthly financial statements
shall be deemed to represent and warrant to the Company and the
Administrative Agent, by such acceptance, that it is not precluded from
receiving any material non-public information in respect of the Company
pursuant to paragraph (b)(1) of Regulation FD under the Securities Act of
1933, as amended.
3.3 Effective on the Amendment Date, a new subsection (m) is added to
section 5.2 of the Credit Agreement as follows:
7
(m) RIGHT OF TERM C LENDERS TO FOREGO CERTAIN MANDATORY PREPAYMENTS. Unless
at such time (after giving effect to any other contemporaneous payments) there
are no Incremental Term Loans outstanding, each Term C Lender shall have the
right to forego the application to its Term C Loans of any mandatory prepayment
of its Term C Loans required to be made pursuant to section 5.2(g) hereof (any
such proposed mandatory prepayment, a "PROPOSED REJECTABLE PREPAYMENT"), in
accordance with the following provisions:
(i) The Administrative Agent shall, on or prior to 3:00 P.M. (local
time at the Notice Office) on the date it receives immediately available
funds from the Borrower in respect of a prepayment of Loans which is in
whole or in part a Proposed Rejectable Prepayment, give each Term C Lender
written or telephonic notice of (A) the amount of such prepayment and (B)
such Term C Lender's right to forego the application to its Term C Loans of
its ratable portion of such prepayment, which notice shall request such
Term C Lender to confirm to the Administrative Agent whether or not it
wishes to forego such application to its Term C Loans.
(ii) If any Term C Lender so indicates its desire to forego such
application to the prepayment of its Term C Loans by giving the
Administrative Agent written or telephone notice to such effect by 5:00
P.M. (local time at the Notice Office) no later than the third Business Day
after the date such Term C Lender receives such written or telephone notice
from the Administrative Agent, the amount of the applicable prepayment
which otherwise would have been applied to its Term C Loans shall,
notwithstanding anything to the contrary contained in this section 5.2, be
applied instead to the prepayment of other Term Loans, and after no Term
Loans are outstanding, to the prepayment of the Revolving Loans, all such
prepayments to be made in accordance with any other applicable provisions
of this section 5.2.
(iii) The Administrative Agent may act without liability upon the
basis of any such telephone notice or written notice believed by the
Administrative Agent in good faith to be from an authorized representative
of a Term C Lender. In the case of each such telephone notice, the
Administrative Agent's record of the terms of such telephonic notice shall
be conclusive absent manifest error.
(iv) Any Term C Lender which does not respond to the Administrative
Agent within the time period specified above to a notice from the
Administrative Agent requesting it to confirm whether or not its wishes to
exercise its right to forego the application of its portion of such
prepayment to its Term C Loans pursuant to this section 5.2(m) shall be
deemed to have waived such right to forego such application.
(v) Notwithstanding anything to the contrary contained in this
Agreement, the Administrative Agent may defer, until the next Business Day,
the distribution to the Lenders of any portion of any prepayment of Loans
received by the Administrative Agent pursuant to section 5.2(g), as to
which the Administrative Agent is determining whether or not the Term C
Lenders wish to exercise their rights under this section 5.2(m).
3.4 ASSET SALE REQUIREMENT. Effective on the Amendment Effective Date,
a new section 8.17 is hereby added to the Credit Agreement as follows:
8
8.17 ASSET SALES/EQUITY PROCEEDS. After the Amendment Effective Date and on
or by the dates as provided below, the Company shall (i) sell or cause its
Subsidiaries to sell, property, land, buildings, the entire capital stock
of any Subsidiary or otherwise dispose of assets or (ii) issue equity
securities (other than Redeemable Stock), generating (A) on or by June 30,
2003, cumulative gross proceeds to the Company of such Asset Sales and
equity issuances of at least $75,000,000 (less reasonable fees, expenses
and taxes paid to non-Affiliates) and (B) on or by December 31, 2003,
cumulative Net Cash Proceeds to the Company from such Asset Sales and
equity issuances of at least $425,000,000. The Net Cash Proceeds generated
from such Asset Sales or equity issuances shall be applied to a prepayment
of the Loans, allocated in accordance with the provisions of section 5.2,
and to the installments thereof in inverse order.
3.5 CONSOLIDATION, MERGER, ACQUISITIONS, ASSET SALES. Effective on the
Amendment Effective Date, sections 9.2(a), 9.2(c), 9.2(d) and 9.2(g) of the
Credit Agreement are hereby each amended and restated in its entirety to read as
follows:
(a) CERTAIN INTERCOMPANY MERGERS, ETC. If no Default or Event of Default
shall have occurred and be continuing or would result therefrom,
(i) the merger, consolidation or amalgamation of any Subsidiary (other
than any Subsidiary party to the New Security Agreement) of the Company
with or into the Company, PROVIDED the Company is the surviving or
continuing or resulting corporation;
(ii) the merger, consolidation or amalgamation of any Domestic
Subsidiary of the Company (other than any Domestic Subsidiary party to the
New Security Agreement) with or into another Domestic Subsidiary of the
Company, PROVIDED that the surviving or continuing or resulting corporation
is a Domestic Subsidiary of the Company which is a Subsidiary Guarantor and
a Wholly-Owned Subsidiary of the Company;
(iii) the merger, consolidation or amalgamation of any Foreign
Subsidiary of the Company (other than any which is a Borrower hereunder or
any which is a party to the New Security Agreement) with or into another
Foreign Subsidiary of the Company, PROVIDED that the surviving or
continuing or resulting corporation is a Wholly-Owned Subsidiary of the
Company;
(iv) the liquidation, winding up or dissolution of (x) any
Wholly-Owned Subsidiary of the Company (other than any Subsidiary party to
the New Security Agreement); or (y) any other Subsidiary of the Company in
an Asset Sale permitted under section 9.2(d); and
(v) the transfer or other disposition of any property by the Company
to any Wholly-Owned Subsidiary or by any Subsidiary (other than any
Subsidiary party to the New Security Agreement) to the Company or any other
Wholly-Owned Subsidiary of the Company, regardless of whether such
intercompany transaction
9
would constitute an Asset Sale of the Company, regardless of whether such
intercompany transaction would constitute an Asset Sale.
