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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-10788
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333696
(State of Incorporation) (I.R.S. Employer
Identification No.)
818 WASHINGTON STREET
WILMINGTON, DELAWARE 19801
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 429-8554
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME ON EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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COMMISSION FILE NUMBER 33-44862
ISP CHEMICALS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3416260
(State of Incorporation) (I.R.S. Employer
Identification No.)
RT. 95 INDUSTRIAL AREA, P.O. BOX 37
CALVERT CITY, KENTUCKY 42029
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (502) 395-4165
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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COMMISSION FILE NUMBER 33-44862-01
ISP TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333795
(State of Incorporation) (I.R.S. Employer
Identification No.)
STATE HIGHWAY 146 & INDUSTRIAL ROAD
TEXAS CITY, TEXAS 77590
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 945-3411
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of International Specialty Products Inc., 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.__
As of March 21, 1997, 96,521,481 shares of common stock of International
Specialty Products Inc. were outstanding. The aggregate market value of the
voting stock held by non-affiliates of International Specialty Products Inc. as
of March 21, 1997 was $207,999,343.12. The aggregate market value was computed
by reference to the closing price on the New York Stock Exchange of Common Stock
of International Specialty Products Inc. on such date ($13 1/8). For purposes of
the computation, voting stock held by executive officers and directors of the
registrants and ISP Holdings Inc., an affiliate of International Specialty
Products Inc., has been excluded. Such exclusion is not intended, and shall not
be deemed, to be an admission that such executive officers and directors are
affiliates of International Specialty Products Inc.
As of March 21, 1997, ISP Chemicals Inc. and ISP Technologies Inc. each had
10 shares of common stock outstanding. No shares are held by non-affiliates.
As of March 21, 1997, each of the additional registrants had the number of
shares outstanding which is shown on the table below. No shares are held by
non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 1997 Annual Meeting of Stockholders of
International Specialty Products Inc. to be filed within 120 days after the
Registrants' fiscal year end (the 'Proxy Statement') is incorporated by
reference in Part III, Items 10, 11, 12 and 13.
ii
ADDITIONAL REGISTRANTS
ADDRESS, INCLUDING ZIP CODE
STATE OR OTHER AND TELEPHONE NUMBER
EXACT NAME OF JURISDICTION OF NO. I.R.S. EMPLOYER INCLUDING AREA CODE,
REGISTRANT AS SPECIFIED INCORPORATION OR OF SHARES IDENTIFICATION OF REGISTRANT'S
IN ITS CHARTER ORGANIZATION OUTSTANDING NO. PRINCIPAL EXECUTIVE OFFICE
- ------------------------- ---------------- ----------- --------------- ------------------------------
ISP (PUERTO RICO) INC.... Delaware 10 22-2934561 Mirador de Bairoa
Calle 27st-14
Caquas, Puerto Rico 00725-8900
(787) 744-3116
ISP ENVIRONMENTAL
SERVICES INC............. Delaware 10 51-0333801 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
ISP FILTERS INC.......... Delaware 10 51-0333796 4436 Malone Road
Memphis, TN 38118
(901) 795-2445
ISP GLOBAL TECHNOLOGIES
INC...................... Delaware 10 51-0333802 818 Washington Street
Wilmington, DE 19801
(302) 429-7492
ISP INTERNATIONAL CORP... Delaware 10 51-0333734 818 Washington Street
Wilmington, DE 19801
(302) 429-7493
ISP INVESTMENTS INC...... Delaware 10 51-0333803 818 Washington Street
Wilmington, DE 19801
(302) 429-7496
ISP MANAGEMENT COMPANY,
INC...................... Delaware 10 51-0333800 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
ISP MINERAL PRODUCTS
INC...................... Delaware 10 51-0333794 34 Charles Street
Hagerstown, MD 21740
(301) 733-4000
ISP MINERALS INC......... Delaware 10 51-0333798 Route 116
Blue Ridge Summit, PA 17214
(717) 794-2184
ISP REAL ESTATE COMPANY,
INC...................... Delaware 2 22-2886551 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
ISP REALTY CORPORATION... Delaware 1,000 13-2720081 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
VERONA INC............... Delaware 100 22-3036319 NCNB Plaza, Suite 300
7 North Laurens St.
Greenville, SC 29601
(803) 271-9194
BLUEHALL INCORPORATED.... Delaware 1 13-3335905 818 Washington Street
Wilmington, DE 19801
(302) 651-0165
iii
PART I
ITEM 1. BUSINESS
GENERAL
International Specialty Products Inc. ('ISP') is a leading multinational
manufacturer of specialty chemicals, mineral products, filter products, and
advanced materials.
ISP, incorporated in Delaware in 1991, operates its business exclusively
through 19 domestic subsidiaries, including ISP Chemicals Inc., ISP Technologies
Inc., ISP Van Dyk Inc. and ISP Fine Chemicals Inc., 37 international
subsidiaries and a joint venture with Huls Aktiengesellschaft, a German
corporation ('Huls'), in which ISP has a 50% interest and which operates under
the name GAF-Huls Chemie GmbH ('GAF-Huls'). Except as the context otherwise
requires, 'ISP' or the 'Company' refers to International Specialty Products Inc.
and its subsidiaries and their predecessors.
ISP is an 83.5% owned subsidiary of ISP Holdings Inc. ('ISP Holdings'). ISP
is indirectly controlled by Samuel J. Heyman, Chairman of the Board of Directors
and Chief Executive Officer of ISP, ISP Holdings and GAF Corporation ('GAF'). On
January 1, 1997, GAF effected a series of transactions (collectively, the
'Separation Transactions') involving its subsidiaries that resulted in, among
other things, the capital stock of ISP Holdings being distributed to the
stockholders of GAF. As a result of the Separation Transactions, ISP Holdings
and ISP are no longer direct or indirect subsidiaries of GAF or G-I Holdings
Inc. ('G-I Holdings'), a subsidiary of GAF.
ISP Chemicals Inc. ('ISP Chemicals'), ISP Technologies Inc. ('ISP
Technologies') and the additional registrants are consolidated subsidiaries of
ISP and, together with ISP Van Dyk Inc., ISP Fine Chemicals Inc., International
Specialty Products Funding Corporation and ISP Newark Inc., constitute all of
the active domestic subsidiaries of ISP. ISP Chemicals was incorporated in
Delaware in 1987 under the name Nordenham Inc. ISP Technologies was incorporated
in Delaware in 1991 under the name ISP 6 Corp.
The address and telephone number for the principal executive offices of ISP
are: 818 Washington Street, Wilmington, Delaware 19801; (302) 429-8554 or (800)
526-5315. The address and telephone number for the principal executive offices
of ISP Chemicals are: Route 95 Industrial Area, P.O. Box 37, Calvert City,
Kentucky 42029; (502) 395-4165. The address and telephone number for the
principal executive offices of ISP Technologies are: State Highway 146 and
Industrial Road, Texas City, Texas 77590; (409) 945-3411.
Financial information concerning ISP's industry segments and foreign and
domestic operations required by Item 1 is included in Notes 10 and 11 to the
Consolidated Financial Statements contained in this Annual Report on Form 10-K.
SPECIALTY CHEMICALS
Products and Markets. ISP manufactures a broad spectrum of specialty
chemicals having numerous applications in consumer and industrial products. ISP
uses proprietary technology to convert various raw materials, through a chain of
one or more processing steps, into increasingly complex and higher value added
derivatives to meet specific customer requirements. The majority of ISP's
specialty chemical products are derived from acetylene, including intermediates,
solvents, vinyl ethers and polymers, and sales of these products represent the
majority of ISP's specialty chemical sales.
ISP's specialty chemicals consist of nine main groups of products: vinyl
ether polymers, polyvinyl pyrrolidone polymers, solvents, intermediates,
specialty preservatives, sunscreens, emollients, pearlescent pigments and fine
chemicals.
Vinyl ether polymers are used in cosmetics and personal care products and
pharmaceutical and health-related products, primarily in hair care and dental
care products. Vinyl ether monomers and oligomers are used in coatings and inks
for both consumer and industrial products.
Polyvinyl pyrrolidone (PVP) polymers are used primarily in cosmetics,
personal care, pharmaceutical and health-related products, food and beverages,
and detergent formulations. Examples are binders and disintegrants for tablets
and vitamins; clarifiers and chill-hazing elimination agents for beer, wine and
fruit juices; microbiocidal products for human and veterinary applications;
resins for hair care products such as hair sprays,
mousses, conditioners, and gels; water proofing ingredients in mascaras,
sunscreens and lipsticks; multifunctional polymers for specialty coatings,
adhesives, ink jet inks and media for consumer and industrial applications; and
dispersants and binders in agricultural chemical formulations.
Solvents are sold to customers for use in agricultural chemicals,
pharmaceuticals, coatings, wire enamels, adhesives, plastics, electronic coating
and cleaning applications, petroleum extraction and specialty cleaners. ISP's
family of solvents includes, among others, N-methyl-2-pyrrolidone,
gamma-butyrolactone, 2-pyrrolidone and tetrahydrofuran, many of which are used
by ISP as raw materials in the manufacture of monomers and polymers.
Intermediates are manufactured primarily for use by ISP as raw materials in
manufacturing solvents and polymers. Some intermediates are also sold to
customers for use in the manufacture of engineering plastics and elastomers,
agricultural chemicals, oil production auxiliaries and other products.
Butanediol, an intermediate produced by ISP, is an essential raw material in the
manufacture of polybutylene terephthalate thermoplastic resins and polyurethane
elastomers, which are used in the automotive, electronics and appliance
industries.
Specialty preservatives are proprietary products that are marketed
worldwide to the cosmetics, personal care and household industries. ISP sells a
number of preservative products, including Germall(Registered) 115,
Germall(Registered) II, Germall(Registered) Plus, Germaben(Registered) II,
Germaben(Registered) II-E, Suttocide(Registered) A and LiquaPar(Registered) Oil.
Uses include infant care preparations, eye and facial makeup, after-shave and
nail, bath, hair and skin preparations.
ISP Van Dyk Inc. produces three multifunctional specialty chemical product
lines which ISP markets primarily to the cosmetics and personal care industry--
ultraviolet absorber chemicals, the principal active ingredients in sunscreens;
pearlescent pigments, which provide the pearly or lustrous color in lipsticks,
eye shadows and other cosmetics; and emollients and emulsifiers, which are used
as moisturizing and softening agents in a variety of creams and lotions, hair
care products and other cosmetics. ISP Van Dyk's Escalol(Registered),
Pearl-Glo(Registered) and Ceraphyl(Registered) products are widely recognized
for their respective sunscreen, pigment and emollient properties.
ISP Fine Chemicals Inc. produces a broad range of pharmaceutical
intermediates, biological buffers, pheromones and several bulk active
pharmaceuticals which serve the pharmaceutical, biotechnology, agricultural and
chemical process industries. Fine chemicals are extremely specialized products,
made in small quantities, which because of their complexity can be priced at
several hundred to several thousand dollars per kilogram. ISP Fine Chemicals
Inc. also provides a custom manufacturing capability serving the pharmaceutical,
biotechnology, agricultural and chemical process industries.
Marketing and Sales. ISP markets its specialty chemicals through a
worldwide marketing and sales force, typically chemists or chemical engineers,
who work closely with ISP's customers to familiarize themselves with their
customer's products, manufacturing processes and markets. ISP conducts its
marketing and domestic sales from ISP's headquarters in Wayne, New Jersey and
regional offices strategically located throughout the United States.
International Operations. ISP markets all of its specialty chemicals
worldwide. ISP conducts its international operations through 37 subsidiaries and
44 sales offices located in Western and Eastern Europe, Canada, Latin America
and the Asia-Pacific region. Services of local distributors are also used to
reach markets that might otherwise be unavailable to ISP.
ISP had approximately 60% of its international sales in 1996 in countries
in Western Europe and Japan which are subject to currency exchange rate
fluctuation risks. For a discussion of the Company's policy regarding the
management of these risks, see Item 7, 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Financial
Condition.' Other countries in which the Company has sales are subject to
additional risks, including high rates of inflation, exchange controls,
government expropriation and general instability.
International sales in 1996 of ISP's specialty chemicals, excluding sales
by GAF-Huls, were approximately 45% of ISP's total 1996 sales. GAF-Huls, a joint
venture in which ISP holds a 50% interest, produces certain intermediates and
solvents. The GAF-Huls plant is located in Marl, Germany.
2
Raw Materials. Because of the multi-step processes required to manufacture
ISP's specialty chemicals, ISP believes that its raw material costs represent a
smaller percentage of the cost of goods sold than for most other chemical
companies. It is estimated that approximately one-third of ISP's manufacturing
costs are for raw materials (including energy and packaging). As a result,
fluctuations in the pricing of raw materials have less impact on ISP than on
those chemical companies for which raw materials costs represent a larger
percent of manufacturing costs.
The principal raw materials used in the manufacture of ISP's specialty
chemicals are acetylene, methanol and methylamine. Most of these raw materials
are obtained from outside sources pursuant to long-term supply agreements.
Acetylene, a significant raw material used in the production of most of ISP's
specialty chemicals, is obtained by ISP for domestic use from two unaffiliated
suppliers pursuant to long-term supply contracts. At ISP's Texas City and
Seadrift, Texas plants, acetylene is supplied via pipeline by a neighboring
large multinational company that generates this raw material as a by-product
from ethylene manufacture. At ISP's Calvert City, Kentucky facility, acetylene
is supplied via pipeline by a neighboring company that generates it from calcium
carbide. The acetylene utilized by GAF-Huls is produced by Huls, using a
proprietary electric arc process, sourced from various hydrocarbon feedstocks.
ISP believes that this diversity of supply sources, using a number of production
technologies (ethylene by-product, calcium carbide and electric arc), provides
the Company with a reliable supply of acetylene. In the event of a substantial
interruption in the supply of acetylene from current sources, no assurances can
be made that ISP would be able to obtain as much acetylene from other sources as
would be necessary to meet its supply requirements. ISP has a long-standing
agreement with GAF-Huls to import butanediol into the United States for use as a
feedstock for the production of ISP's solvents and polymers. ISP has not
experienced an interruption of its acetylene supply that has had a material
adverse effect on its sales of specialty chemicals. With regard to raw materials
other than acetylene, ISP believes that in the event of a supply interruption it
could obtain adequate supplies from alternate sources.
Natural gas and raw materials derived from petroleum are used in many of
ISP's manufacturing processes and, consequently, the price and availability of
petroleum and natural gas could be material to ISP's operations. During 1996,
crude oil and natural gas supplies remained adequate, while prices generally
demonstrated seasonal variations.
While methanol prices were extremely volatile in 1994 and 1995, during 1996
methanol availability remained ample and prices remained relatively constant.
MINERAL PRODUCTS
Products and Markets. ISP manufactures mineral products consisting of
ceramic-coated colored roofing granules, which are produced from rock deposits
that are mined and crushed at ISP's quarries and are colored and coated using a
proprietary process. ISP's mineral roofing granules are sold primarily to the
North American roofing industry for use in the manufacture of asphalt roofing
shingles, for which they provide weather resistance, decorative coloring, heat
deflection and increased weight. ISP is the second largest of only two major
suppliers of colored roofing granules in North America. ISP also markets granule
by-products for use in the construction and maintenance of fast dry, clay-like
tennis courts.
ISP estimates that more than 80% of the asphalt shingles currently produced
by the roofing industry are sold for the reroofing/replacement market, in which
demand is driven not by the pace of new home construction but by the needs of
homeowners to replace existing roofs. Homeowners generally replace their roofs
either because they are worn, thereby creating concerns as to weather-tightness,
or because of the homeowners desire to upgrade the appearance of their homes.
ISP estimates that the balance of the roofing industry's asphalt shingle
production historically has been sold primarily for use in new housing
construction. Sales of ISP's colored mineral granules have benefited from a
trend toward the increased use of heavyweight, three-dimensional laminated
roofing shingles which results in both functional and aesthetic improvements,
which require, on average, approximately 60% more granules than traditional
three-tab, lightweight roofing shingles.
Sales to Building Materials Corporation of America ('BMCA'), an affiliate
of the Company, and its subsidiary, U.S. Intec, Inc. ('USI'), constituted
approximately 59% of ISP's mineral products net sales in 1996. See Note 9 to
Consolidated Financial Statements.
3
Raw Materials. ISP owns rock deposits that have specific performance
characteristics, including weatherability, the ability to reflect UV light,
abrasion-resistance, non-staining characteristics and the ability to absorb
pigments. ISP owns three quarries, each with proven reserves, based on current
production levels, of more than 20 years.
FILTER PRODUCTS AND ADVANCED MATERIALS
ISP manufactures and sells filter products, consisting of pressure filter
vessels, filter bags and filter systems, and sells cartridges and cartridge
housings. These filter products are designed for the removal of macroscopic
contaminants in the treatment of process liquids. The paint, automotive,
chemical, pharmaceutical, petroleum and food and beverage industries accounted
for almost all of ISP's 1996 net sales of filter products.
