================================================================================
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-29764
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0376469
(State of Incorporation) (I.R.S. Employer Identification No.)
300 DELAWARE AVENUE
SUITE 303
WILMINGTON, DELAWARE 19801
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 427-5715
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of International Specialty Products Inc., in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
As of March 15, 2002, 64,550,939 shares of common stock of the registrant
were outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 15, 2002 was $99,576,422. The
aggregate market value was computed by reference to the closing price on the New
York Stock Exchange of common stock of the registrant on such date ($8.92). For
purposes of the computation, voting stock held by executive officers and
directors of the registrant has been excluded. Such exclusion is not intended,
and shall not be deemed, to be an admission that such executive officers and
directors are affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 2002 Annual Meeting of Stockholders of
International Specialty Products Inc. to be filed within 120 days after the
registrant's fiscal year-end (the "Proxy Statement") is incorporated by
reference in Part III, Items 10, 11, 12 and 13.
--------------------------------------------------------------------------------
================================================================================
PART I
ITEM 1. BUSINESS
GENERAL
International Specialty Products Inc., formerly known as ISP Holdings Inc.,
is a leading multinational manufacturer of specialty chemicals and mineral
products. Unless otherwise indicated by the context, "we," "us," "our," and
"ISP" refer to International Specialty Products Inc. and its consolidated
subsidiaries.
ISP operates its business exclusively through its direct and indirect
subsidiaries. ISP was incorporated in Delaware in 1996. ISP owns all of the
issued and outstanding capital stock of International Specialty Holdings Inc.,
formerly known as Newco Holdings, which was formed in 2001 in connection with an
internal restructuring we completed in June 2001. International Specialty
Holdings owns all of the issued and outstanding capital stock of ISP Chemco
Inc., formerly known as ISP Opco Holdings Inc., and ISP Investco LLC. ISP Chemco
operates our specialty chemicals business, exclusively through its direct and
indirect subsidiaries. ISP Investco was formed in 2001 for the purpose of
holding all of our investment assets and related liabilities.
In December 2001, we entered into a letter agreement to sell our
pharmaceutical fine chemicals business to Pharmaceutical Resources, Inc. On
March 14, 2002, we announced that the sale would not be consummated, due to the
failure of Pharmaceutical Resources to proceed with the transaction in a timely
manner. Under the terms of the letter agreement, we received a $3.0 million
break-up fee.
The address and telephone number of our principal executive offices are 300
Delaware Avenue, Suite 303, Wilmington, Delaware 19801, (302) 427-5715.
Financial information concerning our industry segments and foreign and
domestic operations required by Item 1 is included in Notes 17 and 18 to our
Consolidated Financial Statements included in this Annual Report on Form 10-K.
SPECIALTY CHEMICALS
PRODUCTS AND MARKETS.
We manufacture a broad spectrum of specialty chemicals having numerous
applications in consumer and industrial products. We use proprietary technology
to convert various raw materials, through a chain of one or more processing
steps, into increasingly complex and higher value-added specialty chemicals
specifically developed to meet customer requirements.
Our specialty chemicals business is organized based upon the markets for our
products. Accordingly, we manage our specialty chemicals in the following three
business segments:
o Personal Care -- whose products are sold to the skin care and hair
care markets;
o Pharmaceutical, Food and Beverage -- whose products are sold to these
three government-regulated industries; and
o Performance Chemicals, Fine Chemicals and Industrial -- whose products
are sold to numerous consumer and industrial markets.
In each of the years ending December 31, 1999, 2000 and 2001, sales of
specialty chemicals represented approximately 90% of our revenues. For
information about the amount of sales by each of our specialty chemicals
business segments, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations," and
Note 17 to our Consolidated Financial Statements included in this Annual Report
on Form 10-K. Most of our specialty chemical products fall within the following
categories:
o VINYL ETHER MONOMERS -- includes several products for use in specialty
and radiation-cured coatings. Our vinyl ether monomers are marketed by
the Performance Chemicals group of our Performance Chemicals, Fine
Chemicals and Industrial business segment.
1
o VINYL ETHER COPOLYMERS -- includes our GANTREZ(R) line of products.
These products serve as a bioadhesive resin in consumer products such
as tartar-control toothpaste, denture adhesives and facial pore
strips. Vinyl ether copolymers are marketed by our Personal Care and
Pharmaceutical, Food and Beverage business segments.
o POLYVINYL PYRROLIDONE (PVP) POLYMERS AND COPOLYMERS -- represents our
largest product group. These polymers and copolymers are marketed by
all of our business segments. Our PLASDONE(R), POLYCLAR(R) and
GAFQUAT(R) product lines, which are used as tablet binders, beverage
clarifiers and hair fixative resins, respectively, are included in
this group.
o INTERMEDIATES -- includes butanediol, butenediol, butynediol, and
propargyl alcohol for use in numerous industrial applications.
Intermediates are marketed by our Performance Chemicals, Fine
Chemicals and Industrial business segment. Our largest selling
intermediate product is butanediol, which is utilized by industrial
companies to manufacture spandex fibers and polybutylene terephthalate
(PBT) plastics for use in automobiles.
o SOLVENTS -- includes our M-PYROL(R) brand of N-methyl pyrrolidone
(NMP), for use in metal degreasing and paint stripping, BLO(R) brand
of gamma-butyrolactone, for use by electronics companies in the
manufacture of semiconductors and micro-processing chips, and
tetrahydrofuran (THF), which is used in the manufacture and
installation of PVC pipe. Solvents are also marketed by our
Performance Chemicals, Fine Chemicals and Industrial business segment.
o ALGINATES -- includes sodium alginate, propylene glycol alginate and
other alginate derivatives for use as thickeners, stabilizers and
viscosity modifiers. These products are marketed by our
Pharmaceutical, Food and Beverage business segment, with the majority
of our sales to the food industry.
The balance of our specialty chemical products are marketed by our
Performance Chemicals, Fine Chemicals and Industrial business segment, along
with sunscreens, preservatives and emollients, each marketed by our Personal
Care business segment.
PERSONAL CARE. Our Personal Care business segment markets numerous specialty
chemicals that serve as critical ingredients in the formulation of many
well-known skin care, hair care, toiletry and cosmetic products.
Our skin care ingredients include:
o ultraviolet (UV) light absorbing chemicals, which serve as sunscreens;
o emollients, which provide skin softness;
o moisturizers, which enhance the skin's water balance;
o waterproofing agents, which enhance the performance of eye-liners and
sunscreens in wet environments; and
o preservatives, which extend the shelf life of aqueous-based cosmetic
formulations by preventing the growth of harmful bacteria.
Our ESCALOL(R) sunscreen actives serve as the primary active ingredient in
many of the most popular sunscreens today and increasingly find applications in
many other products such as lipsticks and facial creams. Our SUNSPHERES(TM)
product, which was jointly developed through our strategic alliance with a third
party, significantly enhances the sun protection properties of UV absorbers used
in skin care, makeup and beach products. Our CERAPHYL(R) line of emollients and
moisturizers provides a variety of popular bath products with their softening
and moisturizing characteristics. We produce a growing number of specialty
preservatives, including GERMALL(R) Plus, a patented product that offers
broad-spectrum anti-microbial activity, and SUTTOCIDE(R) A, a preservative
gentle enough for infant care products.
Our hair care ingredients, marketed under the GANTREZ(R), GAFQUAT(R), and
PVP/VA family of products, include a number of specially formulated fixative
resins which provide hairsprays, mousses and gels with their holding power, as
well as thickeners and stabilizers for shampoos and conditioners. Utilizing our
combined expertise in
2
hair care and sunscreen applications, we developed the world's first high
performance hair protectant, ESCALOL(R) HP-610, to prevent sun damage to hair.
We also developed a new polymer, AQUAFLEX(R) FX-64, for use in styling products
and low VOC hair sprays where it provides a soft feeling with a long lasting
hold for both aerosol and pump spray applications.
PHARMACEUTICAL, FOOD AND BEVERAGE. Our specialty chemicals for the
Pharmaceutical, Food and Beverage markets provide a number of end-use products
with their unique properties while enabling these products to meet increasingly
strict regulatory requirements.
In the pharmaceutical market, our specialty chemicals serve as key
ingredients in the following types of products:
o prescription and over-the-counter tablets;
o injectable prescription drugs and serums;
o cough syrups;
o antiseptics;
o toothpastes; and
o denture adhesives.
Our PLASDONE(R) and POLYPLASDONE(R) polymers for tablet binders and tablet
disintegrants are established excipients for use in the production of wet
granulated tablets, and our GANTREZ(R) bioadhesive polymers serve as critical
ingredients in denture adhesives and tartar control toothpastes.
Our advanced materials product line includes the FERRONYL(R) brand of
dietary iron supplement, which is marketed to the pharmaceutical industry.
In the food and beverage markets, our alginates and acetylene-derived
polymers serve as critical ingredients in the manufacture of numerous consumer
products, including salad dressings, cheese sauces, fruit fillings, beer and
health drinks. For example, our alginates products, marketed under the
KELCOLOID(R) tradename, are used as stabilizers in many well-known consumer
products, while our acetylene-based specialty polymers, marketed under the
POLYCLAR(R) tradename, serve the beverage market by assuring the clarity and
extending the shelf life of beer, wine and fruit juices.
PERFORMANCE CHEMICALS, FINE CHEMICALS AND INDUSTRIAL. Our Performance
Chemicals business includes acetylene-based polymers, vinyl ether monomers and
advanced materials for consumer, agricultural and industrial applications. Our
acetylene-based chemistry produces a number of performance chemicals for use in
a wide range of markets including:
o coatings;
o agriculture;
o imaging;
o detergents;
o electronics; and
o metalworking.
VIVIPRINT(TM) is our new line of polymers developed for specialty coating
applications in ink jet printing. These products provide significant moisture
and abrasion resistance, high gloss and excellent resolution for high quality
printers and photo reproductions.
Our advanced materials product line includes high-purity carbonyl iron
powders, sold under the MICROPOWDER(R) name, for use in the aerospace, defense,
electronics and powder metallurgy industries.
3
On December 31, 2001, we acquired the industrial biocides business of
Degussa Corporation. This business is comprised of a broad range of
preservatives and fungicides for various product applications, including paints
and coatings. The acquisition, which includes a manufacturing plant in Toronto,
Canada, complements our strategic platform for preservation and significantly
expands our specialty chemicals offering to the coatings industry.
Our Fine Chemicals business focuses on the production of a variety of highly
specialized products sold to the pharmaceutical, biotechnology, agricultural and
imaging markets. We also offer custom manufacturing services for these
industries. The pharmaceutical ingredients portion of the business is centered
in our Columbus, Ohio facility.
We have expanded our Freetown, Massachusetts manufacturing facility's
production capabilities to allow for the manufacture of some specialty chemical
product lines for our Personal Care business segment and to offer custom
manufacturing capability to the pharmaceutical, biotechnology, agricultural and
chemical process industries. In connection with the relocation of some of our
production lines for our Personal Care business segment to our Freetown
facility, we shut down our manufacturing operation at our Belleville, New Jersey
plant in the first quarter of 2001.
In our Industrial business, we market several intermediate and solvent
products, such as butanediol, tetrahydrofuran (THF) and N-methyl pyrrolidone
(NMP), for use in a variety of industries, including:
o high performance plastics;
o lubricating oil and chemical processing;
o electronics cleaning; and
o coatings.
In addition, we offer a family of environmentally friendly products that can
replace chlorinated and other volatile solvents for a variety of industrial
uses, including cleaning, stripping and degreasing.
In the first quarter of 2001, we shut down production of butanediol at our
Texas City facility and now manufacture butanediol solely at our Marl, Germany
facility. We continue to produce polymers at our Calvert City and Texas City
plants and also continue to produce propargyl alcohol from butynediol.
MARKETING AND SALES.
We market our specialty chemicals using a worldwide marketing and sales
force, typically chemists or chemical engineers, who work closely with our
customers to familiarize themselves with our customers' products, manufacturing
processes and markets. We primarily sell our specialty chemicals directly to our
customers through our global distribution network. We sell a limited portion of
our specialty chemicals through distributors. We conduct our domestic marketing
and sales efforts from our facility in Wayne, New Jersey and regional offices
strategically located throughout the United States.
INTERNATIONAL OPERATIONS.
We conduct our international operations through 39 subsidiaries and 48 sales
offices located in Europe, Canada, Latin America and the Asia-Pacific region. We
also use the services of local distributors to reach markets that might
otherwise be unavailable to us.
International sales of our specialty chemicals in 1999, 2000 and 2001 were
approximately 48%, 50% and 52% of our total sales for those periods,
respectively. Approximately 38% of our specialty chemicals sales in 2001 were in
Europe and Japan. For more information about our international sales, see Note
18 to our Consolidated Financial Statements included in this Annual Report on
Form 10-K. International sales are subject to exchange rate fluctuation risks.
