UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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 Number)

127 Public Square
1500 Key Tower
Cleveland, Ohio 44114-1221
(Address of principal executive offices)

(zip code)

(216) 781-0083
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and 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 o           No þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)

Yes þ           No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o           No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2005: Common Stock, $.01 Par Value — 28,472,596 shares

 

 

INDEX
OM GROUP, INC.

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed consolidated balance sheets — June 30, 2005 and December 31, 2004

Condensed statements of consolidated operations — Three months ended June 30, 2005 and 2004; Six months ended June 30, 2005 and 2004

Condensed statements of consolidated cash flows — Six months ended June 30, 2005 and 2004

Notes to condensed consolidated financial statements — June 30, 2005

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

Part II. Other Information

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — Not applicable

Item 3. Defaults upon Senior Securities — Not applicable

Item 4. Submission of Matters to a Vote of Security Holders — Not applicable

Item 5. Other information — Not applicable

Item 6. Exhibits

Exhibit 12 Computation of Ratio of Earnings to Fixed Charges

Exhibit 31.1 Certification

Exhibit 31.2 Certification

Exhibit 32 Certification

Part I Financial Information

Item 1 Financial Statements

OM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)

		June 30,				December 31,
		2005				2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	37,436			$	26,779
Restricted cash in escrow			74,000				—
Accounts receivable, less allowances			139,642				161,346
Inventories			362,186				415,517
Advances to suppliers			13,614				32,498
Other			35,849				52,719
Total Current Assets			662,727				688,859
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land			4,814				4,982
Buildings and improvements			162,470				161,566
Machinery and equipment			501,212				493,930
Furniture and fixtures			17,259				17,130
			685,755				677,608
Less accumulated depreciation			310,176				287,796
			375,579				389,812
OTHER ASSETS
Goodwill			179,710				181,871
Receivables from joint venture partner			29,379				29,379
Other			49,499				44,780
TOTAL ASSETS		$	1,296,894			$	1,334,701
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Long-term debt in default		$	400,000			$	400,000
Current portion of long-term debt			5,750				5,750
Accounts payable			105,760				132,312
Accrued employee costs			20,555				17,062
Retained liabilities of businesses sold			16,675				21,837
Shareholder litigation accrual			74,000				74,000
Other			25,441				50,835
Total Current Liabilities			648,181				701,796
LONG-TERM LIABILITIES
Long-term debt			22,062				24,683
Deferred income taxes			29,368				31,033
Shareholder litigation accrual			17,882				18,000
Minority interest			39,591				44,168
Other			34,059				27,989
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 28,533,831 shares in 2005 and 28,484,098 shares in 2004			285				285
Capital in excess of par value			500,218				498,250
Retained deficit			(8,201	)			(32,080	)
Treasury stock (61,235 shares in 2005 and 14,025 shares in 2004, at cost)			(2,226	)			(710	)
Accumulated other comprehensive income			15,675				21,287
Total Stockholders’ Equity			505,751				487,032
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,296,894			$	1,334,701

See accompanying notes to condensed consolidated financial statements (unaudited).

Part I Financial Information

Item 1 Financial Statements

OM GROUP, INC.

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net sales		$	314,709			$	313,738			$	666,641			$	680,368
Cost of products sold			274,136				243,758				570,217				497,720
			40,573				69,980				96,424				182,648
Selling, general and administrative expenses			20,169				28,312				55,739				66,522
INCOME FROM OPERATIONS			20,404				41,668				40,685				116,126
OTHER INCOME (EXPENSE)
Interest expense			(10,259	)			(11,136	)			(20,252	)			(20,334	)
Foreign exchange loss			(1,482	)			(3,472	)			(2,812	)			(3,835	)
Investment and other income, net			3,860				1,317				5,853				4,064
			(7,881	)			(13,291	)			(17,211	)			(20,105	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST			12,523				28,377				23,474				96,021
Income tax expense			3,090				8,309				5,791				28,115
Minority interest			(1,041	)			2,410				(4,571	)			1,973
INCOME FROM CONTINUING OPERATIONS			10,474				17,658				22,254				65,933
DISCONTINUED OPERATIONS
Income from operations, net of tax			841				—				1,625				—
NET INCOME		$	11,315			$	17,658			$	23,879			$	65,933
Net income per common share — basic
Continuing operations		$	0.37			$	0.62			$	0.78			$	2.32
Discontinued operations			0.03				—				0.06				—
Net income		$	0.40			$	0.62			$	0.84			$	2.32
Net income per common share — assuming dilution
Continuing operations		$	0.37			$	0.62			$	0.78			$	2.31
Discontinued operations			0.03				—				0.06				—
Net income		$	0.40			$	0.62			$	0.84			$	2.31
Weighted average shares outstanding
Basic			28,473				28,470				28,463				28,470
Assuming dilution			28,519				28,562				28,545				28,586