ISP manufactures pressure filter vessels at manufacturing facilities in
Brazil, Canada and Germany, which serve both local and international markets.
ISP also manufactures filter bags in Belgium, Canada, Singapore, Brazil and the
United States and supplies filter products worldwide through its subsidiaries,
sales offices and distributors.
ISP manufactures a variety of advanced materials, consisting of high-purity
carbonyl iron powders, sold under ISP's trademark Micropowder(Registered), which
are used in a variety of advanced technology applications. Using proprietary
technology, ISP manufactures more than 50 different grades of
Micropowder(Registered) iron, one of which is sold under the trademark
Ferronyl(Registered), for use as a vitamin supplement. The primary markets for
ISP's Micropowder(Registered) are the domestic defense industry, which employs
these products in a variety of coating systems for stealth purposes in aircraft
and naval ships, and the emerging metal injection molding segment of the powder
metallurgy industry. Other industries using ISP's carbonyl iron powders are the
aerospace, electronics, power metallurgy, pharmaceutical and food industries.
ISP is the sole domestic manufacturer of carbonyl iron powders.
ISP manufactures a line of processless, electronically imaged film products
including Rad-Sure(Registered), which is a radiation sensitive film strip
affixed to blood bags to indicate whether or not they have been properly
irradiated.
COMPETITION
ISP believes that it is either the first or second largest seller worldwide
of its specialty chemicals derived from acetylene other than butanediol and
tetrahydrofuran. Butanediol, which ISP produces primarily for use as a raw
material, is also manufactured by a limited number of companies in the United
States, Germany, Japan and Korea. Tetrahydrofuran is manufactured by a number of
companies throughout the world. While there are companies, other than ISP and
its principal competitor, that manufacture a limited number of ISP's other
specialty chemicals, the market position of these companies is much smaller than
that of ISP (other than as to solvents and intermediates, with respect to which
there is a significant third competitor). In addition to ISP's competitors as
noted above, there are other companies that produce substitutable products for a
number of ISP's specialty chemicals. These companies compete with ISP in the
personal care, pharmaceutical, beverage preservative and industrial markets and
have the effect of limiting ISP's market penetration and pricing flexibility.
With regard to its mineral products, ISP has only one major and one smaller
competitor and believes that competition has been limited by: (i) the
substantial capital expenditures associated with the construction of new mineral
processing and coloring plants and the acquisition of suitable rock reserves;
(ii) the limited availability of proven rock sources; (iii) the complexity
associated with the construction of a mineral processing and coloring plant,
together with the technical know-how required to operate such a plant; (iv) the
need to obtain, prior to commencing operations, reliable data over a substantial
period of time regarding the weathering of granules in order to assure the
quality and durability of the product; and (v) the difficulty in obtaining the
necessary permits to mine and operate a quarry.
With respect to filter products, ISP competes with a number of companies
worldwide. With respect to advanced materials, ISP is the sole domestic
manufacturer of carbonyl iron powders and one of only two manufacturers
worldwide.
Competition is largely based upon product and service quality, technology,
distribution capability and price. ISP believes that it is well positioned in
the marketplace as a result of its broad product lines, sophisticated technology
and worldwide distribution network.
4
RESEARCH AND DEVELOPMENT
ISP's worldwide research and development expenditures were $20.3 million,
$21.9 million and $25.4 million in 1994, 1995 and 1996, respectively.
ISP's research and development department is located primarily at ISP's
worldwide technical center and laboratories in Wayne, New Jersey. Additional
research and development is conducted at plant sites in Calvert City, Kentucky,
Texas City, Texas, Chatham, New Jersey, Belleville, New Jersey, and Columbus,
Ohio and technical centers in the United Kingdom, Germany, China and Singapore.
ISP's mineral products research and development facility, together with its
customer design and color center, is located at Hagerstown, Maryland.
ENVIRONMENTAL SERVICES
ISP has received conditional site designation for the construction of a
hazardous waste treatment, storage and disposal facility at its Linden, New
Jersey property and has received approval from the New Jersey Turnpike Authority
for a direct access ramp from the New Jersey Turnpike to the site. If ISP is
successful in securing the site designation and the necessary permits to
construct and operate the hazardous waste facility, ISP intends to develop and
operate the facility in a separate subsidiary, either on its own or in a joint
venture with a suitable partner. ISP estimates that the cost of constructing the
facility will be approximately $100 million and, if approved, the facility is
anticipated to be in operation three years after commencement of construction.
ISP anticipates utilizing internally generated cash and/or seeking project or
other independent financing for this project.
PATENTS AND TRADEMARKS
ISP owns approximately 313 domestic and 123 foreign patents and owns or
licenses approximately 118 domestic and 1,350 foreign trademark registrations
related to the business of ISP. The Company does not believe that any single
patent, patent application or trademark is material to ISP's business or
operations.
The Company believes that the duration of the existing patents and patent
licenses is satisfactory.
ENVIRONMENTAL COMPLIANCE
Since 1970, a wide variety of federal, state and local environmental laws
and regulations relating to environmental matters (the 'Regulations') have been
adopted and amended. By reason of the nature of the operations of the Company
and its predecessor and certain of the substances that are or have been used,
produced or discharged at their plants or at other locations, the Company is
affected by the Regulations. The Company has made capital expenditures of less
than $3.9 million in each of the last three years in order to comply with the
Regulations (which expenditures are included in additions to property, plant and
equipment) and anticipates that aggregate capital expenditures relating to
environmental compliance in 1997 and 1998 will be approximately $4.7 million and
$3.8 million, respectively.
The Regulations deal with air and water emissions or discharges into the
environment, as well as the generation, storage, treatment, transportation and
disposal of solid and hazardous waste, and the remediation of any releases of
hazardous substances and materials to the environment. The Company believes that
its manufacturing facilities comply in all material respects with applicable
Regulations, and, while it cannot predict whether more burdensome requirements
will be adopted in the future, it believes that any potential liability for
compliance with the Regulations will not materially affect its business,
liquidity, results of operations, cash flows or financial position.
5
The Company believes that its manufacturing facilities are being operated
in compliance in all material respects with applicable environmental, health and
safety laws and regulations, but cannot predict whether more burdensome
requirements will be imposed by governmental authorities in the future.
EMPLOYEES
At December 31, 1996, the Company employed approximately 2,700 people
worldwide. Approximately 740 employees in the United States and Canada were
subject to six union contracts. The Company expects to renegotiate one labor
contract during 1997. The Company believes that its relations with its employees
and their unions are satisfactory.
The Company has in effect various benefit plans, which include a
non-qualified retirement plan for a group of executives, a capital accumulation
plan for its salaried and certain hourly employees, a flexible benefit plan for
its salaried employees, a retirement plan for certain of its hourly employees,
and group insurance agreements providing life, accidental death, disability,
hospital, surgical, medical and dental coverage. In addition, the Company has
contracted with various health maintenance organizations to provide medical
benefits. The Company and, in many cases, its employees contribute to the cost
of these plans.
ITEM 2. PROPERTIES
The corporate headquarters and principal research and development
laboratories of ISP are located at a 100-acre campus-like office and research
park owned by a subsidiary of ISP at 1361 Alps Road, Wayne, New Jersey 07470.
The premises are subject to a first mortgage.
The principal domestic and foreign real properties either owned by, or
leased to, ISP are described below. Unless otherwise indicated, the properties
are owned in fee. In addition to the principal facilities listed below, ISP
maintains sales offices and warehouses in the United States and abroad,
substantially all of which are in leased premises under relatively short-term
leases.
LOCATION FACILITY PRODUCT LINE
- ----------------------- ------------------------------------------- ---------------------------
DOMESTIC
Alabama
Huntsville........... Plant* Advanced Materials
Kentucky
Calvert City......... Plant Specialty Chemicals
Maryland
Hagerstown........... Research Center, Design Center, Mineral Products
Sales Office
Missouri
Annapolis............ Plant, Quarry Mineral Products
New Jersey
Belleville........... Plant, Sales Office, Research Specialty Chemicals
Center, Warehouse*
Bridgewater.......... Sales Office Specialty Chemicals
Chatham.............. Plant, Sales Office, Research Specialty Chemicals
Center, Warehouse*
Wayne................ Headquarters, Corporate Administrative Specialty Chemicals; Filter
Offices, Research Center Products and Advanced
Materials
Ohio
Columbus............. Plant, Sales Office Fine Chemicals
Pennsylvania
Blue Ridge Summit.... Plant, Quarry Mineral Products
Tennessee
Memphis.............. Plant*, Warehouse*, Distribution Center* Filter Products
Texas
Seadrift............. Plant Specialty Chemicals
Texas City........... Plant Specialty Chemicals
Wisconsin
Pembine.............. Plant, Quarry Mineral Products
6
LOCATION FACILITY PRODUCT LINE
- ----------------------- ------------------------------------------- ---------------------------
INTERNATIONAL
Belgium
Sint-Niklaas......... Plant, Sales Office, Distribution Center Specialty Chemicals and
Filter Products
Brazil
Sao Paulo............ Plant*, Sales Office*, Distribution Center* Specialty Chemicals and
Filter Products
Canada
Mississauga,
Ontario............. Plant*, Sales Office*, Distribution Center* Specialty Chemicals
Oakville, Ontario.... Plant* Filter Products
Germany
Hamburg.............. Plant* Filter Products
Great Britain
Guildford............ European Headquarters*, Research Center* Specialty Chemicals
India
Nagpur............... Plant Specialty Chemicals
Singapore
Southpoint........... Plant*, Sales Office*, Distribution Specialty Chemicals and
Center*, Asia-Pacific Headquarters*, Filter Products
Warehouse*
Affiliate:
GAF-Huls Chemie GmbH
Marl, Germany........ Plant, Sales Office Specialty Chemicals
- ------------------
* Leased Property
The Company believes that its plants and facilities, which are of varying
ages and are of different construction types, have been satisfactorily
maintained, are in good condition, are suitable for their respective operations
and generally provide sufficient capacity to meet production requirements. Each
plant has adequate transportation facilities for both raw materials and finished
products. In 1996, the Company made capital expenditures in the amount of $54.0
million relating to plant, property and equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ('Environmental
Claims') under the Comprehensive Environmental Response Compensation and
Liability Act ('CERCLA') and similar state laws, in which recovery is sought for
the cost of cleanup of contaminated sites, a number of which are in the early
stages or have been dormant for protracted periods.
The Company estimates that its liability in respect of all Environmental
Claims, and certain other environmental compliance expenses, as of December 31,
1996, will be $18.5 million, before reduction for insurance recoveries reflected
on its balance sheet (discussed below) of $6.9 million ('estimated recoveries').
In the opinion of management, the resolution of such matters should not be
material to the business, liquidity, results of operations, cash flows or
financial position of the Company. However, adverse decisions or events,
particularly as to the liability and the financial responsibility of the
Company's insurers and of the other parties involved at each site and their
insurers, could cause the Company to increase its estimate of its liability in
respect of such matters. It is not currently possible to estimate the amount or
range of any additional liability.
After considering the relevant legal issues and other pertinent factors,
the Company believes that it will receive the estimated recoveries and it may
receive amounts substantially in excess thereof. The Company believes it is
entitled to substantially full defense and indemnity under its insurance
policies for most Environmental Claims, although the Company's insurers have not
affirmed a legal obligation under the policies to provide indemnity for such
claims.
The estimated recoveries are based in part upon interim agreements with
certain insurers. The Company terminated these agreements in 1995 and on March
8, 1995 commenced litigation in the United States District Court for the
District of New Jersey seeking amounts substantially in excess of the estimated
recoveries. While the Company believes that its claims are meritorious, there
can be no assurance that the Company will prevail in its efforts to obtain
amounts equal to, or in excess of, the estimated recoveries.
7
In June 1989, ISP entered into a Consent Order with the New Jersey
Department of Environmental Protection ('NJDEP') requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee ISP's performance. In
April 1993, NJDEP issued orders which require the prevention of discharge of
contaminated groundwater and stormwater from the site and the elimination of
other potential exposure concerns. ISP believes, although there can be no
assurance, that, taking into account its plans for development of the site, it
can comply with the NJDEP order at a cost of no more than $7.5 million (in
connection with which ISP anticipates insurance recoveries of approximately $5
million). See 'Item 1, Environmental Services.'
Pursuant to an Order dated September 28, 1990 issued by the United States
Environmental Protection Agency (the 'EPA'), over 100 potentially responsible
parties, including the Company, have agreed to participate in the remediation of
a contaminated waste disposal site in Carlstadt, New Jersey. The EPA is
evaluating final remedies for the site. Total cleanup costs are unknown but the
Company estimates, based on information currently available to it, that the
insurance described above will cover a substantial portion of the Company's
share of such costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS
The following table sets forth the name, age, position and other
information with respect to the executive officers of ISP and the executive
officers and directors of ISP Chemicals and ISP Technologies. Each person listed
below is a citizen of the United States.
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT
NAME AND POSITION HELD(1) AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------
Samuel J. Heyman................ 58 Mr. Heyman has been a director and
Chairman and Chief Executive Chairman and Chief Executive Officer of
Officer, International ISP since its formation and Chief
Specialty Products Inc. Executive Officer of ISP Chemicals and
ISP Technologies since November 1991.
Mr. Heyman has been a director and
Chairman and Chief Executive Officer of
ISP Holdings since its formation, of
G-I Holdings since August 1988 and of
GAF and certain of its subsidiaries
since April 1989, prior to which he
held the same position with the
predecessor to GAF (the 'Predecessor
Company') from December 1983 to April
1989. He has been a director and
Chairman of BMCA since its formation, a
director of USI since October 1995 and
Chief Executive Officer of BMCA since
June 1996. He is also the Chief
Executive Officer, Manager and General
Partner of a number of closely held
real estate development companies and
partnerships whose investments include
commercial real estate and a portfolio
of publicly traded securities.
Peter R. Heinze................. 54 Dr. Heinze has been President, Chief
President and Chief Operating Operating Officer and a director of
Officer, International ISP, President and Chief Operating
Specialty Products Inc. Officer of ISP Chemicals and Chief
Operating Officer of ISP Technologies
since November 1996. He was Senior Vice
President, Chemicals of PPG Industries,
Inc. from April 1993 to November 1996
and Group Vice President, Chemicals of
PPG Industries, Inc. from August 1992
to April 1993. From January 1988 to
August 1992, Dr. Heinze was President,
Chemicals Division, and an Executive
Vice President of BASF Corporation.
8
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT
NAME AND POSITION HELD(1) AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------
Carl R. Eckardt................. 66 Mr. Eckardt was President and Chief
Executive Vice President, Operating Officer of ISP and ISP
Corporate Development, Chemicals and Chief Operating Officer
International Specialty of ISP Technologies from January 1994
Products Inc. to November 1996. He was Executive Vice
President of ISP from its formation to
January 1994 and has served as such
since November 1996. He has been a
director of ISP and Executive Vice
President of ISP Holdings since their
respective formations. Mr. Eckardt has
been Vice Chairman of GAF since
November 1996 and a director of GAF
since April 1987. He was Executive Vice
President of GAF from April 1989 to
November 1996 and held the same
position with the Predecessor Company
from January 1987 to April 1989. Mr.
Eckardt has been Executive Vice
President of G-I Holdings since March
1993. He was President of GAF
Fiberglass Corporation (formerly known
as GAF Chemicals Corporation) ('GFC')
and the Predecessor Company's chemicals
division from 1985 to 1987. Mr. Eckardt
was Senior Vice President Worldwide
Chemicals and Senior Vice President
International Chemicals of the
Predecessor Company from 1982 to 1985
and 1981 to 1982, respectively. Mr.
Eckardt joined the Predecessor Company
in 1974.
James P. Rogers................. 46 Mr. Rogers has been Executive Vice
Executive Vice President- President-Finance of ISP, ISP Chemicals
Finance, International and ISP Technologies, Executive Vice
Specialty Products Inc. President and Chief Financial Officer
of ISP Holdings, G-I Holdings, GAF and
certain of its subsidiaries and
Executive Vice President of BMCA since
December 1996. He was Senior Vice
President and Chief Financial Officer
of GAF, G-I Holdings and certain of
their subsidiaries, and Senior Vice
President-Finance of ISP, ISP
Technologies and ISP Chemicals from
November 1993 to December 1996 and of
BMCA from its formation to December
1996. Mr Rogers has been a director and
Senior Vice President of USI since
October 1995. He has served as
Treasurer of G-I Holdings, GAF and
certain of its subsidiaries since March
1992 and was Vice President-Finance of
such corporations from March 1992 to
October 1993. He was Treasurer of ISP
from March 1992 to December 1994 and
from September 1995 to December 1996.
From August 1987 to March 1992, Mr.
Rogers was Treasurer of Amphenol
Corporation, a manufacturer of
electronic connectors.
