OM GROUP INC - 10-K Annual Report

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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, 2001
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 CHARTER)

DELAWARE 52-1736882
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

50 PUBLIC SQUARE,
3500 TERMINAL TOWER,
CLEVELAND, OHIO 44113-2204
(Address of principal executive offices) (Zip Code)

216-781-0083
Registrant's telephone number, including area code

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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 [ ]

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 15, 2002
was approximately $1,961,365,374.

As of March 15, 2002 there were 28,196,742 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 7, 2002 are incorporated by reference.

TABLE OF CONTENTS

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.

On August 10, 2001, the Company acquired dmc(2) Degussa Metals Catalysts Cerdec
(dmc(2)) for a purchase price of approximately $1.120 billion, including cash
acquired and related financing and transaction costs. dmc(2) is a worldwide
provider of metal-based functional materials for a wide variety of end markets.
The acquisition of dmc(2) 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 dmc(2) for a cash purchase price of $525.5 million,
including interest.

With the acquisition, the Company currently operates in three business segments:
base metal chemistry, precious metal chemistry and metal management. 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.

Base metal chemistry products 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 precious metal chemistry segment 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.

Business information, including reportable segment and geographic data, is
contained in Note N on pages 34 through 36 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 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

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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 and the
inventories and market share positions of the Company and its competitors. The
Company also undertakes to minimize the effect on profitability of changes in
prices of metals used through various hedging activities.

CUSTOMERS
The Company serves over 1,700 customers. During 2001, approximately 54% of the
Company's net sales were to customers in Europe, 36% 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 12% of segment net sales in 2001. Sales to three customers in
the precious metal chemistry segment were approximately 34% of segment net sales
in 2001.

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. Nickel
historically has been sourced primarily from Australia and Brazil. 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.

Raw material cost increases and/or contractual commitments can result in higher
working capital needs. The Company has had sufficient cash availability and
borrowing capacity to finance higher working capital as needed.

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, product forms and packaging methods. Research and development
expenses were approximately $20.5 million for 2001, $13.3 million for 2000 and
$11.3 million for 1999. Expenses for research and development are anticipated to
increase due to the acquisition of the dmc(2) operations.

The Company's research staff of approximately 500 full time persons conducts
research and development at its laboratories located in Cleveland, Ohio;
Westlake, Ohio; Research Triangle Park, North Carolina; Newark, New Jersey;
Auburn Hills, Michigan; Kokkola, Finland; Hanau, Germany; Schwabisch-Gmund,
Germany; and

3

Himeji, Japan. The Company's Kokkola facility also maintains a research
agreement with Outokumpu Research Oy.

PATENTS AND TRADEMARKS
The Company holds approximately 926 patents and has pending 1,023 patent
applications, including approximately 720 patents and 650 patent applications
from the former dmc(2) operations, related to the manufacturing, processing and
use of metallo-organic and metal-based compounds. In addition, the Company has
the right to use, and in certain instances license and sell, technology covered
by approximately 40 patents in the areas of hydrometallurgical processes,
solvent extraction, agitators and metal powders. 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.

Environmental compliance costs were approximately $7.8 million in 2001. 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 and as it
includes the expenditures related to the acquired operations of dmc(2).

The Company also incurred capital expenditures of approximately $6.5 million in
2001 in connection with environmental compliance. The Company anticipates that
capital expenditure levels for these purposes will increase to approximately
$12.0 million in 2002, as it continues to modify certain processes that may have
an environmental impact. The Company also anticipates that capital expenditures
for these purposes will increase due to the acquisition of the dmc(2)
operations.

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, 2001, the Company had 5,210 full-time employees of which 1,561
were located in the Americas, 2,708 in Europe, 511 in Africa and 430 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; Newark, Delaware; Newark, New Jersey; South Plainfield, New Jersey;
Research Triangle Park, North Carolina; Franklin,

4

Pennsylvania; and St. George, Utah are non-unionized. Employees at the
Johnstown, Pennsylvania facilities are members of the United Steelworkers of
America Union. The Johnstown union agreement has a term of five years, expiring
in June 2003. 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. The Calvert City,
Kentucky facility is operated under a service contract with Degussa AG, which
employs two-thirds of the site's employees. The Calvert City contract with the
Paper, Allied Industrial, Chemical, Energy Workers' International Union was
renegotiated in January 2001. This union has been notified that as a consequence
of the change in ownership resulting from the Company's acquisition of the
dmc(2) operations, it will separate its workforce and these employees will
become employees of one of the Company's subsidiaries. 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 2002 in Guarulhos and
Americana, and in August 2002 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 February 2003. 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 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; Newark,
Delaware; Singapore (precious metal chemistry segment); Karlskoga, Sweden; and
St. George, Utah plants are located, is leased under agreements with varying
expirations dates. Otherwise, the land associated with the Company's
manufacturing facilities is owned by the Company. The transfer of ownership and
some hereditary building rights have not yet been completed with respect to some
facilities located in Germany that were acquired as part of the dmc(2)
operations.