See accompanying notes to condensed consolidated financial statements (unaudited).

Part I Financial Information

Item 1 Financial Statements

OM GROUP, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Amounts in thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2005				2004
OPERATING ACTIVITIES
Income from continuing operations		$	22,254			$	65,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			24,640				25,321
Foreign exchange loss			2,812				3,835
Gain on sale of investments			(2,359	)			—
Minority interest			(4,571	)			1,973
Income from equity method investment			(2,841	)			(2,673	)
Other non-cash items			(495	)			7,825
Changes in operating assets and liabilities (a)			(20,219	)			(91,363	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			19,221				10,851
INVESTING ACTIVITIES
Expenditures for property, plant and equipment			(8,735	)			(6,370	)
Proceeds from sale of investments			4,534				—
Acquisition of business			—				(6,715	)
NET CASH USED IN INVESTING ACTIVITIES			(4,201	)			(13,085	)
FINANCING ACTIVITIES
Payments of long-term debt and revolving line of credit			(52,747	)			—
Proceeds from the revolving line of credit			49,872				—
Proceeds from exercise of stock options			117				—
NET CASH USED IN FINANCING ACTIVITIES			(2,758	)			—
Effect of exchange rate changes on cash and cash equivalents			(1,605	)			(1,118	)
Increase (decrease) in cash and cash equivalents			10,657				(3,352	)
Cash and cash equivalents at beginning of period			26,779				54,719
Cash and cash equivalents at end of period		$	37,436			$	51,367

See accompanying notes to condensed consolidated financial statements (unaudited).

Part I Financial Information

Item 1 Financial Statements

OM GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(Thousands of dollars, except as noted and per share amounts)

Note A Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair financial presentation have been included. Past operating results are not necessarily indicative of the results which may occur in future periods, and the interim period results are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Note B Inventories

Inventories consist of the following:

		June 30,				December 31,
		2005				2004
Raw materials and supplies		$	227,283			$	248,536
Work in process			44,659				37,711
Finished goods			90,244				129,270
		$	362,186			$	415,517

Note C Receivables from Joint Venture Partner

In 2001 and 2002, the Company refinanced the capital contribution for the 25% minority shareholder in its joint venture in the Democratic Republic of Congo (DRC). At June 30, 2005 and December 31, 2004, the receivables from this partner were $29.4 million. The receivables are secured by the partner’s interest (book value of $21.8 million at June 30, 2005 and $24.5 million at December 31, 2004) in the joint venture and are due in full on December 31, 2008 ($22.9 million) and December 31, 2010 ($6.5 million). The $22.9 million receivable bears interest at LIBOR plus 2.75% (5.96% at June 30, 2005) and the $6.5 million receivable bears interest at 4.35%. The Company has recorded a full allowance against the interest due but not paid on the receivables. Dividends paid by the joint venture, if any, first serve to reduce the Company’s receivable before any amounts are remitted to the joint venture partner.