(c) ACQUISITIONS. [Intentionally omitted].
(d) PERMITTED DISPOSITIONS. If no Default or Event of Default shall have
occurred and be continuing or would result therefrom, from the Amendment
Effective Date through and including December 31, 2003, the Company or any
of its Subsidiaries may (i) sell any property, land or building (including
any related receivables or other intangible assets) to any Person which is
not a Subsidiary of the Company, or (ii) sell the entire capital stock (or
other equity interests) and Indebtedness of any Subsidiary owned by the
Company or any other Subsidiary to any Person which is not a Subsidiary of
the Company, or (iii) permit any Subsidiary to be merged or consolidated
with a Person which is not an Affiliate of the Company, or (iv) consummate
any other Asset Sale with a Person who is not a Subsidiary of the Company;
PROVIDED that:
(A) the consideration for such transaction represents fair value
(as determined by management of the Company), and at least 80% of such
consideration consists of cash;
(B) without the written consent of the Required Lenders, the
cumulative aggregate consideration for all such transactions completed
during such time period does not exceed $150,000,000;
(C) in the case of any such transaction involving consideration
in excess of $25,000,000, at least five Business Days prior to the
date of completion of such transaction the Company shall have
delivered to the Administrative Agent an officer's certificate
executed on behalf of the Company by an Authorized Officer of the
Company, which certificate shall (1) contain a description of the
proposed transaction, the date such transaction is scheduled to be
consummated, the estimated purchase price or other consideration for
such transaction, (2) contain a certification that no Default or Event
of Default has occurred and is continuing, or would result from
consummation of such transaction, together with a demonstration (x)
that the Company would be in compliance with each of the financial
covenants contained in sections 9.7, 9.8, 9.9 and 9.10, inclusive, on
a pro forma basis after giving effect to such disposition and (y) the
ratio of Consolidated Total Senior Debt to Consolidated EBITDA, on a
pro forma basis after giving effect to such disposition, would not be
greater than such ratio prior to such disposition, and (3) include a
certified copy of the draft or definitive documentation pertaining
thereto; and
(D) contemporaneously with the completion of such transaction the
Company applies the proceeds therefrom to a prepayment of the Loans,
allocated in accordance with section 5.2 hereof.
10
(g) CAPITAL EXPENDITURES. The Company and its Subsidiaries shall be
permitted to make Consolidated Capital Expenditures up to the maximum
amounts for the periods set forth below:
======================================================================
FISCAL PERIOD ENDING
MAXIMUM CAPITAL
EXPENDITURES
======================================================================
December 31, 2002
$18,500,000
---------------------------------------------------------------------March 31, 2003
$22,500,000
---------------------------------------------------------------------June 30, 2003
$20,000,000
---------------------------------------------------------------------September 30, 2003
$16,000,000
---------------------------------------------------------------------December 31, 2003
$14,000,000
---------------------------------------------------------------------Fiscal Year 2003 (cumulative)
$65,000,000
---------------------------------------------------------------------Fiscal Year 2004 and each Fiscal Year thereafter
$60,000,000
======================================================================
PROVIDED, HOWEVER, that to the extent the Company and its Subsidiaries do not
make the maximum amount of permitted Consolidated Capital Expenditures in any
fiscal quarter above, any unused amounts may be expended in any subsequent
fiscal quarter, up to the maximum permitted amount for the relevant Fiscal Year.
3.6 ADVANCES, INVESTMENTS, LOANS AND GUARANTY OBLIGATIONS. Effective
on the Amendment Effective Date, section 9.5(a) is hereby amended and restated
in its entirety to read as follows: "(a) the Company or any of its Subsidiaries
may invest in cash and Cash Equivalents; PROVIDED, HOWEVER, that if as of the
end of any fiscal month of the Company, the aggregate balance of cash and Cash
Equivalents of the Company and its Subsidiaries exceeds $50,000,000, then the
Company shall apply any such excess to the Revolving Loans;" and section 9.5(o)
is hereby amended by deleting the reference to "$50,000,000" in the last line
therein and replacing it with "$40,000,000".
3.7 DIVIDENDS AND OTHER RESTRICTED PAYMENTS. Effective on the
Amendment Effective Date, sections 9.6(d) and 9.6(e) of the Credit Agreement are
hereby amended and restated in their entirety as follows:
(d) [INTENTIONALLY OMITTED.]
(e) [INTENTIONALLY OMITTED.]