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 share
certain physical facilities and have contracts in place for waste disposal,
tolling, utilities, laboratory services and raw material supply with varying
expiration dates.

5

Information regarding the Company's primary offices, research and product
development and manufacturing facilities is set forth below:

* 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.

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 2001 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 29, 2002, 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 -- 54
- - Chairman and Chief Executive Officer, 1994

Edward W. Kissel -- 60
- - President and Chief Operating Officer, 1999
- - Chief Executive Officer, RotoCast Technologies, Inc., 1993
- - Chief Executive Officer, Kissel Group, Ltd., 1993

James M. Materna -- 56
- - Chief Financial Officer, 1992

Michael J. Scott -- 51
- - Chief Administrative Officer, 2002
- - Vice President, Secretary and General Counsel, 1991

7

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 Q on page 45 of this report. The
Company's Common Stock is traded on the New York Stock Exchange. As of March 15,
2002, the Company had approximately 11,000 shareholders.

ITEM 6. SELECTED FINANCIAL DATA

On August 10, 2001 the Company acquired dmc(2) Degussa Metals Catalysts Cerdec
(dmc(2)) for a purchase price of approximately $1.120 billion, including related
financing and transaction costs. On September 7, 2001 the Company disposed of
the electronic materials, performance pigments, glass systems and Cerdec
ceramics divisions of dmc(2) for $525.5 million (See Note B).

On April 4, 2000 the Company acquired Outokumpu Nickel Oy (OKN) for a purchase
price of $188.1 million, including related financing and transaction costs (See
Note B).

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following 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.

8

Set forth below is summary consolidated information of the Company for the years
ended December 31, 2001, 2000 and 1999.

RESULTS OF OPERATIONS
2001 Compared to 2000
The year 2001 was a transition year for the Company given that in August it
acquired dmc(2), a company substantially larger than itself in terms of sales,
facilities, and personnel. The strong performance of dmc(2)'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 for 2001 were $2,367.4 million compared to $887.7 million in 2000
primarily due to the acquisition of dmc(2), partially offset by a decline in the
Company's base metal chemistry segment due to weak global economic conditions
and lower metal prices.

Gross profit increased to $334.6 million in 2001, a 56.5% increase from 2000.
The increase in gross profit was primarily the result of the acquisition of
dmc(2), 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 85.9% of net sales for the year ended 2001 from 75.9%
of net sales in 2000 as a result of the acquisition of dmc(2) with its high cost
of precious metals relative to revenues.

Selling, general and administrative expenses increased by $90.0 million in 2001
from 2000, to $165.4 million, resulting primarily from the dmc(2) 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 $57.3 million in 2001 compared to $38.5 million in 2000
due primarily to increased interest expense on higher outstanding borrowings,
primarily as a result of the dmc(2) acquisition.

Income taxes as a percentage of income before income taxes decreased to 24.8% in
2001 from 28.5% 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 dmc(2) acquisition.

9

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 dmc(2).

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, copper and other base metal chemistry manufacturing businesses,
which comprised the historical businesses of the Company prior to the
acquisition of dmc(2).

The following information summarizes market prices of the primary raw materials
used by the base metal chemistry segment:

The following information summarizes the physical volumes of products sold by
the base metal chemistry segment:

Operating profit for the year ended December 31, 2001 was $154.7 million
compared to $158.4 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 $793.1 million, a decline of 10.7%, 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
8.7% 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 dmc(2) 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 gold and silver. 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 was acquired in the
dmc(2) acquisition. This segment acts as a metal sourcing operation for both the
Company's precious metal chemistry segment and nonaffiliated customers,
primarily procuring platinum group metals such as platinum, palladium, rhodium,
and

10

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, subsequent to the date of the
acquisition, were $989.4 million. Operating profit was $10.1 million for that
period and was positively effected by the higher volatility of precious metal
pricing at certain times during that period.

