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 JUNE 29, 2003
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 or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5818
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
-----------------------------------
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 / /
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes / / No /X/
As of August 12, 2003, 100 shares of the registrant's common stock (par
value $.01 per share) were outstanding. There is no trading market for the
common stock of the registrant. As of August 12, 2003, 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, DE 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, DE 19801
(302) 427-5852
ISP Investments Inc. Delaware 10 033-44862-08/ 300 Delaware Avenue
22-3807361 Suite 303
Wilmington, DE 19801
(302) 427-5822
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 Chemicals LLC Delaware N/A 333-70144-04/ Route 95 Industrial Area,
22-3807378 P.O. Box 37
Calvert City, KY 42029
(270) 395-4165
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)
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- ------------------
JUNE 30, JUNE 29, JUNE 30, JUNE 29,
2002 2003 2002 2003
-------- --------- -------- --------
(THOUSANDS)
Net sales............................ $ 214,724 $ 229,528 $ 433,848 $ 462,104
Cost of products sold................ (138,655) (147,215) (284,032) (299,808)
Selling, general and administrative.. (43,812) (45,121) (86,282) (88,914)
Other operating gains and
(charges), net..................... 9,396 - 12,228 (1,451)
Amortization of intangible assets.... (153) (144) (555) (288)
--------- --------- --------- ---------
Operating income..................... 41,500 37,048 75,207 71,643
Interest expense..................... (15,276) (13,229) (31,797) (26,650)
Charge for early retirement of debt.. - - (4,294) -
Other income (expense), net.......... (85) 1,412 (1,956) 75
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of changes in
accounting principles.............. 26,139 25,231 37,160 45,068
Income taxes......................... (8,933) (9,190) (12,821) (15,793)
--------- --------- --------- ---------
Income before cumulative effect of
changes in accounting principles... 17,206 16,041 24,339 29,275
Cumulative effect of changes in
accounting principles, net of
income tax benefit of $600 in 2003. - - (155,400) (1,021)
--------- --------- --------- ---------
Net income (loss).................... $ 17,206 $ 16,041 $(131,061) $ 28,254
========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
ISP CHEMCO INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 29,
2002 2003
------------ -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 33,291 $ 42,045
Accounts receivable, trade, less allowance of
$6,022 and $6,218 at December 31, 2002 and
June 29, 2003, respectively.................. 79,780 102,680
Accounts receivable, other..................... 15,371 18,510
Receivables from related parties............... 12,412 19,449
Inventories.................................... 176,217 173,735
Deferred income taxes.......................... 34,687 37,858
Prepaid expenses............................... 9,822 9,328
---------- ----------
Total Current Assets......................... 361,580 403,605
Property, plant and equipment, net............... 565,441 568,635
Goodwill, net of accumulated amortization
of $180,486.................................... 325,706 330,957
Intangible assets, net........................... 9,442 9,154
Long-term receivable from related party.......... 30,298 31,207
Other assets..................................... 43,016 48,075
---------- ----------
Total Assets..................................... $1,335,483 $1,391,633
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt................................ $ 144 $ 67
Current maturities of long-term debt........... 2,732 2,722
Accounts payable............................... 53,205 59,011
Accrued liabilities............................ 89,902 82,060
Income taxes payable........................... 34,201 36,221
---------- ----------
Total Current Liabilities.................... 180,184 180,081
---------- ----------
Long-term debt less current maturities........... 623,008 622,269
---------- ----------
Deferred income taxes............................ 100,715 111,590
---------- ----------
Other liabilities................................ 103,678 110,493
---------- ----------
Shareholder's Equity:
Common stock, $.01 par value per share;
1,000 shares authorized; 100 shares issued
and outstanding ............................. - -
Additional paid-in capital..................... 398,023 399,474
Accumulated deficit............................ (51,126) (22,872)
Accumulated other comprehensive loss........... (18,999) (9,402)
---------- ----------
Total Shareholder's Equity................... 327,898 367,200
---------- ----------
Total Liabilities and Shareholder's Equity....... $1,335,483 $1,391,633
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 29,
2002 2003
-------- ---------
(THOUSANDS)
Cash and cash equivalents, beginning of period............. $ 10,830 $ 33,291
--------- --------
Cash provided by (used in) operating activities:
Net income (loss)........................................ (131,061) 28,254
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of changes in accounting principles 155,400 1,021
Gain on sale of assets............................... (5,468) -
Depreciation......................................... 27,678 29,723
Amortization of intangible assets.................... 555 288
Deferred income taxes................................ 4,205 8,304
(Increase) decrease in working capital items............. 5,229 (22,269)
Proceeds (repayments) from sale of accounts receivable... (3,883) (688)
Increase in receivable from related parties.............. (5,379) (7,946)
Change in cumulative translation adjustment.............. 10,584 7,177
Other, net............................................... (1,849) (5,020)
-------- --------
Net cash provided by operating activities.................. 56,011 38,844
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................... (30,610) (33,005)
Net proceeds from sale of assets......................... 27,271 -
-------- --------
Net cash used in investing activities...................... (3,339) (33,005)
-------- --------
Cash provided by (used in) financing activities:
Increase (decrease) in short-term debt................... 6 (77)
Decrease in borrowings under revolving credit facility... (56,850) -
Repayments of long-term debt............................. (183,464) (879)
Call premium on redemption of debt....................... (2,734) -
Decrease in restricted cash.............................. 182,130 -
Debt issuance costs...................................... (797) -
Capital contribution from parent company................. 6,891 1,451
-------- --------
Net cash provided by (used in) financing activities........ (54,818) 495
-------- --------
Effect of exchange rate changes on cash.................... 554 2,420
-------- --------
Net change in cash and cash equivalents.................... (1,592) 8,754
-------- --------
Cash and cash equivalents, end of period................... $ 9,238 $ 42,045
======== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- (CONTINUED)
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 29,
2002 2003
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)................. $ 32,425 $ 26,202
Income taxes (including taxes paid pursuant to the
Tax Sharing Agreement)............................ 4,012 5,774
Acquisition of mineral products facility:
Fair market value of assets acquired................. $ 11,421
Purchase price of acquisition........................ 11,421
--------
Liabilities assumed.................................. $ -
========
Acquisition of Germinal S.A., net of $436
cash acquired:
Fair market value of assets acquired................. $ 7,685
Purchase price of acquisition........................ 7,252
--------
Liabilities assumed.................................. $ 433
========
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 June 29, 2003, and the results of operations and cash flows for the three and
six month periods ended June 30, 2002 and June 29, 2003. 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, 2002 (the "2002 Form 10-K").
NOTE 1. CHARGE FOR EARLY 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. 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). In April 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("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 Accounting Principles Board Opinion No. 30 for classification as
extraordinary. The Company adopted SFAS No. 145 effective January 1, 2003 and,
as a result, the Consolidated Statement of Operations for the first six months
of 2002 was restated to reclassify the pre-tax extraordinary charge of $4.3
million on the early retirement of debt to a separate line item of pre-tax
income. The tax benefit of $1.5 million related to the extraordinary charge has
been reclassified and is included in "Income taxes."
NOTE 2. ASSET RETIREMENT OBLIGATIONS
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. 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. The Company holds long-lived
assets that have legal obligations associated with their retirement. These
assets include deep wells that require capping, minerals quarries that require
reclamation and other plant assets subject to certain environmental regulations.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation ("ARO") be recognized in the period in which it is incurred. 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. Subsequent to the initial measurement of the ARO, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
If the obligation is settled for other than the carrying amount of the
liability, the Company would then recognize a gain or loss on settlement. As a
result of adopting SFAS No. 143, effective January 1, 2003, the Company
recognized an after-tax charge of $1.0 million ($1.6 million before an income
tax benefit of $0.6 million) as the cumulative effect of a change in accounting
principle, and recorded an ARO of $1.9 million and a net increase in
5
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ASSET RETIREMENT OBLIGATIONS - (CONTINUED)
property, plant and equipment of $0.3 million. The ongoing expense on an annual
basis resulting from the initial adoption of SFAS No. 143 is approximately $0.2
million.
The change in the ARO during the six months ended June 29, 2003 is as
follows:
(Thousands)
ARO liability recognized as of January 1, 2003....... $ 1,871
Liabilities incurred, quarter ended June 29, 2003.... 16
ARO liability accretion.............................. 90
--------
ARO liability balance, June 29, 2003................. $ 1,977
========
The pro forma ARO would have been $1.7 million on January 1, 2002 and $1.8
million on June 30, 2002 if SFAS No. 143 had been applied during all periods
affected.
For the six months ended June 30, 2002, the reported net loss on a pro
forma basis would have been $131.2 million, including an additional $0.1 million
due to additional depreciation and liability accretion from AROs. The net income
for the six months ended June 29, 2003 would have increased on a pro forma basis
by $1.0 million to $29.3 million due to the elimination of the cumulative effect
of the change in accounting principle recorded on January 1, 2003 on the
adoption of SFAS No. 143. For the second quarter of 2002, the pro forma net
income would have been $40 thousand lower, while for the second quarter of 2003,
actual and pro forma net income are the same.
NOTE 3. NEW ACCOUNTING STANDARDS
In June 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 for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. As the Company has no plans at this time for any exit or disposal
activities, the adoption of SFAS No. 146 will not have any immediate effect on
the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 for both annual
and interim reporting
6
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. NEW ACCOUNTING STANDARDS - (CONTINUED)
periods by requiring disclosures in a tabular format to reconcile net
income as reported to pro forma net income as if the fair value method was used.
Certain of the disclosure modifications required for fiscal years ending after
December 15, 2002 were disclosed in the Company's 2002 Form 10-K. However, as
discussed in Note 4, with the completion of the going private transaction by ISP
in February 2003, the Company's stock-based compensation plans were terminated
and payments were made in accordance with the terms of the merger agreement.
Therefore, the provisions of SFAS No. 148 are no longer applicable to the
Company as it relates to those plans. In addition, the Company currently
accounts for incentive units granted to eligible Company employees pursuant to
ISP's 2000 Long-Term Incentive Plan and 2003 Executive Long-Term Incentive Plan
under the accounting prescribed by FASB Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option and Award Plans" ("FIN
28"), which requires an entity to measure compensation as the amount by which
the Book Value of the incentive units covered by the grant exceeds the option
price or value specified of such incentive units at the date of grant. Changes,
either increases or decreases, in the Book Value of those incentive units
between the date of grant and the measurement date result in a change in the
measure of compensation for the right or award. The Company expects to continue
to account for its long-term incentive units under the accounting prescribed by
FIN 28 and has adopted the additional disclosure provisions of SFAS No. 148.
Since compensation expense related to such incentive units is included in the
actual Consolidated Statements of Operations, the Company's pro forma net income
under SFAS No. 123 would have been the same as actual net income.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosures of certain
guarantees issued and outstanding. The provisions of FIN 45 apply to guarantee
contracts that contingently require the guarantor to make payments (in cash,
financial instruments, other assets, shares of stock or provision of services)
to the guaranteed party for guarantees such as a financial standby letter of
credit, a market value guarantee on either a financial or nonfinancial asset
owned by the guaranteed party and a guarantee of the collection of the scheduled
contractual cash flows from financial assets held by a special-purpose entity.
FIN 45 also applies to indemnification contracts and indirect guarantees of
indebtedness of others. The requirements of FIN 45 for the initial recognition
and measurement of the liability for a guarantor's obligations are to be applied
only on a prospective basis to guarantees issued or modified after December 31,
2002. The Company currently does not have any guarantees, indemnification
contracts or indirect guarantees of indebtedness of others that would be subject
to the initial recognition and measurement provisions of FIN 45. As discussed in
Note 10, the Company's 10 1/4% Senior Subordinated Notes due 2011 are guaranteed
by all of the Company's domestic subsidiaries, other than certain immaterial
subsidiaries and the Company's accounts receivable financing subsidiary.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." In accordance with FIN 46, a variable interest entity will
be consolidated if either the total equity investment at risk is not sufficient
to
7
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. NEW ACCOUNTING STANDARDS - (CONTINUED)
permit the entity to finance its activities without additional subordinated
financial support from other parties, or as a group, the holders of the equity
investment at risk lack any one of the following three characteristics of a
controlling financial interest: (1) the direct or indirect ability to make
decisions about an entity's activities; (2) the obligation to absorb the
expected losses of the entity if they occur; (3) the right to receive the
expected residual returns of the entity if they occur. All companies with
variable interests in variable interest entities created after January 31, 2003
shall apply the provisions of FIN 46 immediately. A public entity with a
variable interest in a variable interest entity created before February 1, 2003
shall apply the provisions of FIN 46 to that entity no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
The Company does not have an interest in a variable interest entity. Therefore,
FIN 46 does not currently have an impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company does not expect that the adoption of
SFAS No. 149 will have an immediate impact on the Company's consolidated
financial statements.
NOTE 4. OTHER OPERATING GAINS AND CHARGES
On February 28, 2003, ISP completed a going private transaction whereby
stockholders of ISP approved the Agreement and Plan of Merger dated as of
November 8, 2002 of International Specialty Products Holdings Inc. with and into
ISP and pursuant to which holders of ISP common stock received $10.30 per share
in cash for each share of ISP common stock owned (except as otherwise provided
in the merger agreement). As a result of completing this going private
transaction, the Company's stock-based compensation plans were terminated and
payments were made in accordance with the terms of the merger agreement. As a
result, holders of approximately 2.7 million vested, in-the-money stock options
outstanding and exercisable on February 28, 2003 received a cash amount equal to
the excess of $10.30 over the exercise price of such stock options, aggregating
$1.5 million. Compensation expense of $1.5 million related to the payment for
stock option terminations was recorded in the first quarter of 2003 and is
included in "Other operating gains and (charges), net." In addition, outstanding
restricted common stock awards were replaced with long-term incentive units of
comparable vesting and a value equivalent to the previous awards based on the
buyout price of $10.30 per award. First quarter 2002 results included an other
operating gain of $2.8 million for a contract termination related to the sale of
the Company's FineTech business. The Company recorded an additional second
quarter 2002 pre-tax gain, after expenses, of $5.5 million related to this sale.
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.
For additional information, reference is made to Note 6 to Consolidated
Financial Statements contained in the 2002 Form 10-K.
8
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. 2003 EXECUTIVE LONG-TERM INCENTIVE PLAN
In May 2003, ISP adopted the 2003 Executive Long-Term Incentive Plan (the
"Plan"), which authorizes the grant of incentive units ("Incentive Units") to
eligible employees of the Company. The Plan is administered by a committee (the
"Committee") appointed by the Board of Directors of ISP from among the employees
of ISP. The Committee, in its sole discretion, determines the number of
Incentive Units to be granted to each eligible employee. The Plan will terminate
ten years after its effective date of May 15, 2003.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
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 is
subject to at least an annual assessment for impairment and more frequently if
circumstances indicate a possible impairment. The Company adopted SFAS No. 142
effective as of January 1, 2002. Accordingly, during the second quarter of 2002,
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 following schedule reconciles the changes in the carrying amount of
goodwill, by business segment, for the six months ended June 29, 2003. See Note
8 for a discussion of a change in the composition of the Company's business
segments, effective January 1, 2003. Also, see Note 10 for a discussion of the
acquisition of Germinal S.A.
Specialty Industrial Mineral Total
Chemicals Chemicals Products Goodwill
---------- ---------- --------- ---------
(Thousands)
Balance, December 31, 2002........ $ 274,167 $ - $ 51,539 $ 325,706
Acquisition of Germinal S.A. ..... 5,537 - - 5,537
Translation adjustment............ (286) - - (286)
--------- ---------- --------- ---------
Balance, June 29, 2003............ $ 279,418 $ - $ 51,539 $ 330,957
========= ========== ========= =========
Intangible assets at December 31, 2002 and June 29, 2003 relate to the
Company's biocides business, which was acquired on December 31, 2001. The
following is information as of December 31, 2002 and June 29, 2003 related to
the Company's acquired intangible assets:
December 31, 2002 June 29, 2003
Range of ---------------------------- ---------------------------
Amortizable Gross Carrying Accumulated Gross Carrying Accumulated
Lives Amount Amortization Amount Amortization
----------- -------------- ------------ -------------- ------------
(Dollars in Thousands)
Intangible assets subject to amortization:
Patents..................................... 5-20 years $ 669 $ (57) $ 669 $ (85)
Non-compete agreements...................... 2-5 years 1,571 (485) 1,571 (728)
EPA registrations........................... 5 years 167 (33) 167 (50)
---------- ---------- ---------- ----------
Total amortized intangible assets......... 2,407 (575) 2,407 (863)
---------- ---------- ---------- ----------
Intangible assets not subject to amortization:
Trademarks.................................. 2,962 - 2,962 -
EPA registrations........................... 4,648 - 4,648 -
Total unamortized intangible assets....... 7,610 - 7,610 -
---------- ---------- ---------- ----------
Total intangible assets......................... $ 10,017 $ (575) $ 10,017 $ (863)
========== ========== ========== ==========
9
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. GOODWILL AND INTANGIBLE ASSETS - (CONTINUED)
Estimated amortization expense:
Year ended December 31, (Thousands)
2003................................................ $ 575
2004................................................ 290
2005................................................ 290
2006................................................ 290
2007................................................ 26
NOTE 7. COMPREHENSIVE INCOME (LOSS)
Second Quarter Ended Six Months Ended
-------------------- ---------------------
June 30, June 29, June 30, June 29,
2002 2003 2002 2003
-------- -------- -------- ---------
(Thousands)
Net income (loss)............................. $ 17,206 $ 16,041 $(131,061) $ 28,254
-------- -------- --------- ---------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of income tax
benefit of $11, $0, $12 and $0,
respectively............................ (20) - (22) -
Less: reclassification adjustment for
losses included in net income, net of
income tax benefit of $316, $0, $534
and $0, respectively.................... (611) - (986) -
-------- ------- --------- ---------
Total change for the period................. 591 - 964 -
-------- ------- --------- ---------
Foreign currency translation adjustment....... 11,172 8,107 11,138 9,597
-------- ------- --------- ---------
Total other comprehensive income.............. 11,763 8,107 12,102 9,597
-------- -------- --------- ---------
Comprehensive income (loss)................... $ 28,969 $ 24,148 $(118,959) $ 37,851
======== ======== ========= =========
Changes in the components of "Accumulated other comprehensive loss"
for the six months ended June 29, 2003 are as follows:
Cumulative Additional
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Loss
---------- ---------- -------------
(Thousands)
Balance, December 31, 2002....... $ (13,595) $ (5,404) $ (18,999)
Change for the period............ 9,597 - 9,597
---------- --------- ---------
Balance, June 29, 2003........... $ (3,998) $ (5,404) $ (9,402)
========== ========= =========
10
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. BUSINESS SEGMENT INFORMATION
Second Quarter Ended Six Months Ended
--------------------- --------------------
June 30, June 29, June 30, June 29,
2002 2003 2002 2003
--------- --------- -------- ---------
(Thousands)
Net sales (1):
Specialty Chemicals....................... $ 146,711 $ 159,001 $ 306,282 $ 316,914
Industrial Chemicals...................... 42,338 44,391 77,863 93,527
Mineral Products (2)...................... 25,675 26,136 49,703 51,663
--------- --------- --------- ---------
Net sales................................... $ 214,724 $ 229,528 $ 433,848 $ 462,104
========= ========= ========= =========
Operating income (1):
Specialty Chemicals....................... $ 33,844 $ 33,694 $ 59,285 $ 66,937
Industrial Chemicals...................... 403 (1,393) 3,064 (4,121)
Mineral Products.......................... 7,219 4,739 12,888 8,737
--------- --------- --------- --------
Total segment operating income............ 41,466 37,040 75,237 71,553
Unallocated corporate office.............. 34 8 (30) 90
--------- --------- --------- ---------
Total operating income...................... 41,500 37,048 75,207 71,643
Interest expense and other, net............. (15,361) (11,817) (38,047) (26,575)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of changes in accounting principles $ 26,139 $ 25,231 $ 37,160 $ 45,068
========== ========= ========= =========
(1) Effective January 1, 2003, the Company changed the composition of its
reportable segments to be consistent with the current structure of the
Company's businesses. Over the last several years, the Company has
increased its focus on its higher margin consumer-oriented businesses.
Consistent with that business focus, the Company now reports three business
segments: Specialty Chemicals, Industrial Chemicals and Mineral Products.
The Company's Specialty Chemicals segment consists of the personal care,
pharmaceutical, food, beverage, performance chemicals and fine chemicals
product lines. Sales and operating income by business segment for the
second quarter and six months ended June 30, 2002 have been restated to
conform to the 2003 presentation.
(2) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $19.7 and $20.0 million for the second quarter of
2002 and 2003, respectively, and $38.8 and $39.7 for the first six months
of 2002 and 2003, respectively.
NOTE 9. INVENTORIES
Inventories comprise the following:
December 31, June 29,
2002 2003
------------ --------
(Thousands)
Finished goods................ $113,912 $116,395
Work-in-process............... 32,407 31,034
Raw materials and supplies.... 29,898 26,306
-------- --------
Inventories................... $176,217 $173,735
======== ========
11
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. INVENTORIES - (CONTINUED)
At December 31, 2002 and June 29, 2003, $62.0 and $55.6 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 $2.8 and $3.9 million higher at December 31, 2002
and June 29, 2003, respectively.
NOTE 10. ACQUISITION
In May 2003, the Company acquired 100% of the stock of Germinal S.A., a
supplier of food ingredients to the meat and dairy industry in southern Latin
America, for $7.3 million in cash, net of $0.4 million cash acquired. Germinal
has a manufacturing facility at its headquarters in Cabreuva, Brazil. In
accordance with SFAS No. 141, "Business Combinations," the purchase price was
allocated on a preliminary basis to the estimated fair value of the identifiable
assets acquired, primarily property plant and equipment, and the excess of $5.5
million was recorded as goodwill. The Company is in the process of evaluating
the fair value of the net assets acquired and, therefore, the purchase price
allocation is subject to refinement. The results of the Germinal business are
included in the Company's results of operations from the date of acquisition and
are not expected to have a material impact on the Company's results of
operations for the year 2003.
NOTE 11. GUARANTOR FINANCIAL INFORMATION
In 2001, the Company and three of its wholly owned subsidiaries jointly
issued, in three separate transactions, a total of $405.0 million aggregate
principal amount of 10 1/4% Senior Subordinated Notes due 2011 (the "2011
Notes"). The 2011 Notes are guaranteedby all of the Company's 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 the 2011 Notes, is
party to a License and Royalty Agreement with non-guarantor foreign affiliates.
Under this agreement, ISP Global Technologies granted a license to certain
non-guarantor foreign affiliates 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 Company's guarantor subsidiaries and non-guarantor
subsidiaries is not included herein because management has determined that such
information is not material to investors.
12
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 2002
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 108,196 $ 106,528 $ - $ 214,724
Intercompany net sales ................... - 53,115 3,035 (56,150) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 161,311 109,563 (56,150) 214,724
-------- ---------- ---------- ---------- ----------
Cost of products sold .................... - (107,488) (87,317) 56,150 (138,655)
Selling, general and administrative ...... - (28,604) (15,208) (43,812)
Other operating gains and (charges), net.. - 6,317 3,079 9,396
Amortization of intangible assets......... - (153) - (153)
-------- ---------- ---------- ---------- ----------
Operating income ......................... - 31,383 10,117 - 41,500
Equity in income of subsidiaries ......... 16,697 - - (16,697) -
Intercompany royalty income (expense), net - 8,017 (8,017) -
Interest expense ......................... 910 (15,983) (203) (15,276)
Other income (expense), net .............. (126) (3,415) 3,456 (85)
-------- ---------- ---------- ---------- ----------
Income before income taxes ............... 17,481 20,002 5,353 (16,697) 26,139
Income taxes ............................ (275) (7,411) (1,247) (8,933)
-------- ---------- ---------- ---------- ----------
Net income ............................... $ 17,206 $ 12,591 $ 4,106 $ (16,697) $ 17,206
======== ========== ========== ========== ==========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SECOND QUARTER ENDED JUNE 29, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 109,001 $ 120,527 $ - $ 229,528
Intercompany net sales ................... - 58,669 3,805 (62,474) -
------- ---------- ---------- ---------- ----------
Total net sales ....................... - 167,670 124,332 (62,474) 229,528
------- ---------- ---------- ---------- ----------
Cost of products sold .................... - (121,243) (88,446) 62,474 (147,215)
Selling, general and administrative ...... - (28,590) (16,531) (45,121)
Amortization of intangible assets ........ - (144) - (144)
------- ---------- ---------- ---------- ----------
Operating income ......................... - 17,693 19,355 - 37,048
Equity in income of subsidiaries ......... 17,990 - - (17,990) -
Intercompany royalty income (expense), net - 8,852 (8,852) -
Intercompany dividend income ............. - 2,477 - (2,477) -
Interest expense ......................... 812 (14,601) 560 (13,229)
Other income (expense), net .............. (1) (1,365) 2,778 1,412
------- ---------- ---------- ---------- ----------
Income before income taxes................ 18,801 13,056 13,841 (20,467) 25,231
Income taxes ............................. (283) (5,600) (3,307) (9,190)
------- ---------- ---------- ---------- ----------
Net income ............................... $18,518 $ 7,456 $ 10,534 $ (20,467) $ 16,041
======= ========== ========== ========== ==========
13
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(Thousands)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 226,204 $ 207,644 $ - $ 433,848
Intercompany net sales ................... - 105,278 5,223 (110,501) -
--------- ---------- ---------- ---------- ----------
Total net sales ....................... - 331,482 212,867 (110,501) 433,848
--------- ---------- ---------- ---------- ----------
Cost of products sold .................... - (231,805) (162,728) 110,501 (284,032)
Selling, general and administrative ...... - (56,171) (30,111) (86,282)
Other operating gains and (charges), net.. - 9,149 3,079 12,228
Amortization of intangible assets......... - (530) (25) (555)
--------- ---------- ---------- ---------- ----------
Operating income ......................... - 52,125 23,082 - 75,207
Equity in loss of subsidiaries ........... (86,349) - - 86,349 -
Intercompany royalty income (expense), net - 15,158 (15,158) -
Interest expense ......................... 1,413 (34,075) 865 (31,797)
Charge for early retirement of debt....... (4,294) - - (4,294)
Other income (expense), net .............. (128) (3,866) 2,038 (1,956)
--------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle (89,358) 29,342 10,827 86,349 37,160
Income taxes ............................. 1,010 (10,626) (3,205) (12,821)
--------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................. (88,348) 18,716 7,622 86,349 24,339
Cumulative effect of change in accounting
principle.............................. (42,713) (112,687) - (155,400)
--------- ---------- ---------- ---------- ----------
Net income (loss) ........................ $(131,061) $ (93,971) $ 7,622 $ 86,349 $ (131,061)
========= ========== ========== ========== ==========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 29, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 216,640 $ 245,464 $ - $ 462,104
Intercompany net sales ................... - 115,356 6,438 (121,794) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 331,996 251,902 (121,794) 462,104
-------- ---------- ---------- ---------- ----------
Cost of products sold .................... - (238,036) (183,566) 121,794 (299,808)
Selling, general and administrative ...... - (57,494) (31,420) (88,914)
Other operating gains and (charges), net.. - (1,376) (75) (1,451)
Amortization of intangible assets......... - (288) - (288)
-------- ---------- ---------- ---------- ----------
Operating income ......................... - 34,802 36,841 - 71,643
Equity in income of subsidiaries ......... 30,380 - - (30,380) -
Intercompany royalty income (expense), net - 18,052 (18,052) -
Intercompany dividend income ............. - 3,210 - (3,210) -
Interest expense ......................... 1,669 (29,520) 1,201 (26,650)
Other income (expense), net .............. (3) (3,081) 3,159 75
-------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 32,046 23,463 23,149 (33,590) 45,068
Income taxes ............................. (582) (10,969) (4,242) (15,793)
-------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................. 31,464 12,494 18,907 (33,590) 29,275
Cumulative effect of change in accounting
principle, net of income tax benefit of
$600 ................................... - (583) (438) (1,021)
-------- ---------- ---------- ---------- ----------
Net income ............................... $ 31,464 $ 11,911 $ 18,469 $ (33,590) $ 28,254
======== ========== ========== ========== ==========
14
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 6 $ 17,735 $ 15,550 $ - $ 33,291
Accounts receivable, trade, net ....... - 6,025 73,755 79,780
Accounts receivable, other ............ - 4,835 10,536 15,371
Receivables from related parties....... (32) 12,875 (431) 12,412
Inventories ........................... - 104,000 72,217 176,217
Deferred income taxes.................. - 19,313 15,374 34,687
Prepaid expenses ...................... - 4,948 4,874 9,822
-------- ---------- --------- --------- -----------
Total current assets ................ (26) 169,731 191,875 - 361,580
Investment in subsidiaries ............... 294,505 171,977 - (466,482) -
Intercompany loans ....................... 16,021 (16,354) 333 -
Due from (to) subsidiaries, net .......... - 52,554 (52,554) -
Property, plant and equipment, net ....... - 497,768 67,673 565,441
Goodwill, net ............................ 89,931 235,775 - 325,706
Intangible assets, net ................... - 9,442 - 9,442
Long-term receivable from related party... - - 30,298 30,298
Other assets ............................. - 42,676 340 43,016
-------- ---------- --------- ---------- -----------
Total Assets ............................. $400,431 $1,163,569 $ 237,965 $ (466,482) $ 1,335,483
======== ========== ========= ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 144 $ - $ 144
Current maturities of long-term debt .. - 2,728 4 2,732
Accounts payable ...................... - 34,870 18,335 53,205
Accrued liabilities ................... - 66,229 23,673 89,902
Income taxes payable........... 16,520 3,472 14,209 34,201
-------- ---------- --------- ---------- ----------
Total Current liabilities ........... 16,520 107,299 56,365 - 180,184
Long-term debt less current maturities ... - 623,002 6 623,008
Deferred income taxes .................... - 91,771 8,944 100,715
Other liabilities ........................ 56,013 46,992 673 103,678
Total Shareholder's Equity ............... 327,898 294,505 171,977 (466,482) 327,898
-------- ---------- --------- ---------- ----------
Total Liabilities and Shareholder's
Equity ................................ $ 400,431 $1,163,569 $ 237,965 $ (466,482) $ 1,335,483
========= ========== ========= ========== ===========
15
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 29, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 6 $ 23,562 $ 18,477 $ - $ 42,045
Accounts receivable, trade, net ....... - 4,098 98,582 102,680
Accounts receivable, other ............ - 2,287 16,223 18,510
Receivables from related parties....... 185 19,737 (473) 19,449
Inventories ........................... - 102,843 70,892 173,735
Deferred income taxes.................. - 19,313 18,545 37,858
Prepaid expenses ...................... - 3,907 5,421 9,328
-------- ---------- --------- ---------- -----------
Total current assets ................ 191 175,747 227,667 - 403,605
Investment in subsidiaries ............... 334,633 198,360 - (532,993) -
Intercompany loans ....................... 16,021 (8,576) (7,445) -
Due from (to) subsidiaries, net .......... - 63,012 (63,012) -
Property, plant and equipment, net ....... - 494,293 74,342 568,635
Goodwill, net ............................ 89,931 235,775 5,251 330,957
Intangible assets, net ................... - 9,154 - 9,154
Long-term receivable from related party... - - 31,207 31,207
Other assets ............................. - 47,441 634 48,075
-------- ----------- --------- ---------- -----------
Total Assets ............................. $440,776 $ 1,215,206 $ 268,644 $ (532,993) $ 1,391,633
======== =========== ========= ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 67 $ - $ 67
Current maturities of long-term debt .. - 2,719 3 2,722
Accounts payable ...................... - 34,115 24,896 59,011
Accrued liabilities ................... - 63,215 18,845 82,060
Income taxes payable................... 17,579 3,483 15,159 36,221
-------- ----------- --------- ---------- -----------
Total Current liabilities ........... 17,579 103,532 58,970 - 180,081
Long-term debt less current maturities ... - 622,238 31 622,269
Deferred income taxes .................... - 101,665 9,925 111,590
Other liabilities ........................ 55,997 53,138 1,358 110,493
Total Shareholder's Equity ............... 367,200 334,633 198,360 (532,993) 367,200
-------- ----------- --------- ---------- -----------
Total Liabilities and Shareholder's
Equity ................................ $440,776 $ 1,215,206 $ 268,644 $ (532,993) $ 1,391,633
======== =========== ========= ========== ===========
16
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 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)....................................... (44,712) (93,971) 7,622 (131,061)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle.. 42,713 112,687 - 155,400
Gain on sale of assets............................... - (2,389) (3,079) (5,468)
Depreciation......................................... - 22,992 4,686 27,678
Amortization of intangible assets.................... - 530 25 555
Deferred income taxes................................ (1,460) 10,092 (4,427) 4,205
(Increase) decrease in working capital items............ 8,783 309 (3,863) 5,229
Proceeds (repayments) from sale of accounts receivable.. - - (3,883) (3,883)
(Increase) decrease in receivable from related parties.. 56 (4,119) (1,316) (5,379)
Change in amounts due to (from) subsidiaries............ - 21,970 (21,970) -
Change in investment in and advances to affiliates...... 87,215 (100,627) 13,412 -
Change in cumulative translation adjustment............. - - 10,584 10,584
Other, net.............................................. 4,354 (832) (5,371) (1,849)
-------- ---------- ----------- ----------
Net cash provided by (used in) operating activities....... 96,949 (33,358) (7,580) 56,011
-------- ---------- ----------- ----------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition.................... - (27,317) (3,293) (30,610)
Net proceeds from sale of assets........................ - 7,533 19,738 27,271
-------- ---------- ----------- ----------
Net cash provided by (used in) investing activities....... - (19,784) 16,445 (3,339)
-------- ---------- ----------- ----------
Cash provided by (used in) financing activities:
Increase in short-term debt............................. - - 6 6
Decrease in borrowings under revolving
credit facility....................................... - (56,850) - (56,850)
Repayments of long-term debt............................ (182,232) (1,210) (22) (183,464)
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
Debt issuance costs..................................... - (797) - (797)
Capital contribution from parent company................ 6,891 - - 6,891
-------- ---------- ----------- ----------
Net cash provided by (used in) financing activities....... (96,945) 53,959 (11,832) (54,818)
-------- ---------- ----------- ----------
Effect of exchange rate changes on cash................... - - 554 554
-------- ---------- ----------- ----------
Net change in cash and cash equivalents................... 4 817 (2,413) (1,592)
-------- ---------- ----------- ----------
Cash and cash equivalents, end of period.................. $ 9 $ 4,428 $ 4,801 $ 9,238
======== ========== =========== ==========
17
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 29, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash and cash equivalents, beginning of period............ $ 6 $ 17,735 $ 15,550 $ 33,291
-------- ---------- ----------- ---------
Cash provided by (used in) operating activities:
Net income ............................................. (2,126) 11,911 18,469 28,254
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle.. - 583 438 1,021
Depreciation......................................... - 24,024 5,699 29,723
Amortization of intangible assets.................... - 288 - 288
Deferred income taxes................................ - 10,494 (2,190) 8,304
(Increase) decrease in working capital items............ 1,059 2,537 (25,865) (22,269)
Proceeds (repayments) from sale of accounts receivable.. - - (688) (688)
Increase in receivable from related parties............. (217) (6,862) (867) (7,946)
Change in amounts due to (from) subsidiaries............ - (10,458) 10,458 -
Change in investment in and advances to affiliates...... (151) (643) 794 -
Change in cumulative translation adjustment............. - - 7,177 7,177
Other, net.............................................. (16) 643 (5,647) (5,020)
-------- ---------- ----------- ---------
Net cash provided by (used in) operating activities....... (1,451) 32,517 7,778 38,844
-------- ---------- ----------- ---------
Cash used in investing activities:
Capital expenditures and acquisition.................... - (20,486) (12,519) (33,005)
-------- ---------- ----------- ---------
Net cash used in investing activities..................... - (20,486) (12,519) (33,005)
-------- ---------- ----------- ---------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................. - - (77) (77)
Repayments of long-term debt............................ - (903) 24 (879)
(Increase) decrease in intercompany loans............... - (7,778) 7,778 -
Dividends and distributions to parent company........... - 2,477 (2,477) -
Capital contribution from parent company................ 1,451 - - 1,451
-------- ---------- ----------- ---------
Net cash provided by (used in) financing activities....... 1,451 (6,204) 5,248 495
-------- ---------- ----------- ---------
Effect of exchange rate changes on cash................... - - 2,420 2,420
-------- ---------- ----------- ---------
Net change in cash and cash equivalents................... - 5,827 2,927 8,754
-------- ---------- ----------- ---------
Cash and cash equivalents, end of period.................. $ 6 $ 23,562 $ 18,477 $ 42,045
======== ========== =========== =========
18
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. 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 these 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 21 to Consolidated Financial Statements contained in the 2002 Form 10-K.
Tax Claim Against G-I Holdings Inc.
The predecessor of ISP and certain of its domestic subsidiaries were
parties to tax sharing agreements with 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. Until January 1, 1997, ISP and its domestic
subsidiaries were included in the consolidated Federal income tax returns of the
G-I Holdings Group and, accordingly, would be severally liable for any tax
liability of the G-I Holdings Group in respect of those prior years. Those tax
sharing agreements are no longer applicable with respect to the tax liabilities
of ISP for periods subsequent to January 1, 1997, because neither the Company
nor any of its domestic subsidiaries are members of the G-I Holdings Group for
periods after January 1, 1997. 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
19
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. CONTINGENCIES - (CONTINUED)
such deficiency against G-I Holdings and one of its subsidiaries, ACI Inc.,
that also filed for protection under Chapter 11 of the Bankruptcy Code, in the
G-I Holdings bankruptcy. If such proof of claim is sustained, ISP and/or certain
of its subsidiaries together with G-I Holdings and several current and former
subsidiaries of G-I Holdings would be severally liable for taxes and interest in
an amount of approximately $276 million, computed as of June 29, 2003. On May 7,
2002, G-I Holdings filed an objection to that proof of claim. Such objection
will be heard by the United States District Court for the District of New Jersey
which oversees the G-I Holdings bankruptcy court. For additional information
relating to G-I Holdings, reference is made to Notes 9 and 21 to Consolidated
Financial Statements contained in the 2002 Form 10-K.
20
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.
RESULTS OF OPERATIONS - SECOND QUARTER 2003 COMPARED WITH
SECOND QUARTER 2002
We recorded second quarter 2003 net income of $16.0 million compared with
net income of $17.2 million in the second quarter of 2002. The lower results for
the second quarter of 2003 were attributable to $4.5 million lower operating
income, partially offset by $2.1 million lower interest expense and $1.5 million
higher other income, net. Operating income in the second quarter of 2002
included $9.4 million of other operating gains resulting from a $5.5 million
gain on the sale of our FineTech business and a $3.9 million gain on a contract
settlement.
Effective January 1, 2003, we changed the composition of our reportable
segments to be consistent with the current structure of our businesses. Over the
last several years, we have increased our focus on our higher margin
consumer-oriented businesses. Consistent with that business focus, we now report
three business segments: Specialty Chemicals, Industrial Chemicals and Mineral
Products. Our Specialty Chemicals segment consists of the personal care,
pharmaceutical, food, beverage, performance chemicals and fine chemicals product
lines. Sales and operating income by business segment for the second quarter and
six months ended June 30, 2002 have been restated to conform to the 2003
presentation.
Net sales for the second quarter of 2003 were $229.5 million compared with
$214.7 million for the second quarter of 2002. The $14.8 million (7%) increase
in sales resulted from higher unit volumes in the pharmaceutical, food and
beverage product lines (totaling $6.8 million) and the favorable impact of the
weaker U.S. dollar in Europe ($11.6 million). These sales gains were partially
offset by lower volumes in Industrial Chemicals and the fine chemicals product
line (totaling $3.5 million) and lower pricing ($2.0 million), mainly in the
Mineral Products segment and personal care product line.
The gross margin for the second quarter of 2003 was 35.9% compared with
35.4% in the second quarter of 2002. The improved margin resulted primarily from
the higher volumes in the pharmaceutical and beverage product lines and the
favorable impact of the weaker U.S. dollar. Lower gross margins for the Mineral
Products and Industrial Chemicals segments were adversely impacted by higher
energy costs.
While operating income in the second quarter of 2003 was $37.0 million
compared with $41.5 million in the second quarter of 2002, excluding the other
operating gains in the second quarter of 2002 mentioned above, operating income
increased from $32.1 million in the second quarter of 2002 to $37.0 million in
the second quarter of 2003
21
- up 15% (see reconciliation below of non-GAAP financial measures). The
higher comparable operating income for the second quarter of 2003 includes
improved results in the Specialty Chemicals business segment, partially offset
by losses in the Industrial Chemicals segment and lower results in the Mineral
Products segment.
On a comparable basis, excluding the aforementioned other operating gains,
operating income for the Specialty Chemicals segment improved 38% to $33.7
million compared with $24.4 million in last year's second quarter. The improved
results were primarily attributable to higher unit volumes and the favorable
impact of the weaker U.S. dollar in the pharmaceutical and beverage product
lines and, with respect to the personal care product line, the favorable impact
of the weaker U.S. dollar and manufacturing efficiencies.
The Industrial Chemicals segment recorded an operating loss of $1.4 million
in the second quarter of 2003 compared with operating income of $0.4 million in
the second quarter of 2002. The Industrial Chemicals manufacturing operations
are principally based in Europe and costs for this business have been adversely
impacted by the stronger Euro and higher energy costs, partially offset by
manufacturing efficiencies.
Operating income for the Mineral Products business segment decreased by
$2.5 million (35%) to $4.7 million in the second quarter of 2003 because of
unfavorable manufacturing costs, primarily higher energy costs, as well as lower
pricing.
Selling, general and administrative expenses for the second quarter of 2003
increased by 3% to $45.1 million from $43.8 million in the same period last year
as a result of higher administrative and distribution costs, mainly due to the
weaker U.S. dollar. Selling, general and administrative expenses as a percentage
of sales were reduced to 19.7% compared with 20.4% in last year's second
quarter.
Interest expense for the second quarter of 2003 was $13.2 million versus
$15.3 million for the same period last year. The $2.1 million (14%) decrease was
primarily due to lower average interest rates ($1.3 million impact) and, to a
lesser extent, lower average borrowings ($0.8 million impact). Other income,
net, for the second quarter of 2003 was $1.4 million compared with other
expense, net, of $0.1 million in last year's second quarter, with the higher
income due primarily to favorable foreign exchange.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through three reportable business segments:
Specialty Chemicals; Industrial Chemicals; and Mineral Products. As discussed
above, we changed the composition of our reportable segments, effective January
1, 2003. Sales and operating income by business segment for the second quarter
of 2002 have been restated to conform to the 2003 presentation. See also Note 8
to consolidated financial statements.
The business segment review below and the discussion of operating income
above contain information regarding non-GAAP financial measures contained within
the meaning of Item 10 of Regulation S-K promulgated by
22
the Securities and Exchange Commission. As used herein, "GAAP" refers to
accounting principles generally accepted in the United States of America. We use
non-GAAP financial measures to eliminate the effect of certain other operating
gains and charges on reported operating income. Management believes that these
financial measures are useful to investors and financial institutions because
such measures exclude transactions that are unusual due to their nature or
infrequency and therefore allow investors and financial institutions to more
readily compare our company's performance from period to period. Management uses
this information in monitoring and evaluating our company's performance and the
performance of individual business segments. The non-GAAP financial measures
included herein have been reconciled to the most directly comparable GAAP
financial measure as is required under Item 10 of Regulation S-K regarding the
use of such financial measures. These non-GAAP measures should be considered in
addition to, and not as a substitute, or superior to, operating income or other
measures of financial performance in accordance with generally accepted
accounting principles.
Second Quarter
---------------------
2002 2003
--------- -------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................... $ 41.5 $ 37.0
Non-GAAP adjustments:
Less: Other operating (gains) charges(1)........... (9.4) -
--------- -------
Operating income, as adjusted........................... $ 32.1 $ 37.0
========= =======
Supplemental Business Segment Information:
Operating income:
Operating income per GAAP - Specialty Chemicals.... $ 33.8 $ 33.7
Non-GAAP adjustments (1)........................... (9.4) -
--------- -------
Operating income - Specialty Chemicals as adjusted. $ 24.4 $ 33.7
========= =======
Operating income per GAAP - Industrial Chemicals... $ 0.4 $ (1.4)
Non-GAAP adjustments............................... - -
--------- -------
Operating income - Industrial Chemicals as adjusted $ 0.4 $ (1.4)
========= =======
Operating income per GAAP - Mineral Products....... $ 7.2 $ 4.7
Non-GAAP adjustments............................... - -
--------- -------
Operating income - Mineral Products as adjusted.... $ 7.2 $ 4.7
========= =======
(1) Non-GAAP adjustments in the second quarter of 2002 included an other
operating gain of $5.5 million related to the sale of our company's
FineTech business and an other operating gain of $3.9 million related to a
contract settlement with a customer of our fine chemicals product line,
each of which related to the Specialty Chemicals business segment.
Specialty Chemicals
Sales in the second quarter of 2003 were $159.0 million compared with
$146.7 million for the same period last year, while operating income for the
second quarter of 2003 was $33.7 million compared with $33.8 million in last
year's second quarter. The 8% increase in sales
23
was attributable to higher unit volumes in the pharmaceutical, beverage and
food product lines (totaling $6.8 million), and the favorable effect of the
weaker U.S. dollar in Europe ($8.0 million). Partially offsetting these sales
increases were lower unit volumes in the fine chemicals product line ($2.1
million) and lower pricing ($0.9 million), mainly in the personal care product
line in both the skin care and hair care markets. Higher pharmaceutical volumes
were primarily attributable to strong growth in the excipients markets
(Plasdones for tablet binders and Polyplasdones for tablet disintegrants).
Excluding the other operating gains in the second quarter of 2002,
discussed above, operating income for the Specialty Chemicals segment increased
by 38% for the second quarter of 2003 to $33.7 million compared with $24.4
million in last year's second quarter. The improvement resulted primarily from
the favorable effect of the weaker U.S. dollar ($6.0 million) and the impact of
higher unit volumes in the pharmaceutical, beverage and food product lines
(totaling $3.7 million), partially offset by unfavorable pricing ($0.9 million).
Industrial Chemicals
Sales in the second quarter of 2003 were $44.4 million compared with $42.3
million in the second quarter of 2002. The 5% increase in sales was attributable
to the favorable effect of the weaker U.S. dollar ($3.6 million), partially
offset by lower volumes ($1.5 million).
The Industrial Chemicals segment recorded an operating loss of $1.4 million
in the second quarter of 2003 compared with operating income of $0.4 million in
the second quarter of 2002. The Industrial Chemicals manufacturing operations
are principally based in Europe and costs for this business have been adversely
impacted by the stronger Euro. The unfavorable results also included higher
energy costs and operating expenses (totaling $3.9 million), partially offset by
manufacturing efficiencies ($6.1 million).
Mineral Products
Sales for the Mineral Products segment for the second quarter of 2003 were
$26.1 million compared with $25.7 million for the second quarter of 2002, as
higher unit volumes ($1.0 million), mainly increased sales to Building Materials
Corporation of America, an affiliate, which we refer to as BMCA, were offset by
lower pricing ($0.8 million).
Operating income for the second quarter of 2003 was $4.7 million compared
with $7.2 million for the second quarter of 2002. The $2.5 million (35%)
decrease in operating income was due to unfavorable manufacturing costs,
primarily as a result of higher energy costs, as well as lower pricing.
24
RESULTS OF OPERATIONS - FIRST SIX MONTHS 2003 COMPARED WITH
FIRST SIX MONTHS 2002
We have restated our previously issued consolidated financial statements
for the first six months of 2002. See Note 1 and Note 8 to consolidated
financial statements for further information.
For the first six months of 2003, we recorded net income of $28.3 million
compared with a net loss of $131.1 million in the first six months of 2002.
First six months 2003 results include a $1.0 million after-tax charge for the
cumulative effect of a change in accounting principle from the adoption of
Statement of Financial Accounting Standards, which we refer to as "SFAS," No.
143, "Accounting for Asset Retirement Obligations." First six months 2002
results included a $155.4 million goodwill impairment charge, effective January
1, 2002, for the cumulative effect of a change in accounting principle related
to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
Income before the cumulative effect of changes in accounting principles was
$29.3 million for the first six months of 2003 compared with $24.3 million in
the first six months of 2002. The improved results for the first six months of
2003 were attributable to $5.1 million lower interest expense and $2.0 million
higher other income, net, partially offset by $3.6 million lower operating
income. The results for the first six months of 2002 included a $4.3 million
pre-tax charge for the early retirement of debt and other operating gains of
$12.2 million, while first six months 2003 results include an other operating
charge of $1.5 million for stock option payments related to a going private
transaction by our indirect parent company, International Specialty Products
Inc., which we refer to as ISP. The other operating gains of $12.2 million in
the first six months of 2002 included a $2.8 million gain from a contract
termination related to the sale of our company's FineTech business, a $5.5
million gain on the sale of the FineTech business and a $3.9 million gain on a
contract settlement.
Net sales for the first six months of 2003 were $462.1 million compared
with $433.8 million for the first six months of 2002. The $28.3 million (6.5%)
increase in sales resulted primarily from higher unit volumes in Industrial
Chemicals and Mineral Products and the pharmaceutical, food and beverage product
lines (totaling $22.3 million) and the favorable impact of the weaker U.S.
dollar in Europe ($23.5 million). These sales gains were partially offset by
lower pricing in Industrial Chemicals and the personal care product line
(totaling $5.3 million) and lower volumes ($12.0 million) in the fine chemicals
product line, mainly as a result of the loss of sales to Polaroid, which is
operating under bankruptcy court protection.
The gross margin for the first six months of 2003 was 35.1% compared with
34.5% in the first six months of 2002. The improved margin resulted primarily
from manufacturing efficiencies and the favorable impact of the weaker U.S.
dollar in the Specialty Chemicals business segment. Lower gross margins for the
Mineral Products and Industrial Chemicals segments were adversely impacted by
higher energy costs and lower pricing.
25
Operating income for the first six months of 2003 was $71.6 million
compared with $75.2 million for the first six months of 2002. Excluding the
other operating gains and charges in each period mentioned above, operating
income on a comparable basis was $73.1 million and $63.0 million for the first
six months of 2003 and 2002, respectively (see reconciliation below of non-GAAP
financial measures). The higher comparable operating income for the first six
months of 2003 includes improved results in the Specialty Chemicals business
segment, partially offset by losses in the Industrial Chemicals segment and
lower results in the Mineral Products segment.
On a comparable basis, excluding the aforementioned other operating gains
and charges, operating income for the Specialty Chemicals segment improved 44%
to $68.0 million compared with $47.1 million in last year's first six months.
The improved results were primarily attributable to higher volumes,
manufacturing efficiencies, lower operating expenses and the favorable impact of
the weaker U.S. dollar, partially offset by lower pricing. The improved results
in Specialty Chemicals were adversely impacted by the lack of sales to Polaroid.
The Industrial Chemicals segment recorded an operating loss of $4.1 million
in the first six months of 2003 compared with operating income of $3.1 million
in the first six months of 2002. The results were mainly attributable to lower
pricing and to the adverse impact of the stronger Euro on European-based
manufacturing costs and higher energy costs, partially offset by manufacturing
efficiencies.
Operating income for the Mineral Products business segment decreased by
$4.2 million (33%) to $8.7 million in the first six months of 2003 due to
unfavorable manufacturing costs, primarily as a result of higher energy costs.
Selling, general and administrative expenses for the first six months of
2003 increased by 3% to $88.9 million from $86.3 million in the same period last
year as a result of higher administrative and distribution costs, mainly due to
the weaker U.S. dollar. Selling, general and administrative expenses as a
percentage of sales were reduced to 19.2% compared with 19.9% in last year's
first six months.
Interest expense for the first six months of 2003 was $26.7 million versus
$31.8 million for the same period last year. The $5.1 million (16%) decrease was
primarily due to lower average borrowings ($3.0 million impact) and, to a lesser
extent, lower average interest rates ($2.1 million impact). Other income, net,
for the first six months of 2003 was $0.1 million compared with other expense,
net, of $2.0 million in last year's first six months, with the higher income due
primarily to favorable foreign exchange.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through three reportable business segments:
Specialty Chemicals; Industrial Chemicals; and Mineral Products. As discussed
above, we changed the composition of our reportable segments, effective January
1, 2003. Sales and operating income by business segment for the first six months
of 2002
26
have been restated to conform to the 2003 presentation. See also Note 8 to
consolidated financial statements.
The business segment review below and the discussion of operating income
above contain information regarding non-GAAP financial measures contained within
the meaning of Item 10 of Regulation S-K promulgated by the Securities and
Exchange Commission. See "- Results of Operations - Second Quarter 2003 Compared
With Second Quarter 2002" for additional discussion of our use of non-GAAP
financial measures.
First Six Months
-------------------
2002 2003
-------- --------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................... $ 75.2 $ 71.6
Non-GAAP adjustments:
Less: Other operating (gains) charges(1)........... (12.2) 1.5
-------- --------
Operating income, as adjusted........................... $ 63.0 $ 73.1
======== ========
Supplemental Business Segment Information:
Operating income:
Operating income per GAAP - Specialty Chemicals.... $ 59.3 $ 66.9
Non-GAAP adjustments (1)........................... (12.2) 1.1
-------- --------
Operating income - Specialty Chemicals as adjusted. $ 47.1 $ 68.0
======== ========
Operating income per GAAP - Industrial Chemicals... $ 3.1 $ (4.1)
Non-GAAP adjustments (1)........................... - 0.2
-------- --------
Operating income - Industrial Chemicals as adjusted $ 3.1 $ (3.9)
======== ========
Operating income per GAAP - Mineral Products....... $ 12.9 $ 8.7
Non-GAAP adjustments (1)........................... - 0.2
-------- --------
Operating income - Mineral Products as adjusted.... $ 12.9 $ 8.9
======== ========
Total segment operating income as adjusted......... $ 63.1 $ 73.0
Unallocated corporate office per GAAP.............. (0.1) 0.1
-------- --------
Operating income, as adjusted...................... $ 63.0 $ 73.1
======== ========
(1) Non-GAAP adjustments in the first six months of 2003 represent an other
operating charge of $1.5 million for stock option payments related to ISP's
going private transaction, which is also presented by business segment. In
the first six months of 2002, non-GAAP adjustments included other operating
gains of $2.8 million for a contract termination related to the sale of our
company's FineTech business, a gain of $5.5 million on the sale of the
FineTech business and a $3.9 million gain from the settlement of a
manufacturing and supply agreement with a customer of the fine chemicals
product line. All non-GAAP adjustments for the first six months of 2002
related to the Specialty Chemicals business segment.
Specialty Chemicals
Sales in the first six months of 2003 were $316.9 million compared with
$306.3 million for the same period last year, while operating income for the
first six months of 2003 increased by 13% to $66.9 million from $59.3 million in
last year's first six months. The 3% increase in sales was attributable to the
favorable effect of the weaker U.S. dollar ($16.4 million) and higher unit
volumes in the
27
pharmaceutical, food and beverage product lines (totaling $9.2 million).
Partially offsetting these sales increases were lower unit volumes ($12.0
million) in the fine chemicals product line, mainly as a result of the loss of
sales due to the termination of the supply and license agreement with Polaroid,
and unfavorable pricing ($3.2 million), primarily in the personal care product
line in both the skin care and hair care markets. Favorable pharmaceutical
volumes were primarily attributable to strong growth in the excipients markets
(Plasdones for tablet binders and Polyplasdones for tablet disintegrants).
Excluding the other operating gains and charges discussed above, operating
income for the Specialty Chemicals segment increased by 44% for the first six
months of 2003 to $68.0 million compared with $47.1 million in last year's first
six months. The improvement resulted primarily from manufacturing efficiencies
($10.0 million), the favorable effect of the weaker U.S. dollar ($11.1 million),
the impact of higher unit volumes in the personal care, pharmaceutical, food and
beverage product lines (totaling $6.1 million) and lower operating expenses
($3.2 million), partially offset by unfavorable pricing and mix ($4.8 million).
The improved results for this segment were adversely impacted by the lower
volumes in the fine chemicals product line ($5.1 million), mainly due to the
loss of sales to Polaroid.
Industrial Chemicals
Sales in the first six months of 2003 were $93.5 million compared with
$77.9 million in the first six months of 2002. The 20% increase in sales was
attributable to higher unit volumes ($11.3 million) and the favorable effect of
the weaker U.S. dollar ($7.1 million), partially offset by the continuing
adverse effect of unfavorable pricing ($2.9 million) for butanediol.
The Industrial Chemicals segment recorded an operating loss of $4.1 million
in the first six months of 2003, compared with operating income of $3.1 million
in the first six months of 2002. The unfavorable results for this business have
been adversely impacted by the stronger Euro on European-based manufacturing
costs. The unfavorable results also included higher energy costs and operating
expenses ($6.5 million) and unfavorable pricing ($2.9 million), partially offset
by manufacturing efficiencies ($4.8 million) and the impact of higher volumes
and mix ($1.7 million).
There is ongoing pressure on our pricing and revenue related to commodity
type butanediol and related solvents and intermediates. A key competitor in this
market completed construction of additional production capacity in Europe for
these products during the third quarter of 2002. Another competitor is expected
to complete construction of additional capacity in Asia during the fourth
quarter of 2003. With the opening of these two facilities, the increase in the
supply of these products to the merchant market is resulting in increased
downward pressure on pricing.
Mineral Products
Sales for the Mineral Products segment for the first six months of 2003
were $51.7 million compared with $49.7 million for the first six months of 2002.
The 4% increase was due to higher unit volumes
28
($1.7 million) and included $1.1 million (9%) in higher third party sales
and $0.9 million (2%) in higher sales to BMCA.