Note D Contingent Matters and Restricted Cash in Escrow

In November 2002, the Company received notice that shareholder class action lawsuits were filed in the U.S. District Court for the Northern District of Ohio 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 members of 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. In July 2004, these lawsuits were amended to include the entire restatement period back to and including 1999, and to add the Company’s independent auditors, Ernst & Young LLP, as a defendant. The Company and the lead plaintiff of the shareholder class action

		lawsuits have entered into a Stipulation and Agreement of Settlement (Agreement) dated June 6, 2005, which Agreement, as amended, was approved on September 8, 2005 by the U.S. District Court (Court) hearing the cases. The Company recorded a charge to administrative expense of $82.5 million during the fourth quarter of 2003 related to these lawsuits.
		In November 2002, the Company also received notice that shareholder derivative lawsuits had been filed in the U.S. District Court for the Northern District of Ohio against the members of the Company’s Board of Directors and certain of its then executives. Derivative plaintiffs allege the directors and executives breached their fiduciary duties to the Company in connection with a decline in the Company’s stock price after its third quarter 2002 earnings announcement by failing to institute sufficient financial controls to ensure that the Company and its employees complied with generally accepted accounting principles by writing down the value of the Company’s cobalt inventory on or before December 31, 2001. Derivative plaintiffs seek a number of changes to the Company’s accounting, financial and management structures and unspecified damages from the directors and executives to compensate the Company for costs incurred in, among other things, defending the aforementioned securities lawsuits. In July 2004, the derivative plaintiffs amended these lawsuits to include conduct allegedly related to the Company’s decision to restate its earnings back to and including 1999. The Company has entered into an agreement in principle with the lead plaintiffs of the shareholder derivative lawsuits that outlines the general terms of the proposed settlement of these lawsuits subject to the satisfaction of various conditions and execution of a definitive agreement by the interested parties, including the individual defendants. The proposed settlement provides for the Company to issue 380,000 shares of its common stock in payment of attorneys’ fees and costs incurred by plaintiffs’ counsel with respect to this litigation, and also requires the Company to implement various corporate governance changes. The Company recorded a charge to administrative expense of $2.0 million during the fourth quarter of 2003 and an additional charge to administrative expense of $7.5 million during the first quarter of 2004 related to these lawsuits.
		At June 30, 2005 and December 31, 2004, the Company had an aggregate accrual of $91.9 million and $92.0 million, respectively, for the shareholder class action and shareholder derivative lawsuits. The settlements are anticipated to be payable $74.0 million in cash and $17.9 million in common stock. In April 2005, the Company paid $74.0 million into an escrow account and in September 2005 the Company issued $8.5 million of common stock in connection with settlement of the shareholder class action lawsuits. The $74.0 million is classified as Restricted cash in escrow in the Condensed Consolidated Balance Sheet at June 30, 2005. The Restricted cash in escrow and corresponding Shareholder litigation accrual remained on the balance sheet until the Agreement was approved by the Court in September 2005. The cash is restricted for use under the terms of the Agreement solely by lead plaintiff’s counsel to pay actual costs of notice and settlement administration. The Company had no ability under the Agreement to use the amount in escrow for any purpose.
		The 380,000 shares to be issued in connection with the shareholder derivative litigation are marked-to-market through the statement of operations based on changes in the Company’s stock price, as the liability is fixed in shares. During the second quarter of 2005, income of $0.1 million was recognized.
		Insurance proceeds are expected to be available for contribution to the resolution of the cases but the Company does not expect these lawsuits to be resolved within the limits of applicable insurance. As of September 15, 2005, insurance proceeds of approximately $25 million have been received, representing both reimbursement of legal expenses in 2003, 2004 and 2005 related to the lawsuits (approximately $17 million in total, including approximately $3.0 million and $2.0 million for the three months ended June 30, 2005 and 2004, respectively, and approximately $4.9 million and $4.0 million for the six months ended June 30, 2005 and 2004, respectively), as well as reimbursement of a portion of the settlement amount paid by the Company during 2005 (approximately $8 million in the second quarter of 2005). Potential remaining insurance proceeds of up to approximately $19 million are expected to be available and will be recognized when received.
		The Company is a party to various other 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.
		A number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing improvements in remediation techniques. Taking these factors into

		consideration, the Company has estimated the undiscounted costs of remediation, which will be incurred over several years. The Company accrues an amount consistent with the estimates of these costs when it is probable that a liability has been incurred. At June 30, 2005 and December 31, 2004 the Company has recorded environmental liabilities of $7.5 million and $9.5 million, respectively, primarily related to remediation and decommissioning at the Company’s closed manufacturing sites in St. George, Utah, Newark, New Jersey, and Vasset, France. The Company has recorded $4.3 million in other current liabilities and $3.2 million in other long-term liabilities as of June 30, 2005.
		Although it is difficult to quantify the potential impact of compliance with or liability under environmental protection laws, the Company believes that any amount it may be required to pay in connection with environmental matters, as well as other legal proceedings arising out of operations in the normal course of business, is not reasonably likely to exceed amounts accrued by an amount that would have a material adverse effect upon its financial condition, results of operations, or cash flows.