2000 Compared to 1999
Net sales for 2000 were $887.7 million, an increase of 75.1% compared to 1999.
The increase in sales resulted principally through an increase in physical
volume of products sold, primarily due to the acquisition of OKN.

The following table summarizes market prices on the primary raw materials used
by the Company in manufacturing its products:

The following table shows the physical product volumes sold during each period:

The Company sold 307.2 million pounds of product during 2000, an increase of
46.7% compared to 209.4 million pounds in 1999. The increase in physical volume
of organic products sold was primarily due to generally stronger cobalt catalyst
sales in all geographic regions and increased sales of plastic additives in Asia
Pacific. In the inorganics category, the increase in physical volume of products
sold reflects increased volume of electronics chemicals, strong demand for
nickel catalyst products in the United States and higher sales of battery grade
chemicals in Asia Pacific. The increase in physical volume of powder products
reflects increases in sales of cobalt powder to the Asia Pacific battery
industry, and increased sales of cobalt extra fine, cobalt briquettes and
tungsten powders to the hard metal and alloy markets, offsetting a decrease in
copper powders used in automotive applications. The increase in physical volume
of metal products sold is a result of the acquisition of OKN and the resulting
sales of nickel briquettes and cathodes to the European steel industry.

Gross profit increased to $213.9 million in 2000, a 34.1% increase from 1999.
The increase in gross profit was primarily the result of the acquisition of OKN
and the increased volumes of product sold. Cost of products sold increased to
75.9% of net sales for the year ended 2000 from 68.5% of net sales in 1999 as a
result of the acquisition of OKN with lower value-added nickel products and
higher sales of lower value-added cobalt containing products.

Selling, general and administrative expenses increased by $14.6 million in 2000
from 1999, resulting primarily from general increases in administrative costs
due to the Company's growth and the OKN acquisition. Due to the

11

relatively low incremental selling, general and administrative expenses required
to support OKN and relatively high nickel prices, selling, general and
administrative expenses decreased to 8.5% of net sales in 2000 compared to 12.0%
of net sales in 1999.

Other expense-net was $38.5 million in 2000 compared to $18.4 million in 1999
due primarily to increased interest expense on higher outstanding borrowings,
primarily as a result of the OKN acquisition, and higher interest rates.

Income taxes as a percentage of income before income taxes decreased to 28.5% in
2000 from 30.5% in 1999. The lower effective tax rate was due primarily to a
higher percentage of income earned in the relatively low statutory tax country
of Finland and a tax holiday in Malaysia.

Net income for 2000 was $71.5 million, an increase of $15.7 million from 1999,
primarily due to the aforementioned factors.

LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital is cash flow from operations.
During 2001, the Company's net working capital increased by approximately $624.8
million. This increase was primarily the result of the acquisition of dmc(2).
Capital expenditures in 2001 were primarily related to capacity expansions at
the Company's base metal chemistry facilities in Finland and at various precious
metal chemistry locations. These capital expenditures were funded through cash
generated by operations as well as additional borrowings under the Company's
revolving credit facility.

In August 2001, the Company's credit facilities were revised and increased to
$1.31 billion, in conjunction with the acquisition of dmc(2). These credit
facilities were comprised of a $325 million revolving credit facility, a $135
million five year term loan, a $500 million six year term loan and a $350
million asset sale term loan, all bearing interest at a rate of LIBOR plus 3%.
In addition, the Company obtained a $550 million increasing rate bridge loan,
initially bearing interest at a rate of 10.5%. The asset sale term loan and a
portion of the bridge loan were re-paid from the proceeds of the sale of certain
dmc2 related businesses in September 2001. In December 2001, the Company
completed its $400 million offering of 9.25% Senior Subordinated Notes due 2011.
The net proceeds were used to repay the remaining outstanding indebtedness under
its bridge loan and a portion of the outstanding indebtedness under its credit
facilities. In January 2002, the Company completed an offering of 4.025 million
shares of common stock. The $225.7 million of net proceeds were used to repay
outstanding indebtedness under the Company's credit facilities.

The Company's credit facilities include covenants which 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, 2001 and believes that it
will have sufficient cash generated by operations and through its aforementioned
common stock offering to meet future covenant requirements. Cash generated by
operations and through its credit facilities should also be sufficient to
provide for future working capital and capital expenditure requirements and to
pay quarterly dividends on its common stock, subject to the Board's discretion.
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.

