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		52-1736882
(state or other jurisdiction of		(I.R.S., Employer
incorporation or organization)		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 þ Noo

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 Noo

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

Yes o Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2005: Common Stock, $.01 Par Value – 28,927,284 shares

 

 

OM GROUP, INC.
INDEX

Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets – September 30, 2005 and December 31, 2004
Unaudited Condensed Statements of Consolidated Operations – Three months ended September 30, 2005 and 2004; Nine months ended September 30, 2005 and 2004
Unaudited Condensed Statements of Consolidated Cash Flows – Nine months ended September 30, 2005 and 2004
Notes to Unaudited Condensed Consolidated Financial Statements
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
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders — Not applicable
Item 5. Other information
Item 6. Exhibits
EX-10.43 LETTER
EX-10.44: SEVERANCE AGREEMENT
EX-12 COMPUTATION OF EARNINGS
EX-31.1 CERTIFICATION
EX-31.2 CERTIFICATION
EX-32 CERTIFICATION

OM GROUP, INC.

		September 30,				December 31,
		2005				2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	59,868			$	26,779
Accounts receivable, less allowances			169,556				161,346
Inventories			308,335				415,517
Advances to suppliers			9,982				32,498
Other			38,758				52,719
Total Current Assets			586,499				688,859
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land			4,800				4,982
Buildings and improvements			163,795				161,566
Machinery and equipment			508,123				493,930
Furniture and fixtures			17,322				17,130
			694,040				677,608
Less accumulated depreciation			321,987				287,796
			372,053				389,812
OTHER ASSETS
Goodwill			179,761				181,871
Receivables from joint venture partner			29,379				29,379
Other			45,313				44,780
TOTAL ASSETS		$	1,213,005			$	1,334,701
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Long-term debt in default		$	—			$	400,000
Current portion of long-term debt			5,750				5,750
Accounts payable			90,175				132,312
Accrued employee costs			20,747				17,062
Retained liabilities of businesses sold			16,532				21,837
Shareholder litigation accrual			—				74,000
Other			38,277				50,835
Total Current Liabilities			171,481				701,796
LONG-TERM LIABILITIES
Long-term debt			418,458				24,683
Deferred income taxes			26,350				31,033
Shareholder litigation accrual			7,649				18,000
Minority interest			38,393				44,168
Other			35,082				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 28,988,519 shares in 2005 and 28,494,098 shares in 2004			289				285
Capital in excess of par value			509,500				498,250
Retained deficit			(4,834	)			(32,080	)
Treasury stock (61,235 shares in 2005 and 14,025 shares in 2004, at cost)			(2,226	)			(710	)
Accumulated other comprehensive income			12,863				21,287
Total Stockholders’ Equity			515,592				487,032
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,213,005			$	1,334,701

See accompanying notes to unaudited condensed consolidated financial statements.

OM GROUP, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net sales		$	306,586			$	311,902			$	973,227			$	992,270
Cost of products sold			274,442				234,606				844,659				732,326
			32,144				77,296				128,568				259,944
Selling, general and administrative expenses			20,562				27,321				76,301				93,843
INCOME FROM OPERATIONS			11,582				49,975				52,267				166,101
OTHER INCOME (EXPENSE)
Interest expense			(10,159	)			(9,766	)			(30,411	)			(30,100	)
Foreign exchange gain (loss)			545				(2,967	)			(2,267	)			(6,802	)
Investment and other income, net			1,246				1,803				7,099				5,867
			(8,368	)			(10,930	)			(25,579	)			(31,035	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST			3,214				39,045				26,688				135,066
Income tax expense			1,190				8,062				6,981				36,177
Minority interest			(1,204	)			1,193				(5,775	)			3,166
INCOME FROM CONTINUING OPERATIONS			3,228				29,790				25,482				95,723
DISCONTINUED OPERATIONS
Income from operations, net of tax			139				—				1,764				—
NET INCOME		$	3,367			$	29,790			$	27,246			$	95,723
Net income per common share — basic
Continuing operations		$	0.11			$	1.05			$	0.89			$	3.36
Discontinued operations			0.01				—				0.06				—
Net income		$	0.12			$	1.05			$	0.95			$	3.36
Net income per common share — assuming dilution
Continuing operations		$	0.11			$	1.04			$	0.89			$	3.35
Discontinued operations			0.01				—				0.06				—
Net income		$	0.12			$	1.04			$	0.95			$	3.35
Weighted average shares outstanding
Basic			28,591				28,470				28,530				28,470
Assuming dilution			28,615				28,642				28,593				28,613