Note E Pension and Other Postretirement Benefits

The components of the Company’s net periodic benefit expense (income) for its defined benefit pension plan and other postretirement benefits are shown below:

		Three months ended June 30,
		Defined Benefit								Other Postretirement
		Pension Plan								Benefits
		2005				2004				2005				2004
Service cost		$	—			$	—			$	17			$	—
Interest cost			305				216				63				50
Expected return on plan assets			(236	)			(243	)			—				—
Other			54				8				10				(8	)
Net periodic benefit expense (income)		$	123			$	(19	)		$	90			$	42

		Six months ended June 30,
		Defined Benefit								Other Postretirement
		Pension Plan								Benefits
		2005				2004				2005				2004
Service cost		$	—			$	—			$	34			$	—
Interest cost			610				432				126				100
Expected return on plan assets			(472	)			(486	)			—				—
Curtailment			4,728				—				—				—
Other			108				16				20				(16	)
Net periodic benefit expense (income)		$	4,974			$	(38	)		$	180			$	84

		The curtailment expense included in the above table relates to the termination of James P. Mooney’s employment with the Company on January 11, 2005 as discussed in Note J.
		The Medicare Prescription Drug, Improvement and Modernization Act (“Act”) was enacted on December 8, 2003. The Act introduces a prescription drug benefit under Medicare Part D, in addition to a federal subsidy to sponsors of postretirement benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, was issued which provides guidance on accounting for the federal subsidy. The provisions of FASB 106-2 became effective for the Company as of July 1, 2004 and have been applied prospectively. The impact of adopting FASB 106-2 was not significant.

Note F Earnings Per Share

The following table sets forth the computation of basic and dilutive income from continuing operations per common share:

		Three Months								Six Months
		Ended								Ended
		June 30,								June 30,
		2005				2004				2005				2004
Income from continuing operations		$	10,474			$	17,658			$	22,254			$	65,933
Weighted average shares outstanding			28,473				28,470				28,463				28,470
Dilutive effect of stock options and restricted stock			46				92				82				116
Weighted average shares outstanding — assuming dilution			28,519				28,562				28,545				28,586
Basic income per common share from continuing operations		$	0.37			$	0.62			$	0.78			$	2.32
Dilutive income per common share from continuing operations		$	0.37			$	0.62			$	0.78			$	2.31

The following table sets forth the computation of basic and dilutive net income per common share:

		Three Months								Six Months
		Ended								Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income		$	11,315			$	17,658			$	23,879			$	65,933
Weighted average shares outstanding			28,473				28,470				28,463				28,470
Dilutive effect of stock options and restricted stock			46				92				82				116
Weighted average shares outstanding — assuming dilution			28,519				28,562				28,545				28,586
Basic net income per common share		$	0.40			$	0.62			$	0.84			$	2.32
Dilutive net income per common share		$	0.40			$	0.62			$	0.84			$	2.31

Note G Comprehensive Income

During the three months ended June 30, 2005 and 2004, total comprehensive income was $3.6 million and $11.7 million, respectively. Total comprehensive income for the six months ended June 30, 2005 and 2004 was $18.3 million and $60.0 million, respectively. Comprehensive income consists of net income, foreign currency translation adjustments and unrealized gains and losses on commodity hedging activity, net of income taxes.

Note H Income Taxes

The effective income tax rate for the three and six months ended June 30, 2005 was 24.7% versus 29.3% for the three and six months ended June 30, 2004. The effective income tax rate for all periods is lower than the statutory rate in the United States due primarily to a higher proportion of earnings in jurisdictions having lower statutory tax rates (primarily Finland, which has a 26% and 29% statutory rate for 2005 and 2004, respectively) and a tax “holiday” from income taxes in Malaysia, both offset by losses

in the United States with no corresponding tax benefit.