Operating income for the first six months of 2003 was $8.7 million compared
with $12.9 million for the first six months of 2002. The $4.2 million (33%)
decrease in operating income was due to unfavorable manufacturing costs,
primarily as a result of higher energy costs.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flow and Cash Position
During the first six months of 2003, our net cash flow before financing
activities was $5.8 million and included $38.8 million of cash generated from
operations and the reinvestment of $33.0 million for capital programs and the
acquisition of Germinal S.A. (see Note 10 to consolidated financial statements).
Cash generated from operations in the first six months of 2003 of $38.8 million
included a cash outflow of $7.9 million due to an increase in receivables from
related parties, primarily related to an increase in the receivable from BMCA,
resulting from the sale of mineral products. Cash invested in additional working
capital items totaled $22.3 million during the first six months of 2003,
including a $24.8 million increase in receivables as a result of higher sales
and a $0.8 million decrease in payables and accrued liabilities. Partially
offsetting this increase in working capital items was a $2.9 million decrease in
inventories.
Net cash provided by financing activities during the first six months of
2003 totaled $0.5 million, primarily a $1.5 million capital contribution from
ISP for the payment of stock options related to ISP's going private transaction
in February 2003, offset by repayments of long-term debt totaling $0.9 million.
As a result of the foregoing factors, cash and cash equivalents increased
by $8.8 million during the first six months of 2003 to $42.0 million.
Current Maturities of Long-Term Debt
As of June 29, 2003, our current maturities of long-term debt, scheduled to
be repaid during the twelve month period ended June 2004, totaled $2.7 million,
including $2.3 million related to the term loan under our senior credit
facilities.
Freetown Facility
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
29
impacted the sale of our fine chemicals products and reduced the
utilization of our Freetown plant.
We have an operating lease related to equipment at the Freetown facility,
which was entered into as part of a 1998 sale-leaseback transaction. The lease
had an initial term of four years and, at our option, up to three one-year
renewal periods. The first renewal term commenced during 2002. The lease
provides for a substantial guaranteed payment by us, adjusted 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 equipment, or the equipment 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 equipment, currently
$32.6 million, reduced by 50% of any proceeds from the subsequent sale of the
equipment in excess of $4.8 million. Under generally accepted accounting
principles, we cannot recognize this future obligation or recognize an
impairment loss relative to the Freetown equipment since, as an operating lease,
the Freetown equipment 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 then perform a review for possible impairment of the Freetown assets.
We are working toward increasing the utilization of the Freetown plant with
additional production of certain personal care products.
Contractual Obligations
We have a contract with a multinational supplier to supply a substantial
amount of our acetylene needs to our Texas City, Texas facility. This supplier
generates this raw material as a by-product from the manufacture of ethylene.
Pricing under the contract is on a fixed basis and we are obligated to purchase
a specified amount of acetylene under the contract. This supplier has closed its
operation that was the primary source of acetylene for our Texas City facility.
The supplier has an obligation to provide product to us until the end of March
2004 and has confirmed that it will meet this obligation through that date by
delivering product from another of its facilities. We have identified several
alternative sources of supply of acetylene for the Texas City facility for the
period after March 2004. The annualized, incremental cost of acetylene from
these sources is estimated to be less than $2.0 million. Although we believe
that these alternative sources of supply will be sufficient for our projected
needs, there can be no assurance in this regard.
We also had a contract with another supplier for the delivery of additional
amounts of acetylene to our Texas City facility, which expired on June 30, 2003.
We have entered into a five-year contract with an alternative source under which
we are obligated to purchase specified quantities of acetylene. Pricing is fixed
with escalators tied to the Producer Price Index.
In May 2003, we entered into a long-term contract with BMCA to supply BMCA
and its subsidiaries substantially all of their colored roofing granules and
algae-resistant granules requirements, except for the requirements of certain of
their roofing plants that are supplied by third parties. The contract includes
pricing discounts based on volume purchase
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targets, which, if the highest discount levels are reached over the term of
the contract, could adversely impact gross margins and operating income from the
Mineral Products segment. Our supply arrangements with BMCA and its subsidiaries
are at prices and on terms that we believe are no less favorable to it than
could be obtained from an unaffiliated third party.
New Accounting Standards
In June 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 for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. As we have no plans at this time for any exit or disposal activities, the
adoption of SFAS No. 146 will not have any immediate effect on our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 for both annual
and interim reporting periods by requiring disclosures in a tabular format to
reconcile net income as reported to pro forma net income as if the fair value
method was used. Certain of the disclosure modifications required for fiscal
years ending after December 15, 2002 were disclosed in our 2002 Form 10-K.
However, as discussed in Note 4 to consolidated financial statements, with the
completion of the going private transaction by ISP in February 2003, our
stock-based compensation plans were terminated and payments were made in
accordance with the terms of the merger agreement. Therefore, the provisions of
SFAS No. 148 are no longer applicable to us as it relates to those plans. In
addition, we currently account for incentive units granted to our eligible
employees pursuant to ISP's 2000 Long-Term Incentive Plan and 2003 Executive
Long-Term Incentive Plan under the accounting prescribed by FASB Interpretation
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option and Award Plans" ("FIN 28"), which requires an entity to measure
compensation as the amount by which the Book Value of the incentive units
covered by the grant exceeds the option price or value specified of such
incentive units at the date of grant. Changes, either increases or decreases, in
the Book Value of those incentive units between the date of grant and the
measurement date result in a change in the measure of compensation for the right
or award. We expect to continue to account for our long-term incentive units
under the accounting prescribed by FIN 28 and have adopted the additional
disclosure provisions of SFAS No. 148. Since compensation expense related to
such incentive units is included in the actual consolidated statements of
operations, our pro forma net income under SFAS No. 123 would have been the same
as actual net income.
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In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosures of certain
guarantees issued and outstanding. The provisions of FIN 45 apply to guarantee
contracts that contingently require the guarantor to make payments (in cash,
financial instruments, other assets, shares of stock or provision of services)
to the guaranteed party for guarantees such as a financial standby letter of
credit, a market value guarantee on either a financial or nonfinancial asset
owned by the guaranteed party and a guarantee of the collection of the scheduled
contractual cash flows from financial assets held by a special-purpose entity.
FIN 45 also applies to indemnification contracts and indirect guarantees of
indebtedness of others. The requirements of FIN 45 for the initial recognition
and measurement of the liability for a guarantor's obligations are to be applied
only on a prospective basis to guarantees issued or modified after December 31,
2002. We currently do not have any guarantees, indemnification contracts or
indirect guarantees of indebtedness of others that would be subject to the
initial recognition and measurement provisions of FIN 45. As discussed in Note 9
to consolidated financial statements, our 10 1/4% Senior Subordinated Notes due
2011 are guaranteed by all of our domestic subsidiaries, other than certain
immaterial subsidiaries and our accounts receivable financing subsidiary.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." In accordance with FIN 46, a variable interest entity will
be consolidated if either the total equity investment at risk is not sufficient
to permit the entity to finance its activities without additional subordinated
financial support from other parties, or as a group, the holders of the equity
investment at risk lack any one of the following three characteristics of a
controlling financial interest: (1) the direct or indirect ability to make
decisions about an entity's activities; (2) the obligation to absorb the
expected losses of the entity if they occur; (3) the right to receive the
expected residual returns of the entity if they occur. All companies with
variable interests in variable interest entities created after January 31, 2003
shall apply the provisions of FIN 46 immediately. A public entity with a
variable interest in a variable interest entity created before February 1, 2003
shall apply the provisions of FIN 46 to that entity no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
We do not have an interest in a variable interest entity. Therefore, FIN 46 does
not currently have an impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. We do not expect that the adoption of SFAS No.
149 will have an immediate impact on our consolidated financial statements.
See Note 12 to Consolidated Financial Statements for information regarding
contingencies.
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* * *
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.
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 10-K for the
fiscal year ended December 31, 2002, for a discussion of "Market-Sensitive
Instruments and Risk Management." At December 31, 2002 and June 29, 2003, there
were no equity-related financial instruments employed by us to reduce market
risk.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the participation
of the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports filed, furnished or submitted under the
Exchange Act.
Internal Control Over Financial Reporting: There have not been any changes
in our internal control over financial reporting during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
33
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
--------------
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 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 June 29, 2003.
34
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: August 12, 2003 BY: /s/ Neal E. Murphy
--------------- ------------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: August 12, 2003 BY: /s/Kenneth M. McHugh
--------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
35
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: August 12, 2003 BY: /s/Neal E. Murphy
--------------- -----------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: August 12, 2003 BY: /s/Kenneth M. McHugh
--------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
36