See accompanying notes to unaudited condensed consolidated financial statements.

OM GROUP, INC.

		Nine Months Ended
		September 30,
		2005				2004
OPERATING ACTIVITIES
Income from continuing operations		$	25,482			$	95,723
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization			37,036				37,856
Foreign exchange loss			2,267				6,802
Gain on sale of investment in equity securities			(2,359	)			—
Gain on Weda Bay note receivable			(2,500	)			—
Minority interest			(5,775	)			3,166
Income from equity method investment			(3,876	)			(3,959	)
Other non-cash items			(5,256	)			16,317
Changes in operating assets and liabilities
Decrease (increase) in inventories			107,182				(138,607	)
Payment of shareholder litigation settlement			(74,000	)			—
Other changes in operating assets and liabilities			(28,064	)			(61	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			50,137				17,237
INVESTING ACTIVITIES
Expenditures for property, plant and equipment			(18,489	)			(11,909	)
Proceeds from sale of investments in equity securities			4,534				—
Proceeds from Weda Bay note receivable			2,500				—
Proceeds from MPI note receivable			3,035				—
Acquisition of business			—				(6,715	)
NET CASH USED IN INVESTING ACTIVITIES			(8,420	)			(18,624	)
FINANCING ACTIVITIES
Payments of long-term debt and revolving line of credit			(54,185	)			—
Proceeds from the revolving line of credit			49,872				—
Proceeds from exercise of stock options			117				—
NET CASH USED IN FINANCING ACTIVITIES			(4,196	)			—
Effect of exchange rate changes on cash and cash equivalents			(4,432	)			(498	)
Increase (decrease) in cash and cash equivalents			33,089				(1,885	)
Cash and cash equivalents at beginning of period			26,779				54,719
Cash and cash equivalents at end of period		$	59,868			$	52,834

See accompanying notes to unaudited condensed consolidated financial statements.

Part I Financial Information

OM GROUP, INC.

September 30, 2005

(Thousands of dollars, except as noted and per share amounts)

Note A Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of OM Group, Inc. and its subsidiaries (the “Company”). These financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and 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 unaudited condensed consolidated 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:

		September 30,				December 31,
		2005				2004
Raw materials and supplies		$	192,828			$	248,536
Work in process			27,774				37,711
Finished goods			87,733				129,270
		$	308,335			$	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 September 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 $21.3 million at September 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 receivables bear interest at a floating rate based on LIBOR plus a margin. The interest rate on the $22.9 million is LIBOR plus 2.75%, or 6.46%, at September 30, 2005. The interest rate on the $6.5 million is LIBOR plus 1.25%, or 4.35%, at September 30, 2005. 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

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 alleged 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 sought 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 entered into a Stipulation and Agreement of Settlement (the “Shareholder Class Action Agreement”) dated June 6, 2005, which Shareholder Class Action Agreement, as amended, was approved on September 8, 2005 by the U.S. District Court (the “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. During the third quarter of 2005, $8.5 million was paid by the issuance of 407,478 shares of common stock and the remaining $74.0 million was paid in cash to settle these lawsuits.

