OM GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 1O-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, 1998

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:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

Common Stock, par value $0.01 per share New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] [ ] No

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 11,
1999 was approximately $736,281,116.

As of March 11, 1999, there were 23,703,215 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 4, 1999 are incorporated by reference.
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TABLE OF CONTENTS

PAGE
----

PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 4
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......... 5

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 6
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 11
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors.............................. 12
Consolidated Balance Sheets as of December 31, 1998 and
1997........................................................ 13
Statements of Consolidated Income for the years ended
December 31, 1998, 1997 and 1996............................ 14
Statements of Consolidated Stockholders' Equity for the
years ended
December 31, 1998, 1997 and 1996............................ 15
Statements of Consolidated Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................ 16
Notes to Consolidated Financial Statements.................. 17

PART III
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
Item 13. Certain Relationships and Related Transactions.............. 28

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 29
Signatures.................................................. 32

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PART I

ITEM 1. BUSINESS

GENERAL
OM Group, Inc. (the Company) is a leading international producer and marketer of
value-added metal-based specialty chemicals and powders. The Company supplies
more than 400 different product offerings -- principally categorized as metal
carboxylates, inorganic metal salts, and metal powders for diverse applications
to more than 25 industries. Metal carboxylates 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. Metal salts 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. Typically, the Company's
products represent a small portion of the customer's total cost of manufacturing
or processing, but are critical to the customer's product performance.

The Company operates in a single business segment with product lines comprised
of metal-based specialty chemicals.

COMPETITION
The Company's businesses are very competitive. Several of the Company's
competitors are divisions or subsidiaries of companies that are substantially
larger and have greater financial resources than the Company. However, the
Company believes it is the only producer that manufactures and markets three
categories of metal-based specialty chemicals -- carboxylates, inorganic salts
and powders. The Company believes it is the world's leading producer of cobalt
carboxylates, cobalt and nickel specialty inorganic salts and copper powders.
The Company also believes that it is the world's second largest producer of
cobalt extra-fine powders.

The Company believes that its focus on metal-based specialty chemicals as a core
business is an important competitive advantage. Competition in the metal-based
specialty chemicals market is based primarily on product quality, supply
reliability, price, service and technical support capabilities.

Generally, the Company is able to pass through to its customers increases and
decreases in raw material prices by increasing or decreasing, respectively, the
prices of its products. The degree of profitability of the Company depends, in
part, on the Company's ability to maintain the differential between its product
prices and raw material prices. The timing and amount of such adjustments in its
product prices depends upon the type of product sold and the inventories and
market share positions of the Company and its competitors.

The Company's flexibility with respect to the timing of its price adjustments is
greater with respect to carboxylates than with inorganic salts and powders.
Inorganic salt and powder prices respond almost immediately to changes in the
raw material base metal prices.

CUSTOMERS
The Company serves over 1,500 customers with no single customer accounting for
10% or more of the Company's net sales. During 1998, approximately 52% of the
Company's net sales were to customers in the Americas, 32% were to customers in
Europe and 16% 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.

RAW MATERIALS
The primary raw materials used by the Company in manufacturing its products are
cobalt, nickel and copper. The cost of 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 has historically been sourced
primarily from the

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Democratic Republic of Congo (DRC), Australia, Finland and Zambia. Although the
Company has never experienced a material shortage of cobalt, production problems
and political and civil instability in certain supplier countries may in the
future affect the supply and market prices of cobalt. 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.

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.

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. New products include new chemical formulations,
concentrations of various components, product forms and packaging methods.
Research and development expenses were approximately $10.4 million, $6.7
million, and $3.8 million for 1998, 1997, and 1996, respectively. In connection
with the acquisition of Auric Corporation (Fidelity), research and development
expenses increased in 1998 and are anticipated to increase at a rate of
approximately 5% per annum.

The Company's research staff of 83 full time persons conducts carboxylate, metal
salts and powders research and development at the Company's laboratories located
in Westlake, Ohio; Research Triangle Park, North Carolina; Newark, New Jersey;
and Kokkola, Finland. The Company's Finnish facility also maintains a research
agreement with Outokumpu Research Oy.

PATENTS AND TRADEMARKS
The Company holds approximately 170 patents 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 16 patents in the areas of hydrometallurgical processes,
solvent extraction, agitators and metal powders. The Company does not consider
any single patent to be material to its business as a whole.

ENVIRONMENTAL MATTERS
Since 1970, a wide variety of environmental laws and regulations have been
adopted by the United States and by foreign, state and local governments which
continue to be amended and supplemented. The Company is subject to these laws
and regulations as a result of its operations and use of certain substances that
are, or have been, used, produced or discharged by the Company's plants. In
addition, soil and/or groundwater contamination presently exists and may in the
future be discovered at levels which require remediation under environmental
laws at properties now or previously owned, operated or used by the Company.

Annual environmental compliance costs were approximately $3.2 million in 1998.
Such 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 in light of the fact that environmental laws and
regulations are becoming increasingly stringent, including the likely lowering
of permissible discharge limits.

The Company has also incurred capital expenditures of approximately $1.1 million
in 1998 in connection with environmental compliance. The Company anticipates
that capital expenditure levels for such purposes will increase to approximately
$3.1 million in 1999, as it continues to modify on an ongoing, regular basis,
certain of its processes which may have an environmental impact.

Due to the ongoing development and understanding of facts and remedial options
and due to the possibility of unanticipated regulatory developments, the amount
and timing of future environmental expenditures could vary significantly from
those currently anticipated. Although it is difficult to quantify the potential
impact of compliance with or liability under environmental protection laws,
based on presently available information, the

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Company believes that the ultimate aggregate cost to the Company 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, 1998, the Company had 988 full-time employees of which 626 were
located in the United States, 29 in Canada, 254 in Finland, 36 in Western Europe
and 43 in Asia-Pacific. Employees at the Company's facilities in Newark, New
Jersey; Research Triangle Park, North Carolina; Franklin, Pennsylvania; St.
George, Utah; Kuching, Malaysia; and Ezanville, France are non-unionized.
Employees at the Company's facilities in Kokkola, Finland are members of several
national workers' unions under various union agreements. Generally, such union
agreements have two-year terms. Employees at the Johnstown, Pennsylvania
facility are members of the United Steelworkers of America Union. The Johnstown
union agreement has a term of 5 years expiring in June of 2003. Employees at the
Belleville, Canada facility are members of the Communications, Energy and
Paperworkers Union of Canada. The Belleville union agreement has a term of five
years expiring in May, 2003. The Company believes relations with its employees
are good.

INTERNATIONAL OPERATIONS
Financial information related to international operations is contained in Note I
on page 26 of this report.

The Company's products are manufactured at facilities located in Belleville,
Canada; Kokkola, Finland; Ezanville, France; Kuching, Malaysia; Newark, New
Jersey; Research Triangle Park, North Carolina; Franklin, Pennsylvania;
Johnstown, Pennsylvania; and St. George, Utah. The Company conducts its
marketing and sales primarily from its offices in Dusseldorf, Germany; Research
Triangle Park, North Carolina; Westlake, Ohio; Newark, New Jersey; and Taipei,
Taiwan.

Although most of the Company's raw material purchases and product sales are
transacted in U.S. Dollars, liabilities for non-U.S. operating expenses and
income taxes are denominated in local currencies. Accordingly, fluctuations in
currency prices may affect the Company's operating results and net income.
Specifically, when the Finnish Markka has weakened against the U. S. Dollar,
there has been a net favorable effect on the Company due to lower operating
expenses and lower net balance sheet liabilities when translated into U. S.
Dollars. The reverse has been true when the Finnish Markka strengthened against
the U. S. Dollar. During 1998, in order to partially hedge the balance sheet
exposure to fluctuating rates, the Company entered into forward contracts to
purchase Finnish Markka. With the conversion of the Finnish Markka to the euro
as of January 1, 1999, the Company now enters into forward contracts to purchase
euro.

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 plant is located is leased with a remaining term of 92 years.
The land on which the St. George, Utah plant is located is leased with a
remaining term, including options, of 46 years. Otherwise, the real properties
comprising the Company's manufacturing facilities are owned by the Company.