Note I Debt and Other Financial Instruments

Debt consists of the following:

		June 30,				December 31,
		2005				2004
Senior Subordinated Notes		$	400,000			$	400,000
Note payable — bank			20,125				23,000
Deferred gain on termination of fair value hedges			6,356				6,711
Fair value of interest rate swaps (fair value hedges)			1,331				722
			427,812				430,433
Current: Current portion			5,750				5,750
Long-term debt in default			400,000				400,000
Total long-term debt		$	22,062			$	24,683

		The Senior Subordinated Notes (the Notes) bear interest at 9.25% and mature on December 15, 2011. The Company’s domestic subsidiaries are the guarantors of the Notes. The delay by the Company in filing its Form 10-K for the year ended December 31, 2003 caused events of default under the indenture governing the Notes, and the Company reclassified the Notes from long-term to current as of March 31, 2004, which was the date the 2003 Form 10-K was due. The Company filed its 2003 Form 10-K on March 31, 2005 and filed its Form 10-Qs for each of the first three quarters of 2004 on June 10, 2005. The delay by the Company in filing its Form 10-K for the year ended December 31, 2004 and its Form 10-Q for the first quarter of 2005, resulted in new events of default under the indenture governing the Notes. Also, on August 17, 2005, the trustee for the Notes furnished a notice of default to the Company with respect to the delay by the Company in filing its Form 10-Q for the second quarter of 2005. Such delay would have become an event of default if the Form 10-Q for the second quarter of 2005 were not filed by October 16, 2005. However, the Company filed its 2004 Form 10-K on August 22, 2005 and is filing its Form 10-Qs for the first and second quarter of 2005 on September 23, 2005. On August 30, 2005, the trustee for the Notes furnished a letter to the Company that gave the Company until October 29, 2005 to furnish to the trustee an annual compliance certificate required under the indenture governing the Notes in order to avoid an event of default under that indenture. In the event the Company is unable to avoid an event of default, the noteholders, or the indenture trustee at the direction of the noteholders, would have the right but would not be obligated, to accelerate payment of these Notes. The Company cannot predict whether they would do so if an event of default were to occur. If any such acceleration were to occur, based on discussions with the Company’s lead bank, the Company believes it would be able to refinance such obligation on a long-term basis. Further, because the noteholders had the right to accelerate payments of the Notes at the time of filing the Form 10-K for the year ended December 31, 2004, the report of the Company’s independent registered public accounting firm dated August 19, 2005 contains an explanatory paragraph indicating conditions that raise substantial doubt about the Company’s ability to continue as a going concern.
		On August 7, 2003, the Company entered into a $150 million Senior Secured Revolving Credit Facility with a group of lending institutions. The facility bears interest at a rate of LIBOR plus 2.00% to 3.00% or PRIME plus 0.25% to 1.25% and matures in August 2006. There were no borrowings under this facility at June 30, 2005. Because of the delay by the Company in filing required periodic reports with the SEC during 2004, the Company failed to comply with specific covenants in the related credit agreement and events of default occurred under the credit agreement. Due to the filing of the Form 10-Qs for the first and second quarter of 2005 on September 23, 2005, the Company will no longer be in default and will be entitled to borrow under the credit agreement.
		During December 2003, the Company borrowed $22.9 million from a Belgium bank. This loan bore interest at a rate of LIBOR plus 2.75% and was scheduled to mature in December 2008. In November 2004, the Company refinanced this loan with a Finland bank, resulting in a new principal balance of $23.0 million. The refinanced loan has an interest rate of LIBOR plus 1.25% and is payable in 48 equal installments beginning in January 2005 and ending December 2008. Simultaneous to the initial borrowing, the proceeds were loaned by the Company to one of its DRC smelter joint venture partners.

The loan receivable is recorded in Receivables from joint venture partner, bears interest at LIBOR plus 2.75% and matures in December 2008.

Note J Termination Charge

On January 11, 2005, James P. Mooney’s employment with the Company was terminated and he ceased to be its Chief Executive Officer. During the first quarter of 2005, the Company recorded a charge of $8.7 million related to his termination, in accordance with Mr. Mooney’s employment agreement and a supplemental executive retirement plan. Such amount includes termination benefits based on salary, estimated bonus (as calculated per the provisions in the agreement) and certain benefits to be paid over the remaining term of the agreement, as well as the actuarially-determined present value of amounts to be paid under a supplemental executive retirement plan. The Company is examining its alternatives for recovery against Mr. Mooney, including claims for disgorgement under the Sarbanes-Oxley Act of 2002. Any such claims will be recognized when settled.