Insurance proceeds are available for contribution to the resolution of the shareholder class action lawsuits. As of September 30, 2005, insurance proceeds of $25.0 million have been received, representing both reimbursement of legal expenses incurred in 2003, 2004 and 2005 related to the lawsuits (approximately $16.5 million in total, of which $1.9 million and $3.0 million was received and recognized in the Unaudited Condensed Statements of Consolidated Operations in the first and second quarter of 2005, respectively), as well as reimbursement of a portion of the settlement amount paid by the Company during 2005 ($8.5 million which was received and recognized as income in the second quarter of 2005). Additional insurance proceeds of $19.0 million were received by the Company on November 4, 2005 and will be recognized as income in the fourth quarter of 2005.

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 then 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 and the lead plaintiffs of the shareholder derivative lawsuits have entered into a Stipulation and Agreement of Settlement dated September 23, 2005 (the “Shareholder Derivative Agreement”) which was preliminarily approved on September 29, 2005 by the U.S. District Court hearing the cases. The Shareholder Derivative Agreement 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.

The 380,000 shares of common stock expected to be issued in connection with the shareholder derivative litigation are marked-to-market through the unaudited condensed statement of consolidated operations based on changes in the Company’s stock price, as the liability is fixed in shares. The Company recognized income of $1.8 million and $1.9 million for the three and nine months ended September 30, 2005, respectively, related to the mark-to-market of these shares. At September 30, 2005, the Company had an accrual of $7.6 million related to the shareholder derivative lawsuit.

At December 31, 2004, the Company had an aggregate accrual of $92.0 million for the shareholder class action and shareholder derivative lawsuits.

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 September 30, 2005 and December 31, 2004 the Company has recorded environmental liabilities of $7.1 million and $9.5 million, respectively, primarily related to remediation and decommissioning at the Company’s closed manufacturing sites in Newark, New Jersey; St. George, Utah and Vasset, France. The Company has recorded $3.9 million in other current liabilities and $3.2 million in other long-term liabilities as of September 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 September 30,
		Defined Benefit Pension Plan								Other Postretirement 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

		Nine months ended September 30,
		Defined Benefit Pension Plan								Other Postretirement Benefits
		2005				2004				2005				2004
Service cost		$	—			$	—			$	51			$	—
Interest cost			915				648				189				150
Expected return on plan assets			(708	)			(729	)			—				—
Curtailment			4,728				—				—				—
Other			162				24				30				(24	)
Net periodic benefit expense (income)		$	5,097			$	(57	)		$	270			$	126

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, FSP 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 Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(amounts in thousands, except per share amounts)
Income from continuing operations		$	3,228			$	29,790			$	25,482			$	95,723
Weighted average shares outstanding			28,591				28,470				28,530				28,470
Dilutive effect of stock options and restricted stock			24				172				63				143
Weighted average shares outstanding – assuming dilution			28,615				28,642				28,593				28,613
Income per common share from continuing operations		$	0.11			$	1.05			$	0.89			$	3.36
Income per common share from continuing operations - assuming dilution		$	0.11			$	1.04			$	0.89			$	3.35

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(amounts in thousands, except per share amounts)
Net income		$	3,367			$	29,790			$	27,246			$	95,723
Weighted average shares outstanding			28,591				28,470				28,530				28,470
Dilutive effect of stock options and restricted stock			24				172				63				143
Weighted average shares outstanding – assuming dilution			28,615				28,642				28,593				28,613
Net income per common share		$	0.12			$	1.05			$	0.95			$	3.36
Net income per common share - assuming dilution		$	0.12			$	1.04			$	0.95			$	3.35

Note G Comprehensive Income

During the three months ended September 30, 2005 and 2004, total comprehensive income was $0.5 million and $33.2 million, respectively. Total comprehensive income for the nine months ended September 30, 2005 and 2004 was $18.8 million and $93.2 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 income tax provision is based on the application of a forecasted annual effective income tax rate

applied to the current quarter’s year-to-date pre-tax income. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings, taxing jurisdictions in which the earnings will be generated, the Company’s ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated effective annual income tax rate.