Richard A. Weinberg............. 37 Mr. Weinberg has been Senior Vice
Senior Vice President and President and General Counsel of ISP,
General Counsel, International ISP Technologies, ISP Chemicals, GAF,
Specialty Products Inc. G-I Holdings, BMCA and certain of their
subsidiaries since May 1996 and of ISP
Holdings since its formation. He has
been a director of ISP Chemicals and
ISP Technologies since May 1996. He was
Vice President and General Counsel of
BMCA from September 1994 to May 1996,
Vice President-Law of BMCA from May
1994 to September 1994 and Vice
President-Law of GAFBMC from April 1993
to May 1994. Mr. Weinberg was employed
by Reliance Group Holdings Inc., a
diversified insurance holding company,
as Staff Counsel from October 1987 to
January 1990 and as Assistant Vice
President and Corporate Counsel from
January 1990 to April 1993.
9
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT
NAME AND POSITION HELD(1) AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------
Louis S. Goldberg............... 60 Mr. Goldberg has served as Senior Vice
Senior Vice President, President, Headquarters Administrative
Headquarters Administrative Services of ISP, ISP Chemicals and ISP
Services, International Technologies since July 1996. Mr.
Specialty Products Inc. Goldberg has been Senior Vice
President, Corporate Human Resources of
ISP Holdings since its formation and of
GAF and G-I Holdings and certain of
their subsidiaries since July 1996.
From January 1996 to July 1996, Mr.
Goldberg served as a senior consultant
to GAF. From January 1995 to January
1996, he was Commissioner of the
Department of Administrative Services
for the State of Connecticut, and from
January 1991 to December 1993 he served
as Connecticut's Commissioner of the
Department of Motor Vehicles. From
September 1989 to December 1990, he was
Senior Vice President of Staub,
Warmbold & Associates. From August 1984
to April 1989 he was Vice President-
Human Resources of Playtex, Inc. and
from February 1977 to January 1984 he
was Vice President Administration/
Human Resources of The Seagram Company
Ltd.
Richard B. Olsen................ 50 Mr. Olsen has been Senior Vice President
Senior Vice President and and General Manager, Mineral Products
General Manager, Mineral of ISP and ISP Technologies since April
Products, International 1995. From November 1993 to April 1995,
Specialty Products Inc. he served as Senior Vice President and
Chief Financial Officer of ISP, ISP
Chemicals and ISP Technologies. From
June 1991 to November 1993, he was Vice
President-Finance and Purchasing of
ISP, ISP Chemicals and ISP
Technologies. He was Vice President,
Finance of GFC from April 1989 to
November 1993 and held the same
positions with the Predecessor Company
from June 1986 to April 1989.
Randall R. Lay.................. 42 Mr. Lay has been Vice President and Chief
Vice President and Chief Financial Officer of ISP, ISP Chemicals
Financial Officer, and ISP Technologies since April 1995.
International Specialty From August 1993 to April 1995, he
Products Inc. served as Controller, Specialty
Derivatives of ISP. From March 1991 to
August 1993, he was Director, Financial
Planning of Otis Elevator Company and
from July 1989 to March 1991 he was
Director, Financial Planning of United
Technologies Corporation.
- ------------------
(1) Under ISP's By-laws, each director and executive officer continues in office
until ISP's next annual meeting of stockholders and until his or her
successor is elected and qualified.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information pertains to ISP's common stock, which is traded
on the New York Stock Exchange. As of February 21, 1997, there were 297 holders
of record of ISP's outstanding common stock.
1996 BY QUARTER 1995 BY QUARTER
---------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- ------- ------- ------ ------ ------ -------
Price Range of Common Stock:
High...................... $13 1/4 $12 5/8 $11 3/8 $12 3/4 $7 5/8 $8 5/8 $9 7/8 $11
Low....................... 10 1/8 10 3/4 9 5/8 9 6 3/8 6 5/8 8 3/8 8 1/8
ISP announced in the second quarter of 1995 that its Board of Directors had
eliminated the 2 1/2 cents per share semi-annual dividend on ISP's common stock.
The declaration and payment of dividends is at the discretion of the Board of
Directors of ISP. See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 6 to Consolidated Financial
Statements for information regarding restrictions on the payment of dividends
set forth on pages F-2 to F-5 and page F-19, respectively. Any decision to
resume the payment of dividends, and the timing and amount thereof, is dependent
upon, among other things, ISP's
10
results of operations, financial condition, cash requirements, prospects and
other factors deemed relevant by the Board of Directors. Accordingly, there can
be no assurance that the Board of Directors will resume the declaration and
payment of dividends or as to the amount thereof.
ITEM 6. SELECTED FINANCIAL DATA
See Page F-6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See Page F-2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on Page F-1 and Financial Statements and Supplementary Data on
Pages F-7 to F-29.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information relating to the directors of ISP to be contained in the
Proxy Statement under the heading 'Election of Directors' is incorporated by
reference herein. For information relating to the executive officers of ISP, ISP
Chemicals and ISP Technologies, see 'Executive Officers' in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be contained in the Proxy Statement under the headings
'Compensation of Executive Officers of the Company' and 'Election of Directors'
is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information to be contained in the Proxy Statement under the heading
'Security Ownership of Certain Beneficial Owners and Management' is incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be contained in the Proxy Statement under the captions
'Election of Directors' and 'Certain Transactions' is incorporated by reference
herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a)(1) Financial Statements: See Index on Page F-1.
(a)(2) Financial Statement Schedules: See Index on Page F-1.
(a)(3) Exhibits: (a) The following documents are filed as part of this
report:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
3.1 -- Certificate of Incorporation of ISP (incorporated by reference to
Exhibit 3.1 to ISP's Registration Statement on Form S-1,
Registration No. 33-40337) (the 'Common Stock Registration
Statement').
3.2 -- By-laws of ISP (incorporated by reference to Exhibit 3.2 to the
Common Stock Registration Statement).
11
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
3.3 -- Certificate of Incorporation of ISP Chemicals (incorporated by
reference to Exhibit 3.3 to ISP's Registration Statement on Form
S-1, Registration No. 33-44862) (the '9% Note Registration
Statement').
3.4 -- By-laws of ISP Chemicals (incorporated by reference to Exhibit 3.4
to the 9% Note Registration Statement).
3.5 -- Certificate of Incorporation of ISP Technologies (incorporated by
reference to Exhibit 3.5 to the 9% Note Registration Statement).
3.6 -- By-laws of ISP Technologies (incorporated by reference to Exhibit
3.6 to the 9% Note Registration Statement).
4 -- Indenture, dated as of March 1, 1992, relating to ISP's 9% Senior
Notes due March 1, 1999 (incorporated by reference to Exhibit 4 to
the 9% Note Registration Statement).
10.1 -- Management Agreement, dated as of March 3, 1992 ('Management
Agreement'), among GAF, G-I Holdings, G Industries Corp., ISP, GAF
Building Materials Corporation and GAF Broadcasting Company, Inc.
(incorporated by reference to Exhibit 10.5 to ISP's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.2 -- Amendment No. 1, dated as of January 1, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.10 to ISP's
Annual Report on Form 10-K for the year ended December 31, 1993).
10.3 -- Amendment No. 2, dated as of May 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.1 to ISP's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1994).
10.4 -- Amendment No. 3, dated as of December 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.4 to ISP's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.5 -- Amendment No. 4, dated as of December 31, 1995, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-4 of G-I Holdings, Registration No.
333-2436).
10.6 -- Amendment No. 5, dated as of October 18, 1996, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to ISP
Holdings' Registration Statement on Form S-4, Registration No.
333-17827) (the 'ISP Holdings Registration Statement').
10.7 -- Amendment No. 6, dated as of January 1, 1997, to the Management
Agreement (incorporated by reference to Exhibit 10.8 to BMCA's
Registration Statement on Form S-4 (Registration No. 333-20859)).
10.8 -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP
Holdings, ISP and certain subsidiaries of ISP (incorporated by
reference to Exhibit 10.8 to the ISP Holdings Registration
Statement).
10.9 -- Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to ISP's Registration Statement on Form
S-1, Registration No. 33-40337).*
10.10 -- ISP Amended and Restated 1991 Incentive Plan for Key Employees and
Directors ('Incentive Plan')(incorporated by reference to Exhibit 99
to ISP's Registration Statement on Form S-8, Registration No.
33-92518).*
10.11 -- Amendment to the Incentive Plan.*
12
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
10.12 -- Agreement, dated July 30, 1993, between ISP and Carl R. Eckardt
(incorporated by reference to Exhibit 10.16 to the Registration
Statement on Form S-4 of G-I Holdings (Registration No. 33-72220)).*
10.13 -- Letter Agreement, dated October 15, 1996, between GAF and Dr. Peter
Heinze (incorporated by reference to Exhibit 10.14 to the ISP
Holdings Registration Statement).*
10.14 -- Form of Maintenance Agreement between ISP and ISP Chemicals
(incorporated by reference to Exhibit 10.18 to the 9% Note
Registration Statement).
10.15 -- Form of Assignment and Assumption Agreement between G Industries
Corp. and ISP (incorporated by reference to Exhibit 10.19 to the 9%
Note Registration Statement).
10.16 -- Form of Assignment and Assumption Agreement among ISP, ISP Chemicals
and ISP Technologies (incorporated by reference to Exhibit 10.20 to
the 9% Note Registration Statement).
10.17 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Chemicals (incorporated by reference to Exhibit 10.21 to the 9% Note
Registration Statement).
10.18 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Technologies (incorporated by reference to Exhibit 10.22 to the 9%
Note Registration Statement).
10.19 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Chemicals (incorporated by reference to Exhibit 10.23 to the 9%
Note Registration Statement).
10.20 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Technologies (incorporated by reference to Exhibit 10.24 to the
9% Note Registration Statement).
10.21 -- Form of Option Agreement relating to Cumulative Redeemable Preferred
Stock of ISP Holdings.*
10.22 -- Form of ISP Holdings Stock Appreciation Right Agreement.*
21 -- Subsidiaries of ISP and ISP Chemicals; ISP Technologies has no
subsidiaries.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for fiscal year 1996, which is submitted
electronically to the Securities and Exchange Commission for
information only.
- ------------------
* Management and/or compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1996.
13
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: March 26, 1997 INTERNATIONAL SPECIALTY PRODUCTS INC.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chairman of the Board and Chief Executive Officer
Samuel J. Heyman
/s/ PETER R. HEINZE President and Chief Operating Officer; Director
Peter R. Heinze
/s/ CARL R. ECKARDT Executive Vice President; Director
Carl R. Eckardt
/s/ HARRISON J. GOLDIN Director
Harrison J. Goldin
/s/ CHARLES M. DIKER Director
Charles M. Diker
/s/ SANFORD KAPLAN Director
Sanford Kaplan
/s/ BURT MANNING Director
Burt Manning
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: March 26, 1997 ISP CHEMICALS INC.
ISP TECHNOLOGIES INC.
ISP FILTERS INC.
ISP INVESTMENTS INC.
ISP MINERAL PRODUCTS INC.
ISP MINERALS INC.
ISP REAL ESTATE COMPANY, INC.
VERONA INC.
BLUEHALL INCORPORATED
ISP REALTY CORPORATION
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and Secretary;
Richard A. Weinberg Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: March 26, 1997 ISP (PUERTO RICO) INC.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ JAMES M. POTTER President and Director
James M. Potter
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and Secretary;
Richard A. Weinberg Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: March 26, 1997 ISP ENVIRONMENTAL SERVICES INC.
ISP MANAGEMENT COMPANY, INC.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ PETER R. HEINZE President and Chief Operating Officer;
Peter R. Heinze Director
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and
Richard A. Weinberg Secretary; Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: March 26, 1997 ISP GLOBAL TECHNOLOGIES INC.
ISP INTERNATIONAL CORP.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ WILLIAM H. BAUM President and Director
William H. Baum
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and Secretary;
Richard A. Weinberg Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
18
INTERNATIONAL SPECIALTY PRODUCTS INC.
FORM 10-K
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-2
Selected Financial Data.................................................. F-6
Report of Independent Public Accountants................................. F-7
Consolidated Statements of Income for the three years ended December 31,
1996................................................................... F-8
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-9
Consolidated Statements of Cash Flows for the three years ended December
31, 1996............................................................... F-10
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1996...................................................... F-12
Notes to Consolidated Financial Statements............................... F-13
Supplementary Data (Unaudited):
Quarterly Financial Data (Unaudited)................................... F-29
SCHEDULES
Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts......................... S-1
Supplementary Financial Information--Guarantor Financial Data............ S-2
F-1
INTERNATIONAL SPECIALTY PRODUCTS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 Compared With 1995
International Specialty Products Inc. (the 'Company') recorded net income
in 1996 of $80.7 million (83 cents per share) compared with net income of $67.4
million (68 cents per share) in 1995. The 20% increase in net income was
attributable to higher operating income (up $8.9 million), a $4.4 million
reduction in interest expense, and a $6.4 million increase in other income.
Sales for 1996 were $716.5 million compared with $689 million for 1995. The
sales growth was attributable to increased sales of specialty chemicals (up
$25.2 million), primarily reflecting increased sales volumes ($31.3 million),
partially offset by the unfavorable effect ($7.7 million) of the stronger U.S.
dollar relative to other currencies in certain areas of the world, and also
reflected higher filter products sales (up $2.4 million) due to increased unit
sales. Sales for the mineral products business decreased by $.5 million due to
lower sales volumes (down $2.6 million) resulting from a lost customer and
adverse winter weather conditions in the first quarter of 1996. The sales growth
in 1996 reflected higher sales in all geographic regions.
Operating income for 1996 increased by 7% to $136 million compared with
$127.1 million for 1995, while the Company's operating margin improved from
18.4% to 19.0%. The increase in operating income was due to higher specialty
chemicals operating income (up $11.6 million or 11%), partially offset by lower
filter products results (down $3.3 million due to lower gross profit margins).
The higher specialty chemicals operating income resulted primarily from the
higher sales levels and improved gross margins (up 2.4 percentage points) due to
improved pricing and continued benefits from the Company's reengineering
program. The gross margin improvement was attributable to the Company's
increased focus on manufacturing process improvements through increased
production yields, improvements in first pass quality, and increased capacity
resulting from shorter production cycle times and increased on-line time for
equipment. In addition, raw material costs were lower in 1996 than in 1995.
Selling, general and administrative expenses in 1996 increased by $14.3
million (11%) compared with 1995, and, as a percent of sales, increased from
19.5% to 20.7%. The most significant factors for the increase in such expenses
were attributable to the Company's geographic expansion efforts ($3.0 million),
increased research and development spending ($3.5 million) and normal salary
increases ($3.0 million).
Of the $8.9 million increase in operating income in 1996, domestic
operating income increased by $6.5 million, due primarily to increased sales
volumes for specialty chemicals, as well as improved gross margins, while
operating income for the European region increased by $6.6 million, also as a
result of higher sales levels and improved gross margins for specialty
chemicals. Operating income for the Asia-Pacific region decreased by $2.6
million as higher sales volumes were more than offset by increased expenses
associated with the Company's geographic expansion program, and operating income
from other foreign operations declined by $1.5 million.
Interest expense for 1996 was $28.7 million, a decrease of $4.4 million
(13%) from $33.1 million in 1995. The decrease reflected lower average
borrowings (average borrowings of $389.2 million in 1996 versus $442.3 million
in 1995) and lower interest rates (average borrowing rate of 7.9% in 1996 versus
8.3% in 1995).
Other income (expense), net, comprises net investment income, foreign
exchange gains/losses resulting from the revaluation of foreign
currency-denominated accounts receivable and payable as a result of changes in
exchange rates, and other nonoperating and nonrecurring items of income and
expense. Other income, net was $13.1 million in 1996 compared with $6.7 million
in 1995. The increase in 1996 was due principally to higher net investment
income (up $3.6 million) and gains associated with the Company's program to
hedge certain of its foreign currency exposures. See Note 1 to Consolidated
Financial Statements.
1995 Compared With 1994
In 1995, the Company recorded net income of $67.4 million (68 cents per
share) compared with net income of $44.5 million (45 cents per share) in 1994.
Net income in 1994 included an extraordinary charge of $1.2 million (one cent
per share) related to the refinancing of the Company's bank debt.
F-2
The results for 1995 reflected higher operating income (up $27.9 million),
$3.4 million higher equity income from the GAF-Huls Chemie GmbH joint venture
('GAF-Huls'), and a $6.8 million increase in other income, partially offset by a
$4.4 million increase in interest expense.
Sales for 1995 were $689 million compared with $600 million for 1994. The
15% sales growth was attributable to increased sales in all product lines,
particularly specialty chemicals (up $74.8 million), and reflected double-digit
sales increases in all regions of the world. The sales increase was primarily
the result of increased sales volumes in all product lines (up $49.6 million)
and higher selling prices and, to a lesser extent, the favorable effect ($14.3
million) of the weaker U.S. dollar relative to other currencies in certain areas
of the world.
Operating income for 1995 increased by 28% to $127.1 million compared with
$99.2 million for 1994. The increase was attributable to higher sales in all
product lines and improved gross margins (up 1.1 percentage points) due
primarily to higher selling prices, partially offset by higher manufacturing
costs. The gross margin improvement was attributable to the Company's increased
focus on manufacturing process improvements through increased production yields,
improvements in first pass quality, and increased capacity resulting from
shorter production cycle times and increased on-line time for equipment. In
addition, raw material costs increased in the latter half of 1994 and continued
through the first half of 1995. Operating income for the specialty chemicals
business increased by $25.7 million (32%), reflecting the above factors.
Selling, general and administrative expenses for 1995 increased $14.4 million
(12%) over 1994 due to operating expenses associated with higher sales levels;
however, such expenses as a percent of sales decreased from 23% in 1993 to 19.9%
and 19.5% in 1994 and 1995, respectively, primarily as a result of the Company's
cost reduction and productivity programs announced in 1993. The Company's
operating margin improved from 16.5% in 1994 to 18.4% in 1995.
Of the $27.9 million increase in operating income in 1995, domestic
operating income increased by $16.6 million, due primarily to higher selling
prices and increased sales volumes for specialty chemicals, as well as improved
gross margins, while operating income for the European region increased by $9.4
million as a result of higher sales levels and improved gross margins. Operating
income for the Asia-Pacific region increased by $3.6 million, with higher sales
volumes partially offset by increased expenses associated with the Company's
geographic expansion program, and operating income from other foreign operations
declined by $1.7 million as higher sales were offset by additional expenses
attributable to the geographic expansion program and a nonrecurring 1994 benefit
resulting from the Brazilian government's economic program. To help offset the
effects of inflation, this program allowed companies to add normal billing
surcharges in 1994. The operating income benefit to the Company in 1994 of such
surcharges was approximately $1.2 million. As inflation rates dropped, this
program was discontinued in 1995. See Note 11 to Consolidated Financial
Statements.
Interest expense for 1995 was $33.1 million, an increase of $4.4 million
from $28.7 million in 1994. The increase was primarily the result of higher
interest rates (average borrowing rate of 8.3% in 1995 versus 6.6% in 1994).
Other income (expense), net, comprises net investment income, foreign
exchange gains/losses resulting from the revaluation of foreign
currency-denominated accounts receivable and payable as a result of changes in
exchange rates, and other nonoperating and nonrecurring items of income and
expense. Other income, net was $6.7 million in 1995 compared with other expense,
net of $.1 million in 1994. The increase in 1995 was due principally to higher
net investment income (up $10.5 million). See Note 1 to Consolidated Financial
Statements.
LIQUIDITY AND FINANCIAL CONDITION
During 1996, the Company generated cash from operations of $104.3 million,
reinvested $54.6 million for capital programs and generated $5.4 million from
net sales of available-for-sale and held-to-maturity securities and other
short-term investments, for a net cash inflow of $55.1 million before financing
activities. Cash from operations in 1996 included $5.7 million in dividends
received from GAF-Huls and $5.7 million in proceeds from net sales of trading
securities. Cash invested in additional working capital totaled $7.7 million
during 1996. This principally reflected an $8.9 million increase in receivables
due to higher sales levels, partially offset by $2.9 million higher payables and
accrued liabilities.
Net cash used in financing activities in 1996 totaled $51.4 million,
primarily reflecting a $55.3 million reduction in borrowings from affiliates and
a $14.3 million decrease in short-term borrowings, partially offset by a $30.2
million increase in long-term debt which principally reflected increased
borrowings under the Company's
F-3
bank revolving credit facility. Cash used in financing activities also reflected
$15.1 million of expenditures in connection with the Company's common stock
repurchase program. The Company's program, begun in 1994, involves open market
repurchases from time to time of up to a total of 4,500,000 shares of its common
stock. The repurchased shares are held for general corporate purposes, including
issuance of shares under the Company's stock option plan. Through December 31,
1996, 3,594,900 shares of the Company's common stock had been repurchased
pursuant to the program.
As a result of the foregoing factors, cash and cash equivalents increased
by $3.7 million during 1996 to $17.8 million (excluding $123.7 million of
trading, available-for-sale and held-to-maturity securities and other short-term
investments).
The Company's investment strategy is to seek returns in excess of money
market rates on its available cash while minimizing market risks. There can be
no assurance that the Company will be successful in implementing such a
strategy. The Company invests primarily in international and domestic arbitrage
and securities of companies involved in acquisition or reorganization
transactions, including at times, common stock short positions which are offsets
against long positions in securities which are expected, under certain
circumstances, to be exchanged or converted into the short positions. With
respect to its equity positions, the Company is exposed to the risk of market
loss. See Note 1 to Consolidated Financial Statements.
In July 1996, the Company entered into a new five-year revolving credit
facility (the 'Credit Agreement') with a group of banks, which provides for
loans of up to $400 million and letters of credit of up to $75 million (see Note
6 to Consolidated Financial Statements). As of December 31, 1996, loans in the
amount of $70.4 million and letters of credit in the amount of $8.0 million were
outstanding under the Credit Agreement. The Credit Agreement permits the Company
to make loans to affiliates and to make available letters of credit for the
benefit of affiliates in an aggregate amount of up to $75 million, none of which
had been utilized as of December 31, 1996.
Borrowings by the Company, including those under the Credit Agreement, are
subject to the application of certain financial covenants contained in such
agreement and the indentures relating to the 9% Senior Notes due 2003 and 9 3/4%
Senior Notes due 2002, both issued by ISP Holdings Inc. ('ISP Holdings'), the
Company's parent and owner of approximately 83.5% of the Company's common stock.
As of December 31, 1996, the Company was in compliance with such covenants, and
the application of such covenants would not have restricted the amount available
for borrowing under the Credit Agreement. The Credit Agreement and the indenture
relating to the Company's 9% Senior Notes due 1999 limit the amount of cash
dividends, purchases of treasury stock, and other restricted payments (as
defined) by the Company. See Note 6 to Consolidated Financial Statements.
As of December 31, 1996, the Company's scheduled repayments of long-term
debt for the twelve months ending December 31, 1997 aggregated $.6 million.
Fluctuations in the value of foreign currencies may cause U.S. dollar
translated amounts to change in comparison with previous periods and,
accordingly, the Company cannot estimate in any meaningful way the possible
effect of such fluctuations upon future income. The Company has a policy to
manage these exposures to minimize the effects of fluctuations in foreign
currencies, which includes entering into foreign exchange contracts in order to
hedge its exposure. In respect of its foreign exchange contracts, the Company
recognized pre-tax gains of $7.0 million during 1996 and losses of $7.4 and $6.6
million during 1995 and 1994, respectively. At December 31, 1996, the equivalent
U.S. dollar fair value of outstanding forward foreign exchange contracts was
$174.5 million, and the amount of deferred gains and losses on such instruments
was immaterial. The equivalent U.S. dollar fair value of foreign exchange
contracts outstanding as of December 31, 1996 as a hedge of non-local currency
loans was $30.2 million, representing 100% of the Company's foreign currency
exposure with respect to such loans. See Note 1 to Consolidated Financial
Statements.
The objectives of the Company in utilizing interest rate swap agreements
are to lower funding costs, diversify sources of funding and manage interest
rate exposure. As of December 31, 1996, the total notional amount of interest
rate swaps outstanding was $200 million and the amount of underlying debt
relating to such swaps was $200 million. By utilizing interest rate swap
agreements, the Company reduced its interest expense by $2.8, $1.8 and $5.3
million in 1996, 1995 and 1994, respectively. See Note 6 to Consolidated
Financial Statements.
F-4
ISP Holdings was a wholly owned subsidiary of GAF Corporation ('GAF') until
January 1, 1997, when its stock was distributed to the stockholders of GAF in a
series of transactions involving GAF's subsidiaries. As a result, ISP Holdings
and ISP are no longer direct or indirect subsidiaries of GAF or its subsidiary,
G-I Holdings Inc.
ISP Holdings is a holding company without independent businesses or
operations and, as such, is dependent upon the cash flows of the Company in
order to satisfy its obligations. Such obligations include $325 million
principal amount of ISP Holdings' 9% Senior Notes due 2003 and $199.9 million
principal amount of ISP Holdings' 9 3/4% Senior Notes due 2002. ISP Holdings
expects to satisfy such obligations from, among other things, refinancings of
debt, dividends and loans from the Company, as to which there are restrictions
under the Credit Agreement and the indenture relating to the Company's 9% Senior
Notes (see Note 6 to Consolidated Financial Statements), and payments pursuant
to the Tax Sharing Agreement between ISP Holdings and the Company (see Note 2 to
Consolidated Financial Statements). The Company does not believe that the
dependence of ISP Holdings on the cash flows of the Company should have a
material adverse effect on the operations, liquidity or capital resources of the
Company.
As the Company's stock price appreciates, ISP Holdings may at some future
time consider selling shares of the Company's common stock, although it has no
current intention to do so. If ISP Holdings were to own less than 80% of the
outstanding common stock of the Company, payments pursuant to the Tax Sharing
Agreement would not be available to it.
For information with respect to income taxes, see Note 2 to Consolidated
Financial Statements.
The Company does not believe that inflation has had an effect on its
results of operations during the past three years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
The Company intends to acquire or develop a European manufacturing facility
to meet the needs of the Company's European business. While the originally
anticipated commencement date of the European project has been deferred because
the Company has been able to implement cost efficient capacity expansions at its
existing manufacturing facilities, based upon its current analyses of additional
opportunities for expansion of existing capacity, end-use demand, and other
relevant factors, the Company intends to proceed with the project by the end of
1997. Costs capitalized to date related to this project are included in
'Construction in progress'. The Company anticipates utilizing internally
generated funds, existing credit facilities and/or independent financing to fund
the cost of the project.
The Company has received conditional site designation from the New Jersey
Hazardous Waste Facilities Siting Commission for the construction of a hazardous
waste treatment, storage and disposal facility at its Linden, New Jersey
property, and has received approval from the New Jersey Turnpike Authority for a
direct access ramp from the Turnpike to the site. Both the site designation and
the access ramp approval have been appealed to the Courts by the City of Linden.
The Company estimates that the cost of constructing the facility will be
approximately $100 million and, if approved, the facility is anticipated to be
in operation three years after commencement of construction. The Company
anticipates utilizing internally generated cash and/or seeking project or other
independent financing therefor. Accordingly, the Company would not expect such
facility to impact materially its liquidity or capital resources.
The Company, together with other companies, is a party to a variety of
administrative proceedings and lawsuits involving environmental matters. See
Note 12 to Consolidated Financial Statements for further information.
FORWARD-LOOKING STATEMENTS
The discussions in this Annual Report on Form 10-K contain both historical
and forward-looking statements. Although the Company believes that any such
forward-looking statements are based on reasonable assumptions, these statements
involve uncertainties that affect, among other things, the Company's operations,
markets, products, services and prices. These uncertainties include economic,
competitive, governmental and technological factors.
F-5
INTERNATIONAL SPECIALTY PRODUCTS INC.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Net sales........................ $ 716,481 $ 689,002 $ 600,047 $ 548,252 $ 570,757
Operating income................. 136,024 127,096 99,245 65,091 107,664
Interest expense................. 28,729 33,091 28,676 24,500 30,595
Income before income taxes....... 125,967 106,102 72,484 49,823 85,782
Income before extraordinary item
and cumulative effect of
accounting change............. 80,663 67,375 45,752 29,558 57,182
Net income....................... 80,663 67,375 44,515 29,558 50,113
Earnings per common share:
Income before extraordinary item
and cumulative effect of
accounting change............. $ .83 $ .68 $ .46 $ .30 $ .57
Net income....................... $ .83 $ .68 $ .45 $ .30 $ .50
Dividends per common share....... $ -- $ -- $ .05 $ .05 $ .05
OTHER DATA:
Operating margin................. 19.0% 18.4% 16.5% 11.9% 18.9%
Depreciation..................... $ 38,279 $ 35,960 $ 32,753 $ 28,737 $ 25,610
Goodwill amortization............ 13,200 13,223 13,400 13,856 13,706
Capital expenditures and
acquisitions.................. 54,587 38,934 31,098 62,858 70,464
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(THOUSANDS)
BALANCE SHEET DATA:
Total working capital............ $ 219,702 $ 142,550 $ 121,803 $ 78,263 $ 179,310
Total assets..................... 1,316,914 1,312,938 1,251,304 1,243,315 1,270,418
Long-term debt................... 372,870 347,491 377,106 367,722 493,025
Stockholders' equity............. 701,493 643,244 582,368 534,012 516,999
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To International Specialty Products Inc.:
We have audited the accompanying consolidated balance sheets of
International Specialty Products Inc. (a Delaware corporation and an 83.5% owned
subsidiary of ISP Holdings Inc.) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements and the schedule and supplementary financial
information referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements, schedule and supplementary financial information based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, appearing on
pages F-8 to F-28 of this Form 10-K, present fairly, in all material respects,
the financial position of International Specialty Products Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule and supplementary financial
information appearing on pages S-1 to S-4 of this Form 10-K are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 10, 1997
F-7
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net sales................................... $716,481 $689,002 $600,047
-------- -------- --------
Costs and expenses:
Cost of products sold..................... 418,921 414,672 367,746
Selling, general and administrative....... 148,336 134,011 119,656
Goodwill amortization..................... 13,200 13,223 13,400
-------- -------- --------
Total costs and expenses.................. 580,457 561,906 500,802
-------- -------- --------
Operating income............................ 136,024 127,096 99,245
Interest expense............................ (28,729) (33,091) (28,676)
Equity in earnings of joint venture......... 5,604 5,413 2,034
Other income (expense), net................. 13,068 6,684 (119)
-------- -------- --------
Income before income taxes and extraordinary
item...................................... 125,967 106,102 72,484
Income taxes................................ (45,304) (38,727) (26,732)
-------- -------- --------
Income before extraordinary item............ 80,663 67,375 45,752
Extraordinary item, net of $733 income tax
benefit................................... -- -- (1,237)
-------- -------- --------
Net income.................................. $ 80,663 $ 67,375 $ 44,515
-------- -------- --------
-------- -------- --------
Earnings per common share:
Income before extraordinary item.......... $ .83 $ .68 $ .46
Extraordinary item........................ -- -- (.01)
-------- -------- --------
Net income................................ $ .83 $ .68 $ .45
-------- -------- --------
-------- -------- --------
Weighted average number of common shares
outstanding............................... 97,197 98,613 99,888
-------- -------- --------
-------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-8
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
1996 1995
---------- ----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 17,753 $ 14,080
Investments in trading securities................. 1,273 17,183
Investments in available-for-sale securities...... 114,323 109,214
Investments in held-to-maturity securities........ 1,977 4,618
Other short-term investments...................... 6,149 4,885
Accounts receivable, trade, less reserve of $2,840
and $2,879..................................... 66,875 60,327
Accounts receivable, other........................ 12,835 12,356
Receivable from related parties, net.............. 5,518 --
Inventories....................................... 108,586 107,969
Other current assets.............................. 13,239 12,920
---------- ----------
Total Current Assets......................... 348,528 343,552
Property, plant and equipment, net.................. 489,474 475,550
Excess of cost over net assets of businesses
acquired, net of accumulated amortization of
$105,025 and $91,825.............................. 417,258 430,458
Other assets........................................ 61,654 63,378
---------- ----------
Total Assets........................................ $1,316,914 $1,312,938
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................... $ 22,275 $ 36,199
Current maturities of long-term debt.............. 610 398
Loan payable to related party..................... -- 50,597
Accounts payable.................................. 42,939 41,727
Accrued liabilities............................... 57,134 56,538
Payable to related parties, net................... -- 9,429
Income taxes...................................... 5,868 6,114
---------- ----------
Total Current Liabilities.................... 128,826 201,002
---------- ----------
Long-term debt less current maturities.............. 310,294 280,254
---------- ----------
Long-term notes payable to related parties.......... 62,576 67,237
---------- ----------
Deferred income taxes............................... 52,665 55,743
---------- ----------
Other liabilities................................... 61,060 65,458
---------- ----------
Commitments and contingencies.......................
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized: 0 shares
issued......................................... -- --
Common stock, $.01 par value per share;
300,000,000 shares authorized: 99,888,646
shares issued.................................. 999 999
Additional paid-in capital........................ 504,686 504,544
Treasury stock, at cost--3,451,522 and 2,122,395
shares......................................... (30,874) (16,718)
Excess of purchase price over the adjusted
historical cost of predecessor company shares
owned by GAF's stockholders.................... (63,483) (63,483)
Retained earnings................................. 280,297 199,634
Cumulative translation adjustment and other....... 9,868 18,268
---------- ----------
Total Stockholders' Equity................... 701,493 643,244
---------- ----------
Total Liabilities and Stockholders' Equity.......... $1,316,914 $1,312,938
---------- ----------
---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-9
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS)
Cash and cash equivalents, beginning of
year...................................... $ 14,080 $ 20,127 $ 11,022
-------- -------- --------
Cash provided by operating activities:
Net income................................ 80,663 67,375 44,515
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation........................... 38,279 35,960 32,753
Goodwill amortization.................. 13,200 13,223 13,400
Deferred income taxes.................. (2,494) (18,809) (16,494)
(Increase) decrease in working capital
items.................................. (7,650) (5,105) (12,010)
Purchases of trading securities........... (42,002) (66,483) (267,181)
Proceeds from sales of trading
securities............................. 47,677 104,058 284,520
(Increase) decrease in other assets....... 780 56 (2,311)
Decrease in other liabilities............. (31) (1,343) (2,090)
Change in net receivable from/payable to
related parties........................ (14,947) 6,093 (247)
Change in cumulative translation
adjustment............................. (8,376) 6,918 8,306
Other, net................................ (813) 1,868 (4,555)
-------- -------- --------
Net cash provided by operating activities... 104,286 143,811 78,606
-------- -------- --------
Cash used in investing activities:
Capital expenditures and acquisitions..... (54,587) (38,934) (31,098)
Purchases of available-for-sale
securities............................. (287,361) (364,012) (953)
Purchases of held-to-maturity
securities............................. (14,331) (5,592) --
Purchases of other short-term
investments............................ (1,264) (2,188) (2,697)
Proceeds from sales of available-for-sale
securities............................. 291,408 257,197 742
Proceeds from held-to-maturity
securities............................. 16,972 974 --
-------- -------- --------
Net cash used in investing activities....... (49,163) (152,555) (34,006)
-------- -------- --------
Cash provided by (used in) financing
activities:
Proceeds (repayments) from sale of
accounts receivable.................... 2,000 3,768 (1,052)
Increase (decrease) in short-term debt.... (14,256) 36,199 (12,848)
Increase (decrease) in borrowings under
revolving credit facility.............. 29,625 (4,200) (82,250)
Other increase (decrease) in long-term
debt................................... 543 (1,435) (798)
Increase (decrease) in loans from related
parties................................ (55,258) (15,216) 66,263
Dividends................................. -- -- (4,994)
Repurchases of common stock............... (15,134) (16,614) (327)
Other, net................................ 1,030 195 511
-------- -------- --------
Net cash provided by (used in) financing
activities................................ (51,450) 2,697 (35,495)
-------- -------- --------
Net change in cash and cash equivalents..... 3,673 (6,047) 9,105
-------- -------- --------
Cash and cash equivalents, end of year...... $ 17,753 $ 14,080 $ 20,127
-------- -------- --------
-------- -------- --------
F-10
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- -------- --------
(THOUSANDS)
Supplemental Cash Flow Information:
Effect on cash from (increase) decrease in
working capital items*:
Accounts receivable........................ $(8,884) $(10,892) $(14,161)
Inventories................................ (575) 1,029 (5,087)
Other current assets....................... (967) 2,105 1,688
Accounts payable........................... 1,186 (5,895) 8,187
Accrued liabilities........................ 1,738 8,389 (4,162)
Income taxes............................... (148) 159 1,525
------- -------- --------
Net effect on cash from (increase)
decrease in working capital items..... $(7,650) $ (5,105) $(12,010)
------- -------- --------
------- -------- --------
Cash paid during the year for:
Interest (net of amount capitalized)....... $33,015 $ 36,776 $ 31,140
Income taxes (including taxes paid pursuant
to the Tax Sharing Agreement)........... 61,701 44,489 44,499
- ------------------
* Working capital items exclude cash and cash equivalents, short-term
investments, short-term debt and payables to and receivables from related
parties. Working capital acquired in connection with acquisitions is reflected
within 'Capital expenditures and acquisitions.' The effects of
reclassifications between noncurrent and current assets and liabilities are
excluded from the amounts shown above. In addition, the increase in accounts
receivable shown above does not reflect the cash proceeds from the sale of the
Company's domestic trade accounts receivable (see Note 3); such proceeds are
reflected in cash from financing activities.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-11
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
CAPITAL
STOCK AND CUMULATIVE
ADDITIONAL TREASURY TRANSLATION
PAID-IN STOCK ADJUSTMENT RETAINED
CAPITAL AT COST AND OTHER EARNINGS
---------- -------- ----------- --------
(THOUSANDS)
December 31, 1993....................... $ 505,571 $ -- $ (814) $ 92,738
Net income............................ -- -- -- 44,515
Translation adjustment................ -- -- 8,306 --
Dividends declared ($.05 per common
share)............................. -- -- -- (4,994)
Repurchases of common stock--49,000
shares............................. -- (327) -- --
Unrealized loss on available-for-sale
securities, net of $621 income tax
benefit............................ -- -- (1,063) --
Adjustment of unfunded pension
liability.......................... -- -- 1,919 --
---------- -------- ----------- --------
December 31, 1994....................... $ 505,571 $ (327) $ 8,348 $132,259
Net income............................ -- -- -- 67,375
Translation adjustment................ -- -- 6,918 --
Repurchases of common stock--2,102,200
shares............................. -- (16,614) -- --
Change in unrealized gain on
available-for-sale securities, net
of $1,198 income tax effect........ -- -- 2,618 --
Issuances under stock option
plan--28,805 shares................ -- 223 -- --
Excess of cost of treasury stock
issued over proceeds............... (28) -- -- --
Adjustment of unfunded pension
liability.......................... -- -- 384 --
---------- -------- ----------- --------
December 31, 1995....................... $ 505,543 $(16,718) $18,268 $199,634
Net income............................ -- -- -- 80,663
Translation adjustment................ -- -- (8,376) --
Repurchases of common stock--1,443,700
shares............................. -- (15,134) -- --
Change in unrealized gain on
available-for-sale securities, net
of $48 income tax effect........... -- -- (820) --
Issuances under stock option plan--
112,823 shares..................... -- 957 -- --
Issuance of stock (1,750 shares) and
options as incentives.............. 323 21 -- --
Excess of cost of treasury stock
issued over proceeds............... (181) -- -- --
Adjustment of unfunded pension
liability.......................... -- -- 796 --
---------- -------- ----------- --------
December 31, 1996....................... $ 505,685 $(30,874) $ 9,868 $280,297
---------- -------- ----------- --------
---------- -------- ----------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-12
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Specialty Products Inc. (the 'Company') is a multinational
manufacturer of a wide range of specialty chemicals, mineral products, filter
products and advanced materials. See Notes 10 and 11 for financial information
concerning the Company's industry segments and foreign and domestic operations.
Approximately 83.5% of the Company's common stock is owned by ISP Holdings Inc.
('ISP Holdings').
ISP Holdings was a wholly owned subsidiary of GAF Corporation ('GAF') until
January 1, 1997, when its stock was distributed to the stockholders of GAF in a
series of transactions involving GAF's subsidiaries (the 'Separation
Transactions'). As a result, ISP Holdings and the Company are no longer direct
or indirect subsidiaries of GAF or its subsidiary, G-I Holdings Inc. ('G-I
Holdings').
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All subsidiaries are consolidated and intercompany transactions have been
eliminated.
Financial Statement Estimates
The preparation of financial statements requires management to make certain
estimates. Actual results could differ from those estimates. In the opinion of
management, the financial statements herein contain all adjustments necessary to
present fairly the financial position and the results of operations and cash
flows of the Company for the periods presented. The Company has a policy to
review the recoverability of long-lived assets and identify and measure any
potential impairments. The Company does not anticipate any changes in management
estimates that would have a material impact on operations, liquidity or capital
resources.
Investment in Joint Venture
The Company's 50% ownership of GAF-Huls Chemie GmbH ('GAF-Huls'), a joint
venture which operates a chemical manufacturing plant in Germany, is accounted
for by the equity method. The Company's equity in the net assets of GAF-Huls was
$38.2 and $41.2 million as of December 31, 1996 and 1995, respectively, and is
included in 'Other assets'. Dividends received by the Company from GAF-Huls
totaled $5.7, $.3 and $4.4 million for 1996, 1995 and 1994, respectively.
Short-term Investments
For securities classified as 'trading' (including short positions),
unrealized gains and losses are reflected in income. For securities classified
as 'available-for-sale', unrealized gains (losses), net of income tax effect,
are included in a separate component of stockholders' equity, 'Cumulative
translation adjustment and other', and amounted to $.7 and $1.6 million as of
December 31, 1996 and 1995, respectively. Investments classified as
'held-to-maturity' securities are carried at amortized cost in the Consolidated
Balance Sheets.
'Other income (expense), net', includes $20.5, $16.5 and $6.2 million of
net realized and unrealized gains on securities in 1996, 1995 and 1994,
respectively. The determination of cost in computing realized gains and losses
is based on the specific identification method.
During the fourth quarter of 1995, the Company redesignated certain equity
securities held long (which are offsets against short positions in certain other
securities), with a fair market value of $18.1 million, as 'trading' and
recorded unrealized gains on such securities, through the date of redesignation,
in the amount of $2.1 million as 'Other income'.
As of December 31, 1996 and 1995, the market value of the Company's equity
securities held long was $115.1 and $127.3 million, respectively, and the
Company had $7.9 and $22 million, respectively, of short positions in common
stocks. As of December 31, 1996 and 1995, the market value of the Company's
held-to-maturity securities was $2.0 and $4.6 million, respectively. The market
values referred to above are based on quotations as reported by various stock
exchanges and major broker dealers. With respect to its investments in
securities, the Company is exposed to the risk of market loss.
F-13
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
'Other short-term investments' are investments in limited partnerships
which are accounted for by the equity method. Gains and losses are reflected in
'Other income (expense), net'. Liquidation of partnership interests generally
require a 30 to 45 day notice period.
Cash and cash equivalents include cash on deposit and debt securities
purchased with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for a substantial portion of the
Company's domestic inventories. All other inventories are determined principally
based on the FIFO (first-in, first-out) method.
Property, Plant and Equipment
Depreciation is computed principally on the straight-line method based on
the estimated economic lives of the assets. The Company uses an economic life of
10-20 years for land improvements, 40 years for buildings, and 3-20 years for
machinery and equipment, which includes furniture and fixtures. Certain interest
charges are capitalized during the period of construction as part of the cost of
property, plant and equipment.
Foreign Exchange Contracts
The Company enters into forward foreign exchange instruments with
off-balance-sheet risk in order to hedge a portion of both its borrowings
denominated in foreign currency and its firm or anticipated purchase commitments
related to the operations of foreign affiliates. Gains and losses on instruments
used to hedge firm purchase commitments are deferred, and amortization is
included in the measurement of the foreign currency transactions hedged. Gains
and losses on instruments used to hedge anticipated purchases are recognized
within 'Other income (expense), net'.
Forward contract agreements require the Company and the counterparty to
exchange fixed amounts of U.S. dollars for fixed amounts of foreign currency on
specified dates. The market value of such contracts varies with changes in the
market exchange rates. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the forward contract agreements.
However, the Company does not anticipate nonperformance by the counterparties.
The Company does not generally require collateral or other security to support
these financial instruments.
As of December 31, 1996 and 1995, the equivalent dollar fair value of
outstanding forward foreign exchange contracts was $174.5 and $183.1 million,
respectively, and the amount of deferred gains and losses on such instruments
was immaterial at each of such dates. All forward contracts are in major
currencies with highly liquid markets and mature within one year. The Company
uses quoted market prices obtained from major financial institutions to
determine the market value of its outstanding forward exchange contracts. The
U.S. dollar equivalent fair value of foreign exchange contracts outstanding as
of December 31, 1996 as a hedge of non-local currency loans was $30.2 million,
representing 100% of the Company's foreign currency exposure with respect to
such loans.
The Company continually monitors its risk from the effect of foreign
currency fluctuations on its operations and on the derivative products used to
hedge its risk. The Company utilizes real-time, on-line foreign exchange data
and news as well as evaluation of economic information provided by financial
institutions. Mark-to-market valuations are made on a regular basis. Hedging
strategies are approved by senior management before being implemented.
F-14
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, other than those located in
highly inflationary countries, are translated at year-end exchange rates. The
effects of these translation adjustments are reported in a separate component of
stockholders' equity, 'Cumulative translation adjustment and other', and
amounted to $9.1 and $17.5 million as of December 31, 1996 and 1995,
respectively. Income and expenses are translated at average exchange rates
prevailing during the year. Exchange gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity
involved, and translation adjustments of subsidiaries in countries with highly
inflationary economies, are included in 'Other income (expense), net'.
Excess of Purchase Price Over the Adjusted Historical Cost of Predecessor
Company Shares
Stockholders' equity reflects a reduction of $63.5 million which arose from
a management-led buyout in March 1989 of the predecessor company to the
Company's former parent company, GAF (the 'Acquisition'), because certain
members of the management group owned shares of the predecessor company's common
stock before the Acquisition and own shares of GAF after the Acquisition.
Accordingly, a step-up in asset values to fair value as required by the purchase
method of accounting (which was applied to the Acquisition) does not apply to
their shares.
Excess of Cost Over Net Assets of Businesses Acquired ('Goodwill')
Goodwill, which arose principally from the Acquisition, is amortized on the
straight-line method over a period of approximately 40 years. The Company
believes that the goodwill is recoverable. The primary financial indicator to
assess recoverability of goodwill is operating income before amortization of
goodwill. The assessment is based on an undiscounted analysis.
Debt Issuance Costs
Debt issuance costs are amortized to expense over the life of the related
debt.
Interest Rate Swaps
Gains (losses) on interest rate swap agreements ('swaps') are deferred and
amortized as a reduction (increase) of interest expense over the remaining life
of the debt issue with respect to which the swaps were entered.
Research and Development
Research and development costs are charged to operations as incurred and
amounted to $25.4, $21.9 and $20.3 million for 1996, 1995 and 1994,
respectively.
Environmental Liability
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters. The Company estimates
that its liability in respect of such environmental matters, and certain other
environmental compliance expenses, as of December 31, 1996, is $18.5 million,
before reduction for insurance recoveries reflected on its balance sheet of $6.9
million. The Company's liability is reflected on an undiscounted basis. See Note
12 for further discussion with respect to environmental liabilities and
estimated insurance recoveries.
Reclassifications
Certain amounts in the 1995 and 1994 Consolidated Financial Statements and
Notes to Consolidated Financial Statements have been reclassified to conform to
the 1996 presentation.
F-15
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INCOME TAXES
Income tax (provision) benefit consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS)
Federal:
Current..................... $(38,968) $(48,955) $(36,055)
Deferred.................... 2,071 17,794 16,051
-------- -------- --------
Total Federal............... (36,897) (31,161) (20,004)
-------- -------- --------
Foreign--current.............. (6,648) (6,432) (6,019)
-------- -------- --------
State and local:
Current..................... (2,182) (2,149) (1,152)
Deferred.................... 423 1,015 443
-------- -------- --------
Total state and local....... (1,759) (1,134) (709)
-------- -------- --------
Income tax provision.......... $(45,304) $(38,727) $(26,732)
-------- -------- --------
-------- -------- --------
The differences between the income tax provision computed by applying the
statutory Federal income tax rate to pre-tax income, and the income tax
provision reflected in the Consolidated Statements of Income are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS)
Statutory tax provision..................... $(44,045) $(37,136) $(25,369)
Impact of:
Foreign operations........................ 1,848 3,633 1,657
Nondeductible goodwill amortization....... (4,620) (4,628) (4,690)
Percentage depletion...................... 1,668 1,824 1,684
Other, net................................ (155) (2,420) (14)
-------- -------- --------
Income tax provision........................ $(45,304) $(38,727) $(26,732)
-------- -------- --------
-------- -------- --------
The components of the net deferred tax liability are as follows:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
Deferred tax liabilities related to:
Property, plant and equipment........................ $ 90,103 $ 90,854
Other................................................ 1,948 6,019
-------- --------
Total deferred tax liabilities....................... 92,051 96,873
-------- --------
Deferred tax assets related to:
Expenses not yet deducted for tax purposes........... (16,798) (14,099)
Deferred income...................................... (22,921) (19,912)
Foreign tax credits not yet utilized under the Tax
Sharing Agreement................................. -- (3,326)
Other................................................ (5,534) (10,389)
-------- --------
Total deferred tax assets............................ (45,253) (47,726)
-------- --------
Net deferred tax liability............................. 46,798 49,147
Deferred tax assets reclassified to other current
assets............................................... 5,867 6,596
-------- --------
Noncurrent deferred tax liability...................... $ 52,665 $ 55,743
-------- --------
-------- --------
F-16
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INCOME TAXES--(CONTINUED)
Effective January 1, 1997, the Company and its domestic subsidiaries
entered into a Tax Sharing Agreement with ISP Holdings with respect to the
payment of Federal income taxes and certain related matters (the 'Tax Sharing
Agreement'). During the term of the Tax Sharing Agreement, which extends as long
as the Company or any of its domestic subsidiaries, as the case may be, are
included in a consolidated Federal income tax return filed by ISP Holdings, or a
successor entity, the Company is obligated to pay to ISP Holdings an amount
equal to those Federal income taxes the Company would have incurred if, subject
to certain exceptions, the Company (on behalf of itself and its domestic
subsidiaries) filed its own consolidated Federal income tax return. These
exceptions include, among others, that the Company may utilize certain favorable
tax attributes i.e., losses, deductions and credits (except for a certain amount
of foreign tax credits and, in general, net operating losses) only at the time
such attributes reduce the Federal income tax liability of ISP Holdings and its
consolidated subsidiaries (the 'ISP Holdings Group'); and that the Company may
carry back or carry forward its favorable tax attributes only after taking into
account current tax attributes of the ISP Holdings Group. In general, subject to
the foregoing limitations, unused tax attributes carry forward for use in
reducing amounts payable by the Company to ISP Holdings in future years. Subject
to certain exceptions, actual payment for such attributes will be made by ISP
Holdings to the Company only when ISP Holdings receives an actual refund of
taxes from the IRS or, under certain circumstances, the earlier of (i) the dates
of the filing of Federal income tax returns of the Company for taxable years of
the Company following the last taxable year in which it was a member of the ISP
Holdings Group, or (ii) when ISP Holdings no longer owns more than 50% of the
Company. Foreign tax credits not utilized by the Company in computing its tax
sharing payments will be refunded by ISP Holdings to the Company, if such
credits expire unutilized, upon the termination of the statute of limitations
for the year of expiration.
The Tax Sharing Agreement provides for analogous principles to be applied
to any consolidated, combined or unitary state or local income taxes. Under the
Tax Sharing Agreement, ISP Holdings makes all decisions with respect to all
matters relating to taxes of the ISP Holdings Group. The provisions of the Tax
Sharing Agreement take into account both the Federal income taxes the Company
would have incurred if it filed its own separate Federal income tax return and
the fact that the Company is a member of the ISP Holdings Group for Federal
income tax purposes.
The Company was a party to tax sharing agreements with members of the GAF
consolidated group (the 'GAF Group'). As a result of the Separation
Transactions, the Company is no longer included in the consolidated Federal
income tax returns of GAF, and therefore, such tax sharing agreements are no
longer applicable with respect to the future tax liabilities of the Company. The
Company remains obligated, however, with respect to tax liabilities imposed or
that may be imposed for periods prior to the Separation Transactions. Among
other things, those tax sharing agreements provide for the sharing of the GAF
Group's consolidated tax liability based on each member's share of the tax as if
such member filed on a separate basis. Accordingly, a payment of tax would be
made to GAF equal to the Company's allocable share of the GAF Group's
consolidated tax liability. Alternatively, the Company would be entitled to
refunds if losses or other attributes reduce the GAF Group's consolidated tax
liability. Moreover, foreign tax credits generated by the Company not utilized
by GAF will be refunded by GAF or its subsidiary to the Company, if such credits
expire unutilized upon termination of the statute of limitations for the year of
expiration. Furthermore, those tax sharing agreements provide for an
indemnification to the Company for any tax liability attributable to another
member of the GAF Group.
In connection with Rhone-Poulenc Surfactants and Specialties, L.P. (the
'Surfactants Partnership'), GAF Fiberglass Corporation ('GFC') (formerly known
as GAF Chemicals Corporation, and an indirect subsidiary of GAF), has recorded a
deferred tax liability in the amount of $131.4 million, which is reflected as a
liability on the consolidated balance sheet of G-I Holdings. Payment of this
liability (subject to reduction to reflect utilization of the tax attributes of
GAF and its subsidiaries) is not expected earlier than 1999 under present
circumstances. In certain circumstances, GFC could be required to satisfy this
liability earlier than 1999. GAF, G-I Holdings and certain subsidiaries of GAF
have agreed to jointly and severally indemnify the Company against such tax
liability. Prior to the Separation Transactions, the Company was a member of the
same consolidated Federal
F-17
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INCOME TAXES--(CONTINUED)
income tax group as GFC. Subject to such indemnification, the Company would be
severally liable for any tax liability imposed in connection with the
Surfactants Partnership should GAF, G-I Holdings and such subsidiaries be unable
to satisfy such liability. GAF has advised the Company that, in the event the
tax liability becomes payable, GAF believes that it will have access to
sufficient funds to satisfy this liability if so required.
NOTE 3. SALE OF ACCOUNTS RECEIVABLE
In June 1993, the Company sold its domestic trade accounts receivable,
without recourse, for a maximum of $25 million in cash to be made available to
the Company based on eligible domestic receivables outstanding from time to
time. As of November 6, 1996, the agreement under which the Company sells its
domestic trade accounts receivable was extended for one year on substantially
the same terms and conditions, and the maximum purchase amount was increased to
$29 million. The excess of accounts receivable sold over the net proceeds
received is included in 'Accounts receivable, other'. The effective cost to the
Company varies with LIBOR or commercial paper rates and is included in 'Other
income (expense), net'.
In 1996, the Financial Accounting Standards Board issued SFAS No. 125,
relating to accounting for transfers and servicing of financial assets and
extinguishments of liabilities, which will be adopted in 1997. The Company does
not anticipate that the implementation of SFAS No. 125 will have a material
effect on the Company's results of operations or financial position.
NOTE 4. INVENTORIES
At December 31, 1996 and 1995, $49.2 and $56.2 million, respectively, of
domestic inventories were valued using the LIFO method. Inventories comprise the
following:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
Finished goods................ $ 68,436 $ 71,431
Work in process............... 24,261 20,540
Raw materials and supplies.... 17,814 18,634
-------- --------
Total.................... 110,511 110,605
Less LIFO reserve............. (1,925) (2,636)
-------- --------
Inventories................... $108,586 $107,969
-------- --------
-------- --------
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprises the following:
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(THOUSANDS)
Land and land improvements.............. $ 71,653 $ 69,504
Buildings and building equipment........ 85,693 80,880
Machinery and equipment................. 475,917 438,579
Construction in progress................ 45,341 46,547
--------- ---------
Total.............................. 678,604 635,510
Less accumulated depreciation........... (189,130) (159,960)
--------- ---------
Property, plant and equipment, net...... $ 489,474 $ 475,550
--------- ---------
--------- ---------
See Note 12 for information regarding capital leases.
F-18
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt comprises the following:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
9% Senior Notes due 1999................................ $200,000 $200,000
Borrowings under revolving credit facility.............. 70,425 40,800
Obligation on mortgaged property due 1999............... 38,125 38,125
Obligations under capital leases (Note 12).............. 2,068 1,727
Other................................................... 286 --
-------- --------
Total long-term debt............................... 310,904 280,652
Less current maturities................................. (610) (398)
-------- --------
Long-term debt less current maturities.................. $310,294 $280,254
-------- --------
-------- --------
In connection with the issuance of the 9% Senior Notes due 1999 (the '9%
Notes'), the Company entered into interest rate swap agreements ('swaps') with
banks in an aggregate notional principal amount of $200 million. In 1993, the
Company terminated the swaps, resulting in gains of $25.1 million, and entered
into new swaps. The gains were deferred and are being amortized as a reduction
of interest expense over the remaining life of the 9% Notes. As a result of the
new swaps, the effective interest cost to the Company of the 9% Notes varies at
a fixed spread over LIBOR. Based on the fair value of the swaps at December 31,
1996 and 1995, the Company would have incurred losses of $4.8 and $2.8 million,
respectively, representing the estimated amount that would be payable by the
Company if the swaps were terminated at such dates.
The Company may be considered to be at risk, to the extent of the costs of
replacing such swaps at current market rates, in the event of nonperformance by
counterparties. However, since the counterparties are major financial
institutions, the credit ratings of which are continually monitored by the
Company, the risk of such nonperformance is considered by the Company to be
remote.
In connection with the refinancing of the Company's bank facility in
October 1994, the Company recorded an extraordinary charge of $1.2 million
(after an income tax benefit of $.7 million), representing the write-off of
deferred financing fees related to the previous bank credit agreement. In July
1996, the Company refinanced this credit facility with a $400 million five-year
revolving credit facility (the 'Credit Agreement'). Borrowings under the Credit
Agreement bear interest at a floating rate (6.67% on December 31, 1996) based on
the banks' base rate, federal funds rate, Eurodollar rate or a competitive bid
rate (which may be based on LIBOR or money market rates), at the option of the
Company.
As of December 31, 1996, letters of credit in the amount of $8.0 million
were outstanding under the Credit Agreement. The Credit Agreement permits the
Company to make loans to affiliates, and to make available letters of credit for
the benefit of affiliates, in an aggregate amount of up to $75 million, none of
which had been utilized as of December 31, 1996.
The Company has a $38.1 million mortgage obligation, due 1999, on its
headquarters property. Interest on the mortgage is at a floating rate based on
LIBOR.
Borrowings by the Company, including those under the Credit Agreement, are
subject to the application of certain financial covenants contained in such
agreement and in the indentures relating to ISP Holdings' 9% Senior Notes due
2003 and 9 3/4% Senior Notes due 2002. As of December 31, 1996, the Company was
in compliance with such covenants, and the application of such covenants would
not have restricted the amount available for borrowing under the Credit
Agreement. The Credit Agreement and the indenture relating to the 9% Notes also
limit the amount of cash dividends, purchases of treasury stock, and other
restricted payments (as defined) by the Company. As of December 31, 1996, under
the most restrictive of such limitations, the Company could have paid dividends
in the aggregate amount of $80.2 million.
The Credit Agreement and the indenture relating to the 9% Notes contain
additional affirmative and negative covenants, including restrictions on liens,
investments, transactions with affiliates, sale-leaseback
F-19
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. LONG-TERM DEBT--(CONTINUED)
transactions, and restrictions on mergers and transfers of all or substantially
all of the assets of the Company or its subsidiaries. The Credit Agreement also
provides for a default if there is a change in control (as defined) of the
Company.
Neither the Credit Agreement nor the 9% Notes are secured by any assets of
the Company or its subsidiaries. The indenture governing the 9% Notes provides,
subject to certain exceptions, that if the Company issues any debt secured by a
lien on the stock of certain of its subsidiaries or upon any principal property,
then such notes must be equally and ratably secured.
The Company believes that the fair value of its non-public variable rate
indebtedness approximates the book value of such indebtedness because the
interest rates on such indebtedness are at floating short-term rates. The Credit
Agreement also provides for adjustments to the interest rate if there is a
change in the credit rating of the Company. With respect to the Company's
publicly traded debt securities, the Company has obtained estimates of fair
values from an independent source believed to be reliable. The estimated fair
value of the 9% Notes as of December 31, 1996 and 1995 was $207.8 and $214.6
million, respectively.
The aggregate maturities of long-term debt as of December 31, 1996 for the
next five years are as follows:
(THOUSANDS)
-----------
1997.... $ 610
1998.... 628
1999.... 238,503
2000.... 350
2001.... 83,277
In the above table, 1999 maturities include the $200 million of 9% Notes
and the $38.1 million mortgage obligation. Maturities in 2001 include the $70.4
million of borrowings outstanding under the Credit Agreement as of December 31,
1996, based on the expiration of the Credit Agreement in July 2001, and $12.6
million of borrowings from ISP Holdings pursuant to a note agreement maturing in
July 2001 (see Note 9).
At December 31, 1996, the Company's foreign subsidiaries had total
available short-term lines of credit aggregating $38.5 million, of which $16.2
million were unused, and the Company also had a domestic bank line of credit of
$10 million, none of which was utilized. The weighted average interest rate on
the Company's short-term borrowings as of December 31, 1996 and 1995 was 4.6%
and 5.8%, respectively.
NOTE 7. BENEFIT PLANS
Eligible, full-time employees of the Company are covered by various benefit
plans, as described below.
Defined Contribution Plan
The Company provides a defined contribution plan for eligible employees.
The Company contributes up to 7% of participants' compensation (of which up to
4% of participants' compensation, at the participants' option, is contributed in
the form of the Company's common stock at a $.50 per share discount from the
market price on the date of contribution), and also contributes fixed amounts,
ranging from $50 to $750 per year depending on age, to the accounts of
participants who are not covered by a Company-provided postretirement medical
benefit plan. The aggregate contributions by the Company were $6.4, $6.3 and
$6.1 million for 1996, 1995 and 1994, respectively.
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan for
certain hourly employees (the 'Hourly Retirement Plan'). Benefits under this
plan are based on stated amounts for each year of service. The Company's funding
policy is consistent with the minimum funding requirements of ERISA.
F-20
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. BENEFIT PLANS--(CONTINUED)
The Company's net periodic pension cost for the Hourly Retirement Plan
included the following components:
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
(THOUSANDS)
Service cost..................................... $ 315 $ 287 $ 363
Interest cost.................................... 1,439 1,349 1,253
Actual income on plan assets..................... (1,733) (976) (924)
Net deferral and amortization of unrecognized
prior service cost and actuarial losses........ 174 275 343
------- ------ ------
Net periodic pension cost........................ $ 195 $ 935 $1,035
------- ------ ------
------- ------ ------
The following table sets forth the funded status of the Hourly Retirement
Plan:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
Accumulated benefit obligation:
Vested................................................ $ 16,914 $ 16,919
Nonvested............................................. 3,117 2,273
-------- --------
Total accumulated benefit obligation.................... $ 20,031 $ 19,192
-------- --------
-------- --------
Projected benefit obligation............................ $ 20,031 $ 19,192
Fair value of plan assets, primarily listed stocks and
U.S. Government securities............................ (19,076) (15,314)
-------- --------
Projected benefit obligation in excess of plan assets... 955 3,878
Unrecognized prior service cost......................... (1,202) (1,956)
Unrecognized net loss................................... -- (796)
-------- --------
Unfunded (prepaid) accrued pension cost................. $ (247) $ 1,126)
-------- --------
-------- --------
At December 31, 1996, the difference between the 'Projected benefit
obligation in excess of plan assets' and the 'Unfunded (prepaid) accrued pension
cost', in the amount of $1,202,000, has been recorded by the Company as an
intangible asset. The foregoing amount will be amortized to expense over a
period of approximately 15 years, as the Company continues to fund the benefits
under the Hourly Retirement Plan.
In determining the projected benefit obligation, the weighted average
assumed discount rate was 7.75% and 7.5% for 1996 and 1995, respectively. The
expected long-term rate of return on assets, used in determining net periodic
pension cost, was 11% for 1996 and 9% for 1995.
The Company also provides a nonqualified defined benefit retirement plan
for certain key employees. Expense accrued for this plan was $.6, $1.4 and $1.2
million for 1996, 1995 and 1994, respectively.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997.
F-21
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. BENEFIT PLANS--(CONTINUED)
The following table shows the components of the accrued postretirement
health care cost obligation as of December 31, 1996 and 1995:
DECEMBER 31,
------------------
1996 1995
------- -------
(THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees, dependents and beneficiaries eligible for
benefits............................................. $ 8,141 $ 9,053
Active employees fully eligible for benefits............ 1,941 2,042
Active employees not fully eligible for benefits........ 123 121
------- -------
Total accumulated postretirement benefit obligation....... 10,205 11,216
Fair value of plan assets................................. -- --
Unrecognized prior service cost and unrecognized net gains
(losses)................................................ 573 (241)
------- -------
Accrued postretirement benefit obligation................. $10,778 $10,975
------- -------
------- -------
The net periodic postretirement benefit cost included the following
components:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
(THOUSANDS)
Service cost......................................... $ 4 $ 3 $ 39
Interest cost........................................ 805 884 845
Amortization of unrecognized prior service cost...... (39) (145) (25)
----- ----- -----
Net periodic postretirement benefit cost............. $ 770 $ 742 $ 859
----- ----- -----
----- ----- -----
For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. Retirees as of December 31,
1996 who were formerly salaried employees (with certain exceptions) were assumed
to receive a Company subsidy of $700 to $1,000 per year. For retirees over age
65, this subsidy may be replaced by participation in a managed care program.
With respect to retirees who were formerly hourly employees, most such retirees
are subject to a $5,000 per person lifetime maximum benefit. Subject to such
lifetime maximum, a 13% and 7% annual rate of increase in the Company's per
capita cost of providing postretirement medical benefits was assumed for 1997
for such retirees under and over age 65, respectively. To the extent that the
lifetime maximum benefits have not been reached, the foregoing rates were
assumed to decrease gradually to 7% and 6%, respectively, by the year 2003 and
remain at that level thereafter. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.75% and 7.5%
for 1996 and 1995, respectively.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by $877,000 and the aggregate of the
service and interest cost components of the net periodic postretirement benefit
cost for the year 1996 by $118,000.
NOTE 8. STOCK OPTION PLAN
The 1991 Incentive Plan for Key Employees and Directors, as amended ('the
Plan'), authorizes the grant of options to purchase a maximum of 5,000,000
shares of the Company's common stock. In December 1996, the Company's Board of
Directors approved an amendment to the Plan, subject to stockholder approval,
increasing the number of shares as to which options may be granted under the
Plan to 7,000,000. In December 1995, the Company's Board of Directors approved
an amendment to the Plan, which was approved by the Company's stockholders in
1996, to permit the Compensation Committee of the Board of Directors (the
'Committee') to determine the exercise price and vesting schedule of options
granted under the Plan. In December 1995 and December 1996, the Company granted
options to certain employees to purchase 215,500 and 338,645 shares,
respectively, of the Company's common stock at exercise prices ranging from
$.625 to $5.625 below the fair
F-22
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. STOCK OPTION PLAN--(CONTINUED)
market value of such shares on the date of grant. The difference between the
exercise price and the fair market value of such shares on the date of grant is
recognized as compensation expense over the vesting periods of 2 1/2 to 3 years.
Compensation expense was $.3 million and $0 in 1996 and 1995, respectively, for
such options. All other employee options granted under the Plan have a term of
nine years, have an exercise price equal to the fair market value of such shares
on the date of grant and become exercisable at a rate determined by the
Committee at the time of grant. Special vesting rules apply to options granted
to non-employee directors.
The Company has elected the disclosure-only provisions of SFAS No. 123,
'Accounting for Stock-Based Compensation', and applies APB Opinion No. 25 and
related interpretations in accounting for the Plan. If the Company had elected
to recognize compensation cost based on the fair value of awards at grant dates,
the Company's pro forma net income for the years 1996 and 1995 would have been
$80.0 and $67.2 million, respectively, and pro forma earnings per share would
have been $.82 and $.68, respectively. The SFAS No. 123 method of accounting has
not been applied to options granted prior to January 1, 1995, and the resulting
pro forma compensation expense may not be indicative of pro forma expense in
future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share is the estimated present value at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 6%; expected life of 6
years; expected volatility of 27%; and dividend yield of 0%.
The following is a summary of transactions pertaining to the Plan:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000's) PRICE (000's) PRICE
------- -------- ------- --------
Outstanding, January 1............. 3,277 $ 7.86 2,200 $ 7.72
Granted............................ 2,110 11.31 1,355 8.05
Exercised.......................... (115) 6.90 (29) 6.76
Forfeited.......................... (258) 8.17 (249) 7.79
------- -------
Outstanding, December 31........... 5,014 $ 9.32 3,277 $ 7.86
------- -------
------- -------
Options exercisable, December 31... 1,140 $ 8.45 708 $ 8.65
------- -------- ------- --------
------- -------- ------- --------
Based on calculations using the Black-Scholes option-pricing model, the
weighted-average fair value of options granted in 1996 for which the exercise
price equaled the fair market value of such shares on the date of grant was
$3.50 per share, and such weighted average fair value of options granted in 1996
for which the exercise price was less than the fair market value of such shares
on the date of grant was $5.99 per share.
The following is a summary of the status of stock options outstanding and
exercisable under the Plan as of December 31, 1996:
STOCK OPTIONS
OUTSTANDING STOCK OPTIONS
---------------------------------- EXERCISABLE
WEIGHTED -------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
EXERCISE PRICES (000's) PRICE LIFE (000's) PRICE
- ----------------- ------- -------- ----------- ------- --------
$ 5.00-$ 7.50.... 1,945 $ 6.71 5.99 years 654 $ 6.76
$ 7.51-$11.25.... 1,023 9.15 7.75 years 186 8.71
$11.26-$14.00.... 2,046 11.88 8.17 years 300 11.96
------- -------
Total............ 5,014 $ 9.32 7.24 years 1,140 $ 8.45
------- -------- ----------- ------- --------
------- -------- ----------- ------- --------
F-23
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS
Building Materials Corporation of America ('BMCA'), an indirect wholly
owned subsidiary of GAF and an affiliate of the Company, purchases all of its
colored roofing granule requirements from the Company (except for the
requirements of its California roofing plant) under a requirements contract
which was renewed for 1997 and is subject to annual renewal unless terminated by
the Company or BMCA. In addition, in December 1995, U.S. Intec, Inc. ('USI') an
indirect subsidiary of GAF and, as of January 1, 1997, a subsidiary of BMCA,
commenced purchasing substantially all of its requirements for colored roofing
granules from the Company (except for the requirements of its Stockton,
California and Corvallis, Oregon plants) pursuant to a requirements contract
which expires December 31, 1997. In 1996, BMCA and USI purchased a total of
$50.5 million of mineral products from the Company, representing approximately
7% of the Company's total net sales and approximately 59% of the Company's net
sales of mineral products. Sales by the Company to BMCA and USI totaled $45.8
and $42.5 million for 1995 and 1994, respectively.
The receivable from BMCA for sales of mineral products as of December 31,
1996 and 1995 was $3.5 and $2.7 million, respectively, and the receivable from
USI for sales of mineral products at each of December 31, 1996 and 1995 was $.1
million.
Pursuant to a Management Agreement, which expires at the end of 1997, the
Company provides certain general management, administrative, and facilities
services to ISP Holdings and certain of its affiliates, including GAF, BMCA,
USI, G-I Holdings and GFC. Charges by the Company for providing such services
aggregated $4.9, $4.5 and $4.4 million for 1996, 1995 and 1994, respectively,
and are reflected as reductions of 'Selling, general and administrative'
expense. The basis for such charges is an estimate of the costs the Company
incurs to provide management services, including, but not limited to, executive,
legal, tax, treasury and accounting services, and the costs to the Company of
providing and maintaining facilities services at the corporate headquarters,
which is owned by a subsidiary of the Company. In addition to the management
services charge, BMCA paid approximately $.8 million to the Company in 1996 and
$.7 million in each of 1995 and 1994, primarily for telecommunications and
information services, and ISP Holdings, G-I Holdings and BMCA paid an aggregate
of approximately $.5, $.2 and $.3 million in 1996, 1995 and 1994, respectively,
to the Company for certain legal services, which in each case were not
encompassed within the Management Agreement. In connection with the Separation
Transactions, the Management Agreement was modified to incorporate such
services, and, in that connection, the total charges for management fees were
increased to an annual rate of $5.5 million, effective January 1, 1997.
See Note 2 for a discussion of the Tax Sharing Agreement.
Under the terms of the Credit Agreement, the Company or any of its
subsidiaries are permitted to make loans to affiliates, and provide letters of
credit issued for the benefit of such affiliates, up to an aggregate amount not
to exceed $75 million outstanding at any time (see Note 6).
The Company and its subsidiaries also borrow from ISP Holdings and G-I
Holdings and its subsidiaries at the same rates available to the Company under
the Credit Agreement. Such borrowings outstanding from G-I Holdings at December
31, 1995 comprised $50.6 million, classified as current, and $67.2 million,
classified as long-term pursuant to an interest-bearing note maturing in July
2001. Such borrowings from G-I Holdings were repaid in 1996, and, as a result of
the Separation Transactions, loans between the Company and G-I Holdings are
prohibited by ISP Holdings' debt instruments. At December 31, 1996, the Company
had total borrowings from ISP Holdings of $62.6 million, $50 million pursuant to
a note agreement maturing in December 2006 and $12.6 million pursuant to a note
agreement maturing in July 2001.
Certain executive officers of the Company were granted stock appreciation
rights relating to ISP Holdings' common stock. Compensation expense in
connection with such stock appreciation rights is reflected in ISP Holdings'
operating expense and was immaterial for 1996, 1995 and 1994, respectively.
ISP Holdings has issued options to certain employees to purchase shares of
its Redeemable Convertible Preferred Stock; such shares are convertible, at the
holder's option, into shares of common stock of ISP Holdings at a formula price.
The common stock is subject to repurchase by ISP Holdings under certain
circumstances at a
F-24
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS--(CONTINUED)
price equal to current Book Value as defined. No expense is accrued in
connection with the preferred stock options.
NOTE 10. BUSINESS SEGMENT INFORMATION
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(MILLIONS)
Net sales:
Specialty Chemicals....................... $ 587.2 $ 562.0 $ 487.2
Mineral Products(1)....................... 85.6 86.1 81.1
Other..................................... 43.7 40.9 31.7
-------- -------- --------
Net sales................................... $ 716.5 $ 689.0 $ 600.0
-------- -------- --------
-------- -------- --------
Operating income:
Specialty Chemicals(2).................... $ 117.9 $ 106.3 $ 80.6
Mineral Products.......................... 16.5 16.3 14.6
Other 1.6 4.5 4.0
-------- -------- --------
Total operating income...................... $ 136.0 $ 127.1 $ 99.2
-------- -------- --------
-------- -------- --------
Identifiable assets:
Specialty Chemicals(3).................... $ 958.1 $ 953.5 $ 962.5
Mineral Products.......................... 154.5 154.6 158.5
Other..................................... 27.7 25.0 20.0
General Corporate(4)...................... 176.6 179.8 110.3
-------- -------- --------
Total assets................................ $1,316.9 $1,312.9 $1,251.3
-------- -------- --------
-------- -------- --------
Capital expenditures and acquisitions:
Specialty Chemicals....................... $ 41.6 $ 31.1 $ 22.5
Mineral Products.......................... 9.5 6.0 8.3
Other..................................... 3.5 1.8 .3
-------- -------- --------
Total....................................... $ 54.6 $ 38.9 $ 31.1
-------- -------- --------
-------- -------- --------
Depreciation and goodwill amortization:
Specialty Chemicals....................... $ 41.0 $ 38.6 $ 36.1
Mineral Products.......................... 9.6 9.7 9.3
Other..................................... .9 .9 .8
-------- -------- --------
Total....................................... $ 51.5 $ 49.2 $ 46.2
-------- -------- --------
-------- -------- --------
- ------------------
(1) Includes sales to BMCA of $48.1, $45.7 and $42.5 million for 1996, 1995 and
1994, respectively, and sales to USI of $2.4 and $.1 million for 1996 and
1995, respectively.
(2) Does not include operating income of the Company's 50% ownership of
GAF-Huls. The Company's equity in the earnings of GAF-Huls is reflected in
the Consolidated Statements of Income as 'Equity in earnings of joint
venture' below Operating Income.
(3) Identifiable assets of Specialty Chemicals include the Company 50% ownership
of GAF-Huls. See Note 1.
(4) General Corporate assets primarily represent the Company's investments in
trading, available-for-sale and held-to-maturity securities and other
short-term investments, which are held for general corporate purposes and
are not allocated to industry segments.
The Company manufactures a broad spectrum of specialty chemicals having
numerous applications in consumer and industrial products encompassing such
worldwide markets as pharmaceuticals, hair and skin care, plastics,
agricultural, coatings and adhesives. The Company's mineral products business
manufactures ceramic-coated colored roofing granules which are sold primarily to
the North American roofing industry for use in the manufacture of asphalt
roofing shingles. Over 50% of the Company's sales of mineral products are to
BMCA (see Note 9). The Company also manufactures filter products and advanced
materials.
F-25
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
NOTE 11. GEOGRAPHIC INFORMATION
Results set forth below for foreign operations represent sales and
operating income of foreign-based subsidiaries.
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(MILLIONS)
Net sales:
Domestic operations(1).................... $ 361.0 $ 345.2 $ 306.4
Europe(2)................................. 212.3 209.1 180.9
Asia-Pacific.............................. 102.9 101.2 83.4
Other foreign operations.................. 40.3 33.5 29.3
-------- -------- --------
Net sales................................... $ 716.5 $ 689.0 $ 600.0
-------- -------- --------
-------- -------- --------
Operating income:
Domestic operations....................... $ 64.4 $ 57.9 $ 41.3
Europe.................................... 53.1 46.5 37.1
Asia-Pacific.............................. 17.5 20.2 16.6
Other foreign operations.................. 1.0 2.5 4.2
-------- -------- --------
Operating income............................ 136.0 127.1 99.2
Equity in earnings of joint venture......... 5.6 5.4 2.0
Interest expense and other, net............. (15.6) (26.4) (28.7)
-------- -------- --------
Income before income taxes and extraordinary
item...................................... $ 126.0 $ 106.1 $ 72.5
-------- -------- --------
-------- -------- --------
Identifiable assets:
Domestic operations....................... $ 948.4 $ 954.1 $ 974.3
Europe(3)................................. 130.8 133.1 128.9
Asia-Pacific.............................. 41.4 32.2 28.5
Other foreign operations.................. 19.7 13.7 9.3
General Corporate(4)...................... 176.6 179.8 110.3
-------- -------- --------
Total assets................................ $1,316.9 $1,312.9 $1,251.3
-------- -------- --------
-------- -------- --------
- ------------------
(1) Net sales--domestic operations excludes sales by the Company's domestic
subsidiaries to foreign-based subsidiaries of $160.1, $140.9 and $135.1
million for 1996, 1995 and 1994, respectively.
(2) Net sales--Europe excludes sales by the Company's European subsidiaries to
domestic and other foreign-based subsidiaries of $20.7, $19.9 and $12.8
million for 1996, 1995 and 1994, respectively.
(3) Identifiable assets--Europe include the Company's 50% ownership of GAF-Huls.
See Note 1.
(4) General Corporate assets primarily represent the Company's investments in
trading, available-for-sale and held-to-maturity securities and other
short-term investments, which are held for general corporate purposes.
Approximately 60% of the Company's international sales in 1996 were in
countries in Western Europe and Japan which are subject to currency exchange
rate fluctuation risks. See Note 1 for a discussion of the Company's policy to
manage these risks. Other countries in which the Company has sales are subject
to additional risks, including high rates of inflation, exchange controls,
government expropriation and general instability.
NOTE 12. COMMITMENTS AND CONTINGENCIES
ISP Holdings is a holding company without independent businesses or
operations and, as such, is dependent upon the cash flows of the Company in
order to satisfy its obligations. Such obligations include $325 million
principal amount of ISP Holdings' 9% Senior Notes due 2003 and $199.9 million
principal amount of ISP Holdings' 9 3/4% Senior Notes due 2002. ISP Holdings
expects to satisfy such obligations from, among other things, refinancings of
debt, dividends and loans from the Company, as to which there are restrictions
under the Credit Agreement and the indenture relating to the 9% Notes (see Note
6), and payments pursuant to the Tax
F-26
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Sharing Agreement (see Note 2). The Company does not believe that the dependence
of ISP Holdings on the cash flows of the Company should have a material adverse
effect on the operations, liquidity or capital resources of the Company.
Asbestos Litigation Against GAF
GAF and G-I Holdings have established reserves for asbestos bodily injury
claims, as of December 31, 1996, in the amount of $333.8 million (before
estimated present value of recoveries from products liability insurance policies
of $190.5 million and related deferred tax benefits of $51.7 million). GAF and
G-I Holdings have advised the Company that certain components of the
asbestos-related liability and the related insurance recoveries have been
reflected on a discounted basis in their financial statements, and that the
aggregate undiscounted liability as of December 31, 1996, before estimated
recoveries from products liability insurance policies, was $370.6 million. GAF
and G-I Holdings have also advised the Company that they believe that their
reserves adequately reflect their asbestos-related liabilities. GAF's and G-I
Holdings' estimate of liability for asbestos claims is based on a pending
settlement of future asbestos bodily injury claims (the 'Settlement') becoming
effective and on assumptions which relate, among other things, to the number of
new cases filed, the cost of resolving (either by settlement or litigation or
through the mechanism established by the Settlement) pending and future claims,
the realization of related tax benefits, the favorable resolution of pending
litigation against certain insurance companies and the amount of recoveries from
various insurance companies.
Neither the Company nor the assets or operations of the Company, which was
operated as a division of a corporate predecessor of GAF prior to July 1986,
have been employed in the manufacture or sale of asbestos products. The Company
believes that it should have no legal responsibility for damages in connection
with asbestos-related claims.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
administrative proceedings and lawsuits involving environmental matters
('Environmental Claims') in which recovery is sought for the cost of cleanup of
contaminated sites, a number of which are in the early stages or have been
dormant for protracted periods.
The Company estimates that its liability in respect of all Environmental
Claims, as of December 31, 1996, will be approximately $18.5 million, before
reduction for insurance recoveries reflected on the Company's balance sheet
(discussed below) of $6.9 million ('estimated recoveries'). The gross
environmental liability is included within 'Accrued liabilities' and 'Other
liabilities', and the estimated recoveries are included within 'Other current
assets' and 'Other assets'.
In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, liquidity, results
of operations, cash flows or financial position of the Company. However, adverse
decisions or events, particularly as to the liability and the financial
responsibility of the Company's insurers and of the other parties involved at
each site and their insurers, could cause the Company to increase its estimate
of its liability in respect of such matters. It is not currently possible to
estimate the amount or range of any additional liability.
After considering the relevant legal issues and other pertinent factors,
the Company believes that it will receive the estimated recoveries and it may
receive amounts substantially in excess thereof. The Company believes it is
entitled to substantially full defense and indemnity under its insurance
policies for the Environmental Claims, although the Company's insurers have not
affirmed a legal obligation under the policies to provide indemnity for such
claims.
The estimated recoveries are based in part upon interim agreements with
certain insurers. The Company terminated these agreements in 1995 and commenced
litigation seeking amounts substantially in excess of the estimated recoveries.
While the Company believes that its claims are meritorious, there can be no
assurance that the Company will prevail in its efforts to obtain amounts at or
in excess of the estimated recoveries.
F-27
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
In June 1989, the Company entered into a Consent Order with the New Jersey
Department of Environmental Protection (NJDEP) requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee the Company's
performance. In April 1993, NJDEP issued orders which require the prevention of
discharge of contaminated groundwater and stormwater from the site and the
elimination of other potential exposure concerns. The Company believes, although
there can be no assurance, that, taking into account its plans for development
of the site, it can comply with the NJDEP order at a cost of no more than $7.5
million (in connection with which the Company anticipates insurance recoveries
of approximately $5 million).
Lease Commitments
Leases for certain equipment at two of the Company's mineral products
plants are accounted for as capital leases and are included in 'Property, plant
and equipment, net', at December 31, 1996 and 1995 in the amount of $2.3 and
$2.1 million, respectively. The Company also has operating leases for
transportation, production and data processing equipment and for various
buildings. Rental expense on operating leases was $8.7, $8.2 and $7.4 million
for 1996, 1995 and 1994, respectively. Future minimum lease payments for
properties which were held under long-term noncancelable leases as of December
31, 1996 were as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(THOUSANDS)
1997........................................... $ 735 $ 2,865
1998........................................... 694 1,985
1999........................................... 399 1,330
2000........................................... 346 756
2001........................................... 251 598
Later years.................................... 49 988
------- ---------
Total minimum payments......................... 2,474 $ 8,522
---------
Less interest included above................... (406) ---------
-------
Present value of net minimum lease payments.... $ 2,068
-------
-------
Other Commitments
The Company intends to acquire or develop a European manufacturing
facility to meet the needs of the Company's European business. While the
originally anticipated commencement date of the European project has been
deferred because the Company has been able to implement cost efficient capacity
expansions at its existing manufacturing facilities, based upon its current
analyses of additional opportunities for expansion of existing capacity, end-use
demand, and other relevant factors, the Company intends to proceed with the
project by the end of 1997. Costs capitalized to date related to this project
are included in 'Construction in progress'. The Company anticipates utilizing
internally generated funds, existing credit facilities and/or independent
financing to fund the cost of the project.
The Company has received conditional site designation from the New Jersey
Hazardous Waste Facilities Siting Commission for the construction of a hazardous
waste treatment, storage and disposal facility at its Linden, New Jersey
property, and has received approval from the New Jersey Turnpike Authority for a
direct access ramp from the Turnpike to the site. Both the site designation and
the access ramp approval have been appealed to the Courts by the City of Linden.
The Company estimates that the cost of constructing the facility will be
approximately $100 million and, if approved, the facility is anticipated to be
in operation three years after commencement of construction. The Company
anticipates utilizing internally generated cash and/or seeking project or other
independent financing therefor. Accordingly, the Company would not expect such
facility to impact materially its liquidity or capital resources.
F-28
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 BY QUARTER 1995 BY QUARTER
------------------------------------ ------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------ ------ ------ ------ ------ ------ ------ ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net sales...................... $185.6 $185.0 $173.6 $172.3 $179.9 $182.6 $167.8 $158.7
Cost of products sold.......... 112.9 107.1 100.3 98.6 113.2 109.2 99.9 92.4
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... $ 72.7 $ 77.9 $ 73.3 $ 73.7 $ 66.7 $ 73.4 $ 67.9 $ 66.3
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Operating income............... $ 34.2 $ 38.0 $ 33.5 $ 30.3 $ 31.2 $ 36.2 $ 31.8 $ 27.9
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes..... $ 31.3 $ 35.6 $ 31.3 $ 27.8 $ 24.1 $ 29.6 $ 27.5 $ 24.9
Income taxes................... (11.4) (13.0) (11.2) (9.7) (9.0) (11.1) (9.9) (8.7)
------ ------ ------ ------ ------ ------ ------ ------
Net income..................... $ 19.9 $ 22.6 $ 20.1 $ 18.1 $ 15.1 $ 18.5 $ 17.6 $ 16.2
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Earnings per common share(1)... $ .20 $ .23 $ .21 $ .19 $ .15 $ .19 $ .18 $ .17
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
- ------------------
(1) Earnings per share are calculated separately for each quarter and the full
year. Accordingly, annual earnings per share will not necessarily equal the
total of the quarters.
F-29
SCHEDULE II
INTERNATIONAL SPECIALTY PRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1996 EXPENSES DEDUCTIONS 1996
- ----------------------------------------------- ---------- ---------- ---------- ------------
(THOUSANDS)
Valuation and Qualifying Accounts
Deducted from Assets to Which
They Apply:
Allowance for doubtful accounts........... $ 2,879 $ 272 $ 311(a) $ 2,840
Reserve for inventory market valuation.... 13,978 8,329 9,495 12,812
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1995 EXPENSES DEDUCTIONS 1995
- ----------------------------------------------- ---------- ---------- ---------- ------------
(THOUSANDS)
Valuation and Qualifying Accounts
Deducted from Assets to Which
They Apply:
Allowance for doubtful accounts........... $ 2,292 $ 681 $ 94(a) $ 2,879
Reserve for inventory market valuation.... 9,631 8,861 4,514 13,978
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1994 EXPENSES DEDUCTIONS 1994
- ----------------------------------------------- ---------- ---------- ---------- ------------
(THOUSANDS)
Valuation and Qualifying Accounts
Deducted from Assets to Which
They Apply:
Allowance for doubtful accounts........... $ 2,313 $ 325 $ 346(a) $ 2,292
Reserve for inventory market valuation.... 8,991 7,052 6,412 9,631
- ------------------
Notes:
(a) Represents write-offs of uncollectible accounts net of recoveries.
S-1
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
GUARANTOR FINANCIAL DATA (FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS)
The 9% Senior Notes discussed in Note 6 to Consolidated Financial
Statements were issued by ISP Chemicals Inc. and ISP Technologies Inc., domestic
subsidiaries of ISP (the 'Issuers') and are guaranteed by ISP and certain of its
domestic subsidiaries (the 'Subsidiary Guarantors'). Presented below is combined
condensed financial information for the Issuers and the Subsidiary Guarantors,
which together are interdependent and with their subsidiaries constitute all of
the domestic subsidiaries of ISP, except for International Specialty Products
Funding Corporation, a special purpose subsidiary of ISP which is the seller of
the Company's accounts receivable. See Note 3 to Consolidated Financial
Statements. This financial information should be read in conjunction with ISP's
Consolidated Financial Statements and related notes included in this Form 10-K.
Financial information for ISP's foreign subsidiaries, including its investment
in GAF-Huls, is reflected in the following financial information by the equity
method of accounting.
COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(MILLIONS)
Net sales......................................... $521.1 $486.0 $441.6
------ ------ ------
Costs and expenses:
Cost of products sold........................... 355.2 333.7 309.9
Selling, general and administrative............. 88.3 81.2 77.0
Goodwill amortization........................... 13.2 13.2 13.4
------ ------ ------
Total costs and expenses..................... 456.7 428.1 400.3
------ ------ ------
Operating income.................................. 64.4 57.9 41.3
Interest expense.................................. (27.3) (34.3) (28.6)
Equity in income from foreign subsidiaries and 50%
owned joint venture............................. 61.8 53.3 39.4
Other income, net................................. 20.2 22.4 14.3
------ ------ ------
Income before income taxes and extraordinary
item............................................ 119.1 99.3 66.4
Income taxes...................................... (38.6) (31.9) (20.7)
------ ------ ------
Income before extraordinary item.................. 80.5 67.4 45.7
Extraordinary item, net of related income tax
benefit......................................... -- -- (1.2)
------ ------ ------
Net income........................................ $ 80.5 $ 67.4 $ 44.5
------ ------ ------
------ ------ ------
S-2
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
GUARANTOR FINANCIAL DATA (FOR THE ISSUERS AND
THE SUBSIDIARY GUARANTORS)--(CONTINUED)
COMBINED CONDENSED BALANCE SHEETS
FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS
DECEMBER 31,
--------------------
1996 1995
-------- --------
(MILLIONS)
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 5.3 $ 3.3
Investments in trading securities....................... .7 17.3
Investments in available-for-sale securities............ 59.8 71.4
Other short-term investments............................ 6.1 4.9
Accounts receivable, net................................ 4.9 10.4
Receivable from related parties, net.................... 5.0 --
Loan receivable from related party...................... 2.6 --
Inventories............................................. 67.5 72.5
Other current assets.................................... 11.0 10.1
-------- --------
Total Current Assets................................. 162.9 189.9
Property, plant and equipment, net........................ 459.7 449.8
Excess of cost over net assets of businesses acquired,
net..................................................... 417.3 430.5
Advances to and equity in investment in foreign
subsidiaries and 50% owned joint venture................ 192.2 161.1
Other assets.............................................. 22.1 21.4
-------- --------
Total Assets......................................... $1,254.2 $1,252.7
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt......................................... $ -- $ 13.0
Current maturities of long-term debt.................... .6 .4
Loan payable to related party........................... -- 50.6
Accounts payable........................................ 29.7 26.3
Accrued liabilities..................................... 39.9 42.0
Payable to related parties, net......................... -- 9.4
-------- --------
Total Current Liabilities............................ 70.2 141.7
Long-term debt less current maturities.................... 310.0 280.3
Long-term notes payable to related parties................ 62.6 67.2
Deferred income taxes..................................... 52.7 55.7
Other liabilities......................................... 59.7 64.6
Stockholders' Equity...................................... 699.0 643.2
-------- --------
Total Liabilities and Stockholders' Equity........... $1,254.2 $1,252.7
-------- --------
-------- --------
S-3
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
GUARANTOR FINANCIAL DATA (FOR THE ISSUERS AND
THE SUBSIDIARY GUARANTORS)--(CONTINUED)
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------- -------
(MILLIONS)
Cash and cash equivalents, beginning of year.... $ 3.3 $ 9.9 $ 1.1
------ ------- -------
Cash provided by operating activities:
Net income.................................... 80.5 67.4 44.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 35.4 33.6 30.6
Goodwill amortization...................... 13.2 13.2 13.4
Deferred income taxes...................... (2.5) (18.8) (16.5)
(Increase) decrease in working capital
items...................................... 9.4 (7.1) (.6)
Purchases of trading securities............... (10.3) (66.5) (267.2)
Proceeds from sales of trading securities..... 19.5 104.1 284.5
Change in advances to and equity in investment
in foreign subsidiaries and 50% owned joint
venture.................................... (34.4) (26.8) (10.5)
Change in net receivable from/payable to
related parties............................ (14.5) 6.1 (.2)
Change in cumulative translation adjustment... (8.4) 6.9 8.3
Other, net.................................... (4.6) 8.1 (10.0)
------ ------- -------
Net cash provided by operating activities..... 83.3 120.2 76.3
------ ------- -------
Cash used in investing activities:
Capital expenditures.......................... (45.5) (34.4) (29.2)
Purchases of available-for-sale securities.... (170.0) (325.3) (.9)
Purchases of other short-term investments..... (1.3) (2.2) (2.7)
Proceeds from sales of available-for-sale
securities................................. 188.9 255.6 .7
------ ------- -------
Net cash used in investing activities......... (27.9) (106.3) (32.1)
------ ------- -------
Cash provided by (used in) financing activities:
Proceeds (repayments) from sale of accounts
receivable................................. 2.0 3.7 (1.1)
Increase (decrease) in short-term debt........ (13.0) 13.0 (12.7)
Increase (decrease) in borrowings under
revolving credit facility.................. 29.6 (4.2) (82.3)
Other increase (decrease) in long-term debt... .4 (1.4) (.8)
Increase (decrease) in loans from related
parties.................................... (57.9) (15.2) 66.3
Dividends..................................... -- -- (5.0)
Repurchases of common stock................... (15.1) (16.6) (.3)
Other, net.................................... .6 .2 .5
------ ------- -------
Net cash used in financing activities......... (53.4) (20.5) (35.4)
------ ------- -------
Net change in cash and cash equivalents......... 2.0 (6.6) 8.8
------ ------- -------
Cash and cash equivalents, end of year.......... $ 5.3 $ 3.3 $ 9.9
------ ------- -------
------ ------- -------
The advances to and equity in investment in foreign subsidiaries and 50%
owned joint venture and the related equity in income from foreign subsidiaries
and 50% owned joint venture include the net assets and operating results,
respectively, of ISP's wholly owned foreign subsidiaries and its 50% owned joint
venture, GAF-Huls. Domestic operating income includes $39.4, $28.4 and $32.1
million of profits on sales made by ISP's domestic subsidiaries to its
foreign-based subsidiaries for 1996, 1995 and 1994, respectively. Profits earned
on sales to the foreign-based subsidiaries which were included in the
foreign-based subsidiaries' inventories at the end of each period have been
eliminated from domestic operating income and from advances to and equity in
investment in foreign subsidiaries.
Dividends received from foreign-based subsidiaries and GAF-Huls aggregated
$18.7, $26 and $59.8 million for 1996, 1995 and 1994, respectively.
S-4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
3.1 -- Certificate of Incorporation of ISP (incorporated by reference to
Exhibit 3.1 to ISP's Registration Statement on Form S-1,
Registration No. 33-40337) (the 'Common Stock Registration
Statement').
3.2 -- By-laws of ISP (incorporated by reference to Exhibit 3.2 to the
Common Stock Registration Statement).
3.3 -- Certificate of Incorporation of ISP Chemicals (incorporated by
reference to Exhibit 3.3 to ISP's Registration Statement on Form
S-1, Registration No. 33-44862) (the '9% Note Registration
Statement').
3.4 -- By-laws of ISP Chemicals (incorporated by reference to Exhibit 3.4
to the 9% Note Registration Statement).
3.5 -- Certificate of Incorporation of ISP Technologies (incorporated by
reference to Exhibit 3.5 to the 9% Note Registration Statement).
3.6 -- By-laws of ISP Technologies (incorporated by reference to Exhibit
3.6 to the 9% Note Registration Statement).
4 -- Indenture, dated as of March 1, 1992, relating to ISP's 9% Senior
Notes due March 1, 1999 (incorporated by reference to Exhibit 4 to
the 9% Note Registration Statement).
10.1 -- Management Agreement, dated as of March 3, 1992 ('Management
Agreement'), among GAF, G-I Holdings, G Industries Corp., ISP, GAF
Building Materials Corporation and GAF Broadcasting Company, Inc.
(incorporated by reference to Exhibit 10.5 to ISP's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.2 -- Amendment No. 1, dated as of January 1, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.10 to ISP's
Annual Report on Form 10-K for the year ended December 31, 1993).
10.3 -- Amendment No. 2, dated as of May 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.1 to ISP's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1994).
10.4 -- Amendment No. 3, dated as of December 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.4 to ISP's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.5 -- Amendment No. 4, dated as of December 31, 1995, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-4 of G-I Holdings, Registration No.
333-2436).
10.6 -- Amendment No. 5, dated as of October 18, 1996, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to ISP
Holdings' Registration Statement on Form S-4, Registration No.
333-17827) (the 'ISP Holdings Registration Statement').
10.7 -- Amendment No. 6, dated as of January 1, 1997, to the Management
Agreement (incorporated by reference to Exhibit 10.8 to BMCA's
Registration Statement on Form S-4 (Registration No. 333-20859)).
10.8 -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP
Holdings, ISP and certain subsidiaries of ISP (incorporated by
reference to Exhibit 10.8 to the ISP Holdings Registration
Statement).
10.9 -- Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to ISP's Registration Statement on Form
S-1, Registration No. 33-40337).*
10.10 -- ISP Amended and Restated 1991 Incentive Plan for Key Employees and
Directors ('Incentive Plan')(incorporated by reference to Exhibit 99
to ISP's Registration Statement on Form S-8, Registration No.
33-92518).*
10.11 -- Amendment to the Incentive Plan.*
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
10.12 -- Agreement, dated July 30, 1993, between ISP and Carl R. Eckardt
(incorporated by reference to Exhibit 10.16 to the Registration
Statement on Form S-4 of G-I Holdings (Registration No. 33-72220)).*
10.13 -- Letter Agreement, dated October 15, 1996, between GAF and Dr. Peter
Heinze (incorporated by reference to Exhibit 10.14 to the ISP
Holdings Registration Statement).*
10.14 -- Form of Maintenance Agreement between ISP and ISP Chemicals
(incorporated by reference to Exhibit 10.18 to the 9% Note
Registration Statement).
10.15 -- Form of Assignment and Assumption Agreement between G Industries
Corp. and ISP (incorporated by reference to Exhibit 10.19 to the 9%
Note Registration Statement).
10.16 -- Form of Assignment and Assumption Agreement among ISP, ISP Chemicals
and ISP Technologies (incorporated by reference to Exhibit 10.20 to
the 9% Note Registration Statement).
10.17 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Chemicals (incorporated by reference to Exhibit 10.21 to the 9% Note
Registration Statement).
10.18 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Technologies (incorporated by reference to Exhibit 10.22 to the 9%
Note Registration Statement).
10.19 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Chemicals (incorporated by reference to Exhibit 10.23 to the 9%
Note Registration Statement).
10.20 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Technologies (incorporated by reference to Exhibit 10.24 to the
9% Note Registration Statement).
10.21 -- Form of Option Agreement relating to Cumulative Redeemable Preferred
Stock of ISP Holdings.*
10.22 -- Form of ISP Holdings Stock Appreciation Right Agreement.*
21 -- Subsidiaries of ISP and ISP Chemicals; ISP Technologies has no
subsidiaries.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for fiscal year 1996, which is submitted
electronically to the Securities and Exchange Commission for
information only.
- ------------------
* Management and/or compensation plan or arrangement.