Note K DRC Smelter Shut-down

During the first quarter of 2005, the Company’s joint venture in the DRC shut-down its smelter as scheduled for approximately four months for regular maintenance and production improvements. The impact of the shut-down reduced the Company’s gross profit and income from continuing operations by approximately $2.0 million and $1.1 million, respectively, for the three months ended June 30, 2005, and approximately $9.4 million and $5.2 million, respectively, for the six months ended June 30, 2005. The smelter was re-opened in May of 2005.

Note L Recently Issued Accounting Standards

		In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, Inventory Costs — An amendment of ARB No. 43 (SFAS 151). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. The adoption of SFAS 151 is not expected to have a material impact on the Company’s results of operations or financial position.
		In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payments (SFAS 123R). SFAS 123R is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that the cost of transactions involving share-based payments be recognized in the financial statements based on a fair-value-based measurement. SFAS 123R is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 123R is not expected to have a material impact on the Company’s results of operations or financial position.
		The American Jobs Creation Act of 2004 (AJCA) was enacted on October 22, 2004. The AJCA repeals an export incentive, creates a new deduction for qualified domestic manufacturing activities, and includes a special one-time deduction of 85 percent of certain foreign earnings repatriated to the U.S. In December 2004, the Financial Accounting Standards Board issued Staff Position No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP FAS 109-1). In accordance with FSP FAS 109-1, the Company will treat the deduction for qualified domestic manufacturing as a special deduction in future years as realized. The deduction for qualified domestic manufacturing activities did not impact the Company’s consolidated financial statements in 2004 and for the first and second quarters of 2005. The Company has not yet completed its evaluation of the deduction for qualified domestic manufacturing activities on the Company’s future effective tax rate. The phase-out of the export incentive is not expected to have a material impact on the Company’s effective tax rate in the future. In December 2004, the Financial Accounting Standards Board issued Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision with the American Jobs Creation Act of 2004,” allowing companies additional time to evaluate

the effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. The Company is in the process of evaluating the effects of the repatriation provision; however, the Company does not expect the impact of repatriation of foreign earnings, if any, to have a material impact on the Company’s results of operations or financial position.

Note M Business Segment Information

		The Company operates in two business segments — Cobalt and Nickel. The Cobalt segment includes products manufactured using cobalt and other metals including copper, zinc, manganese and calcium. The Nickel segment includes nickel-based products. The Company’s products are essential components in numerous complex chemical and industrial processes, and are used in many end markets, such as rechargeable batteries, coatings, custom catalysts, liquid detergents, lubricants and fuel additives, plastic stabilizers, polyester promoters and adhesion promoters for rubber tires, colorants, petroleum additives, magnetic media, metal finishing agents, cemented carbides for mining and machine tools, diamond tools used in construction, stainless steel, alloy and plating applications. The Company’s products are sold in various forms such as solutions, crystals, powders, cathodes and briquettes. Corporate is comprised of general and administrative expense not allocated to the segments.
		While the primary manufacturing sites are in Finland, the Company also has manufacturing and other facilities in Australia, North America, Europe and Asia-Pacific, and the Company markets its products worldwide. Further, approximately 25% of the Company’s investment in property, plant and equipment is located in the Democratic Republic of Congo where the Company operates a smelter through a 55% owned joint venture.
		These segments correspond to management’s approach to aggregating products and business units, making operating decisions and assessing performance. The following table reflects the results of the segments.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net sales
Cobalt		$	133,624			$	165,125			$	293,615			$	329,108
Nickel			192,581				166,292				400,542				389,173
Intercompany sales between segments:
Cobalt			(175	)			(617	)			(484	)			(1,783	)
Nickel			(11,321	)			(17,062	)			(27,032	)			(36,130	)
Total net sales		$	314,709			$	313,738			$	666,641			$	680,368
Income (loss) from operations
Cobalt		$	6,410			$	39,029			$	14,486			$	90,341
Nickel			14,457				14,459				43,481				58,460
Corporate expenses (a)			(463	)			(11,820	)			(17,282	)			(32,675	)
Total income from operations		$	20,404			$	41,668			$	40,685			$	116,126
Interest expense			(10,259	)			(11,136	)			(20,252	)			(20,334	)
Foreign exchange loss			(1,482	)			(3,472	)			(2,812	)			(3,835	)
Investment and other income, net			3,860				1,317				5,853				4,064
Income from continuing operations before income taxes and minority interest		$	12,523			$	28,377			$	23,474			$	96,021