The Company’s effective tax rate is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Effective income tax rate			37.0	%			20.6	%			26.2	%			26.8	%

Excluding discrete items, the effective income tax rate is lower than the statutory rate in the United States primarily due to a higher proportion of earnings in jurisdictions having lower statutory tax rates (primarily in Finland) and a tax “holiday” from income taxes in Malaysia, both offset by losses in the United States with no corresponding tax benefit. In the third quarter of 2005, discrete items include a $0.7 million charge related to the liquidation of an entity in Thailand; and in the third quarter of 2004 discrete items include a benefit of $1.7 million as a result of adjusting deferred taxes in Finland for a rate change from 29% to 26% and a benefit of $1.7 million related to refundable Malaysian income taxes.

There is currently a case pending in the European Court of Justice that could impact the taxation of companies that do business in the European Union. Depending on the outcome of this case, the Company’s effective income tax rate could be negatively affected. At this time it is not practicable to predict the outcome of the case or estimate any impact on the taxation of the Company.

Note I Debt and Other Financial Instruments

Debt consists of the following:

		September 30,				December 31,
		2005				2004
Senior Subordinated Notes			400,000			$	400,000
Note payable — bank			18,687				23,000
Deferred gain on termination of fair value hedges			6,170				6,711
Fair value of interest rate swaps (fair value hedges)			(649	)			722
			424,208				430,433
Current: Current portion			5,750				5,750
Long-term debt in default			—				400,000
Total long-term debt		$	418,458			$	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 Company also was delayed in filing its Form 10-K for the year ended December 31, 2004 and its Form 10-Q for the first quarter of 2005, which resulted in new events of default on August 17, 2005 under the indenture governing the Notes. However, the Company filed its 2004 Form 10-K on August 22, 2005 and filed its Form 10-Qs for the first and second quarters of 2005 on September 23, 2005, at which time it became current with respect to its required SEC periodic reports. At September 30, 2005, the Notes are classified as long-term as the Company is no longer in default under the indenture and the holders of the Notes no longer have the right to accelerate payment of the Notes.

Since the noteholders had the right to accelerate payment 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. Because the Company is no longer in default under the indenture and the holders of the Notes no longer have the right to accelerate payment of the Notes, the Company believes the conditions that raised substantial doubt about the Company’s ability to continue as a going concern have been resolved.

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 outstanding under this facility at September 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 delayed SEC reports as described above, the Company is no longer in default and is 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. At September 30, 2005, the balance of this loan was $18.7 million. 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 partners, 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 would be recognized when settled. Including amounts accrued in previous periods, the total liability related to Mr. Mooney as of September 30, 2005 is $11.2 million.

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 $9.4 million and $5.2 million, respectively, for the nine months ended September 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 (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs – An amendment of ARB No. 43.” SFAS No. 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 No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. SFAS No. 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 No. 151 is not expected to have a material impact on the Company’s results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payments” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Issued to Employees” and supersedes APB Opinion No. 25, ”Accounting for Stock Issued to Employees.” SFAS No. 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 No. 123R is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect the adoption of SFAS No. 123R will have on the Company’s results of operations and financial position.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which expresses views of the SEC staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations, and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance of SAB No. 107 when it adopts SFAS No. 123R.

In May 2005, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 00-19-1, “Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation.” The FSP clarifies that, for freestanding financial instruments originally issued as employee compensation, a requirement to deliver registered shares, in and of itself, will not result in liability classification. The Company will apply the guidance in this FSP in accordance with the effective date and transition provisions of SFAS No. 123R.

The American Jobs Creation Act of 2004 (the “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 FASB issued FSP 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 109-1”). In accordance with FSP 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 or the first nine months of 2005. 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 FASB issued FSP 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 does not expect to repatriate any foreign earnings under the repatriation provision of the AJCA.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the effect the adoption of FIN No. 47 will have on the Company’s results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt SFAS No. 154 beginning January 1, 2006.