The Company's Kokkola, Finland production facility (KCO) is situated on property
owned by Outokumpu Zinc Oy. KCO and Outokumpu Zinc Oy share certain physical
facilities, services and utilities under agreements with varying expiration
dates. Utilities and raw material purchase assistance contracts provide that KCO
jointly purchase with, or pay a fee to, affiliates of Outokumpu Oy for
assistance in negotiating contracts and securing bulk quantity discounts.

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

APPROXIMATE LEASED/
LOCATION FACILITY FUNCTION SQUARE FEET OWNED
-------- ----------------- ----------- -------

AMERICAS:
Newark, New Jersey Manufactures salts 21,000 owned
Marketing and administration offices 6,000 owned
Research and development facility 5,000 owned
Research Triangle Park, Manufactures powders 83,500 owned
North Carolina Marketing and administration offices 15,500 owned
Research and development facility 27,900 owned
Cleveland, Ohio Corporate headquarters 14,700 leased
Pilot plant facility 11,400 leased
Westlake, Ohio Research and development facility 27,500 owned
Marketing and administration offices 10,000 owned
Belleville, Ontario Manufactures carboxylates 33,000 owned
Franklin, Pennsylvania Manufactures carboxylates and salts 230,000 owned
Johnstown, Pennsylvania Manufactures powders 156,400 owned
St. George, Utah Manufactures salts 76,000 owned

EUROPE:
Kokkola, Finland Manufactures carboxylates, salts and 470,000 owned
powders
Ezanville, France Manufactures carboxylates 50,000 owned
Dusseldorf, Germany Marketing and administration offices 4,800 leased

ASIA-PACIFIC:
Kuching, Malaysia Manufactures salts 20,000 owned
Marketing and administration office 5,000 owned
Taipei, Taiwan Marketing and administration office 4,000 leased

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 1998 fiscal year.

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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 19, 1999, 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 -- 51
- - Chairman and Chief Executive Officer, 1994

Eugene Bak -- 65
- - President and Chief Operating Officer, 1994

James M. Materna -- 53
- - Chief Financial Officer, 1992

Thomas E. Fleming -- 53
- - Corporate Vice President, Chief Marketing Officer, 1997
- - President, OMG Americas, Inc., 1994 (chemical manufacturer, subsidiary of
registrant)

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 J on page 27 of this report. The
Company's Common Stock is traded on the New York Stock Exchange. As of March 11,
1999, the Company had approximately 16,000 shareholders.

ITEM 6. SELECTED FINANCIAL DATA

YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
(IN MILLIONS, EXCEPT PER SHARE DATA) ------ ------ ------ ------ ------

INCOME STATEMENT DATA:
Net sales...................................... $521.2 $487.3 $388.0 $361.0 $251.3
Gross profit................................... 145.0 117.4 84.0 74.6 60.6
Selling, general and administrative expenses... 58.1 46.8 32.6 30.6 25.4
Income from operations......................... 86.9 70.6 51.4 44.0 35.2
Other expense -- net........................... (15.6) (12.6) (7.0) (5.5) (4.1)
Net income..................................... $ 48.4 $ 38.4 $ 30.0 $ 25.9 $ 20.7
Net income per common share.................... $ 2.11 $ 1.84 $ 1.61 $ 1.39 $ 1.11
Net income per common share -- assuming
dilution..................................... $ 2.05 $ 1.78 $ 1.56 $ 1.36 $ 1.09
Dividends declared and paid per common share... $ 0.36 $ 0.32 $ 0.28 $ 0.24 $ 0.19
BALANCE SHEET DATA:
Total assets................................... $870.7 $601.1 $443.5 $358.0 $278.0
Long-term debt (excluding current portion)..... 310.0 170.3 109.3 89.8 46.6

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.

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Set forth below is summary consolidated information of the Company:

YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
(THOUSANDS OF DOLLARS) -------- -------- --------

INCOME STATEMENT DATA:
Net sales.......................................... $521,226 $487,296 $387,999
Gross profit....................................... 144,952 117,363 83,974
Selling, general and administrative expenses....... 58,028 46,791 32,553
-------- -------- --------
Income from operations............................. 86,924 70,572 51,421
Other expense -- net............................... (15,600) (12,595) (7,018)
Income taxes....................................... (22,966) (19,534) (14,356)
-------- -------- --------
Net income......................................... $ 48,358 $ 38,443 $ 30,047
======== ======== ========
PRODUCTS SOLD (millions of pounds):
Carboxylates....................................... 60.5 50.3 43.1
Salts.............................................. 89.3 61.0 50.7
Powders............................................ 40.4 38.6 2.9
-------- -------- --------
Total.............................................. 190.2 149.9 96.7
======== ======== ========

RESULTS OF OPERATIONS
1998 Compared to 1997
Net sales for 1998 were $521.2 million, an increase of 7.0% compared to 1997.
The increase in sales resulted principally from the acquisition of Auric
Corporation (Fidelity) and an increase in physical volume of products sold,
which offset a decline in the Company's product prices resulting from decreasing
cobalt, nickel and copper market prices.

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

MARKET PRICE RANGES PER POUND
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997
---------------- ----------------

Cobalt -- 99.3% Grade.................... $ 8.85 TO $21.18 $17.50 to $22.23
Nickel................................... $ 1.71 TO $ 2.69 $ 2.66 to $ 3.66
Copper................................... $ 0.65 TO $ 0.85 $ 0.77 to $ 1.20

The Company generally passes through to its customers increases and decreases in
raw material prices by increasing and decreasing, respectively, the prices of
its products. Cobalt 99.3% market prices (per pound) dropped from approximately
$18 at September 30, 1998, to $8.85 by December 31, 1998, and have since
rebounded to approximately $17 during the first quarter of 1999. When raw
material prices decrease precipitously, the Company's LIFO inventory value may
exceed the value at which the inventory can be sold (i.e., LIFO inventory costs
may exceed market). Consequently, the Company evaluates its inventory carrying
value to state it at the lower of cost or market. At December 31, 1998, no
adjustment to carrying value was needed, as the market value of the inventory
exceeded LIFO cost.

Pounds of product sold by the Company were 190.2 million pounds during 1998
compared to 149.9 million pounds in 1997. The increase in carboxylate products
sold was primarily the result of the acquisition of Dussek Campbell Limited
(Dussek) and increases in sales of cobalt carboxylates and PVC additives. In the
salts category, the increase was due to the acquisition of Fidelity as overall
nickel salt volumes, excluding Fidelity, declined due primarily to a decrease in
the sales of lower margin nickel sulfate products. The increase in physical
volume of powder products reflects the introduction of tungsten powders during
1998 and overall growth in cobalt extra fine powders, which offset a decrease in
copper powder volumes related to slowness in the aerospace and agricultural
equipment business areas.

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Gross profit increased to $145.0 million in 1998, a 23.5% increase from 1997.
The improvement in gross profit was primarily the result of the acquisitions of
Fidelity and Dussek, an increased contribution from higher value-added products,
and higher physical volume excluding the decrease in lower margin nickel sulfate
products. Cost of products sold decreased to 72.2% of net sales for the year
ended 1998 from 75.9% of net sales in 1997 primarily because of lower cobalt,
nickel and copper market prices, which declined more rapidly than selling
prices, improved product mix and the acquisitions of Fidelity and Dussek.

Selling, general and administrative expenses increased to 11.1% of net sales in
1998 from 9.6% of net sales in 1997, due to the acquisition of Fidelity and its
relatively higher selling, administrative, and research expenses per dollar of
sales, and to the decline in net sales resulting from lower cobalt, nickel and
copper prices.

Other expense-net was $15.6 million in 1998 compared to $12.6 million in 1997
due primarily to increased interest expense on higher outstanding borrowings,
primarily as a result of the acquisitions of Fidelity and Dussek.

Income taxes as a percentage of income before income taxes decreased to 32.2% in
1998 from 33.7% in 1997. The lower effective tax rate was due primarily to
higher income earned in the relatively low statutory tax countries of Finland
and Malaysia, offsetting the impact of non-tax deductible goodwill related to
the acquisitions of Fidelity and Dussek.

Net income for 1998 was $48.4 million, an increase of $9.9 million from 1997,
primarily due to the aforementioned factors.