Note N 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.
		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:

		June 30, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Balance Sheet Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	16,722			$	580			$	20,134			$	—			$	37,436
Restricted cash in escrow			74,000				—				—				—				74,000
Accounts receivable			490,757				89,476				318,423				(759,014	)			139,642
Inventories			—				47,117				315,069				—				362,186
Other assets			—				3,365				46,098				—				49,463
Total current assets			581,479				140,538				699,724				(759,014	)			662,727
Property, plant and equipment — net			—				34,220				341,359				—				375,579
Goodwill			75,830				68,908				34,972				—				179,710
Intercompany receivables			276,520				—				987,813				(1,264,333	)			—
Investment in subsidiaries			92,347				—				2,160,527				(2,252,874	)			—
Receivables from joint venture partner			—				—				29,379				—				29,379
Other assets			10,546				12,149				26,804				—				49,499
Total assets		$	1,036,722			$	255,815			$	4,280,578			$	(4,276,221	)		$	1,296,894
Current liabilities:
Current portion of long-term debt		$	—			$	—			$	5,750			$	—			$	5,750
Long-term debt in default			400,000				—				—				—				400,000
Accounts payable			423				94,955				341,266				(330,884	)			105,760
Other accrued expenses			92,422				15,410				28,839				—				136,671
Total current liabilities			492,845				110,365				375,855				(330,884	)			648,181
Long-term debt			7,687				—				14,375				—				22,062
Deferred income taxes			3,673				—				25,695				—				29,368
Other long-term liabilities and minority interest			26,766				19,918				44,848				—				91,532
Intercompany payables			—				457,897				1,210,344				(1,668,241	)			—
Stockholders’ equity			505,751				(332,365	)			2,609,461				(2,277,096	)			505,751
Total liabilities and stockholders’ equity		$	1,036,722			$	255,815			$	4,280,578			$	(4,276,221	)		$	1,296,894

		December 31, 2004
						Combined				Combined
						Guarantor				Non-guarantor
Balance Sheet Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	8,533			$	1,197			$	17,049			$	—			$	26,779
Accounts receivable			496,692				79,383				531,902				(946,631	)			161,346
Inventories			—				58,450				357,067				—				415,517
Other assets			—				6,291				78,926				—				85,217
Total current assets			505,225				145,321				984,944				(946,631	)			688,859
Property, plant and equipment — net			—				35,542				354,270				—				389,812
Goodwill			75,830				68,908				37,133				—				181,871
Intercompany receivables			334,598				—				935,132				(1,269,730	)			—
Investment in subsidiaries			92,347				—				2,160,526				(2,252,873	)			—
Receivables from joint venture partner			—				—				29,379				—				29,379
Other assets			11,120				12,166				21,494				—				44,780
Total assets		$	1,019,120			$	261,937			$	4,522,878			$	(4,469,234	)		$	1,334,701
Current liabilities:
Current portion of long-term debt		$	—			$	—			$	5,750			$	—			$	5,750
Long-term debt in default			400,000				—				—				—				400,000
Accounts payable			100				76,262				571,394				(515,444	)			132,312
Other accrued expenses			97,671				18,811				47,252				—				163,734
Total current liabilities			497,771				95,073				624,396				(515,444	)			701,796
Long-term debt			7,433				—				17,250				—				24,683
Deferred income taxes			—				—				31,033				—				31,033
Other long-term liabilities and minority interest			26,884				14,157				49,116				—				90,157
Intercompany payables			—				497,038				1,189,735				(1,686,773	)			—
Stockholder’s equity			487,032				(344,331	)			2,611,348				(2,267,017	)			487,032
Total liabilities & stockholder’s equity		$	1,019,120			$	261,937			$	4,522,878			$	(4,469,234	)		$	1,334,701