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 its primary manufacturing sites are in Finland, the Company also has manufacturing and other facilities in Australia, North America, other countries in 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.

OM GROUP, INC.
SEGMENT DATA
(Amounts in thousands)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net sales
Cobalt		$	129,268			$	163,281			$	422,883			$	492,389
Nickel			191,915				170,479				592,457				559,652
Intercompany sales between segments:
Cobalt			(347	)			(582	)			(831	)			(2,365	)
Nickel			(14,250	)			(21,276	)			(41,282	)			(57,406	)
Total net sales		$	306,586			$	311,902			$	973,227			$	992,270
Income from operations
Cobalt		$	6,521			$	39,125			$	21,007			$	129,466
Nickel			12,233				21,056				55,714				79,516
Corporate expenses (a)			(7,172	)			(10,206	)			(24,454	)			(42,881	)
Total income from operations		$	11,582			$	49,975			$	52,267			$	166,101
Interest expense			(10,159	)			(9,766	)			(30,411	)			(30,100	)
Foreign exchange gain (loss)			545				(2,967	)			(2,267	)			(6,802	)
Investment and other income, net			1,246				1,803				7,099				5,867
Income from continuing operations before income taxes and minority interest		$	3,214			$	39,045			$	26,688			$	135,066

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:

		September 30, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Balance Sheet Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	17,548			$	786			$	41,534			$	—			$	59,868
Accounts receivable, less allowances			498,468				92,708				349,688				(771,308	)			169,556
Inventories			—				54,220				254,115				—				308,335
Other			—				4,204				44,536				—				48,740
Total current assets			516,016				151,918				689,873				(771,308	)			586,499
Property, plant and equipment — net			—				34,235				337,818				—				372,053
Goodwill			75,830				68,908				35,023				—				179,761
Intercompany receivables			274,958				—				988,347				(1,263,305	)			—
Investment in subsidiaries			92,347				—				2,160,526				(2,252,873	)			—
Receivables from joint venture partner			—				—				29,379				—				29,379
Other assets			8,100				12,653				24,560				—				45,313
Total assets		$	967,251			$	267,714			$	4,265,526			$	(4,287,486	)		$	1,213,005
Current liabilities:
Current portion of long-term debt		$	—			$	—			$	5,750			$	—			$	5,750
Accounts payable			1,606				102,860				317,769				(332,060	)			90,175
Other accrued expenses			27,505				14,305				33,746				—				75,556
Total current liabilities			29,111				117,165				357,265				(332,060	)			171,481
Long-term debt			405,521				—				12,937				—				418,458
Deferred income taxes			—				—				26,350				—				26,350
Other long-term liabilities and minority interest			17,027				19,172				44,925				—				81,124
Intercompany payables			—				497,189				1,192,176				(1,689,365	)			—
Stockholders’ equity			515,592				(365,812	)			2,631,873				(2,266,061	)			515,592
Total liabilities and stockholders’ equity		$	967,251			$	267,714			$	4,265,526			$	(4,287,486	)		$	1,213,005

		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, less allowances			496,692				79,383				531,902				(946,631	)			161,346
Inventories			—				58,450				357,067				—				415,517
Other			—				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:
Long-term debt in default		$	400,000			$	—			$	—			$	—			$	400,000
Current portion of long-term debt			—				—				5,750				—				5,750
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 and stockholder’s equity		$	1,019,120			$	261,937			$	4,522,878			$	(4,469,234	)		$	1,334,701