For a discussion of our policy regarding the management of these risks, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and
4
Financial Condition." Other countries in which we have sales are subject to
additional risks, including high rates of inflation, exchange controls,
government expropriation and general instability.
We own and operate ISP Marl GmbH, primarily a butanediol manufacturing
facility, and ISP Acetylene GmbH, an acetylene production plant. Both production
facilities are located at Degussa's Chemiepark site in Marl, Germany, and each
relies upon Degussa to provide specific services, including utilities, rail
transport and waste handling. We believe that the production costs for
butanediol and THF at ISP Marl are among the most competitive in the industry.
ISP Acetylene operates a fully-dedicated modern production facility that
provides ISP Marl with its primary raw material, acetylene. ISP Acetylene, which
employs electric arc technology for the production of acetylene from various
hydrocarbon feedstocks, utilizes state-of-the-art gas separation technology. ISP
Acetylene's entire production is dedicated to fulfilling ISP Marl's requirements
and has no third-party sales.
We operate an alginates manufacturing plant in Girvan, Scotland and a
research and administrative center in Tadworth, England. In addition, we hold
equity investments in three seaweed processing joint ventures located in
Ireland, Iceland and Tasmania. These joint ventures serve to provide our
alginates business with a steady supply of its primary raw material, seaweed.
For information about the locations of our long-lived international assets,
see Note 18 to our Consolidated Financial Statements included in this Annual
Report on Form 10-K.
RAW MATERIALS.
Because of the multi-step processes required to manufacture our specialty
chemicals, we believe that our raw materials costs represent a smaller
percentage of the cost of goods sold than for most other chemical companies. We
estimate that approximately one-third of our manufacturing costs are for raw
materials, including energy and packaging. As a result, we believe that
fluctuations in the price of raw materials have less of an impact on our
specialty chemicals business than on those chemical companies for which raw
materials costs represent a larger percentage of manufacturing costs.
The principal raw materials used in the manufacture of our acetylene-based
specialty chemicals are acetylene, methanol and methylamine. Most of the raw
materials for consumption in the United States are obtained from third party
sources pursuant to supply agreements. Acetylene, a significant raw material
used in the production of most of our specialty chemicals, is obtained by us for
domestic use from two unaffiliated suppliers pursuant to supply contracts. At
our Texas City, Texas plant, acetylene is primarily supplied via pipeline by a
neighboring large multinational company that generates this raw material as a
by-product from the manufacture of ethylene. At our Calvert City, Kentucky
facility, acetylene is supplied via pipeline by a neighboring company that
generates it from calcium carbide.
Due to the nature of the manufacturing process, electricity and hydrocarbon
feedstocks, primarily butane, are critical raw materials for the production of
acetylene at our operations in Marl, Germany, where methanol is also a principal
raw material. Electricity, butane and methanol for our Marl, Germany operations
are supplied by Degussa pursuant to a long-term supply agreement.
We believe that the diversity of our acetylene supply sources and our use of
a number of acetylene production technologies, including ethylene by-product,
calcium carbide and electric arc technology, provide us with a reliable supply
of acetylene. In the event of a substantial interruption in the supply of
acetylene from current sources, or, in the case of ISP Marl, electricity and
hydrocarbon feedstocks, we cannot assure that we would be able to obtain as much
acetylene from other sources as would be necessary to meet our supply
requirements. To date, we have not experienced an interruption of our acetylene
supply that has had a material adverse effect on our sales of specialty
chemicals.
The principal raw material used in the manufacture of alginates consists of
select species of seaweed. We process seaweed in both wet and dry forms. We use
our own specially designed vessels to harvest, under government license, wet
seaweed from leased kelp beds in the Pacific Ocean to supply our San Diego,
California facility. Our Girvan, Scotland facility processes primarily dry
seaweed purchased from our joint ventures in Iceland, Ireland and Tasmania, as
well as from independent suppliers in South America. We believe that the
5
species of seaweed required to manufacture alginates will remain readily
available and that we will have adequate access to this seaweed to provide us
with adequate supplies of this raw material for the foreseeable future.
Availability of other raw materials, including methanol and methylamine,
remained adequate during 2001. We believe that, in the event of a supply
interruption, we could obtain adequate supplies of raw materials from alternate
sources.
We use natural gas and raw materials derived from petroleum in many of our
manufacturing processes and, consequently, the price and availability of natural
gas and petroleum could be material to our operations. During 2001, supplies of
natural gas and petroleum remained adequate.
MINERAL PRODUCTS
PRODUCTS AND MARKETS.
We manufacture mineral products consisting of semiceramic-coated colored
roofing granules, algae resistant granules and headlap granules, which are
produced from rock deposits that are mined and crushed at our quarries. We
utilize a proprietary process to produce our colored and algae resistant roofing
granules. We sell our mineral roofing granules primarily to the United States
roofing industry for use in the manufacture of asphalt roofing shingles. The
granules help to provide weather resistance, decorative coloring, heat
deflection and increased weight in the shingle. We are the second largest of
only three major suppliers of colored roofing granules in the United States. For
information about the amount of sales of our mineral products see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations," and Note 17 to our Consolidated Financial
Statements included in this Annual Report on Form 10-K.
We estimate that approximately 80% of the asphalt shingles currently
produced by the roofing industry are sold for the reroofing/replacement market,
in which demand is driven not by the pace of new home construction but by the
needs of homeowners to replace existing roofs. Homeowners generally replace
their roofs either because they are worn, thereby creating concerns as to
weather-tightness, or because of the homeowners' desire to upgrade the
appearance of their homes. We estimate that the balance of the roofing
industry's asphalt shingle production historically has been sold primarily for
use in new housing construction. Sales of our colored mineral granules have
benefited from a trend toward the increased use of heavyweight,
three-dimensional laminated roofing shingles which results in both functional
and aesthetic improvements. These shingles require, on average, approximately
60% more granules than traditional three-tab, lightweight roofing shingles.
Sales to Building Materials Corporation of America, or BMCA, our affiliate,
and its subsidiaries constituted approximately 79% of our mineral products net
sales in 2001. See Item 13, "Certain Relationships and Related Transactions" and
Note 16 to our Consolidated Financial Statements included in this Annual Report
on Form 10-K. See also Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- 2001
Compared with 2000."
MARKETING AND SALES.
We market our mineral products on a national basis to residential and
commercial roofing manufacturers utilizing a direct sales team with expertise in
product application and logistics. We ship finished products using rail and
trucks from three manufacturing facilities strategically located throughout the
United States. From our offices located in Hagerstown, MD, we provide logistical
support and operate a customer design center to engineer product applications
according to our customers' requirements. Our technical services and
manufacturing teams provide support and consultation services upon specific
requirements by our customers.
RAW MATERIALS.
We own rock deposits that have specific performance characteristics,
including weatherability, the ability to reflect UV light, abrasion-resistance,
non-staining characteristics and the ability to absorb pigments. We own three
quarries, each with proven reserves, based on current production levels, of more
than 20 years.
6
COMPETITION
We believe that we are either the first or second largest seller, based on
revenues, worldwide of our specialty chemicals derived from acetylene, other
than butanediol and tetrahydrofuran, and the second largest seller, based on
revenues, of alginates.
In each end-use market, there are a limited number of companies that produce
substitutable products for our acetylene-derived specialty chemicals. These
companies compete with us in the personal care, pharmaceutical, beverage and
industrial markets and have the effect of limiting our market penetration and
pricing flexibility. For our specialty chemicals not derived from acetylene,
including alginates, sunscreens, emollients, moisturizers and fine chemicals, a
number of world-wide competitors can provide similar products or services.
Butanediol, which we produce primarily for use as a raw material, is also
manufactured by a limited number of companies throughout the world for both
their captive use or to supply the merchant market. We believe that there are
three competitors of significance for merchant market butanediol. One of these
competitors supplies the merchant market from its plants in the United States
and in Europe. Two other competitors each supply the merchant market from their
single manufacturing plants in the United States. Tetrahydrofuran and N-methyl
pyrrolidone are manufactured by a number of companies throughout the world.
With regard to our mineral products, we have only one larger and one smaller
competitor and believe that competition has been limited by:
o the substantial capital expenditures associated with the construction
of new mineral processing and coloring plants and the acquisition of
suitable rock reserves;
o the limited availability of proven rock sources;
o the complexity associated with the construction of a mineral
processing and coloring plant, together with the technical know-how
required to operate such a plant;
o the need to obtain, prior to commencing operations, reliable data over
a substantial period of time regarding the weathering of granules in
order to assure the quality and durability of the product; and
o the difficulty in obtaining the necessary permits to mine and operate
a quarry.
Competition in the markets for our specialty chemicals and mineral products
is largely based upon product and service quality, technology, distribution
capability and price. We believe that we are well-positioned in the marketplace
as a result of our broad product lines, sophisticated technology and worldwide
distribution network.
RESEARCH AND DEVELOPMENT
Our worldwide research and development expenditures were $23.0, $25.6 and
$25.4 million in 1999, 2000 and 2001, respectively.
Our research and development activities are conducted primarily at our
worldwide technical center and laboratories in Wayne, New Jersey. Additional
research and development is conducted at plant sites in Calvert City, Kentucky;
Texas City, Texas; Chatham, New Jersey; Freetown, Massachusetts; Columbus, Ohio;
San Diego, California; and Girvan, Scotland, and at a research center in
Piscataway, New Jersey, as well as at technical centers in the United Kingdom,
Germany, China, Singapore, Mexico and Israel. Our mineral products research and
development facility, together with our customer design and color center, is
located in Hagerstown, Maryland.
ENVIRONMENTAL SERVICES
We have received site designation for the construction of a hazardous waste
treatment, storage and disposal facility at our Linden, New Jersey property and
have received approval from the New Jersey Turnpike Authority for a direct
access ramp extension from the New Jersey Turnpike to the site. If we are
successful in securing the necessary permits to construct and operate the
hazardous waste facility and decide to proceed with this project, we would
develop and operate the facility in a separate subsidiary, either on our own or
in a joint venture with a
7
suitable partner. We estimate that the cost of constructing the facility will be
approximately $100 million and, if approved, the facility is anticipated to be
in operation three years after commencement of construction. We anticipate
utilizing internally generated cash and/or seeking project or other independent
financing for this project. We are also investigating other development
opportunities at this site consistent with a plan by the County of Union to
re-develop the Tremley Point area of Linden. We expect that related planning and
evaluation efforts will continue through 2002.
PATENTS AND TRADEMARKS
As of December 31, 2001, we owned or licensed approximately 370 domestic and
540 foreign patents or patent applications and owned or licensed approximately
155 domestic and 2,015 foreign trademark registrations or applications related
to our business. While we believe the patent protection covering some of our
products is material to those products, we do not believe that any single
patent, patent application or trademark is material to our business or
operations. We believe that the duration of the existing patents and patent
licenses is consistent with our business needs.
ENVIRONMENTAL COMPLIANCE
Since 1970, a wide variety of federal, state and local environmental laws
and regulations relating to environmental matters have been adopted and amended.
By reason of the nature of our operations and the operations of our predecessor
and certain of the substances that are or have been used, produced or discharged
at our or our predecessor's plants or at other locations, we are affected by
these environmental laws and regulations. We have made capital expenditures of
approximately $5.0 million in each of 1999 and 2000, and approximately $6.3
million in the year ended December 31, 2001, in order to comply with these laws
and regulations. These expenditures are included in additions to property, plant
and equipment. We anticipate that aggregate capital expenditures relating to
environmental compliance in each of the years 2002 and 2003 will be
approximately $6.0 million.
The environmental laws and regulations deal with air and water emissions or
discharges into the environment, as well as the generation, storage, treatment,
transportation and disposal of solid and hazardous waste, and the remediation of
any releases of hazardous substances and materials to the environment. We
believe that our manufacturing facilities comply in all material respects with
applicable environmental laws and regulations, and, while we cannot predict
whether more burdensome requirements will be adopted by governmental authorities
in the future, we believe that any potential liability for compliance with
environmental laws and regulations will not materially affect our business,
liquidity, results of operations, cash flows or financial position.
EMPLOYEES
At December 31, 2001, we employed approximately 2,600 people worldwide.
Approximately 725 employees in the United States were subject to seven union
contracts. We believe that our relations with our employees and their unions are
satisfactory.
OTHER DEVELOPMENTS
On May 24, 2001, at Hercules Incorporated's Annual Meeting, three of our
director nominees, including Messrs. Heyman and Kumar, were elected as
directors. On June 28, 2001, Hercules' board unanimously appointed our fourth
director nominee as a director.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development
laboratories are located at a 100-acre campus-like office and research park
owned by one of our subsidiaries at 1361 Alps Road, Wayne, New Jersey 07470.
8
The principal domestic and foreign real properties either owned by, or
leased to, us are described below. Unless otherwise indicated, the properties
are owned in fee. In addition to the principal facilities listed below, we
maintain sales offices and warehouses in the United States and abroad,
substantially all of which are in leased premises under relatively short-term
leases.