3.8 FINANCIAL COVENANTS. (a) Effective on the Amendment Effective
Date, section 9.7 of the Credit Agreement is hereby amended and restated in its
entirety as follows:
9.7 (a) CONSOLIDATED TOTAL DEBT/CONSOLIDATED EBITDA RATIO. The Company will
not on the last day of any Testing Period indicated below permit the ratio
of (i) the amount of its Consolidated Total Debt at such time to (ii) its
Consolidated EBITDA for its Testing Period most recently ended, to exceed
the ratio specified below for such Testing Period:
11
======================================================================
TESTING PERIOD
RATIO
======================================================================
Testing Period ended December 31, 2002
5.50 to 1.00
---------------------------------------------------------------------Testing Period ended March 31, 2003
6.00 to 1.00
---------------------------------------------------------------------Testing Period ended June 30, 2003
6.50 to 1.00
---------------------------------------------------------------------Testing Period ended September 30, 2003
6.50 to 1.00
---------------------------------------------------------------------Testing Period ended December 31, 2003
6.00 to 1.00
---------------------------------------------------------------------Any Testing Period thereafter
3.25 to 1.00
======================================================================
(b) CONSOLIDATED TOTAL SENIOR DEBT/CONSOLIDATED EBITDA RATIO. The
Company will not on the last day of any Testing Period indicated below permit
the ratio of (i) the amount of its Consolidated Total Senior Debt at such time
to (ii) its Consolidated EBITDA for its Testing Period most recently ended, to
exceed the ratio specified below for such Testing Period:
======================================================================
TESTING PERIOD
RATIO
======================================================================
Testing Period ended December 31, 2002
3.75 to 1.00
---------------------------------------------------------------------Testing Period ended March 31, 2003
4.00 to 1.00
---------------------------------------------------------------------Testing Period ended June 30, 2003
4.25 to 1.00
---------------------------------------------------------------------Testing Period ended September 30, 2003
4.25 to 1.00
---------------------------------------------------------------------Testing Period ended December 31, 2003
2.25 to 1.00
---------------------------------------------------------------------Any Testing Period thereafter
2.00 to 1.00
======================================================================
(b) Effective on the Amendment Effective Date, section 9.8 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
9.8 CONSOLIDATED TOTAL DEBT/CONSOLIDATED TOTAL CAPITALIZATION RATIO. The
Company will not on the last day of any fiscal quarter indicated below
permit the ratio, expressed as a percentage, of (i) the amount of its
Consolidated Total Debt at such time to (ii) its Consolidated Total
Capital, to exceed the ratio specified below:
===================================================================
PERIOD
RATIO
===================================================================
December 31, 2002, March 31, 2003,
June 30, 2003, September 30,
65%
2003, December 31, 2003
------------------------------------------------------------------Any fiscal quarter thereafter
55%
===================================================================
(c) Effective on the Amendment Effective Date, section 9.10 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
12
9.10 INTEREST COVERAGE RATIO. The Company will not permit its Interest
Coverage Ratio for any Testing Period to be less than the ratio specified
below:
========================================================================
TESTING PERIOD
RATIO
========================================================================
Testing Period ended December 31, 2002
3.00 to 1.00
-----------------------------------------------------------------------Testing Period ended March 31, 2003
2.60 to 1.00
-----------------------------------------------------------------------Testing Period ended June 30, 2003
2.25 to 1.00
-----------------------------------------------------------------------Testing Period ended September 30, 2003
2.10 to 1.00
-----------------------------------------------------------------------Testing Period ended December 31, 2003
2.40 to 1.00
-----------------------------------------------------------------------Any Testing Period thereafter
3.50 to 1.00
========================================================================
3.9 Effective on the Amendment Effective Date, section 13.8(a) of the
Credit Agreement is hereby amended and restated in its entirety to read as
follows:
(a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER WILL EACH BE DEEMED TO
BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF
NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK) TO THE FULLEST EXTENT
PERMITTED BY LAW. EACH BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY
WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY JURISDICTION OTHER THAN THE
STATE OF NEW YORK GOVERNS THIS AGREEMENT OR ANY OF THE OTHER CREDIT
DOCUMENTS. Any legal action or proceeding with respect to this Agreement or
any other Credit Document may be brought in the Courts of the State of New
York or of the United States for the Southern District of New York, located
in New York County, New York, and, by execution and delivery of this
Agreement, each Borrower hereby irrevocably accepts for itself and in
respect of its property, generally and unconditionally, the jurisdiction of
the aforesaid courts. Each Borrower hereby further irrevocably consents to
the service of process out of any of the aforementioned courts in any such
action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to the Borrowers at their addresses for
notices pursuant to section 13.3, such service to become effective 30 days
after such mailing or at such earlier time as may be provided under
applicable law. Nothing herein shall affect the right of the Administrative
Agent or any Lender to serve process in any other manner permitted by law
or to commence legal proceedings or otherwise proceed against the Borrowers
in any other jurisdiction.
SECTION 4. ADDITIONAL COVENANTS AND AGREEMENTS.
4.1 ADDITIONAL PAYMENT. If as of the end of the Fiscal Year of the
Company ending on December 31, 2002 or December 31, 2003, the Company's ratio of
Consolidated Total
13
Debt to Consolidated EBITDA for and as of the end of such Fiscal Year exceeds
2.00 to 1.00, the Company shall, on or before the date on which the Company is
required to deliver the financial statements pursuant to section 8.1(a), in
addition to any payments required to be made pursuant to section 5.2(f) of the
Credit Agreement, make an additional payment of the Term Loans in an amount
equal to 25% of Excess Cash Flow for such Fiscal Year. Such payment shall be
allocated among the Term C Loans and the Incremental Term Loans PRO RATA, and
applied to the Scheduled Repayments and Incremental Term Loan installments
thereof in inverse order of their maturity.
4.2 ADDITIONAL SECURITY. Notwithstanding anything contained in
sections 8.11 or 8.12 of the Credit Agreement or elsewhere, in partial
consideration for the amendments and concessions provided in this Amendment, the
Company agrees that on or before January 2, 2003, the Company shall cause each
of OMG Bellville, Ltd., OMG Catalyst Canada, 1354950 Ontario Inc. and OMG UK
Ltd. (collectively, the "ADDITIONAL SUBSIDIARY GUARANTORS") to (i) deliver to
the Administrative Agent a Subsidiary Guaranty in form and substance
satisfactory to the Joint Lead Arrangers and (ii) grant to the Collateral Agent
for the benefit of the Secured Creditors (as defined in the Security Documents)
a valid and enforceable first priority perfected security interest, superior to
and prior to the rights of all third persons and subject to no other Lien, other
than Permitted Liens and other Liens as may be acceptable to the Administrative
Agent, in all real and personal tangible and intangible property of each of the
Additional Subsidiary Guarantors (except to the extent not required by the
Administrative Agent), such security interest to be granted pursuant to
Additional Security Documents satisfactory in form and substance to the
Administrative Agent, together with authorizing resolutions of the Board of
Directors (or the equivalent) of each of them, certified by the Secretary of
each such Person as duly adopted and in full force and effect, authorizing the
execution and delivery of such Subsidiary Guaranty and the Additional Security
Documents, together with such opinions of counsel as may be reasonably requested
by the Administrative Agent.
4.3 RELEASE OF COLLATERAL. Effective on the Amendment Effective Date,
the Collateral Agent is hereby authorized and directed to release from the Lien
of the Security Agreement executed in connection with the Existing Credit
Agreement the Collateral identified on Annex II hereto, and from time to time
thereafter, such additional Collateral as is required to be pledged pursuant to
the terms of the New Security Agreement (defined below). Effective on the
Amendment Effective Date, the Collateral Agent is authorized and directed to
enter into the security agreement in the form attached as Exhibit A hereto (as
amended, supplemented, amended and restated or otherwise modified from time to
time, the "NEW SECURITY AGREEMENT"), covering, among other things, the
Collateral identified on Annex II.