		Three months ended September 30, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	51,577			$	345,305			$	(90,296	)		$	306,586
Cost of products sold			—				42,461				322,277				(90,296	)			274,442
			—				9,116				23,028				—				32,144
Selling, general and administrative expense			—				9,116				11,446				—				20,562
Income from operations			—				—				11,582				—				11,582
Interest expense			(9,800	)			(2,297	)			(12,420	)			14,358				(10,159	)
Foreign exchange gain			—				4				541				—				545
Investment and other income, net			186				327				15,091				(14,358	)			1,246
Income (loss) from continuing operations before income taxes and minority interest			(9,614	)			(1,966	)			14,794				—				3,214
Income tax expense			—				—				1,190				—				1,190
Minority interest			—				—				(1,204	)			—				(1,204	)
Income (loss) from continuing operations			(9,614	)			(1,966	)			14,808				—				3,228
Income from discontinued operations, net of tax			139				—				—				—				139
Net income (loss)		$	(9,475	)		$	(1,966	)		$	14,808			$	—			$	3,367

		Three months ended September 30, 2004
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	53,391			$	400,555			$	(142,044	)		$	311,902
Cost of products sold			—				34,584				342,066				(142,044	)			234,606
			—				18,807				58,489				—				77,296
Selling, general and administrative expense			—				17,302				10,019				—				27,321
Income from operations			—				1,505				48,470				—				49,975
Interest expense			(9,367	)			(1,311	)			(12,853	)			13,765				(9,766	)
Foreign exchange gain (loss)			(129	)			17				(2,855	)			—				(2,967	)
Investment and other income, net			1,620				314				13,634				(13,765	)			1,803
Income (loss) before income taxes and minority interest			(7,876	)			525				46,396				—				39,045
Income tax expense			—				—				8,062				—				8,062
Minority interest			—				—				1,193				—				1,193
Net income (loss)		$	(7,876	)		$	525			$	37,141			$	—			$	29,790

		Nine months ended September 30, 2005
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	165,518			$	1,120,668			$	(312,959	)		$	973,227
Cost of products sold			—				137,341				1,020,277				(312,959	)			844,659
			—				28,177				100,391				—				128,568
Selling, general and administrative expense			—				36,921				39,380				—				76,301
Income (loss) from operations			—				(8,744	)			61,011				—				52,267
Interest expense			(29,205	)			(6,541	)			(38,659	)			43,994				(30,411	)
Foreign exchange loss			—				(27	)			(2,240	)			—				(2,267	)
Investment and other income, net			4,984				850				45,259				(43,994	)			7,099
Income (loss) from continuing operations before income taxes and minority interest			(24,221	)			(14,462	)			65,371				—				26,688
Income tax expense			—				—				6,981				—				6,981
Minority interest			—				—				(5,775	)			—				(5,775	)
Income (loss) from continuing operations			(24,221	)			(14,462	)			64,165				—				25,482
Income from discontinued operations, net of tax			1,764				—				—				—				1,764
Net income (loss)		$	(22,457	)		$	(14,462	)		$	64,165			$	—			$	27,246

		Nine months ended September 30, 2004
						Combined				Combined
						Guarantor				Non-guarantor
Income Statement Data		The Company				Subsidiaries				Subsidiaries				Eliminations				Total
Net sales		$	—			$	161,963			$	1,266,244			$	(435,937	)		$	992,270
Cost of products sold			—				118,097				1,050,166				(435,937	)			732,326
			—				43,866				216,078				—				259,944
Selling, general and administrative expense			—				62,290				31,553				—				93,843
Income (loss) from operations			—				(18,424	)			184,525				—				166,101
Interest expense			(28,496	)			(4,333	)			(42,679	)			45,408				(30,100	)
Foreign exchange gain (loss)			(375	)			9				(6,436	)			—				(6,802	)
Investment and other income, net			5,260				528				45,487				(45,408	)			5,867
Income (loss) before income taxes and minority interest			(23,611	)			(22,220	)			180,897				—				135,066
Income tax expense			—				—				36,177				—				36,177
Minority interest			—				—				3,166				—				3,166
Net income (loss)		$	(23,611	)		$	(22,220	)		$	141,554			$	—			$	95,723