1997 Compared to 1996
Net sales for 1997 were $487.3 million, an increase of 25.6% compared to 1996.
The increase in sales resulted principally from the January, 1997 acquisition of
SCM Metal Products, Inc. (SCM) and an increase in physical volume of products
sold, which offset a decline in the Company's product prices resulting from
decreasing cobalt market prices.

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

MARKET PRICE RANGES PER POUND
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996
---------------- ----------------

Cobalt -- 99.3% Grade.................... $17.50 to $22.23 $18.40 to $28.58
Nickel................................... $ 2.66 to $ 3.66 $ 2.92 to $ 3.78
Copper................................... $ 0.77 to $ 1.20 $ .84 to $ 1.29

Pounds of product sold by the Company were 149.9 million pounds during 1997
compared to 96.7 million pounds in 1996. The increase in carboxylate products
sold resulted from higher sales in all market regions. The increase in physical
volume of salt and powder products sold primarily reflects the addition of
copper salt and powder products sold, as a result of the SCM acquisition.

Gross profit increased to $117.4 million in 1997, a 39.8% increase from 1996.
The improvement in gross profit was primarily the result of the acquisition of
SCM, higher physical volume of products sold, and changes in product mix. Cost
of products sold decreased to 75.9% of net sales for the year ended 1997 from
78.4% of net sales in 1996 primarily because of lower cobalt market prices and
the acquisition of SCM.

Selling, general and administrative expenses increased to 9.6% of net sales in
1997 from 8.4% of net sales in 1996, primarily as a result of the acquisition of
SCM.

Other expense-net was $12.6 million in 1997 compared to $7.0 million in 1996 due
primarily to increased interest expense on higher outstanding borrowings
associated with the acquisition of SCM, offset by gains on foreign exchange.

Income taxes as a percentage of income before income taxes increased to 33.7% in
1997 from 32.3% in 1996 due primarily to the non-tax deductible goodwill related
to the acquisition of SCM.

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Net income for 1997 was $38.4 million, an increase of $8.4 million from 1996,
primarily due to the aforementioned factors.

LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company's net working capital increased by approximately $78
million. This increase was primarily the result of provisional payments made on
Zambia Consolidated Copper Mines Limited cobalt-copper concentrate, purchased in
the fourth quarter, 1998 (see Note H) and approximately $25 million in
acquisition working capital. Capital expenditures increased in 1998, primarily
due to expansion at various plant facilities and the smelter construction
project in Lumbumbashi, Democratic Republic of Congo. These increased cash needs
were funded through additional borrowings under the Company's revolving credit
facility, an equity offering and cash generated by operations.

In July, 1998, the Company sold 1,750,000 shares of common stock in a public
offering. A portion of the net proceeds of the offering, in the amount of $68.7
million, was used to pay down a portion of the debt incurred in connection with
the 1998 acquisitions.

In January, 1999, the Company's revolving credit facility was revised to
increase available credit to $325 million to finance the purchase of
cobalt-copper concentrate, and to expand its sources of capital by adding three
new institutions. Subject to several limitations in its credit facilities, the
Company may incur additional borrowings under this facility to finance working
capital and certain capital expenditures, including, without limitation, the
purchase of additional raw materials.

The Company believes that it will have sufficient cash generated by operations
and through its credit facility to provide for its future working capital and
capital expenditure requirements and to pay quarterly dividends on its common
stock, subject to the Board's discretion. In February, 1999, the Board of
Directors authorized an increase in quarterly dividends to $.10 per share.

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 $35 million for 1999.

Although most of the Company's raw material purchases and product sales are
transacted in U.S. Dollars, liabilities for non-U.S. operating expenses and
income taxes are denominated in local currencies. Accordingly, fluctuations in
currency prices will affect the Company's operating results and net income (see
page 4 -- International Operations).

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.

The primary raw materials used by the Company in manufacturing its products are
cobalt, nickel and copper. While nickel and copper are worldwide commodities and
generally available, cobalt availability can be more uncertain. The Company's
supply of cobalt has historically been sourced primarily from the Democratic
Republic of Congo, Australia, Finland and Zambia. Although the Company has never
experienced a material shortage of cobalt, production problems and political and
civil instability in certain supplier countries may affect the supply and market
price of cobalt. 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 cobalt from other sources as would be necessary to satisfy the Company's
requirements at prices comparable to its current arrangements. The Company
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
customers increases and decreases in raw material prices by increasing or
decreasing, respectively, the prices of its products. The degree of
profitability of the Company 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, particularly

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cobalt, could also result in the Company's inventory being written down to
market value (see Results of Operations, 1998 Compared to 1997).

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 roll-over risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and business financing
requirements (see Note D). The following table presents principal cash flows and
related weighted-average interest rates by expected maturity dates of the
Company's long term-debt.

EXPECTED MATURITY DATE
--------------------------------------------------------------------------
DECEMBER 31, 1998
------------------------------------ FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
(THOUSANDS OF DOLLARS) ---- ---- ---- ---- ---- ---------- -------- --------

Long-term debt, including
current portion
Fixed rate................... $ 20 $ 20 $ 20 $ 20 $ 60,124 $ 60,204 $ 60,204
Average interest rate........ 4.0% 4.0% 4.0% 4.0% 7.1%
Variable rate................ $141 $249,760 $249,901 $249,901
Average interest rate........ 1.0% 6.1%

In addition to the United States, the Company has manufacturing and other
facilities in Canada, Europe and Asia-Pacific, and markets its products
worldwide. Although most of the Company's raw material purchases and product
sales are transacted in U.S. Dollars, liabilities for non-U.S. operating
expenses and income taxes are denominated in local currencies. Accordingly,
fluctuations in currency prices may affect the Company's operating results and
net income (see page 4 -- International Operations).

YEAR 2000
Based on ongoing reviews of the Company's systems, the Company presently
believes that with modifications to existing computer software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems to its normal business activities.

The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. The following table
summarizes the Company's progress on these Year 2000 phases, with respect to: 1)
the nature and potential effects of the Year 2000 on information (IT) and non-IT
systems; 2) the status of the Company's progress in becoming Year 2000 ready for
both IT and non-IT systems, including estimated timetable for completion of each
phase; and 3) third parties and their exposure to the Year 2000.

RESOLUTION PHASES
-------------------------------------------------------
EXPOSURE TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
------------- ---------- ----------- -------- --------------

INFORMATION SYSTEMS
% Complete at 12/31/98.............. 85% 75% 75% 75%
Expected Completion Date............ Apr 1999 Jun 1999 Jul 1999 Sep 1999
NON-INFORMATION SYSTEMS
Production and Manufacturing Systems
% Complete at 12/31/98.............. 100% 85% 75% 70%
Expected Completion Date............ Sep 1998 Jun 1999 Jul 1999 Sep 1999
Products
% Complete at 12/31/98.............. 100% N/A N/A N/A
Expected Completion Date............ Sep 1998
THIRD PARTIES
System Interface
% Complete at 12/31/98.............. 95% N/A N/A N/A
Expected Completion Date............ Apr 1999
Other Material Exposures
% Complete at 12/31/98.............. 100% N/A N/A N/A
Expected Completion Date............ Sep 1998

10
12

This project will be completed using a combination of existing internal and
external resources. The total cost of the Year 2000 project is estimated at $2.5
million and is being funded through operating cash flows. As of December 31,
1998, approximately $1.1 million had been incurred. Of the total project cost,
approximately $.8 million is attributable to a new software purchase, which has
been capitalized. The remaining $1.7 million, which is being expensed as
incurred, is not expected to have a material effect on the results of operations
of the Company.

Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. Disruptions in
the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.

The Company currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 program, but does not believe that lack of
completion would materially disrupt its operations. The Company plans to
evaluate the status of completion in April 1999 and determine whether such a
plan is necessary.

EURO CONVERSION
The Company has converted and/or installed the necessary software modifications
and is successfully operating in the post-euro conversion European economy since
the introduction of the euro currency on January 1, 1999.

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.
The foregoing discussion includes forward-looking statements relating to the
business of the Company. Such forward-looking statements are subject to
uncertainties and factors relating to the Company's operations and business
environment, all of which are difficult to predict and many of which are beyond
the control of the Company, that could cause actual results of the Company to
differ materially from those matters expressed in or implied by such
forward-looking statements. The Company believes that the following factors,
among others, could affect its future performance and cause actual results of
the Company to differ materially from those expressed in or implied by
forward-looking statements made by or on behalf of the Company: (a) the price
and supply of raw materials, particularly cobalt, copper and nickel; (b) demand
for metal-based specialty chemicals in the mature markets in the United States
and Europe; (c) demand for metal-based specialty chemicals in Asia-Pacific and
other less mature markets; (d) the effect of non-currency risks of investing in
and conducting operations in foreign countries, together with fluctuations in
currency exchange rates upon the Company's international operations, including
those relating to political, social, economic and regulatory factors; and (e)
the Company's ability and its customers' and suppliers' ability to replace,
modify or upgrade computer programs in ways that adequately address the Year
2000 Issue.

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 9 and 10
of this report.

11
13

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, 1998 and 1997, and the related statements of consolidated
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Cleveland, Ohio
February 12, 1999

12
14

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
--------------------
1998 1997
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) -------- --------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,750 $ 13,193
Accounts receivable, less allowance of $1,390 in 1998 and
$680 in 1997........................................... 80,906 80,602
Inventories............................................... 283,264 219,201
Refundable taxes.......................................... 15,673
Other current assets...................................... 32,648 9,913
-------- --------
TOTAL CURRENT ASSETS........................................ 420,241 322,909
Property, plant and equipment:
Land...................................................... 4,241 2,867
Buildings and improvements................................ 80,148 53,468
Machinery and equipment................................... 242,137 162,938
Furniture and fixtures.................................... 12,242 10,455
-------- --------
338,768 229,728
Less accumulated depreciation............................. 93,423 74,112
-------- --------
245,345 155,616
Other assets:
Goodwill and other intangible assets, less accumulated
amortization of $13,510 in 1998 and $8,296 in 1997..... 188,486 116,751
Other assets.............................................. 16,647 5,787
-------- --------
TOTAL ASSETS................................................ $870,719 $601,063
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 141 $ 219
Short-term debt........................................... 2,000
Accounts payable.......................................... 76,412 67,521
Accrued income taxes...................................... 9,532
Deferred income taxes..................................... 20,271 8,628
Other accrued expenses.................................... 20,743 14,782
-------- --------
TOTAL CURRENT LIABILITIES................................... 119,567 100,682
Long-term debt.............................................. 309,964 170,334
Deferred income taxes....................................... 29,950 20,555
Other long-term liabilities................................. 7,095 8,251
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 23,959,346 shares
in 1998 and 22,209,346 shares in 1997.................. 240 222
Capital in excess of par value............................ 258,085 189,281
Retained earnings......................................... 155,691 117,465
Treasury stock (234,847 shares in 1998 and 142,720 shares
in 1997, at cost)...................................... (8,494) (4,829)
Accumulated other comprehensive income.................... (1,379) (898)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. 404,143 301,241
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $870,719 $601,063
======== ========

See accompanying notes to consolidated financial statements.
13
15

STATEMENTS OF CONSOLIDATED INCOME

YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) -------- -------- --------

Net sales................................................. $521,226 $487,296 $387,999
Cost of products sold..................................... 376,274 369,933 304,025
-------- -------- --------
144,952 117,363 83,974
Selling, general and administrative expenses.............. 58,028 46,791 32,553
-------- -------- --------
Income from operations.................................... 86,924 70,572 51,421
Other income (expense)
Interest expense.......................................... (15,560) (13,410) (7,485)
Interest income........................................... 223 100 244
Foreign exchange (loss) gain.............................. (263) 715 223
-------- -------- --------
(15,600) (12,595) (7,018)
-------- -------- --------
Income before income taxes................................ 71,324 57,977 44,403
Income taxes.............................................. 22,966 19,534 14,356
-------- -------- --------
NET INCOME................................................ $ 48,358 $ 38,443 $ 30,047
======== ======== ========
NET INCOME PER COMMON SHARE............................... $ 2.11 $ 1.84 $ 1.61
======== ======== ========
NET INCOME PER COMMON SHARE -- ASSUMING DILUTION.......... $ 2.05 $ 1.78 $ 1.56
======== ======== ========
CASH DIVIDENDS PAID PER COMMON SHARE...................... $ .36 $ .32 $ .28
======== ======== ========

See accompanying notes to consolidated financial statements
14
16

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

ACCUMULATED
CAPITAL OTHER
COMMON IN EXCESS RETAINED TREASURY COMPREHENSIVE
STOCK OF PAR VALUE EARNINGS STOCK INCOME TOTAL
(THOUSANDS OF DOLLARS) ------ ------------ -------- -------- ------------- --------

BALANCE AT JANUARY 1, 1996....... $125 $102,088 $ 61,370 $(2,119) $ (36) $161,428
Net income....................... 30,047 30,047
Translation adjustment........... (205) (205)
--------
Total comprehensive income....... 29,842
Non-employee directors'
compensation................... 100 100
Dividends paid................... (5,465) (5,465)
Treasury stock purchased......... (742) (742)
Issuance of shares under benefit
plans, including tax benefit... (81) 240 159
Three-for-two stock split........ 63 (63)
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1996..... 188 102,125 85,871 (2,621) (241) 185,322
Net income....................... 38,443 38,443
Translation adjustment........... (657) (657)
--------
Total comprehensive income....... 37,786
Non-employee directors'
compensation................... 198 198
Dividends paid................... (6,792) (6,792)
Treasury stock purchased......... (4,173) (4,173)
Issuance of shares under benefit
plans, including tax benefit... (57) 1,965 1,908
Sale of common stock............. 34 86,958 86,992
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997..... 222 189,281 117,465 (4,829) (898) 301,241
Net income....................... 48,358 48,358
Translation adjustment........... (481) (481)
--------
Total comprehensive income....... 47,877
Non-employee directors'
compensation................... 133 133
Dividends paid................... (8,246) (8,246)
Treasury stock purchased......... (7,070) (7,070)
Issuance of shares under benefit
plans, including tax benefit... (1,886) 3,405 1,519
Sale of common stock............. 18 68,671 68,689
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998..... $240 $258,085 $155,691 $(8,494) $(1,379) $404,143
==== ======== ======== ======= ======= ========

See accompanying notes to consolidated financial statements
15
17

STATEMENTS OF CONSOLIDATED CASH FLOWS

YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
(THOUSANDS OF DOLLARS) --------- --------- ---------

OPERATING ACTIVITIES
Net income.............................................. $ 48,358 $ 38,443 $ 30,047
Items not affecting cash:
Depreciation and amortization......................... 25,435 21,225 15,814
Foreign exchange loss (gain).......................... 263 (715) (223)
Deferred income taxes................................. 17,309 5,108 7,841
Changes in operating assets and liabilities:
Accounts receivable................................... 5,139 (9,435) 11,905
Inventories........................................... (75,976) 15,520 (83,482)
Accounts payable and other accruals................... (11,387) (40,837) 34,765
Other................................................. (10,283) 637 1,699
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES..... (1,142) 29,946 18,366
INVESTING ACTIVITIES
Expenditures for property, plant and equipment -- net... (91,942) (34,785) (30,679)
Acquisitions of businesses.............................. (103,253) (123,718) (395)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................... (195,195) (158,503) (31,074)
FINANCING ACTIVITIES
Dividend payments....................................... (8,246) (6,792) (5,465)
Short-term borrowings................................... 2,000
Long-term borrowings.................................... 197,773 172,315 33,364
Payments of long-term debt.............................. (63,569) (114,643) (15,591)
Purchase of treasury stock.............................. (7,070) (4,173) (742)
Proceeds from exercise of stock options................. 719 708 159
Issuance of common stock................................ 68,689 86,992
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............... 190,296 134,407 11,725
Effect of exchange rate changes on cash and cash
equivalents........................................... 598 (475) (297)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (5,443) 5,375 (1,280)
Cash and cash equivalents at beginning of year.......... 13,193 7,818 9,098
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 7,750 $ 13,193 $ 7,818
========= ========= =========

See accompanying notes to consolidated financial statements.
16
18

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. Investments in joint ventures are accounted for under the equity
method.

Inventories -- Inventories are principally stated at the lower of cost or market
and valued using the last-in, first-out (LIFO) method.

Property, Plant and Equipment -- 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 three to forty years, based on the various classes of assets. Long-lived
assets are assessed for impairment when operating profits for the related
business indicate that the carrying value may not be recoverable.

Research and Development -- Selling, general and administrative expenses include
research and development costs of $10,367, $6,687, and $3,756 in 1998, 1997 and
1996, respectively.

Income Taxes -- Deferred income taxes are provided to recognize the effect of
temporary differences between financial and tax reporting arising principally
from different depreciation methods and inventory reserves. 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 subsidiary is the U.S. Dollar since a majority of its purchases and
sales are denominated in U.S. Dollars and it holds a significant intercompany
note payable 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 Finnish Markka) are included in results of
operations. The Company enters into forward contracts to partially hedge its
balance sheet exposure to the Finnish Markka, 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.

Goodwill and Other Intangibles -- Goodwill represents the excess of the purchase
price of businesses acquired over the estimated fair market value of the net
assets acquired. Other intangibles represent principally patents, trademarks and
technology acquired. Goodwill, other intangible assets and capitalized software
are being amortized on a straight-line basis over their respective useful lives
(five to forty years). Goodwill is assessed for impairment when operating
profits for the related business indicate that the carrying value may not be
recoverable.

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.

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

17
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

compensation. Accordingly, compensation expense is recognized for stock option
and restricted share grants elected by eligible directors.

Revenue Recognition -- Revenues are recognized when products are shipped to
unaffiliated customers.

Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles 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.

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

Recently Issued Accounting Pronouncements -- In June, 1998, SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company must adopt SFAS
No. 133 no later than the first quarter of fiscal year 2000; adoption of this
Statement is not expected to have a material effect on earnings or the financial
position of the Company.

B. INVENTORIES
Inventories consist of the following:

DECEMBER 31
--------------------
1998 1997
-------- --------

Raw materials and supplies.............................. $ 99,471 $110,477
Finished goods.......................................... 123,651 107,989
-------- --------
223,122 218,466
LIFO reserve............................................ 60,142 735
-------- --------
Total inventories............................. $283,264 $219,201
======== ========

C. ACQUISITIONS AND SALE OF COMMON STOCK
The Company acquired Auric Corporation (Fidelity) and Dussek Campbell Limited
(Dussek) in January and February, 1998, respectively, for an aggregate amount of
approximately $95,000. These acquisitions, which had combined fiscal 1997 sales
and net income aggregating approximately $60,000 and $8,200 respectively, have
been recorded using the purchase method of accounting. Accordingly, the
Company's results of operations reflect the impact of Fidelity and Dussek from
their respective dates of acquisition.

In April, 1998, the Company acquired the rapid carbothermal reduction technology
and related assets of Dow Chemical Company for approximately $13,000, plus a
conditional amount up to $20,000 based upon the achievement of certain
performance targets, which would be paid at the end of five years.

The acquisitions were initially financed through bank borrowings. In July, 1998,
the Company sold 1,750,000 shares of common stock in a public offering; the
majority of the net proceeds of $68,700 were used to pay down a portion of the
debt incurred in connection with the aforementioned acquisitions.

Goodwill associated with the aforementioned acquisitions of approximately
$74,000 is being amortized on a straight-line basis over a forty-year period.

18
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

D. FINANCIAL INSTRUMENTS
Long-term debt consists of the following:

DECEMBER 31
--------------------
1998 1997
-------- --------

Notes payable to banks.................................. $249,760 $110,000
Notes payable to insurance companies.................... 60,000 60,000
Other................................................... 345 553
-------- --------
310,105 170,553
Less: Current portion................................... 141 219
-------- --------
Total long-term debt.......................... $309,964 $170,334
======== ========

At December 31, 1998, the Company had a $250,000 revolving credit facility with
a group of banks, including a $10,000 sublimit for issuance of letters of
credit, with variable interest rates based upon either the agent bank's base
lending rate or LIBOR plus a .40% to .80% margin, at the Company's option. The
Company's revolving credit facility was further expanded to $325,000 in January,
1999, including $10,000 for the issuance of letters of credit. The five year
credit facility, expiring in January, 2004, has variable interest rates based
upon either the agent bank's base lending rate or LIBOR plus a .40% to 1.50%
margin at the Company's option. Under this credit agreement, the Company must
meet certain funded debt ratios, and there are also covenants which restrict
capital expenditure, dividend paying and borrowing capability of the Company.
Capital expenditures are restricted to $75,000 in 1999, while annual dividends
are limited to $12,000 or 25% of consolidated net income, whichever is greater.

The Company has entered into several interest rate swap agreements to convert
the variable interest rates on an aggregate contract amount of $60,000 to an
average fixed rate of 5.65% plus .40% to .80% for a three year period ending
February 9, 2001. During the three year period ended December 20, 1997, the
Company had an interest rate swap agreement to convert the variable interest
rates on an aggregate contract amount of $30,000 to a fixed rate of 7.28% plus
.35% to .75%. At December 31, 1998, the combined effective rate of the Company's
bank borrowings and the related swap agreements was 6.33%. 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.

During 1995 the Company borrowed $30,000 from a group of insurance companies
through a private placement. The borrowings bear interest at 7.38% and are due
August 30, 2005. During 1997, in order to convert to a fixed rate and extend the
term on a portion of its borrowings, the Company borrowed an additional $30,000
in a private placement with a group of insurance companies and used the proceeds
to reduce borrowings under its revolving credit facility with its banks.
Borrowings amounting to $15,000 bear interest at 6.82% and are due October 24,
2007. The balance of the borrowings bears interest at 6.99% and is due October
24, 2009. Under the terms of these note purchase agreements, the Company must
meet certain interest coverage and funded debt ratios. There are also covenants
which restrict the dividend paying and borrowing capability of the Company.

Aggregate annual maturities of long-term debt for the five years following
December 31, 1998 are as follows: 1999 -- $141; 2000 -- $20; 2001 -- $20;
2002 -- $20 and 2003 -- $20. Interest paid, net of capitalized amounts, was
$15,660, $14,771 and $7,056 for the years ended December 31, 1998, 1997 and
1996, respectively. Interest capitalized as part of construction of major fixed
assets was $1,605 in 1998 and $0 in 1997 and 1996. At December 31, 1998, the
carrying value of the Company's debt approximated its fair value.

At December 31, 1998, the Company had short-term borrowings of $2,000 from a
commercial bank, with a variable interest rate based upon the bank's base
lending rate of 7.75%.

The Company enters into forward contracts to purchase Finnish Markka to
partially hedge its balance sheet exposure to rate fluctuations between the
Finnish Markka and the U.S. Dollar. At December 31, 1998, the notional value of
these forward contracts approximated $7,850. The fair value of the forward
contracts, based on

19
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

the current settlement price at December 31, 1998, approximated $225 payable,
which was recorded in results of operations.

E. INCOME TAXES
Income before income taxes consists of the following:

YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------

United States................................... $17,998 $ 7,794 $ 1,384
Outside the United States....................... 53,326 50,183 43,019
------- ------- -------
$71,324 $57,977 $44,403
======= ======= =======

Income taxes are summarized as follows:

YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------

Current:
United States:
Federal.................................... $ 1,634 $ 1,267 $ 923
State and local............................ 860 1,166 258
Outside the United States..................... 3,163 11,993 5,334
------- ------- -------
5,657 14,426 6,515
Deferred:
United States................................. 5,426 1,209 644
Outside the United States..................... 11,883 3,899 7,197
------- ------- -------
17,309 5,108 7,841
------- ------- -------
$22,966 $19,534 $14,356
======= ======= =======

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

DECEMBER 31
--------------------
1998 1997
-------- --------

Current asset -- operating accruals...................... $ 2,614 $ 3,372
Current liability -- inventories......................... (20,271) (8,628)
Long-term asset -- employee benefits..................... 3,255 2,580
Long-term liability -- accelerated depreciation.......... (29,950) (20,555)
-------- --------
$(44,352) $(23,231)
======== ========

20
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

A reconciliation of income taxes computed at the United States statutory rate to
the effective income tax rate follows:

YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
----- ----- -----

Income taxes at the United States statutory rate......... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit........... .8 1.3 .4
Effective tax rate differential of earnings outside of
the United States...................................... (6.0) (2.7) (5.7)
Adjustment of worldwide tax liabilities.................. .1 (2.0) 2.2
Non-deductible goodwill.................................. 2.0 1.6 .4
Other--net............................................... .3 .5
---- ---- ----
32.2% 33.7% 32.3%
==== ==== ====

The Company has not provided additional United States income taxes on
approximately $152,000 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.

The Company conducts business in Malaysia, which attracts industry by granting a
"holiday" from income taxes. This agreement, which expires in March, 2002,
reduced tax expense in 1998 by $1,051, or $.04 per common share-assuming
dilution. Income tax payments were $24,611, $12,551, and $14,129 during the
years ended December 31, 1998, 1997 and 1996, respectively.

F. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined contribution plans covering certain
employees. Company contributions are determined by the Board of Directors based
upon participant compensation. The Company also sponsors a non-contributory,
non-qualified supplemental executive retirement plan for certain employees,
providing benefits beyond those covered in the defined contribution plans; the
Company also maintains a 401(k) plan for certain non-union employees in the
United States. Aggregate defined contribution plan expenses were $4,784, $2,295
and $1,727 in 1998, 1997 and 1996, respectively.

The 1998 increase in aggregate defined contribution plan expenses was due to
additional participants resulting from businesses acquired in 1998 and 1997 (see
Note C).

21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

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

OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------

Benefit obligation at beginning of year............ $(15,827) $(14,368) $(6,041) $(4,353)
Service cost....................................... (158) (513) (474) (202)
Interest cost...................................... (991) (1,056) (443) (332)
Plan amendments.................................... (1,361) (1,468)
Actuarial (loss) gain.............................. (1,747) (483) (1,281) 236
Benefits paid...................................... 741 593 231 78
Curtailment gain................................... 2,664
-------- -------- ------- -------
Benefit obligation at end of year.................. $(15,318) $(15,827) $(9,369) $(6,041)
-------- -------- ------- -------
Fair value of plan assets at beginning of year..... $ 13,746 $ 11,737 $ 0 $ 0
Actual return on plan assets....................... 1,367 1,696
Employer contributions............................. 395 906 231 78
Benefits paid...................................... (741) (593) (231) (78)
-------- -------- ------- -------
Fair value of plan assets at end of year........... $ 14,767 $ 13,746 $ 0 $ 0
-------- -------- ------- -------
Plan assets less than benefit obligations.......... $ (551) $ (2,081) $(9,369) $(6,041)
Unamortized:
Net loss (gain).................................. 1,412 (148) 1,245 (44)
Prior service cost............................... 2,694 1,468
-------- -------- ------- -------
Recorded asset (liability)......................... $ 861 $ (2,229) $(5,430) $(4,617)
======== ======== ======= =======

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 $3,063, $3,063 and $2,278 respectively, as of December 31,
1998 and $2,865, $2,865, and $2,007, respectively, as of December 31, 1997.

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

PENSION BENEFITS
-----------------------------
1998 1997 1996
------- ------- -------

Service cost..................................... $ 158 $ 513 $ --
Interest cost.................................... 991 1,056 --
Expected return on plan assets................... (1,182) (1,071) --
------- ------- -------
(33) 498 --
Curtailment gain................................. (2,664) --
------- ------- -------
$(2,697) $ 498 $ --
======= ======= =======

22
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

OTHER POSTRETIREMENT BENEFITS
-----------------------------
1998 1997 1996
------- ------- -------

Service cost..................................... $ 474 $ 202 $ 27
Interest cost.................................... 443 332 84
Net amortization................................. 90
------- ------- -------
$ 1,007 $ 534 $ 111
======= ======= =======

Prior to 1997, the Company did not maintain any defined benefit pension plans.
During 1998, the Company froze its salaried pension plan, resulting in a
curtailment gain.

Actuarial assumptions used in the calculation of the recorded amounts are as
follows:

1998 1997
---- ----

Discount rate............................................... 6.75% 7.50%
Return on pension plan assets............................... 9.00% 9.00%
Projected health care cost trend rate....................... 9.50% 9.50%
Ultimate health care trend rate............................. 5.50% 5.50%
Year ultimate health care trend rate is achieved............ 2006 2006

Assumed health care cost trend rates have a significant effect on the amounts
reported for other postretirement benefits. A one-percentage-point change in the
assumed health care cost trend rate would have the following effect:

1% INCREASE 1% DECREASE
----------- -----------

1998 benefit cost..................................... $ 276 $ 200
Recorded liability at December 31, 1998............... $2,564 $1,882

G. STOCKHOLDERS' EQUITY
In November, 1996, the Board of Directors declared a dividend distribution of
one Right for each outstanding share of common stock. Each Right entitles the
shareholder to purchase one one-hundredth share of Series A Participating
Preferred Stock at a purchase price of $160 per share, subject to adjustment.
The Rights become exercisable if a person or group (Acquiring Person) acquires
or attempts to acquire 15% or more of the outstanding shares of common stock. In
the event that the Rights become exercisable, each Right (except for Rights
beneficially owned by the Acquiring Person, which become null and void) would
entitle the holder to purchase for the exercise price then in effect, shares of
the Company's common stock having a value of twice the exercise price. The
Rights may be redeemed by the Board of Directors in whole, but not in part, at a
price of $0.01 per Right. The Rights have no voting or dividend privileges and
are attached to, and do not trade separately from, the common stock. The Rights
expire on November 14, 2006.

23
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

The following table sets forth the computation of net income per common share
and net income per common share -- assuming dilution (shares in thousands):

YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------

Net income...................................... $48,358 $38,443 $30,047
======= ======= =======
Weighted average shares outstanding............. 22,874 20,929 18,624
Dilutive effect of stock options................ 672 725 642
------- ------- -------
Weighted average shares outstanding -- assuming
dilution...................................... 23,546 21,654 19,266
======= ======= =======
Net income per common share..................... $ 2.11 $ 1.84 $ 1.61
======= ======= =======
Net income per common share -- assuming
dilution...................................... $ 2.05 $ 1.78 $ 1.56
======= ======= =======

The Company's 1998 Long-Term Incentive Compensation Plan authorizes the annual
grant of options to management personnel of up to one and one-half percent of
the total number of issued and outstanding shares of common stock of the
Company. The Company's 1995 Non-Employee Directors' Equity Compensation Plan has
also authorized the grant of options to non-employee members of the Board of
Directors for up to 250,000 shares of the Company's common stock. All options
granted to employees have 10 year terms and vest and become fully exercisable at
the end of the next fiscal year following the year of grant.

Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, "Accounting for Stock Based Compensation", and has been
determined as if the Company had accounted for its employee and non-employee
stock options under the fair value method of that Statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes options
pricing model with the following weighted-average assumptions:

YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----

Risk-free interest rate................................ 5.5% 6.0% 6.5%
Dividend yield......................................... 1.2% 1.2% 1.2%
Volatility factor of Company common stock.............. .25 .19 .20
Weighted-average expected option life (years).......... 5 5 5

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

1998 1997 1996
------- ------- -------

Net income............................................ $46,718 $37,352 $29,285
Net income per common share........................... $ 2.04 $ 1.78 $ 1.57
Net income per common share -- assuming dilution...... $ 1.98 $ 1.72 $ 1.52

24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

A summary of the Company's stock option activity and related information
follows:

1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------

Outstanding at January 1....... 1,367,773 $17.89 1,243,079 $12.55 1,061,656 $ 9.94
Granted...................... 341,513 34.60 239,603 39.94 202,860 25.96
Exercised.................... (102,752) 7.00 (114,909) 6.15 (17,355) 9.19
Forfeited.................... (4,082) 12.25
--------- ------ --------- ------ --------- ------
Outstanding at December 31..... 1,606,534 $22.01 1,367,773 $17.89 1,243,079 $12.55
Exercisable at end of year..... 1,288,534 1,138,773 1,055,579
Weighted-average fair value of
options granted during the
year......................... $10.05 $10.28 $ 7.37

The weighted-average remaining contractual life of options outstanding is 7.0
years.

The following table summarizes information about stock options outstanding and
exercisable at December 31, 1998:

OUTSTANDING EXERCISABLE
------------------------------------ ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OF SHARES LIFE PRICE OF SHARES PRICE
--------- ----------- -------- --------- --------

Range of exercise prices:
$ 5.04-$13.00................ 650,763 4.4 $ 8.39 650,763 $ 8.39
$17.31-$39.94................ 955,771 8.8 $31.29 637,771 $29.25

H. COMMITMENTS AND CONTINGENCIES
In April, 1997, the Company entered into a supply agreement with La Generale des
Carriers et des Mines (Gecamines) to purchase all of the concentrate produced by
the Luiswishi mine in Shaba, Democratic Republic of Congo through 1999. Annual
production from this facility is estimated to contain approximately 3,000 metric
tons of cobalt and 6,000 metric tons of copper. The cost of the cobalt and
copper obtained will be based upon the prevailing market price as material is
processed.

In June, 1997, the Company signed contracts as a partner to build a smelter in
Lubumbashi, Democratic Republic of Congo. The Company's approximately $40
million share of the $80 million project will be funded over the two year
construction period through cash generated by operations and the Company's
credit facility. As of December 31, 1998, approximately $32 million has been
expended on the project.

In October, 1998, the Company entered into a supply agreement to procure
approximately 4,000 metric tons of cobalt and 9,000 tons of copper, contained in
cobalt-copper concentrate produced by Zambia Consolidated Copper Mines Limited.
This material has been delivered to the Company's Kokkola, Finland production
facility. Provisional payments have been made, with the final cost of the cobalt
and copper obtained to be based upon the prevailing market price as material is
processed.

The Company is a party to various legal proceedings incidental to its business
and is subject to a variety of environmental and pollution control laws and
regulations in the jurisdictions in which it operates. As is the case with other
companies in similar industries, the Company faces exposure from actual or
potential claims and legal proceedings involving environmental matters. Although
it is difficult to quantify the potential impact of compliance with or liability
under environmental protection laws, management believes that the ultimate

25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

aggregate cost to the Company of environmental remediation, as well as other
legal proceedings arising out of operations in the normal course of business,
will not result in a material adverse effect upon its financial condition or
results of operations.

I. REPORTABLE SEGMENT AND GEOGRAPHIC INFORMATION
The Company and its operating subsidiaries manufacture and sell metal
carboxylates, salts, and powders that are primarily derived from cobalt, copper
and nickel. Metal carboxylates are essential components in numerous complex
chemical and industrial processes, and are used in many end markets, such as
coatings, custom catalysts, liquid detergents, lubricant and fuel additives,
plastic stabilizers, polyester promoters and adhesion promoters for rubber
tires. Metal salts 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. The Company operates in a single
business segment serving numerous customers and industries.

1998 1997 1996
-------- -------- --------

INFORMATION ABOUT PRODUCTS
Net sales
Carboxylates..................................... $115,895 $126,697 $100,880
Salts............................................ 247,896 214,410 205,639
Powders.......................................... 157,435 146,189 81,480
-------- -------- --------
$521,226 $487,296 $387,999
======== ======== ========
GEOGRAPHIC INFORMATION
Net sales (1)
United States.................................... $295,791 $274,200 $160,507
Finland.......................................... 201,059 207,122 219,754
Other............................................ 24,376 5,974 7,738
-------- -------- --------
$521,226 $487,296 $387,999
======== ======== ========
Long-lived assets
United States.................................... $114,441 $ 78,570 $ 43,757
Finland.......................................... 95,755 72,120 65,344
Other............................................ 35,149 4,926 1,520
-------- -------- --------
$245,345 $155,616 $110,621
======== ======== ========
Net sales (2)
United States.................................... $239,563 $213,541 $135,326
Outside the United States........................ 281,663 273,755 252,673
-------- -------- --------
$521,226 $487,296 $387,999
======== ======== ========

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

(1) Net sales are attributed to the geographic area based on the location of the
manufacturing facility.

(2) Net sales are attributed to the geographic area based on the location of the
customer.

No single customer accounts for 10% or more of the Company's net sales.

26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

J. QUARTERLY DATA (UNAUDITED)

QUARTER ENDED
------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ---------------- ---------------

1998
Net sales.................... $138,098 $139,154 $124,683 $119,291
Gross profit................. 34,630 35,909 36,161 38,252
Income from operations....... 20,533 21,650 22,143 22,598
Net income................... 11,169 11,536 12,724 12,929
Net income per common
share...................... $.51 $.52 $.54 $.54
Net income per common
share -- assuming
dilution................... $.49 $.51 $.53 $.53
Market price: high-low....... 46-35 5/16 45 7/8-38 3/4 40 5/8-26 7/8 36 15/16-26 1/4
Dividends paid per share..... $.09 $.09 $.09 $.09

1997
Net sales.................... $110,055 $124,334 $126,317 $126,590
Gross profit................. 26,578 29,483 29,949 31,353
Income from operations....... 15,696 17,869 18,320 18,687
Net income................... 8,216 9,579 10,215 10,433
Net income per common
share...................... $.44 $.46 $.46 $.48
Net income per common
share -- assuming
dilution................... $.43 $.44 $.45 $.46
Market price: high-low....... 31 3/8-26 1/2 33 1/4-25 3/4 39 15/16-33 3/16 41 1/4-35 1/16
Dividends paid per share..... $.08 $.08 $.08 $.08

27
29

PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no such changes or disagreements.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of the Company contained under the heading
"Election of Directors" on pages 2 and 3 of the Company's Proxy Statement dated
April 2, 1999, is incorporated herein by reference. For information with respect
to the executive officers of the Company, see "Executive Officers of the
Company" in Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation contained under the headings
"Committees and Meetings of the Board of Directors" on page 6 and "Executive
Compensation" on pages 7 through 10, inclusive, of the Company's Proxy Statement
dated April 2, 1999, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership set forth under the heading
"Security Ownership of Directors and Officers, and Certain Beneficial Owners" on
pages 4 and 5 of the Company's Proxy Statement dated April 2, 1999, is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to the related transactions set forth under the heading
"Related Party Transactions" on page 11 of the Company's Proxy Statement dated
April 2, 1999, is incorporated herein by reference.

28
30

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of the Company are included
in Part II Item 8:

(1) The following Consolidated Financial Statements of OM Group, Inc.
are filed as a separate section of this report:

Consolidated Balance Sheets at December 31, 1998 and 1997 -- page
13.

Statements of Consolidated Income for the years ended December 31,
1998, 1997, and 1996 -- page 14.

Statements of Consolidated Stockholders' Equity for the years
ended December 31, 1998, 1997, and 1996 -- page 15.

Statements of Consolidated Cash Flows for the years ended December
31, 1998, 1997 and 1996 -- page 16.

Notes to Consolidated Financial Statements -- pages 17 through 27.

(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are either not required under the related instructions or are
inapplicable and, therefore, have been omitted.

(3) Exhibits

The following exhibits are included in this Annual Report on Form
10-K:

(3) Articles of Incorporation and by-laws

3.1 Amended and Restated Certificate of Incorporation of the **
Company
3.2 Amended and Restated Bylaws of the Company **

(4) Instruments defining rights of security holders, including
indentures

4.1 Form of Common Stock Certificate of the Company **
4.2 Second Amended and Restated Credit Agreement dated as of
January 21, 1997 among National City Bank as Agent and ABN
Amro Bank N.V., Key Bank National Association and Mellon
Bank N.A. and OM Group, Inc., as Borrower.
4.3 Amendment No. 1 to Amended and Restated Credit Agreement
dated as of January 13, 1999 among National City Bank as
Agent and Letter of Credit Bank and ABN Amro Bank N.V. as
Co-Agent and Keybank National Association, Mellon Bank N.A.,
Harris Trust and Savings Bank, NBD Bank, The Chase Manhattan
Bank, PNC Bank, NA and Comerica Bank and OM Group, Inc., as
Borrower.
4.4 Note Purchase Agreement among OM Group, Inc. as Seller and
The Mutual Life Insurance Company of New York, Nationwide
Life Mutual Life Insurance Company of New York, Nationwide
Life Insurance Company and Great-West Life & Annuity
Insurance Company, as Purchaser, dated August 30, 1995
(filed as Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
4.5 Stockholder Rights Agreement dated as of November 5, 1996
between OM Group, Inc. and National City Bank (filed as
Exhibit 1 to the Company's Current Report on Form 8-K filed
on December 5, 1996 which exhibit is incorporated herein by
reference).
4.6 Certificate of Designation, Preferences and Rights of Series
A Participatory Preferred Stock (filed as Exhibit to Current
Report on Form 8-K filed November 27, 1996 and incorporated
herein by reference).