SECTION 5. BINDING EFFECT.
This Amendment shall become effective on and as of the date (the "AMENDMENT
EFFECTIVE DATE"), on or before December 9, 2002, on which the following
conditions are satisfied:
(a) this Amendment shall have been executed by each Borrower, the
Administrative Agent and the Collateral Agent, and counterparts hereof as
so executed shall have been delivered to the Administrative Agent;
14
(b) the Administrative Agent shall have been notified by the Required
Revolving Lenders, the Required Term C Loan Lenders and the Required
Incremental Term Lenders that such Lenders have executed this Amendment
(which notification may be by facsimile or other written confirmation of
such execution);
(c) the Company shall have executed and delivered to the
Administrative Agent for delivery to the respective Incremental Term
Lenders an Incremental Term Loan Note reflecting the Incremental Loans of
such Lender to the Company;
(d) the Company and each Subsidiary party thereto shall have executed
and delivered to the Administrative Agent, for the benefit of the Lenders,
the New Security Agreement and all filings deemed by the Administrative
Agent to be necessary or applicable thereunder shall have been executed and
delivered to the Administrative Agent by the applicable Credit Party;
(e) the Company shall have delivered to the Administrative Agent, for
the account of the Lenders, (i) certified resolutions of the Board of
Directors of the Company, approving the Incremental Term Loans and the
other matters covered by this Amendment and (ii) a certificate of a
responsible financial or accounting officer of the Company to the effect
that, as of the Amendment Effective Date, and both before and after giving
effect to the Incremental Term Loans, (x) the Company is in compliance with
all of the covenants contained in sections 8 and 9 of the Credit Agreement,
as amended hereby, (y) no Default or Event of Default has occurred and is
continuing, and (z) all representations and warranties of the Credit
Parties contained in the Credit Documents are true and correct in all
material respects as if made on the Amendment Effective Date;
(f) the Company shall have delivered to the Administrative Agent, for
the account of the Lenders, a written opinion of Squire, Sanders & Dempsey,
counsel for the Company, in form and substance satisfactory to the Joint
Lead Arrangers, covering such matters incident to the transactions
contemplated by this Amendment as the Joint Lead Arrangers may request;
(g) the Administrative Agent shall have received for the pro rata
account of each Consenting Lender (as defined below) a non-refundable
amendment fee (the "AMENDMENT FEE") equal to 0.50% of the amount of the
Commitment (after giving effect to this Amendment) of such Consenting
Lender. The Amendment Fee shall be payable only to each Lender that has
delivered (including by way of facsimile) its executed signature page to
this Amendment to the attention of RACHEL RAWSON AT JONES DAY, 901 LAKESIDE
AVENUE, CLEVELAND, OHIO 44114, FACSIMILE NUMBER, 216-579-0212, at or prior
to 5:00 p.m. (EST) on December 6, 2002 (each, a "CONSENTING LENDER") and
only in the event that the Amendment becomes effective in accordance with
the terms hereof and of the Credit Agreement.
(h) each Subsidiary Guarantor shall have delivered to the
Administrative Agent, for the benefit of the Lenders, an Acknowledgement
and Consent with respect to this Amendment.
15
The Administrative Agent shall notify the Borrowers and each Lender in
writing of the effectiveness hereof and of the Amendment Effective Date, and
will promptly furnish a copy of this Amendment to each Lender.
SECTION 6. RATIFICATIONS.
The terms and provisions set forth in this Amendment shall modify and
supersede all inconsistent terms and provisions set forth in the Credit
Agreement, and except as expressly modified and superseded by this Amendment,
the terms and provisions of the Credit Agreement are ratified and confirmed and
shall continue in full force and effect.
SECTION 7. REPRESENTATIONS AND WARRANTIES.
The Borrowers represent and warrant to the Lenders and the Administrative
Agent as follows:
(a) AUTHORIZATION, VALIDITY AND BINDING EFFECT. This Amendment has
been duly authorized by all necessary corporate action on the part of each
Borrower, has been duly executed and delivered by a duly authorized officer
or officers of each Borrower, and constitutes the valid and binding
agreement of each Borrower, enforceable against each Borrower in accordance
with its terms.
(b) REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The
representations and warranties of the Borrowers and each other Credit Party
contained in the Credit Agreement and each other Credit Document, as
amended hereby, are true and correct on and as of the date hereof as though
made on and as of the date hereof, except to the extent that such
representations and warranties expressly relate to a specified date, in
which case such representations and warranties are hereby reaffirmed as
true and correct as of the date when made.
(c) NO EVENT OF DEFAULT, ETC. No condition or event has occurred or
exists which constitutes or which, after notice or lapse of time or both,
would constitute a Default or an Event of Default.
(d) COMPLIANCE. The Company and each of its Subsidiaries is in full
compliance with all covenants and agreements contained in the Credit
Agreement, as amended hereby, and each of the other Credit Documents to
which they are a party, and without limitation of the foregoing, each
Subsidiary Guarantor of the Company which as of the date hereof is required
to be a Subsidiary Guarantor, has as on or prior to the date hereof become
a Subsidiary Guarantor under the Subsidiary Guaranty.
SECTION 8. AMENDMENT TO SUBSIDIARY GUARANTY, SECURITY AGREEMENT AND PLEDGE
AGREEMENT
8.1 AMENDMENT TO OTHER CREDIT DOCUMENTS. By their signatures below,
the Required Lenders hereby authorize and direct the Collateral Agent to execute
and deliver, on behalf of the Required Lenders, an amendment to each of the
Subsidiary Guaranty, the Security Agreement and the Pledge Agreement, to the
extent necessary to conform the governing law and
16
venue provisions thereof to the governing law and venue provisions in the Credit
Agreement, as amended by this Amendment.
SECTION 9. MISCELLANEOUS.
9.1 SUCCESSORS AND ASSIGNS. This amendment shall be binding upon and
inure to the benefit of the borrower, each lender and the administrative agent
and their respective permitted successors and assigns.
9.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Amendment shall survive the execution and delivery
of this Amendment, and no investigation by the Administrative Agent or any
Lender or any subsequent Loan or issuance of a Letter of Credit shall affect the
representations and warranties or the right of the Administrative Agent or any
Lender to rely upon them.
