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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