LOCATION FACILITY PRODUCT LINE
--------------- ------------ -------------------
DOMESTIC
Alabama, Huntsville Plant* Specialty Chemicals
California, San Diego Plant* Specialty Chemicals
Kentucky, Calvert City Plant Specialty Chemicals
Maryland, Hagerstown Research Center, Design Center,
Sales Office Mineral Products
Massachusetts, Freetown Plant, Research Center Specialty Chemicals
Missouri, Annapolis Plant, Quarry Mineral Products
New Jersey
Bridgewater Sales Office* Specialty Chemicals
Chatham Plant, Research Center Specialty Chemicals
Piscataway Research Center*, Sales Office* Specialty Chemicals
Wayne Headquarters, Corporate
Administrative Offices,
Research Center Specialty Chemicals
New York, New York City Corporate Administrative
Offices N/A
Ohio, Columbus Plant, Research Center,
Sales Office Specialty Chemicals
Pennsylvania, Blue
Ridge Summit Plant, Quarry Mineral Products
Texas, Texas City Plant Specialty Chemicals
Wisconsin, Pembine Plant, Quarry Mineral Products
INTERNATIONAL
Belgium, Sint-Niklaas Sales Office, Distribution
Center Specialty Chemicals
Brazil, Sao Paulo Sales Office*, Distribution
Center* Specialty Chemicals
Canada, Mississauga,
Ontario Sales Office*, Distribution
Center* Specialty Chemicals
Canada, Toronto, Ontario Plant, Research Center,
Sales Office, Warehouse Specialty Chemicals
England, Tadworth Research Center*, Sales Office* Specialty Chemicals
Germany
Cologne European Headquarters*,
Research Center*,
Sales Office* Specialty Chemicals
Marl Plants**, Sales Office** Specialty Chemicals
India, Nagpur Plant** Specialty Chemicals
Israel, Haifa Plant*, Research Center* Specialty Chemicals
Japan, Tokyo Sales Office* Specialty Chemicals
Scotland, Girvan Plant Specialty Chemicals
Singapore Sales Office*,
Distribution Center*,
Asia-Pacific Headquarters*,
Warehouse* Specialty Chemicals
-----------
* Leased property
** Long-term ground lease
We believe that our plants and facilities, which are of varying ages and are
of different construction types, have been satisfactorily maintained, are in
good condition, are suitable for their respective operations and generally
provide sufficient capacity to meet production requirements. Each plant has
adequate transportation facilities for both raw materials and finished products.
In 2001, we made capital expenditures in the amount of $53.0 million relating to
plant, property and equipment.
9
ITEM 3. LEGAL PROCEEDINGS
We, together with other companies, are a party to a variety of proceedings
and lawsuits involving environmental matters under the Comprehensive
Environmental Response Compensation and Liability Act, the Resource Conservation
and Recovery Act and similar state laws, in which recovery is sought for the
cost of cleanup of contaminated sites or remedial obligations are imposed, a
number of which are in the early stages or have been dormant for protracted
periods. We refer to these claims in this report as "Environmental Claims".
We estimate that our liability in respect of all Environmental Claims,
including those relating to our closed Linden, New Jersey plant described below,
and certain other environmental compliance expenses, as of December 31, 2001, is
$26.6 million, before reduction for insurance recoveries reflected on our
balance sheet of $21.7 million that relate to both past expenses and estimated
future liabilities to which we refer as "estimated recoveries." While we cannot
predict whether adverse decisions or events can occur in the future, in the
opinion of management, the resolution of such matters should not be material to
our business, liquidity, results of operations, cash flows or financial
position. However, adverse decisions or events, particularly as to increases in
remedial costs, discovery of new contamination, assertion of natural resource
damages, plans for development of the Linden, New Jersey property, and the
liability and the financial responsibility of our insurers and of the other
parties involved at each site and their insurers, could cause us to increase our
estimate of our liability in respect of those matters. It is not currently
possible to estimate the amount or range of any additional liability.
After considering the relevant legal issues and other pertinent factors, we
believe that we will receive the estimated recoveries and that the recoveries
could be in excess of the current estimated liability for all Environmental
Claims, although there can be no assurance in this regard. We believe we are
entitled to substantially full defense and indemnity under our insurance
policies for most Environmental Claims, although our insurers have not affirmed
a legal obligation under the policies to provide indemnity for those claims.
Prior to January 1, 1997, ISP Holdings was a wholly owned subsidiary of GAF
Corporation. On January 1, 1997, GAF effected a series of transactions involving
its subsidiaries that resulted in, among other things, the capital stock of ISP
Holdings being distributed to the stockholders of GAF. Since this distribution,
we have not been a subsidiary of GAF or its successor by merger, G-I Holdings
Inc. As used in this report, "G-I Holdings" includes G-I Holdings Inc. and any
and all of its predecessors, including GAF Corporation, G-I Holdings Inc. and
GAF Fiberglass Corporation.
In June 1997, G-I Holdings commenced litigation against the insurers on
behalf of itself and its predecessors, successors, subsidiaries and related
corporate entities seeking amounts substantially in excess of the estimated
recoveries. While we believe that our claims are meritorious, there can be no
assurance that we will prevail in our efforts to obtain amounts equal to, or in
excess of, the estimated recoveries.
In June 1989, we entered into a Consent Order with the New Jersey Department
of Environmental Protection requiring the development of a remediation plan for
our closed Linden, New Jersey plant and the maintenance of financial assurances,
currently $7.5 million, to guarantee our performance. This Consent Order does
not address any potential natural resource damage claims for which an estimate
cannot currently be made. In April 1993, the New Jersey Department of
Environmental Protection issued orders which require the prevention of discharge
of contaminated groundwater and stormwater from the site and the elimination of
other potential exposure concerns. We believe, although we cannot be certain,
that, taking into account our plans for development of the site, we can comply
with the New Jersey Department of Environmental Protection order at a cost of
approximately $17.0 million. See Item 1, "Business -- Environmental Services."
For more information about legal proceedings, see Notes 8 and 19 to our
Consolidated Financial Statements included in this Annual Report on Form 10-K.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age, position and other information
with respect to ISP's executive officers. Under ISP's By-laws, each director and
executive officer continues in office until ISP's next annual meeting of
stockholders and until his or her successor is elected and qualified. As used in
this section, "ISP" refers to both Old ISP prior to the merger of Old ISP into
ISP Holdings and ISP subsequent to the merger. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
PRESENT PRINCIPAL OCCUPATION
NAME AND POSITION HELD AGE OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
---------------------- --- ----------------------------------------------
Samuel J. Heyman 63 Mr. Heyman has been a director and Chairman
Chairman of the Board of the Board of ISP Chairman of the Board
since its formation and Chairman of the Board
and director of one of its subsidiaries since
December 2001. He was Chief Executive Officer
of ISP and some of its subsidiaries from
their formation to June 1999. Mr. Heyman also
has been a director of G-I Holdings for more
than five years and was President and Chief
Executive Officer of G-I Holdings and some of
its subsidiaries for more than five years
until September 2000. 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
claims. Mr. Heyman was a director and
Chairman of the Board of BMCA from its
formation to September 2000 and served as
Chief Executive Officer of BMCA and some of
its subsidiaries from June 1999 to September
2000 and from June 1996 to January 1999. He
is also the Chief Executive Officer, Manager
and General Partner of a number of closely
held real estate development companies and
partnerships whose investments include
commercial real estate and a portfolio of
publicly traded securities. Mr. Heyman has
served as a director of Hercules
Incorporated, a global manufacturer and
marketer of specialty chemicals, since May
2001.
Sunil Kumar 52 Mr. Kumar has been a director, President and
President and Chief Executive Officer of ISP and a director
Chief Executive Officer and President and Chief Executive Officer
Officer of some of its subsidiaries since
June 2001 and June 1999, respectively. Mr.
Kumar was a director, President and Chief
Executive Officer of BMCA and some of its
subsidiaries from May 1995, July 1996 and
January 1999, respectively, to June 1999. He
also was Chief Operating Officer of BMCA and
some of its subsidiaries from March 1996 to
January 1999. Mr. Kumar was President,
Commercial Roofing Products Division, and
Vice President of BMCA from February 1995 to
March 1996. He also was a director and
Vice-Chairman of the Board of G-I Holdings
from January 1999 to June 1999. 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 claims. Mr. Kumar has served
as a director of Hercules Incorporated since
May 2001.
11
PRESENT PRINCIPAL OCCUPATION
NAME AND POSITION HELD AGE OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
---------------------- --- ----------------------------------------------
Richard A. Weinberg 42 Mr. Weinberg has been Executive Vice
Executive Vice President, President, General Counsel and Secretary of
General Counsel and ISP and its subsidiaries since May 1998 and
Secretary was Senior Vice President, General Counsel
and Secretary of ISP and its subsidiaries
from May 1996 to May 1998. He has also been
serving as a director of various ISP
subsidiaries since February 2002, December
2001 and May 1996. Mr. Weinberg has been
President, Chief Executive Officer, General
Counsel and Secretary of G-I Holdings since
September 2000 and was Executive Vice
President, General Counsel and Secretary of
G-I Holdings from May 1998 to September 2000.
He also was Senior Vice President, General
Counsel and Secretary of these corporations
from May 1996 to May 1998. Mr. Weinberg has
served as a director of G-I Holdings since
May 1996. 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 claims. Mr. Weinberg
also has been Executive Vice President,
General Counsel and Secretary of BMCA and its
subsidiaries since May 1998, and was Senior
Vice President, General Counsel and Secretary
of BMCA and its subsidiaries from May 1996 to
May 1998.
Susan B. Yoss 43 Ms. Yoss has been Executive Vice President--
Executive Finance and Treasurer of ISP and its
Vice President-- subsidiaries since September 2000. She was
Finance and Treasurer Senior Vice President and Treasurer of ISP
and its subsidiaries from July 1999 to
September 2000 and was Vice President and
Treasurer of ISP and its subsidiaries from
February 1998 to June 1999. She also has been
Senior Vice President of BMCA and its
subsidiaries since August 2001, was Senior
Vice President and Treasurer of the same
companies from July 1999 to August 2001 and
was Vice President and Treasurer of the same
companies from February 1998 to July 1999.
Ms. Yoss also has served as Senior Vice
President, Chief Financial Officer and
Treasurer of G-I Holdings since July 1999. 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 claims. She was Assistant
Treasurer of Joseph E. Seagram & Sons, Inc.,
a global beverage and entertainment company
for more than five years until February 1998.
Paul T. Brady 39 Mr. Brady has been Senior Vice President--
Senior Vice President-- Sales, Americas of ISP, and a director of one
Sales, Americas of its subsidiaries since June 2001. He was
Vice President -- Sales, North America for
ISP and some of its subsidiaries from
November 2000 to June 2001. Mr. Brady was
Vice President, Global Commercial Operations
-- ISP Alginates Inc. from October 1999 to
November 2000. He was employed as Senior
Director -- Sales and Marketing of Monsanto
Company's Kelco Alginates from January 1998
to October 1999. He was Global Sales and
Marketing Director of Monsanto Company's
Kelco Biopolymers from June 1997 to January
1998 and was Business Director, Nutrasweet
Kelco from November 1996 to June 1997.
12
PRESENT PRINCIPAL OCCUPATION
NAME AND POSITION HELD AGE OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
---------------------- --- ----------------------------------------------
Roger J. Cope 57 Mr. Cope has been Senior Vice President--
Senior Vice President-- Sales and Commercial Director-- Europe of ISP
Sales and Commericial and one of its subsidiaries since July 1999
Director--Europe and a director of one of its subsidiaries
since June 2001. He was Senior Vice
President, Pharmaceutical, Agricultural and
Beverage Group of ISP and some of its
subsidiaries from July 1998 to July 1999 and
Vice President, Asia-Pacific Region of the
same corporations from March 1997 to July
1998. Mr. Cope also held the position of Vice
President -- Hair Care of ISP and some of its
subsidiaries from December 1995 to March
1997.
Neal E. Murphy 45 Mr. Murphy has been Senior Vice President and
Senior Vice President Chief Financial Officer of ISP and its
and Chief Financial subsidiaries since February 2002 and a Chief
Officer Financial Officer director of one of its
subsidiaries since February 2002. Prior to
joining ISP, he was President of PQ Europe, a
global developer and producer of silica-based
specialty chemicals, inorganic chemicals and
performance particles from August 1999 to
September 2001 and Vice President and Chief
Financial Officer of PQ Corporation, the
parent of PQ Europe, from May 1995 until July
1999.
Stephen R. Olsen 39 Mr. Olsen has been Senior Vice President--
Senior Vice President-- Corporate Development and Strategy of ISP,
Corporate Development since September 2000 and a director of some
and Strategy of its subsidiaries since June 2001. He was
President and Chief Operating Officer of LL
Building Products Inc., one of BMCA's
subsidiaries, from June 1999 to September
2000. He was Vice President, Corporate
Development and Vice President and General
Manager, Accessories and Specialty Products,
of BMCA from May 1997 to October 1998 and
also was Director, Operational Planning of
BMCA from December 1993 to May 1997.