9.3 REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any and
all other agreements, instruments or documentation now or hereafter executed and
delivered pursuant to the terms of the Credit Agreement as amended hereby, are
hereby amended so that any reference therein to the Credit Agreement shall mean
a reference to the Credit Agreement as amended hereby.
9.4 EXPENSES. As provided in the Credit Agreement, but without
limiting any terms or provisions thereof, the Borrower agrees to pay on demand
all costs and expenses incurred by the Administrative Agent in connection with
the preparation, negotiation, and execution of this Amendment, including without
limitation the costs and fees of the Administrative Agent's special legal
counsel, regardless of whether this Amendment becomes effective in accordance
with the terms hereof, and all costs and expenses incurred by the Administrative
Agent or any Lender in connection with the enforcement or preservation of any
rights under the Credit Agreement, as amended hereby.
9.5 SEVERABILITY. Any term or provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the term or provision so held to be invalid or unenforceable.
9.6 APPLICABLE LAW. THIS AMENDMENT WILL BE DEEMED TO BE A CONTRACT
MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING
FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF
THE STATE OF NEW YORK).
9.7 HEADINGS. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
9.8 ENTIRE AGREEMENT. This Amendment is specifically limited to the
matters expressly set forth herein. This Amendment and all other instruments,
agreements and documentation executed and delivered in connection with this
Amendment embody the final, entire agreement among the parties hereto with
respect to the subject matter hereof and supersede any and all prior
commitments, agreements, representations and understandings, whether written or
oral, relating to the matters covered by this Amendment, and may not be
contradicted or
17
varied by evidence of prior, contemporaneous or subsequent oral agreements or
discussions of the parties hereto. There are no oral agreements among the
parties hereto relating to the subject matter hereof or any other subject matter
relating to the Credit Agreement.
9.9 JURY TRIAL WAIVER. EACH OF THE PARTIES TO THIS AMENDMENT HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AMENDMENT, THE OTHER CREDIT
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY HERETO
HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OR ANY OTHER
PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATION
IN THIS SECTION.
9.10 COUNTERPARTS. This Amendment may be executed by the parties
hereto separately in one or more counterparts, each of which when so executed
shall be deemed to be an original, but all of which when taken together shall
constitute one and the same agreement.
18
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered as
of the date first above written.
19
EXHIBIT 10.29
AMENDMENT
TO
EMPLOYMENT AGREEMENT
This Amendment to Employment Contract is made this 20 day of December,
2002 by and between OM Group, Inc. ("Employer") and James P. Mooney
("Executive").
WHEREAS, Executive and Employer, previously known as Mooney Acquisition
Corporation, entered into a certain employment agreement date September 20, 1991
(the "Agreement"); and
WHEREAS, the Agreement was amended on one occasion; and
WHEREAS, in order to secure the continued employment of the Executive
which the Company deems to be beneficial, the parties desire to amend the
Agreement again in certain respects;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree the Agreement is amended, effective as of
December 1, 2002, in the following respects.
1.
Paragraph (a) of Section 1 of the Agreement is hereby amended to
provide as follows:
(a)
SERVICES. For the term set forth in Section 1(b),
Executive shall serve as Chief Executive Officer of Employer. For as
long as Executive is so employed, he shall devote his full productive
time, energy, and abilities to his duties as Chief Executive Officer of
the Employer, except for incidental attention to the management of his
personal investments. Executive may serve on the board of directors of
other corporations or organizations so long as such participation does
not conflict with the interests or business of Employer or materially
interfere with the performance of his duties hereunder.
2.
Paragraph (b) of Section 1 of the Agreement is hereby amended to
provide as follows:
(b)
TERM. The Employer agrees to continue to employ Executive
and Executive agrees to continue to be employed by the Employer during
the term of the Agreement, subject to the provisions hereinafter set
forth. Unless terminated earlier as specifically provided herein, the
revised term of the Agreement shall commence December 1, 2002, and
continue until November 30, 2005; provided, however, that the Agreement
shall be renewed automatically for one additional 12-month period on
each anniversary of December 1, 2002 (an "Anniversary Date"), unless
either the Employer or Executive gives contrary written notice at least
six months prior an Anniversary Date. The revised term as renewed
pursuant to the above provisions shall be 36 months as of an
Anniversary Date.
3.
Paragraph (b) of Section 7 of the Agreement is hereby amended to
provide as follows:
(b)
TERMINATION WITHOUT CAUSE. If Employer terminates
Executive's employment without Cause, Employer shall pay Executive for
the number of months remaining under the term of the Agreement: (i)
100% of his current total annual monthly salary; and (ii) his "EARNED
BONUS". Executive's earned bonus shall equal his ESTIMATED ANNUAL
BONUS, as defined below, divided by 12 and then multiplied by the
number of months remaining under the term of the Agreement. Executive's
Estimated Annual Bonus shall equal the greater of (x) the average of
Executive's annual incentive bonus paid to Executive by Employer over
the most recent three years and (y) 75% of Executive's annual base
salary in effect on the date of termination. Payments made under this
Section 7(b) shall be payable during the term of the Agreement pursuant
to the payroll practices of Employer The healthcare, life insurance,
and nonqualified retirement benefits as well as the use of the car to
which Executive was entitled, or was accruing, on the date of such
termination shall be continued with respect to Executive for the period
during which payments are made to Executive pursuant to the above
provisions. Restricted stock granted to the Executive shall vest
immediately in the event of Termination by Employer without cause or by
Executive.
4.
Paragraph (d) of Section 7 of the Agreement is hereby amended to
provide as follows:
(d)
TERMINATION FOR DISABILITY. Employer shall have the right
to terminate Executive's Employment on or after the date Executive
incurs a Disability and such termination shall be treated as a
termination without cause, except that any payments received pursuant
to Section 7(b) shall be offset by any disability payments received
pursuant to any disability benefit plan maintained by Employer.
Disability for purposes of the Agreement shall mean a condition that
renders Executive unable (as determined by Employer in good faith,
based upon the opinion of a physician selected by Employer) to
regularly perform his duties hereunder by reason of illness or injury
for a period of more than six consecutive months.