The Company 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 and metal leases out at December 31, 2001 were
$276.1 million and $110.7 million, respectively. Degussa AG has agreed to lease
to the Company precious metals up to an aggregate amount of approximately
12

$297 million, until August 10, 2002, if the Company is otherwise unable to lease
precious metals from other sources. Since the acquisition, the Company has not
leased any precious metals from Degussa AG.

The Company has ongoing capital expenditure programs to improve its processing
technology and plant and equipment, and to expand capacity to accommodate future
growth. The Company anticipates that capital spending, exclusive of acquisitions
or joint ventures, will approximate $88 million in 2002.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financial activities, is
exposed to changes in commodity 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 commodity
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. Nickel
historically has been sourced primarily from Australia and Brazil. 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. 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 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 metals 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.
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

13

rates and business financing requirements (see Note E). The following table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates of the Company's long term-debt.

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 price of raw materials, liabilities for
non-U.S. operating expenses and income taxes are denominated in local
currencies. 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 dmc(2) increased our exposure to
fluctuations in foreign currency exchange rates. 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.

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 raw material metal with the selling prices it currently charges for
its products. The balance sheet amounts of inventory will reflect the quantities
of metal in inventory valued at metal prices paid for 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 amount may exceed the amount the Company could
realize on sale. In this case, the Company would record a lower of cost or
market adjustment.

14

Long-lived assets -- Long-lived assets are assessed for impairment when
operating profits for the related business 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
reserve.

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.

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.

Important facts that may affect the Company's expectations, estimates or
projections include:

- - the price and supply of raw materials, particularly cobalt, copper, nickel,
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 dmc(2) and the Company's ability to
refinance or repay that debt; and

- - the effect of fluctuations in currency exchange rates on the Company's
international operations.

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 13
through 15 of this report.

15

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, 2001 and 2000, and the related statements of consolidated
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.

ERNST & YOUNG LLP

Cleveland, Ohio
March 27, 2002

16

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.
17

STATEMENTS OF CONSOLIDATED INCOME

See accompanying notes to consolidated financial statements.

18

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.
19

STATEMENTS OF CONSOLIDATED CASH FLOWS

See accompanying notes to consolidated financial statements.
20

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.

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.

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.

Long-Lived Assets -- 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.

For acquisitions completed prior to July 1, 2001, goodwill is amortized on a
straight-line basis over 20 to 40 years. Other intangibles represent principally
patents, trademarks, technology acquired and capitalized software and are being
amortized on a straight-line basis over five to seventeen years.

Long-lived assets are assessed for impairment when operating profits for the
related business indicate that the carrying value may not be recoverable. 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.

Research and Development -- Selling, general and administrative expenses include
research and development costs of $20,486, $13,308 and $11,332 in 2001, 2000 and
1999, 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
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 D, "Metals Financial Instruments." The use of interest rate swaps to
hedge interest rate risk on the Company's variable rate

21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

debt is discussed in Note E, "Debt and Other Financial Instruments." The use of
foreign exchange contracts to hedge foreign currency risk associated with
foreign operations is managed with foreign exchange contracts and is also
discussed in Note E.

Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. SFAS No. 133 requires all derivative financial
instruments to be recorded on the balance sheet at fair value. Accounting for
the change in the fair value (that is, gain or loss) from the financial
instrument depends on whether it has been designated and is effective as a hedge
and, if so, on the nature of the hedging activity. The adoption of SFAS No. 133
resulted in cumulative effect adjustment of approximately $1,600.

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 in
shareholders' equity and subsequently reclassified to net income when the hedged
item affects net income. Any ineffective portions of the cash flow hedges are
recognized immediately in net income.

The gain or loss related to financial instruments that are not designated as
hedges are recognized immediately in net income.

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 stock options
using the intrinsic value method. Accordingly, compensation expense is not
recognized for the stock option grants.

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.

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. Shipping and handling are included in cost of products sold and
are included in the sales price when billed to customers.

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.