Steven E. Post 47 Mr. Post has been Senior Vice President--
Senior Vice President-- Operations for Specialty Chemicals of ISP,
Operations for Specialty and a director of one of its subsidiaries
Chemicals since June 2001. He has been President of ISP
Alginates Inc. since October 1999. He was
employed as President of Monsanto Company's
Kelco Alginates division from January 1999 to
October 1999. He served as Vice President and
General Manager, Alginates of Monsanto
Company from December 1997 to January 1999.
He was Vice President, Manufacturing for the
Nutrition and Consumer sector of Monsanto
Company from January 1997 to December 1997.
Mr. Post was Vice President, Manufacturing
Services - Nutrasweet Kelco Division of
Monsanto Company from January 1996 to January
1997.
Lawrence Grenner 59 Mr. Grenner has been Senior Vice President--
Senior Vice President-- Marketing and Product Development of ISP and
Marketing and Product some of its subsidiaries since June 2000. He
Development was Vice President and Business Unit
Director, Skin Care of ISP and some of its
subsidiaries from January 1999 to June 2000
and Vice President, Marketing-Personal Care
of ISP and some of its subsidiaries from
January 1997 to January 1999.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information pertains to our common stock, which is traded on
the New York Stock Exchange. As of March 15, 2002, there were 188 holders of
record of our outstanding shares of common stock.
2001 BY QUARTER 2000 BY QUARTER
--------------------------------- -----------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------ ------ ----- ------ ----- ------ ----- ------
Price Range
Per Share
High .... $8.74 $11.25 $11.25 $9.60 $9.31 $6.50 $6.19 $7.00
Low ..... 6.63 7.80 7.95 7.85 5.75 5.19 5.31 5.00
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 13 to our Consolidated Financial Statements
included in this Annual Report on Form 10-K for information regarding
restrictions on the payment of dividends set forth on pages F-2 to F-11 and page
F-30, respectively. We have not paid dividends since 1995. Any decision to
resume the payment of dividends, and the timing and amount thereof, is dependent
upon, among other things, our results of operations, financial condition, cash
requirements, prospects and other factors deemed relevant by our Board of
Directors. Accordingly, we cannot assure you that our Board of Directors will
resume the declaration and payment of dividends or the amount thereof.
ITEM 6. SELECTED FINANCIAL DATA
See page F-12.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See page F-2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Financial Condition-Market Sensitive
Instruments and Risk Management" on page F-9.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on page F-1 and Financial Statements and Supplementary Data on
pages F-14 to F-47.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of ISP to be contained in the
Proxy Statement under the heading "Election of Directors" is incorporated by
reference herein. For information relating to the executive officers of ISP, see
"Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be contained in the Proxy Statement under the headings
"Compensation of Executive Officers of the Company" and "Election of Directors"
is incorporated by reference herein.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information to be contained in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be contained in the Proxy Statement under the captions
"Election of Directors" and "Certain Transactions" is incorporated by reference
herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a)(1) Financial Statements: See Index on page F-1.
(a)(2) Financial Statement Schedules: See Index on page F-1.
(a)(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
3.1 -- Amended and Restated Certificate of Incorporation of International
Specialty Products Inc. (incorporated by reference to Exhibit 4.1 to
Post-Effective Amendment No. 1 of Form S-8 to the Registration
Statement on Form S-4 of International Specialty Products Inc.
(Registration No. 333-53709) (the "ISP Registration Statement")).
3.2 -- By-laws of International Specialty Products Inc. (incorporated by
reference to Exhibit 99.2 to the ISP Registration Statement).
4.1 -- Indenture, dated as of June 27, 2001, between ISP Chemco Inc., ISP
Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as
issuers, the subsidiary guarantors party thereto, and Wilmington Trust
Company, as trustee (the "2011 Notes Indenture") (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4 of
ISP Chemco Inc. (Registration No. 333-70144) (the "ISP Chemco
Registration Statement")).
4.2 -- Amendment No. 1 to the 2011 Notes Indenture, dated as of November 13,
2001 (incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-4 of ISP Chemco Inc. (Registration No.
333-75574)).
4.3 -- Registration Rights Agreement, dated as of November 13, 2001, by and
among ISP Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP
Technologies Inc., as issuers, the subsidiary guarantors party
thereto, and UBS Warburg LLC, as initial purchaser (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form S-4 of
ISP Chemco Inc. (Registration No. 333-75574)).
4.4 -- Indenture, dated as of December 13, 2001, between International
Specialty Holdings Inc., as issuer and Wilmington Trust Company, as
trustee.
4.5 -- A/B Exchange Registration Rights Agreement, dated as of December 13,
2001, by and among International Specialty Holdings Inc., as issuer
and Bear Stearns & Co. Inc. and UBS Warburg LLC as initial purchasers.
15
EXHIBIT
NUMBER DESCRIPTIONS
-------- ------------
10.1 -- Amended and Restated Management Agreement, dated as of January 1,
1999, by and among GAF Corporation, G-I Holdings Inc., G Industries
Corp., Merick Inc., GAF Fiberglass Corporation, International
Specialty Products Inc., GAF Building Materials Corporation, GAF
Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Opco Holdings Inc. (incorporated by reference to Exhibit 10.1
to Building Materials Corporation of America's Annual Report on Form
10-K for the fiscal year ended December 31, 1998).
10.2 -- Amendment No. 1 to the Amended and Restated Management Agreement,
dated as of January 1, 2000 by and among GAF Corporation, G-I Holdings
Inc., G Industries Corp., Merick Inc., GAF Fiberglass Corporation,
International Specialty Products Inc., GAF Building Materials
Corporation, GAF Broadcasting Company, Inc., Building Materials
Corporation of America and ISP Opco Holdings Inc., as assignee of
International Specialty Products Inc. (incorporated by reference to
Exhibit 10.2 to International Specialty Products Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 (the "1999
Form 10-K")).
10.3 -- Amendment No. 2 to the Amended and Restated Management Agreement,
dated as of January 1, 2001 by and among G-1 Holdings Inc., Merick
Inc., International Specialty Products Inc., GAF Broadcasting Company,
Inc., Building Materials Corporation of America and ISP Opco Holdings
Inc., as assignee of International Specialty Products Inc.
(incorporated by reference to Exhibit 10.3 to International Specialty
Products Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (the "2000 Form 10-K")).
10.4 -- Amendment No. 3 to the Amended and Restated Management Agreement,
dated as of June 27, 2001 by and among G-1 Holdings Inc., Merick Inc.,
International Specialty Products Inc., ISP Investco LLC, GAF
Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Management Company, Inc., as assignee of ISP Chemco Inc.
(incorporated by reference to Exhibit 10.7 to the ISP Chemco
Registration Statement).
10.5 -- Amendment No. 4 to the Amended and Restated Management Agreement,
dated as of January 1, 2002 by and among G-1 Holdings Inc., Merick
Inc., International Specialty Products Inc., ISP Investco LLC, GAF
Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Management Company, Inc., as assignee of ISP Chemco Inc.
10.6 -- Indemnification Agreement, dated as of October 18, 1996, among GAF
Corporation, G-I Holdings Inc., ISP Holdings Inc., G Industries Corp.
and GAF Fiberglass Corporation (incorporated by reference to Exhibit
10.7 to the Registration Statement on Form S-4 of ISP Holdings Inc.
(Registration No. 333-17827) (the "Holdings Registration Statement")).
10.7 -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP Holdings
Inc., International Specialty Products Inc. and certain subsidiaries
of International Specialty Products Inc. (incorporated by reference to
Exhibit 10.8 to the Holdings Registration Statement).
10.8 -- Tax Sharing Agreement, dated as of January 1, 2001, by and among
International Specialty Products Inc., International Specialty
Holdings Inc. and ISP Chemco Inc. (incorporated by reference to
Exhibit 10.8 to the ISP Chemco Registration Statement).
10.9 -- Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to the Registration Statement on Form S-1
of International Specialty Products Inc. (Registration No.
333-40351)).*
10.10-- International Specialty Products Inc. 1991 Incentive Plan for Key
Employees and Directors, as amended (incorporated by reference to
Exhibit 4.3 to Post-Effective Amendment No. 1 on Form S-8 to the ISP
Registration Statement).*
16
EXHIBIT
NUMBER DESCRIPTIONS
-------- ------------
10.11 -- International Specialty Products Inc. 2000 Stock Option Plan for
Non-Employee Directors (incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-8 of International Specialty
Products Inc. (Registration Statement No. 333-81490)).*
10.12 -- International Specialty Products Inc. 2000 Long-Term Incentive Plan
(incorporated by reference to Annex A to International Specialty
Products Inc.'s definitive proxy statement on Schedule 14A with
respect to International Specialty Products Inc.'s 2000 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission on
April 20, 2000).*
10.13 -- Amendment No. 2 to the International Specialty Products Inc. 2000
Long-Term Incentive Plan (incorporated by reference to Annex C to
International Specialty Products Inc.'s definitive proxy statement on
Schedule 14A with respect to International Specialty Products Inc.'s
2001 Annual Meeting of Stockholders filed with the Securities and
Exchange Commission on April 20, 2001)*.
10.14 -- Letter Agreement, dated September 29, 1999, between International
Specialty Products Inc. and Sunil Kumar (incorporated by reference to
Exhibit 10 to the International Specialty Products Inc.'s Quarterly
Report on Form 10-Q for the fiscal quarter ended October 3, 1999).*
10.15 -- First Amendment to Letter Agreement dated September 29, 1999 between
International Specialty Products Inc. and Sunil Kumar (incorporated by
reference to Exhibit 10.11 to International Specialty Products Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
2000).*
10.16 -- International Specialty Products Inc. Yoss Restricted Share Plan
(incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-8 of International Specialty Products Inc.
(Registration No. 333-52504)).*
10.17 -- International Specialty Products Inc. Olsen Restricted Share Plan
(incorporated by reference to Exhibit 4.3 to the Form S-8 of
International Specialty Products Inc. (Registration No. 333-52638)).*
10.18 -- International Specialty Products Inc. Olsen Restricted Share Plan II
(incorporated by reference to Exhibit 4.3 to the Form S-8 of
International Specialty Products Inc. (Registration No. 333-81486)).*
10.19 -- International Specialty Products Inc. Kumar Restricted Share Plan
(incorporated by reference to Exhibit 4.3 to the Form S-8 of
International Specialty Products Inc. (Registration No. 333-81488)).*
10.20 -- Compensation and Indemnification Agreement among Charles M. Diker,
Burt Manning and International Specialty Products Inc., dated October
10, 1997 (incorporated by reference to Exhibit 10.23 to the ISP
Registration Statement).*
10.21 -- Credit Agreement, dated as of June 27, 2001, between ISP Chemco Inc.,
ISP Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as
borrowers, the subsidiary guarantors party thereto, the lenders party
thereto, The Chase Manhattan Bank, as administrative agent, J.P.
Morgan Securities Inc., as advisor, lead arranger and bookrunner, Bear
Stearns Corporate Lending Inc. and UBS Warburg LLC, as co-syndication
agents, and Deutsche Bank Alex. Brown Inc. and The Bank of Nova
Scotia, as co-documentation agents (incorporated by reference to
Exhibit 10.1 to the ISP Chemco Registration Statement).
10.22 -- Amendment No. 1 to Credit Agreement, dated as of July 24, 2001, by and
among ISP Chemco Inc., ISP Chemicals Inc., ISP Technologies Inc. and
ISP Minerals Inc., as borrowers, and The Chase Manhattan Bank, as
administrative agent (incorporated by reference to Exhibit 10.2 to the
ISP Chemco Registration Statement).
17
EXHIBIT
NUMBER DESCRIPTIONS
-------- ------------
10.23 -- Pledge and Security Agreement, dated as of June 27, 2001, among ISP
Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP
Technologies Inc., as borrowers, the subsidiary guarantors party
thereto, The Chase Manhattan Bank, as administrative agent, J.P.
Morgan Securities Inc., as advisor, lead arranger and bookrunner, Bear
Stearns Corporate Lending Inc. and UBS Warburg LLC, as co-syndication
agents, and Deutsche Bank Alex. Brown Inc. and The Bank of Nova
Scotia, as co-documentation agents (incorporated by reference to
Exhibit 10.3 to the ISP Chemco Registration Statement).
21 -- Subsidiaries of International Specialty Products Inc.
23 -- Consent of Arthur Andersen LLP.
99.1 -- Letter to commission pursuant to temporary note 3T, dated March
22, 2002.
------
* Management and/or compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 2001.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL SPECIALTY PRODUCTS INC.