5.
Section 7 of the Agreement is hereby amended by the addition of
Paragraph (e) at the end thereof to provide as follows:
(e)
TERMINATION BY REASON OF DEATH. In the event of
Executive's death while in the employ of Employer, Employer shall:
(i) pay Executive's designated beneficiary or if there is
no designated beneficiary, his estate, his base salary in effect on the
date of death for the period of the term of the Agreement;
-2-
(ii) pay Executive's designated beneficiary or if there
is no designated beneficiary, his estate, his earned bonus, determined
pursuant to the provisions of Section 7(b) for the year in which
Executive's death occurs;
(iii) make, or cause to be made, such payments and
benefits under Employer's welfare and pension plans with respect to
Executive pursuant to the terms of such plans; and
(iv) restricted stock granted to the Executive shall
vest immediately.
6.
Section 8 of the Agreement is hereby amended to provide as follows:
8.
RENEWAL. The Agreement shall be renewed pursuant to the
provisions of Section 1(b) above.
IN WITNESS WHEREOF, Employer has caused this Amendment to Employment
Agreement and Executive has executed this Amendment to Employment Agreement as
of the date first above written.
OM GROUP, INC
By:
--------------------------------Title:
APPROVED:
-----------------------------------Lee R. Brodeur
Chairman, Compensation Committee
-3-
EXECUTIVE
By:
--------------------------------
EXHIBIT 10.30
AMENDMENT
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT is made as of December 1, 2002
by and between OM GROUP, INC., a Delaware corporation ("Company"), and Thomas R.
Miklich, an individual ("Executive").
WHEREAS, the parties entered into a certain employment agreement dated
May 1, 2002 (the "Agreement"), with respect to the employment of the Executive
by the Company; and
WHEREAS, the Executive requested to have certain provisions of the
Agreement clarified or amended; and
WHEREAS, the Company is agreeable to making such revisions since it has
decided that the request is reasonable and that the continued services of the
Executive are beneficial to the Company;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree that the Agreement is hereby amended, effective
as of December 1, 2002, in the following respects:
1.
Section 1 of the Agreement is hereby amended to provide as
follows:
1.
EMPLOYMENT AND TERM. The Company agrees to employ
Executive and Executive agrees to be employed by the Company during the
term of the Agreement, subject to the provisions hereinafter set forth.
Unless terminated earlier as specifically provided herein, the initial
term of the Agreement shall commence on May 1, 2002 and continue until
November 30, 2005; provided, however, that the Agreement shall be
renewed automatically for one additional 12-month period on each
anniversary of December 1, 2002 (an "Anniversary Date"), unless either
the Company or Executive gives contrary written notice to the other
party at least six months prior to an Anniversary Date. The term of the
Agreement as renewed pursuant to the above provisions shall be 36
months as of an Anniversary Date.
2.
Paragraph (d) of Section 3 of the Agreement is hereby amended to
provide as follows:
(d)
RETIREMENT BENEFITS. Upon the termination of Executive's
employment without Cause (as hereinafter defined), Executive shall be
entitled to receive from the Company an annual amount equal to the
annual benefit that Executive would have been eligible to receive under
the supplemental executive retirement plan (in effect as of February 1,
2000) of his immediate prior employer (the "SERP"), including any
applicable Offsets as defined in the SERP, if: (a) he had remained
employed and covered by the SERP until the later of the term of the
Agreement, and (b) his Earnings (as defined under the SERP) with such
prior employer has increased at the rate of five percent per annum;
provided, however, that such amount shall be reduced by the actuarial
equivalent of any amounts which Executive is entitled to receive that
are: (i) attributable to Company Contributions (as defined in the OMG
Americas, Inc. Employees' Profit-Sharing Plan (the "PROFIT-SHARING
PLAN") or any successor thereto) made to the Profit-Sharing Plan, or
(ii) payable under the Benefit Restoration Plan or any other
supplemental pension or severance plan, program or arrangement
maintained by the Company. Actuarial equivalency for such purposes
shall be the applicable mortality rate and applicable interest rate
defined in Section 417(e)(3)(A)(ii) of the Internal Revenue Code of
1986, as amended. Notwithstanding the foregoing, in the event the
Company establishes a supplemental executive retirement plan in the
future, the Executive shall receive the greater of: (i) the benefit
described above, or (ii) the benefit under such newly established plan.
3.
Paragraph (b) of Section 4 of the Agreement is hereby amended to
provide as follows:
(b)
TERMINATION WITHOUT CAUSE OR BY EXECUTIVE. If the Company
terminates Executive's employment without Cause, the Company shall pay
Executive for the number of months remaining under the term of the
Agreement: (i) 100% of his total annual salary in effect on the date of
his termination; and (ii) his "EARNED BONUS". Executive's earned bonus
shall equal the ESTIMATED ANNUAL BONUS, as defined below, divided by 12
and then multiplied by the number of months remaining under the term
of the Agreement. The Estimated Annual Bonus shall equal the greater of
(x) the average of the Executive's annual incentive bonus paid to
Executive by the Company over the most recent three years or the length
of his employment, if less and (y) 75% of Executive's annual base
salary in effect on the date of termination. Payments made under this
Section 4(b) shall be payable during the term of the Agreement pursuant
to the payroll practices of the Company. If Executive resigns, the
Company shall pay Executive the amount determined under the above
provisions for twelve months provided that any such resignation occurs
on or after November 30, 2004. The healthcare, life insurance, and
nonqualified retirement benefits as well as the use of the car to which
Executive was entitled, or was accruing, on the date of any such
termination or resignation shall be continued with respect to Executive
for the period during which payments are made to the Executive pursuant
to the above provisions. Restricted stock granted to the Executive
shall vest immediately in the event of Termination by the Company
without cause or by Executive.
4.
Paragraph (d) of Section 4 of the Agreement is hereby amended to
provide as follows:
(d)
TERMINATION FOR DISABILITY. The Company shall have the
right to terminate Executive's employment on or after the date of
Executive incurs a
-2-
Disability, and such termination shall be treated as a termination
without cause, except that any payments received pursuant to Section
4(b) shall be offset by any disability payments received pursuant to
any disability benefit plan maintained by the Company. Disability for
purposes of the Agreement shall mean a condition that renders Executive
unable (as determined by the Company in good faith, based upon the
opinion of a physician selected by the Company) to regularly perform
his duties hereunder by reason of illness or injury for a period of
more than six consecutive months.