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.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Recently Issued Accounting Pronouncements -- In June 2001, the Financial
Accounting Standards Board issued SFAS 141, "Business Combination," and SFAS
142, "Goodwill and Other Intangible Assets." SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS 142 will require that goodwill and certain intangibles no
longer be amortized, but instead tested for impairment at least annually. SFAS
142 is required to be applied starting in the fiscal year beginning after
December 15, 2001. The adoption of SFAS 142 will result in an annual decrease in
pre-tax amortization expense of approximately $6,700.

In the third quarter of 2001, the FASB issued SFAS No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets." This Statement addresses the
conditions under which an impairment charge should be recorded related to
long-lived assets to be held and used, except for goodwill, and those to be
disposed of by sale or otherwise. The provisions of this Statement are effective
January 1, 2002. The Company does not expect this Statement to have a material
impact on its financial position, results of operations or cash flows.

Financial Presentation Changes -- Certain amounts for prior years have been
reclassified to conform to the current year presentation.

B. ACQUISITIONS AND PRO FORMA RESULTS OF OPERATIONS
On August 10, 2001, the Company acquired dmc(2) Degussa Metals Catalysts Cerdec
(dmc(2)) for a purchase price of approximately $1.120 billion, including cash
acquired and related financing and transaction costs. dmc(2) is a worldwide
provider of metal-based functional materials for a wide variety of end markets.
The acquisition of dmc(2) 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 dmc(2) for a cash purchase price of $525.5 million.
In both transactions, the purchase price is subject to working capital
adjustments, which may ultimately impact the final purchase price.

The acquired assets and liabilities of dmc(2) are recorded at estimated fair
values, as determined by the Company's management, based on information
currently available, including its responsibility for any environmental or legal
matters at the date of acquisition. Accordingly, the allocation of the purchase
price to the acquired assets and liabilities of dmc(2) may be revised at a later
date as fair value determinations are finalized, including appraisals of
property, plant and equipment and intangible assets.

The preliminary allocation of the aggregate purchase price of the businesses
acquired of dmc(2) is as follows (in millions):

Net assets acquired......................................... $ 498.7
Fair value of assets sold................................... 525.5
Adjust acquired net assets to estimated fair value.......... 143.4
Record preliminary adjustment for acquired intangible
assets.................................................... 18.1
Establish deferred tax liability............................ (67.5)
Record preliminary estimate of goodwill..................... 2.2
--------
Total aggregate purchase price.................... $1,120.4
========

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Acquired intangible assets, consisting of patents and trademarks, are being
amortized over their estimated useful lives of 15 years. Goodwill, which is
anticipated to be principally non-deductible for tax purposes, is attributable
to the precious metal chemistry segment.

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 $45.7 million. The
combined sales of these entities were $75.3 million in 2001.

On April 4, 2000, the Company acquired Outokumpu Nickel Oy (OKN) for a purchase
price of $188.1 million, including related financing and transaction costs. OKN
manufactures, distributes and sells a broad range of nickel products,
principally plating and alloy-grade cathodes and briquettes. The acquisition of
OKN, was financed through bank borrowings and was recorded using the purchase
method of accounting. The Company is resolving certain matters with the seller
related to the net assets acquired, which may ultimately impact the final
purchase price. Accordingly, the allocation of the purchase price is subject to
revision, which is not expected to be material, based on finalization of the
purchase price.

Pro forma net sales, net income and net income per share, for the years ended
December 31, 2001 and 2000, as if the acquisitions had occurred as of January 1,
2001 and 2000, respectively, would have been as follows:

The pro forma results include preliminary estimates and assumptions which the
Company's management believes are reasonable. However, the pro forma results are
not necessarily indicative of the results which would have occurred if the
acquisitions had occurred on the dates indicated, or which may result in the
future.

The aforementioned pro forma information reflects the following assumptions:
amortization of financing costs over 6 years; adjustment of depreciation expense
over 10 years; interest cost on the incremental funds borrowed; and the issuance
of equity securities.

C. INVENTORIES
Inventories consist of the following:

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

D. 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 in Committed Metal Positions and Hedged Metal
Obligations, with the resulting changes in the fair value due to fluctuating
metal prices recorded as a gain or loss in income from operations.

The table below summarizes the open metals forwards/futures contracts:

- ---------------

(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, 2001, the notional value of the open contracts
approximated $22,433. The fair value of the unrealized gain/loss on those
contracts, based on current settlement prices at December 31, 2001, approximated
$279 receivable.

