FERRO Corporation 10-K
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to
Commission file number 1-584
FERRO CORPORATION
(Exact name of registrant as specified in its charter)
     
Ohio
  34-0217820
(State of Corporation)   (IRS Employer Identification No.)
1000 Lakeside Avenue
Cleveland, OH
  44114
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: 216-641-8580
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 $1.00
  New York Stock Exchange
Common Stock Purchase Rights   New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
91/8% Senior Notes due January 1, 2009
75/8% Debentures due May 1, 2013
73/8% Debentures due November 1, 2015
8% Debentures due June 15, 2025
71/8% Debentures due April 1, 2028
Series A ESOP Convertible Preferred Stock, without Par Value
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES o         NO þ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES o         NO þ
     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 o         NO þ
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained here, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ    Accelerated filer o    Non-accelerated filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES o         NO þ
     The aggregate market value of Ferro Common Stock, par value $1.00, held by non-affiliates (based on the closing sale price) as of June 30, 2004, was approximately $1,070,186,000.
     On February 28, 2006 there were 42,508,340 shares of Ferro Common Stock, par value $1.00 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
     None.
 
 


 

TABLE OF CONTENTS
         
 PART I
   Business   Page 3
   Risk Factors   Page 10
   Unresolved Staff Comments   Page 11
   Properties   Page 11
   Legal Proceedings   Page 12
   Submission of Matters to a Vote of Security Holders   Page 13
 PART II
   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities   Page 15
   Selected Financial Data   Page 15
   Management’s Discussion and Analysis of Financial Condition and Results of Operations   Page 16
   Quantitative and Qualitative Disclosures about Market Risk   Page 33
   Financial Statements and Supplementary Data   Page 35
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   Page 81
   Controls and Procedures   Page 81
   Other Information   Page 86
 PART III
   Directors and Executive Officers of the Registrant   Page 87
   Executive Compensation   Page 91
   Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters   Page 96
   Certain Relationships and Related Transactions   Page 100
   Principal Accounting Fees and Services   Page 100
 PART IV
   Exhibits and Financial Statement Schedules and Reports on Form 8-K   Page 102
 Exhibit 10(D) Schedule I
 Exhibit 10(H) Change in Control Agreement
 Exhibit 10(I) Schedule II
 Exhibit 10(J) Contribution Plan
 Exhibit 10(K) Deferred Compensation Plan
 Exhibit 10(L) Defined Benefit Plan
 Exhibit 10(N) Separation Agreement
 Exhibit 10(O) Separation Agreement and Release
 Exhibit 11 Computation of Earnings Per Share
 Exhibit 12 Ratio of Earnings to Fixed Charges
 Exhibit 21 List of Subsidiaries
 Exhibit 23 Consent of Independent Registered Public Accounting Firm
 Exhibit 31.1 Certification
 Exhibit 31.2 Certification
 Exhibit 32.1 Certification
 Exhibit 32.2 Certification

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PART I
Item 1 — Business
      Ferro Corporation (“Ferro” or the “Company”), incorporated under the laws of Ohio in 1919, is a leading global producer of a diverse array of performance materials sold to a broad range of manufacturers in approximately 30 markets throughout the world. The Company applies certain core scientific expertise in organic chemistry, inorganic chemistry, polymer science and material science to develop coatings for ceramics and metal; materials for passive electronic components; pigments; enamels, pastes and additives for the glass market; glazes and decorating colors for the dinnerware market; specialty plastic compounds and colors; polymer additives; specialty chemicals for the pharmaceuticals and electronics markets; and active ingredients and high purity carbohydrates for pharmaceutical formulations. Ferro’s products are classified as performance materials, rather than commodities, because they are formulated to perform specific and important functions both in the manufacturing processes and in the finished products of its customers. The Company’s performance materials require a high degree of technical service on an individual customer basis. The value of these performance materials stems from the results and performance they achieve in actual use.
      Ferro’s products are traditionally used in markets such as appliances, automotive, building and renovation, electronics, household furnishings, industrial products, pharmaceuticals, telecommunications and transportation. The Company’s leading customers include major chemical companies, pharmaceutical companies, producers of multi-layer ceramic capacitors, and manufacturers of tile, appliances and automobiles. Many customers, particularly in the appliance and automotive markets, purchase materials from more than one of the Company’s business units. Ferro’s customer base is also well-diversified both geographically and by end market.
Restatement
      Financial data and financial statements included in this Form 10-K have been restated to reflect adjustments to previously reported quarterly financial data and annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, and previously reported financial information in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
      In early July 2004, as a result of issues discovered by management during the performance of certain of the Company’s internal control procedures in connection with the preparation of the Company’s second quarter 2004 financial statements, the Company commenced an internal investigation into certain potentially inappropriate accounting entries made in the Company’s domestic Polymer Additives business unit.
      Following an initial investigation, management reached the preliminary conclusion that inappropriate accounting in the Company’s Polymer Additives business unit both overstated the unit’s historical performance and undermined the reliability of the unit’s forecasting process. On July 23, 2004, the Company issued a press release announcing that the Company’s Polymer Additives business unit’s performance in the second quarter fell short of expectations and that the Company’s Audit Committee had engaged independent legal counsel (Jones Day) and an independent public accounting firm (Ernst & Young LLP) to conduct an investigation under its auspices.
      On September 15, 2004, the Company announced it would be restating certain previously-filed information and reported that the independent investigation conducted under the auspices of the Audit Committee had generally confirmed management’s preliminary conclusions reported in the Company’s July 23, 2004, press release. The September 15 release reported that the investigative team had concluded that all of the potentially irregular accounting entries were made at the Polymer Additives business unit and were made without senior management’s knowledge or involvement. The release also reported that the investigative team concluded that substantially all of the irregular accounting entries were made by a subordinate divisional employee who had since left the Company. The Company announced in that press release that, pending completion of the restatement process, it expected to take a non-cash charge to earnings of approximately

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$6.4 million after tax for the period from January 1, 2003, through March 31, 2004, relating both to irregular accounting entries and accounting mistakes.
      In a January 18, 2005, press release, the Company reported that it had undertaken a thorough review of its previously-reported financial statements for fiscal years 2001, 2002, 2003 and the first quarter of 2004 and had conducted further procedures requested by its external auditor to assess certain accounting issues identified in, and tangentially related to, the investigation. In that press release, the Company reported that, while the total of all adjustments had not changed substantially, the effect on certain quarters had changed, some positively, some negatively, and that, subject to completion of the restatement process, the total of all adjustments for periods prior to the second quarter of 2004 was approximately $10.0 million of non-cash charges after tax.
      The January 18, 2005, press release also reported that the Company’s external auditor had requested the independent investigators to perform certain additional procedures, including the review of certain electronic files. In addition, the release disclosed that, as a consequence of an interview with the former subordinate division employee who had been responsible for substantially all of the irregular accounting entries at the Polymer Additives business, suspicions had been raised that irregular accounting entries had also been made in another smaller business unit and that the investigation team was reviewing those allegations. The former employee, the press release noted, had confirmed the irregular entries that the investigators had reported earlier and the fact that he had made the entries without any knowledge or involvement of senior management.
      In a press release dated April 21, 2005, the Company announced that the independent investigation team had completed the additional procedures requested by its external auditors and had reported to the Audit Committee that:
  •  The leadership of Ferro’s finance organization strives to apply generally accepted accounting principles and produce accurate financial records,
 
  •  All of the individuals potentially responsible for irregular accounting entries either had resigned before the investigation started or had been terminated by the Company, and
 
  •  The investigative team did not find evidence of a pervasive pattern or practice of managing earnings or conduct that constitutes illegal acts.
      The release also noted that investigators had again confirmed their earlier conclusions that substantially all of the irregular entries had been made by the former subordinate divisional employee and that the entries were made without any knowledge or involvement of senior management.
      The April 21, 2005, press release also reported that, despite the findings and conclusions of the investigation, the Company’s external auditor had advised the Audit Committee that it was unable to conclude at that time that the investigation was adequate for its purposes. The Company’s independent registered public accounting firm also advised the Committee that it believed further investigation was necessary to constitute a predicate for its audit of the Company’s financial statements. Finally, the press release noted that the Company’s external auditor had expressed the view that the additional investigation work it proposed should be undertaken by “a new investigation team.” The Company’s Audit Committee evaluated both the external auditor’s position and the reports of its independent investigative team relating to the issues raised by the external auditor. On the basis of that evaluation, the Audit Committee believed it could rely in good faith on the judgments and conclusions of the independent investigators, that additional investigation was neither necessary nor justified and that the only additional work that was necessary was routine audit examinations that fell outside the province of the investigation team.
      While the Committee continued to believe its reliance on the judgments and conclusions of the investigative team was justified, the Audit Committee responded to the external auditor’s expressed concerns in such a way that the external auditor would be able to complete its audit of the Company’s financial statements. To that end, the Audit Committee engaged a second independent investigative team, consisting of independent legal counsel (Venable LLP) and independent forensic accountants (Navigant Consulting).

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      On October 3, 2005, the former subordinate division employee who had been responsible for substantially all of the irregular accounting entries at the Polymer Additives business, and who had departed Ferro’s employment before the internal investigation started, entered a guilty plea to a single count of securities law fraud.
      In an October 31, 2005, press release, the Company reported that the second investigation team had completed its investigation. The Venable/ Navigant team reported to the Audit Committee that, although they found evidence of Ferro accounting personnel spreading expenses and some other misapplications of generally accepted accounting principles to achieve internal forecasts, they did not find that this was done with the intent to affect reported earnings in a way that misleads the investing public.
      The Company has restated its 2003 and first quarter 2004 financial statements to reflect correction of the irregular entries and of the accounting mistakes and errors identified during the investigation and restatement process. The total adjustments for accounting irregularities and accounting mistakes and errors, after tax, was $10.1 million for the period January 1, 2003, through March 31, 2004 (versus the earlier January 2005 estimate of $10.0 million). See related discussion in Note 2 to the consolidated financial statements in Item 8 of this Form 10-K. The Company has also instituted remedial actions to strengthen internal controls. See related discussion in Item 9A of this Form 10-K.
      The restated results reflect three categories of changes. The first category of changes is “accounting irregularities,” which consist of intentional or wrongful misstatements or omission of amounts included in previously-filed consolidated financial statements. The second category of changes is “accounting mistakes and errors,” which includes mathematical mistakes, mistakes in application of accounting principles, and mistakes that resulted from oversight or misuse of facts that existed at the time a given set of financial statements was prepared. The final category of changes results from a voluntary early adoption of a new accounting pronouncement relating to stripping costs for the Company’s mining operation in Argentina.
Accounting Irregularities
      The adjustments for accounting irregularities by period were as follows:
                     
    Quarter        
    Ended   Year Ended    
    March 31,   December 31,    
Income (Expense)   2004   2003   Total
             
    (Dollars in thousands)
Adjustments for accounting irregularities
  $ (724 )   $ (5,068 )   $(5,792)
                 
      The majority of the adjustments involved expenses that were improperly recorded or accruals that were improperly adjusted. The adjustments primarily affected accounts receivable, inventories, accounts payable, and accrued expenses at the Company’s Polymer Additives business unit.

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Accounting Mistakes and Errors
      The adjustments for accounting mistakes and errors by period were as follows:
                           
    Quarter        
    Ended   Year Ended    
    March 31,   December 31,    
Income (Expense)   2004   2003   Total
             
    (Dollars in thousands)
Total adjustments for accounting mistakes and errors at Polymer Additives locations
  $ (2,339 )   $ (2,490 )   $ (4,829 )
Adjustments for accounting mistakes and errors at other locations:
                       
 
Incomplete application of U.S. GAAP at foreign locations
    (478 )     (2,252 )     (2,730 )
 
Employee benefits and compensation
    (158 )     2,888       2,730  
 
Inventory valuations
    (2,962 )     2,347       (615 )
 
Account reconciliations
    (191 )     (6,148 )     (6,339 )
 
Derivative contracts
    480       623       1,103  
 
Expense recognition
    1,278       (1,064 )     214  
                   
Total adjustments for accounting mistakes and errors
  $ (4,370 )   $ (6,096 )   $ (10,466 )
                   
      During the investigations, substantial reconciliation efforts were made in the Polymer Additives business unit that resulted in adjustments reducing income by $0.7 million for 2003 and the first quarter of 2004. The most significant reconciliation adjustments for accounting mistakes and errors were made to inventories and accrued expenses. Adjustments reducing income by $2.3 million for inventory valuation primarily consist of adjustments resulting from inappropriate deferrals of purchase price variances and incorrect timing of expense recognition for slow moving inventories. Charges reducing income by $1.2 million were recorded to accrue earned customer rebates in the correct accounting periods.
      Adjustments for accounting mistakes and errors at other locations consisted of the following:
      Incomplete application of U.S. GAAP at foreign locations — During the restatement process, the Company determined that subsidiaries in two countries had not been fully applying U.S. generally accepted accounting principles. Adjustments reducing income by $2.7 million were recorded for 2003 and the first quarter of 2004 in the aggregate. These adjustments principally related to the timing of expense recognition and accounting for postemployment benefits. Also, charges were recorded relating to impaired assets.
      Employee benefits and compensation — Adjustments reducing expenses by $2.7 million in the aggregate were recorded to correct mistakes in accounting for defined benefit pension and other incentive compensation liabilities.
      Inventory valuations — Adjustments to record additional expenses of $0.6 million in the aggregate corrected inventory valuation matters. This category is primarily comprised of adjustments relating to the valuation of inventories resulting from either inconsistent or incorrect use of methodologies to compute manufacturing variance adjustments to standard costs of inventories, and errors triggered by the incorrect configuration of information systems relating to the treatment of purchase price variances. The adjustments also include corrections in the timing of writedowns associated with slow moving and handling loss accounts.
      Account reconciliations — As part of the restatement process, considerable efforts were directed toward validating various balance sheet accounts at both domestic and international locations. As a result of either the failure to reconcile accounts or resolve reconciliation issues in a timely manner, corrections reducing income by $6.3 million were recorded for 2003 and the first quarter of 2004 in the aggregate. The most significant adjustment in this category corrected mistakes totaling $2.9 million made in reconciling the results of a physical inventory observation taken during 2003. Additionally, other adjustments were made related to accounts receivable, accounts payable and accrued expense accounts.

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      Derivative contracts — This category reflects revisions to previous accounting for natural gas supply and metal forward contracts. Adjustments decreasing expenses by $1.1 million were recorded for 2003 and the first quarter of 2004 in the aggregate. The changes were necessary because the Company determined that its hedge designation documentation relating to natural gas supply contracts did not meet the technical requirements to qualify for hedge accounting treatment in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” and the related documentation requirements set forth therein.
      Expense recognition — This category includes adjustments reducing expenses by $0.2 million in the aggregate. The most significant items contained in this category relate to the incorrect timing of accruing costs associated with repair and maintenance activities and recognition of asset impairments. In connection with planned plant shutdowns, several international and domestic locations incorrectly accrued costs before they were incurred, and as a result, adjustments were recorded to expense these costs during the periods in which they were incurred.
Tax Adjustments
      Included in this category are charges totaling to $1.1 million for 2003 and the first quarter of 2004 in the aggregate, which includes corrections in the timing of the realization of a net operating loss carryforward, as well as corrections to errors made in the computations of deferred tax assets and liabilities at certain international subsidiaries.
                     
    Quarter        
    Ended   Year Ended    
    March 31,   December 31,    
Income (Expense)   2004   2003   Total
             
    (Dollars in thousands)
Tax adjustments
  $ (912 )   $ (203 )   $(1,115)
                 
Adjustments Relating to Voluntary Early Adoption of Accounting Pronouncement
      In March 2005, the FASB’s Emerging Issues Task Force (“EITF”) ratified Issue No. 04-06, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” (EITF No. 04-06) which is effective for fiscal years beginning after December 15, 2005 with early adoption permitted. This pronouncement requires that stripping costs incurred during production activities be recognized as period expenses. The Company voluntarily early-adopted EITF No. 04-06 and elected to recognize this change in accounting by retroactive application to its prior-period financial statements. (See Note 1 to the consolidated financial statements included under Item 8 of this Form 10-K.) The after-tax effect of this change was as follows:
                             
    Quarter            
    Ended   Year Ended   Year Ended    
    March 31,   December 31,   December 31,    
Income (Expense)   2004   2003   2002   Total
                 
    (Dollars in thousands)
Voluntary early adoption
of EITF No. 04-06, net of tax
  $ (157 )   $ (691 )   $ (556 )   $(1,404)
                       

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Combined Effect
      The combined effects of the foregoing changes on the Company’s originally reported results of operations are summarized as follows:
                                   
    Quarter            
    Ended   Year Ended   Year Ended    
    March 31,   December 31,   December 31,    
Income (Expense)   2004   2003   2002   Total
                 
    (Dollars in thousands)
Adjustments for accounting irregularities
  $ (724 )   $ (5,068 )   $     $ (5,792 )
Adjustments for accounting mistakes and errors
    (4,370 )     (6,096 )           (10,466 )
                         
Total adjustments for accounting irregularities, mistakes and errors, before tax
    (5,094 )     (11,164 )           (16,258 )
Income tax benefit on adjustments for accounting irregularities, mistakes and errors
    771       4,316             5,087  
Tax adjustments
    (912 )     (203 )           (1,115 )
                         
Adjustments for accounting irregularities, mistakes and errors, net of tax:
                               
 
Continuing operations
    (5,235 )     (7,051 )           (12,286 )
 
Discontinued operations
    (39 )     2,241             2,202  
                         
Total adjustment for accounting irregularities, mistakes and errors, after tax
    (5,274 )     (4,810 )           (10,084 )
Adjustment for voluntary early adoption of EITF No. 04-06, net of tax
    (157 )     (691 )     (556 )     (1,404 )
                         
Total adjustments, net of tax
    (5,431 )     (5,501 )     (556 )   $ (11,488 )
                         
Net income as originally reported
    14,391       19,551       73,723          
                         
Net income as restated
  $ 8,960     $ 14,050     $ 73,167          
                         
      As a result of the changes, originally reported net income was reduced by $5.4 million ($0.13 basic and diluted earnings per share), $5.5 million ($0.13 basic and diluted earnings per share), and $0.6 million ($0.01 basic and diluted earnings per share) for the three months ended March 31, 2004, and the years ended December 31, 2003 and 2002, respectively.
Raw Materials
      Raw materials widely used in Ferro’s operations include resins, thermoplastic polymers, pigments, cobalt oxide, nickel oxide, zinc oxide, zircon sand, borates, chlorine, silica, stearic acid, phthalic anhydride, toluene, tallow and titanium dioxide. Other important raw materials include silver, nickel, copper, gold, palladium, platinum and other precious metals, butanol, and fiberglass. Raw materials make up a large portion of the product cost in certain of the Company’s product lines and fluctuations in the cost of raw materials may have a significant impact on the financial performance of those businesses. The Company attempts to pass through to customers raw material cost fluctuations, including those related to precious metals.
      The Company has a broad supplier base and, in many instances, alternative sources of raw materials are available if problems arise with a particular supplier. Ferro maintains many comprehensive supplier agreements for its strategic and critical raw materials. In addition, the magnitude of the Company’s purchases provides for leverage in negotiating favorable conditions for supplier contracts. The raw materials essential to Ferro’s operations both in the United States and overseas are in most cases obtainable from multiple sources worldwide. Ferro did not encounter raw material shortages in 2004 but is aware of potential future shortages in the world market for certain commodities such as zircon. Ferro does not expect to be affected by such shortages, other than by cost increases for such products.

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Patents, Trademarks and Licenses
      Ferro owns a substantial number of patents and patent applications relating to its various products and their uses. While these patents are of importance to Ferro, management does not believe that the invalidity or expiration of any single patent or group of patents would have a material adverse effect on its business. Ferro’s patents and patents that may issue from pending applications will expire at various dates through the year 2024. Ferro also uses a number of trademarks that are important to its business as a whole or to a particular segment. Ferro believes that these trademarks are adequately protected.
Customers
      None of the Company’s reportable segments is dependent on any single customer or group of customers.
Backlog of Orders; Seasonality
      In general, no significant lead-time between order and delivery exists in any of Ferro’s business segments. As a result, Ferro does not consider that the dollar amount of backlog orders believed to be firm as of any particular date is material for an understanding of its business. Ferro does not regard any material part of its business to be seasonal, however the second quarter is normally the strongest quarter of the year in terms of sales and operating profit, because customer demands tend to be higher in the second quarter.
Competition
      In most of its markets, Ferro has a substantial number of competitors, none of which is dominant. Due to the diverse nature of Ferro’s product lines, no single company competes across all product lines in any of the Company’s segments. Competition varies by product and by region and is based primarily on price, product quality and performance, customer service and technical support.
      The Company is a worldwide leader in the production of glass enamels, porcelain enamel, ceramic glaze coatings and passive electronic materials, and believes it is currently the only merchant manufacturer of all primary components (electrodes, dielectrics, and termination pastes) of multi-layer capacitors. Strong local competition for ceramic glaze and color exists in the markets of Italy and Spain. The Company is one of the largest producers of polymer additives in the United States and has several large competitors. The Company is also one of the largest plastics compounders in the United States.
Research and Development
      Ferro is involved worldwide in research and development activities relating to new and existing products, services and techniques required by the ever-changing markets of its customers. The Company’s research and development resources are organized into centers of excellence that support its regional and worldwide major business units. These centers are augmented by local laboratories, which provide technical service and support to meet customer and market needs of particular geographic areas.
      Expenditures for research and development activities relating to the development or significant improvement of new and/or existing products, services and techniques for continuing operations were approximately $42.4 million in 2004, $40.2 million in 2003 and $33.8 million in 2002. Expenditures for individual customer requests for research and development were not material. During 2005, Ferro spent approximately $39.0 million on research and development activities, a decrease of 8% over 2004.
Environmental Matters
      Ferro’s manufacturing facilities, like those of its industry generally, are subject to numerous laws and regulations implemented to protect the environment, particularly with respect to plant wastes and emissions. Ferro believes that it is in compliance with the environmental regulations to which its operations are subject and that, to the extent Ferro may not be in compliance with such regulations, non-compliance has not had a materially adverse effect on Ferro’s operations.

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      Capital expenditures for environmental control were $7.1 million in 2004, $9.6 million in 2003, and $3.0 million in 2002. In addition, Ferro spent approximately $7.0 million in 2005 and expects to spend approximately $4.0 million in 2006 on capital expenditures for environmental control.
Employees
      At December 31, 2004, Ferro, in its continuing business operations, employed 7,003 full-time employees, including 4,503 employees in its foreign consolidated subsidiaries and 2,500 in the United States. Total employment increased by 156 full time employees from December 31, 2003, due to business growth.
      Approximately 22% of the domestic workforce is covered by labor agreements, and approximately 9% is affected by labor agreements that expire in 2005. The Company completed renewals of these agreements with no significant disruption to the related businesses during 2005.
Domestic and Foreign Operations
      Financial information about Ferro’s domestic and foreign operations by segment is included herein in Note 16 to the consolidated financial statements under Item 8 of this Form 10-K.
      Ferro’s products are produced and distributed in domestic as well as foreign markets. Ferro commenced its international operations in 1927.
      Wholly-owned subsidiaries operate manufacturing facilities in Argentina, Australia, Belgium, Brazil, China, France, Germany, Italy, Japan, Mexico, the Netherlands, Portugal, Spain, Thailand and the United Kingdom. Partially-owned subsidiaries and affiliates manufacture in China, Ecuador, Indonesia, Italy, Japan, Spain, South Korea, Taiwan, Thailand and Venezuela.
      Ferro receives technical service fees and/or royalties from many of its foreign subsidiaries. Historically, as a matter of corporate policy, the foreign subsidiaries have been expected to remit a portion of their annual earnings to the parent as dividends. To the extent earnings of foreign subsidiaries are not remitted to Ferro, those earnings are indefinitely re-invested in those subsidiaries.
Available Information
      The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments, will be made available free of charge on the Company’s web site, www.ferro.com, as soon as reasonably practicable, following the filing of the reports with the Securities and Exchange Commission.
Forward-looking Statements
      Certain statements contained here and in future filings with the Securities and Exchange Commission reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company.
Item 1A — Risk Factors
      Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect the Company’s future financial performance, include the following:
  •  Current and future economic conditions in the United States and worldwide, including continuing economic uncertainties in some or all of the Company’s major product markets;
 
  •  Changes in customer requirements, markets or industries Ferro serves;

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  •  Changes in the costs of major raw materials or sources of energy, particularly natural gas;
 
  •  Escalation in the cost of providing employee health care and pension benefits;
 
  •  Risks related to fluctuating currency rates, changing legal, tax and regulatory requirements that affect the Company’s businesses and changing social and political conditions in the many countries in which the Company operates;
 
  •  Access to capital markets and borrowings, primarily in the United States, and any restrictions placed on Ferro by current or future financing arrangements, including consequences of any future failure to be in compliance with any material provisions or covenants of our credit facilities;
 
  •  The ultimate outcome of class action lawsuits filed against the Company; and
 
  •  The effect of possible acts of God, terrorists, or the public enemy, or of fires, explosions, wars, riots, accidents, embargos, natural disasters, strikes or other work stoppages, or quarantines or other governmental actions or other events or circumstances beyond the Company’s reasonable control.
      The risks and uncertainties identified above are not the only risks the Company faces. Additional risks and uncertainties not presently known to the Company or that it currently believes to be immaterial also may adversely affect the Company. Should any known or unknown risks and uncertainties develop into actual events, these developments could have material adverse effects on the Company’s financial position, results of operations, and cash flows.
Item 1B — Unresolved Staff Comments
      None.
Item 2 — Properties
      The Company’s corporate headquarters offices are located at 1000 Lakeside Avenue, Cleveland, Ohio. The Company also owns other corporate facilities, located in Independence, Ohio. The locations of the principal manufacturing plants by business segment owned by Ferro are as follows, listed by segment:
      Performance Coatings — U.S.: Cleveland, Ohio. Outside the U.S.: Argentina, Australia, China, France, Indonesia, Italy, Mexico, the Netherlands, Spain, Taiwan, Thailand and Venezuela.
      Electronic Materials — U.S.: Vista, California; Penn Yan, New York; South Plainfield, New Jersey; and Niagara Falls, New York. Outside the U.S.: the Netherlands.
      Color and Glass Performance Materials — U.S.: Toccoa, Georgia; Orrville, Ohio; and Washington, Pennsylvania. Outside the U.S.: Australia, China, France, Germany, Mexico, Taiwan, United Kingdom and Venezuela.
      Polymer Additives — U.S.: Bridgeport, New Jersey; Cleveland, Ohio; Walton Hills, Ohio; and Fort Worth, Texas. Outside the U.S.: Belgium.
      Specialty Plastics — U.S.: Carpentersville, Illinois; Evansville, Indiana; Plymouth, Indiana; Edison, New Jersey; and Stryker, Ohio. Outside the U.S.: the Netherlands and Spain.
      Other — U.S.: Waukegan, Illinois; Baton Rouge, Louisiana; and China
      In addition, Ferro leases manufacturing facilities for the Performance Coatings segment in Brazil and Italy; for the Electronic Materials segment in Vista, California, Germany and Japan; for the Color and Glass Performance Materials segment in Japan and Portugal; and for the Specialty Plastics segment in Carpentersville, Illinois. In some instances, the manufacturing facilities are used for two or more business segments.

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Item 3 — Legal Proceedings
      In February 2003, the Company was requested to produce documents in connection with an investigation by the United States Department of Justice into possible antitrust violations in the heat stabilizer industry. Subsequently, the Company was named as a defendant in several putative class action lawsuits alleging civil damages and requesting injunctive relief. The Company has no reason to believe that it or any of its employees engaged in any conduct that violated the antitrust laws. The Company is cooperating with the Department of Justice in its investigation and is vigorously defending itself in the putative class action lawsuits. Management does not expect this investigation or the lawsuits to have a material effect on the consolidated financial position, results of operations, or cash flows of the Company.
      In a July 23, 2004, press release, Ferro announced that its Polymer Additives business performance in the second quarter fell short of expectations and that its Audit Committee would investigate possible inappropriate accounting entries in Ferro’s Polymer Additives business. See further information in Item 1 — Business, Restatement, regarding the investigation. A consolidated putative securities class action lawsuit arising from and related to the July 23, 2004, announcement is currently pending in the United States District Court for the Northern District of Ohio against Ferro, its deceased former Chief Executive Officer, its Chief Financial Officer, and a former operating Vice President of Ferro. This claim is based on alleged violations of federal securities laws. Ferro and the named executives consider these allegations to be unfounded, are vigorously defending this action and have notified Ferro’s directors and officers liability insurer of the claim. Because this action is in its preliminary stage, the outcome of this litigation cannot be determined at this time.
      On June 10, 2005, a putative class action lawsuit was filed against Ferro, and certain former and current employees alleging breach of fiduciary duty with respect to ERISA plans. The Company considers these allegations to be unfounded, is vigorously defending this action, and has notified Ferro’s fiduciary liability insurer of the claim. Because this action is in the preliminary stage, the outcome of this litigation cannot be determined at this time.
      In addition, on October 15, 2004, the Belgian Ministry of Economic Affairs’ Commercial Policy Division (the “Ministry”) served on Ferro’s Belgian subsidiary a mandate requiring the production of certain documents related to an alleged cartel among producers of butyl benzyl phthalate (“BBP”) from 1983 to 2002. Subsequently, German and Hungarian authorities initiated their own national investigations in relation to the same allegations. Ferro’s Belgian subsidiary acquired its BBP business from Solutia Europe S.A./ N.V. (“SOLBR”) in August 2000. Ferro promptly notified SOLBR of the Ministry’s actions and requested SOLBR to indemnify and defend Ferro and its Belgian subsidiary with respect to these investigations. In response to Ferro’s notice, SOLBR exercised its right under the 2000 acquisition agreement to take over the defense and settlement of these matters, subject to reservation of rights. In December 2005, the Hungarian authorities imposed a de minimus fine on Ferro’s Belgian subsidiary, and the Company expects the German and Belgian authorities also to assess fines for the alleged conduct. Management cannot predict the amount of fines that will ultimately be assessed and cannot predict the degree to which SOLBR will indemnify Ferro’s Belgian subsidiary for such fines.
      In October 2005, the Company performed a routine environmental, health and safety audit of its Bridgeport, New Jersey facility. In the course of this audit, internal environmental, health and safety auditors assessed the Company’s compliance with the New Jersey Department of Environmental Protection’s (“NJDEP”) laws and regulations regarding water discharge requirements pursuant to the New Jersey Water Pollution Control Act (“WPCA”). On October 31, 2005, the Company disclosed to the NJDEP that it had identified potential violations of the WPCA and the Company commenced an investigation and committed to report any violations and to undertake any necessary remedial actions. In December 2005, the Company met with the NJDEP to discuss the Company’s investigation and potential settlement of this matter, which would involve the payment of civil administrative penalties. The NJDEP is reviewing the matter and the Company expects the NJDEP to propose a penalty settlement during the first half of 2006. At this time, although management cannot estimate with certainty the ultimate penalty or related costs that may result from this matter, management does not expect such penalties to have a material effect on the consolidated financial position, results of operations, or cash flows of the Company.

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      There are various other lawsuits and claims pending against the Company and its consolidated subsidiaries. In the opinion of management, the ultimate liabilities, if any, and expenses resulting from such lawsuits and claims will not materially affect the consolidated financial position, results of operations, or cash flows of the Company.
Item 4 — Submission of Matters to a Vote of Security Holders
      No matters were submitted to a vote of Ferro’s security holders during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
      Below are set forth the name, age and positions held by each individual serving as an executive officer of the Company as of February 28, 2006, as well as their business experience during the past five years. Years indicate the year the individual was named to or held the indicated position. There is no family relationship between any of Ferro’s executive officers.
James F. Kirsch — 48
  President and Chief Executive Officer, 2005
  President and Chief Operating Officer, 2004
  President, Premix Inc., and President, Quantum Composites Inc., manufacturers of thermoset molding compounds, parts and sub-assemblies for the automotive, aerospace, electrical and HVAC industries, 2002
  President and Director, Ballard Generation Systems Inc., a producer of hydrogen proton exchange membrane (PEM) fuel cells and component systems; Vice President, Ballard Power Systems Inc., a subsidiary of Ballard Generation Systems Inc., 1999
James C. Bays — 56
  Vice President and General Counsel, 2001
  Senior Vice President, General Counsel and Chief Legal Officer, Invensys plc, a global supplier of automation and control systems, 1996
Thomas M. Gannon — 56
  Vice President and Chief Financial Officer, 2003
  Chief Operating Officer, Riverwood International Corporation, a global supplier of paperboard packaging products, 2001
  Executive Vice President, Commercial Operations, Riverwood International Corporation, 1998
Ann E. Killian — 51
  Vice President, Human Resources, 2005
  Vice President, Human Resources, W. W. Holdings, LLC, a manufacturer and distributor of doors, frames and hardware products for the commercial construction industry, 2003
  Vice President, Compensation & Benefits, TRW Inc., a provider of advanced technology products and services for the global automotive, aerospace and information systems markets, 1999
Celeste Beeks Mastin — 37
  Vice President, Color and Glass Performance Materials, 2004
  World Wide Business Director, Performance Pigments and Colors, 2003
  Vice President and General Manager, Bostik Findley, Inc., Nonwovens Division, a global producer of adhesives, 2001
  General Manager, Nitta Findley Co., Ltd., a distributor of adhesive products in Japan, 2001
  Global Sales and Marketing Director, Ato Findley, Inc./ Bostik Findley, Inc., a global producer of adhesives, 2000

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Michael J. Murry — 55
  Vice President, Coatings, 2005
  President, Chief Executive Officer, and Director, Catalytica Energy Systems, Inc., a provider of products that reduce nitrogen oxides (NOx) emissions for the transportation and power generation industries, 2003
  Vice President and General Manager, Ballard Power Systems Inc., a producer of hydrogen proton exchange membrane (PEM) fuel cells and component systems, 2001
  Chief Operating Officer, Ballard Generation Systems Inc., a subsidiary of Ballard Power Systems Inc., 2000
Peter T. Thomas — 50
  Vice President, Pharmaceuticals and Fine Chemicals and Polymer Additives, 2004
  Vice President, Pharmaceuticals and Fine Chemicals, 2003
  Worldwide Business Director, Pharmaceuticals and Fine Chemicals, 2002
  Commercial Director, Performance and Fine Chemicals, 2001
  Commercial Director, Polymer Additives, 2000

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PART II
Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Quarterly Data
      The quarterly high and low intra-day sales prices and dividends declared per share for the Company’s common stock during 2004 and 2003 are presented below:
                                                 
    2004   2003
         
    High   Low   Dividends   High   Low   Dividends
                         
First Quarter
  $ 27.62       24.21       0.145       24.68       19.24       0.145  
Second Quarter
  $ 27.40       24.08       0.145       24.75       20.20       0.145  
Third Quarter
  $ 26.50       18.47       0.145       23.57       20.62       0.145  
Fourth Quarter
  $ 23.51       20.18       0.145       27.47       20.00       0.145  
      The common stock of the Company is listed on the New York Stock Exchange under the ticker symbol FOE. At February 28, 2006, the Company had 1,749 shareholders of record for its common stock.
      The Company intends to continue to declare quarterly dividends on its common stock, however, no assurances can be made as to the amount of future dividends, since such dividends are subject to the Company’s cash flow from operations, earnings, financial condition, capital requirements, and other matters concerning liquidity included herein in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7.
Item 6 — Selected Financial Data
      The following table presents selected financial data for the last five years ended December 31. Financial data for 2000 through 2003 reflect voluntary early adoption of EITF No. 04-06. See further information regarding restatement in Note 2 to the Company’s consolidated financial statements included herein under Item 8.
                                         
        Restated            
    2004   2003(b)(c)   2002(b)   2001(b)   2000(b)
                     
    (Dollars in millions, except per share data)
Net sales
  $ 1,843.7       1,615.6       1,528.5       1,246.5       1,173.0  
Income from continuing operations
  $ 27.8       9.6       33.2       29.9       69.3  
Diluted earnings per share from continuing operations
  $ 0.62       0.18       0.80       0.79       1.82  
Cash dividends per share
  $ 0.58       0.58       0.58       0.58       0.58  
Total assets
  $ 1,773.4       1,731.3       1,603.6       1,732.2       1,126.8  
Long-term debt, including current portion
  $ 498.8       525.3       444.4       831.4       352.5  
Total debt(a)
  $ 510.6       538.6       562.1       939.5       530.6  
 
(a) Total debt is comprised of long-term debt, including current portion, notes and loans payable, borrowings under asset securitization and leveraged lease programs. See further information in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, for discussion on the asset securitization and leveraged lease programs.
 
(b) Reflects voluntary early adoption of EITF No. 04-06.
 
(c) Selected financial data for 2003 has been restated. See Note 2 to the consolidated financial statements included herein under Item 8.
      The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (FAS No. 142) for business combinations consummated after June 30, 2001, as of July 1, 2001, and adopted FAS No. 142 in its entirety effective January 1, 2002. Accordingly, all goodwill and other

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intangible assets having indefinite useful lives are not amortized but instead are subject to impairment testing on at least an annual basis. Before the adoption of any provisions of FAS No. 142, goodwill and intangible assets having indefinite useful lives were amortized ratably over their estimated useful lives.
      In September 2001, the Company acquired from OM Group, Inc. certain businesses previously owned by dmc2 Degussa Metals Catalysts Cerdec AG (dmc2). See further information regarding the transaction in Note 9 to the Company’s consolidated financial statements included herein under Item 8.
      On September 30, 2002, Ferro completed the sale of its Powder Coatings business unit. On June 30, 2003, the Company completed the sale of its Petroleum Additives business and its Specialty Ceramics business. For all periods presented, the Powder Coatings, Petroleum Additives and Specialty Ceramics businesses have been reported as discontinued operations. The divestiture of the Powder Coatings, Petroleum Additives and Specialty Ceramics businesses are further discussed in Note 11 to the Company’s consolidated financial statements included herein under Item 8. The results of these divested operations are excluded from the information presented in the table below.
      Quarterly information from continuing operations is set forth below:
                                             
                Per Common Share
                 
Quarter   Net Sales   Cost of Sales   Income   Basic Earnings   Diluted Earnings
                     
    (Dollars in millions, except per share data)
2003
                                       
 
1*
  $ 397.6     $ 298.6     $ 5.8     $ 0.13     $ 0.13  
 
2*
    414.2       319.6       3.1       0.06       0.06  
 
3*
    397.6       308.4       (2.4 )     (0.07 )     (0.07 )
 
4*
    406.2       315.8       3.1       0.06       0.06  
                               
   
Total*
  $ 1,615.6     $ 1,242.4     $ 9.6     $ 0.18     $ 0.18  
                               
2004
                                       
 
1*
  $ 461.6     $ 359.9     $ 9.0     $ 0.20     $ 0.20  
 
2
    482.6       375.5       11.8       0.27       0.27  
 
3
    451.6       358.9       6.5       0.14       0.14  
 
4
    447.9       367.2       0.5       0.00       0.00  
                               
   
Total
  $ 1,843.7     $ 1,461.5     $ 27.8     $ 0.62     $ 0.62  
                               
 
Restated
      The impact of the restatement is reported in this Annual Report on Form 10-K for the year ended December 31, 2004, and will be reported in an amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, and in Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2004, and September 30, 2004.
      The quarterly data presented above has not been subject to a review by the independent registered public accounting firm, conducted in accordance with standards established by the Public Company Accounting Oversight Board.
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
      Market conditions in 2004 were generally favorable, resulting in increased demand for all of the Company’s major product offerings. Improved economic conditions in North America drove regional volume growth in excess of 12%. Volume growth in Asia Pacific and Latin America improved by 11% and 9%, respectively, while European volume declined by nearly 3%. Consolidated net sales increased by approxi-

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mately 14%. In addition to increased consolidated volumes, sales also benefited from higher average selling prices and favorable foreign currency exchange rates.
      Beyond fundamental product demand, the market factors that most affected 2004 results include the following:
  •  Increased raw material costs and our ability to raise selling prices,
 
  •  A deterioration in the primary market served by the Electronic Materials Segment in the second half of 2004,
 
  •  Cost control initiatives, including restructuring programs,
 
  •  Costs incurred for the accounting investigation and restatement process, and
 
  •  Sales of assets.
      Raw material costs in general increased substantially during the year, and the Company was unable to fully recover the raw material cost increases through pricing actions, resulting in lower profit margins. Increased raw materials costs and the Company’s inability to pass these higher costs onto customers had a particularly adverse impact on the Polymer Additives, Specialty Plastics and Performance Coatings segments. This adverse impact, across the Company, was more pronounced in the second half of the year, resulting in decreased operating results in the second half of 2004 compared to the first half of the year.
      Demand for electronic materials also weakened in the second half of 2004. Following a very strong start to 2004 for the Company’s Electronic Materials segment, demand in the electronics market slowed as a result of customers’ inventory corrections. The inventory corrections caused a substantial sales decline in the fourth quarter, compared to the previous three quarters of 2004.
      As a result of increasing raw material costs in most of the Company’s businesses and lower sales for the Electronic Materials and Color and Glass Performance Materials segments, segment income declined by approximately 50% from $72.1 million in the first half of 2004 to $34.3 million in the second half.
      Income from continuing operations for the year increased to $27.8 million from $9.6 million in 2003. The income improvement was driven by increased sales volumes, higher average selling prices and lower selling, general and administrative (“SG&A”) expenses, partially offset by higher raw material costs. During 2004, the Company benefited from the sale of its interest in a joint venture and an operating facility. The pre-tax gains on these sales totaled approximately $6.9 million. Net Income for 2004 also benefited from lower restructuring costs relative to 2003, partially offset by costs incurred in support of the accounting investigation and restatement process.
      During the year, the Company remained focused on working capital management and cash flow, generating net cash provided by continuing operations of $62.6 million which enabled a further reduction in total debt, as defined in Item 6, of $28.0 million.
Outlook
      Due to the timing of the filing of this Form 10-K, it is not meaningful to provide an outlook for the calendar year 2005. Refer to Form 8-K’s filed or furnished to the Securities and Exchange Commission by the Company during 2005.
Results of Operations
Comparison of the years ended December 31, 2004 and 2003 (restated)
      Sales from continuing operations for the year ended December 31, 2004, of $1,843.7 million were 14.1% higher than the $1,615.6 million of sales for the comparable 2003 period. Increased volumes in North America, Asia-Pacific and Latin America were the primary drivers for the revenue gain. Increased volumes were driven by improved economic conditions in North America, particularly in construction, automotive, appliance and vinyl processing end markets coupled with increased demand for electronic materials and

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continued volume gains in Asia for tile coatings products. Europe also recorded increased sales due to the year-over-year change in foreign currency exchange rates. On a consolidated basis, the impact of strengthening currencies, in particular the Euro, improved revenue by approximately $61 million.
      Gross margin (net sales less cost of sales) was 20.7% of sales compared with 23.1% for the comparable 2003 period. The reduced gross margin compared with the prior year stemmed primarily from increased raw material and energy costs that were only partially recovered through price adjustments. Increased costs of many basic materials, including crude oil and related petrochemical feedstocks, base and precious metals, and agricultural based commodities, drove much of the raw material cost increases. In addition, tight supply positions and strong global demand for basic plastics, including polypropylene, polystyrene, and polyethylene, further pressured raw material costs.
      Selling, general and administrative expenses from continuing operations were $312.4 million, or 16.9% of sales for 2004 compared to $315.9 million, or 19.6% of sales for 2003. The strength of foreign currencies, primarily the Euro, increased 2004 reported costs by approximately $11 million. Excluding the impact of foreign currencies, SG&A declined by approximately $14 million. Differences in restructuring charges were a primary driver for the decline. In 2004, the Company recorded in SG&A $2.5 million of restructuring charges compared to $10.1 million in 2003. Restructuring savings from the actions taken in 2003 and other expense reductions initiated during 2004 further contributed to the decline, offsetting $2.7 million in expenses incurred as a result of the accounting investigation coupled with other cost increases, including pensions and research and development.
      Earnings for the year ended December 31, 2004 included total pre-tax charges of $9.3 million related primarily to restructuring activities and the investigation and restatement process. Earnings for the year ended December 31, 2003 included pre-tax charges of $14.2 million related primarily to restructuring costs, consisting principally of employee termination expenses related to facility rationalization, overhead reduction and lease buy-out costs. Of the $9.3 million of charges incurred in 2004, $2.6 million were recorded in cost of sales, $5.2 million in SG&A expenses, and $1.5 million in miscellaneous expense.
      Interest expense from continuing operations declined from $43.1 million for 2003 to $42.0 million for 2004. This change was driven by a decline in interest expense relating to capitalized lease obligations. This decline was partially offset by increased interest on the Company’s credit facility driven by higher average interest rates and increases in credit facility fees offset partially by reduced average debt levels during 2004.
      Net foreign currency loss for the year ended December 31, 2004 was $3.0 million as compared to $1.2 million for the prior year. The current year includes a $1.0 million loss from the write-off of accumulated translation adjustments associated with the liquidation of a joint venture company. The Company uses certain foreign currency instruments to offset the effect of changing exchange rates on foreign subsidiary earnings and short-term transaction exposure. The carrying values of such contracts are adjusted to market value and resulting gains or losses are charged to income or expense in the period.
      A pre-tax gain of $5.2 million was recognized in 2004 for the sale of the Company’s interest in Tokan Material Technology Co. Limited, an unconsolidated affiliate. There were no similar gains or losses in the prior year.
      Net miscellaneous income for the year was $0.4 million as compared to expense of $1.8 million in 2003. The majority of the increase in net miscellaneous income resulted from gains associated with an asset sale. The Company recorded a $1.7 million pre-tax gain on the sale of a manufacturing facility. This asset related gain was partially offset by costs incurred to recognize unrealized losses on natural gas contracts. In 2004 the Company recorded a gain of $0.9 million for the mark-to-market valuation of gas contracts versus a $0.6 million gain in 2003.
      Income tax as a percentage of pre-tax income from continuing operations for the year ended December 31, 2004 was 10.7% compared to 19.8% for the year ended December 31, 2003. Contributing to the decline in the effective tax rate were several positive adjustments to the Company’s tax provision, primarily in the fourth quarter, the largest of which was due to a reduction in a valuation allowance for a deferred tax asset

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associated with a net operating loss carryforward that is expected to be realized. The positive effect of the tax adjustments recorded in the fourth quarter of 2004 was approximately $3.1 million.
      Income from continuing operations for the year ended December 31, 2004 was $27.8 million compared with $9.6 million for the year ended December 31, 2003. Diluted earnings per share from continuing operations totaled $0.62 for the year ended December 31, 2004 compared with $0.18 in 2003.
      There were no businesses reported as discontinued operations in the year ended December 31, 2004. The Company, however, recorded a loss of $2.9 million, net of taxes, in 2004 related to certain post-closing matters associated with businesses sold in prior periods, including Powder Coatings and Specialty Ceramics. The loss from discontinued operations in 2003 was $0.9 million. The 2003 results include the Petroleum Additives and Specialty Ceramics business units, which were divested in June 2003. The disposal of the Petroleum Additives and Specialty Ceramics business units resulted in a gain, net of income taxes, of $3.1 million in the year ended December 31, 2003. In addition, certain post-closing matters increased the previously recorded gain on the 2002 sale of Powder Coatings business by $2.2 million. Diluted earnings per share from discontinued operations totaled a loss of $0.07 for December 31, 2004 compared to a $0.11 gain for the year ended December 31, 2003.
      Net income for the year ended December 31, 2004 totaled $24.9 million, or $0.55 per diluted share versus $14.1 million, or $0.29 per diluted share for the year ended December 31, 2003.
      Performance Coatings Segment Results. For 2004, sales in the Performance Coatings segment increased 9.7% to $466.5 million compared to $425.1 million for 2003. The higher revenue is primarily due to improved economic conditions in North America, resulting in increased sales to the appliance market, increased demand for tile coatings products, principally driven by increased market demand in Asia, and the favorable impact of foreign currency exchange rates. These gains were partially offset by volume declines related to key European end markets for tile coatings and a slightly lower average selling price. Operating income for the segment was $23.9 million for the year ended December 31, 2004 compared with operating income of $26.2 million in the prior year. The decline in segment income was driven primarily by higher raw material costs partially offset by slightly lower SG&A costs.
      Electronic Materials Segment Results. For 2004, sales in the Electronic Materials segment increased 14.8% to $388.3 million compared to $338.3 million for 2003. The higher revenue is primarily due to volume growth to support global semiconductor demand. Segment revenues also benefited from the favorable impact of foreign currency exchange rates. Operating income for the segment was $33.2 million for the year ended December 31, 2004 compared with operating income of $21.0 million in the prior year. The increase in segment income reflects the increased demand from the electronics industry and higher operating rates, partially offset by increased SG&A costs, primarily due to increased research and development spending. As noted in the Overview Section above, while the Electronic Materials Segment results were favorable for 2004, operating results declined substantially late in the year. Following a very strong first eight months of 2004, demand in the electronics market slowed as a result of customers’ inventory corrections which caused a substantial sales decline in the fourth quarter, compared to the previous three quarters of 2004.
      Color and Glass Performance Materials Segment Results. Sales in the Color and Glass Performance Materials segment were $355.9 million for 2004, an increase of 16.5% versus $305.4 million in the prior year. Both increased volumes and a higher average selling price drove the year-over-year sales increase. Demand for products serving construction and container glass markets were major contributors to the increased volume, partially offset by a decline in sales to the dinnerware market. Appreciating foreign currency exchange rates relative to the U.S. dollar also added to the increase. Segment operating income decreased to $37.1 million from $41.7 million in 2003. The lower segment income was due primarily to higher raw material costs that the Company was unable to recover through pricing initiatives and increased SG&A expenditures.
      Polymer Additives Segment Results. Sales in the Polymer Additives segment were $280.2 million for 2004, an increase of 16.6% versus $240.4 million in the prior year. The year-over-year increase in sales was primarily due to improved demand from the North American end markets, including vinyl processing and construction. Increased pricing and appreciating foreign currency exchange rates relative to the U.S. dollar

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also added to the increase. These sales gains were partially offset by weakness in Europe, excluding the effect of foreign currency. Segment operating income for 2004 was a loss of $0.9 million versus income of $2.5 million in 2003. The lower segment income was due primarily to higher raw material cost that the Company was unable to recover through pricing initiatives coupled with increased SG&A spending.
      Specialty Plastics Segment Results. Sales in the Specialty Plastics segment were $265.0 million for 2004, an increase of 12.3% versus $236.0 million in the prior year. The year-over-year increase in sales was primarily due to improved demand for North American durable goods, including automobiles and appliances. Increased pricing coupled with appreciating foreign currency exchange rates relative to the U.S. dollar also added to the increase. These sales gains were partially offset by weakness in Europe, where volumes declined by approximately 7%. Segment operating income decreased to $9.6 million from $12.8 million in 2003. The lower segment income was due primarily to higher raw material cost that the Company was unable to recover through pricing initiatives, partially offset by lower SG&A spending.
      Other Segment Results. Sales in the Other segment were $87.8 million for 2004, an increase of 24.7% versus $70.4 million in the prior year. Operating income improved to $3.6 million from $3.1 million in 2003.
      Geographic Sales. Sales in the United States were $900.0 million for the year ended December 31, 2004 compared with sales of $776.4 for the year ended December 31, 2003. The increase was primarily due to increased volumes sold to the electronics industry coupled with improved demand in construction, automotive, appliance, and vinyl processing end markets. International sales were $943.7 million in 2004 compared with $839.2 million in 2003. The majority of the international sales increase occurred in Europe due to the strengthening of the Euro against the dollar and in the Asia-Pacific region due to volume growth.
      Cash Flows. Net cash provided by operating activities of continuing operations for the year ended December 31, 2004, was $62.6 million, compared with $4.6 million for 2003. The difference between the two periods was driven primarily by changes in net income, working capital balances, and use of the asset securitization facility.
      Cash used for investing activities was $18.3 million in 2004 compared with $49.7 million in 2003. Capital expenditures for continuing operations were $39.1 million in 2004 compared to $36.1 million in 2003. Cash used for investing activities in 2003 included a $25.0 million buy out of an operating lease agreement, accounting for the majority of the change in cash used for investing activities between 2004 and 2003.
      Net cash used for financing activities was $52.0 million in 2004 compared with a source of $53.6 million in 2003. Cash used in 2004 reflects primarily debt reduction and dividends paid to the Company’s shareholders. The Company increased debt in 2003 primarily to buy-out an operating lease arrangement.
      Net cash used for operating activities of discontinued operations was $1.6 million in 2004 versus $1.1 million in 2003. Net cash provided by investing activities of discontinued operations was $19.3 million in 2003, including the proceeds from the sale of the Company’s Specialty Ceramics and Petroleum Additives businesses.
      Related Party Transactions. Transactions with unconsolidated affiliates included sales of $19.4 million and $5.5 million in 2004 and 2003, respectively, and purchases of $6.4 million and $2.2 million in 2004 and 2003, respectively. At December 31, 2004, the Company had a 2.4 million guarantee outstanding, expiring February 21, 2008, to support the borrowing of an unconsolidated affiliate, and also had $2.8 million due to Ferro Finance Corporation. In addition, Ferro purchased raw material from a company whose controlling interest is held by a company whose chief executive officer currently serves on the Company’s Board of Directors. These purchases amounted to $14.3 million in 2004 and $7.0 million in 2003. There were no payables outstanding relating to these purchases at December 31, 2004.
     
Comparison of the years ended December 31, 2003 (restated) and 2002
      Sales from continuing operations for the year ended December 31, 2003, of $1,615.6 million were 5.7% higher than the $1,528.5 million of sales for 2002. The impact of strengthening currencies, in particular the Euro, improved revenue by 6.6% during the year ended December 31, 2003. Higher volumes in the Asia

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Pacific region and North America also contributed to the sales increase for the year 2003 but were partially offset by lower volumes in Europe stemming from continued economic weakness.
      Gross margin from continuing operations was 23.1% of sales compared with 25.1% for the prior year. The reduced gross margin compared with the prior year stemmed from raw material cost increases particularly in the Performance Coatings, Polymer Additives and Specialty Plastics segments only partially recovered through price adjustments.
      Selling, general and administrative expenses from continuing operations were $315.9 million for the year ended December 31, 2003, compared with $282.5 million for 2002. The $33.4 million increase in SG&A expenses was caused primarily by the effect of stronger foreign currencies against the U.S. dollar of approximately $19 million, increased integration and restructuring costs of $5.0 million and higher pension expense. In addition, research and development spending increased by $6.4 million compared to the same period of 2002 primarily to support research activities for the Company’s electronic materials, color and glass and pharmaceuticals businesses.
      Earnings for the year ended December 31, 2003 included pre-tax charges of $14.2 million primarily related to restructuring costs, consisting principally of the costs of terminating employees related to facilities rationalization, overhead reduction and lease buy-out costs. The year ended December 31, 2002 included $9.4 million of similar charges. Of the $14.2 million of charges incurred in 2003, $3.6 million were recorded in cost of sales, $10.1 million in selling, general and administrative expenses, and $0.5 million in miscellaneous expense.
      Interest expense from continuing operations was $43.1 million for the year ended December 31, 2003, compared with $46.1 million for the year ended December 31, 2002. The decrease is due to both lower levels of borrowing and lower average interest rates in 2003 compared with 2002. Partially offsetting these decreases were higher interest costs associated with capital lease obligations and higher credit facility fees.
      Net foreign currency loss for the year ended December 31, 2003, was $1.2 million as compared to $0.4 million for the year ended December 31, 2002. The Company has and continues to use certain foreign currency instruments to offset the effect of changing exchange rates on foreign subsidiary earnings. The carrying values of such contracts are adjusted to market value and resulting gains or losses are charged to income or expense in the period.
      There were no gains or losses for sales of businesses for the year ended December 31, 2003. In 2002, the Company recorded a $0.5 million pre-tax gain for the sale of an Australia based Polymer Additives business.
      Miscellaneous expense, net, for the year ended December 31, 2003 was $1.8 million as compared to expense of $9.1 million for the year ended December 31, 2002. The primary components of the net 2003 expense included minority interest expense offset by affiliated income, gains on sales of assets and mark-to-market adjustments on natural gas contracts. The decline in 2003 relates to higher gains on marked to market derivatives and gains on sales of assets as compared to 2002. Also, minority interest expense was higher in 2002 versus 2003.
      Income tax as a percentage of pre-tax income from continuing operations for the year ended December 31, 2003 was 19.8% compared with 30.5% for the year ended December 31, 2002. Contributing to this decline in the effective tax rate was a decrease in the valuation allowance resulting from the utilization of a capital loss and tax benefits realized from export sales.
      Income from continuing operations for the year ended December 31, 2003, was $9.6 million compared with $33.2 million for the year ended December 31, 2002. Diluted earnings per share from continuing operations totaled $0.18 for the year ended December 31, 2003 compared with $0.80 for the year ended December 31, 2002.
      The loss from discontinued operations was $0.9 million for the year ended December 31, 2003, compared with income of $6.2 million for the year ended December 31, 2002. Prior year results included the Company’s Powder Coatings business unit, which was divested in September 2002, and full year results for the Petroleum Additives and Specialty Ceramics business units, which were divested in June 2003. A gain on the disposal of

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the Company’s Powder Coatings business of $33.8 million, net of income taxes of $20.2 million, was recorded in the year ended December 31, 2002. The disposal of the Petroleum Additives and Specialty Ceramics business units resulted in a gain of $3.1 million, net of income taxes of $1.0 million, in the year ended December 31, 2003. In addition, certain post-closing matters increased the previously recorded gain on the sale of the Powder Coatings business by $2.2 million, net of income taxes. Diluted earnings per share from discontinued operations totaled $0.11 for the year ended December 31, 2003, compared to $0.97 for the year ended December 31, 2002.
      Net income for the year ended December 31, 2003 totaled $14.1 million compared with net income of $73.2 million for the year ended December 31, 2002. The decline was primarily due to $35.6 million in lower contribution from discontinued operations, including the $33.8 million gain from the sale of Powder Coatings, raw material cost increases and lower operating rates. Diluted earnings per share were $0.29 for the year ended December 31, 2003 versus diluted earnings of $1.77 for the year ended December 31, 2002.
      Performance Coatings Segment Results. Sales in the Performance Coatings segment were $425.1 million for the year ended December 31, 2003, compared with sales of $410.8 million for the year ended December 31, 2002. The increase of 3.5% in sales is due to the effect of currency exchange rates and slightly higher volumes for tile coatings products, partially offset by lower average selling prices. Operating income for the segment was $26.2 million for the year ended December 31, 2003, compared with operating income of $35.1 million for the year ended December 31, 2002. The decrease in segment income reflects lower volumes related to key international end markets for tile coatings and porcelain enamel coupled with the lower average selling price and higher raw material costs. This decrease was partially offset by cost-saving actions taken throughout the year.
      Electronic Materials Segment Results. For 2003, sales in the Electronic Materials segment increased 19.0% to $338.3 million compared to $284.3 million for 2002. The higher revenue is primarily due to volume growth to support global semiconductor demand and higher average precious metal pricing. The costs associated with precious metals, which are contained in the Company’s products, are passed directly to customers. This pass through positively affects revenues as average metal pricing increases but does not materially contribute to operating income. Segment revenues also benefited from the favorable impact of foreign currency exchange rates. Operating income for the segment was $21.0 million for the year ended December 31, 2003 compared with operating income of $18.1 million in the prior year. The increase in segment income reflects the increased demand from the electronics industry, partially offset by increased SG&A costs, primarily for increased research and development spending.
      Color and Glass Performance Materials Segment Results. Sales in the Color and Glass Performance Materials segment were $305.4 million for the year ended December 31, 2003, compared with sales of $291.5 million for the year ended December 31, 2002. The year-over-year increase in sales was due to the effect of currency exchange rates, partially offset by a lower average selling price and reduced volumes. Operating income for the segment was $41.7 million for the year ended December 31, 2003, compared with $43.1 million for the year ended December 31, 2002. The lower segment income was due primarily to the impact of the lower sales volume and increased SG&A spending.
      Polymer Additives Segment Results. Sales in the Polymer Additives segment were $240.4 million for the year ended December 31, 2003, a decline of 2.7% from the $247.1 million recorded for the year ended December 31, 2002. The year-over-year decline in sales was due to a 4% reduction in global volumes, partially offset by an increase in average selling prices. Operating income for the segment was $2.5 million for the year ended December 31, 2003, compared with $19.3 million for the year ended December 31, 2002. The lower segment income was due primarily to the impact of lower sales volume coupled with higher raw material costs that the Company was unable to recover through pricing initiatives.
      Specialty Plastics Segment Results. Sales in the Specialty Plastics segment were $236.0 million for the year ended December 31, 2003, compared with sales of $231.7 million for the year ended December 31, 2002. The year-over-year increase in sales was due to the positive effect of currency exchange rates, while global volumes declined by nearly 4%. Operating income for the segment was $12.8 million for the year ended December 31, 2003, compared with $15.4 million for the year ended December 31, 2002. The lower segment

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income was due primarily to the impact of the lower sales volume and higher raw material costs that the Company was unable to recover through pricing initiatives.
      Other Segment Results. Sales in the Other segment were $70.4 million for 2003, an increase of 11.7% versus $63.1 million in the prior year. Operating income improved to $3.1 million from a loss of $0.2 million in 2002.
      Geographic Sales. Sales in the United States were $776.4 million for the year ended December 31, 2003, compared with sales of $758.6 million for the year ended December 31, 2002. The increase was primarily due to higher sales in the electronics business unit. International sales were $839.2 million for the year ended December 31, 2003, compared with sales of $769.9 million for the year ended December 31, 2002. The majority of the international sales increase occurred in Europe due to the strengthening of the Euro against the dollar and in the Asia-Pacific region due to volume growth.
      Cash Flows. Net cash provided by operating activities of continuing operations for the year ended December 31, 2003, was $4.6 million, compared with $171.6 million for 2002. The difference was driven principally by a decline in net income, excluding discontinued operations, and increased working capital requirements coupled with changes in usage of the asset securitization program. The increase in working capital was caused primarily by an increase in accounts and trade notes receivable and inventory levels in 2003. The increase in accounts and trade notes receivable reflects the impact of the Euro and higher volumes in the Asia Pacific region and North America.
      Cash used for investing activities of continuing operations was $69.0 million in 2003 compared with $38.8 million in 2002. The increase in cash used for investing activities in 2003 was primarily due to the $25.0 million buy out of an operating lease agreement and purchase price settlement payments of approximately $8.5 million related to the dmc2 acquisition.
      Net cash provided by financing activities was $53.6 million in 2003 compared with a usage of $283.3 million in 2002. The cash used in the prior year reflects the repayment of long-term debt and the capital markets facility offset partially by the net proceeds from the issuance of common stock. Cash provided in 2003 reflects increased long-term debt.
      Net cash used for operating activities of discontinued operations was $1.1 million in 2003 compared with net cash provided by operating activities of discontinued operations of $17.4 million in 2002. Net cash provided by investing activities of discontinued operations was $19.3 million in 2003, including the proceeds from the sale of the Company’s Specialty Ceramics and Petroleum Additives businesses of $19.7 million, as compared to cash provided by investing activities of discontinued operations in 2002 of $129.3 million, including proceeds from the sale of Powder Coatings of $131.4 million.
      Related Party Transactions. Transactions with unconsolidated affiliates included sales of $5.5 million and $4.8 million in 2003 and 2002, respectively, and purchases of $2.2 million and $1.5 million in 2003 and 2002, respectively. At December 31, 2003, the Company had a 2.4 million guarantee outstanding, expiring February 21, 2008, to support the borrowing of an unconsolidated affiliate, and also had $2.8 million due to Ferro Finance Corporation. In addition, Ferro purchased raw material from a company whose controlling interest is held by a company whose chief executive officer currently serves on the Company’s Board of Directors. These purchases amounted to $7.0 million in 2003 and $1.2 million in 2002. Payables relating to these purchases were $0.7 million at December 31, 2003.
     
Liquidity and Capital Resources
      The Company’s liquidity requirements include primarily debt service, working capital requirements, capital investments, post-retirement obligations and dividend payments. Capital expenditures were $39.1 million and $36.1 million for the years ended December 31, 2004 and 2003, respectively. The Company expects to be able to meet its liquidity requirements from a variety of sources, including cash flow from operations and use of its credit facilities. The Company has a $300 million revolving unsecured senior credit facility, of which $162.6 million was available as of December 31, 2004. The Company also has an accounts receivable

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securitization facility under which the Company may receive advances of up to $100 million, subject to the level of qualifying accounts receivable. See further information regarding the Company’s credit facilities included in Note 4 to the Company’s consolidated financial statements included herein under Item 8.
      At December 31, 2004, the Company’s senior credit rating was Baa3 by Moody’s Investor Service, Inc. (“Moody’s”) and BB+ by Standard & Poor’s Rating Group (“S&P”). In the second quarter of 2005, the Company’s senior credit rating was downgraded to Ba1 by Moody’s and BB by Standard & Poors. In March 2006, Moody’s downgraded its rating to B1 and then withdrew its ratings, and Standard & Poors downgraded their rating to B+. The rating agencies may, at any time, based on various factors including changing market, political or economic conditions, reconsider the current rating of the Company’s outstanding debt. Based on rating agency disclosures, Ferro understands that ratings changes within the general industrial sector are evaluated based on quantitative, qualitative and legal analyses. Factors considered by the rating agencies include: industry characteristics, competitive position, management, financial policy, profitability, capital structure, cash flow production and financial flexibility. Moody’s and S&P have disclosed that the Company’s ability to improve earnings, reduce the Company’s level of indebtedness and strengthen cash flow protection measures, whether through asset sales, increased free cash flows from operations or otherwise, will be factors in their ratings determinations going forward.
      The senior notes are redeemable at the option of the Company at any time for the principal amount of the senior notes then outstanding plus the sum of any accrued but unpaid interest and the present value of any remaining scheduled interest payments. The senior notes are redeemable at the option of the holders only upon a change in control of the Company combined with a rating by either Moody’s or S&P below investment grade as defined in the indenture. Currently, the rating of the senior notes is below investment grade.
      The 8.0% debentures, due 2025, are redeemable at the option of the Company at any time after June 15, 2005, for redemption prices ranging from 103.31% to 100% of par. The 7.125% debentures, due 2028, are redeemable at the option of the Company at any time for the principal amount then outstanding plus the sum of any accrued but unpaid interest and the present value of any remaining scheduled interest payments. The 7.625% debentures, due 2013, and the 7.375% debentures, due 2015, are not redeemable before maturity.
      The indentures under which the senior notes and the debentures are issued contain operating covenants that limit the Company’s ability to engage in certain activities including limitations on consolidations, mergers, and transfers of assets; creation of additional liens; and sale and leaseback transactions. The indentures contain cross-default provisions with other debt obligations that exceed $10 million of principal outstanding. In addition, the terms of the indentures require, among other things, the Company to file with the Trustee copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q and an Officers’ Certificate relating to the Company’s compliance with the terms of the indenture within 120 days after the end of its fiscal year. Prior to the filing of this Form 10-K, the Company had not filed with the Securities and Exchange Commission its annual report for 2004 and still has not filed its Form 10-Qs for the third quarter of 2004 and each of the first three quarters of 2005 or its Form 10-K for fiscal year 2005 (the “SEC Filings”) as a result of the restatement process. For this reason, the Company was also unable to provide an Officer’s Certificate for 2004 in a timely manner. Consequently, the Company has failed to comply with its financial reporting covenants. After the close of business on March 30, 2006, the Company received a notice of default with respect to its failure to file the SEC Filings from a holder of the 7.375% Debentures due 2015 (the “Notes”) of which $25 million is outstanding. Under the terms of the indenture governing the Notes, the Company has a 90-day period in which to cure the failure to file the SEC Filings or obtain a waiver. If the Company does not cure or obtain a waiver within the 90-day period, an event of default will have occurred, and the holders of the Notes may declare the $25 million of principal immediately due and payable. In addition, as described above, the resulting event of default would trigger cross-default provisions for all other series of debt issued under the indenture as well as under the agreements governing most of the Company’s other outstanding indebtedness. The Company does not expect to cure the failure to file the overdue SEC filings within the 90 day period and intends to pursue a waiver. Whether or not any such defaults are triggered, management plans to enter into the New Credit Facility (described below) on or before June 29, 2006 and to continue its Asset Securitization Program (described below) so that the Company is in a position to be able to repay any indebtedness that may

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be accelerated as a result of a default and also to prepay or redeem such other indebtedness as the circumstances may warrant.
Revolving Credit Facility
      The Company’s revolving credit facility expires September 7, 2006 and contains financial covenants relating to total debt, fixed charges and EBITDA (earnings before interest, taxes, depreciation and amortization), cross default provisions with other debt obligations, and customary operating covenants that limit its ability to engage in certain activities, including significant acquisitions. In addition, if the Company’s senior credit rating is downgraded below Ba2 by Moody’s or BB by S&P, as it currently is, the Company and its material subsidiaries are required to grant, within 30 days from such a rating downgrade, security interests in their tangible and intangible assets (with the exception of the receivables sold as part of the Company’s asset securitization program), pledge 100% of the stock of domestic material subsidiaries and pledge 65% of the stock of foreign material subsidiaries, in each case, in favor of the lenders under the senior credit facility. As a result, liens on principal domestic manufacturing properties and the stock of domestic subsidiaries would be shared with the holders of the Company’s senior notes and debentures. The Company’s ability to meet these covenants in the future may be affected by events beyond its control, including prevailing economic, financial and market conditions and their effect on the Company’s financial position and results of operations. The Company does have several options available to mitigate these circumstances, including selected asset sales.
      During 2004, the Company was granted waivers from the banks providing the revolving credit facility for financial reporting delays. The delays were a result of the Company’s restatement of its 2003 and first quarter 2004 consolidated financial information. See further information regarding the restatement in Note 2 to the Company’s consolidated financial statements included herein under Item 8. Subsequent to December 31, 2004, the revolving credit agreement was amended to relax certain financial covenants, and the Company obtained amended waivers for financial reporting delays. In March 2006, the Company executed a commitment letter for a $700 million credit facility (the “New Credit Facility”) from a syndicate of lenders. The New Credit Facility will provide for a five year, $300 million multi-currency senior revolving credit facility and a six year, $400 million term loan facility. The Company expects to use the New Credit Facility to replace the existing credit facility, to repay any indebtedness that may be accelerated because of an event of default, and to prepay or redeem such other indebtedness as circumstances may warrant and to provide funds for working capital and general corporate purposes. In addition, the New Credit Agreement, is subject to, among other conditions, the negotiation, execution and delivery of definitive documentation; completion of lender’s due diligence; the absence of a disruptive or adverse change in the financial banking or capital markets; and compliance with certain Financial measures at the closing date. See further information regarding this subsequent event in Note 22 to the Company’s consolidated financial statements included herein under Item 8.
Off Balance Sheet Arrangements
      Asset Securitization Program. In 2000, the Company initiated an aggregate $150 million program to sell (securitize), on an ongoing basis, a pool of its trade accounts receivable. This program serves to accelerate cash collections of the Company’s trade accounts receivable at favorable financing costs and helps manage the Company’s liquidity requirements. During the fourth quarter of 2004, the Company amended the $100 million U.S. portion of the securitization program to resolve issues related to an earlier rating downgrade and delayed quarterly SEC filings. The Company also evaluated the $50 million European portion of the program and decided to cancel the European program since it had not been drawn upon during 2004 and due to changing regulatory requirements for this type of facility in Europe and changes that would have been required due to the rating downgrade. At the end of 2004, the Company had only the $100 million U.S. program remaining, and subsequently, extended the program through June 2006 and obtained amended waivers through March 2006 for financial reporting delays. The Company intends to replace, extend, amend or otherwise modify the U.S. asset securitization program prior to its June 2006 expiration, but has not yet decided upon the desired course of action. This decision will be based on other liquidity program decisions that will be made before the

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expiration date of the asset securitization program. While the Company expects to maintain a satisfactory U.S. asset securitization program to help meet the Company’s liquidity requirements, factors beyond the Company’s control such as prevailing economic, financial and market conditions may prevent the Company from doing so.
      The accounts receivable securitization facility contains cross-default provisions with other debt obligations and a provision under which the agent can terminate the facility if the Company’s senior credit rating is downgraded below Ba2 by Moody’s or BB by S&P. Currently, the ratings are below the minimum and the Company is in the process of obtaining a wavier. There can be no assurance however, that the Company will be successful. The termination of this program at December 31, 2004, would have reduced the Company’s liquidity to the extent that the total program of $100 million exceeded advances outstanding of $3.6 million. The liquidity from the Company’s revolving credit facility of $300 million, under which $162.6 million was available at December 31, 2004, and the available cash flows from operations, should allow the Company to meet its funding requirements and other commitments if this program was terminated.
      Under this program, certain of the Company’s receivables are sold to Ferro Finance Corporation (“FFC”), a wholly-owned unconsolidated qualified special purpose entity (QSPE), as defined by Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” (FAS No. 140). FFC finances its acquisition of trade accounts receivables assets by issuing financial interests to various multi-seller receivables securitization companies (“commercial paper conduits”). At December 31, 2003, $1.5 million had been advanced to the Company, net of repayments, under this program. During the twelve months ended December 31, 2004, $923.6 million of accounts receivable were sold under this program and $921.5 million of receivables were collected and remitted to FCC and the commercial paper conduits, resulting in a net increase in advances of $2.1 million and total advances outstanding at December 31, 2004 of $3.6 million.
      The Company on behalf of FFC and the commercial paper conduits provides normal collection and administration services with respect to the receivables. In accordance with FAS No. 140, no servicing asset or liability is reflected on the Company’s consolidated balance sheet. FFC and the commercial paper conduits have no recourse to the Company’s other assets for failure of debtors to pay when due as the assets transferred are legally isolated in accordance with the bankruptcy laws of the United States. Under FAS No. 140 and Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities,” neither the amounts advanced nor the corresponding receivables sold are reflected in the Company’s consolidated balance sheets as the trade receivables have been de-recognized with an appropriate accounting loss recognized and included in interest expense in the Consolidated Statements of Income included in Item 8 of this Form 10-K.
      The Company retains a beneficial interest in the receivables transferred to FFC or the conduits in the form of a note receivable to the extent that cash flows collected from receivables transferred exceed cash flows used by FFC to pay the commercial paper conduits. The note receivable balance was $108.5 million as of December 31, 2004, and $91.8 million as of December 31, 2003. The Company, on a monthly basis, measures the fair value of the retained interests using management’s best estimate of the undiscounted expected future cash collections on the transferred receivables. Actual cash collections may differ from these estimates and would directly affect the fair value of the retained interests.
      Consignment Arrangements. The Company consigns, from various financial institutions, precious metals (primarily for silver, gold, platinum and palladium, collectively “metals”) used in the production of certain products for customers. Under these consignment arrangements, the financial institutions provide the Company with metals for a specified period of one year or less in duration, for which the Company pays a fee. Under these arrangements, the financial institutions own the metals, and accordingly, the Company does not report these consigned materials as part of its inventory on its consolidated balance sheet. These agreements are cancelable by either party at the end of each consignment period, however, because the Company has access to a number of consignment arrangements with available capacity, consignment needs can be shifted among the other participating institutions. In certain cases, these other participating institutions may require cash deposits to provide additional collateral beyond the underlying precious metals. In the fourth quarter of

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2005, due to the Company’s delays in filing consolidated financial statements, certain financial institutions began to require the Company to make deposits. At March 31, 2006 the Company had made deposits of $79.0 million.
Other Financing Arrangements
      In addition, the Company maintains other lines of credit and receivable sale programs to provide liquidity. Most of these lines are international and provide global flexibility for the Company’s liquidity requirements. At December 31, 2004, the unused portions of these lines provided approximately $27.0 million of additional liquidity. Also at December 31, 2004, the Company had a 2.4 million guarantee outstanding, expiring February 21, 2008, to support the borrowing facilities of an unconsolidated affiliate.
      In June 2003, the Company bought out its $25.0 million leveraged lease program under which the Company leased certain land, buildings, machinery and equipment. The assets had a net carrying value of $24.0 million and an appraised value of $22.6 million. A loss of $1.4 million was recognized in cost of sales in 2003 as a result of the buyout. The program was accounted for as an operating lease.
Liquidity
      Ferro’s level of debt and debt service requirements could have important consequences to its business operations and uses of cash flow. In addition, a reduction in overall demand for the Company’s products could adversely affect cash flows from operations. However, the Company has a $300.0 million revolving credit facility of which $162.6 million was available as of December 31, 2004. This liquidity, along with the liquidity from the Company’s asset securitization program of which $96.4 million was available as of December 31, 2004, other financing arrangements and available cash flows from operations, should allow the Company to meet its funding requirements and other commitments. However, the Company has not met the financial reporting requirements under the debenture and senior notes due to the Company’s restatement process. In addition, its senior credit ratings are below the minimum required under the asset securitization program. In order to maintain adequate liquidity, the Company is in the process of obtaining a waiver under the asset securitization program and also entering into the New Credit Facility, previously described. There can be no assurance, however, that the Company will be successful in these efforts.
      The Company’s aggregate amount of obligations for the next five years and thereafter is set forth below:
                                                         
    2005   2006   2007   2008   2009   Thereafter   Totals
                             
    (Dollars in thousands)
Maturities of notes and debentures
  $ 533     $ 589     $ 206     $ 206     $ 200,116     $ 155,207     $ 356,857  
Revolving credit facility
          137,400                               137,400  
Accounts receivable securitization facility
          3,642                               3,642  
Obligations under capital leases
    1,632       1,423       1,209       1,145       1,115       6,774       13,298  
Obligations under operating leases
    9,511       6,093       3,817       2,145       1,310       4,900       27,776  
Supplemental retirement plan obligations
    174       2,326       427       420       428       3,740       7,515  
                                           
    $ 11,850     $ 151,473     $ 5,659     $ 3,916     $ 202,969     $ 170,621     $ 546,488  
                                           
Derivative Financial Instruments
      Commodity Price Risk Management. The Company purchases portions of its natural gas requirements under fixed price contracts, which in certain circumstances, although unlikely because committed quantities are below expected usage, could result in the Company settling its obligations under these contracts in cash at prevailing market prices. In compliance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” the Company marks these contracts to fair market value and

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recognizes the resulting gains or losses as miscellaneous income or expense, respectively. The fair value of the contracts for natural gas was $(0.9) million and $0.6 million at December 31, 2004 and 2003, respectively.
      Consignment Arrangements. The Company consigns, from various financial institutions, precious metals (primarily for silver, gold, platinum and palladium, collectively “metals”) used in the production of certain products for customers. Under these consignment arrangements, the financial institutions provide the Company with metals for a specified period of one year or less in duration, for which the Company pays a fee. Under these arrangements, the financial institutions own the metals, and accordingly, the Company does not report these consigned materials as part of its inventory on its consolidated balance sheet. These agreements are cancelable by either party at the end of each consignment period, however, because the Company has access to a number of consignment arrangements with available capacity, consignment needs can be shifted among the other participating institutions. In certain cases, these other participating institutions may require cash deposits to provide additional collateral beyond the underlying precious metals. In the fourth quarter of 2005, due to the Company’s delays in filing consolidated financial statements, certain financial institutions began to require the Company to make deposits. At March 31, 2006, the Company had made deposits of $79.0 million. The fair value of the Company’s rights and obligations under these arrangements at December 31, 2004 and 2003 is not material.
      Costs of sales related to the consignment arrangements’ fees were $2.4 million for 2004, $1.6 million for 2003, and $2.0 million for 2002. At December 31, 2004 and 2003, the Company had 9.4 million and 8.3 million troy ounces of metals (primarily silver) on consignment for periods of less than one year with market values of $106.4 million and $94.7 million, respectively.
      The consignment arrangements allow for the Company to replace the metals used in the manufacturing process by obtaining replacement quantities on the spot market and to charge the customer for the cost of the replacement quantities (i.e., the price charged to the customer is largely a pass-through). In certain circumstances, customers request at the time an order is placed, a fixed price for the metals cost pass-through. In these instances, the Company will enter into a fixed price sales contract to establish the cost for the customer at the estimated future delivery date. At the same time, the Company enters into a forward purchase arrangement with a metal supplier to completely cover the value of the fixed price sales contract. The fair value of the fixed price contracts for future metal consignment replenishments are approximately $6.8 million and $1.3 million at December 31, 2004 and 2003, respectively. In accordance with FAS No. 133, the market value of these fixed price contracts is analyzed quarterly. Due to the short duration of the contracts (generally three months or less), the difference between the contract values and market values at any financial reporting date is not material.
Impact of Newly Issued Accounting Pronouncements
      The FASB’s Emerging Issues Task Force ratified Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” in March 2004. The issue provided guidance for evaluating whether an investment is other-than-temporarily impaired and was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 was delayed by FASB Staff Position (“FSP”) EITF Issue No. 03-1-1, “Effective Date of Paragraphs 10 – 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” in September 2004; the delay of that effective date will be superseded concurrent with the final issuance of FSP EITF Issue No. 03-1-a. The adoption of EITF Issue No. 03-1 is not expected to have a material impact on the Company’s results of operations or financial position.
      The FASB issued Statement No. 151, “Inventory Costs,” (FAS No. 151) in November 2004. FAS No. 151 is effective for fiscal years beginning after June 15, 2005, and amends the guidance of ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. FAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” The adoption of FAS No. 151 as of January 1, 2006, is not expected to have a material impact on the results of operations or financial position of the Company.

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      In December 2004, the FASB issued Statement No. 123R, “Share-Based Payments,” (FAS No. 123R) that requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — normally the vesting period. FAS No. 123R is effective for interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards as of the adoption date. It provides three alternative transition methods, each having different reporting implications. In April 2005, the Securities and Exchange Commission published a rule allowing public companies with calendar year ends to delay the quarter in which they begin to expense stock options to first quarter 2006 from third quarter 2005. The Company is still evaluating the various implementation options and at this time is uncertain as to the impact on the Company’s results of operations or financial position.
      In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets,” (FAS No. 153). This statement, effective for fiscal periods ending after June 15, 2005, amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of FAS No. 153 is expected to have no impact on the results of operations or the financial position of the Company.
      FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (Interpretation No. 47) was issued in March 2005 and is effective for fiscal years ending after December 15, 2005. Interpretation No. 47 clarifies that the term “conditional and retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligation,” refers to an unconditional legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future event. This obligation should be recognized at its face value, if that value can be reasonably estimated. Management is evaluating the impact of Interpretation No. 47 and is uncertain as to the impact on the Company’s results of operations or financial position.
      In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” (FAS No. 154) that replaces APB Opinion No. 20 and FASB Statement No. 3 and changes the accounting for and reporting of a change in accounting principle. FAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when specific transition provisions are not provided. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle. FAS No. 154 is effective for fiscal years beginning after December 15, 2005. The Company has no plans to make any voluntary changes in its accounting principles.
Critical Accounting Policies
      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application requires management’s most subjective or complex judgments, often a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the development, selection and disclosure of these policies with the Audit Committee of the Board of Directors.
Environmental and Other Contingent Liabilities
      The Company expenses recurring costs associated with control and disposal of hazardous materials in current operations. Accruals for environmental remediation and other contingent liabilities, including those relating to ongoing, pending or threatened litigation, are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The amount accrued for environmental remediation reflects the Company’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible

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parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Estimated costs are not discounted due to the uncertainty with respect to the timing of related payments. The Company actively monitors the status of sites, and as assessments and cleanups proceed, accruals are reviewed periodically and adjusted, if necessary, as additional information becomes available.
Income Taxes
      Deferred income taxes are provided to recognize the effect of temporary differences between financial and tax reporting. Deferred income taxes are not provided for undistributed earnings of foreign consolidated subsidiaries, to the extent such earnings are reinvested for an indefinite period of time. The Company has significant operations outside the United States, where substantial pre-tax earnings are derived, and in jurisdictions where the statutory tax rate is lower than in the United States. The Company also has significant cash requirements in the United States to pay interest and principal on borrowings. As a result, significant tax and treasury planning and analysis of future operations are necessary to determine the proper amount of tax assets, liabilities and tax expense. The Company’s tax assets, liabilities and tax expense are supported by its best estimates and assumptions of its global cash requirements, planned dividend repatriations and expectations of future earnings. Expectations of future earnings are the primary drivers underlying management’s evaluation of the valuation allowance on net deferred tax assets. Management considers the timing of the expected earnings, as well as the nature and amounts of expected future earnings, and also considers tax planning strategies under certain circumstances. However, the amounts recorded may materially differ from the amounts that are ultimately payable if management’s estimates of future earnings and cash flow are ultimately inaccurate. Valuation allowances are recorded against net deferred tax assets for which management believes realization is not more likely than not.
Pension and Other Postretirement Benefits
      The Company sponsors defined benefit plans in the U.S. and many countries outside the U.S., and also sponsors retiree medical benefits for a segment of the salaried and hourly work force within the U.S. The assumptions used in actuarial calculations for these plans have a significant impact on benefit obligations and annual net periodic benefit costs. Ferro management meets with its actuary annually to discuss key economic assumptions used to develop these benefit obligations and net periodic costs. The discount rate for the U.S. pension plans is determined based on a bond model. Using the Company’s projected pension cash flows, the bond model considers all possible bond portfolios (based on bonds with a quality rating of AA or better under either Moody’s or S&P) that produce matching cash flows and selects the optimal one with the highest possible yield. The discount rate for the U.S. retiree medical plan is selected to be the same as the discount rate for the U.S. pension plans. The discount rates for the non-U.S. plans are selected based on a yield curve method. Using AA-rated bonds applicable in respective capital markets, the duration of each plans’ liabilities is used to select the rate from the yield curve corresponding to the same duration. The resulting yield is rounded to the nearest 25 basis points. The expected return on assets at the beginning of the year for defined benefit plans is calculated as the weighted-average of the expected return for the target allocation of the principal asset classes held by each of the plans. In determining the expected returns, the Company considers both historical performance and an estimate of future long-term rates of return. The resulting expected returns are then rounded to the nearest 25 basis points. All other assumptions are reviewed periodically by the Company’s management and its actuaries and may be adjusted based on current trends and expectations as well as past experience in the plans.

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      The following table provides the sensitivity of net periodic benefit costs to a 25 basis point decrease in both the discount rate and asset return assumption:
                 
        25 Basis Point Decrease
    25 Basis Point Decrease   in Asset Return
    in Discount Rate   Assumption
         
    (Dollars in millions)
U.S. Pension Plans
  $ 1.2     $ 0.5  
U.S. Retiree Medical Plan
    0.1       0.0  
Non-U.S. Pension Plans
    0.7       0.3  
             
Total
  $ 2.0     $ 0.8  
             
      The discount rate used to determine the net periodic pension cost associated with U.S. pension and retiree medical purposes decreased from 6.25% for 2003 to 6.10% for 2004. The discount rate used to determine actuarial liabilities associated with U.S. pension and retiree medical plans decreased from 6.25% at December 31, 2004 to 6.1% at December 31, 2003. The Company also reduced the expected asset return assumption for the U.S. pension plans from 8.75% in 2004 to 8.50% in 2005. The weighted average discount rate and expected asset return assumptions for our non-U.S. pension plans decreased from 5.26% and 5.41% in 2004 to 4.62% and 5.26% in 2005, respectively. Ferro’s overall net periodic cost (U.S. pension, U.S. retiree medical, and non-U.S. pension) increased approximately $2.0 million from 2004 to 2005. The measurement dates used to determine pension and other postretirement benefit measurements are September 30 for the United States plans and December 31 for the international plans.
      Amortization of unrecognized gains or losses is a component of net periodic cost. These gains or losses result from the difference between actual and assumed results and from changes in actuarial assumptions. Ferro’s U.S. and non-U.S. pension plans currently have unrecognized losses, while Ferro’s U.S. retiree medical plan currently has unrecognized gains. These unrecognized gains and losses will be recognized in future net periodic costs.
      In February 2006, the Company announced that it was freezing the Company’s U.S. defined benefit pension plan effective March 31, 2006, providing additional contributions to the U.S. defined contribution plan beginning April 1, 2006, and limiting eligibility for U.S. retiree medical benefits. The Company estimates that the changes in these retirement plans will reduce pre-tax expenses by $30 to $40 million over five years.
      The Company contributed approximately $37.3 million to its U.S. pension plans in 2005. Over the four-year period from 2006 through 2009, an additional $128 million of contributions could be required. These cash contribution requirements were determined based on current ERISA and IRS guidelines. For significant non-U.S. plans, the Company expects to contribute $4.5 million in 2005 and an additional $16 million over the four-year period from 2006 through 2009. These funding amounts were determined based on the rules in each respective country.
Inventories
      The Company values inventory at the lower of cost or market, with cost being determined utilizing the first-in, first-out (FIFO) method, except for selected inventories where the last-in, first-out (LIFO) method is used. Inventory valuation is periodically evaluated primarily based upon the age of the inventory, but also considers assumptions of future demand and market conditions. As a result of the evaluation, the inventory may be written down to the lower of cost or realizable value. If actual valuations are less favorable than those projected by management, additional write-downs may be required.
Restructuring and Cost Reduction Programs
      Costs associated with exit and disposal activities are recognized when liabilities are incurred. Reserves are established for such activities by estimating employee termination costs utilizing detailed restructuring plans approved by management. Reserve calculations are based upon various factors including an employee’s length of service, contract provisions, salary level and health care benefit choices. The Company believes the

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estimates and assumptions used to calculate these restructuring provisions are appropriate, and although significant changes are not anticipated, actual costs could differ from the estimates should changes be made in the nature or timing of the restructuring plans.
      The Company continued actions during 2004 associated with its cost reduction and integration programs. The programs affect all businesses across the Company, and generally will take no longer than twelve months to complete from the date of commencement unless certain legal or contractual restrictions on the Company’s ability to complete the program exist. The Company recorded $6.0 million of charges during 2004, which included $3.5 million of severance benefits for employees affected by plant closings or capacity reduction, as well as various personnel in administrative or shared service functions. Termination benefits were based on various factors including length of service, contract provisions, local legal requirements and salary levels. Management estimated the charges based on these factors as well as projected final service dates.
Revenue Recognition
      The Company recognizes revenue when persuasive evidence of an arrangement exists, the selling price is fixed and determinable, collection is reasonably assured, and title has passed to it customers. Provision is made for uncollectible accounts based on historical experience and specific circumstances, as appropriate. Accounts deemed to be uncollectible or to require excessive collection costs are written off against the provision for doubtful accounts. Customer rebates are accrued over the rebate periods based upon estimated attainments of the provisions set forth in the rebate agreements.
Valuation of Goodwill and Other Intangibles
      The Company adopted FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (FAS No. 142) for goodwill and intangible assets acquired after June 30, 2001 as of July 1, 2001. FAS No. 142 was adopted in its entirety as of January 1, 2002 and accordingly, the Company’s goodwill and intangible assets with indefinite useful lives are no longer being amortized.
      Fair value is estimated using the discounted cash flow method. The Company uses projections of market growth, internal sales efforts, input cost movements, and cost reduction opportunities to project future cash flows. Certain corporate expenses and assets and liabilities are allocated to the business units in this process. Using a risk adjusted, weighted average cost-of-capital, the Company discounts the cash flow projections to the annual measurement date, October 31st. If the fair value of any of the units was determined to be less than its carrying value, the Company would proceed to the second step and obtain independent appraisals of its assets. This step was not necessary in 2004. However, following the drop in profitability of the Polymer Additives business in 2004, the Company engaged an independent appraiser to assess the fair value of that business as of June 30, 2004. That valuation confirmed management’s assessment that the fair value of that business exceeded its carrying value.
Assessment of Long-Lived Assets
      The Company’s long-lived assets include property, plant, equipment, goodwill and other intangible assets. Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives.
      Property, plant and equipment are reviewed for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use and eventual disposition is less than their recorded value. In the event of impairment, a loss is recognized for the excess of the recorded value over fair value. The long-term nature of these assets requires the estimation of cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of impairment.
      Due to depressed conditions in the electronics industry in late 2004, the Company specifically evaluated its electronics assets in Holland. The Company also evaluated its Italian tile and Belgian polymer additives manufacturing assets because of sluggish market conditions in those regions. In each situation, management concluded that the assets were not impaired.

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Asset Retirement Obligations
      In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations,” (FAS No. 143). Effective for fiscal years beginning after June 15, 2002, FAS No. 143 requires that the fair value of a liability for an asset retirement obligation (“ARO”) be recognized in the period in which it is incurred. The Company recorded AROs of $0.1 million at January 1, 2003, upon adoption of FAS No. 143.
      At December 31, 2004 and 2003, estimated liabilities for AROs were $0.1 million and $0.1 million, respectively. In addition, the Company has identified, but not recognized, AROs related to many of its existing operating facilities. These obligations would include demolition, decommissioning, disposal, restorative and other activities. Legal obligations exist in connection with the retirement of these assets upon closure of the facilities or abandonment of existing operations. The Company currently plans to continue operations at these facilities indefinitely, and therefore, a reasonable estimate of fair value cannot be currently determined. In the event that in the future the Company considers plans to abandon or cease operations at these sites, the need for and amount of an ARO will be reassessed at that time. If certain operating facilities were to be closed, the related AROs could significantly affect the Company’s results of operations and cash flows at that time.
Derivative Financial Instruments
      The Company employs derivative financial instruments, primarily foreign currency forward exchange contracts and foreign currency options, to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Gains and losses on foreign currency forward exchange contracts and foreign currency options are recognized as foreign currency transaction gains and losses.
      The Company purchases portions of its natural gas requirements under fixed price contracts, which in certain circumstances, although unlikely because committed quantities are below expected usage, could result in the Company settling its obligations under these contracts in cash at prevailing market prices. In compliance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” the Company marks these contracts to fair market value and recognizes the resulting gains or losses as miscellaneous income or expense, respectively.
      The Company consigns, from various financial institutions, precious metals (primarily for silver, gold, platinum and palladium, collectively “metals”) used in the production of certain products for customers. Under these consignment arrangements, the financial institutions provide the Company with metals for a specified period of one year or less in duration, for which the Company pays a fee. Under these arrangements, the financial institutions own the metals, and accordingly, the Company does not report these consigned materials as part of its inventory on its consolidated balance sheet. These agreements are cancelable by either party at the end of each consignment period, however, because the Company has access to a number of consignment arrangements with available capacity, consignment needs can be shifted among the other participating institutions. In certain cases, these other participating institutions may require cash deposits to provide additional collateral beyond the underlying precious metals. In the fourth quarter of 2005, due to the Company’s delays in filing consolidated financial statements, certain financial institutions began to require the Company to make deposits. At March 31, 2006, the Company made deposits of $79.0 million. Fees for these contracts are recorded as cost of sales.
Item 7A — Quantitative and Qualitative Disclosures about Market Risk
      The Company’s exposure to market risks is primarily limited to fluctuations in interest rates, foreign currency exchange rates, and costs of raw material and natural gas.
      Ferro’s exposure to interest rate risk relates primarily to its debt portfolio including obligations under the accounts receivable securitization program. The Company’s interest rate risk management objective is to limit the effect of interest rate changes on earnings, cash flows and overall borrowing costs. To limit interest rate risk on borrowings, the Company maintains a portfolio of fixed and variable debt within defined parameters. In managing the percentage of fixed versus variable rate debt, consideration is given to the interest rate

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environment and forecasted cash flows. This policy limits exposure from rising interest rates and allows the Company to benefit during periods of falling rates. The Company’s interest rate exposure is generally limited to the amounts outstanding under the revolving credit facility and amounts outstanding under its asset securitization program. Based on the amount of variable-rate indebtedness outstanding at December 31, 2004 and 2003, a 1% increase or decrease in interest rates would have resulted in a $1.5 million and a $1.8 million corresponding change in interest expense, respectively. At December 31, 2004, the Company had $353.3 million carrying value of fixed rate debt outstanding with an average effective interest rate of 8.6%, substantially all maturing after 2008. The fair market value of these debt securities was approximately $387.1 million at December 31, 2004.
      Ferro manages its currency risks principally through the purchase of put options and by entering into forward contracts. Put options are purchased to protect the value of Euro-denominated earnings against a depreciation of the Euro versus the U.S. dollar. Forward contracts are entered into to mitigate the impact of currency fluctuations on transaction and other exposures. At December 31, 2004, the Company held forward contracts, which had a notional amount of $116.7 million and an aggregate fair value of $(0.7) million, and held no put options. A 10% appreciation of the U.S. dollar would have resulted in a $0.8 million decrease and a $0.1 million increase in the fair value of these positions in the aggregate at December 31, 2004 and 2003, respectively. A 10% depreciation of the U.S. dollar would have resulted in a $1.0 million and a $0.2 million increase in the fair value of these positions in the aggregate at December 31, 2004 and 2003, respectively.
      The Company is also subject to cost changes with respect to its raw materials and natural gas purchases. The Company attempts to mitigate raw materials cost increases with price increases to the Company’s customers. In addition, the Company purchases portions of its natural gas requirements under fixed price contracts, over short time periods, to reduce the volatility of this cost. The fair value of contracts for natural gas was a net loss of approximately $0.9 million at December 31, 2004. A 10% increase or decrease in the forward prices of natural gas would have resulted in a $0.9 million and a $0.6 million corresponding change in the fair market value of the contracts as of December 31, 2004 and 2003, respectively.

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Item 8 — Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Ferro Corporation:
      We have audited the accompanying consolidated balance sheets of Ferro Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the index at Item 15(a) for the three-year period ended December 31, 2004. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ferro Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated statements taken as a whole, present fairly, in all material respects, the information set forth therein.
      As discussed in Note 2 to the consolidated financial statements, the 2003 consolidated financial statements have been restated.
      The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company faces certain liquidity uncertainties that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
      As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirements Obligations; and effective January 1, 2002, the Company voluntarily early adopted the provisions of the Financial Accounting Standards Board’s Emerging Issues Tax Force Issue No. 04-06, Accounting for Stripping Costs Incurred During Production in the Mining Industry.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ferro Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2006 expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.
/s/  KPMG LLP
Cleveland, Ohio
March 31, 2006

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FERRO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
                             
    Years Ended December 31,
     
        Restated    
    2004   2003   2002
             
    (Dollars in thousands, except per share data)
Net sales
  $ 1,843,721     $ 1,615,598     $ 1,528,454  
Cost of sales
    1,461,514       1,242,414       1,144,179  
Selling, general and administrative expenses
    312,441       315,910       282,459  
Other charges (income):
                       
 
Interest expense
    41,993       43,106       46,096  
 
Interest earned
    (887 )     (883 )     (1,036 )
 
Foreign currency transactions, net
    3,035       1,199       402  
 
Gain on sale of businesses
    (5,195 )           (458 )
 
Miscellaneous expense (income), net
    (372 )     1,836       9,087  
                   
Income before taxes
    31,192       12,016       47,725  
Income tax expense
    3,352       2,378       14,534  
                   
Income from continuing operations
    27,840       9,638       33,191  
Discontinued operations:
                       
 
Income (loss) from discontinued operations, net of tax
          (903 )     6,172  
 
Gain (loss) on disposal of discontinued operations, net of tax
    (2,915 )     5,315       33,804  
                   
Net income
    24,925       14,050       73,167  
Dividends on preferred stock
    (1,705 )     (2,088 )     (2,447 )
                   
Net income available to common shareholders
  $ 23,220     $ 11,962     $ 70,720  
                   
Per common share data
                       
 
Basic earnings (loss):
                       
   
From continuing operations
  $ 0.62     $ 0.18     $ 0.80  
   
From discontinued operations
    (0.07 )     0.11       1.05  
                   
    $ 0.55     $ 0.29     $ 1.85  
                   
 
Diluted earnings (loss):
                       
   
From continuing operations
  $ 0.62     $ 0.18     $ 0.80  
   
From discontinued operations
    (0.07 )     0.11       0.97  
                   
    $ 0.55     $ 0.29     $ 1.77  
                   
See accompanying notes to consolidated financial statements.

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FERRO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                       
    December 31,
     
        Restated
    2004   2003
         
    (Dollars in thousands)
ASSETS
Current assets
               
 
Cash and cash equivalents
  $ 13,939     $ 23,381  
 
Accounts and trade notes receivable, net
    184,470       193,422  
 
Notes receivable
    114,030       93,922  
 
Inventories
    220,126       182,962  
 
Deferred tax assets
    45,647       45,363  
 
Other current assets
    34,137       38,394  
             
   
Total current assets
    612,349       577,444  
Other assets
               
 
Property, plant and equipment, net
    598,719       616,657  
 
Unamortized intangibles
    412,507       419,077  
 
Deferred tax assets
    46,696       36,167  
 
Miscellaneous other assets
    63,166       81,913  
             
   
Total assets
  $ 1,733,437     $ 1,731,258  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
 
Notes and loans payable
  $ 9,674     $ 13,207  
 
Accounts payable
    260,215       239,721  
 
Income taxes
    3,609       16,962  
 
Accrued payrolls
    31,468       28,558  
 
Accrued expenses/other current liabilities
    96,017       118,733  
             
   
Total current liabilities
    400,983       417,181  
Other liabilities
               
 
Long-term debt, less current portion
    497,314       523,915  
 
Post-retirement and pension liabilities
    247,132       226,630  
 
Other non-current liabilities
    42,914       41,379  
             
   
Total liabilities
    1,188,343       1,209,105  
Series A convertible preferred stock
    22,829       27,942  
Shareholders’ equity
               
 
Common stock, par value $1 per share; 300,000,000 shares authorized; 52,323,053 shares issued
    52,323       52,323  
 
Paid-in capital
    162,912       159,162  
 
Retained earnings
    605,521       606,588  
 
Accumulated other comprehensive loss
    (67,683 )     (83,296 )
 
Other
    (7,292 )     (6,915 )
             
      745,781       727,862  
 
Common shares in treasury, at cost
    (223,516 )     (233,651 )
             
     
Total shareholders’ equity
    522,265       494,211  
             
   
Total liabilities and shareholders’ equity
  $ 1,733,437     $ 1,731,258  
             
See accompanying notes to consolidated financial statements.

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FERRO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
                                                                   
    Common Shares               Accumulated       Total
    In Treasury               Other       Share-
        Common   Paid-in   Retained   Comprehensive       holders’
    Shares   Amount   Stock   Capital   Earnings   Income (Loss)(a)   Other   Equity(b)
                                 
    (In thousands, except per share data)
Balances at December 31, 2001 (originally reported)
    12,987     $ (265,100 )     47,323       22,386       569,322       (107,675 )     (8,373 )     257,883  
Adjustment for cumulative effect on prior years of adoption of EITF No. 04-06
                                    (331 )                     (331 )
                                                 
Balances at December 31, 2001
    12,987     $ (265,100 )     47,323       22,386       568,991       (107,675 )     (8,373 )     257,552  
Net income
                                    73,167                       73,167  
Other comprehensive income (loss), net of tax(b):
                                                               
 
Foreign currency translation adjustment 
                                            20,110               20,110  
 
Minimum pension liability adjustment 
                                            (43,618 )             (43,618 )
                                                 
Total comprehensive income
                                                            49,659  
Issuance of common stock(d)
                    5,000       126,540                               131,540  
Cash dividends(c):
                                                               
 
Common
                                    (21,651 )                     (21,651 )
 
Preferred
                                    (2,447 )                     (2,447 )
Federal tax benefits
                                    59                       59  
Transactions involving benefit plans
    (1,196 )     17,994               4,189                       2,255       24,438  
Purchase of treasury stock
    16       (424 )                                             (424 )
                                                 
Balances at December 31, 2002
    11,807     $ (247,530 )     52,323       153,115       618,119       (131,183 )     (6,118 )     438,726  
Net income (restated)
                                    14,050                       14,050  
Other comprehensive income (loss), net of tax(b):
                                                               
 
Foreign currency translation adjustment 
                                            57,043               57,043  
 
Minimum pension liability adjustment 
                                            (9,426 )             (9,426 )
 
Other adjustments
                                            270               270  
                                                 
Total comprehensive income (restated)
                                                            61,937  
Cash dividends(c):
                                                               
 
Common
                                    (23,552 )                     (23,552 )
 
Preferred
                                    (2,088 )                     (2,088 )
Federal tax benefits
                                    59                       59  
Transactions involving benefit plans
    (941 )     13,879               6,047                       (797 )     19,129  
                                                 
Balances at December 31, 2003 (restated)
    10,866     $ (233,651 )     52,323       159,162       606,588       (83,296 )     (6,915 )     494,211  
Net income
                                    24,925                       24,925  
Other comprehensive income (loss), net of tax(b):
                                                               
 
Foreign currency translation adjustment 
                                            25,166               25,166  
 
Minimum pension liability adjustment 
                                            (9,778 )             (9,778 )
 
Other adjustments
                                            225               225  
                                                 
Total comprehensive income
                                                            40,538  
Cash dividends(c):
                                                               
 
Common
                                    (24,344 )                     (24,344 )
 
Preferred
                                    (1,705 )                     (1,705 )
Federal tax benefits
                                    57                       57  
Transactions involving benefit plans
    (681 )     10,135               3,750                       (377 )     13,508  
                                                 
Balances at December 31, 2004
    10,185     $ (223,516 )     52,323       162,912       605,521       (67,683 )     (7,292 )     522,265  
                                                 
See accompanying notes to consolidated financial statements.
 
(a) Accumulated translation adjustments were $1,644, $(23,522) and $(80,565), and accumulated minimum pension liability adjustments were $(69,822), $(60,044) and $(50,618) at December 31, 2004, 2003, and 2002, respectively.
 
(b) Income tax benefits related to stock options, performance plans, and pensions were $5,385, $5,222 and $24,376 in 2004, 2003 and 2002, respectively.
 
(c) Dividends per share of common stock were $0.58 for 2004, 2003 and 2002. Dividends per share of preferred stock were $3.75 for 2004, 2003 and 2002.
 
(d) In 2002, the Company issued 5,000 shares of common stock.

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FERRO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                             
    Years Ended December 31,
     
        Restated    
    2004   2003   2002
             
    (Dollars in thousands)
Cash flows from operating activities
                       
Net income
  $ 24,925     $ 14,050     $ 73,167  
 
Adjustments to reconcile net income to net cash provided by operating activities
                       
   
(Income) loss from discontinued operations, net of tax
          903       (6,172 )
   
(Gain) loss on sale of discontinued operations, net of tax
    2,915       (5,315 )     (33,804 )
   
Gain on sale of business, net of tax
    (3,376 )           (283 )
   
Depreciation and amortization
    75,020       76,634       64,252  
   
Retirement benefits
    16,186       6,282       4,675  
   
Deferred income taxes
    (10,477 )     (8,226 )     5,171  
   
Net proceeds (payments) from asset securitization
    2,182       (84,238 )     20,388  
 
Changes in current assets and liabilities, net of effects of acquisitions Accounts and trade notes receivable
    8,780       (35,747 )     (1,806 )
   
Inventories
    (37,210 )     114       23,797  
   
Other current assets
    (16,969 )     8,705       16,002  
   
Accounts payable
    20,494       31,911       24,895  
   
Accrued expenses and other current liabilities
    (26,384 )     (12,649 )     (17,914 )
 
Other operating activities
    7,400       12,152       (738 )
                   
Net cash provided by continuing operations
    63,486       4,576       171,630  
Net cash provided by (used for) discontinued operations
    (1,582 )     (1,068 )     17,389  
                   
Net cash provided by operating activities
    61,904       3,508       189,019  
Cash flows from investing activities
                       
 
Capital expenditures for plant and equipment of continuing operations
    (39,054 )     (36,055 )     (38,465 )
 
Capital expenditures for plant and equipment of discontinued operations
          (381 )     (2,147 )
 
Divestitures (acquisitions), net of cash, of continuing operations
    17,844       (7,378 )     54  
 
Divestitures, net of cash, of discontinued operations
          19,685       131,446  
 
Buy-out of operating lease
          (25,000 )      
 
Other investing activities
    1,826       (533 )     (389 )
                   
Net cash provided by (used for) investing activities
    (19,384 )     (49,662 )     90,499  
Cash flows from financing activities
                       
 
Proceeds from issuance of common stock
                131,540  
 
Net borrowings (repayments) under short-term facilities
    (3,533 )     4,608       (11,671 )
 
Repayment of capital markets facility
                (103,555 )
 
Proceeds from long-term debt
    661,162       670,092       747,691  
 
Principal payments on long-term debt
    (688,159 )     (598,514 )     (1,034,356 )
 
Proceeds from sale of treasury stock, net
                12,002  
 
Cash dividends paid
    (26,049 )     (25,640 )     (24,098 )
 
Other financing activities
    4,777       3,094       (846 )
                   
Net cash provided by (used for) financing activities
    (51,802 )     53,640       (283,293 )
Effect of exchange rate changes on cash
    (160 )     953       3,400  
                   
Increase (decrease) in cash and cash equivalents
    (9,442 )     8,439       (375 )
Cash and cash equivalents at beginning of period
    23,381       14,942       15,317  
                   
Cash and cash equivalents at end of period
  $ 13,939     $ 23,381     $ 14,942  
                   
Cash paid during the period for
                       
 
Interest
  $ 39,900     $ 36,640     $ 31,078  
 
Income taxes
  $ 22,199     $ 11,871     $ 18,007  
See accompanying notes to consolidated financial statements.

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004, 2003 and 2002
1. Summary of significant accounting policies
Nature of Operations
      Ferro Corporation (“Company” or “Ferro”) is a worldwide producer of performance materials for manufacturers. Ferro produces a variety of coatings and performance chemicals by utilizing organic and inorganic chemistry. The Company’s materials are used extensively in the markets of building and renovation, automotive, major appliances, household furnishings, transportation, electronics and industrial products. Ferro’s products are sold principally in the United States and Europe; however, operations also extend to the Latin America and Asia Pacific regions.
Principles of Consolidation
      The consolidated financial statements include the accounts of the Company and its majority owned and controlled subsidiaries. Intercompany accounts, transactions and profits have been eliminated. Minority interests in consolidated subsidiaries are classified in other non-current liabilities. Investments in affiliated companies, over which Ferro has significant influence, but does not have effective control, are accounted for using the equity method and classified in miscellaneous other assets. Financial results for acquisitions are included in the Company’s consolidated financial statements from the date of acquisition.
Use of Estimates and Assumptions in the Preparation of Financial Statements
      The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and judgments pertain to environmental and other contingent liabilities, income taxes, pension and other postretirement benefits, inventories, restructuring and cost reduction programs, revenue recognition, valuation of goodwill and other intangibles, assessment of long-lived assets, asset retirement obligations, and derivative financial instruments. Actual results could differ from those estimates.
Currency Translation
      Operations in non-U.S. subsidiaries are recorded in local currencies, which are in most cases also the functional currencies for financial reporting purposes. The results of operations for non-U.S. subsidiaries are translated from local currencies into US dollars using the average exchange rate during each period, which approximates the results that would be obtained using actual exchange rates on the dates of individual transactions. Assets and liabilities are translated using exchange rates at the end of the period with translation adjustments recorded as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Transaction gains and losses are recorded as incurred in foreign currency transactions, net, in the consolidated statements of income.
      For subsidiaries that use the U.S. dollar as the functional currency, remeasurement and transaction gains and losses are reflected in net income.
Revenue Recognition
      The Company recognizes revenue when persuasive evidence of an arrangement exists, the selling price is fixed and determinable, collection is reasonably assured, and title has passed to it customers. Provision is made for uncollectible accounts based on historical experience and specific circumstances, as appropriate. Accounts deemed to be uncollectible or to require excessive collection costs are written off against the provision for

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
doubtful accounts. Customer rebates are accrued over the rebate periods based upon estimated attainments of the provisions in the rebate agreements using available information.
      In 2000, the Emerging Issues Task Force reached consensus on Issue 00-10, “Accounting for Shipping and Handling Fees and Costs,” which required all amounts billed to customers related to shipping and handling fees to be classified as revenue with related costs being recorded in cost of sales. In 2004, the Company identified that shipping and handling fees were embedded in amounts billed to customers, and the related costs were being reported net with revenues. For 2004, the Company reclassified $36.8 million of such costs from net sales into cost of sales. This change does not have an effect on operating profit or net income. Due to extensive financial systems implementations in 2002 and 2003, shipping and handling fees and costs for those years were not reclassified because the amounts could not be determined and which management believes are not material to sales and cost of sales.
Stock-based Compensation
      At December 31, 2004, the Company has stock-based employee compensation plans, which are more fully described in Note 5. The Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB No. 25) and related interpretations. No stock-based compensation cost is reflected in net earnings for stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Compensation cost for performance shares is recorded on the quoted price of the Company’s common stock at the end of each period. The fair value of performance stock is charged to unearned compensation in Shareholders’ Equity and amortized to expense as earned over the term of the performance share plans.
Postretirement and Other Employee Benefits
      Costs are recognized as employees render the services necessary to earn the related benefits.
Research and Development
      The costs of research and development are charged as an expense in the period in which they are incurred.
Restructuring and Cost Reduction Programs
      Costs associated with exit and disposal activities are recognized when liabilities are incurred. Reserves are established for such activities by estimating employee termination costs utilizing detailed restructuring plans approved by management. Reserve calculations are based upon various factors including an employee’s length of service, contract provisions, salary level and health care benefit choices. The Company believes the estimates and assumptions used to calculate these restructuring provisions are appropriate, and although significant changes are not anticipated, actual costs could differ from the estimates should changes be made in the nature or timing of the restructuring plans. The resulting changes in costs could have a material impact on the Company’s results of operations, financial position, or cash flows.
Income Taxes
      Income taxes are determined using the liability method of accounting for income taxes in accordance with Financial Statement of Accounting Standard No. 109, “Accounting for Income Taxes” (FAS No. 109). Under FAS No. 109, income tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Tax credits and other incentives reduce tax expense in the year the credits are claimed. Deferred tax assets are

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognized if it is more likely than not that the assets will be realized in future years. Valuation allowances are recorded against net deferred tax assets for which management believes realization is not more likely than not.
Earnings per Share
      Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares outstanding for the period, adjusted for the effect of the assumed exercise of all dilutive options outstanding at the end of the period.
Cash Equivalents
      Cash equivalents consist of highly liquid instruments with original maturities of three months or less and are carried at cost, which approximates market value.
Allowance for Doubtful Accounts
      Provision is made for uncollectible accounts based on historical experience and specific circumstances, as appropriate. Accounts deemed to be uncollectible or to require excessive collection costs are written off against the provision for doubtful accounts. The allowance for possible losses in the collection of accounts and trade notes receivable totaled $9.2 million and $9.0 million at December 31, 2004 and 2003, respectively. Bad debt expense was $3.3 million, $0.8 million and $1.8 million for 2004, 2003 and 2002, respectively.
Inventories
      Inventories are valued at the lower of cost or market. Cost is determined utilizing the first-in, first-out (FIFO) method, except for selected inventories where the last-in, first-out (LIFO) method is used. Inventory valuation is periodically evaluated primarily based upon the age of the inventory, but also considers assumptions of future demand and market conditions. As a result of the evaluation, the inventory may be written down to the lower of cost or realizable value. If actual valuations are less favorable than those projected by management, additional write-downs may be required.
Property, Plant and Equipment
      Property, plant and equipment are capitalized at cost. Acquisitions, additions and betterments, either to provide necessary capacity, improve the efficiency of production units, modernize or replace older facilities or to install equipment for environmental protection are capitalized. The Company capitalizes interest costs incurred during the period of construction of plants and equipment. Repair and maintenance costs are charged against earnings as incurred, except for major planned maintenance activities. Such activities generally include relining smelter furnaces; related costs are accrued in advance of when the costs are expected to be incurred which normally ranges between 18 and 24 months.
      Depreciation of plant and equipment is provided on a straight-line basis for financial reporting purposes, generally over the following estimated useful lives of the assets:
     
Buildings
  20 to 40 years
Machinery and equipment
  5 to 15 years
      At December 31, 2004 and 2003, estimated liabilities for asset retirement obligations (“ARO”), as defined in Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” were $0.1 million and $0.1 million, respectively. In addition, the Company has identified, but not recognized, AROs related to many of its existing operating facilities. These obligations would include demolition, decommissioning, disposal, restorative and other activities. Legal obligations exist in connection

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with the retirement of these assets upon closure of the facilities or abandonment of existing operations. The Company currently plans to continue operations at these facilities indefinitely and to renew as needed related leases, and therefore, a reasonable estimate of fair value cannot be currently determined. In the event that in the future the Company considers plans to abandon or cease operations at these sites, the need for and amount of an ARO will be reassessed at that time. If certain operating facilities were to be closed, the related AROs could significantly affect the Company’s results of operations and cash flows at that time.
Valuation of Goodwill and Other Intangibles
      The Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets,” (FAS No. 142) for goodwill and intangible assets acquired after June 30, 2001 as of July 1, 2001. FAS No. 142 was adopted in its entirety as of January 1, 2002 and accordingly, the Company’s goodwill and intangible assets with indefinite useful lives are no longer being amortized.
      Fair value is estimated using the discounted cash flow method. The Company uses projections of market growth, internal sales efforts, input cost movements, and cost reduction opportunities to project future cash flows. Certain corporate expenses and assets and liabilities are allocated to the reporting units in this process. Using a risk adjusted, weighted average cost-of-capital, the Company discounts the cash flow projections to the annual measurement date, October 31st. If the fair value of any of the reporting units was determined to be less than its carrying value, the Company would proceed to the second step and obtain independent appraisals of its assets. This step was not necessary in 2004. However, following the drop in profitability of the Polymer Additives reporting unit in 2004, the Company engaged an independent appraiser to assess the fair value of that business as of June 30, 2004. That valuation confirmed management’s assessment that the fair value of that business exceeded its carrying value.
Assessment of Long-Lived Assets
      The Company’s long-lived assets include property, plant, equipment, goodwill and other intangible assets. Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives.
      Property, plant and equipment are reviewed for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use and eventual disposition is less than their recorded value. In the event of impairment, a loss is recognized for the excess of the recorded value over fair value. The long-term nature of these assets requires the estimation of cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of review.
      Due to depressed conditions in the electronics industry in late 2004 and 2005, the Company specifically evaluated its electronics assets in Holland. The Company also evaluated its Italian tile and Belgian polymer additives manufacturing assets because of sluggish market conditions in those regions. In each situation, management concluded that the assets were not impaired.
Asset Securitization
      Certain of the Company’s receivables are sold to a wholly-owned unconsolidated qualified special purpose entity, Ferro Finance Corporation (“FFC”). FFC can sell, under certain conditions, an undivided fractional ownership interest in the pool of receivables to multi-seller receivables securitization companies (commercial paper conduits). Additionally, under this program, receivables of certain European subsidiaries were sold directly to other commercial paper conduits during 2003 and 2002. Amounts borrowed under the program are not recorded on the balance sheet in accordance with FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The Company and certain European subsidiaries, on behalf of FFC and the commercial paper conduits provide service, administration and

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
collection of the receivables. In accordance with Statement No. 140, no servicing liability is reflected on the Company’s balance sheet.
      The Company retains interest in the receivables transferred to FFC and the commercial paper conduits in the form of notes receivable to the extent that receivables transferred exceed advances. FFC and the commercial paper conduits have no recourse to the Company’s other assets for failure of debtors to pay when due. The Company and certain European subsidiaries, on a monthly basis, measure the fair value of the notes receivable based on management’s best estimate of the undiscounted expected future cash collections on the transferred receivables.
Environmental and Other Contingent Liabilities
      The Company’s operations are subject to various hazards incidental to the production of some of its products, including the use, handling, processing, and storage of hazardous materials. The Company expenses recurring costs associated with control and disposal of hazardous materials in current operations. Accruals for environmental remediation and other contingent liabilities, including those relating to ongoing, pending or threatened litigation, are recorded if available information indicates it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The amount accrued for environmental remediation reflects the Company’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, existing technology, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Estimated costs are not discounted due to the uncertainty with respect to the timing of related payments. The Company actively monitors the status of sites, and as assessments and cleanups proceed, accruals are reviewed periodically and adjusted, if necessary, as additional information becomes available. If the loss is neither probable nor reasonably estimable, but is reasonably possible, the Company provides appropriate disclosure if the contingency is material.
Derivative Financial Instruments
      The Company employs derivative financial instruments, primarily foreign currency forward exchange contracts and foreign currency options, to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Gains and losses on foreign currency forward exchange contracts and foreign currency options are recognized as foreign currency transaction gains and losses.
      The Company purchases portions of its natural gas requirements under fixed price contracts, which in certain circumstances, although unlikely because committed quantities are below expected usage, could result in the Company settling its obligations under these contracts in cash at prevailing market prices. In compliance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” the Company marks these contracts to fair market value and recognizes the resulting gains or losses as miscellaneous income or expense, respectively.
      The Company consigns, from various financial institutions, precious metals (primarily for silver, gold, platinum and palladium, collectively “metals”) used in the production of certain products for customers. Under these consignment arrangements, the financial institutions provide the Company with metals for a specified period of one year or less in duration, for which the Company pays a fee. Under these arrangements, the financial institutions own the metals, and accordingly, the Company does not report these consigned materials as part of its inventory on its consolidated balance sheet. These agreements are cancelable by either party at the end of each consignment period, however, because the Company has access to a number of consignment arrangements with available capacity, consignment needs can be shifted among the other participating institutions. In certain cases, these other participating institutions may require cash deposits to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
provide additional collateral beyond the underlying precious metals. Fees for these contracts are recorded as cost of sales.
Reclassifications
      Certain reclassifications have been made to prior year balances to conform to current year presentation.
Recently Adopted Accounting Pronouncements
      In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations,” (FAS No. 143). FAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When a liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted FAS No. 143 as of January 1, 2003, and recognized asset retirement obligations of $0.1 million; the effect on the Company’s proforma net income and proforma earnings per share for the year ended December 31, 2002 is not material. The ongoing expense on an annual basis resulting from the adoption of FAS No. 143 is immaterial.
      In July 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (FAS No. 146). FAS No. 146 applies to costs from activities such as eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. The Company adopted FAS No. 146 as of January 1, 2003, and accordingly, records exit or disposal costs when they are “incurred” and can be measured at fair value. The adoption of FAS No. 146 did not have an impact on the financial statements because the Company recorded restructuring and integration charges as summarized in Note 10 of the Company’s consolidated financial statements using the guidance under FASB Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and FASB Statement No. 112, “Employers’ Accounting for Postemployment Benefits.”
      The FASB published Interpretation No. 46, “Consolidation of Variable Interest Entities,” (Interpretation No. 46) in January 2003 and Interpretation No. 46R of the same name (Interpretation No. 46R) in December 2003. Interpretation No. 46 addresses consolidation by business enterprises of variable interest entities and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among the parties involved. Interpretation No. 46R clarifies some of the provisions of FASB Interpretation No. 46 and exempts certain entities from its requirements. Under the transition provisions of Interpretation No. 46R, special effective dates apply to enterprises that have fully or partially applied Interpretation No. 46 prior to issuance of Interpretation No. 46R. The Company adopted Interpretation No. 46 as of October 1, 2003, and Interpretation No. 46R as of January 1, 2004. The adoption of these Interpretations did not have a material impact on the results of operations or financial position of the Company. In June 2003, the Company bought out its asset defeasance program that would have required consolidation under Interpretation No. 46.
      In January 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” (FSP No. 106-1). FSP No. 106-1 was superseded by FSP No. 106-2 of the same name, issued in May 2004. It was effective for the first interim or annual period beginning after June 15, 2004, and applied only to sponsors of single-employer defined benefit postretirement health care plans for which a) the employer concluded that prescription drug benefits available under the plan to some or all participants for some or all future years are “actuarially equivalent” to Medicare Part D and thus qualify for the subsidy under the Medicare Prescription Drug Improvement and Modernization Act of 2003 and b) the expected subsidy offset

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or reduced the employer’s share of the cost of the underlying post-retirement prescription drug coverage on which the subsidy is based. The Company adopted FSP No. 106-2 as of July 1, 2004, and had a reduction of approximately $0.1 million in the Company’s net periodic postretirement pension cost in each of the third and fourth quarters of 2004, and a reduction of $0.2 million to the accumulated postretirement benefit obligation as of December 31, 2004.
      In October 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into Federal law. The FASB issued two staff positions to address the accounting for income taxes in conjunction with the Act. The Act, when fully phased-in, includes a tax deduction of up to 9 percent of the lesser of (a) qualified production activities income or (b) taxable income, both as defined in the Act. FSP No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004,” (FSP No. 109-1) was effective upon its release in December 2004. FSP No. 109-1 requires companies to treat the tax deduction as a special deduction instead of a change in tax rate that would have impacted existing deferred tax balances. Adoption of FSP No. 109-1 did not have a material impact on the Company’s income tax provision.
      In addition, the Act includes a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated no later than in the 2005 tax year. FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” (FSP No. 109-2) was issued in December 2004 and was effective upon issuance. FSP No. 109-2 established accounting and disclosure requirements for enterprises in the process of evaluating the repatriation provision of the Act. Based on the Company’s analysis, repatriation under the Act would not have provided significant additional benefits, and therefore, the application of FSP No. 109-2 did not affect income tax expense in the period of enactment or any related disclosures.
      In March 2005, the FASB’s Emerging Issues Task Force (“EITF”) ratified Issue No. 04-06, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” (EITF No. 04-06) which is effective for fiscal years beginning after December 15, 2005 with early adoption permitted. This pronouncement requires that stripping costs incurred during production activities be recognized as period expenses. The Company voluntarily early-adopted EITF No. 04-06 and elected to recognize this change in accounting by restatement of its prior-period financial statements. The effect of the accounting change was to decrease retained earnings as of December 31, 2001 by $0.3 million, net income in 2003 and 2002 by $0.7 million and $0.6 million, respectively, and earnings per share, both basic and diluted, in 2003 and 2002 by $0.02 and $0.02, respectively.
Newly Issued Accounting Pronouncements
      The FASB’s Emerging Issues Task Force ratified Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” in March 2004. The issue provided guidance for evaluating whether an investment is other-than-temporarily impaired and was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 was delayed by FSP EITF Issue No. 03-1-1, “Effective Date of Paragraphs 10 — 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” in September 2004; the delay of that effective date will be superseded concurrent with the final issuance of FSP EITF Issue 03-1-a. The adoption of EITF Issue No. 03-1 is not expected to have a material impact on the Company’s results of operations or financial position.
      The FASB issued Statement No. 151, “Inventory Costs,” (FAS No. 151) in November 2004. FAS No. 151 is effective for fiscal years beginning after June 15, 2005, and amends the guidance of ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). FAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” The adoption of FAS No. 151 as of January 1,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2006, is not expected to have a material impact on the results of operations or financial position of the Company.
      In December 2004, the FASB issued Statement No. 123R, “Share-Based Payments,” (FAS No. 123R) that requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — normally the vesting period. FAS No. 123R is effective for interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards as of the adoption date. It provides three alternative transition methods, each having different reporting implications. In April 2005, the Securities and Exchange Commission published a rule allowing public companies with calendar year ends to delay the quarter in which they begin to expense stock options to first quarter 2006 from third quarter 2005. The Company is still evaluating the various implementation options and at this time is uncertain as to the impact on the Company’s results of operations or financial position.
      In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets,” (FAS No. 153). This statement, effective for fiscal periods ending after June 15, 2005, amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of FAS No. 153 is expected to have no impact on the results of operations or the financial position of the Company.
      FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (Interpretation No. 47) was issued in March 2005 and is effective for fiscal years ending after December 15, 2005. Interpretation No. 47 clarifies that the term “conditional and retirement obligation” as used in FASB Statement No. 143 “Accounting for Asset Retirement Obligation,” refers to an unconditional legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future event. This obligation should be recognized at its face value, if that value can be reasonably estimated. Management is evaluating the impact of Interpretation No. 47 and is uncertain as to the impact on the Company’s results of operations or financial position.
      In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” (FAS No. 154) that replaces APB Opinion No. 20 and FASB Statement No. 3 and changes the accounting for and reporting of a change in accounting principle. FAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when specific transition provisions are not provided. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle. FAS No. 154 is effective for fiscal years beginning after December 15, 2005. The Company has no plans to make any voluntary changes in its accounting principles.
2. Restatement
      Financial data and financial statements included in this Form 10-K have been restated to reflect adjustments to previously reported annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
      In July 2004, management identified several adjustments in connection with the preparation of the Company’s condensed consolidated financial statements for the quarter ended June 30, 2004. Based on the preliminary results of management’s efforts, the audit committee of the board of directors (“Audit Committee”) determined that it would be appropriate to initiate a special investigation of these adjustments by independent outside counsel and forensic accountants. Shortly thereafter, the Audit Committee commenced the first of two independent investigations. The investigations were conducted by separate teams of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
independent counsel and forensic accountants, and involved analyses and reviews of the Company’s books and records. The investigations also included reviews of documentation and e-mail communications, as well as interviews with numerous current and former employees. Simultaneously, the Company performed additional account analyses to identify other errors that may have existed. The investigations, both external and internal, identified accounting adjustments relating to the Company’s Polymer Additives business as well as accounting mistakes and errors at other locations.
      The effects of these changes on the Company’s originally reported results of operations are summarized as follows:
               
    Year Ended
    December 31,
Income (Expense)   2003
     
    (Dollars in
    thousands)
Adjustments at Polymer Additives locations
  $ (7,558 )
Adjustments at other locations:
       
 
Incomplete application of U.S. GAAP at foreign locations
    (2,252 )
 
Employee benefits and compensation
    2,888  
 
Inventory valuations
    2,347  
 
Account reconciliations
    (6,148 )
 
Derivative contracts
    623  
 
Expense recognition
    (1,064 )
       
     
Total adjustments at other locations
    (3,606 )
       
Total adjustments for accounting mistakes and errors, before tax
    (11,164 )
Income tax benefit on adjustments for accounting mistakes and errors
    4,316  
Tax adjustments
    (203 )
       
Adjustments for accounting mistakes and errors, net of tax:
       
   
Continuing operations
    (7,051 )
   
Discontinued operations
    2,241  
       
Total adjustment for accounting mistakes and errors, after tax
    (4,810 )
       
      As a result of the changes, originally reported net income was reduced by $4.8 million ($0.11 basic and diluted earnings per share) for the year ended December 31, 2003.
Polymer Additives Locations:
      During the investigations, adjustments were identified reducing income by $7.6 million for 2003. Adjustments were made to accounts receivable, inventories and accrued expenses. Inventory valuation adjustments primarily resulted from inappropriate deferrals of purchase price variances and incorrect timing of expense recognition for slow moving inventories. Charges reducing income were recorded to accrue earned customer rebates in the correct accounting periods. Adjustments were also made to reduce expenses by

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$1.1 million due to incorrect timing of expense recognition associated with freight and repair and maintenance costs.
           
    Year Ended
    December 31,
Income (Expense)   2003
     
    (Dollars in
    thousands)
Account reconciliations
  $ (3,306 )
Inventory valuations
    (1,983 )
Rebate accruals
    (1,193 )
Expense Recognition
    (1,076 )
       
 
Total
  $ (7,558 )
       
Adjustments Relating to Other Locations:
      Incomplete application of U.S. GAAP at foreign locations — During the restatement process, the Company determined that subsidiaries in two countries had not been fully applying U.S. generally accepted accounting principles. Adjustments reducing income by $2.3 million were recorded for 2003. These adjustments principally related to the timing of expense recognition and accounting for post employment benefits. Also, charges were recorded relating to impaired assets.
      Employee benefits and compensation — Adjustments reducing expenses by $2.9 million were recorded to correct mistakes in accounting for defined benefit pension and other incentive compensation liabilities.
      Inventory valuations — Adjustments reducing expenses by $2.3 million corrected inventory valuation matters. This category is primarily comprised of adjustments relating to the valuation of inventories resulting from either inconsistent or incorrect use of methodologies to compute manufacturing variance adjustments to standard costs of inventories, and errors triggered by the incorrect configuration of information systems relating to the treatment of purchase price variances. The adjustments also include corrections in the timing of writedowns associated with slow moving and handling loss accounts.
      Account reconciliations — As part of the restatement process, validation of various balance sheet accounts was completed for many domestic and international locations. As a result of either the failure to reconcile accounts or resolve reconciliation issues in a timely manner, corrections reducing income by $6.1 million were recorded for 2003. The most significant adjustment in this category corrected mistakes totaling $2.9 million made in reconciling the results of a physical inventory observation taken during 2003. Additionally, other adjustments were made related to accounts receivable, accounts payable and accrued expense accounts.
      Derivative contracts — This category reflects revisions to previous accounting for natural gas supply and metal forward contracts. Adjustments decreasing expenses by $0.6 million were recorded for 2003. The changes were necessary because the Company determined that its hedge designation documentation relating to natural gas supply and metal forward contracts did not meet the technical requirements to qualify for hedge accounting treatment in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and the related documentation requirements set forth therein.
      Expense recognition — This category includes adjustments reducing income by $1.1 million. The most significant items contained in this category relate to the incorrect timing of accruing costs associated with repair and maintenance activities and recognition of asset impairments. In connection with planned plant shutdowns, several international and domestic locations incorrectly accrued costs before they were incurred,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and as a result, adjustments were recorded to expense these costs during the periods in which they were incurred.
Tax Adjustments
      Included in this category are adjustments netting to an increase of previously-reported expenses by $0.2 million for 2003, which includes corrections in the timing of the reduction of a valuation allowance resulting from the utilization of a capital loss carryforward, as well as corrections to errors made in the computations of deferred tax assets and liabilities at certain international subsidiaries.
Other Adjustments and Disclosure Changes
      Adjustments were also made to correct errors in the initial recording of the fair value of certain assets acquired in connection with the Company’s acquisition of Pfanstiehl, Inc. in 2000. These adjustments had no impact on shareholders’ equity, net income, or cash flows for any periods presented herein.
      Other errors totaling $0.4 million reducing cumulative after-tax expenses relating to continuing operations were discovered relating to periods ending before January 1, 2003. Also, errors totaling $0.1 million reducing cumulative after-tax expenses relating to discontinued operations were identified. Based upon qualitative and quantitative analyses, the Company concluded these errors were not material to the consolidated financial statements for the prior periods, and accordingly, those prior period financial statements have not been restated. The correction of those errors has been included in the restatement of the consolidated financial statements as of and for the year ended December 31, 2003.

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table sets forth the effects of the restatement adjustments discussed above and the voluntary early adoption of EITF 04-06 as discussed in Note 1 on the Condensed Consolidated Statement of Income for the year ended December 31, 2003:
                     
    Year Ended
    December 31, 2003
     
    Originally    
    Reported   Restated
         
    (Dollars in thousands, except
    per share amounts)
Net sales
  $ 1,622,370     $ 1,615,598  
Cost of sales
    1,241,096       1,242,414  
Selling, general and administrative expenses
    309,279       315,910  
Other charges (income):
               
 
Interest expense
    35,647       43,106  
 
Foreign currency transactions, net
    2,239       1,199  
 
Miscellaneous expense, net
    9,866       953  
             
Income before taxes
    24,243       12,016  
Income tax expense
    6,863       2,378  
             
Income from continuing operations
    17,380       9,638  
Discontinued operations:
               
 
Loss from discontinued operations, net of tax
    (923 )     (903 )
 
Gain on disposal of discontinued operations, net of tax
    3,094       5,315  
             
Net income
    19,551       14,050  
Dividends on preferred stock
    2,088       2,088  
             
Net income available to common shareholders
  $ 17,463     $ 11,962  
             
Per common share data
               
 
Basic earnings:
               
   
From continuing operations
  $ 0.38     $ 0.18  
   
From discontinued operations
    0.05       0.11  
             
    $ 0.43     $ 0.29  
             
 
Diluted earnings:
               
   
From continuing operations
  $ 0.38     $ 0.18  
   
From discontinued operations
    0.05       0.11  
             
    $ 0.43     $ 0.29  
             

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table sets forth the effects of the restatement adjustments and the voluntary early adoption of EITF04-06 as discussed in Note 1 discussed above on the Consolidated Balance Sheet as of December 31, 2003:
                       
    December 31, 2003
     
    Originally    
    Reported   Restated
         
    (Dollars in thousands)
ASSETS
Current assets
               
 
Cash and cash equivalents
  $ 23,419     $ 23,381  
 
Accounts and trade notes receivable
    195,729       193,422  
 
Notes receivable
    97,466       93,922  
 
Inventories
    181,604       182,962  
 
Deferred tax assets
    39,942       45,363  
 
Other current assets
    43,883       38,394  
             
   
Total current assets
    582,043       577,444  
Other assets
               
Net property, plant and equipment
    608,484       616,657  
Unamortized intangibles
    421,313       419,077  
Deferred tax assets
    62,986       36,167  
Miscellaneous other assets
    76,400       81,913  
             
   
Total assets
  $ 1,751,226     $ 1,731,258  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
 
Notes and loans payable
  $ 12,404     $ 13,207  
 
Accounts payable
    231,652       239,721  
 
Income taxes
    15,058       16,962  
 
Accrued payrolls
    28,050       28,558  
 
Accrued expenses/other current liabilities
    125,931       118,733  
             
   
Total current liabilities
    413,095       417,181  
Other liabilities
               
Long-term debt, less current portion
    516,236       523,915  
Post-retirement and pension liabilities
    224,439       226,630  
Other non-current liabilities
    71,535       41,379  
             
   
Total liabilities
    1,225,305       1,209,105  
Series A convertible preferred stock
          27,942  
Shareholders’ Equity
               
Series A convertible preferred stock
    70,500        
Common stock
    52,323       52,323  
Paid-in capital
    157,221       159,162  
Retained earnings
    612,976       606,588  
Accumulated other comprehensive loss
    (85,790 )     (83,296 )
Other
    (6,516 )     (6,915 )
             
      800,714       727,862  
Less: Cost of treasury stock
               
     Common
    232,235       233,651  
     Preferred
    42,558        
             
      525,921       494,211  
             
     
Total liabilities and shareholders’ equity
  $ 1,751,226     $ 1,731,258  
             

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In addition, the following items affect the restated consolidated balance sheet:
      As part of the restatement process, the Company re-evaluated the method it previously utilized to classify its deferred tax assets and liabilities to more appropriately present deferred tax assets and liabilities on a net basis by tax jurisdiction.
      The Company also changed the classification of its Series A convertible preferred stock. As discussed in Note 6 to the consolidated financial statements, these securities contain redemption features that can be exercised on behalf of the holders under certain circumstances outside the control of the Company. As a result of these redemption features, these securities have been reclassified outside of permanent equity on the consolidated balance sheets.
Shareholders’ Equity Impact
      The restatement affected the consolidated statements of shareholders’ equity and comprehensive income for the years ended December 31, 2003 and 2002. Shareholders’ equity as of January 1, 2002, is $257.6 million as restated, compared to $300.4 million as previously reported. The changes are primarily due to a $42.5 million reclassification of Series A convertible preferred stock and a $0.3 million adjustment for the cumulative effect on prior years relating to the voluntary early adoption of EITF No. 04-06. The following table shows the impact as of December 31, 2003 and 2002:
         
    December 31,
    2003
     
    (Dollars in
    thousands)
Ending shareholders’ equity, as previously reported
  $ 525,921  
Effect of restatement adjustments on net income for the current period
    (5,501 )
Reclassification of Series A convertible preferred stock
    (27,942 )
Cumulative adjustment of retained earnings for the impact of EITF No. 04-06
    (887 )
Adjustments to other comprehensive income
    2,620  
       
Ending shareholders’ equity, as restated
  $ 494,211  
       
      The change in other comprehensive income is driven by corrections to additional minimum pension liabilities, foreign currency, and the change in accounting for derivative financial instruments as discussed earlier.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table sets forth the effects of the restatement adjustments discussed above and the voluntary early adoption of EITF 04-06 as discussed in Note 1 on the Consolidated Statement of Cash Flows for the year ended December 31, 2003:
                     
    December 31, 2003
     
    Originally    
    Reported   Restated
         
    (Dollars in thousands)
Cash flows from operating activities
               
Net income
  $ 19,551     $ 14,050  
 
Adjustments to reconcile net income to net cash provided by operating activities
               
   
Loss from discontinued operations, net of tax
    923       903  
   
Gain on sale of discontinued operations, net of tax
    (3,094 )     (5,315 )
   
Depreciation and amortization
    70,385       76,634  
   
Retirement benefits
          6,282  
   
Deferred income taxes
    (4,449 )     (8,226 )
   
Net payments from asset securitization
          (84,238 )
 
Changes in current assets and liabilities, net of effects of Acquisitions
               
   
Accounts and trade notes receivable
    (38,234 )     (35,747 )
   
Inventories
    1,455       114  
   
Other current assets
    2,605       8,705  
   
Accounts payable
    23,827       31,911  
   
Accrued expenses and other current liabilities
    (5,087 )     (12,649 )
 
Other operating activities
    18,891       12,152  
             
Net cash provided by continuing operations
    86,773       4,576  
Net cash provided by (used for) discontinued operations
    (1,068 )     (1,068 )
             
Net cash provided by operating activities
    85,705       3,508  
Cash flows from investing activities
               
 
Capital expenditures for plant and equipment of continuing operations
    (35,702 )     (36,055 )
 
Capital expenditures for plant and equipment of discontinued operations
    (381 )     (381 )
 
Divestitures (acquisitions), net of cash, of continuing operations
    12,307       (7,378 )
 
Divestitures, net of cash, of discontinued operations
          19,685  
 
Buy-out of operating lease
    (25,000 )     (25,000 )
 
Other investing activities
    513       (533 )
             
Net cash provided by (used for) investing activities
    (48,263 )     (49,662 )
Cash flows from financing activities
               
 
Net borrowings (repayments) under short-term facilities
    4,569       4,608  
 
Proceeds from long-term debt
    670,092       670,092  
 
Principal payments on long-term debt
    (598,514 )     (598,514 )
 
Net payments from asset securitization
    (84,238 )      
 
Cash dividends paid
    (25,640 )     (25,640 )
 
Other financing activities
    3,813       3,094  
             
Net cash provided by (used for) financing activities
    (29,918 )     53,640  
Effect of exchange rate changes on cash
    953       953  
             
Increase (decrease) in cash and cash equivalents
    8,477       8,439  
Cash and cash equivalents at beginning of period
    14,942       14,942  
             
Cash and cash equivalents at end of period
  $ 23,419     $ 23,381  
             
Cash paid during the period for:
               
 
Interest
  $ 33,228     $ 36,640  
 
Income taxes
  $ 11,871     $ 11,871  

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In addition to the impact of the restatement adjustments, the Company has reclassified the presentation of its asset securitization programs to conform to the 2004 cash flow presentation. In December 2004, the Securities and Exchange Commission staff raised concerns about proper presentation of the statement of cash flows for companies that have securitization programs. Prior to 2004, the Company reflected activity in its securitization programs in the “financing” section of the statement of cash flows. As a result of concerns raised by the Securities and Exchange Commission, that include requirements that companies report cash receipts and sales of receivables from securitization programs with the “operating” activities section of the statement of cash flows, the Company has reclassified the consolidated statements of cash flows for prior periods in order to properly address these concerns.
3. Inventories
      Inventories as of December 31 are comprised of the following:
                 
        Restated
    2004   2003
         
    (Dollars in thousands)
Raw materials
  $ 61,249     $ 43,669  
Work in process
    35,091       23,589  
Finished goods
    135,541       125,235  
             
      231,881       192,493  
LIFO reserve
    (11,755 )     (9,531 )
             
Total
  $ 220,126     $ 182,962  
             
      The portion of inventories valued by the LIFO method at December 31 is as follows:
                 
    2004   2003
         
United States
    14.9%       15.6%  
Consolidated
    6.7%       6.4%  
      The LIFO reserve increased by $2.2 million in 2004, compared with a decrease of $0.7 million in 2003.
4. Financing and short-term and long-term debt
      Notes and loans payable at December 31 are as follows:
                 
        Restated
    2004   2003
         
    (Dollars in
    thousands)
Loans payable to banks
  $ 8,159     $ 11,777  
Current portion of long-term debt
    1,515       1,430  
             
Total
  $ 9,674     $ 13,207  
             

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Long-term debt at December 31 is as follows:
                 
        Restated
    2004   2003
         
    (Dollars in thousands)
$200,000 Senior notes, 9.125%, due 2009*
  $ 197,549     $ 196,937  
$25,000 Debentures, 7.625%, due 2013*
    24,864       24,853  
$25,000 Debentures, 7.375%, due 2015*
    24,961       24,957  
$50,000 Debentures, 8.0%, due 2025*
    49,526       49,503  
$55,000 Debentures, 7.125%, due 2028*
    54,511       54,490  
Revolving credit agreement
    137,400       164,450  
Capitalized lease obligations (see Note 18)
    8,161       8,443  
Other notes
    1,857       1,712  
             
      498,829       525,345  
Less: Current portion
    1,515       1,430  
             
Total
  $ 497,314     $ 523,915  
             
 
Net of unamortized discounts
      The aggregate maturities of long-term debt are as follows:
                                     
2005   2006   2007   2008   2009
                 
(Dollars in thousands)
  $1,515       139,412       1,415       1,351       201,231  
      At December 31, 2004, the Company had $355.0 million principal amount outstanding under debentures and senior notes, which had an estimated fair market value of $387.1 million. At December 31, 2003, the Company had $355.0 million principal amount outstanding, with an estimated fair market value of $388.3 million. Fair market value represents a third party’s indicative bid prices for these obligations. The Company’s senior credit rating was Baa3 by Moody’s Investor Service, Inc. (“Moody’s”) and BB+ by Standard & Poor’s Rating Group (“S&P”) at December 31, 2004. Subsequently, these ratings were downgraded to B1 and B+, respectively. In addition, after downgrading the rating, Moody’s withdrew its rating. See further information regarding this matter in Note 22.
      The senior notes are redeemable at the option of the Company at any time for the principal amount of the senior notes then outstanding plus the sum of any accrued but unpaid interest and the present value of any remaining scheduled interest payments. The senior notes are redeemable at the option of the holders only upon a change in control of the Company combined with a rating by either Moody’s or S&P below investment grade as defined in the indenture. Currently, the rating of the senior notes is below investment grade.
      The 8.0% debentures, due 2025, are redeemable at the option of the Company at any time after June 15, 2005, for redemption prices ranging from 103.31% to 100% of par. The 7.125% debentures, due 2028, are redeemable at the option of the Company at any time for the principal amount then outstanding plus the sum of any accrued but unpaid interest and the present value of any remaining scheduled interest payments. The 7.625% debentures, due 2013, and the 7.375% debentures, due 2015, are not redeemable before maturity.
      The indentures under which the senior notes and the debentures are issued contain operating covenants that limit the Company’s ability to engage in certain activities including limitations on consolidations, mergers, and transfers of assets; creation of additional liens; and sale and leaseback transactions. The indentures contain cross-default provisions with other debt obligations that exceed $10 million of principal outstanding. In addition, the terms of the indentures require, among other things, the Company to file with the Trustee copies

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of its annual reports on Form 10-K, quarterly reports on Form 10-Q and an Officers’ Certificate relating to the Company’s compliance with the terms of the indenture within 120 days after the end of its fiscal year. Prior to the filing of this Form 10-K, the Company had not filed with the Securities and Exchange Commission its annual report for 2004 and still has not filed its Form 10-Qs for the third quarter of 2004 and each of the first three quarters of 2005 or its Form 10-K for fiscal year 2005 (the “SEC Filings”). After the close of business on March 30, 2006, the Company received a notice of default with respect to its failure to file the SEC Filings from a holder of the 7.375% Debentures due 2015 (the “Notes”) of which $25 million is outstanding. Under the terms of the indenture governing the Notes, the Company has a 90-day period in which to cure the failure to file the SEC Filings or obtain a waiver. If the Company does not cure or obtain a waiver within the 90-day period, an event of default will have occurred and the holders of the Notes may declare the $25 million of principal immediately due and payable. In addition, as described above, the resulting event of default would trigger cross-default provisions for all other series of debt issued under the indenture as well as under the agreements governing most of the Company’s other outstanding indebtedness.
      The revolving credit agreement is a $300 million unsecured senior credit facility that expires September 7, 2006. The Company had borrowed $137.4 million under the revolving credit facility as of December 31, 2004. Based upon the type of funding used, borrowings under the revolving credit facility bear interest at a rate equal to (1) LIBOR, or (2) the greater of the prime rate established by National City Bank, Cleveland, Ohio, and the Federal Funds effective rate plus 0.5% (Prime Rate); plus, in each case, applicable margins based upon a combination of the Company’s index debt rating and the ratio of the Company’s total debt to EBITDA (earnings before interest, taxes, depreciation and amortization). The average interest rates for borrowings against the facility at December 31, 2004 and 2003 were 4.0% and 2.9%, respectively.
      The Company’s revolving credit facility contains financial covenants relating to total debt, fixed charges and EBITDA, cross default provisions with other debt obligations, and customary operating covenants that limit its ability to engage in certain activities, including significant acquisitions. In addition, if the Company’s senior credit rating is downgraded below Ba2 by Moody’s or BB by S&P, as it currently is, the Company and its material subsidiaries are required to grant, within 30 days from such a rating downgrade, security interests in their tangible and intangible assets (with the exception of the receivables sold as part of the Company’s asset securitization program), pledge 100% of the stock of domestic material subsidiaries and pledge 65% of the stock of foreign material subsidiaries, in each case, in favor of the lenders under the senior credit facility. The Company is currently in the process of granting such security interest. As a result, liens on principal domestic manufacturing properties and the stock of domestic subsidiaries would be shared with the holders of the Company’s senior notes and debentures. The Company’s ability to meet these covenants in the future may be affected by events beyond its control, including prevailing economic, financial and market conditions and their effect on the Company’s financial position and results of operations. The Company does have several options available to mitigate these circumstances, including selected asset sales.
      During 2004, the Company was granted waivers from the banks providing the revolving credit facility for financial reporting delays. The delays were a result of the Company’s restatement of its 2003 and first quarter 2004 consolidated financial information. See further information regarding the restatement in Note 2. Subsequent to December 31, 2004, the revolving credit agreement was amended to relax certain financial covenants, and the Company obtained amended waivers for financial reporting delays. In March 2006, the Company executed a commitment letter for a $700 million credit facility (the “New Credit Facility”) from a syndicate of lenders. The New Credit Facility provides for a five year, $300 million multi-currency senior revolving credit facility and a six year, $400 million term loan facility. The Company intends to use the New Credit Facility to replace the existing credit facility and for working capital and general corporate purposes. See further information regarding this subsequent event in Note 22.
      In 2000, the Company initiated an aggregate $150 million program to sell (securitize), on an ongoing basis, a pool of its trade accounts receivable. This program serves to accelerate cash collections of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s trade accounts receivable at favorable financing costs and helps manage the Company’s liquidity requirements. During the fourth quarter of 2004, the Company amended the $100 million U.S. portion of the asset securitization program to resolve issues related to a prior rating downgrade and delayed quarterly Securities and Exchange Commission filings. The Company also evaluated the $50 million European portion of the program and decided to cancel the European program since it had not been drawn upon during 2004 and due to changing regulatory requirements for this type of facility in Europe and changes that would have been required due to the rating downgrade. At December 31, 2004, the Company had only the U.S. program remaining for $100 million, and subsequently, extended the program through June 2006 and obtained amended waivers through March 2006 for financial reporting delays. The Company intends to replace, extend, amend or otherwise modify the U.S. asset securitization program prior to its June 2006 expiration but has not yet decided upon the desired course of action. This decision will be based on other liquidity program decisions that will be made before the expiration date of the asset securitzation program. While the Company expects to maintain a satisfactory U.S. asset securitization program to help meet the Company’s liquidity requirements, factors beyond the Company’s control such as prevailing economic, financial and market conditions may prevent the Company from doing so.
      The accounts receivable securitization facility contains cross default provisions with other debt obligations and a provision under which the agent can terminate the facility if the Company’s senior credit rating is downgraded below Ba2 by Moody’s or BB by S&P. Currently, the senior credit rating is below the minimum ratings and the facility could be terminated. The Company is in the process of obtaining a waiver and the facility is currently being utilized. There can be no assurance, however, that such waiver will be obtained. The termination of this program at December 31, 2004, would have reduced the Company’s liquidity to the extent that the total program of $100 million exceeded advances outstanding of $3.6 million. The liquidity from the Company’s revolving credit facility of $300 million under which $162.6 million was available at December 31, 2004, and the available cash flows from operations, should allow the Company to meet its funding requirements and other commitments if this program was terminated.
      Under this program, certain of the Company’s receivables are sold to Ferro Finance Corporation (“FFC”), a wholly-owned unconsolidated qualified special purpose entity (QSPE), as defined by Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” (FAS No. 140). FFC finances its acquisition of trade accounts receivable assets by issuing financial interests to various multi-seller receivables securitization companies (“commercial paper conduits”). At December 31, 2003, $1.5 million had been advanced to the Company, net of repayments, under this program. During the twelve months ended December 31, 2004, $923.6 million of accounts receivable were sold under this program and $921.5 million of receivables were collected and remitted to FFC and the commercial paper conduits, resulting in a net increase in advances of $2.1 million and total advances outstanding at December 31, 2004 of $3.6 million.
      The Company on behalf of FFC and the commercial paper conduits provides normal collection and administration services with respect to the receivables. In accordance with FAS No. 140, no servicing asset or liability is reflected on the Company’s consolidated balance sheet. FFC and the commercial paper conduits have no recourse to the Company’s other assets for failure of debtors to pay when due as the assets transferred are legally isolated in accordance with the bankruptcy laws of the United States. Under FAS No. 140 and FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” neither the amounts advanced nor the corresponding receivables sold are reflected in the Company’s consolidated balance sheet as the trade receivables have been de-recognized with an appropriate accounting loss recognized.
      The Company retains a beneficial interest in the receivables transferred to FFC in the form of a note receivable to the extent that cash flows collected from receivables transferred exceed cash flows used by FFC to pay the commercial paper conduits. The note receivable balance was $108.5 million as of December 31, 2004, and $91.8 million as of December 31, 2003. The Company, on a monthly basis, measures the fair value

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of the retained interests using management’s best estimate of the undiscounted expected future cash collections on the transferred receivables. Actual cash collections may differ from these estimates and would directly affect the fair value of the retained interests.
      In addition, the Company maintains other lines of credit and receivable sale programs to provide liquidity. Most of these lines are international and provide global flexibility for the Company’s liquidity requirements. At December 31, 2004, the unused portions of these lines provided approximately $27.0 million of additional liquidity. Also at December 31, 2004, the Company had a $3.3 million guarantee outstanding, expiring February 21, 2008, to support the borrowing facilities of an unconsolidated affiliate.
      The Company’s level of debt and debt service requirements could have important consequences to the Company’s business operations and uses of cash flows. In addition, a reduction in overall demand for the Company’s products could adversely affect the Company’s cash flows from operations. However, the Company has a $300.0 million revolving credit facility, under which $162.6 million was available as of December 31, 2004. This liquidity, along with liquidity from the Company’s asset securitization program, other financing arrangements, and the available cash flows from operations, should allow the Company to meet its funding requirements and other commitments.
5. Stock-based compensation plans
      In April 2003, shareholders of the Company approved the 2003 Long-Term Incentive Compensation Plan (the “Plan”). The Plan authorizes several different types of long-term incentives. The available incentives include stock options, stock appreciation rights, restricted shares, performance shares and common stock awards. The shares of common stock to be issued under the Plan may be either authorized but unissued shares or shares held as treasury stock. The effective date of the Plan is January 1, 2003. The number of shares of common stock reserved for awards under the Plan is 3,250,000 shares. At December 31, 2004, there were 1,488,350 shares available for grant.
      Previous Employee Stock Option Plans and a 1997 Performance Share Plan authorized different types of long-term incentives, including stock options, stock appreciation rights, performance shares and common stock awards. No further grants may be made under Ferro’s previous Employee Stock Option Plans or under Ferro’s 1997 Performance Share Plan. However, any outstanding awards or grants made under these plans will continue until the end of their specified term.
      The Company maintains a performance share plan whereby awards, expressed as shares of common stock of the Company, are earned only if the Company meets specific performance targets over a three-year period. The plan pays 50% cash and 50% common stock for the value of any earned performance shares. Performance share awards in the amount of 119,100 shares at a weighted-average market price of $26.26 per share were granted in 2004 (135,500 shares at $21.26 in 2003 and 144,950 shares at $28.25 in 2002). The Company accrues amounts based on performance reflecting the fair value of cash and common stock, which is anticipated to be earned. The effects of the plan on the Company’s operations were expenses (credits) of $(0.6) million, $1.2 million and $2.6 million in 2004, 2003 and 2002, respectively.

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Information pertaining to stock options is shown below:
                   
        Weighted-
        Average
    Number of   Exercise
    Options   Price
         
Outstanding at January 1, 2002
    3,704,017     $ 20.84  
 
Granted in 2002
    857,150       25.52  
 
Exercised in 2002
    (633,777 )     19.67  
 
Canceled in 2002
    (113,208 )     23.32  
             
Outstanding at December 31, 2002
    3,814,182       21.86  
 
Granted in 2003
    830,800       21.44  
 
Exercised in 2003
    (202,833 )     20.56  
 
Canceled in 2003
    (232,341 )     23.29  
             
Outstanding at December 31, 2003
    4,209,808       21.75  
 
Granted in 2004
    831,250       25.49  
 
Exercised in 2004
    (340,367 )     19.41  
 
Canceled in 2004
    (160,560 )     23.37  
             
Outstanding at December 31, 2004
    4,540,131       22.56  
             
Exercisable at December 31, 2002
    2,329,903     $ 20.62  
Exercisable at December 31, 2003
    2,627,387       21.06  
Exercisable at December 31, 2004
    2,836,687       21.60  
      Significant option groups outstanding at December 31, 2004 and the related weighted-average price for the exercisable options and remaining life information are as follows:
                                         
Options Outstanding   Options Exercisable
     
    Outstanding   Weighted-Average   Weighted-   Exercisable   Weighted-
    as of   Remaining   Average   as of   Average
Range of Exercise Prices   12/31/2004   Contractual Life   Exercise Price   12/31/2004   Exercise Price
                     
$14.00-17.00
    260,371       0.7     $ 15.83       260,371     $ 15.83  
$17.01-22.00
    1,865,286       5.7       20.36       1,260,372       19.95  
$22.01-27.00
    2,311,028       6.8       24.82       1,213,248       23.97  
$27.01-30.00
    103,446       4.1       28.52       102,696       28.52  
                               
Total options
    4,540,131       6.0       22.56       2,836,687       21.60  
                               
      Stock options have a term of 10 years and vest evenly over four years on the anniversary of the grant date. In the case of death, retirement, disability or change in control, the stock options become 100% vested and exercisable.

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table shows pro forma information regarding net income and earnings per share as if the Company had accounted for stock options based on the fair value at the grant date under the fair value recognition provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation.” The fair value for these options was estimated at the date of grant using a Black Scholes option-pricing model.
                         