5.
Subparagraphs (e)(i) and (c)(ii) of Section 4 of the Agreement a
hereby amended to provide as follows:
(i) pay Executive's designated beneficiary or if there is
no designated beneficiary, Executive's estate, his base salary in
effect on the date of his death for the period of the term of the
Agreement;
(ii) pay Executive's designated beneficiary or if there is
no surviving beneficiary, Executive's estate, his earned bonus,
determined pursuant to the provisions of Section 4(b), for the year in
which Executive's death occurs;
(iii) restricted stock granted to the Executive shall vest
immediately; and
Subparagraph (e)(iii) is renumbered (e)(iv).
IN WITNESS WHEREOF, the Company has caused this Amendment to Employment
Agreement to be executed by its duly authorized officer and Executive has
executed this Amendment to Employment Agreement as of the date first above
written.
OM GROUP, INC.
EXECUTIVE
By:
----------------------Name:
Title:
By: /s/ Thomas R. Miklich
----------------------Thomas R. Miklich
APPROVED:
/s/ Lee R. Brodeur
-------------------------Lee R. Brodeur
Chairman, Compensation Committee
-3-
.
.
.
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
(all amounts except ratios are shown in millions)
December 31,
----------------------------------------------2002
2001
2000
1999
1998
------------------------------Income (loss) from continuing
operations before income taxes,
minority interests, equity income
and extraordinary item
$(204.8)
126.1
$
99.5
$
71.6
$
57.9
Add (deduct) earnings of less than
50% owned affiliates (net of
distributed earnings) included in
pretax income
0
0
0
0
0
Add losses of less than 50% owned
affiliates included in pretax income
0
0
0
0
0
Add fixed charges net of capitalized
interest
81.2
66.7
37.8
16.5
12.5
0.6
0.1
0.1
0.1
0.1
Add previously capitalized interest
amortized during the period
-------------------------
-------
Earnings
$(123.0)
$ 192.9
$ 137.4
$
88.2
$
70.5
Gross interest expense including
capitalized interest (fixed charges)
$
$
$
$
23.6
$
14.1
Ratio of earnings to fixed charges
86.4
(a)
77.0
2.5
48.8
2.8
(a) - Earnings were inadequate to cover fixed charges by $209.4 million.
3.7
5.0
.
.
.
EXHIBIT 21
SUBSIDIARIES
JURISDICTION OF
NAME OF SUBSIDIARY*
------------------Fidelity Chemical Products Malaysia SDN.BHD
OM Holdings, Inc.
OMG Americas, Inc.
OMG Asia-Pacific Co., Ltd.
OMG Belleville, Limited
OMG Europe GmbH
OMG Fidelity, Inc.
OMG Finland Oy
OMG Harjavalta Chemicals Holding BV
OMG Harjavalta Nickel Oy
OMG Japan, Inc.
OMG Jett, Inc.
OMG Kokkola Chemicals Holding BV
OMG Kokkola Chemicals Oy
OMG Chemicals Pte, Ltd.
OMG Thailand Co., Ltd.
OMG Vasset, S.A.
SCM Metal Products, Inc.
Harko CV
Groupement Pour Le Traitement Du teril De Lubumbashi (55%)
Societe De Traitement du Terril De Lubumbashi (55%)
OMG AG & Co. KG
OMG Management AG
Allgemeine Gold- und Silberscheideanstalt AG ("Agosi") (90.8%)
Degussa Galvanotechnik GmbH
Schone Edelmetaal B.V.
Ogussa Osterreichische Gold- und Silberscheideanstalt Gesellschaft m.b.H.
OMG UK Limited
Allgemeine France S.A.R.L.
Degussa NA Edelmetall GmbH
BrazeTec GmbH
Cycleon S.A. (50%)
OMG Brasil
Ltda
OMG Argentina S.A.
Clarex S.A.
Coimpa Sociedade Industrial de Metais Preciosos da Amazonia Ltda
Icomeq Industria e Comercio Ltda
OMG Automotive Catalysts Skandinavien AB
OMG Automotive Catalysts (Pty) Ltd. (55%)
DMC Catalyst Port Elisabeth (Pty) Ltd. (55%)
OMG Marketing South Africa (Pty) Ltd.
OMG Automotive Catalyst (Thailand) Ltd.
Ordeg Co., Ltd. (50%)
OMG China Limited
International Catalyst Technology, Inc. (50%)
OMG Precious Metals, Inc
ORGANIZATION
--------------Malaysia
Delaware
Ohio
Taiwan
Canada
Germany
Delaware
Finland
Netherlands
Finland
Japan
Ohio
Netherlands
Finland
Singapore
Thailand
France
Delaware
Netherlands
Jersey
DRC
Germany
Germany
Germany
Germany
Netherlands
Austria
United Kingdom
France
Germany
Germany
France
Brazil
Argentina
Brazil
Brazil
Brazil
Sweden
South Africa
South Africa
South Africa
Thailand
Korea
Hong Kong
Delaware
Japan
ICT Co., Inc. (50%)
Strand Minerals Pte. Ltd.
Italbras S.p.A.
dmc(2) Electronic Components Corporation
OMG Michigan Inc.
OMG Catalysts Canada Corp.
1354950 Ontario, Inc.
OMG Cawse Pty Ltd.
OMG KG Holdings, Inc.
Japan
Singapore
Italy
Delaware
Delaware
Canada
Canada
Australia
Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of OM Group, Inc. of our report dated February 4, 2003, with respect
to the consolidated financial statements of OM Group, Inc. included in this
Annual Report (Form 10-K) for the year ended December 31, 2002:
Registration
Statement
Description
---------------------33-74674
OM Group, Inc. Long-Term Incentive
Compensation Plan--Form S-8 Registration
Statement--1,015,625 Shares
Filing Date
----------January 27, 1994
333-07529
OMG Americas, Inc. Employees' Profit
Sharing Plan--Form S-8 Registration
Statement--250,000 Shares
July 3, 1996
333-07531
OM Group, Inc. Non-Employees Directors'
Equity Plan--Form S-8 Registration
Statement--250,000 Shares
July 3, 1996
333-47230
OM Group, Inc. 1998 Long-Term Incentive
Compensation Plan--Form S-8 Registration
Statement--2,000,000 Shares
October 3, 2000
333-65852
OM Group, Inc. 1998 Long-Term Incentive
Compensation Plan--Form S-8 Registration
Statement--2,000,000 Shares
July 25, 2001
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 19, 2003
Exhibit 24
OM Group, Inc.
Form 10-K
Power of Attorney for Directors
The undersigned, a director of OM Group, Inc., a Delaware corporation (the
"Company"), which anticipates the filing with the Securities and Exchange
Commission (the "Commission") under the provisions of the Securities Exchange
Act of 1934 (the "Act") a Form 10-K (together with any and all subsequent
amendments, the "Form 10-K"), does hereby constitute and appoint James P.
Mooney, Thomas R. Miklich or Michael J. Scott and any one of them with full
power of substitution and resubstitution, as attorney or attorneys to execute
and file on behalf of the undersigned, in his capacity as director of the
Company, the Form 10-K and any and all other documents to be filed with the
Commission pertaining to the Form 10-K, with full power and authority to do and
perform any and all acts and things whatsoever required or necessary to be done
in the premises, as fully as to all intents and purposes a she could do if
personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitution.
Executed this 24th day of March 2003.
/s/ Markku Toivanen
OM Group, Inc.
Form 10-K
Power of Attorney for Directors
The undersigned, a director of OM Group, Inc., a Delaware corporation (the
"Company"), which anticipates the filing with the Securities and Exchange
Commission (the "Commission") under the provisions of the Securities Exchange
Act of 1934 (the "Act") a Form 10-K (together with any and all subsequent
amendments, the "Form 10-K"), does hereby constitute and appoint James P.
Mooney, Thomas R. Miklich or Michael J. Scott and any one of them with full
power of substitution and resubstitution, as attorney or attorneys to execute
and file on behalf of the undersigned, in his capacity as director of the
Company, the Form 10-K and any and all other documents to be filed with the
Commission pertaining to the Form 10-K, with full power and authority to do and
perform any and all acts and things whatsoever required or necessary to be done
in the premises, as fully as to all intents and purposes a she could do if
personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitution.
Executed this 24th day of March 2003.
/s/ Lee R. Brodeur
OM Group, Inc.
Form 10-K
Power of Attorney for Directors
The undersigned, a director of OM Group, Inc., a Delaware corporation (the
"Company"), which anticipates the filing with the Securities and Exchange
Commission (the "Commission") under the provisions of the Securities Exchange
Act of 1934 (the "Act") a Form 10-K (together with any and all subsequent
amendments, the "Form 10-K"), does hereby constitute and appoint James P.
Mooney, Thomas R. Miklich or Michael J. Scott and any one of them with full
power of substitution and resubstitution, as attorney or attorneys to execute
and file on behalf of the undersigned, in his capacity as director of the
Company, the Form 10-K and any and all other documents to be filed with the
Commission pertaining to the Form 10-K, with full power and authority to do and
perform any and all acts and things whatsoever required or necessary to be done
in the premises, as fully as to all intents and purposes a she could do if
personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitution.
Executed this 24th day of March 2003.
/s/ William J. Reidy
OM Group, Inc.
Form 10-K
Power of Attorney for Directors
The undersigned, a director of OM Group, Inc., a Delaware corporation (the
"Company"), which anticipates the filing with the Securities and Exchange
Commission (the "Commission") under the provisions of the Securities Exchange
Act of 1934 (the "Act") a Form 10-K (together with any and all subsequent
amendments, the "Form 10-K"), does hereby constitute and appoint James P.
Mooney, Thomas R. Miklich or Michael J. Scott and any one of them with full
power of substitution and resubstitution, as attorney or attorneys to execute
and file on behalf of the undersigned, in his capacity as director of the
Company, the Form 10-K and any and all other documents to be filed with the
Commission pertaining to the Form 10-K, with full power and authority to do and
perform any and all acts and things whatsoever required or necessary to be done
in the premises, as fully as to all intents and purposes a she could do if
personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitution.
Executed this 24th day of March 2003.
/s/ John E. Mooney
OM Group, Inc.
Form 10-K
Power of Attorney for Directors
The undersigned, a director of OM Group, Inc., a Delaware corporation (the
"Company"), which anticipates the filing with the Securities and Exchange
Commission (the "Commission") under the provisions of the Securities Exchange
Act of 1934 (the "Act") a Form 10-K (together with any and all subsequent
amendments, the "Form 10-K"), does hereby constitute and appoint James P.
Mooney, Thomas R. Miklich or Michael J. Scott and any one of them with full
power of substitution and resubstitution, as attorney or attorneys to execute
and file on behalf of the undersigned, in his capacity as director of the
Company, the Form 10-K and any and all other documents to be filed with the
Commission pertaining to the Form 10-K, with full power and authority to do and
perform any and all acts and things whatsoever required or necessary to be done
in the premises, as fully as to all intents and purposes a she could do if
personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitution.
Executed this 24th day of March 2003.
/s/ Frank Butler
OM Group, Inc.
Form 10-K
Power of Attorney for Directors
The undersigned, a director of OM Group, Inc., a Delaware corporation (the
"Company"), which anticipates the filing with the Securities and Exchange
Commission (the "Commission") under the provisions of the Securities Exchange
Act of 1934 (the "Act") a Form 10-K (together with any and all subsequent
amendments, the "Form 10-K"), does hereby constitute and appoint James P.
Mooney, Thomas R. Miklich or Michael J. Scott and any one of them with full
power of substitution and resubstitution, as attorney or attorneys to execute
and file on behalf of the undersigned, in his capacity as director of the
Company, the Form 10-K and any and all other documents to be filed with the
Commission pertaining to the Form 10-K, with full power and authority to do and
perform any and all acts and things whatsoever required or necessary to be done
in the premises, as fully as to all intents and purposes a she could do if
personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitution.
Executed this 24th day of March 2003.
/s/ Katharine L. Plourde