E. DEBT AND OTHER FINANCIAL INSTRUMENTS
Long-term debt consists of the following:

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

In August 2001, the Company's credit facilities were revised and increased to
$1.31 billion, in conjunction with the acquisition of dmc(2) (which is discussed
more fully in Note B). These credit facilities were comprised of a $325 million
revolving credit facility, a $135 million five year term loan, a $500 million
six year term loan and a $350 million asset sale term loan, all bearing interest
at a rate of LIBOR plus 3%. In addition, the Company obtained a $550 million
increasing rate bridge loan, initially bearing interest at a rate of 10.5%. The
asset sale term loan and a portion of the bridge loan were re-paid from the
proceeds of the sale of certain dmc(2) related businesses. On December 13, 2001,
the Company completed its $400 million offering of 9.25% Senior Subordinated
Notes due 2011. The net proceeds were used to repay the remaining outstanding
indebtedness under its bridge loan and a portion of the outstanding indebtedness
under its credit facilities. The Company retired the bridge loan early and as a
result incurred an extraordinary loss of $4,600 after-tax. Under the credit
agreement, the Company must meet various financial covenants, and there are
restrictions on investments and dividend payments. Investments in Weda Bay
Minerals, Inc. (see Note L) are limited to $20 million. Annual dividends are
limited to the greater of $15 million or 25% of consolidated net income. Notes
payable to the banks are fully collateralized by a portion of the Company's
assets. As described in Note O, the Company's domestic subsidiaries are the
guarantors of the Senior Subordinated Notes. At December 31, 2001, the Company
had approximately $31 million available under its revolving credit facilities.

The Company has entered into several interest rate swap agreements to convert
the variable interest rates on an aggregate contract amount of $55 million to an
average fixed rate of 5.20% plus 1.25% to 2.5% for the period ending February
14, 2003. The Company has also entered into several interest rate swap
agreements to convert the variable interest rates on an aggregate contract
amount of $120 million to an average fixed rate of 6.88% plus 1.25% to 2.5% for
the period ending April 25, 2003. These interest rate swap agreements are
recorded as cash flow hedges.

At December 31, 2001, the combined effective rate of the Company's bank
borrowings and the related swap agreements was 6.6%. 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, 2001, the fair values of the Company's interest rate swaps
approximated $5,525 payable.

Aggregate annual maturities of long-term debt for the five years following
December 31, 2001 are as follows: 2002 -- $20,188; 2003 -- $26,938;
2004 -- $33,687; 2005 -- $40,438 and 2006 -- $325,363. Interest paid, net of
capitalized amounts, was $65,210, $39,752, and $19,112 for the years ended
December 31, 2001, 2000 and 1999, respectively. Interest capitalized as part of
the acquisition or construction of major fixed assets was $10,307 in 2001,
$10,972 in 2000 and $7,057 in 1999. At December 31, 2001, the carrying value of
the Company's debt approximated its fair value.

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

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 U.S. Dollar. The
following table summarizes the Company's open foreign currency forward
contracts:

- ---------------

(1) Market value is determined by financial institution counterparties.

F. INCOME TAXES
Income (loss) before income taxes, minority interests, equity income and
extraordinary item consists of the following:

Income taxes are summarized as follows:

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

Significant components of the Company's deferred income taxes are as follows:

At December 31, 2001, certain United States subsidiaries had operating loss
carryforwards of approximately $129,700. These carryforwards expire at various
dates from 2019 through 2021.

The Company has not provided additional United States income taxes on
approximately $490,000 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 2002, 2003, and 2005 respectively, reduced income
tax expense by $9,005 or $.37; $2,572 or $.11; and $1,680 or $.07 per common
share -- assuming dilution, in 2001, 2000 and 1999, respectively.

Income tax payments were $28,293, $15,867 and $7,355 during the years ended
December 31, 2001, 2000 and 1999, respectively.

G. 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

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

non-union employees. Aggregate defined contribution plan expenses were $6,051,
$5,565 and $5,351 in 2001, 2000 and 1999, respectively.

The Company has non-contributory defined benefit pension plans and other
postretirement benefit plans, primarily health care and life insurance for
certain employees in the United States and Germany. Components of plan
obligations and assets, and the recorded asset (liability) at December 31 are as
follows:

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 $48,479, $44,215 and $15,413 respectively, as of December
31, 2001 and $3,137, $3,137 and $2,616, respectively, as of December 31, 2000.

29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

The components of net periodic benefit cost (income) for the years ended
December 31 are as follows: