UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 29, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-17827-01
ISP CHEMCO INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0382622
(State of Incorporation) (I.R.S. Employer
Identification No.)
300 Delaware Avenue, Suite 303, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 427-5818
___________________________________
See Table of Additional Registrants
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 / /
As of November 12, 2002, 100 shares of ISP Chemco Inc. common stock (par
value $.01 per share) were outstanding. There is no trading market for the
common stock of the registrant. As of November 12, 2002, each of the additional
registrants had the number of shares outstanding which is shown on the table
below. There is no trading market for the common stock of the additional
registrants. No shares of the registrant or the additional registrants were held
by non-affiliates.
THE REGISTRANT AND THE ADDITIONAL REGISTRANTS MEET THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
ADDITIONAL REGISTRANTS
Address, including zip
Commission File code and telephone
Exact name of registrant as State or other No. of No./ I.R.S. number, including area
specified in its charter jurisdiction of Shares Employer code, of registrant's
incorporation or Outstanding Identification No. principal executive
organization offices
- --------------------------- ---------------- ----------- ------------------ -----------------------
ISP Chemicals Inc. Delaware 10 333-70144-08/ Route 95 Industrial Area,
22-3807357 P.O. Box 37
Calvert City, KY 42029
(270) 395-4165
ISP Minerals Inc. Delaware 10 333-70144-07/ 34 Charles Street
22-3807370 Hagerstown, MD 21740
(301) 733-4000
ISP Technologies Delaware 10 333-70144-09/ 4501 Attwater Avenue
Inc. 22-3807372 and State Highway 146
Texas City, TX 77590
(409) 945-3411
ISP Management Delaware 10 333-70144-13/ 1361 Alps Road
Company, Inc. 22-3807364 Wayne, NJ 07470
(973) 628-4000
Bluehall Incorporated Delaware 1 033-44862-15/ c/o ISP Management
13-3335905 Company, Inc.
1361 Alps Road
Wayne, NJ 07470
(973) 628-4000
Verona Inc. Delaware 100 033-44862-16/ 1361 Alps Road
22-3036319 Wayne, NJ 07470
(973) 628-4000
ISP Real Estate Company, Delaware 2 033-44862-12/ 1361 Alps Road
Inc. 22-2886551 Wayne, NJ 07470
(973) 628-4000
ISP Freetown Fine Delaware 10 033-70144-12/ 238 South Main Street
Chemicals Inc. 52-2069636 Assonet, MA 02702
(508) 672-0634
ISP International Corp. Delaware 10 033-44862-07/ 300 Delaware Avenue
51-0333734 Suite 303
Wilmington, Delaware
19801
(302) 427-5715
ISP (Puerto Rico) Inc. Delaware 10 033-44862-03/ Mirador de Bairoa
22-2934561 Calle 27 ST-14
HC01 Box 29030
PMB 15
Caguas, PR 00725-8900
(787) 744-3188
ISP Alginates Inc. Delaware 10 333-70144-11/ 2145 East Belt Street
22-3676745 San Diego, CA 92113
(619) 557-3100
ISP Environmental Delaware 10 033-44862-04/ 1361 Alps Road
Services Inc. 51-0333801 Wayne, NJ 07470
(973) 628-4000
ISP Global Delaware 10 333-70144-10/ 300 Delaware Avenue
Technologies Inc. 22-3807358 Suite 303
Wilmington, Delaware
19801
(302) 427-5852
ISP Investments Inc. Delaware 10 033-44862-08/ 300 Delaware Avenue
22-3807361 Suite 303
Wilmington, Delaware
19801
(302) 427-5822
ISP Chemicals LLC Delaware N/A 333-70144-04/ Route 95 Industrial Area
22-3807378 P.O. Box 37
Calvert City, Kentucky
42029
(270) 395-4165
ADDITIONAL REGISTRANTS
Address, including zip
Commission File No./ code and telephone
Exact name of registrant as State or other No. of I.R.S. Employer number, including area
specified in its charter jurisdiction of Shares Identification No. code, of registrant's
incorporation or Outstanding principal executive
organization offices
- --------------------------- ---------------- ----------- -------------------- -------------------------------
ISP Management LLC Delaware N/A 333-70144-05/ 1361 Alps Road
22-3807385 Wayne, NJ 07470
(973) 628-4000
ISP Minerals LLC Delaware N/A 333-70144-01/ 34 Charles Street
22-3807387 Hagerstown, MD 21740
(301) 733-4000
ISP Technologies Delaware N/A 333-70144-06/ 4501 Attwater Avenue and
LLC 22-3807390 State Highway 146
Texas City, TX 77590
(409) 945-3411
ISP Investments Delaware N/A 333-70144-03/ 300 Delaware Avenue
LLC 22-3807381 Suite 303
Wilmington, DE 19801
(302) 427-5822
ISP Global Delaware N/A 333-70144-02/ 300 Delaware Avenue
Technologies 22-3807380 Suite 303
LLC Wilmington, DE 19801
(302) 427-5852
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Third Quarter Ended Nine Months Ended
-------------------- ------------------
Sept. 30, Sept. 29, Sept. 30, Sept. 29,
2001 2002 2001 2002
-------- --------- -------- --------
(Thousands)
Net sales............................ $ 188,633 $ 208,363 $ 595,124 $ 642,211
--------- --------- --------- ---------
Costs and Expenses:
Cost of products sold.............. (114,896) (132,105) (370,491) (416,137)
Selling, general and administrative (39,137) (40,566) (120,191) (126,848)
Gain on sale of assets............. - - - 5,468
Gains on settlement of contracts... - - - 6,760
Amortization of goodwill and
intangibles...................... (4,010) (125) (12,031) (680)
--------- --------- --------- ---------
Total costs and expenses ....... (158,043) (172,796) (502,713) (531,437)
--------- --------- --------- ---------
Operating income..................... 30,590 35,567 92,411 110,774
Interest expense..................... (20,326) (14,050) (54,573) (45,847)
Investment income, net of
investment-related expenses of
$2,560............................. - - 27,618 -
Other expense, net................... (1,079) (4,245) (10,078) (6,201)
--------- --------- --------- ---------
Income before income taxes........... 9,185 17,272 55,378 58,726
Income taxes......................... (3,232) (6,407) (19,449) (20,688)
--------- --------- --------- ---------
Income before extraordinary item and
cumulative effect of accounting
change............................ 5,953 10,865 35,929 38,038
Extraordinary item - loss on early
retirement of debt, net of income
tax benefit of $1,460.............. - - - (2,834)
Cumulative effect of change in
accounting principle, net of
income tax benefit of $216 in 2001. - - (440) (155,400)
--------- --------- --------- ---------
Net income (loss).................... $ 5,953 $ 10,865 $ 35,489 $(120,196)
========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
ISP CHEMCO INC.
CONSOLIDATED BALANCE SHEETS
Sept. 29,
December 31, 2002
2001 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 10,830 $ 9,011
Restricted cash................................ 182,130 -
Accounts receivable, trade, net................ 86,611 90,861
Accounts receivable, other..................... 21,171 23,190
Income taxes receivable........................ 5,743 -
Receivable from related parties, net........... 11,599 15,580
Inventories.................................... 190,582 177,584
Deferred income tax benefits................... 32,929 36,844
Other current assets........................... 8,624 10,016
---------- ----------
Total Current Assets......................... 550,219 363,086
Property, plant and equipment, net............... 556,725 559,353
Goodwill, net.................................... 497,402 325,706
Long-term receivable from related party.......... 28,583 29,869
Intangible assets, net........................... 15,167 8,385
Other assets..................................... 56,627 57,855
---------- ----------
Total Assets..................................... $1,704,723 $1,344,254
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt................................ $ 143 $ 158
Current maturities of long-term debt........... 184,500 2,609
Accounts payable............................... 43,719 58,311
Accrued liabilities............................ 93,895 81,015
Income taxes................................... - 10,388
---------- ----------
Total Current Liabilities.................... 322,257 152,481
---------- ----------
Long-term debt less current maturities........... 719,557 634,332
---------- ----------
Deferred income taxes............................ 164,103 166,655
---------- ----------
Other liabilities................................ 72,682 66,850
---------- ----------
Shareholder's Equity:
Common stock, $.01 par value per share;
1,000 shares authorized; 100 shares issued
and outstanding ............................. - -
Additional paid-in capital..................... 390,989 398,023
Retained earnings (accumulated deficit)........ 67,164 (53,032)
Accumulated other comprehensive loss........... (32,029) (21,055)
---------- ----------
Total Shareholder's Equity................... 426,124 323,936
---------- ----------
Total Liabilities and Shareholder's Equity....... $1,704,723 $1,344,254
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
-------------------
Sept. 30, Sept. 29,
2001 2002
-------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 14,763 $ 10,830
-------- --------
Cash provided by (used in) operating activities:
Net income (loss)...................................... 35,489 (120,196)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item................................. - 2,834
Cumulative effect of change in accounting principle 440 155,400
Gain on sale of assets............................. - (5,468)
Depreciation....................................... 39,243 42,127
Amortization of goodwill and intangibles........... 12,031 680
Deferred income taxes.............................. (11,482) 7,574
Unrealized losses on trading securities and other
short-term investments........................... 1,039 -
(Increase) decrease in working capital items........... (39,548) 9,093
Purchases of trading securities........................ (217,335) -
Proceeds from sales of trading securities.............. 376,292 -
Proceeds (repayments) from sale of accounts receivable. (7,791) 3,932
(Increase) decrease in receivable from related parties. 51 (5,111)
Change in cumulative translation adjustment............ (765) 9,374
Other, net............................................. 1,756 (5,524)
-------- --------
Net cash provided by operating activities................ 189,420 94,715
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. (58,716) (42,471)
Net proceeds from sale of assets....................... - 27,271
Purchases of available-for-sale securities............. (121,299) -
Proceeds from sales of available-for-sale securities... 19,700 -
Proceeds from sales of other short-term investments.... 12,529 -
-------- --------
Net cash used in investing activities.................... (147,786) (15,200)
-------- --------
Cash provided by (used in) financing activities:
Increase (decrease) in short-term debt................. (108,542) 15
Proceeds from issuance of debt......................... 526,364 -
Decrease in borrowings under revolving credit facility. (115,400) (85,250)
Repayments of long-term debt........................... (65,059) (182,202)
Borrowings from parent company......................... 28,915 -
Call premium on redemption of debt..................... - (2,734)
(Increase) decrease in restricted cash................. (257,649) 182,130
Financing fees and expenses............................ (13,789) (820)
Effect of Restructuring - transfer to ISP Investco LLC. (22,220) -
Dividends and distributions to parent company.......... (35,000) -
Capital contribution from parent company............... 20,116 6,891
-------- --------
Net cash used in financing activities.................... (42,264) (81,970)
-------- --------
Effect of exchange rate changes on cash.................. (219) 636
-------- --------
Net change in cash and cash equivalents.................. (849) (1,819)
-------- --------
Cash and cash equivalents, end of period................. $ 13,914 $ 9,011
======== ========
3
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- (CONTINUED)
Nine Months Ended
-------------------
Sept. 30, Sept. 29,
2001 2002
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 42,517 $ 57,918
Income taxes (including taxes paid pursuant to
the Tax Sharing Agreement).................... 28,685 5,278
Acquisition of FineTech Ltd.:
Fair market value of assets acquired............. $ 26,547
Purchase price of acquisition.................... 22,450
--------
Liabilities assumed.............................. $ 4,097
========
Acquisition of mineral products facility:
Fair market value of assets acquired............. $ 11,421
Purchase price of acquisition.................... 11,421
--------
Liabilities assumed.............................. $ -
========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for ISP Chemco Inc. (the "Company")
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position of the Company and its consolidated subsidiaries
at September 29, 2002, and the results of operations and cash flows for the
third quarter and nine months ended September 30, 2001 and September 29, 2002.
All adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the annual consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001 (the "Form 10-K").
NOTE 1. RETIREMENT OF DEBT
On January 14, 2002, the Company's indirect parent company, International
Specialty Products Inc. ("ISP"), redeemed the remaining $307.9 million aggregate
principal amount of its 9% Senior Notes due 2003 (the "2003 Notes"), of which
$182.1 million was reflected on the Company's Consolidated Balance Sheet at
December 31, 2001. The 2003 Notes were redeemed at a redemption price of 101.5%
of the principal amount plus accrued and unpaid interest to the redemption date.
As a result, the Company recorded an extraordinary loss on the early retirement
of debt of $2.8 million ($4.3 million before income tax benefit of $1.5
million). The extraordinary charge was comprised of $2.7 million of call
premium, $0.2 million of remaining discount amortization and the write-off of
$1.4 million of unamortized deferred financing fees. The redemption was funded
utilizing a restricted cash escrow account which had been established in 2001 in
connection with the issuances of long-term debt.
NOTE 2. RECENT ACCOUNTING DEVELOPMENT
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life. However, goodwill will
be subject to at least an annual assessment for impairment and more frequently
if circumstances indicate a possible impairment. Companies must perform a
fair-value-based goodwill impairment test. In addition, under SFAS No. 142, an
acquired intangible asset should be separately recognized if the benefit of the
intangible is obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged.
Intangible assets will be amortized over their useful lives. The Company adopted
SFAS No. 142 effective as of January 1, 2002. Accordingly, the Company completed
a transitional impairment test, effective January 1, 2002, and recognized a
goodwill impairment loss of $155.4 million as the cumulative effect of a change
in accounting principle. The Statement of Operations for the first quarter of
2002 has been restated to reflect this loss. The write-off represents the
goodwill associated with the Company's Performance Chemicals, Fine Chemicals and
Industrial business segment and was based upon the Company's estimate of fair
value for these businesses, considering expected future cash flows and
profitability. The Company intends to complete its annual test for impairment by
the end of the year 2002.
Following is a reconciliation showing "Income before extraordinary item and
cumulative effect of accounting change" and "Net income (loss)," as reported for
the third quarters and nine months ended September 30, 2001 and September 29,
2002, and as adjusted to exclude amortization of goodwill.
5
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. RECENT ACCOUNTING DEVELOPMENT - (Continued)
Third Quarter Ended Nine Months Ended
-------------------- ------------------
Sept. 30, Sept. 29, Sept. 30, Sept. 29,
2001 2002 2001 2002
-------- --------- -------- --------
(Thousands)
Income before extraordinary item
and cumulative effect of
accounting change, as reported..... $ 5,953 $ 10,865 $ 35,929 $ 38,038
Add back: goodwill amortization...... 4,010 - 12,031 -
--------- --------- -------- ---------
Income before extraordinary item and
cumulative effect of accounting
change, as adjusted................ $ 9,963 $ 10,865 $ 47,960 $ 38,038
========= ========= ======== =========
Net income (loss), as reported....... $ 5,953 $ 10,865 $ 35,489 $(120,196)
Add back: goodwill amortization...... 4,010 - 12,031 -
--------- --------- -------- ---------
Net income (loss), as adjusted....... $ 9,963 $ 10,865 $ 47,520 $(120,196)
========= ========= ======== =========
NOTE 3. GAIN ON SALE OF ASSETS
In April 2002, the Company sold its Haifa, Israel-based FineTech, Ltd.
business to Pharmaceutical Resources, Inc. ("PRI") for $32 million. The Company
recorded a second quarter pre-tax gain, after expenses, of $5.5 million related
to this transaction. Also see Note 4.
NOTE 4. GAINS ON SETTLEMENT OF CONTRACTS
In December 2001, ISP entered into a letter agreement to sell its
pharmaceutical fine chemicals business, including its Haifa, Israel-based
FineTech Ltd. business and its Columbus, Ohio manufacturing facility to PRI. In
February 2002, the Company received a $250,000 payment from PRI in consideration
of extending the negotiations pursuant to the letter agreement. In March 2002,
the Company announced that the sale would not be consummated due to the failure
of PRI to proceed with the transaction in a timely manner. Under the terms of
the letter agreement, the Company received a $3.0 million break-up fee.
Accordingly, the Company recognized a first quarter 2002 pre-tax gain of $2.8
million, representing the total cash received in February and March of $3.25
million less related expenses of $0.4 million.
In the second quarter of 2002, the Company received $4.0 million in
settlement of a manufacturing and supply contract with a customer of the Fine
Chemicals business. After related expenses, a pre-tax gain of $3.9 million was
recognized.
6
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. ACQUISITION
In April 2002, the Company acquired the roofing granules manufacturing
operations in Ione, California of Reed Minerals, a division of Harsco
Corporation. In a related transaction, the Company also acquired the adjacent
quarry operations and certain mining assets from Hanson Aggregates Mid-Pacific,
Inc. The total purchase price of the acquisitions was $11.4 million.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
Third Quarter Ended Nine Months Ended
-------------------- -------------------
Sept. 30, Sept. 29, Sept. 30, Sept. 29,
2001 2002 2001 2002
------- -------- -------- ---------
(Thousands)
Net income (loss)............................ $ 5,953 $ 10,865 $ 35,489 $(120,196)
-------- -------- -------- ---------
Other comprehensive income (loss), net of tax:
Change in unrealized losses on
available-for-sale securities:
Unrealized holding losses arising during
the period, net of income tax benefit
of $39,099................................ - - (74,884) -
Less: reclassification adjustment for
losses included in net income, net of
income tax benefit of $311................ - - (574) -
Effect of Corporate Restructuring in 2001... - - 40,290 -
-------- -------- -------- ---------
Total change for the period................. - - (34,020) -
-------- -------- -------- ---------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of income tax
benefit of $443, $0, $1,070 and $12,
respectively.............................. (819) - (1,979) (22)
Less: reclassification adjustment for
losses included in net income, net of
income tax benefit of $151, $0, $341
and $534, respectively.................... (280) - (630) (986)
-------- -------- -------- ---------
Total change for the period................. (539) - (1,349) 964
-------- -------- -------- ---------
Foreign currency translation adjustment....... 7,992 (1,128) (984) 10,010
Effect of Corporate Restructuring in 2001..... - - (3,364) -
-------- -------- -------- ---------
Net translation adjustment for the period... 7,992 (1,128) (4,348) 10,010
-------- -------- -------- ---------
Total other comprehensive income (loss)....... 7,453 (1,128) (39,717) 10,974
-------- --------- -------- ---------
Comprehensive income (loss)................... $ 13,406 $ 9,737 $ (4,228) $(109,222)
======== ========= ======== =========
7
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. COMPREHENSIVE INCOME (LOSS) - (CONTINUED)
Changes in the components of "Accumulated other comprehensive loss" for the
nine months ended September 29, 2002 are as follows:
Unrealized Cumulative
Losses on Foreign Accumulated
Derivative Currency Other
Hedging Translation Comprehensive
Instruments Adjustment Loss
---------- ---------- -----------
(Thousands)
Balance, December 31, 2001....... $ (964) $ (31,065) $ (32,029)
Change for the period............ 964 10,010 10,974
---------- --------- ---------
Balance, September 29, 2002...... $ - $ (21,055) $ (21,055)
========== ========= =========
NOTE 7. BUSINESS SEGMENT INFORMATION
Third Quarter Ended Nine Months Ended
--------------------- --------------------
Sept. 30, Sept. 29, Sept. 30, Sept. 29,
2001 2002 2001 2002
--------- --------- -------- ---------
(Thousands)
Net sales (1):
Personal Care............................. $ 45,487 $ 51,047 $ 150,599 $ 156,164
Pharmaceutical, Food and Beverage......... 57,846 62,269 169,645 181,039
Performance Chemicals, Fine Chemicals and
Industrial.............................. 61,510 70,493 211,068 230,751
--------- --------- --------- ---------
Total Specialty Chemicals............... 164,843 183,809 531,312 567,954
Mineral Products (2)...................... 23,790 24,554 63,812 74,257
--------- --------- --------- ---------
Net sales................................... $ 188,633 $ 208,363 $ 595,124 $ 642,211
========= ========= ========= =========
Operating income(1):
Personal Care............................. $ 5,743 $ 10,008 $ 27,026 $ 28,101
Pharmaceutical, Food and Beverage......... 12,430 16,990 39,354 43,429
Performance Chemicals, Fine Chemicals and
Industrial (3).......................... 7,322 2,959 16,907 20,776
--------- --------- --------- --------
Total Specialty Chemicals............... 25,495 29,957 83,287 92,306
Mineral Products.......................... 5,078 5,540 8,434 18,428
--------- --------- --------- --------
Total segment operating income............ 30,573 35,497 91,721 110,734
Unallocated corporate office.............. 17 70 690 40
--------- --------- --------- ---------
Total operating income...................... 30,590 35,567 92,411 110,774
Interest expense, investment income
and other expense, net.................... (21,405) (18,295) (37,033) (52,048)
--------- --------- --------- ---------
Income before income taxes.................. $ 9,185 $ 17,272 $ 55,378 $ 58,726
========= ========= ========= =========
(1) Net sales and operating income for the third quarter and the first nine
months of 2001 for the three Specialty Chemicals business segments
have been restated to conform to the 2002 presentation. In 2002, the
Company realigned its Alginates business based on the markets for its
products. Sales and operating income for the Alginates business are
now included in the Personal Care, Pharmaceutical,
8
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. BUSINESS SEGMENT INFORMATION - (CONTINUED)
Food and Performance Chemicals businesses. Prior to 2001, the sales and
operating income of the Alginates business represented the Food business
of the Pharmaceutical, Food and Beverage business segment.
(2) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $18.7 and $19.1 million for the third quarter of
2001 and 2002, respectively, and $50.5 and $57.9 million for the first
nine months of 2001 and 2002, respectively.
(3) Operating income for the Performance Chemicals, Fine Chemicals and
Industrial business segment for the first nine months of 2002 includes a
gain of $5.5 million from the sale of the FineTech business (see Note 3)
and a $3.9 million gain from the settlement of a manufacturing and supply
contract (see Note 4). For the first nine months of 2002, operating income
for the Performance Chemicals, Fine Chemicals and Industrial business
segment also includes a gain of $2.8 million from the termination of a
contract related to the sale of the FineTech business (see Note 4).
NOTE 8. HEDGING AND DERIVATIVES
In June 2001, the Company entered into $450.0 million of Senior Credit
Facilities, which include a $225.0 million term loan. The Company designated
interest rate swaps, with a notional amount of $100 million, as a hedge of its
exposure to changes in the eurodollar rate under the term loan. The interest
rate swaps are structured to receive interest based on the eurodollar rate and
pay interest on a fixed rate basis. A cash flow hedging relationship was
established whereby the interest rate swaps hedged the risk of changes in the
eurodollar rate related to borrowings against the term loan through July 2002.
These swaps matured in June and July of 2002. During the first nine months of
2002, $1.9 million related to the interest rate swaps was reclassified and
charged against interest expense.
9
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. INVENTORIES
Inventories comprise the following:
December 31, September 29,
2001 2002
------------ -------------
(Thousands)
Finished goods................ $120,797 $110,739
Work-in-process............... 36,960 31,943
Raw materials and supplies.... 32,825 34,902
-------- --------
Inventories................... $190,582 $177,584
======== ========
At December 31, 2001 and September 29, 2002, $60.1 and $61.6 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, the value of
inventories would have been $3.7 and $2.1 million higher at December 31, 2001
and September 29, 2002, respectively.
NOTE 10. GUARANTOR FINANCIAL INFORMATION
In June 2001, the Company and three of its wholly owned subsidiaries issued
$205.0 million aggregate principal amount of 10 1/4% Senior Subordinated Notes
due 2011 (the "2011 Notes") in a private placement. On each of July 31, 2001 and
November 13, 2001, the Company and its three subsidiaries issued an additional
$100.0 million of the 2011 Notes. The 2011 Notes are guaranteed by all of the
Company's other domestic subsidiaries, other than certain immaterial
subsidiaries and the Company's accounts receivable financing subsidiary. These
guarantees are full, unconditional and joint and several.
ISP Global Technologies Inc., which is a guarantor of these senior notes,
is party to a License and Royalty Agreement with non-guarantor foreign
affiliates. Under this agreement, the non-guarantor affiliates have been given
license for the use of the Patent Rights, Know-how and Trademarks in connection
with the manufacture, use and sale of the Company's products.
Presented below is condensed consolidating financial information for the
Company, the guarantor subsidiaries and the non-guarantor subsidiaries. This
financial information should be read in conjunction with the Consolidated
Financial Statements and other notes related thereto. Separate financial
information for the guarantor subsidiaries and non-guarantor subsidiaries is not
included herein because management has determined that such information is not
material to investors.
10
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED SEPTEMBER 30, 2001
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 93,847 $ 94,786 $ - $ 188,633
Intercompany net sales ................... - 50,549 8,314 (58,863) -
-------- ---------- ---------- ---------- -----------
Total net sales ....................... - 144,396 103,100 (58,863) 188,633
-------- ---------- ---------- ---------- -----------
Costs and Expenses:
Cost of products sold ................. - (99,076) (74,683) 58,863 (114,896)
Selling, general and administrative ... (302) (26,929) (11,906) (39,137)
Goodwill amortization ................. (908) (3,102) - (4,010)
-------- ---------- --------- --------- ----------
Total costs and expenses ........... (1,210) (129,107) (86,589) 58,863 (158,043)
-------- ---------- --------- --------- ----------
Operating income ......................... (1,210) 15,289 16,511 - 30,590
Equity in income of subsidiaries ......... 19,570 - - (19,570) -
Intercompany royalty income (expense) net - 6,569 (6,569) -
Intercompany dividend income ............. - 3,571 - (3,571) -
Interest expense ......................... (12,722) (6,999) (605) (20,326)
Other expense, net ....................... (181) (651) (247) (1,079)
-------- --------- -------- -------- -----------
Income before income taxes ............... 5,457 17,779 9,090 (23,141) 9,185
Income tax (provision) benefit ........... 4,067 (5,622) (1,677) (3,232)
-------- ---------- ---------- ---------- -----------
Net income ............................... $ 9,524 $ 12,157 $ 7,413 $ (23,141) $ 5,953
======== ========== ========== ========== ===========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED SEPTEMBER 29, 2002
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 108,305 $ 100,058 $ - $ 208,363
Intercompany net sales ................... - 50,815 2,704 (53,519) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 159,120 102,762 (53,519) 208,363
-------- ---------- ---------- ---------- ----------
Costs and Expenses:
Cost of products sold ................. - (111,557) (74,067) 53,519 (132,105)
Selling, general and administrative ... - (29,367) (11,199) (40,566)
Amortization of intangibles ........... - (150) 25 (125)
-------- --------- ---------- ---------- ----------
Total costs and expenses ............ - (141,074) (85,241) 53,519 (172,796)
-------- --------- ---------- ---------- ----------
Operating income ......................... - 18,046 17,521 - 35,567
Equity in income of subsidiaries ......... 15,119 - - (15,119) -
Intercompany royalty income (expense), net - 7,356 (7,356) -
Intercompany dividend income ............. - 4,408 - (4,408) -
Interest expense ......................... 919 (15,994) 1,025 (14,050)
Other expense, net ....................... (682) (1,381) (2,182) (4,245)
-------- --------- --------- --------- ---------
Income before income taxes ............... 15,356 12,435 9,008 (19,527) 17,272
Income tax (provision) benefit ........... (83) (6,522) 198 (6,407)
-------- ---------- ---------- ---------- ----------
Net income ............................... $ 15,273 $ 5,913 $ 9,206 $ (19,527) $ 10,865
======== ========== ========== ========== ==========
11
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------- ------------ ------------ ------------
Net sales ................................ $ - $ 298,567 $ 296,557 $ - $ 595,124
Intercompany net sales ................... - 153,690 21,877 (175,567) -
-------- ---------- ---------- ---------- -----------
Total net sales ....................... - 452,257 318,434 (175,567) 595,124
-------- ---------- ---------- ---------- -----------
Costs and Expenses:
Cost of products sold ................. - (316,264) (229,794) 175,567 (370,491)
Selling, general and administrative ... (2,731) (79,590) (37,870) (120,191)
Goodwill amortization ................. (2,723) (9,308) - (12,031)
-------- ---------- ---------- ---------- -----------
Total costs and expenses ........... (5,454) (405,162) (267,664) 175,567 (502,713)
-------- ---------- ---------- ---------- -----------
Operating income ......................... (5,454) 47,095 50,770 - 92,411
Equity in income of subsidiaries ......... 77,047 - - (77,047) -
Intercompany royalty income (expense) net - 20,870 (20,870) -
Intercompany dividend income ............. - 16,744 - (16,744) -
Interest expense ......................... (31,030) (14,264) (9,279) (54,573)
Investment income, net ................... - - 27,618 27,618
Other expense, net ....................... (225) (6,781) (3,072) (10,078)
-------- ---------- ---------- ---------- -----------
Income before income taxes ............... 40,338 63,664 45,167 (93,791) 55,378
Income tax (provision) benefit ........... 11,895 (19,261) (12,083) (19,449)
-------- ---------- ---------- ---------- -----------
Income before cumulative effect of
accounting change ..................... 52,233 44,403 33,084 (93,791) 35,929
Cumulative effect of accounting change,
net of income tax benefit of $216 ..... - (473) 33 - (440)
-------- ---------- ---------- ---------- -----------
Net income ............................... $ 52,233 $ 43,930 $ 33,117 $ (93,791) $ 35,489
======== ========== ========== ========== ===========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 29, 2002
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------- ------------ ------------ ------------
Net sales ................................ $ - $ 334,509 $ 307,702 $ - $ 642,211
Intercompany net sales ................... - 156,093 7,927 (164,020) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 490,602 315,629 (164,020) 642,211
-------- ---------- ---------- ---------- ----------
Costs and Expenses:
Cost of products sold ................. - (343,362) (236,795) 164,020 (416,137)
Selling, general and administrative ... - (85,538) (41,310) (126,848)
Gain on sale of assets ................ - 2,389 3,079 5,468
Gains on settlement of contracts....... - 6,760 - 6,760
Amortization of intangibles ........... - (680) - (680)
-------- ---------- ---------- ---------- ----------
Total costs and expenses ............ - (420,431) (275,026) 164,020 (531,437)
-------- ---------- ---------- ---------- ----------
Operating income ......................... - 70,171 40,603 - 110,774
Equity in income (loss) of subsidiaries .. (71,230) - - 71,230 -
Intercompany royalty income (expense), net - 22,514 (22,514) -
Intercompany dividend income ............. - 4,408 - (4,408) -
Interest expense ......................... 2,332 (50,069) 1,890 (45,847)
Other expense, net ....................... (810) (5,247) (144) (6,201)
-------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (69,708) 41,777 19,835 66,822 58,726
Income tax (provision) benefit ........... (533) (17,148) (3,007) (20,688)
-------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting change.. (70,241) 24,629 16,828 66,822 38,038
Extraordinary item - loss on early
retirement of debt, net of income tax
benefit of $1,460 ..................... (2,834) - - (2,834)
Cumulative effect of accounting change.... (42,713) (112,687) - - (155,400)
-------- ---------- ---------- ---------- ----------
Net income (loss)......................... $(115,788) $ (88,058) $ 16,828 $ 66,822 $ (120,196)
========= ========== ========== ========== ==========
12
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 5 $ 3,611 $ 7,214 $ - $ 10,830
Restricted cash ....................... 81,130 101,000 - 182,130
Accounts receivable, trade, net ....... - 12,325 74,286 86,611
Accounts receivable, other ............ 308 4,950 15,913 21,171
Income taxes receivable ............... 21,133 (3,395) (11,995) 5,743
Receivable from related parties, net .. 140 11,999 (540) 11,599
Inventories ........................... - 121,861 68,721 190,582
Deferred income tax benefits........... - 20,263 12,666 32,929
Other current assets .................. - 4,742 3,882 8,624
--------- ---------- --------- ---------- ----------
Total current assets ................ 102,716 277,356 170,147 - 550,219
Investment in subsidiaries ............... 376,332 137,044 - (513,376) -
Intercompany loans ....................... 16,021 (4,538) (11,483) -
Due from (to) subsidiaries, net .......... - 79,329 (79,329) -
Property, plant and equipment ............ - 494,489 62,236 556,725
Goodwill, net ............................ 132,644 361,883 2,875 497,402
Long-term receivable from parent company . - - 28,583 28,583
Intangible assets, net ................... - 14,725 442 15,167
Other assets ............................. 1,487 42,581 12,559 56,627
--------- ---------- --------- ---------- -----------
Total Assets ............................. $ 629,200 $1,402,869 $ 186,030 $ (513,376) $ 1,704,723
========= ========== ========= ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 143 $ - $ 143
Current maturities of long-term debt .. 182,093 2,372 35 184,500
Accounts payable ...................... - 25,612 18,107 43,719
Accrued liabilities ................... 3,452 69,993 20,450 93,895
--------- ---------- --------- ---------- -----------
Total Current liabilities ........... 185,545 97,977 38,735 - 322,257
Long-term debt less current maturities ... - 719,549 8 719,557
Deferred income taxes .................... - 154,454 9,649 164,103
Other liabilities ........................ 17,531 54,557 594 72,682
Total Shareholder's Equity ............... 426,124 376,332 137,044 (513,376) 426,124
--------- ---------- --------- ---------- -----------
Total Liabilities and Shareholder's
Equity ................................ $ 629,200 $1,402,869 $ 186,030 $ (513,376) $ 1,704,723
========= ========== ========= ========== ===========
13
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 29, 2002
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and equivalents .................. $ 7 $ 2,408 $ 6,596 $ - $ 9,011
Accounts receivable, trade, net ....... - 9,544 81,317 90,861
Accounts receivable, other ............ - 5,032 18,158 23,190
Receivable from related parties, net .. 149 15,698 (267) 15,580
Inventories ........................... - 113,800 63,784 177,584
Deferred income tax benefits........... - 20,263 16,581 36,844
Other current assets .................. - 3,609 6,407 10,016
--------- ---------- ---------- ---------- ----------
Total current assets ................ 156 170,354 192,576 - 363,086
Investment in subsidiaries ............... 228,190 163,021 - (391,211) -
Intercompany loans ....................... 16,021 (16,354) 333 -
Due from (to) subsidiaries, net .......... - 50,858 (50,858) -
Property, plant and equipment ............ - 494,578 64,775 559,353
Goodwill, net ............................ 89,931 235,775 - 325,706
Long-term receivable from related party .. - - 29,869 29,869
Intangible assets, net ................... - 8,385 - 8,385
Other assets ............................. - 57,567 288 57,855
--------- ---------- ---------- ---------- ----------
Total Assets ............................. $ 334,298 $1,164,184 $ 236,983 $ (391,211) $1,344,254
========= ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 158 $ - $ 158
Current maturities of long-term debt .. - 2,608 1 2,609
Accounts payable ...................... - 31,841 26,470 58,311
Accrued liabilities ................... - 56,659 24,356 81,015
Income taxes .......................... (7,118) 3,240 14,266 10,388
--------- ---------- ---------- ---------- ----------
Total Current Liabilities ........... (7,118) 94,348 65,251 - 152,481
Long-term debt less current maturities ... - 634,323 9 634,332
Deferred income taxes .................... - 158,483 8,172 166,655
Other liabilities ........................ 17,480 48,840 530 66,850
Total Shareholder's Equity ............... 323,936 228,190 163,021 (391,211) 323,936
--------- ---------- ---------- ---------- ----------
Total Liabilities and Shareholder's
Equity ................................ $ 334,298 $1,164,184 $ 236,983 $ (391,211) $1,344,254
========= ========== ========== ========== ==========
14
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash and cash equivalents, beginning of period............ $ - $ 2,884 $ 11,879 $ 14,763
-------- ---------- ---------- ---------
Cash provided by (used in) operating activities:
Net income (loss)....................................... (41,558) 43,930 33,117 35,489
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change............... - 473 (33) 440
Depreciation......................................... - 32,581 6,662 39,243
Goodwill amortization................................ 2,723 9,308 - 12,031
Deferred income taxes................................ - (13,859) 2,377 (11,482)
Unrealized losses on trading securities and other
short-term investments ............................ - - 1,039 1,039
(Increase) decrease in working capital items............ 19,301 39,722 (98,571) (39,548)
Purchases of trading securities......................... - - (217,335) (217,335)
Proceeds from sales of trading securities............... - - 376,292 376,292
Proceeds from sale of accounts receivable............... - - (7,791) (7,791)
(Increase) decrease in receivable from related parties.. (18,006) 19,031 (974) 51
Change in investment in and advances to affiliates...... 48,087 (208,868) 160,781 -
Change in cumulative translation adjustment............. - - (765) (765)
Other, net.............................................. 2,379 (4,814) 4,191 1,756
-------- ---------- ---------- ---------
Net cash provided by (used in) operating activities....... 12,926 (82,496) 258,990 189,420
-------- ---------- ---------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions................... - (37,037) (21,679) (58,716)
Purchases of available-for-sale securities.............. - - (121,299) (121,299)
Proceeds from sales of available-for-sale securities.... - - 19,700 19,700
Proceeds from sales of other short-term investments..... - - 12,529 12,529
-------- ---------- ---------- ---------
Net cash used in investing activities..................... - (37,037) (110,749) (147,786)
-------- ---------- ---------- ---------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................. - - (108,542) (108,542)
Proceeds from issuance of debt.......................... 301,364 225,000 - 526,364