By: /s/ NEAL E. MURPHY
--------------------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
Date: March 22, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 22, 2002, by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
------------------ ---------
/s/ SAMUEL J. HEYMAN Chairman of the Board; Director
-----------------------
Samuel J. Heyman
/s/ SUNIL KUMAR President and Chief Executive Officer; Director
----------------------- (Principal Executive Officer)
Sunil Kumar
/s/ CHARLES M. DIKER Director
-----------------------
Charles M. Diker
/s/ ROBERT ENGLANDER Director
-----------------------
Robert Englander
/s/ SANFORD KAPLAN Director
-----------------------
Sanford Kaplan
/s/ BURT MANNING Director
-----------------------
Burt Manning
/s/ ALAN M. MECKLER Director
-----------------------
Alan M. Meckler
/s/ NEAL E. MURPHY Senior Vice President and Chief Financial Officer
----------------------- (Principal Financial and Accounting Officer)
Neal E. Murphy
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTIONS
-------- ------------
3.1 -- Amended and Restated Certificate of Incorporation of International
Specialty Products Inc. (incorporated by reference to Exhibit 4.1 to
Post-Effective Amendment No. 1 of Form S-8 to the Registration
Statement on Form S-4 of International Specialty Products Inc.
(Registration No. 333-53709) (the "ISP Registration Statement")).
3.2 -- By-laws of International Specialty Products Inc. (incorporated by
reference to Exhibit 99.2 to the ISP Registration Statement).
4.1 -- Indenture, dated as of June 27, 2001, between ISP Chemco Inc., ISP
Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as
issuers, the subsidiary guarantors party thereto, and Wilmington Trust
Company, as trustee (the "2011 Notes Indenture") (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4 of
ISP Chemco Inc. (Registration No. 333-70144) (the "ISP Chemco
Registration Statement")).
4.2 -- Amendment No. 1 to the 2011 Notes Indenture, dated as of November 13,
2001 (incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-4 of ISP Chemco Inc. (Registration No.
333-75574)).
4.3 -- Registration Rights Agreement, dated as of November 13, 2001, by and
among ISP Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP
Technologies Inc., as issuers, the subsidiary guarantors party
thereto, and UBS Warburg LLC, as initial purchaser (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form S-4 of
ISP Chemco Inc. (Registration No. 333-75574)).
4.4 -- Indenture, dated as of December 13, 2001, between International
Specialty Holdings Inc., as issuer and Wilmington Trust Company, as
trustee.
4.5 -- A/B Exchange Registration Rights Agreement, dated as of December 13,
2001, by and among International Specialty Holdings Inc., as issuer
and Bear Stearns & Co. Inc. and UBS Warburg LLC as initial purchasers.
10.1 -- Amended and Restated Management Agreement, dated as of January 1,
1999, by and among GAF Corporation, G-I Holdings Inc., G Industries
Corp., Merick Inc., GAF Fiberglass Corporation, International
Specialty Products Inc., GAF Building Materials Corporation, GAF
Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Opco Holdings Inc. (incorporated by reference to Exhibit 10.1
to Building Materials Corporation of America's Annual Report on Form
10-K for the fiscal year ended December 31, 1998).
10.2 -- Amendment No. 1 to the Amended and Restated Management Agreement,
dated as of January 1, 2000 by and among GAF Corporation, G-I Holdings
Inc., G Industries Corp., Merick Inc., GAF Fiberglass Corporation,
International Specialty Products Inc., GAF Building Materials
Corporation, GAF Broadcasting Company, Inc., Building Materials
Corporation of America and ISP Opco Holdings Inc., as assignee of
International Specialty Products Inc. (incorporated by reference to
Exhibit 10.2 to International Specialty Products Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 (the "1999
Form 10-K")).
10.3-- Amendment No. 2 to the Amended and Restated Management Agreement,
dated as of January 1, 2001 by and among G-1 Holdings Inc., Merick
Inc., International Specialty Products Inc., GAF Broadcasting Company,
Inc., Building Materials Corporation of America and ISP Opco Holdings
Inc., as assignee of International Specialty Products Inc.
(incorporated by reference to Exhibit 10.3 to International Specialty
Products Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (the "2000 Form 10-K")).
20
EXHIBIT
NUMBER DESCRIPTIONS
-------- ------------
10.4 -- Amendment No. 3 to the Amended and Restated Management Agreement,
dated as of June 27, 2001 by and among G-1 Holdings Inc., Merick Inc.,
International Specialty Products Inc., ISP Investco LLC, GAF
Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Management Company, Inc., as assignee of ISP Chemco Inc.
(incorporated by reference to Exhibit 10.7 to the ISP Chemco
Registration Statement).
10.5 -- Amendment No. 4 to the Amended and Restated Management Agreement,
dated as of January 1, 2002 by and among G-1 Holdings Inc., Merick
Inc., International Specialty Products Inc., ISP Investco LLC, GAF
Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Management Company, Inc., as assignee of ISP Chemco Inc.
10.6 -- Indemnification Agreement, dated as of October 18, 1996, among GAF
Corporation, G-I Holdings Inc., ISP Holdings Inc., G Industries Corp.
and GAF Fiberglass Corporation (incorporated by reference to Exhibit
10.7 to the Registration Statement on Form S-4 of ISP Holdings Inc.
Regiatration No. 333-17827) (the "Holdings Registration Statement")).
10.7 -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP Holdings
Inc., International Specialty Products Inc. and certain subsidiaries
of International Specialty Products Inc. (incorporated by reference to
Exhibit 10.8 to the Holdings Registration Statement).
10.8 -- Tax Sharing Agreement, dated as of January 1, 2001, by and among
International Specialty Products Inc., International Specialty
Holdings Inc. and ISP Chemco Inc. (incorporated by reference to
Exhibit 10.8 to the ISP Chemco Registration Statement).
10.9 -- Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to the Registration Statement on Form S-1
of International Specialty Products Inc. (Registration No.
333-40351)).*
10.10-- International Specialty Products Inc. 1991 Incentive Plan for Key
Employees and Directors, as amended (incorporated by reference to
Exhibit 4.3 to Post-Effective Amendment No. 1 on Form S-8 to the ISP
Registration Statement).*
10.11-- International Specialty Products Inc. 2000 Stock Option Plan for
Non-Employee Directors (incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-8 of International Specialty
Products Inc. (Registration Statement No. 333-81490)).*
10.12-- International Specialty Products Inc. 2000 Long-Term Incentive Plan
(incorporated by reference to Annex A to International Specialty
Products Inc.'s definitive proxy statement on Schedule 14A with
respect to International Specialty Products Inc.'s 2000 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission on
April 20, 2000).*
10.13-- Amendment No. 2 to the International Specialty Products Inc. 2000
Long-Term Incentive Plan (incorporated by reference to Annex C to
International Specialty Products Inc.'s definitive proxy statement on
Schedule 14A with respect to International Specialty Products Inc.'s
2001 Annual Meeting of Stockholders filed with the Securities and
Exchange Commission on April 20, 2001)*.
10.14-- Letter Agreement, dated September 29, 1999, between International
Specialty Products Inc. and Sunil Kumar (incorporated by reference to
Exhibit 10 to the International Specialty Products Inc.'s Quarterly
Report on Form 10-Q for the fiscal quarter ended October 3, 1999).*
21
EXHIBIT
NUMBER DESCRIPTIONS
-------- ------------
10.15-- First Amendment to Letter Agreement dated September 29, 1999 between
International Specialty Products Inc. and Sunil Kumar (incorporated by
reference to Exhibit 10.11 to International Specialty Products Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
2000).*
10.16-- International Specialty Products Inc. Yoss Restricted Share Plan
(incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-8 of International Specialty Products Inc.
(Registration No. 333-52504)).*
10.17-- International Specialty Products Inc. Olsen Restricted Share Plan
(incorporated by reference to Exhibit 4.3 to the Form S-8 of
International Specialty Products Inc. (Registration No. 333-52638)).*
10.18-- International Specialty Products Inc. Olsen Restricted Share Plan II
(incorporated by reference to Exhibit 4.3 to the Form S-8 of
International Specialty Products Inc. (Registration No. 333-81486)).*
10.19-- International Specialty Products Inc. Kumar Restricted Share Plan
(incorporated by reference to Exhibit 4.3 to the Form S-8 of
International Specialty Products Inc. (Registration No. 333-81488)).*
10.20-- Compensation and Indemnification Agreement among Charles M. Diker,
Burt Manning and International Specialty Products Inc., dated October
10, 1997 (incorporated by reference to Exhibit 10.23 to the ISP
Registration Statement).*
10.21-- Credit Agreement, dated as of June 27, 2001, between ISP Chemco Inc.,
ISP Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as
borrowers, the subsidiary guarantors party thereto, the lenders party
thereto, The Chase Manhattan Bank, as administrative agent, J.P.
Morgan Securities Inc., as advisor, lead arranger and bookrunner, Bear
Stearns Corporate Lending Inc. and UBS Warburg LLC, as co-syndication
agents, and Deutsche Bank Alex. Brown Inc. and The Bank of Nova
Scotia, as co-documentation agents (incorporated by reference to
Exhibit 10.1 to the ISP Chemco Registration Statement).
10.22-- Amendment No. 1 to Credit Agreement, dated as of July 24, 2001, by and
among ISP Chemco Inc., ISP Chemicals Inc., ISP Technologies Inc. and
ISP Minerals Inc., as borrowers, and The Chase Manhattan Bank, as
administrative agent (incorporated by reference to Exhibit 10.2 to the
ISP Chemco Registration Statement).
10.23-- Pledge and Security Agreement, dated as of June 27, 2001, among ISP
Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP
Technologies Inc., as borrowers, the subsidiary guarantors party
thereto, The Chase Manhattan Bank, as administrative agent, J.P.
Morgan Securities Inc., as advisor, lead arranger and bookrunner, Bear
Stearns Corporate Lending Inc. and UBS Warburg LLC, as co-syndication
agents, and Deutsche Bank Alex. Brown Inc. and The Bank of Nova
Scotia, as co-documentation agents (incorporated by reference to
Exhibit 10.3 to the ISP Chemco Registration Statement).
21 -- Subsidiaries of International Specialty Products Inc.
23 -- Consent of Arthur Andersen LLP.
99.1 -- Letter to commission pursuant to temporary note 3T, dated March 22,
2002.
---------
* Management and/or compensation plan or arrangement.
22
INTERNATIONAL SPECIALTY PRODUCTS INC.
FORM 10-K
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... F-2
Selected Financial Data .................................................. F-12
Report of Independent Public Accountants ................................. F-13
Consolidated Statements of Income for the
three years ended December 31, 2001 .................................... F-14
Consolidated Balance Sheets as of December 31, 2000 and 2001. ............ F-15
Consolidated Statements of Cash Flows for the three years
ended December 31, 2001 ................................................ F-16
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 2001............................. F-18
Notes to Consolidated Financial Statements................................ F-20
Supplementary Data (Unaudited):
Quarterly Financial Data (Unaudited) ................................... F-47
SCHEDULES
Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts ........................ S-1
F-1
INTERNATIONAL SPECIALTY PRODUCTS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On July 15, 1998, International Specialty Products Inc., which we refer to
as "Old ISP", merged with and into ISP Holdings Inc. In connection with the
merger, our company, which was then known as ISP Holdings, changed its name to
International Specialty Products Inc. In the merger, each outstanding share of
Old ISP's common stock, other than those held by ISP Holdings, was converted
into one share of our common stock, and the outstanding shares of Old ISP's
common stock which were held by ISP Holdings were converted into an aggregate of
53,833,333 shares (or approximately 78%) of the outstanding shares of our common
stock.
In October 1999, we sold the stock of our filter products subsidiaries (see
Note 7 to Consolidated Financial Statements). Accordingly, the results of
operations of the filter products subsidiaries have been classified as a
"Discontinued Operation" within the Consolidated Financial Statements for the
year 1999. The following discussion is on a continuing operations basis.
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
We recorded net income in 2001 of $0.2 million compared with $94.1 million
($1.38 diluted earnings per share) in 2000. The lower results were attributable
to investment losses in 2001 compared with significant investment income in
2000, as well as higher interest expense, partially offset by improved operating
income. The results for 2001 include an after-tax charge of $0.4 million ($.01
diluted earnings per share) for the cumulative effect of adopting Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Also included in the results for 2001 are a $1.6
million gain on an insurance settlement and a $0.5 million reversal of excess
restructuring reserves established in 2000.
The results for 2000 included a $14.4 million provision for restructuring
and a $3.5 million gain on a contract settlement. Excluding the effect of such
nonrecurring items in each year, the net loss for 2001 was $0.7 million ($.01
diluted earnings per share) compared with net income of $101.2 million ($1.49
diluted earnings per share) in 2000.
Sales for 2001 were $787.2 million compared with $783.9 million in 2000. The
increase in sales resulted from higher volumes in the Pharmaceutical and
Beverage, Personal Care, and Mineral Products businesses (totaling $33.5
million) and improved pricing and mix in the Industrial business ($22.4
million), offset by lower volumes in the Industrial, Alginates and Fine
Chemicals businesses (totaling $45.3 million) and by the adverse effect of the
stronger U.S. dollar ($10.8 million), primarily in Europe.