		Three months ended June 30, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	59,246			$	353,706			$	(98,243	)		$	314,709
Cost of products sold			—				47,468				324,911				(98,243	)			274,136
			—				11,778				28,795				—				40,573
Selling, general and administrative expenses			—				4,025				16,144				—				20,169
Income from operations			—				7,753				12,651				—				20,404
Interest expense			(9,805	)			(2,200	)			(12,508	)			14,254				(10,259	)
Foreign exchange loss			—				(14	)			(1,468	)			—				(1,482	)
Investment and other income, net			2,499				251				15,364				(14,254	)			3,860
Income (loss) from continuing operations before income taxes and minority interest			(7,306	)			5,790				14,039				—				12,523
Income tax expense			—				—				3,090				—				3,090
Minority interest			—				—				(1,041	)			—				(1,041	)
Income (loss) from continuing operations			(7,306	)			5,790				11,990				—				10,474
Income from discontinued operations, net of tax			841				—				—				—				841
Net income (loss)		$	(6,465	)		$	5,790			$	11,990			$	—			$	11,315

		Three months ended June 30, 2004
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	56,387			$	408,950			$	(151,599	)		$	313,738
Cost of products sold			—				43,828				351,529				(151,599	)			243,758
			—				12,559				57,421				—				69,980
Selling, general and administrative expenses			—				18,137				10,175				—				28,312
Income (loss) from operations			—				(5,578	)			47,246				—				41,668
Interest expense			(10,293	)			(1,569	)			(12,834	)			13,560				(11,136	)
Foreign exchange loss			(31	)			—				(3,441	)			—				(3,472	)
Investment and other income, net			1,893				192				12,792				(13,560	)			1,317
Income (loss) from continuing operations before income taxes and minority interest			(8,431	)			(6,955	)			43,763				—				28,377
Income tax expense			—				—				8,309				—				8,309
Minority interest			—				—				2,410				—				2,410
Net income (loss)		$	(8,431	)		$	(6,955	)		$	33,044			$	—			$	17,658

		Six months ended June 30, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	113,941			$	775,363			$	(222,663	)		$	666,641
Cost of products sold			—				94,880				698,000				(222,663	)			570,217
			—				19,061				77,363				—				96,424
Selling, general and administrative expenses			—				27,806				27,933				—				55,739
Income (loss) from operations			—				(8,745	)			49,430				—				40,685
Interest expense			(19,405	)			(4,244	)			(26,240	)			29,637				(20,252	)
Foreign exchange loss			—				(31	)			(2,781	)			—				(2,812	)
Investment and other income, net			4,797				524				30,169				(29,637	)			5,853
Income (loss) from continuing operations before income taxes and minority interest			(14,608	)			(12,496	)			50,578				—				23,474
Income tax expense			—				—				5,791				—				5,791
Minority interest			—				—				(4,571	)			—				(4,571	)
Income (loss) from continuing operations			(14,608	)			(12,496	)			49,358				—				22,254
Income from discontinued operations, net of tax			1,625																1,625
Net income (loss)		$	(12,983	)		$	(12,496	)		$	49,358			$	—			$	23,879

		Six months ended June 30, 2004
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	108,572			$	865,689			$	(293,893	)		$	680,368
Cost of products sold			—				83,512				708,101				(293,893	)			497,720
			—				25,060				157,588				—				182,648
Selling, general and administrative expenses			—				44,989				21,533				—				66,522
Income (loss) from operations			—				(19,929	)			136,055				—				116,126
Interest expense			(19,129	)			(3,022	)			(29,826	)			31,643				(20,334	)
Foreign exchange loss			(246	)			(8	)			(3,581	)			—				(3,835	)
Investment and other income, net			3,640				215				31,852				(31,643	)			4,064
Income (loss) from continuing operations before income taxes and minority interest			(15,735	)			(22,744	)			134,500				—				96,021
Income tax expense			—				—				28,115				—				28,115
Minority interest			—				—				1,973				—				1,973
Net income (loss)		$	(15,735	)		$	(22,744	)		$	104,412			$	—			$	65,933