        Restated    
    2004   2003   2002
             
    (Dollars in thousands, except per
    share data)
Income available to common shareholders from continuing operations — as reported*
  $ 26,135     $ 7,550     $ 30,744  
Deduct: Total stock-based employee compensation expense determined under fair value methods for all awards, net of tax
    (3,347 )     (3,263 )     (3,564 )
                   
Income available to common shareholders from continuing operations — pro forma
  $ 22,788     $ 4,287     $ 27,180  
                   
Basic earnings per share from continuing operations — as reported
  $ 0.62     $ 0.18     $ 0.80  
Basic earnings per share from continuing operations — pro forma
  $ 0.54     $ 0.10     $ 0.71  
Diluted earnings per share from continuing operations —
as reported
  $ 0.62     $ 0.18     $ 0.80  
Diluted earnings per share from continuing operations —
pro forma
  $ 0.54     $ 0.10     $ 0.66  
Weighted-average fair value of options granted
  $ 6.65     $ 7.12     $ 7.60  
Expected life of option in years
    6.80       7.35       7.60  
Risk-free interest rate
    3.30 %     4.02 %     4.61 %
Expected volatility
    28.07 %     28.90 %     28.40 %
Expected dividend yield
    2.40 %     2.43 %     2.18 %
 
* Includes $0.1 million, net of tax, in 2004 and 2003 for expense recognized in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” with the granting of stock options in 2003.
      There was no impact of the pro forma expense on discontinued operations for 2004, 2003, or 2002.
6. Serial convertible preferred stock
      The Company is authorized to issue up to 2,000,000 shares of serial convertible preferred stock without par value. In 1989, Ferro issued 1,520,215 shares of 7% Series A ESOP Convertible Preferred Stock (“Series A Preferred Stock”) to the Trustee of the Ferro Employee Stock Ownership Plan (“ESOP”). The Series A Preferred Stock was issued at a price of $46.375 per share for a total consideration of $70.5 million. As of December 31, 1999, all shares of the Series A Preferred Stock were allocated to participating individual employee accounts. The Trustee may redeem the Series A Preferred Stock to provide for distributions to participants or to satisfy an investment election provided to participants, or to provide loans to or withdrawals by participants. The Series A Preferred Stock is redeemable at the option of the Company, in whole or in part, at any time after July 1, 1999, and under certain other circumstances if the Company terminates the Plan or future contributions to the Plan, in the event of changes in Federal tax laws that would preclude the Company from claiming a tax deduction for dividends paid on the Series A Preferred Stock, or if the Plan is determined not to be a qualified plan within the meanings of Section 401(a) or 4975(e)(7) of the Internal Revenue Code. In any redemption other than plan termination or the termination of future contributions to the Plan, the redemption price is fixed at $46.375 per preferred share plus earned but unpaid dividends as of the date of redemption. In addition, the Trustee is entitled, at any time, to cause any or all shares of Series A Preferred

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock to be converted into shares of common stock at a fixed conversion rate of 2.5988 shares (adjusted for stock splits) of common stock for each one share of Series A Preferred Stock.
      Each share of Series A Preferred Stock carries one vote, voting together with the common stock on most matters. The Series A Preferred Stock accrues dividends at an annual rate of 7% on shares outstanding. The dividends are cumulative from the date of issuance. To the extent the Company is legally permitted to pay dividends and the Board of Directors declares a dividend payable, the Company pays dividends on a quarterly basis. In the case of liquidation or dissolution of the Company, the holders of the Series A Preferred Stock are entitled to receive $46.375 per preferred share, or $25.00 per preferred share in the event of involuntary liquidation, plus earned but unpaid dividends, before any amount shall be paid or distributed to holders of the Company’s common stock.
      There were 489,649 and 603,442 shares of Series A Preferred Stock outstanding at December 31, 2004 and 2003, respectively. During 2004, 2003 and 2002, respectively, 113,793 shares, 101,060 shares, and 226,656 shares were redeemed as permitted by the Plan.
7. Common stock
      In May 2002 the Company issued 5,000,000 shares of common stock at a price of $27.75 per share. The total proceeds of $138.8 million, less underwriting commissions and expenses, were used to reduce then outstanding bank borrowings.
      The Company did not purchase common stock on the open market in 2004 or 2003, and purchased 16,381 shares of common stock in 2002 at an aggregate cost of $0.4 million. At December 31, 2004, the Company had remaining authorization to acquire 4,201,216 shares under its current treasury stock purchase program. Until the Company becomes current in its filings with the Securities and Exchange Commission, the Company is prohibited from purchasing additional shares.
      The Company maintains a Shareholder Rights Plan (the “Plan”) whereby, until the occurrence of certain events, each share of the outstanding common stock represents ownership of one right (“Right”). The Rights become exercisable only if a person or group acquires 20% or more of the Company’s common stock (10% under certain circumstances) or commences a tender or exchange offer upon consummation of which such person or group would control 20% or more of the common shares or is declared an Adverse Person (as defined in the Plan) by the Board of Directors. The Rights, which do not have the entitlement to vote or receive dividends, expire on April 8, 2006. Rights may be redeemed by the Company at $0.031/3  per Right at any time until the 15th day following public announcement that a person or group has acquired 20% or more of the voting power, unless such period is extended by the Board of Directors while the Rights are redeemable.
      If any person becomes the owner of 20% or more of the common stock (10% under certain circumstances), or if the Company is the surviving corporation in a merger with a 20% or more stockholder and its common shares are not changed or converted, or if a 20% or more stockholder engages in certain self-dealing transactions with the Company, then each Right not owned by such person or related parties will entitle its holder to purchase shares of common stock at a purchase price of 50% of the then current market price of the common stock up to a value of $73.33 per Right.
      In the event the Company engages in a merger or other business combination transaction in which the Company is not the surviving corporation or the Company is the surviving corporation but its common stock is changed or exchanged or 50% or more of the Company’s assets or earning power is sold or transferred, each holder of a Right shall have the right to receive, upon exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the surviving company which at the time of the transaction would have a market value of two times the exercise price of the Right.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Earnings per share computation
      Information concerning the calculation of basic and diluted earnings per share is shown below:
                         
        Restated    
    2004   2003   2002
             
    (In thousands, except per share
    amounts)
Basic earnings per share computation:
                       
Net income available to common shareholders
  $ 23,220     $ 11,962     $ 70,720  
Less: Income (loss) from discontinued operations
    (2,915 )     4,412       39,976  
                   
    $ 26,135     $ 7,550     $ 30,744  
                   
Weighted-average common shares outstanding
    41,981       40,903       38,277  
Basic earnings per share from continuing operations
  $ 0.62     $ 0.18     $ 0.80  
                   
Diluted earnings per share computation:
                       
Net income available to common shareholders
  $ 23,220     $ 11,962     $ 70,720  
Less: Income (loss) from discontinued operations
    (2,915 )     4,412       39,976  
Plus: Convertible preferred stock
                1,988  
                   
    $ 26,135     $ 7,550     $ 32,732  
                   
Weighted-average common shares outstanding
    41,981       40,903       38,277  
Assumed conversion of convertible preferred stock
                1,992  
Assumed exercise of stock options
    254       184       740  
                   
Weighted-average diluted shares outstanding
    42,235       41,087       41,009  
                   
Diluted earnings per share from continuing operations
  $ 0.62     $ 0.18     $ 0.80  
                   
      The convertible preferred shares were anti-dilutive for the twelve months ended December 31, 2004 and 2003, and thus not included in the diluted shares outstanding.
9. Acquisitions
      On September 7, 2001, the Company acquired from OM Group, Inc. certain businesses previously owned by dmc2 Degussa Metals Catalysts Cerdec AG (“dmc2”) pursuant to an agreement to purchase certain assets of dmc2, including shares of certain of its subsidiaries. The Company paid $8.5 million in cash for certain purchase price settlements with dmc2 in the first quarter of 2003. In 2004, the Company received approximately $8.5 million in cash from dmc2 as the final settlement of the purchase price, which was recorded as a reduction to goodwill.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Restructuring and cost reduction programs
      The following table summarizes the activities relating to the Company’s reserves for restructuring and cost reduction programs:
                         
        Other    
    Severance   Costs   Total
             
    (Dollars in thousands)
Balance, December 31, 2002
  $ 13,867     $ 132     $ 13,999  
Gross charges (restated)
    10,762       2,210       12,972  
Cash payments (restated)
    (10,832 )     (578 )     (11,410 )
Non-cash write-offs
          (1,583 )     (1,583 )
                   
Balance, December 31, 2003(restated)
    13,797       181       13,978  
Gross charges
    3,497       2,509       6,006  
Cash payments
    (12,397 )     (458 )     (12,855 )
Non-cash write-offs
          (1,256 )     (1,256 )
                   
Balance, December 31, 2004
  $ 4,897     $ 976     $ 5,873  
                   
      Charges for 2004 and 2003 relate to the Company’s ongoing cost reduction and restructuring programs. These programs include employment cost reductions in response to a slowdown in general economic conditions. In addition, charges for 2003 included costs for integration synergy plans relating to the acquisition of certain businesses of dmc2. Total gross charges for the year ended December 31, 2004 were $6.0 million, of which $2.6 million, $2.5 million and $0.9 million were included in the cost of sales, selling and general and administrative expenses, and miscellaneous expense, respectively. Total gross charges for the year ended December 31, 2003, were $13.0 million of which $2.4 million, $10.1 million and $0.5 million were included in cost of sales, selling and general and administrative expenses, and miscellaneous expense, respectively. Total gross charges for the year ended December 31, 2002, were $9.9 million of which $3.4 million and $6.0 million were included in cost of sales, and selling and general and administrative expenses, respectively. No charges for discontinued operations were incurred in 2004 or 2003 and $0.5 million were incurred in 2002.
      The remaining reserve balance for restructuring and cost reduction programs of $5.9 million at December 31, 2004, primarily represents future cash payment made during 2005 except where certain legal or contractual restrictions on the Company’s ability to complete the program exist. The Company will continue to evaluate further steps to reduce costs and improve efficiencies.
11. Discontinued operations
      On September 30, 2002, the Company completed the sale of its Powder Coatings business unit in separate transactions with Rohm and Haas Company and certain of its wholly-owned subsidiaries and certain wholly-owned subsidiaries of Akzo Nobel NV. On June 30, 2003, the Company completed the sale of its Petroleum Additives business to Dover Chemicals and its Specialty Ceramics business to CerCo LLC. For all periods presented, the Powder Coatings, Petroleum Additives and Specialty Ceramics businesses have been reported as discontinued operations.
      There were no sales or earnings from discontinued operations in 2004. Sales from discontinued operations were $30.0 million and $205.2 million for the years ended December 31, 2003 and 2002, respectively. Earnings (loss) before tax from discontinued operations were $(1.5) million and $9.0 million for the years ended December 31, 2003 and 2002, respectively. The related tax expenses (benefits) were $(0.6) million and $2.8 million for the years ended December 31, 2003 and 2002, respectively. The results of discontinued operations include the operating earnings of the discontinued units as well as interest expense, foreign currency

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
gains and losses, other income or expenses and income taxes directly related to, or allocated to, the discontinued operations. Interest was allocated to discontinued operations assuming debt levels approximating the estimated or actual debt reductions upon disposal of the operations, and the Company’s actual weighted average interest rates for the respective years.
      Disposal of discontinued operations resulted in pre-tax losses of $3.8 million for 2004 and pre-tax gains of $7.7 million and $54.0 million for 2003 and 2002, respectively. The related tax expenses (benefits) were $(0.9) million, $2.4 million, and $20.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. Selling prices are subject to certain post-closing adjustments with respect to assets sold to and liabilities assumed by the buyers. In connection with certain divestitures, the Company has continuing obligations with respect to environmental remediation. The Company accrued $1.3 million and $3.1 million as of December 31, 2004 and 2003, respectively, for these matters. These amounts are based on management’s best estimate of the nature and extent of soil and/or groundwater contamination, as well as expected remedial actions as determined by agreements with relevant authorities where applicable, and existing technologies. The gain (loss) on disposal of discontinued operations includes such post-closing and accrual adjustments.
12. Contingent liabilities
      In February 2003, the Company was requested to produce documents in connection with an investigation by the United States Department of Justice into possible antitrust violations in the heat stabilizer industry. Subsequently, the Company was named as defendant in several putative class action lawsuits alleging civil damages and requesting injunctive relief. The Company has no reason to believe that it or any of its employees engaged in any conduct that violated the antitrust laws. The Company is cooperating with the Department of Justice in its investigation and is vigorously defending itself in the putative class action lawsuits. Management does not expect this investigation or the lawsuits to have a material effect on the consolidated financial position, results of operations, or liquidity of the Company.
      In a July 23, 2004, press release, Ferro announced that its Polymer Additives business performance in the second quarter fell short of expectations and that its Audit Committee had engaged independent legal counsel (Jones Day) and an independent public accounting firm (Ernst & Young) to investigate possible inappropriate accounting entries in Ferro’s Polymer Additives business. (See Note 2.) A consolidated putative securities class action lawsuit arising from and related to the July 23, 2004 announcement is currently pending in the United States District Court for the Northern District of Ohio against Ferro, its deceased former Chief Executive Officer, its Chief Financial Officer, and a former Vice President of Ferro. These claims are based on alleged violations of federal securities laws. Ferro and the named executives consider these allegations to be unfounded, are vigorously defending this action and have notified Ferro’s directors and officers liability insurer of the claim. Because this action is in its preliminary stage, the outcome of this litigation cannot be determined at this time.
      On June 10, 2005, a putative class action was filed against Ferro, and certain former and current employees alleging breach of fiduciary duty with respect to ERISA plans. The Company considers these allegations to be unfounded, is vigorously defending this action, and has notified Ferro’s fiduciary liability insurer of the claim. Because this action is in the preliminary stage, the outcome of this litigation cannot be determined at this time.
      In addition, on October 15, 2004, the Belgian Ministry of Economic Affairs’ Commercial Policy Division (the “Ministry”) served on Ferro’s Belgian subsidiary a mandate requiring the production of certain documents related to an alleged cartel among producers of butyl benzyl phthalate (“BBP”) from 1983 to 2002. Subsequently, German and Hungarian authorities initiated their own national investigations in relation to the same allegations. Ferro’s Belgian subsidiary acquired its BBP business from Solutia Europe S.A./ N.V. (“SOLBR”) in August 2000. Ferro promptly notified SOLBR of the Ministry’s actions and requested SOLBR to indemnify and defend Ferro and its Belgian subsidiary with respect to these investigations. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
response to Ferro’s notice, SOLBR exercised its right under the 2000 acquisition agreement to take over the defense and settlement of these matters, subject to reservation of rights. In December 2005, the Hungarian authorities imposed a de minimus fine on Ferro’s Belgian subsidiary, and the Company expects the German and Belgian authorities also to assess fines for the alleged conduct. Management cannot predict the amount of fines that will ultimately be assessed and cannot predict the degree to which SOLBR will indemnify Ferro’s Belgian subsidiary for such fines.
      In October 2005, the Company performed a routine environmental, health and safety audit of its Bridgeport, New Jersey facility. In the course of this audit, internal environmental, health and safety auditors assessed the Company’s compliance with the New Jersey Department of Environmental Protection’s (“NJDEP”) laws and regulations regarding water discharge requirements pursuant to the New Jersey Water Pollution Control Act (“WPCA”). On October 31, 2005, the Company disclosed to the NJDEP that it had identified potential violations of the WPCA and the Company commenced an investigation and committed to report any violations and to undertake any necessary remedial actions. In December 2005, the Company met with the NJDEP to discuss the Company’s investigation and potential settlement of this matter, which would involve the payment of civil administrative penalties. The NJDEP is reviewing the matter and the Company expects the NJDEP to propose a penalty settlement during the first half of 2006. At this time, although management cannot estimate with certainty the ultimate penalty or related costs that may result from this matter, management does not expect such penalties to have a material effect on the consolidated financial position, results of operations or liquidity of the Company.
      There are various other lawsuits and claims pending against the Company and its consolidated subsidiaries. In the opinion of management, the ultimate liabilities, if any, and expenses resulting from such lawsuits and claims will not materially affect the consolidated financial position, results of operations, or cash flows of the Company.
13. Research and development expense
      Amounts expended for development or significant improvement of new and/or existing products, services and techniques for continuing operations were $42.4 million, $40.2 million and $33.8 million in 2004, 2003 and 2002, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. Retirement benefits
      Information concerning the pension and other post-retirement benefit plans of the Company is as follows:
                                 
    Pension Benefits   Other Benefits
         
        Restated*    
    2004   2003   2004   2003
                 
    (Dollars in thousands)
Change in benefit obligation:
                               
Benefit obligation at beginning of year
  $ 436,667     $ 370,749     $ 56,283     $ 57,727  
Service cost
    14,610       12,995       902       888  
Interest cost
    25,375       24,105       3,361       3,979  
Amendments
    126       102              
Effect of curtailment
    (137 )     (340 )            
Effect of settlements
    (902 )     (3,912 )            
Plan participants’ contributions
    599       608              
Special termination benefits
          996              
Benefits paid
    (23,052 )     (19,164 )     (3,518 )     (3,608 )
Acquisitions
    (532 )     18              
Actuarial loss (gain)
    23,290       28,462       (4,017 )     (2,703 )
Exchange rate effect
    12,704       22,048              
                         
Benefit obligation at end of year
  $ 488,748     $ 436,667     $ 53,011     $ 56,283  
                         
Accumulated benefit obligation at end of year
  $ 460,854     $ 411,776     $ 53,011     $ 56,283  
Change in plan assets:
                               
Fair value of plan assets at beginning of year
  $ 292,383     $ 239,250     $     $  
Actual return plan assets
    23,320       26,638              
Employer contributions
    11,492       33,187       3,518       3,608  
Plan participants’ contributions
    599       608              
Benefits paid
    (23,052 )     (19,164 )     (3,518 )     (3,608 )
Effect of settlements
    (902 )     (3,912 )            
Acquisitions
    (532 )     18              
Exchange rate effect
    8,799       15,758              
                         
Fair value of plan assets at end of year
  $ 312,107     $ 292,383     $     $  
                         
Reconciliation of accrued costs:
                               
Funded status
  $ (176,641 )   $ (144,284 )   $ (53,011 )   $ (56,283 )
Unrecognized net actuarial loss (gain)
    123,636       105,937       (8,796 )     (4,920 )
Unrecognized prior service cost (benefit)
    1,968       1,514       (4,839 )     (5,397 )
                         
Net amount recognized
  $ (51,037 )   $ (36,833 )   $ (66,646 )   $ (66,600 )
                         
Amounts recognized in the statement of financial position consist of:
                               
Prepaid benefit cost
  $ 17     $ 4,312     $     $  
Accrued benefit liability
    (151,535 )     (128,513 )     (66,646 )     (66,600 )
Intangible assets
    1,635       2,046              
Accumulated other comprehensive income
    98,846       85,322              
                         
Net amount recognized
  $ (51,037 )   $ (36,833 )   $ (66,646 )   $ (66,600 )
                         
Weighted-average assumptions as of December 31:
                               
Discount rate
    5.63 %     5.97 %     6.10 %     6.25 %
Expected return on plan assets
    7.51 %     8.01 %     N/A       N/A  
Rate of compensation increase
    3.25 %     2.80 %     N/A       N/A  
 
2003 amounts were restated to include the benefit plans of a foreign subsidiary and to correct the classification of data used in actuarial calculations in another foreign subsidiary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                 
        Pension Plans with
    Pension Plans with   Accumulated Benefit
    Benefit Obligations in   Obligations in
    Excess of Plan Assets   Excess of Plan Assets
         
        Restated       Restated
    2004   2003   2004   2003
                 
    (Dollars in thousands)
Benefit obligations
  $ 486,734     $ 369,211     $ 444,999     $ 345,690  
Plan assets
    310,018       222,259       295,894       220,364  
      For measurement purposes, the assumed increase in the cost of covered pre-Medicare health care benefits was 10.7% for 2004, gradually decreasing to 5.1% for 2013 and later years, and the assumed increase in the cost of covered post-Medicare health care benefits was 11.2% for 2004, gradually decreasing to 5.2% for 2013 and later years.
      In December 2003 the new Medicare Prescription Drug, Improvement and Modernization Act became law and will provide a basic subsidy of 28% of certain retiree health care beneficiaries’ drug costs if the benefit is at least actuarially equivalent to the Medicare benefit. See Note 1 regarding impact of adoption during 2004.
                                                 
    Pension Benefits   Other Benefits
         
        Restated        
    2004   2003   2002   2004   2003   2002
                         
    (Dollars in thousands)
Components of net periodic cost:
                                               
Service cost
  $ 14,610     $ 12,995     $ 13,539     $ 902     $ 888     $ 953  
Interest cost
    25,375       24,105       22,395       3,361       3,979       3,986  
Expected return on plan assets
    (21,810 )     (20,194 )     (20,847 )                  
Amortization of prior service cost
    80       28       220       (558 )     (558 )     (727 )
Net amortization and deferral
    6,130       4,594       580       (97 )           (130 )
Curtailment and settlement effects
    (66 )     1,684       (2,324 )                  
                                     
Net periodic benefit cost
  $ 24,319     $ 23,212     $ 13,563     $ 3,608     $ 4,309     $ 4,082  
                                     
      During 2002, the Company sold its Powder Coatings business unit. The impact on the Company’s defined-benefit pension plans was to decrease the projected benefit obligation by $2.0 million and $3.5 million for settlements and curtailments, respectively. In connection with the Company’s divestment of the Petroleum Additives and Specialty Ceramics businesses during 2003, a curtailment expense of $0.7 million was recognized as part of the gain on disposal of discontinued operations. Additionally, as a result of a cost reduction and restructuring program implemented in 2003 at an international subsidiary, a $1.0 million expense was recorded for special termination benefits.
      A one-percentage point change in the assumed health care cost trend rates would have the following effect:
                 
    1-Percentage   1-Percentage
    Point Increase   Point Decrease
         
    (Dollars in thousands)
Effect on total of service and interest cost component
  $ 247     $ (193 )
Effect on post-retirement benefit obligation
  $ 3,347     $ (2,281 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company contributed approximately $50.2 million to its pension and other post-retirement benefit plans in 2005.
      The expected return on assets at the beginning of the year is calculated as the weighted-average of the expected return for the target asset allocations of the principal asset categories held by each plan. In determining the expected return, the Company considers both historical performance and an estimate of future long-term rates of return. The Company consults with and considers the opinion of its actuaries in developing appropriate return assumptions.
      The measurement dates used to determine pension and other postretirement benefit measurements are September 30 for the United States plans and December 31 for the international plans. The weighted average asset allocations of the pension benefit plans at their measurement dates were:
                 
    2004   2003
         
Debt Securities
    40 %     45 %
Equity Securities
    57       54  
Other
    3       1  
             
Total
    100 %     100 %
             
      The Company establishes asset allocation ranges and targets for each major category of plan assets. The risks inherent in the various asset categories are considered along with the benefit obligations, financial status and short-term liquidity needs of the fund. Listed below are the range of percentages and the target percentage for each asset category on a weighted-average basis:
                         
    Minimum   Target   Maximum
             
Debt securities
    37 %     46 %     48 %
Equity securities
    50 %     54 %     65 %
      The Company’s pension plans held 424,651 shares of the Company’s common stock with a market value of $9.8 million at December 31, 2004, and received $0.2 million of dividends from the Company’s common stock in 2004.
      At December 31, 2004, retiree benefit payments, which reflect expected future service, were anticipated to be paid as follows:
                         
        Other Benefits   Other Benefits
    Pension   Before   After
    Benefits   Medicare Subsidy   Medicare Subsidy
             
    (Dollars in thousands)
2005
  $ 20,989     $ 4,527     $ 4,527  
2006
    21,888       4,656       4,335  
2007
    22,168       4,665       4,331  
2008
    23,601       4,738       4,397  
2009
    24,942       4,728       4,382  
2010-2014
    146,411       23,211       21,526  
      The Company also sponsors supplemental defined benefit retirement plans for certain employees and for these plans expensed $2.1 million, $2.1 million and $2.1 million in 2004, 2003 and 2002, respectively.
      The parent company and certain subsidiaries have defined contribution retirement plans covering certain employees. The Company’s contributions are determined by the terms of the plans subject to the limitations that they shall not exceed the amounts deductible for income taxes. Generally, benefits under these plans vest gradually over a period of five years from date of employment and are based on the employee’s contributions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The expense applicable to these plans was $5.2 million, $5.6 million, and $5.7 million in 2004, 2003 and 2002, respectively.
      In February 2006, the Company announced changes to certain of its postretirement benefit plans. See additional information regarding this matter in Note 22.
15. Income taxes
      Income tax expense (benefit) from continuing operations is comprised of the following components:
                           
        Restated    
    2004   2003   2002
             
    (Dollars in thousands)
Current:
                       
 
U.S. federal
  $ 2,151     $ (2,611 )   $ (4,868 )
 
Foreign
    11,484       13,543       15,537  
 
State and local
    194       (328 )     (1,306 )
                   
      13,829       10,604       9,363  
Deferred:
                       
 
U.S. federal
    (3,650 )     (3,529 )     4,254  
 
Foreign
    (6,780 )     (4,157 )     (605 )
 
State and local
    (47 )     (540 )     1,522  
                   
      (10,477 )     (8,226 )     5,171  
                   
Total income tax
  $ 3,352     $ 2,378     $ 14,534  
                   
      In addition to the 2004 income tax expense of $3.4 million, certain net tax benefits of $7.1 million were allocated directly to shareholders’ equity.
      The above taxes are based on earnings (losses) from continuing operations before income taxes. These earnings (losses) aggregated $(0.1) million, $(14.7) million and $3.9 million for domestic operations, and $31.3 million, $26.7 million and $43.8 million for foreign operations in 2004, 2003 and 2002, respectively.
      A reconciliation of the statutory federal income tax rate and the effective tax rate follows:
                         
    Restated
     
    2004   2003   2002
             
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
Foreign tax rate difference
    (9.1 )     3.9       0.1  
Extraterritorial income exclusion
    (4.4 )     (11.9 )     (3.5 )
Reversal of valuation allowances
    (9.9 )     (14.2 )      
ESOP dividend tax benefit
    (2.5 )     (8.0 )     (2.2 )
Net adjustment of prior year accrual
    (6.6 )     (0.2 )     (3.3 )
U.S. tax cost of foreign dividends
    4.2       10.4       2.9  
Miscellaneous
    4.0       4.8       1.5  
                   
Effective tax rate(%)
    10.7 %     19.8 %     30.5 %
                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The components of deferred tax assets and liabilities at December 31 were:
                   
        Restated
    2004   2003
         
    (Dollars in thousands)
Deferred tax assets:
               
 
Pension and other benefit program
  $ 81,194     $ 75,162  
 
Accrued liabilities
    8,212       9,325  
 
Net operating loss carryforwards
    25,527       22,771  
 
Inventories
    3,525       5,061  
 
Foreign tax credit carryforwards
    17,428       15,925  
 
Reserve for doubtful accounts
    4,341       4,507  
 
Other credit carryforwards
    2,394       450  
 
State and local
    3,287       3,139  
 
Other
    6,870       5,703  
             
Total deferred tax assets
    152,778       142,043  
Deferred tax liabilities:
               
 
Property and equipment — depreciation and amortization
    69,327       63,800  
             
Net deferred tax asset before valuation allowance
    83,451       78,243  
Valuation allowance
    (8,163 )     (14,070 )
             
Net deferred tax assets
  $ 75,288     $ 64,173  
             
      At December 31, 2004, the Company has deferred tax assets related to foreign operating loss carryforwards of $25.6 million, some of which can be carried forward indefinitely and others that expire in 1 to 10 years. A valuation allowance of $8.2 million has been established due to the uncertainty of realizing certain foreign operating loss carryforwards. $2.6 million of this total represents an adjustment to goodwill related to purchase accounting. The recognition of any future tax benefits resulting from the reduction of $1.6 million of the valuation allowance will reduce any goodwill and other noncurrent intangibles resulting from the dmc2 acquisition that remain at the time of reduction. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income such that the net deferred tax assets will be realized.
      At December 31, 2004, the Company has deferred tax assets related to foreign tax credit carryforwards of $17.4 million for tax purposes, which can be carried forward for ten years. Approximately half expire in 2012 and approximately half in 2013. In management’s opinion, it is more likely than not that the credits will be utilized before the expiration period.
      Of the total net deferred tax assets, $45.6 million and $45.4 million were classified as other current assets, $46.7 million and $36.2 million as other assets, $1.7 million and $2.3 million as current liabilities, and $15.3 million and $15.1 million as other liabilities at December 31, 2004 and 2003, respectively.
      Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $125.5 million. Deferred income taxes are not provided on these earnings as it is intended that these earnings be indefinitely invested in these entities.
16. Reporting for segments
      During the restatement process, the Company re-evaluated its aggregation of operating units into reportable segments under the provisions of FASB’s Statement No. 131. As a result, the former two reportable

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
segments are now being presented as six reportable segments: Performance Coatings, Electronic Materials, Color and Glass Performance Materials, Polymer Additives, Specialty Plastics and Other, which is comprised of two business units which do not meet the quantitative thresholds for separate disclosure. The Company uses the criteria outlined in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” to identify segments which management has concluded are its seven major business units. Further, the Company has concluded that it is appropriate to aggregate its Tile and Porcelain Enamel operating segments into one reportable segment, Performance Coatings, based on their similar economic and operating characteristics.
      The accounting policies of the segments are consistent with those described for the Company’s consolidated financial statements in the summary of significant accounting policies (see Note 1). The Company measures segment income for reporting purposes as net operating profit before interest and taxes. Net operating profit also excludes unallocated corporate expenses and charges associated with employment cost reduction programs and certain integration costs related to the acquisition of certain businesses of dmc2.
      Net sales to external customers by segment (inter-segment sales are not material):
                         
        Restated    
    2004   2003   2002
             
    (Dollars in millions)
Performance Coatings
  $ 466.5     $ 425.1     $ 410.8  
Electronic Materials
    388.3       338.3       284.3  
Color and Glass Performance Materials
    355.9       305.4       291.5  
Polymer Additives
    280.2       240.4       247.1  
Specialty Plastics
    265.0       236.0       231.7  
Other
    87.8       70.4       63.1  
                   
Total
  $ 1,843.7     $ 1,615.6     $ 1,528.5  
                   
      Income and reconciliation to income (loss) before taxes by segment:
                         
        Restated    
    2004   2003   2002
             
    (Dollars in millions)
Performance Coatings
  $ 23.9     $ 26.2     $ 35.1  
Electronic Materials
    33.2       21.0       18.1  
Color and Glass Performance Materials
    37.1       41.7       43.1  
Polymer Additives
    (.9 )     2.5       19.3  
Specialty Plastics
    9.6       12.8       15.4  
Other
    3.6       3.1       (.2 )
                   
Total
    106.5       107.3       130.8  
Unallocated expenses
    (36.8 )     (50.1 )     (29.1 )
Interest expense
    (42.0 )     (43.1 )     (41.8 )
Interest earned
    .9       .9       1.0  
Foreign currency
    (3.0 )     (1.2 )     (0.4 )
Gain on sale of businesses
    5.2             .5  
Miscellaneous — net
    .4       (1.8 )     (13.3 )
                   
Income before taxes from continuing operations
  $ 31.2     $ 12.0     $ 47.7  
                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Depreciation and amortization by segment:
                         
        Restated    
    2004   2003   2002
             
    (Dollars in millions)
Performance Coatings
  $ 13.3     $ 12.4     $ 12.3  
Electronic Materials
    19.8       19.7       17.3  
Color and Glass Performance Materials
    11.5       11.2       9.6  
Polymer Additives
    10.6       8.9       7.4  
Specialty Plastics
    4.5       5.2       5.5  
Other
    5.1       5.4       4.7  
                   
Segment depreciation and amortization
    64.8       62.8       56.8  
Other
    10.2       13.8       7.5  
                   
Total consolidated
  $ 75.0     $ 76.6     $ 64.3  
                   
      Total assets at December 31 by segment:
                 
        Restated
    2004   2003
         
    (Dollars in millions)
Performance Coatings
  $ 347.7     $ 351.7  
Electronic Materials
    400.9       408.8  
Color and Glass Performance Materials
    275.3       261.5  
Polymer Additivies
    243.6       235.9  
Specialty Plastics
    105.9       102.3  
Other
    113.6       102.2  
             
Segment assets
    1,487.0       1,462.4  
Other assets
    246.4       268.9  
             
Total consolidated
  $ 1,733.4     $ 1,731.3  
             
      Segment assets primarily consist of trade receivables, inventories, intangibles, and property, plant and equipment, net of applicable reserves. Other assets include cash, deferred taxes, pension assets, and other items.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Intangible assets at December 31 by segment:
                     
        Restated
    2004   2003
         
    (Dollars in
    millions)
Performance Coatings Goodwill
  $ 46.7     $ 47.8  
 
Other intangibles
    .3       .3  
 
Accumulated amortization
    (.4 )     (.4 )
             
   
Total Coatings Materials
    46.6       47.7  
Electronic Materials Goodwill
    162.3       164.6  
 
Other intangibles
    21.9       21.9  
 
Accumulated amortization
    (15.8 )     (15.3 )
             
   
Total Electronic Materials
    168.4       171.2  
Color and Glass Performance Materials
               
 
Goodwill
    65.0       69.3  
 
Other intangibles
    4.4       3.4  
 
Accumulated amortization
    (2.4 )     (1.9 )
             
   
Total Color and Glass Materials
    67.0       70.8  
Polymer Additivies
               
 
Goodwill
    39.9       39.6  
 
Other intangibles
    42.4       42.4  
 
Accumulated amortization
    (9.0 )     (9.0 )
             
   
Total Additives Materials
    73.3       73.0  
Specialty Plastics Goodwill
    20.8       20.8  
 
Other intangibles
           
 
Accumulated amortization
    (3.8 )     (3.8 )
             
   
Total Plastics Materials
    17.0       17.0  
Other
               
 
Goodwill
    41.4       40.6  
 
Other intangibles
           
 
Accumulated amortization
    (1.2 )     (1.2 )
             
   
Total Other Materials
    40.2       39.4  
             
Net intangible assets
  $ 412.5     $ 419.1  
             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Expenditures for long-lived assets (including acquisitions) by segment:
                         
        Restated    
    2004   2003   2002
             
    (Dollars in millions)
Performance Coatings
  $ 12.9     $ 8.8     $ 13.5  
Electronic Materials
    3.6       4.8       6.2  
Color and Glass Performance Materials
    4.8       7.5       5.6  
Polymer Additives
    4.7       5.1       3.0  
Specialty Plastics
    3.2       2.7       1.9  
Other
    9.9       4.9       3.1  
                   
Total Segments
    39.1       33.8       33.3  
Other
          2.3       5.2  
                   
Total Consolidated
  $ 39.1     $ 36.1     $ 38.5  
                   
      Geographic revenues are based on the region in which the customer invoice is generated. The United States of America is the single largest country for customer sales. No other single country represents greater than 10% of the Company’s consolidated sales. Net sales by geographic region:
                         
        Restated    
    2004   2003   2002
             
    (Dollars in millions)
United States
  $ 900.0     $ 776.4     $ 758.6  
International
    943.7       839.2       769.9  
                   
Total
  $ 1,843.7     $ 1,615.6     $ 1,528.5  
                   
      Long-lived assets by geographic region at December 31:
                         
        Restated    
    2004   2003   2002
             
    (Dollars in millions)
United States
  $ 626.8     $ 649.3     $ 667.6  
International
    384.4       386.4       331.3  
                   
Total
  $ 1,011.2     $ 1,035.7     $ 998.9  
                   
      Except for the United States of America, no single country has greater than 10% of consolidated long-lived assets.
17. Financial instruments
      The carrying amounts of cash and cash equivalents, trade receivables, other current assets, accounts payable and amounts included in investments and accruals meeting the definition of a financial instrument approximate fair value due to the short period to maturity of the instruments.
      The Company manages exposures to changing foreign currency exchange rates principally through the purchase of put options on currencies and forward foreign exchange contracts. The options and forwards are marked-to-market at the end of each reporting period, with the corresponding gain or loss included in the consolidated statement of income. The Company does not engage in speculative transactions for trading purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Put options are purchased to offset the exposure of foreign currency-denominated earnings to a depreciation in the value of the local currency to the U.S. dollar. The Company’s primary foreign currency put option market is the Euro. The maturity of the Company’s put option contracts is generally under one year. At December 31, 2004, no options were outstanding. At December 31, 2003, the face value or notional amount of all outstanding currency options was $19.0 million. If liquidated at December 31, 2003, these options would have produced a cash amount of $0.1 million versus an unamortized cost of $0.3 million.
      Forward contracts are entered into to manage the impact of currency fluctuations on transaction exposures. The maturity of such foreign currency forward contracts is consistent with the underlying exposure, generally less than one year. At December 31, 2004, the notional amount and fair market value of these forward contracts was $116.7 million and $(0.7) million, respectively. At December 31, 2003, the notional amount and fair market value of these forward contracts was $72.3 million and $(0.9) million, respectively. The maturity dates of the forward contracts are generally less than one year.
      All forward contract and put option activity is executed with major reputable multinational financial institutions. Accordingly, the Company does not anticipate counter-party default.
      The Company purchases portions of its natural gas requirements under fixed price contracts, which in certain circumstances, although unlikely because committed quantities are below expected usage, could result in the Company settling its obligations under these contracts in cash at prevailing market prices. In compliance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” the Company marks these contracts to fair market value and recognizes the resulting gains or losses as miscellaneous income or expense, respectively. The fair value of the contracts for natural gas was $(0.9) million and $0.6 million at December 31, 2004 and 2003, respectively.
      The Company consigns, from various financial institutions, precious metals (primarily for silver, gold, platinum and palladium, collectively “metals”) used in the production of certain products for customers. Under these consignment arrangements, the financial institutions provide the Company with metals for a specified period of one year or less in duration, for which the Company pays a fee. Under these arrangements, the financial institutions own the metals, and accordingly, the Company does not report these consigned materials as part of its inventory on its consolidated balance sheet. These agreements are cancelable by either party at the end of each consignment period, however, because the Company has access to a number of consignment arrangements with available capacity, consignment needs can be shifted among the other participating institutions. In certain cases, these other participating institutions may require cash deposits to provide additional collateral beyond the underlying precious metals. In the fourth quarter of 2005, due to the Company’s delay in filing consolidated financial statements, certain financial institutions began to require the Company to make deposits. At March 31, 2006, the Company made deposits of $79.0 million. The fair value of the Company’s rights and obligations under these arrangements at December 31, 2004 and 2003 is not material.
      Cost of sales related to the consignment arrangements’ fees were $2.4 million for 2004, $1.6 million for 2003, and $2.0 million for 2002. At December 31, 2004 and 2003, the Company had 9.4 million and 8.3 million troy ounces of metals (primarily silver) on consignment for periods of less than one year with market values of $106.4 million and $94.7 million, respectively.
      The consignment arrangements allow for the Company to replace the metals used in the manufacturing process by obtaining replacement quantities on the spot market and to charge the customer for the cost of the replacement quantities (i.e., the price charged to the customer is largely a pass through). In certain circumstances, customers request at the time an order is placed, a fixed price for the metals cost pass through. In these instances, the Company will enter into a fixed price sales contract to establish the cost for the customer at the estimated future delivery date. At the same time, the Company enters into a forward purchase

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
arrangement with a metal supplier to completely cover the value of the fixed price sales contract. The fair value of the fixed price contracts for future metal consignment replenishments are approximately $1.7 million and $1.3 million at December 31, 2004 and 2003, respectively. In accordance with FAS No. 133, the market value of these fixed price contracts is analyzed quarterly. Due to the short duration of the contracts (generally three months or less), the difference between the contract values and market values at any financial reporting date is not material.
18. Leases
      Rent expense for all operating leases was approximately $13.9 million in 2004, $10.7 million in 2003, and $15.6 million in 2002. Amortization of assets recorded under capital leases is recorded as depreciation expense.
      The Company has a number of capital lease arrangements relating primarily to buildings and production equipment. Assets held under capitalized leases and included in property, plant and equipment at December 31 are as follows:
                   
        Restated
    2004   2003
         
    (Dollars in thousands)
Gross Amounts Capitalized
               
 
Buildings
  $ 3,100     $ 3,100  
 
Equipment
    9,398       8,664  
             
      12,498       11,764  
Accumulated Amortization
               
 
Buildings
    (1,356 )     (1,279 )
 
Equipment
    (4,915 )     (3,844 )
             
      (6,271 )     (5,123 )
             
Net Capital Lease Assets
  $ 6,227     $ 6,641  
             
      At December 31, 2004, future minimum lease payments under all non-cancelable leases are as follows:
                 
    Capitalized   Operating
    Leases   Leases
         
    (Dollars in thousands)
2005
  $ 1,632       9,511  
2006
    1,423       6,093  
2007
    1,209       3,817  
2008
    1,145       2,145  
2009
    1,115       1,310  
Thereafter
    6,774       4,900  
             
Total minimum lease payments
    13,298     $ 27,776  
             
Less amount representing executory costs
    30          
             
Net minimum lease payments
    13,268          
Less amount representing imputed interest
    5,107          
             
Present value of net minimum lease payments
    8,161          
Less current portion
    982          
             
Long-term obligations at December 31, 2004
  $ 7,179          
             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Intangible Assets
                     
        December 31,
         
    Estimated       Restated
    Economic Life   2004   2003
             
        (Dollars in millions)
Goodwill
  Indefinite   $ 432.4     $ 438.7  
Patents
  9-15 years     5.9       5.9  
Non-compete
  3-5 years     3.0       3.0  
Other
  1 year-indefinite     3.7       3.0  
                 
Total gross intangible assets
        445.0       450.6  
Accumulated amortization
        32.5       31.5  
                 
Net intangible assets
      $ 412.5     $ 419.1  
                 
      Amortization expense from continuing operations was $1.0 million, $1.7 million and $0.6 million for the years ended December 31, 2004, 2003, and 2002, respectively.
20. Property, plant and equipment
                 
    December 31,
     
        Restated
    2004   2003
         
    (Dollars in millions)
Land
  $ 43.7     $ 43.3  
Buildings
    274.3       258.9  
Machinery and Equipment
    842.6       805.3  
Leased property under capitalized leases
    12.5       11.8  
             
Total Property, Plant and Equipment
    1,173.1       1,119.3  
Total Accumulated Depreciation
    574.4       502.6  
             
Net Property, Plant and Equipment
  $ 598.7     $ 616.7  
             
      Depreciation expense from continuing operations was $67.8 million, $66.4 million, and $61.0 million for the years ended December 31, 2004, 2003, and 2002, respectively.
21. Related Party Transactions
      Ferro had the following transactions with its unconsolidated affiliates:
                         
    2004   2003   2002
             
    (Dollars in thousands)
Sales
  $ 19,354     $ 5,456     $ 4,829  
Purchases
    6,374       2,229       1,493  
Commissions/ Royalties received
    352       335       320  
Dividends/ Interest received
    147             333  
      Ferro purchased raw materials from a company whose controlling interest is held by a company whose chief executive officer currently serves on the Company’s Board of Directors. These purchases amounted to $14.3 million in 2004, $7.0 million in 2003 and $1.2 million in 2002 and were made at arm’s-length terms. Payables related to these purchase were $0.0 million and $0.7 million at December 31, 2004 and 2003, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      At December 31, 2004 and 2003, the Company had a 2.4 million guarantee outstanding, expiring February 21, 2008, to support the borrowing facilities of an unconsolidated affiliate, and also had $2.8 million due to Ferro Finance Corporation.
22. Subsequent Events
      In February 2006, the Company announced that it was freezing the Ferro Corporation Retirement Plan effective March 31, 2006, and would be providing additional contributions to the U.S. defined contribution plan beginning April 1, 2006, and was limiting eligibility for U.S. retiree medical benefits. The Company estimates that the changes in these retirement plans will reduce expenses by $30 to $40 million over the upcoming five years.
      In the second quarter of 2005, the Company’s senior credit rating was downgraded to Ba1 by Moody’s and BB by S&P. In March 2006, Moody’s further lowered its rating to B1 and then withdrew its ratings. Moody’s cited the absence of audited financials for a sustained period of time and the concern that there may be additional delays in receiving audited financial statements for 2005. Moody’s also noted that the Company’s business profile is consistent with a rating in the Ba category, according to Moody’s rating methodology for the chemical industry. Moody’s indicated it could reassign ratings to the Company once it has filed audited financials for 2004 and 2005 with the Securities and Exchange Commission. Although there are negative implications to this action, the Company anticipates that it will continue to have access to sufficient liquidity, albeit at a higher borrowing costs.
      Moody’s rating downgrade triggered the springing lien in the Company’s revolving credit facility. (See related discussion in Note 4.) Under the terms of the agreement the lenders will be entitled to security interests in the Company’s and its domestic material subsidiaries’ tangible and intangible assets (with the exception of the receivables sold as part of the Company’s asset securitization program) and the pledge of 100% of the stock of the Company’s domestic material subsidiaries and 65% of the stock of the Company’s foreign material subsidiaries. Under the terms of the Company’s senior unsecured notes and debentures, the holders of the Company’s notes will be equally secured with the revolving credit lenders with security interests in the Company’s principal domestic manufacturing facilities and the pledge of 100% of the stock of the Company’s domestic subsidiaries. The Company obtained a waiver from the lenders in the revolving credit facility to extend reporting requirements through June 2006 for the 2004 period and through the expiration of the program for the 2005 and 2006 periods. The extension will give the Company time to put in place the New Credit Facility as described below. In addition, the Company expects to continue its current $100 million asset securitization facility.
      On March 24, 2006, the Company accepted a commitment from a syndicate of lenders to underwrite a $700 million credit facility (the “New Credit Facility”). The New Credit Facility will provide for a five year, $300 million multi-currency senior revolving credit facility and a six year, $400 million term loan facility. The New Credit Facility will be used to replace the existing credit facility and for working capital and general corporate purposes.
      The New Credit Facility will bear interest at a rate equal to, at the Company’s option, either (1) LIBOR or (2) the Alternate Base Rate (“ABR”) which is the higher of the Prime Rate and the Federal Funds Effective Rate plus 0.5%; plus, in each case, applicable margins based on the Company’s index debt rating. The New Credit Facility will be secured by substantially all of the Company’s assets, including the assets and 100% of the shares of the Company’s material domestic subsidiaries and 65% of the of the shares of the Company’s material foreign subsidiaries, excluding trade receivables and related collateral sold pursuant to the Company’s accounts receivable securitization program (see Note 4). The New Credit Facility will contain customary operating covenants that limit its ability to engage in certain activities, including limitations on additional loans and investments; prepayments, redemptions and repurchases of debt; mergers, acquisitions

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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and asset sales; and capital expenditures. The Company will also be subject to customary financial covenants including a leverage ratio and a fixed charge coverage ratio.
      The New Credit Facility is subject to, among other conditions, the negotiation, execution and delivery of definitive documentation with respect to the New Credit Facility; completion of lender’s due diligence procedures; the absence of a disruption or adverse change in the financial, banking or capital markets; the nonoccurrence of events that have a material adverse effect on the Company’s business (the restatement of consolidated financial statements or delisting of shares will not be considered a material adverse effect); and compliance with certain financial measures at the closing date.
      After the close of business on March 30, 2006, the Company received a notice of default from a holder of the 7.375% Debentures due 2015 (the “Notes”) of which $25 million is outstanding. The notice recites the Company’s failure to timely file with the Securities and Exchange Commission and the Trustee of the Notes required Form 10-Qs and Form 10-Ks for the respective periods ending September 30, 2004 through December 31, 2005. Under the terms of the Indenture governing the Notes, the Company has a 90-day period in which to cure the failure to file its reports or obtain a waiver. If the Company does not cure or obtain a waiver within the 90-day period, an event of default will have occurred and the holders of the Notes may declare the $25 million of principal immediately due and payable. In addition, under the Indenture, the resulting event of default would trigger a default for all other series of debt issued under the indenture as well as under the agreements governing most of the Company’s other outstanding indebtedness. Whether or not such default is triggered, the Company intends to enter into the New Credit Facility and continue its asset securitization program so that it is in a position to be able to repay any indebtedness that may be accelerated as a result of a default and prepay or redeem such other indebtedness as the circumstances may warrant.
      On March 31, 2006, the Company’s senior credit rating was downgraded from BB to B+ by S&P. S&P cited delays in filing, a recent absence of transparency with regard to current results and near term prospects and a diminished business profit that has resulted in weak operating margins and earnings.

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Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      There are no such changes or disagreements.
Item 9A — Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
      Pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2004. Based on that evaluation, and the material weaknesses noted below, management concluded that the disclosure controls and procedures were not effective as of December 31, 2004.
      Procedures were undertaken in order for management to conclude that reasonable assurance exists regarding the reliability of the consolidated financial statements contained in this filing. Accordingly, management believes that the consolidated financial statements included in this Form 10-K present fairly, in all material respects, the financial position, results of operations and cash flows for the periods presented.
(b) Management’s Report on Internal Control over Financial Reporting
      The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is identified in Exchange Act Rule 13a-15(f). The Company’s internal control system is a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
      The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with the authorization of its management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its consolidated financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, the Company used the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published in its report entitled Internal Control-Integrated Framework. As a result of its assessment, management identified material weaknesses in the Company’s internal control over financial reporting. Based on the weaknesses identified as described below, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2004. The independent registered public accounting firm that audited the Company’s consolidated financial statements has issued an audit report on management’s assessment of, and the effectiveness of, the Company’s internal control over financial reporting as of December 31, 2004. This report appears in Item 9A(e).
      A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

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      As a result of its assessment, the Company has identified the following material weaknesses in internal control over financial reporting as of December 31, 2004:
      1. Inadequately trained and insufficient numbers of accounting personnel coupled with insufficient accounting policies and procedures. A number of our finance and accounting personnel were inadequately trained and lacked the appropriate expertise in U.S. GAAP to prepare financial information for inclusion in the Company’s consolidated financial statements. Also, staffing levels in the accounting functions in certain locations were insufficient given the complexity of the various accounting systems and the Company’s geographic dispersion. Furthermore, our accounting policies and procedures documentation was either insufficiently prescriptive or insufficiently comprehensive to ensure proper and consistent application of U.S. GAAP throughout the organization. This resulted in errors in accounting for employee benefit obligations, environmental contingencies, leases, derivatives, repair and maintenance expense recognition, and income taxes. It also resulted in failure to properly record impairment of property, plant and equipment and other long-term assets, failure to properly capitalize variances from its inventory standard cost system, incorrect calculations of inventory valuation and shrinkage reserves, improper revenue recognition that was not in accordance with agreed upon sales terms, improper recognition of earned customer rebates, use of incorrect exchange rates for foreign currency translation during consolidation in accordance with U.S. GAAP, and an incorrect calculation being used in the Company’s goodwill impairment analysis.
      This material weakness resulted in adjustments to and restatements of the consolidated financial statements, with the exception of the goodwill impairment analysis, which resulted in a more than remote likelihood that a material misstatement of our consolidated financial statements would not be prevented or detected. This material weakness was also a contributing factor to the following material weaknesses:
      2. Non-adherence to policies and procedures associated with the financial statement reporting process. Specifically, policies and procedures to ensure accurate, reliable and timely preparation and presentation of consolidated financial statements and related footnote disclosures were not consistently followed. As a result, adjustments were required in the consolidated financial statements and related footnote disclosures.
      3. Failure to consistently reconcile and perform timely reviews of accounting reconciliations, data files and journal entries. Specifically, deficiencies were noted in the following areas: a) inadequate supporting documentation for, and inconsistent performance of, management approval of post-closing and nonstandard journal entries in many business units; b) inconsistent performance of account reconciliations and analysis for all significant accounts on a timely basis; c) inconsistent review of account reconciliations; and d) inconsistent review of changes to sales price data files. As a result, adjustments and restatements were required to correct inventory, accrued liabilities, accounts payable, accounts receivable, intercompany accounts, and related income statement accounts in the consolidated financial statements.
      4. Failure to properly identify and ensure receipt of agreements for review by accounting personnel. Specifically, the Company did not have appropriate controls in place to ensure that agreements with financial reporting implications are received by accounting personnel for their review. As a result, the Company improperly accounted for derivative natural gas supply contracts and precious metals arrangement contracts. Also, certain raw material supply agreements were improperly treated as consignment arrangements. These resulted in adjustments to and restatements of the consolidated financial statements.
      5. Failure to consistently review the calculations and accounting for amounts due to employees under various compensation plans. Specifically, certain business units had insufficient controls to ensure that amounts recorded under incentive compensation programs were properly calculated in accordance with established policies. In addition, reviews by corporate personnel to ensure adherence to those policies were not consistently performed. Furthermore, controls to ensure that recorded amounts associated with defined benefit pension plans were properly calculated or reviewed were not consistently performed. As a result, adjustments and restatements were required to correct accrued liabilities and related income statement accounts in the consolidated financial statements.

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(c) Changes in Internal Control over Financial Reporting and Other Remediation
      Changes in the Company’