Operating income for the year 2001 was $112.6 million compared with $81.4
million in 2000. Excluding nonrecurring items in each year, operating income for
2001 was $110.5 million, a 15% increase compared with $95.8 million in 2000. The
improvement in operating income resulted primarily from higher volumes and
favorable manufacturing costs in the Pharmaceutical and Beverage and the Fine
Chemicals businesses, and improved pricing and favorable manufacturing costs in
the Industrial and Mineral Products businesses. These gains were partially
offset by the impact of lower volumes in the Industrial, Alginates and
Performance Chemicals businesses, unfavorable manufacturing costs in the
Alginates and Performance Chemicals businesses and by the adverse effect of the
stronger U.S. dollar, primarily in Europe. Operating income in 2001 increased in
Europe, Asia-Pacific and Latin America. Excluding the nonrecurring items in each
year discussed above, operating income decreased in the U.S. by $10.3 million in
2001.
Interest expense for 2001 was $86.2 million, a $5.0 million (6%) increase
over the $81.2 million recorded in 2000, with the increase due to higher average
borrowings, primarily reflecting the debt financing transactions discussed below
in "Liquidity and Financial Condition," partially offset by the impact of lower
average interest rates.
F-2
Other income (expense), net, comprises net investment income, foreign
exchange gains/losses resulting from the revaluation of foreign
currency-denominated accounts receivable and payable as a result of changes in
exchange rates, and other nonoperating and nonrecurring items of income and
expense. Other expense, net, was $25.4 million in 2001 compared with other
income of $141.3 million in 2000, with the decrease the result of investment
losses in 2001 versus significant investment income in 2000. Investment losses
in 2001 were $9.4 million, which included a $29.1 million write-down to fair
market value of certain available-for-sale securities which were sold shortly
after the balance sheet date. Investment income in 2000 was $157.1 million and
included net gains of $127.6 million from the sale of our investments in Dexter
Corporation and Life Technologies, Inc. (see Note 3 to Consolidated Financial
Statements).
BUSINESS SEGMENT REVIEW
A discussion of operating results for each of our business segments follows.
We operate our Specialty Chemicals business through three reportable business
segments, in addition to the Mineral Products segment. See Notes 17 and 18 to
Consolidated Financial Statements for additional business segment and geographic
information.
PERSONAL CARE
Sales for the Personal Care business segment in 2001 were $196.2 million
compared with $189.0 million in 2000, while operating income in 2001 was $34.0
million compared with $33.2 million in 2000. The 4% increase in sales resulted
primarily from higher volumes ($8.6 million), mainly in the North American and
European hair care markets, reflecting strong mass market sales of hair gels and
styling aids, and, to a lesser extent, favorable pricing and mix ($1.9 million).
These sales gains were partially offset by lower volumes in the North American
skin care market, reflecting increased competition in the sunscreen and
preservative markets, and were also impacted by the adverse effect of the
stronger U.S. dollar ($3.3 million), primarily in Europe.
The increase in operating income in 2001 was attributable to the favorable
volumes and pricing and to favorable manufacturing costs, offset by an
unfavorable mix, higher operating expenses and the unfavorable effect of the
stronger U.S. dollar ($2.3 million), primarily in Europe.
PHARMACEUTICAL, FOOD AND BEVERAGE ("PFB")
Sales for the PFB segment were $234.6 million in 2001 compared with $232.8
million in 2000. Sales for the Pharmaceutical and Beverage business increased
$14.8 million (9%), reflecting volume growth ($14.7 million) across all regions
and, to a lesser extent, favorable pricing and mix ($3.0 million), partially
offset by the impact of the stronger U.S. dollar ($2.9 million). The sales
growth in Pharmaceutical and Beverage was primarily the result of strong sales
in the excipients and beverage markets, partially offset by lower sales in the
oral care market. Sales for the Alginates food business decreased in 2001 by
$13.0 million (20%) due to lower volumes ($11.8 million) and unfavorable pricing
and mix ($1.2 million) across all regions due to competitive pressures.
Operating income for the PFB segment was $48.5 million in 2001 compared with
$48.0 million in 2000. Operating income for the Pharmaceutical and Beverage
business increased 37% in 2001 due to the higher volumes and pricing and to
lower manufacturing costs which reflected cost savings from lower natural gas
prices. Partially offsetting these improvements was the adverse impact of the
stronger U.S. dollar ($2.2 million), primarily in Europe. Operating results for
the Alginates food business decreased by $13.0 million from 2000, resulting from
the lower unit volumes, unfavorable manufacturing costs related to lower
production volumes and the impact of unfavorable pricing.
PERFORMANCE CHEMICALS, FINE CHEMICALS AND INDUSTRIAL
Sales for the Performance Chemicals, Fine Chemicals and Industrial segment
were $275.7 million for 2001, a decrease of $14.5 million (5%) compared with
$290.2 million in 2000, while operating income increased to $18.5 million in
2001 compared with $4.4 million in 2000. Although all three businesses
experienced sales declines in 2001, the decrease in sales was principally
attributable to 8% lower Industrial sales.
F-3
Sales for the Performance Chemicals business decreased by $0.6 million (1%)
in 2001. The decline in sales resulted from the adverse impact of the stronger
U.S. dollar in Europe ($1.4 million) and slightly lower volumes ($0.3 million)
in the specialty coatings and adhesives market, offset by favorable pricing and
mix ($1.1 million). Operating results for the Performance Chemicals business
decreased by $8.0 million in 2001 due mainly to an unfavorable product mix and
higher manufacturing costs and, to a lesser extent, the impact of the lower
volumes and the stronger U.S. dollar ($0.9 million).
Sales for the Fine Chemicals business decreased $0.7 million (1.5%) in 2001,
while operating income increased $4.4 million. The lower sales reflected lower
volumes related to contract sales to Polaroid, offset by sales of $2.2 million
from the FineTech business, which was acquired in the second quarter of 2001
(see Note 9 to Consolidated Financial Statements), and by volume increases from
other fine chemicals products. The higher operating income for Fine Chemicals in
2001 resulted from a significantly improved gross margin due to favorable
manufacturing costs, and the favorable impact of the FineTech acquisition,
partially offset by increased operating expenses. The gross margin in 2000 for
Fine Chemicals was adversely impacted by higher energy costs and lower plant
utilization.
Sales for the Industrial business decreased by $13.3 million (8%) in 2001,
with the decrease resulting from lower volumes ($32.5 million) and the adverse
impact of the stronger U.S. dollar in Europe ($3.1 million), partially offset by
improved pricing and mix ($22.4 million). Operating income for the Industrial
business improved by $17.7 million in 2001, resulting from the improved pricing
and favorable manufacturing costs, reflecting favorable methanol and raw
material pricing, partially offset by the unfavorable volumes and the impact of
the stronger U.S. dollar.
MINERAL PRODUCTS
Sales for the Mineral Products segment in 2001 were $80.7 million, an $8.8
million (12%) increase compared with sales of $71.9 million in 2000, while
operating income increased $1.3 million (14%) to $10.7 million in 2001. The
higher sales resulted from a $4.7 million (38%) increase in third party sales
and a $4.1 million (7%) increase in sales to Building Materials Corporation of
America, an affiliate. The higher operating profits in 2001 reflected the
improved volume and favorable manufacturing efficiencies, partially offset by
higher natural gas prices and higher operating expenses due mainly to an
increased provision for doubtful accounts.
RESULTS OF OPERATIONS
2000 COMPARED WITH 1999
We recorded income from continuing operations in 2000 of $94.1 million
($1.38 diluted earnings per share) compared with $49.6 million ($.72 diluted
earnings per share) in 1999. Including income from a discontinued operation of
$25.3 million, which reflected an after-tax gain of $23.5 million from the sale
of filter products, net income in 1999 was $74.9 million ($1.09 diluted earnings
per share).
The results for 2000 included a $14.4 million provision for restructuring
and a $3.5 million gain on a contract settlement, while the results for 1999
included an $8.5 million pre-tax gain from the sale of our pearlescent pigments
business, a non-core product line. Also in 1999, we reversed previously recorded
restructuring reserves in the amount of $1.9 million and established a staff
reduction program for which a pre-tax provision for severance of $2.3 million
was recorded (see Note 4 to Consolidated Financial Statements). Excluding the
effect of such nonrecurring items in each period, income from continuing
operations for 2000 was $101.2 million ($1.49 diluted earnings per share)
compared with $44.4 million ($.65 diluted earnings per share) in 1999. On a
comparable basis, the higher income from continuing operations in 2000 was
attributable to higher investment income, partially offset by lower operating
income and higher interest expense.
Sales for 2000 were $783.9 million compared with $787.4 million in 1999. The
decrease in sales was primarily attributable to lower volumes in the Fine
Chemicals, Mineral Products and Performance Chemicals businesses (totaling $50.1
million), the adverse effect of the stronger U.S. dollar ($27.5 million),
principally in Europe, and to lower pricing and mix in the Industrial business
($20.0 million), partially offset by the full year's
F-4
contribution to sales by the Alginates business ($66.5 million) acquired in
October 1999 (see Note 9 to Consolidated Financial Statements) and by improved
volumes in the Pharmaceutical and Beverage business and the Personal Care
segment (totaling $19.8 million). Sales in 2000 reflected 13% and 23% higher
sales in the Asia-Pacific and Latin America regions, respectively, offset by
lower sales in the U.S. and Europe.
Operating income was $81.4 million in 2000 compared with $146.0 million in
1999. Excluding nonrecurring items in each year, operating income for 2000 was
$95.8 million compared with $137.8 million in 1999. The decrease in 2000 was
attributable to lower pricing in the Industrial business, the adverse effect of
the stronger U.S. dollar in Europe, higher raw material and energy costs which
lowered gross margins, and lower volumes in Fine Chemicals, Mineral Products and
Performance Chemicals, partially offset by the full year's contribution to
operating income of the Alginates business. Operating income in 2000 decreased
in the U.S. and Europe, due to the factors discussed above, while the
Asia-Pacific and Latin America regions experienced a 50% and 14%, respectively,
growth in operating income in 2000 over 1999.
Interest expense for 2000 was $81.2 million, a $2.6 million (3%) increase
over the $78.6 million recorded in 1999, with the increase due primarily to
higher average interest rates, partially offset by lower average borrowings.
Other income, net, was $141.3 million in 2000 versus $9.0 million in 1999,
with the increase the result of higher investment income, reflecting net gains
in 2000 of $127.6 million from the sale of our investments in Dexter Corporation
and Life Technologies, Inc. (see Note 3 to Consolidated Financial Statements).
Our total gain related to these investments prior to and in 1999 and 2000 was
approximately $150 million prior to expenses.
BUSINESS SEGMENT REVIEW
A discussion of operating results for each of our business segments follows.
We operate our Specialty Chemicals business through three reportable business
segments, in addition to the Mineral Products segment. See Notes 17 and 18 to
Consolidated Financial Statements for additional business segment and geographic
information.
PERSONAL CARE
Sales for the Personal Care segment in 2000 were $189.0 million compared
with $187.1 million in 1999, while operating income in 2000 was $33.2 million
compared with $47.1 million in 1999, which included an $8.5 million pre-tax gain
on the sale of the pearlescent pigments business, a non-core product line. The
sales increase reflected higher volumes ($10.3 million), mainly in hair care
products, partially offset by the adverse effect of the stronger U.S. dollar in
Europe ($5.9 million) and lower average pricing in both hair care and skin care.
Operating income, excluding the gain in 1999 on the sale of the pearlescent
pigments business, decreased by $5.4 million in 2000 to $33.2 million, as the
impact of volume increases was offset by higher manufacturing and operating
expenses, the adverse effect of the stronger U.S. dollar in Europe ($4.8
million) and lower average pricing.
PHARMACEUTICAL, FOOD AND BEVERAGE ("PFB")
Sales for the PFB segment were $232.8 million in 2000 compared with $177.3
million in 1999, principally reflecting a full year's contribution to sales from
the Alginates business ($66.5 million), compared with $12.8 million in 1999
after the date of its acquisition in October 1999. Sales for the Pharmaceutical
and Beverage business increased $1.8 million, reflecting volume growth across
all regions ($9.6 million), partially offset by the impact of the stronger U.S.
dollar ($6.5 million). The sales growth was primarily the result of strong sales
in the oral care and excipients markets, partially offset by lower sales in the
Beverage business.
Operating income for the PFB segment was $48.0 million in 2000, an 18%
improvement compared with $40.7 million in 1999, with the increase resulting
from the full year's contribution from the Alginates business. Operating income
for the Pharmaceutical and Beverage business decreased 9% in 2000 as the impact
of favorable volumes was offset by the adverse impact of the stronger U.S.
dollar in Europe ($5.2 million) and higher operating expenses.