29
31

4.7 Note Purchase Agreement among OM Group, Inc. as Seller and
Nationwide Life Insurance Company and Great-West Life &
Annuity Insurance Company as Purchaser, dated October 24,
1997.

(10) Material Contracts

10.1 Technology Agreement among Outokumpu Oy, Outokumpu **
Engineering Contractors Oy, Outokumpu Research Oy, Outokumpu
Harjavalta Metals Oy and Kokkola Chemicals Oy dated March
24, 1993.
*10.2 OM Group, Inc. Long-Term Incentive Compensation Plan **
*10.3 Amendment to OM Group, Inc. Long-Term Incentive Compensation ***
Plan
*10.4 Amendment to OM Group, Inc. Long-Term Incentive Compensation
Plan (filed as Exhibit 99 to the OM Group, Inc. Form S-8
Registration Statement filed on July 3, 1996, and
incorporated herein by reference).
*10.5 Mooney Chemicals, Inc. Welfare Benefit Plan. **
*10.6 Mooney Chemicals, Inc. Profit Sharing Plan. **
*10.7 Amendment to Mooney Chemicals, Inc. Profit Sharing Plan. **
*10.8 OMG/Mooney Chemicals, Inc. Employee Profit Sharing Plan
(January 1, 1994 restatement) (filed as Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by
reference).
*10.9 OM Group, Inc. Benefit Restoration Plan, effective January
1, 1995 (filed as Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
*10.10 Trust under OM Group, Inc. Benefit Restoration Plan,
effective January 1, 1995 (filed as Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference).
*10.11 Amendment to OMG Americas, Inc. Profit-Sharing Plan (filed
as Exhibit 99 to the OM Group, Inc. Form S-8 Registration
Statement filed on July 3, 1996, and incorporated herein by
reference).
10.12 OM Group, Inc. Non-employee Directors' Equity Compensation
Plan dated May 9, 1995, the date of the Annual Shareholder
Meeting formally adopting the plan (filed as Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by
reference).
*10.13 OM Group, Inc. Bonus Program for Key Executives and Middle **
Management.
*10.14 Employment Agreement between Mooney Acquisition Corporation **
and James P. Mooney dated September 30, 1991.
*10.15 Amendment to Employment Agreement between OM Group, Inc. and **
James P. Mooney dated August 19, 1992.
*10.16 Employment Agreement between OM Group, Inc. and James M. **
Materna dated January 1, 1993.
*10.17 Employment Agreement between Mooney Chemicals, Inc. and **
Eugene Bak dated August 19, 1991.
*10.18 Amendment to Employment Agreement between Mooney Chemicals, **
Inc. and Eugene Bak dated September 1, 1992.
*10.19 Employment Agreement between OM Group, Inc. and Thomas E. **
Fleming dated August 19, 1992.
*10.20 Employment Agreement between OM Group, Inc. and Thomas E. **
Fleming dated August 19, 1991.
*10.21 Amendment to Employment Agreement between OM Group, Inc. and **
Thomas E. Fleming dated August 19, 1991.

30
32

*10.22 Employment Agreement between OM Group, Inc. and Michael J. Scott (filed as Exhibit to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference).
10.23 Agreement and Plan of Merger between Auric Corporation and OM Group, Inc. dated
December 19, 1997 (filed as Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by reference).
+10.24 Joint Venture Agreement among OMG B.V., Groupe George Forrest S.A., La Generale Des
Carrieres Et Des Mines and OM Group, Inc. to partially or totally process the slag
located in the site of Lumbumbashi, Democratic Republic of the Congo (filed as Exhibit
to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated herein by reference).
+10.25 Agreement for Sale of concentrate production between Kokkola Chemicals Oy and La
Generale Des Carrieres Et Des Mines dated April 21, 1997 (filed as Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated herein by reference).
+10.26 Long Term Slag Sales Agreement between La Generale Des Carrieres Et Des Mines and J.V.
Groupement Pour Le Treatment Du Terrill De Lubumbashi (filed as an annex to Exhibit
10.33 of the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
+10.27 Long Term Cobalt Alloy Sales Agreement between J.V. Groupement Pour Le Treatment Du
Terril De Lumbumbashi and OMG Kokkola Chemicals Oy (filed as an annex to Exhibit 10.33
of the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
+10.28 Tolling Agreement between Groupement Pour Le Treatment Du Terril De Lumbumbashi and
Societe De Treatment Due Terril De Lumbumbashi (filed as an annex to Exhibit 10.33 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
+10.29 Agreement for sale of cobalt concentrates between OM Group, Inc. and Metal Resources
Group Limited, dated September 24, 1998.
+10.30 Agreement for sale of cobalt concentrates between OM Group, Inc. and Metal Resources
Group Limited, dated October 20, 1998.
*10.31 OM Group, Inc. 1998 Long-Term Incentive Compensation Plan.
*10.32 Amendment of Benefits Agreement and Split Dollar Agreement, Eugene Bak, dated October
1, 1998.
+ Portions of Exhibit have been omitted and filed separately with the Securities and
Exchange Commission in reliance on Rule 24b-2 and the Company's request for
confidential treatment.
* Indicate a management contract, executive compensation plan or arrangement.
** These documents were filed as exhibits to the Company's Form S-1 Registration Statement
(Registration No. 33-60444) which became effective on October 12, 1993, and are
incorporated herein by reference.
*** Filed as Exhibit 99(b) to the OM Group, Inc. Form S-8 Registration Statement filed on
February 1, 1994, and incorporated herein by reference.

(21) List of Subsidiaries

(23) Consent of Ernst & Young LLP

(24) Power of Attorney

(27) Financial Data Schedule

(b) There were no reports filed on Form 8-K during the last quarter of 1998.

31
33

SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K be signed
on its behalf by the undersigned, thereunto duly authorized.

OM GROUP, INC.

By: /s/ James P. Mooney

------------------------------------
James P. Mooney
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ James P. Mooney* Chairman and Chief Executive Officer March 22, 1999
- ------------------------------------------
James P. Mooney

/s/ Eugene Bak* President and Chief Operating Officer March 22, 1999
- ------------------------------------------
Eugene Bak

/s/ Markku Toivanen* Director March 22, 1999
- ------------------------------------------
Markku Toivanen

/s/ Lee R. Brodeur* Director March 22, 1999
- ------------------------------------------
Lee R. Brodeur

/s/ Thomas R. Miklich* Director March 22, 1999
- ------------------------------------------
Thomas R. Miklich

/s/ John E. Mooney* Director March 22, 1999
- ------------------------------------------
John E. Mooney

/s/ Frank Butler* Director March 22, 1999
- ------------------------------------------
Frank Butler

/s/ James M. Materna Chief Financial Officer (Principal March 22, 1999
- ------------------------------------------ Financial and Accounting Officer)
James M. Materna

/s/ James P. Mooney
- ------------------------------------------
James P. Mooney
Attorney-in-Fact
March 22, 1999

* James P. Mooney, by signing his name hereto signs this document on behalf of
each of the persons so indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.

32
34

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT
- ----------- -------

4.2 Amendment No. 1 to Amended and Restated Credit Agreement
dated as of January 13, 1999 among National City Bank as
Agent and Letter of Credit Bank and ABN Amro Bank, N.V. as
Co-Agent and Keybank National Association, Mellon Bank, N.A.,
Harris Trust and Savings Bank, NBD Bank, The Chase Manhattan
Bank, PNC Bank, NA and Comerica Bank and OM Group, Inc., as
Borrower.
10.29 Agreement for sale of cobalt concentrates between OM Group,
Inc. and Metal Resources Group Limited dated September 24,
1998.
10.30 Agreement for sale of cobalt concentrates between OM Group,
Inc. and Metal Resources Group Limited, dated October 20,
1998.
10.31 OM Group, Inc. 1998 Long-Term Incentive Compensation Plan.
10.32 Amendment of Benefits Agreement and Split Dollar Agreement,
Eugene Bak, dated October 1, 1998.
21 List of Subsidiaries
23 Consent of Ernst & Young LLP
24 Power of Attorney
27 Financial Data Schedule