Decrease in borrowings under revolving credit facility - (115,400) - (115,400)
Repayments of long-term debt............................ (36,170) (28,893) 4 (65,059)
Increase (decrease) in loans from parent company ....... (1,085) - 30,000 28,915
Change in net intercompany loans ....................... 2,570 29,612 (32,182) -
Increase in restricted cash ............................ (257,649) - - (257,649)
Financing fees and expenses ............................ (7,068) (6,721) - (13,789)
Effect of Restructuring - transfer to ISP Investco LLC.. - - (22,220) (22,220)
Dividends and distributions to parent company........... (35,000) 16,744 (16,744) (35,000)
Capital contribution from parent company................ 20,116 - - 20,116
-------- ---------- ---------- ---------
Net cash provided by (used in) financing activities....... (12,922) 120,342 (149,684) (42,264)
-------- ---------- ---------- ---------
Effect of exchange rate changes on cash................... - - (219) (219)
-------- ---------- ---------- ---------
Net change in cash and cash equivalents................... 4 809 (1,662) (849)
-------- ---------- ---------- ---------
Cash and cash equivalents, end of period.................. $ 4 $ 3,693 $ 10,217 $ 13,914
======== ========== ========== =========
15
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 29, 2002
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash and cash equivalents, beginning of period............ $ 5 $ 3,611 $ 7,214 $ 10,830
-------- ----------- ---------- ---------
Cash provided by (used in) operating activities:
Net income (loss)....................................... (48,966) (88,058) 16,828 (120,196)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary item................................... 2,834 - - 2,834
Cumulative effect of accounting change............... 42,713 112,687 - 155,400
Gain on sale of assets............................... - (2,389) (3,079) (5,468)
Depreciation......................................... - 34,841 7,286 42,127
Amortization of intangibles.......................... - 680 - 680
Deferred income taxes................................ - 12,966 (5,392) 7,574
(Increase) decrease in working capital items............ 10,871 (5,289) 3,511 9,093
Proceeds (repayments) from sale of accounts receivable. - - 3,932 3,932
(Increase) decrease in receivable from related parties.. (9) (3,365) (1,737) (5,111)
Change in amounts due to (from) subsidiaries........... - 28,471 (28,471) -
Change in investment in and advances to affiliates.... 89,489 (88,628) (861) -
Change in cumulative translation adjustment............. - - 9,374 9,374
Other, net.............................................. 15 (113) (5,426) (5,524)
-------- ---------- ---------- ---------
Net cash provided by (used in) operating activities...... 96,947 1,803 (4,035) 94,715
-------- ---------- ---------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. - (37,348) (5,123) (42,471)
Net proceeds from sale of assets....................... - 7,533 19,738 27,271
-------- ---------- ---------- ---------
Net cash provided by (used in) investing activities...... - (29,815) 14,615 (15,200)
-------- ---------- ---------- ---------
Cash provided by (used in) financing activities:
Increase in short-term debt............................ - - 15 15
Decrease in borrowings under revolving
credit facility....................................... - (85,250) - (85,250)
Repayments of long-term debt............................ (182,232) 63 (33) (182,202)
Call premium on redemption of debt...................... (2,734) - - (2,734)
Change in net intercompany loans........................ - 11,816 (11,816) -
Decrease in restricted cash............................. 81,130 101,000 - 182,130
Financing fees and expenses............................. - (820) - (820)
Capital contribution from parent company................ 6,891 - - 6,891
-------- ---------- ---------- ---------
Net cash provided by (used in) financing activities....... (96,945) 26,809 (11,834) (81,970)
-------- ---------- ---------- ---------
Effect of exchange rate changes on cash.................. - - 636 636
-------- ---------- ---------- ---------
Net change in cash and cash equivalents................... 2 (1,203) (618) (1,819)
-------- ---------- ---------- ---------
Cash and cash equivalents, end of period.................. $ 7 $ 2,408 $ 6,596 $ 9,011
======== ========== ========== =========
16
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. CONTINGENCIES
Environmental Litigation
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, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed, a number of which Environmental Claims are in
the early stages or have been dormant for protracted periods.
While the Company cannot predict whether adverse decisions or events can
occur in the future, 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 increases in remedial costs,
discovery of new contamination, assertion of natural resource damages, and 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 those matters. It is not
currently possible to estimate the amount or range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 20 to Consolidated Financial Statements contained in the Form 10-K.
Tax Claim Against G-I Holdings Inc.
The Company and certain of its subsidiaries were members of a consolidated
group for Federal income tax purposes that included G-I Holdings Inc., (the "G-I
Holdings Group") in certain prior years and, accordingly, would be severally
liable for any tax liability of the G-I Holdings Group in respect of those prior
years. Effective as of January 1, 1997, neither the Company nor any of its
subsidiaries are members of the G-I Holdings Group. In January 2001, G-I
Holdings filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code due to its asbestos-related bodily injury claims relating
to the inhalation of asbestos fiber.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in the tax matter arising out of the surfactants partnership, although
there can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. On September 21, 2001,
the IRS filed a proof of claim with respect to such deficiency against G-I
Holdings in the G-I Holdings bankruptcy. On May 7, 2002, G-I Holdings filed an
objection to that proof of claim. On July 13, 2002, the IRS filed a motion with
the U.S. District Court for a withdrawal of the reference to the bankruptcy
court of G-I Holdings' objection to the proof of claim, which motion
17
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. CONTINGENCIES - (CONTINUED)
remains pending. If such proof of claim is sustained, the Company and/or
some of the Company's subsidiaries, together with G-I Holdings and several
current and former subsidiaries of G-I Holdings, would be severally liable for
such taxes and interest in the amount of approximately $250.0 million should G-I
Holdings be unable to satisfy such liability. For additional information
relating to G-I Holdings, reference is made to Notes 8, 16 and 20 to
Consolidated Financial Statements contained in the Form 10-K.
NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting and reporting
standards for legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and the
normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred. Upon initial recognition of such liability, an
entity must capitalize the asset retirement cost by increasing the carrying
amount of the related long-lived asset and subsequently depreciating the asset
retirement cost over the useful life of the related asset. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, although earlier
application is encouraged. The Company is in the process of assessing the impact
of this Statement on its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement of SFAS No. 4 that gains
and losses on the early extinguishments of debt be recorded as an extraordinary
item unless such gains and losses meet the criteria of APB No. 30 for
classification as extraordinary. The rescission of SFAS No. 4 is effective for
fiscal years beginning after May 15, 2002, although early application is
encouraged. The Company intends to adopt SFAS No. 145 effective January 1, 2003,
which will result in the Company's first quarter 2002 pre-tax loss of $7.1
million on the early extinguishment of debt being reclassified to other expense,
net.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, and concludes that an entity's
commitment to an exit plan does not by itself create a present obligation that
meets the definition of a liability. This Statement also establishes that fair
value is the objective of initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is in the process of
assessing the impact of this Statement on its financial statements.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us" and "our" refer to
ISP Chemco Inc. and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires our management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent
liabilities. On an on-going basis, we evaluate our estimates, including but not
limited to those related to doubtful accounts, inventory valuation,
environmental liabilities, goodwill and intangible assets, pensions and other
postemployment benefits, and contingent liabilities. We base our estimates on
historical experience adjusted for current conditions, and on various other
assumptions that are believed to be reasonable under the current circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from these estimates
under different assumptions or conditions. We do not anticipate any changes in
management estimates that would have a material impact on our operations,
liquidity or capital resources. We believe the following critical accounting
policies are the most important to the portrayal of our financial condition and
results of operations and require our management's more significant judgments
and estimates in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Management
continuously assesses the financial condition of our customers and the markets
in which these customers participate. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Inventories
Inventories are valued at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for substantially all domestic
acetylene-based finished goods and work-in-process and the raw materials to
produce these products. All other inventories are valued on the FIFO (first-in,
first out) method. We write down our inventories for estimated obsolescence or
unmarketable inventories equal to the difference between the cost of inventories
and their estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
19
Goodwill and Other Intangibles
Through December 31, 2001, we amortized goodwill and certain other
intangible assets on a straight-line basis over the expected useful lives of the
underlying assets. In accordance with the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective
January 1, 2002, goodwill is no longer being amortized over its estimated useful
life, but rather will be subject to at least an annual assessment for impairment
and more frequently if circumstances indicate a possible impairment. We adopted
SFAS No. 142 on January 1, 2002. Accordingly, we completed a transitional
impairment test, effective January 1, 2002, and recognized a goodwill impairment
loss of $155.4 million as the cumulative effect of a change in accounting
principle. The write-off represents the goodwill associated with our Performance
Chemicals, Fine Chemicals and Industrial business segment. We use both a market
comparable approach and income approach to determine the fair value of our
reporting units. We will perform our annual test for impairment before the end
of the year 2002.