F-5
PERFORMANCE CHEMICALS, FINE CHEMICALS AND INDUSTRIAL
Sales for the Performance Chemicals, Fine Chemicals and Industrial segment
were $290.2 million for 2000, a decrease of $45.5 million (14%) compared with
$335.7 million in 1999, while operating income declined to $4.4 million in 2000
compared with $44.0 million in 1999. Although all three businesses experienced
significant sales declines in 2000, the decrease in sales was primarily
attributable to 34% lower Fine Chemicals sales.
Sales for the Performance Chemicals business decreased by $12.3 million
(13%) in 2000. The primary factors for the decline in sales were lower volumes
($9.2 million), mainly in Europe and North America in PVP polymers in the
household, industrial and institutional markets, in addition to the adverse
impact of the stronger U.S. dollar in Europe ($3.0 million). Operating income
for the Performance Chemicals business decreased by $6.3 million (46%) in 2000
due to the volume shortfalls and the stronger dollar ($2.4 million), partially
offset by an improved gross margin due to favorable manufacturing costs.
Sales for the Fine Chemicals business decreased $23.9 million (34%) in 2000,
while operating income decreased $19.1 million (85%). The Fine Chemicals
business was significantly impacted by the expiration of a substantial custom
manufacturing agreement at the end of 1999. Sales related to this agreement
contributed $32.2 million of sales and $17.4 million of gross margin in 1999.
Higher sales volumes of other fine chemicals products partially offset the
impact of this contract termination. The lower operating income in 2000 was also
impacted by higher energy costs and lower plant utilization.
Sales for the Industrial business decreased by $9.3 million in 2000, with
the decrease resulting from unfavorable selling prices and mix ($20.0 million)
and the adverse impact of the stronger U.S. dollar in Europe ($12.1 million),
partially offset by volume increases ($22.8 million) in Europe and Asia-Pacific.
As a result of the unfavorable pricing and the impact of the stronger dollar
($3.1 million), operating results for the Industrial business decreased by $14.4
million in 2000.
MINERAL PRODUCTS
Sales for the Mineral Products segment in 2000 were $71.9 million, a $15.4
million (18%) decrease compared with sales of $87.3 million in 1999, while
operating income decreased $6.7 million (42%) to $9.4 million in 2000. The lower
sales and operating income resulted from substantially lower third party sales,
resulting from the loss of two major trade customers for colored roofing
granules in the fourth quarter of 1999, which together accounted for
approximately 68% of Mineral Products third party sales and approximately 23% of
total Mineral Products sales in 1999. The loss of these customers adversely
impacted the year 2000 sales by $19.3 million. Operating income in 2000 was also
impacted by higher energy costs.
LIQUIDITY AND FINANCIAL CONDITION
During 2001, our net cash flow before financing activities was $68.2
million, including $254.3 million of cash generated from operations, the
reinvestment of $101.4 million for capital programs and the acquisitions of the
FineTech business and the industrial biocides business of Degussa Corporation
(see Note 9 to Consolidated Financial Statements), and the use of $84.7 million
of cash for net purchases of available-for-sale securities and other short-term
investments.
Cash from operations for 2001 reflected a $186.6 million cash flow from net
sales of trading securities. Excluding this cash flow, cash provided from
operations for 2001 totaled $67.5 million. Cash from operations also reflects
non-cash charges of $44.2 million from unrealized losses on securities in 2001
(see Note 3 to Consolidated Financial Statements). Cash invested in additional
working capital totaled $48.1 million, primarily reflecting a $34.5 million
increase in inventories, due mainly to higher production levels, and a $16.5
million decrease in payables and accrued liabilities.
Net cash used in financing activities in 2001 totaled $6.4 million,
reflecting the debt financing transactions discussed below, financing fees and
expenses of $20.5 million related to the financing transactions, repayments of
long-term debt totaling $246.0 million, a $143.5 million decrease in short-term
borrowings and a $100.8 million decrease in borrowings under our revolving
credit agreement. In addition, financing activities included a $17.6
F-6
million cash outlay for repurchases of 1,937,800 shares of our common stock
pursuant to our repurchase program. At December 31, 2001, 949,062 shares of
common stock remained available for purchase under our repurchase program. The
repurchased shares will be held for general purposes, including the issuance of
shares under our stock option plan and for individual restricted stock plans.
On June 27, 2001, ISP Chemco, our indirect wholly owned subsidiary, and
three of its wholly owned subsidiaries jointly issued $205.0 million aggregate
principal amount of 10 1/4% Senior Subordinated Notes due 2011, which we refer
to as the "2011 Notes." The net proceeds of $197.3 million, after discount and
fees, were placed in a restricted cash escrow account and used to retire our
9 3/4% Senior Notes due 2002, which we refer to as the "2002 Notes." During the
third quarter of 2001, we retired $19.9 million of the 2002 Notes, and the
remaining $180.0 million of the 2002 Notes were retired on or prior to October
15, 2001. On July 31, 2001, ISP Chemco and those same three wholly owned
subsidiaries jointly issued an additional $100.0 million aggregate principal
amount of the 2011 Notes. These notes have the same terms as the 2011 Notes
issued in June 2001. The net proceeds were $98.9 million, including $0.9 million
of accrued interest from June 27, 2001 to the date of issuance, of which $98.0
million were placed in a restricted cash escrow account and used to retire a
portion of our 9% Senior Notes due 2003, which we refer to as the "2003 Notes."
On November 13, 2001, ISP Chemco and those same three wholly owned subsidiaries
jointly issued an additional $100.0 million aggregate principal amount of the
2011 Notes. These notes have the same terms as the 2011 Notes issued in June
2001, except with respect to interest accrual and registration rights. The net
proceeds of $101.0 million were placed in a restricted cash escrow account and
used to retire a portion of the 2003 Notes. We retired $16.9 million aggregate
principal amount of the 2003 Notes in 2001 and redeemed the remaining $307.9
million aggregate principal amount of the 2003 Notes on January 14, 2002. We
will record an after-tax extraordinary charge of $4.7 million in the first
quarter of 2002 in connection with this redemption.
The 2011 Notes are guaranteed by substantially all of ISP Chemco's domestic
subsidiaries. The 2011 Notes were issued under an indenture which, among other
things, limits the ability of ISP Chemco and its subsidiaries, except our
accounts receivable subsidiary and certain immaterial subsidiaries, to incur
additional debt, issue preferred stock, incur liens, and pay dividends or make
certain other restricted payments and restricted investments.
In a related transaction, ISP Chemco and those same three subsidiaries which
issued the 2011 Notes also entered into $450.0 million of new senior secured
credit facilities, which we refer to as the "Senior Credit Facilities," the
initial borrowings under which were used to repay amounts outstanding under our
previous credit facility. The Senior Credit Facilities are comprised of a $225.0
million term loan with a maturity of seven years and a $225.0 million revolving
credit facility which will terminate in five years. The revolving credit
facility includes a borrowing capacity not in excess of $50.0 million for
letters of credit. All borrowings under the Senior Credit Facilities are based
on either an alternate base rate (based on the banks' base rate or on the
federal funds rate) or on the eurodollar rate plus a margin based on the ratio
of ISP Chemco's total consolidated debt to EBITDA (as defined in the Senior
Credit Facilities). The average interest rate at December 31, 2001 on borrowings
under the Senior Credit Facilities was 5.3%. The Senior Credit Facilities
require compliance with various financial covenants, including a total debt
leverage maintenance ratio, a senior debt leverage maintenance ratio, an
interest coverage ratio and a minimum adjusted net worth. As of December 31,
2001, $95.3 million of borrowings and $5.6 million of letters of credit were
outstanding under the revolving credit facility. In addition, the Senior Credit
Facilities limit the ability of ISP Chemco and its subsidiaries, except its
accounts receivable subsidiary and certain immaterial subsidiaries, to incur
additional debt, issue preferred stock, incur liens, and pay dividends or make
certain other restricted payments and restricted investments. ISP Chemco and
substantially all of its domestic subsidiaries are designated as obligors under
the Senior Credit Facilities. The obligations of the obligors under the Senior
Credit Facilities are secured by a first-priority security interest in 100% of
the capital stock of ISP Chemco's domestic subsidiaries and 66% of the capital
stock of some of ISP Chemco's foreign subsidiaries, and substantially all of the
real and personal property of the obligors, except for our accounts receivable
subsidiary and certain immaterial subsidiaries.
On December 13, 2001, our wholly owned subsidiary, International Specialty
Holdings, issued $200.0 million principal amount of 10 5/8% Senior Secured Notes
due 2009, which we refer to as the "2009 Notes." The net proceeds
F-7
from this issuance were approximately $194.3 million, of which $125.7 million
were placed in a restricted cash escrow account and used to redeem the remaining
2003 Notes on January 14, 2002. The 2009 Notes are secured by a first priority
lien on all of the outstanding capital stock of ISP Chemco. The 2009 Notes are
structurally subordinated to all liabilities of International Specialty
Holdings' subsidiaries. The 2009 Notes were issued under an indenture which,
among other things, limits the ability of International Specialty Holdings and
its subsidiaries, except unrestricted subsidiaries, to incur additional debt,
issue preferred stock, incur liens, and pay dividends or make certain other
restricted payments and restricted investments. ISP Investco, a wholly owned
subsidiary of International Specialty Holdings, its subsidiaries, our accounts
receivable subsidiary and certain immaterial subsidiaries have been designated
as unrestricted subsidiaries under the indenture related to the 2009 Notes.
As a result of the foregoing factors, cash and cash equivalents increased by
$61.3 million during 2001 to $79.5 million, excluding $296.0 million of trading
and available-for-sale securities and other short-term investments.
As of December 31, 2001, our current maturities of long-term debt, scheduled
to be repaid during 2002, totaled $310.3 million, including the remaining $307.9
million outstanding amount of the 2003 Notes as of December 31, 2001, which were
redeemed on January 14, 2002.
Borrowings by our subsidiaries are subject to the application of certain
financial covenants contained in the Senior Credit Facilities and in the
indentures governing the 2009 and 2011 Notes. As of December 31, 2001, our
subsidiaries were in compliance with those covenants, and the application of
those covenants would not have restricted available borrowings under the Senior
Credit Facilities. See Note 13 to Consolidated Financial Statements.
The Senior Credit Facilities and the indentures governing the 2009 and 2011
Notes contain additional affirmative and negative covenants affecting some of
our subsidiaries, including restrictions on transactions with affiliates,
sale-leaseback transactions, mergers and transfers of all or substantially all
of those subsidiaries' assets. Additionally, in the event the holders of the
2009 Notes were to foreclose on ISP Chemco's capital stock following an event of
default under those notes, the sale of the capital stock would constitute a
change of control of ISP Chemco. Under the indenture governing the 2011 Notes,
if a change of control of ISP Chemco occurs, ISP Chemco is obligated to make an
offer to repurchase the 2011 Notes from their respective holders. The terms of
the Senior Credit Facilities, however, prohibit the repayment of the 2011 Notes
in that event, unless and until such time as the indebtedness under the Senior
Credit Facilities is repaid in full. Failure to make such repayment upon a
change of control would result in a default under the 2011 Notes. A change of
control of ISP Chemco would also result in a default under the Senior Credit
Facilities. In the event of a default under the indenture governing the 2011
Notes or under the Senior Credit Facilities, the holders of the 2011 Notes or
the lenders under the Senior Credit Facilities, as the case may be, could elect
to accelerate the maturity of all the 2011 Notes or the loans under the Senior
Credit Facilities. Those events could have a material adverse effect on our
financial condition and results of operations.
Subject to restrictions in our Senior Credit Facilities and the indentures
governing the 2009 and 2011 Notes, our subsidiaries may incur additional debt
for working capital, capital expenditures, acquisitions and other purposes.
"Other assets" on the Consolidated Balance Sheets increased in 2001 by $45.7
million to $77.6 million, primarily reflecting deferred financing fees of $20.5
million related to the financing transactions discussed above and $15.8 million
of intangible assets related to the acquisitions of the FineTech business and
the biocides business of Degussa Corporation (see Note 9 to Consolidated
Financial Statements). In addition, "Other assets" and "Other liabilities"
increased by $9.0 million each due to a gross-up of environmental insurance
receivables and liabilities to reflect current estimated liabilities and
insurance recoveries (see Note 19 to Consolidated Financial Statements). "Other
liabilities" increased in 2001 by $11.0 million to $72.7 million and also
reflected a $3.8 million accrual related to our Long Term Incentive Plan (see
Note 15 to Consolidated Financial Statements).
Capital expenditures are expected to be approximately $57.0 million in 2002,
primarily for maintenance and compliance expenditures.
In the fourth quarter of 2001, the economic turmoil in Argentina, which
resulted in the devaluation of the Argentinian currency, adversely impacted our
pre-tax earnings by $0.8 million. While payments from our subsidiary in
Argentina to our domestic operations may be adversely affected by current
banking regulations in
F-8
Argentina, we do not believe that this situation will have a material impact on
our liquidity, cash flows or results of operations. Sales by our subsidiary in
Argentina were approximately $3.0 million in 2001.