Other intangible assets will be amortized over their useful lives. The
useful life of an intangible asset is based on management's assumptions
regarding the expected use of the asset and other assumptions. If events or
circumstances indicate that the life of an intangible asset has changed, it
could result in higher future amortization charges or recognition of an
impairment loss.
Environmental Liability
We accrue environmental costs when it is probable that we have incurred a
liability and the expected amount can be reasonably estimated. The amount
accrued reflects our assumptions about remedial requirements at the contaminated
site, the nature of the remedy, the outcome of discussions with regulatory
agencies and other potential responsible parties at multi-party sites, and the
number and financial viability of other potentially responsible parties. Adverse
decisions or events, particularly as to increases in remedial costs, discovery
of new contamination, assertion of natural resource damages, plans for
development of our Linden, New Jersey property, and the liability and the
financial responsibility of our insurers and of the other parties involved at
each site and their insurers, could cause us to increase our estimate of
liability in respect of those matters. It is not currently possible to estimate
the amount or range of any additional liability.
Pension and Other Postemployment Benefits
We maintain defined benefit plans that provide eligible employees with
retirement benefits. In addition, while we generally do not provide
postretirement medical and life insurance benefits, we subsidize such benefits
for certain employees and certain retirees. The costs and obligations related to
these benefits reflect our assumptions related to general economic conditions
(particularly interest rates), expected return on plan assets, and rate of
compensation increases for employees. Projected health care benefits
additionally reflect our assumptions about health care cost trends. The cost of
providing plan benefits also depends on demographic assumptions including
retirements, mortality, turnover, and
20
plan participation. If actual experience differs from these assumptions, the
cost of providing these benefits could increase or decrease.
RESULTS OF OPERATIONS - THIRD QUARTER 2002 COMPARED WITH
THIRD QUARTER 2001
We recorded third quarter 2002 net income of $10.9 million compared with
net income of $6.0 million in the third quarter of 2001. Third quarter 2001
results reflected $4.0 million of goodwill amortization. Net income for the
third quarter of 2001, adjusted to exclude the goodwill amortization, was $10.0
million. On a comparable basis, the improved results for the third quarter of
2002 reflected $6.3 million lower interest expense and $1.0 million higher
operating income, partially offset by $3.2 million increased other expense, net.
Net sales for the third quarter of 2002 were $208.4 million compared with
$188.6 million for the same period in 2001. The 10.5% increase in sales resulted
primarily from the contribution to sales from the biocides business ($7.9
million), which was acquired on December 31, 2001, higher unit volumes in the
Personal Care, Pharmaceutical, Performance Chemicals and Industrial businesses
(totaling $13.4 million), and the favorable impact of the weaker U.S. dollar in
Europe ($4.4 million). Lower pricing in the Industrial and Personal Care
businesses (totaling $4.7 million) partially offset the sales gains.
Gross margins for the third quarter of 2002 were 36.6% compared with 39.1%
in the third quarter of 2001. The decline in margins resulted primarily from a
reduction in the Fine Chemicals business due to the Polaroid bankruptcy and
price declines in the Industrial business.
Operating income for the third quarter of 2002 was $35.6 million compared
with $30.6 million for the third quarter of 2001. Excluding the $4.0 million of
goodwill amortization in the third quarter of 2001, operating income was $34.6
million for the third quarter of 2001. On a comparable basis, operating income
in the Personal Care business was up $3.0 million mainly due to higher volumes,
while in the Pharmaceutical, Food and Beverage business, operating income
increased $3.5 million primarily due to improved volumes and mix in
pharmaceutical products. Operating income was lower in Performance Chemicals,
Fine Chemicals and Industrial, as strength in Performance Chemicals (up $3.9
million), which includes the additional profit contribution from the biocides
business, did not offset unfavorable pricing and higher manufacturing costs in
Industrial (totaling $5.8 million) and lower volumes in Fine Chemicals ($7.0
million). Operating income for the Mineral Products business decreased by $0.3
million on 3% higher sales due to increased manufacturing costs. Selling,
general and administrative expenses for the third quarter of 2002 increased 4%
to $40.6 million from $39.1 million in the same period last year, primarily due
to the biocides acquisition and to higher selling and distribution costs, but
those expenses as a percentage of sales were 19.5% compared with 20.7% in last
year's third quarter.
21
Interest expense for the third quarter of 2002 was $14.1 million versus
$20.3 million for the same period last year. The 31% decrease was due to lower
average borrowings. Other expense, net, for the third quarter of 2002 was $4.2
million compared with $1.1 million in last year's third quarter, with the
increased expense due to unfavorable foreign exchange.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our Specialty Chemicals business through three reportable
business segments, in addition to the Mineral Products segment. Each business
segment was favorably impacted in the third quarter of 2002 by the absence of
goodwill amortization. The business segment discussion that follows excludes the
impact of goodwill amortization on third quarter 2001 results. Goodwill
amortization in the third quarter of 2001 by business segment was as follows:
(Millions)
Personal Care $1.2
Pharmaceutical, Food and Beverage 1.0
Performance Chemicals, Fine Chemicals
and Industrial 1.0
Mineral Products 0.8
Personal Care
Sales in the third quarter of 2002 were $51.0 million compared with $45.5
million for the same period last year, while operating income for the third
quarter of 2002 increased to $10.0 million from $7.0 million in last year's
third quarter. The 12% increase in sales resulted from higher unit volumes in
both hair care and skin care products ($5.2 million), mainly in North America
and Europe, and also as a result of the favorable impact of the weaker U.S.
dollar in Europe ($1.2 million). The higher operating income resulted from the
favorable volumes ($3.7 million), the favorable impact of the weaker dollar
($0.9 million) and $1.0 million lower operating expenses, partially offset by
unfavorable manufacturing costs ($1.8 million).
Pharmaceutical, Food and Beverage
Sales for the Pharmaceutical, Food and Beverage segment were $62.3 million
for the third quarter of 2002 compared with $57.8 million for the third quarter
of 2001. The 8% sales growth reflected higher unit volumes ($3.1 million),
primarily in the pharmaceutical excipients market in North America and Asia, and
also reflected the favorable impact of the weaker U.S dollar in Europe ($1.4
million).
Operating income for the Pharmaceutical, Food and Beverage segment was
$17.0 million in the third quarter of 2002 compared with $13.5 million in the
same period last year. The 26% increase in earnings primarily resulted from
improved volumes ($3.3 million) in pharmaceutical products, and the favorable
impact of the weaker
22
dollar ($1.1 million), partially offset by unfavorable manufacturing costs
($0.9 million).
Performance Chemicals, Fine Chemicals and Industrial
Sales in the third quarter of 2002 were $70.5 million compared with $61.5
million in the third quarter of 2001. The 15% increase in sales was primarily
attributable to the biocides business ($7.9 million), which was acquired on
December 31, 2001. The increased sales also reflected higher Performance
Chemicals and Industrial volumes (totaling $5.5 million) in the industrial
specialty, agriculture and specialty coatings markets, in addition to the
favorable impact of the weaker U.S dollar in Europe ($1.8 million). These sales
increases were partially offset by lower pricing in the Industrial business
($3.9 million). In the Fine Chemicals business, the lack of sales to Polaroid
more than offset increased sales volumes of bulk pharmaceuticals and
pharmaceutical intermediates.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $3.0 million in the third quarter of 2002 compared with
$8.4 million for the third quarter of 2001. The reduction in operating income
was attributable to losses from the Fine Chemicals business due to unfavorable
volumes and the loss of sales to Polaroid (totaling $7.0 million). In addition,
Industrial profits were lower due to the impact of unfavorable pricing ($3.9
million) and unfavorable manufacturing costs ($2.0 million). Partially
offsetting these reductions in operating profits was $3.9 million higher
operating income in Performance Chemicals due to higher volumes and favorable
manufacturing efficiencies (totaling $1.9 million) and also to the additional
profit contribution from the biocides business.
Mineral Products
Sales for the Mineral Products segment for the third quarter of 2002 were
$24.6 million compared with $23.8 million for the third quarter of 2001. The 3%
increase was due equally to higher sales to Building Materials Corporation of
America, an affiliate, and to higher third party sales. We are beginning to
experience competitive pricing pressures in the Mineral Products business as a
result of additional capacity coming on stream in the industry.
Operating income for the third quarter of 2002 was $5.5 million compared
with $5.8 million for the third quarter of 2001, reflecting unfavorable
manufacturing costs due to start-up costs associated with the Ione, California
roofing granules plant acquired in April 2002.
RESULTS OF OPERATIONS - FIRST NINE MONTHS 2002 COMPARED WITH
FIRST NINE MONTHS 2001
For the first nine months of 2002, we recorded a net loss of $120.2 million
compared with net income of $35.5 million in the first nine months of 2001. In
accordance with the adoption of SFAS No. 142, we completed a transitional test
for impairment of goodwill, and, accordingly, recorded a $155.4 million charge,
effective January 1,
23
2002, for the cumulative effect of a change in accounting principle. The
write-off represents the goodwill associated with our Performance Chemicals,
Fine Chemicals and Industrial business segment and was based upon our estimate
of fair value for these businesses, considering expected future cash flows and
profitability.
First nine months 2002 results also include a $5.5 million pre-tax gain
from the sale of the FineTech business, $6.8 million of pre-tax gains from
contract settlements and an after-tax extraordinary charge of $2.8 million on
the early retirement of debt. First nine months 2001 results included $12.0
million of goodwill amortization, prior to the adoption of SFAS No. 142, and an
after-tax charge of $0.4 million for the cumulative effect of adopting SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." Excluding
such charges and nonrecurring gains discussed above, adjusted "Income before
extraordinary item and cumulative effect of accounting change" for the first
nine months of 2002 was $30.1 million compared with $48.0 million for the first
nine months of 2001. On a comparable basis, the lower results for the first nine
months of 2002 were mainly attributable to the absence of investment income as a
result of the corporate restructuring in June 2001 compared with investment
income of $27.6 million in the six-month period prior to the restructuring. In
addition, results in the first nine months of 2002 reflected $5.9 million lower
adjusted operating income (excluding the nonrecurring gains), offset by $8.7
million lower interest expense and $3.9 million lower other expense, net.
Net sales for the first nine months of 2002 were $642.2 million compared
with $595.1 million for the same period in 2001. The 8% increase in sales in the
first nine months of 2002 resulted primarily from the contribution to sales from
the biocides business ($25.6 million), which was acquired on December 31, 2001,
and by higher unit volumes in the Pharmaceutical, Mineral Products, Personal
Care and Industrial businesses (totaling $35.6 million). The weaker U.S. dollar
in Europe also had a favorable impact ($5.2 million) on net sales. Partially
offsetting these increases was lower pricing in the Industrial, Fine Chemicals
and Personal Care businesses (totaling $19.2 million).
Gross margins for the first nine months of 2002 were 35.2% compared with
37.7% in the first nine months of 2001. The decline in margins resulted
primarily from a reduction in the Fine Chemicals business due to the Polaroid
bankruptcy, unfavorable manufacturing costs, and the lower pricing in the
Industrial, Fine Chemicals and Personal Care businesses.
Operating income for the first nine months of 2002 was $110.8 million
compared with $92.4 million for the first nine months of 2001. Excluding the
$12.2 million of nonrecurring pre-tax gains on the sale of the FineTech business
and the settlements of contracts in the first nine months of 2002 and $12.0
million of goodwill amortization in the first nine months of 2001, adjusted
operating income was $98.5 million for the first nine months of 2002 compared
with $104.4 million for the first nine months of 2001. On a comparable basis,
the $5.9 million decrease in operating income in
24
the first nine months of 2002 was primarily attributable to lower results
in the Fine Chemicals, Industrial and Personal Care businesses (totaling $19.7
million). Partially offsetting these lower results were improved operating
profits in the Mineral Products and Pharmaceutical businesses (totaling $10.2
million) and the contribution to income from the biocides business. Selling,
general and administrative expenses increased 5.5% in the first nine months of
2002 to $126.8 million from $120.2 million in the same period last year,
primarily due to the biocides acquisition and higher selling and distribution
costs, but those expenses as a percentage of sales were 19.8% compared with
20.2% last year.
Interest expense for the first nine months of 2002 was $45.8 million versus
$54.6 million for the same period last year. The decrease was due to lower
average borrowings, partially offset by higher average interest rates. Interest
expense for the first nine months of 2001 included interest on a $50 million
intercompany loan from our parent company, which was repaid at the time of the
restructuring in June 2001. Investment income in the first nine months of 2001
was $27.6 million prior to a corporate restructuring in June 2001 in which we
transferred our investment assets to our parent company, International Specialty
Holdings Inc. For additional information regarding this restructuring, see Note
1 to Consolidated Financial Statements contained in the Form 10-K. Other
expense, net, for the first nine months of 2002 was $6.2 million compared with
other expense, net, of $10.1 million in last year's period, with the lower
expense due to the impact of a weaker U.S. dollar in Europe and Asia and a $1.4
million higher provision for environmental liability in last year's first nine
months.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our Specialty Chemicals business through three reportable
business segments, in addition to the Mineral Products segment. Each business
segment was favorably impacted in the first nine months of 2002 by the absence
of goodwill amortization. The business segment discussion that follows excludes
the impact of goodwill amortization on nine months 2001 results. Goodwill
amortization in the first nine months of 2001 by business segment was as
follows:
(Millions)
Personal Care $3.6
Pharmaceutical, Food and Beverage 3.1
Performance Chemicals, Fine Chemicals
and Industrial 3.1
Mineral Products 2.3
Personal Care
Sales in the first nine months of 2002 were $156.2 million compared with
$150.6 million in the same period last year, while operating income for the
first nine months of 2002 decreased to $28.1
25
million from $30.7 million in the same period last year. The 4% increase in
sales resulted from higher unit volumes in both hair care and skin care products
($7.3 million), mainly in North America and Europe, and also as a result of the
favorable impact of the weaker U.S. dollar in Europe ($1.3 million). The lower
operating income resulted primarily from unfavorable manufacturing costs and
pricing ($7.0 million), partially offset by the impact of the favorable volumes
($3.5 million) and the favorable impact of the weaker U.S. dollar ($0.9
million).
Pharmaceutical, Food and Beverage
Sales for the Pharmaceutical, Food and Beverage segment were $181.0 million
for the first nine months of 2002, a 7% increase compared with $169.6 million
for the first nine months of 2001. Sales for the Pharmaceutical business
increased by 11.5% in the first nine months of 2002, reflecting higher unit
volumes ($11.1 million), primarily in the excipients and oral care markets in
Europe and North America. Sales for the Beverage and alginates food businesses
decreased by 2% and 4%, respectively, due to lower unit volumes and pricing
(totaling $1.7 million), primarily in Europe and Latin America.
Operating income for the Pharmaceutical, Food and Beverage segment was
$43.4 million in the first nine months of 2002 compared with $42.4 million in
the same period last year. Operating income for the Pharmaceutical business
increased 8% in the first nine months of 2002 compared with the same period in
2001. The improvement reflected the impact of the higher unit volumes ($5.0
million) and the favorable impact of the weaker U.S. dollar ($0.9 million),
partially offset by unfavorable manufacturing costs ($0.9 million). Operating
results for the Beverage and alginates food businesses decreased by a total of
$2.7 million in the first nine months of 2002 due primarily to unfavorable
manufacturing costs ($1.5 million) and, to a lesser extent, to the lower volumes
and pricing.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first nine months of 2002 were $230.8 million compared with
$211.1 million in the first nine months of 2001. The 9% higher sales were
attributable to the biocides business ($25.6 million), which was acquired on
December 31, 2001. Sales for the Performance Chemicals, Fine Chemicals and
Industrial businesses, excluding biocides, decreased by a total of $5.9 million
(3%) due to lower pricing in Industrial and Fine Chemicals (totaling $16.2
million). Partially offsetting these sales declines were higher Industrial
volumes ($8.7 million) and the favorable impact of the weaker U.S. dollar in
Europe ($2.5 million). Market selling prices of butanediol decreased in the
first nine months of 2002 compared with average 2001 levels due to weakening
demand and in anticipation of new capacity coming on stream in Europe. Sales for
the Fine Chemicals business were unfavorably impacted due to the loss of
Polaroid sales as a result of Polaroid's bankruptcy.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $20.8 million in the first nine months of
26
2002 compared with $20.0 million for the first nine months of 2001.
Excluding the $5.5 million gain on the sale of the FineTech business and the
$6.8 million of gains on contract settlements, operating income for the first
nine months of 2002 was $8.5 million. The decline in operating profits was
primarily attributable to losses in the Fine Chemicals business due to the loss
of Polaroid sales and unfavorable pricing ($3.1 million). Operating profits for
the Industrial business were 56% lower for the first nine months of 2002 due to
the impact of unfavorable pricing ($13.0 million). Partially offsetting these
unfavorable factors were favorable manufacturing efficiencies ($4.4 million) due
to consolidation of our butanediol production at our Marl, Germany facility,
together with lower methanol and natural gas prices. The lower operating profits
from the Fine Chemicals and Industrial businesses were partially offset by $5.7
million higher operating income in Performance Chemicals, primarily reflecting
the profit contribution from the biocides business, and also due to favorable
manufacturing efficiencies and volumes (totaling $2.2 million).
Mineral Products
Sales for the Mineral Products segment for the first nine months of 2002
were $74.3 million compared with $63.8 million for the first nine months of
2001. The $10.5 million (16%) increase reflected $7.4 million (15%) higher sales
to Building Materials Corporation of America, an affiliate, and $3.1 million
(23%) higher third party sales. The increased sales reflected higher unit
volumes ($8.6 million) resulting from an increased market demand for roofing
granules. We are beginning to experience competitive pricing pressures in the
Mineral Products business as a result of additional capacity coming on stream in
the industry.
Operating income for the first nine months of 2002 was $18.4 million, a 72%
increase compared with $10.7 million for the same period in 2001, reflecting
favorable manufacturing efficiencies and lower natural gas costs ($3.9 million),
as well as the impact of the higher volumes.
Liquidity and Financial Condition
During the first nine months of 2002, our net cash inflow before financing
activities was $79.5 million, reflecting $94.7 million of cash generated from
operations, the reinvestment of $42.5 million for capital programs and the
acquisition of a Mineral Products manufacturing facility, and net cash proceeds
of $27.3 million from the sale of the FineTech business. Cash generated from a
reduction in working capital items totaled $9.1 million during the first nine
months of 2002, reflecting a $13.8 million decrease in inventories and a $7.4
million net increase in payables and accrued liabilities, partially offset by a
$10.8 million increase in receivables. The reduced inventories resulted from an
inventory reduction program and the higher receivables resulted from $16.3
million higher sales in the third quarter of 2002 versus the fourth quarter of
2001.
27
Net cash used in financing activities during the first nine months of 2002
totaled $82.0 million, primarily reflecting an $85.3 million decrease in
borrowings under our bank revolving credit facility and a $2.7 million call
premium on the redemption of debt. On January 14, 2002, ISP redeemed the
remaining $307.9 million aggregate principal amount of its 9% Senior Notes due
2003, which we refer to as the "2003 Notes," of which $182.1 million was
reflected on our Consolidated Balance Sheet at December 31, 2001. The 2003 Notes
were redeemed at a redemption price of 101.5% of the principal amount plus
accrued and unpaid interest to the redemption date. The redemption was funded
utilizing a restricted cash escrow account which had been established in 2001 in
connection with the issuances of long-term debt. In addition, financing
activities included a $6.9 million capital contribution from our parent company.
As a result of the foregoing factors, cash and cash equivalents decreased
by $1.8 million during the first nine months of 2002 to $9.0 million.
On July 8, 2002, ISP announced that its Board of Directors had received a
letter from Samuel J. Heyman, ISP's Chairman of the Board, proposing that the
Board consider a going private transaction whereby holders of shares of ISP's
common stock (other than those shares beneficially owned by Mr. Heyman) would
receive $10 in cash per share. Such shares total approximately 12.5 million
shares, or approximately 19% of ISP's outstanding shares. ISP's Board of
Directors formed a Special Committee of independent Directors to evaluate this
proposal. On November 7, 2002, ISP announced that the Special Committee and Mr.
Heyman reached agreement on such transaction whereby holders of shares of ISP's
common stock (other than Mr. Heyman) would receive $10.30 in cash per share. The
agreement followed a determination by the Special Committee that the transaction
consideration is fair to ISP's public shareholders. The total consideration for
such shares of approximately $130 million would be paid out of our available
funds.
In December 2001, we entered into a letter agreement to sell our
pharmaceutical fine chemicals business to Pharmaceutical Resources Incorporated,
which we refer to as "PRI," including our Haifa, Israel-based FineTech, Ltd.
business and our Columbus, Ohio manufacturing facility. In February 2002, we
received a $250,000 payment from PRI in consideration of extending the
negotiations pursuant to the letter agreement. In March 2002, we announced that
the sale would not be consummated due to the failure of PRI to proceed with the
transaction in a timely manner. Under the terms of the letter agreement, we
received a $3.0 million break-up fee, which was recorded as income in the first
quarter of 2002 (see Note 4 to Consolidated Financial Statements). Following
negotiations with PRI, in April 2002, we sold the Haifa-based business to PRI
for $32 million. We recorded a second quarter pre-tax gain, after expenses, of
$5.5 million related to this sale.
In April 2002, we acquired the roofing granules manufacturing operations in
Ione, California of Reed Minerals, a division of Harsco Corporation. In a
related transaction, we also acquired the adjacent quarry operations and certain
mining assets from Hanson Aggregates Mid-
28
Pacific, Inc. The total purchase price of the acquisitions was $11.4
million.
As part of our acquisition of our Freetown, Massachusetts plant in 1998, we
entered into a multi-year agreement to supply the imaging dyes and polymers used
by Polaroid in its instant film business. In October 2001, Polaroid filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. In the third quarter of
2002, the majority of Polaroid's assets were acquired by a new owner. As a
result, we no longer have a long-term supply contract with Polaroid. These
events have negatively impacted the sale of our fine chemicals products and
reduced the utilization of our Freetown plant.
We have an operating lease for a sale-leaseback transaction related to the
Freetown facility, which was entered into in 1998. The lease had an initial term
of four years and, at our option, up to three one-year renewal periods. The
lease provides for a substantial guaranteed payment by us at the end of each
renewal period and includes purchase and return options at fair market values
determined at the inception of the lease. We have the right to exercise a
purchase option with respect to the leased facility, or the facility can be
returned to the lessor and sold to a third party. We are obligated to pay a
maximum guaranteed payment amount upon the return of the facility, currently
$35.8 million, reduced by 50% of any proceeds from the subsequent sale of the
facility in excess of $5.2 million. Under generally accepted accounting
principles, we cannot recognize this future obligation or recognize an
impairment loss relative to the Freetown facility since, as an operating lease,
the Freetown facility is not carried as a long-lived asset on our balance sheet.
However, given the current utilization of the Freetown facility as a result of
the Polaroid bankruptcy, if we should exercise the purchase option at the end of
any future renewal period or at the termination of the lease in 2005, we would
anticipate having to recognize a material impairment charge. However, we are
working toward increasing the utilization of the Freetown plant and have
transferred production of certain personal care products to this facility.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting and reporting
standards for legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and the
normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred. Upon initial recognition of such liability, an
entity must capitalize the asset retirement cost by increasing the carrying
amount of the related long-lived asset and subsequently depreciating the asset
retirement cost over the useful life of the related asset. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, although earlier
application is encouraged. We are in the process of assessing the impact of this
Statement on our financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement of SFAS No. 4 that gains
and losses on the early extinguishments of debt be
29
recorded as an extraordinary item unless such gains and losses meet the
criteria of APB No. 30 for classification as extraordinary. The rescission of
SFAS No. 4 is effective for fiscal years beginning after May 15, 2002, although
early application is encouraged. We intend to adopt SFAS No. 145 effective
January 1, 2003, which will result in our first quarter 2002 pre-tax loss of
$7.1 million on the early extinguishment of debt being reclassified to other
expense, net.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, and concludes that an entity's
commitment to an exit plan does not by itself create a present obligation that
meets the definition of a liability. This Statement also establishes that fair
value is the objective of initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. We are in the process of assessing the
impact of this Statement on our financial statements.
See Note 11 to Consolidated Financial Statements for information regarding
contingencies.
* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or
phrases of similar import. Similarly, statements that describe our objectives,
plans or goals also are forward-looking statements. Our operations are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
The forward-looking statements included herein are made only as of the date of
this Quarterly Report on Form 10-Q and we undertake no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances. No assurances can be given that projected results or events will
be achieved.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form Form 10-K for
the fiscal year ended December 31, 2001, for a discussion of "Market-Sensitive
Instruments and Risk Management." At December 31, 2001 and June 30, 2002, there
were no equity-related financial instruments employed by us to reduce market
risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer are
responsible for the design, maintenance and effectiveness of disclosure controls
and procedures (as defined in the Rules 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934).
The effectiveness of the disclosure controls and procedures have been
evaluated by the Chief Executive Officer and Chief Financial Officer within 90
days of the filing date of this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure
controls and procedures are adequate and effective.
There have been no significant changes in internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of the evaluation in connection with the preparation of this Quarterly
Report on Form 10-Q.
31
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K filed during the current quarter:
No reports on Form 8-K were filed during the three-month period
ended September 29, 2002.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISP CHEMCO INC.
ISP CHEMICALS INC.
ISP MINERALS INC.
ISP TECHNOLOGIES INC.
ISP MANAGEMENT COMPANY, INC.
BLUEHALL INCORPORATED
VERONA INC.
ISP REAL ESTATE COMPANY, INC.
ISP FREETOWN FINE CHEMICALS INC.
ISP INTERNATIONAL CORP.
ISP (PUERTO RICO) INC.
ISP ALGINATES INC.
ISP ENVIRONMENTAL SERVICES INC.
ISP GLOBAL TECHNOLOGIES INC.
ISP INVESTMENTS INC.
DATE: November 13, 2002 BY: /s/ Neal E. Murphy
----------------- ------------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: November 13, 2002 BY: /s/Kenneth M. McHugh
----------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISP CHEMICALS LLC
By: ISP Chemicals Inc., its Sole Member
ISP MANAGEMENT LLC
By: ISP Management Company, Inc., its Sole Member
ISP MINERALS LLC
By: ISP Minerals Inc., its Sole Member
ISP TECHNOLOGIES LLC
By: ISP Technologies Inc., its Sole Member
ISP INVESTMENTS LLC
By: ISP Investments Inc., its Sole Member
ISP GLOBAL TECHNOLOGIES LLC
By: ISP Global Technologies Inc., its Sole Member
DATE: November 13, 2002 BY: /s/Neal E. Murphy
----------------- -----------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: November 13, 2002 BY: /s/Kenneth M. McHugh
----------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
34
CERTIFICATION
I, Sunil Kumar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ISP Chemco Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
35
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Sunil Kumar
- ---------------------------
Name: Sunil Kumar
Title: President and Chief Executive Officer
36
CERTIFICATION
I, Neal E. Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ISP Chemco Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
37
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
s/ Neal E. Murphy
- -------------------------------
Name: Neal E. Murphy
Title: Senior Vice President and
Chief Financial Officer
38