For information with respect to income taxes, see Note 8 to Consolidated
Financial Statements.
We do not believe that inflation has had an effect on our results of
operations during the past three years. However, there can be no assurance that
our business will not be affected by inflation in the future.
We have received site designation for the construction of a hazardous waste
treatment, storage and disposal facility at our Linden, New Jersey property and
have received approval from the New Jersey Turnpike Authority for a direct
access ramp extension from the New Jersey Turnpike to the site. If we are
successful in securing the necessary permits to construct and operate the
hazardous waste facility and decide to proceed with this project, we would
develop and operate the facility in a separate subsidiary, either on its own or
in a joint venture with a suitable partner. We estimate that the cost of
constructing the facility will be approximately $100 million and, if approved,
the facility is anticipated to be in operation three years after commencement of
construction. We anticipate utilizing internally generated cash and/or seeking
project or other independent financing for this project. Accordingly, we would
not expect such facility to impact materially our liquidity or capital
resources. We are also investigating other development opportunities at this
site consistent with a plan by the County of Union to re-develop the Tremley
Point area of Linden. We expect that related planning and evaluation efforts
will continue through 2002.
We, together with other companies, are a party to a variety of proceedings
and lawsuits involving environmental matters. See Note 19 to Consolidated
Financial Statements for further information.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Our investment strategy is to seek returns in excess of money market rates
on our available cash while minimizing market risks. There can be no assurance
that we will be successful in implementing such a strategy. We invest primarily
in international and domestic arbitrage and securities of companies involved in
acquisition or reorganization transactions, including at times, common stock
short positions which are offsets against long positions in securities which are
expected, under certain circumstances, to be exchanged or converted into the
short positions. From time to time, we invest in securities of companies that we
consider undervalued. With respect to our equity positions, we are exposed to
the risk of market loss. See Notes 2 and 3 to Consolidated Financial Statements.
We enter into financial instruments in the ordinary course of business in
order to manage our exposure to market fluctuations in interest rates, foreign
currency rates and on our short-term investments. The financial instruments we
employ to reduce market risk include swaps, forwards and other hedging
instruments. The financial instruments are subject to strict internal controls
and their use is primarily confined to the hedging of our debt, foreign currency
exposure and short-term investment portfolio. The counterparties to these
financial instruments are major financial institutions with high credit
standings. The amounts subject to credit risk are generally limited to the
amounts, if any, by which the counterparties' obligations exceed our
obligations. We control credit risk through credit approvals, limits and
monitoring procedures. We do not anticipate nonperformance by counterparties to
these instruments.
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
(MILLIONS)
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------ -------- ------
Interest rate financial instruments ....... $100.0 $(0.8) $100.0 $(3.1)
Foreign currency financial instruments .... $ 20.9 $ 0 $ 17.7 $ 0
Equity-related financial instruments ...... $ 40.1 $ 0 $ 20.7 $ 0
All of the financial instruments in the above table have a maturity of less
than one year.
We enter into forward foreign exchange instruments in order to hedge a
portion of both our borrowings denominated in foreign currency and transactions
related to the operations of our foreign subsidiaries. Forward contract
agreements require us and the counterparty to exchange fixed amounts of U.S.
dollars for fixed amounts
F-9
of foreign currency on specified dates. All forward contracts are in major
currencies with highly liquid markets and mature within one year. Hedging
strategies are approved by senior management before they are implemented.
As of December 31, 2000 and 2001, the U.S. dollar equivalent notional value
of outstanding forward foreign exchange contracts was $20.9 and $17.7 million,
respectively. The U.S. dollar equivalent notional value of foreign exchange
contracts outstanding as of December 31, 2000 and 2001, which were entered into
as a hedge of intercompany loans, was $17.0 and $17.7 million, respectively,
representing 100% of our foreign currency exposure with respect to such loans.
We enter into equity-related financial instruments as a means to manage our
exposure to market fluctuations on our short-term investments. As of December
31, 2001, the value of equity-related long contracts was $13.5 million, and the
value of equity-related short contracts was $7.2 million, both of which are
marked-to-market each month, with unrealized gains and losses included in the
results of operations. As such, there is no economic cost at December 31, 2001
to terminate these instruments and therefore the fair market value is zero.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement.
We adopted SFAS No. 133 as of January 1, 2001. Accounting for interest rate
swaps and foreign exchange forward contracts held by us is affected by
implementation of this standard. The earnings impact of the transition
adjustments related to the initial adoption of the standard was an after-tax
loss of $0.4 million, which was recorded in the first quarter of 2001 as the
cumulative effect of a change in accounting principle.
The Senior Credit Facilities include a $225.0 million term loan. We have
designated interest rate swaps, with a total notional amount of $100 million, as
a hedge of our exposure to changes in the eurodollar rate under the term loan.
The interest rate swaps are structured to receive interest based on the
eurodollar rate and pay interest on a fixed rate basis. A cash flow hedging
relationship has been established whereby the interest rate swaps hedge the risk
of changes in the eurodollar rate related to borrowings against the term loan.
The interest rate swaps hedge exposure to changes in the eurodollar rate through
July 2002.
On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and eliminates the pooling method of
accounting. SFAS No. 141 will not have an impact on our business since we have
historically accounted for all business combinations using the purchase method
of accounting. With the adoption of SFAS No. 142, goodwill will no longer be
subject to amortization over its estimated useful life. However, goodwill will
be subject to at least an annual assessment for impairment and more frequently
if circumstances indicate a possible impairment. Companies must perform a
fair-value-based goodwill impairment test. In addition, under SFAS No. 142, an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged.
Intangible assets will be amortized over their useful lives. SFAS No. 142 is
effective as of January 1, 2002. On an annualized basis, our net income will
increase by approximately $16.6 million, unless any impairment charges are
necessary.
* * *
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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
F-10
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 Annual Report on Form 10-K 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.
F-11
INTERNATIONAL SPECIALTY PRODUCTS INC.
SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial data. On July 15,
1998, Old ISP merged with and into ISP Holdings. In connection with the merger,
ISP Holdings changed its name to International Specialty Products Inc. The
financial information presented herein for periods prior to the merger of Old
ISP and ISP Holdings represent the results of the former ISP Holdings. In
October 1999, we sold the stock of our filter products subsidiaries (see Note 7
to Consolidated Financial Statements). Accordingly, the results of operations
and assets and liabilities of the filter products subsidiaries have been
classified as a "Discontinued Operation" within the Selected Financial Data
below for all periods presented prior to 2000.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ------------- ----------- ------------- -----------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Net Sales ........................... $ 708,971 $ 784,616 $ 787,356 $ 783,941 $ 787,216
Gross profit ........................ 295,199 321,105 304,959 269,054 286,379
Operating income .................... 137,689 66,177 145,978 81,353 112,589
Interest expense .................... 73,612 75,564 78,552 81,166 86,198
Income from continuing operations
before income taxes ............... 104,219 27,168 76,454 144,975 957
Income from continuing operations
before cumulative effect of
change in accounting principle .... 51,702 2,779 49,632 94,106 607
Net income .......................... 54,005 4,812 74,930 94,106 167
Income from continuing operations
per common share:
Basic ............................. $ .96 $ .05 $ .72 $ 1.38 $ --
Diluted ........................... $ .96 $ .05 $ .72 $ 1.38 $ --
OTHER DATA:
Depreciation ........................ $ 41,236 $ 49,272 $ 48,590 $ 51,293 $ 53,120
Amortization of goodwill and
intangibles ....................... 13,294 15,025 16,344 16,192 17,229
Capital expenditures and acquisitions 67,674 163,850 108,955 58,382 101,375
DECEMBER 31,
---------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ------------- ----------- ------------- -----------
(THOUSANDS)
BALANCE SHEET DATA:
Total working capital ............... $ 322,080 $ 406,654 $ 438,083 $ 339,751 $ 564,516
Total assets ........................ 1,483,977 1,763,870 1,835,308 1,960,284 2,172,568
Long-term debt less current
maturities ........................ 798,762 896,095 820,141 524,780 919,557
Stockholders' equity ................ 261,841 501,723 587,261 691,335 604,057
F-12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To International Specialty Products Inc.:
We have audited the accompanying consolidated balance sheets of
International Specialty Products Inc. (a Delaware corporation) and subsidiaries
as of December 31, 2000 and 2001, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, appearing on
pages F-14 to F-46 of this Form 10-K, present fairly, in all material respects,
the financial position of International Specialty Products Inc. and subsidiaries
as of December 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule appearing on page S-1 of
this Form 10-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 27, 2002
F-13
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 2000 2001
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ........................................................... $ 787,356 $ 783,941 $ 787,216
Cost of products sold ............................................... (482,397) (514,887) (500,837)
Selling, general and administrative ................................. (150,768) (157,080) (158,632)
(Provision) benefit for restructuring ............................... (410) (14,429) 471
Gain on insurance settlement ........................................ -- -- 1,600
Gain on sale of assets .............................................. 8,541 -- --
Amortization of goodwill and intangibles ............................ (16,344) (16,192) (17,229)
-------- -------- --------
Operating income .................................................... 145,978 81,353 112,589
Interest expense .................................................... (78,552) (81,166) (86,198)
Gain on contract settlement ......................................... -- 3,450 --
Other income (expense), net ......................................... 9,028 141,338 (25,434)
-------- -------- --------
Income from continuing operations before income taxes ............... 76,454 144,975 957
Income taxes ........................................................ (26,822) (50,869) (350)
-------- -------- --------
Income from continuing operations ................................... 49,632 94,106 607
-------- -------- --------
Discontinued operation:
Income from discontinued operation, net of income taxes ........... 1,769 -- --
Gain on sale of discontinued operation, net of income taxes
of $12,725 ...................................................... 23,529 -- --
-------- -------- --------
Income from discontinued operation .................................. 25,298 -- --
-------- -------- --------
Income before cumulative effect of change in accounting principle ... 74,930 94,106 607
Cumulative effect of change in accounting principle, net of income
tax benefit of $216 ............................................. -- -- (440)
--------- --------- ---------
Net income .......................................................... $ 74,930 $ 94,106 $ 167
========= ========= =========
Earnings per common share:
Basic:
Income from continuing operations ............................... $ .72 $ 1.38 $ .01
Income from discontinued operation .............................. .37 -- --
Cumulative effect of accounting change .......................... -- -- (.01)
-------- -------- ---------
Net income ...................................................... $ 1.09 $ 1.38 $ --
========= ========= =========
Diluted:
Income from continuing operations ............................... $ .72 $ 1.38 $ .01
Income from discontinued operation .............................. .37 -- --
Cumulative effect of accounting change .......................... -- -- (.01)
-------- -------- --------
Net income ...................................................... $ 1.09 $ 1.38 $ --
========= ========= =========
Weighted average number of common and
common equivalent shares outstanding:
Basic ............................................................. 68,536 68,096 65,772
========= ========= =========
Diluted ........................................................... 68,685 68,096 65,853
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-14
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
2000 2001
---------- -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents ........................................................ $ 18,181 $ 79,509
Investments in trading securities ................................................ 303,103 54,437
Investments in available-for-sale securities ..................................... 222,327 239,273
Other short-term investments ..................................................... 19,129 2,299
Restricted cash .................................................................. -- 307,866
Accounts receivable, trade, less reserve of
$4,911 and $5,472 .............................................................. 89,173 86,574
Accounts receivable, other ....................................................... 19,596 20,357
Receivable from related parties, net ............................................. 11,624 9,009
Inventories ...................................................................... 150,948 190,582
Other current assets ............................................................. 36,928 41,564
----------- -----------
Total Current Assets ........................................................... 871,009 1,031,470
Property, plant and equipment, net ................................................. 562,973 560,844
Excess of cost over net assets of businesses acquired, net of accumulated
amortization of $165,880 and $182,526 ............................................ 494,386 502,607
Other assets ....................................................................... 31,916 77,647
----------- -----------
Total Assets ....................................................................... $ 1,960,284 $ 2,172,568
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt .................................................................. $ 143,682 $ 143
Current maturities of long-term debt ............................................. 224,419 310,265
Accounts payable ................................................................. 58,238 49,088
Accrued liabilities .............................................................. 91,309 97,659
Income taxes ..................................................................... 13,610 9,799
----------- -----------
Total Current Liabilities ...................................................... 531,258 466,954
----------- -----------
Long-term debt less current maturities ............................................. 524,780 919,557
----------- -----------
Deferred income taxes .............................................................. 151,181 109,297
----------- -----------
Other liabilities .................................................................. 61,730 72,703
----------- -----------
Commitments and Contingencies ......................................................
Stockholders' Equity:
Preferred stock, $.01 par value per share; 20,000,000 shares authorized:
no shares issued ............................................................... -- --
Common stock, $.01 par value per share; 300,000,000 shares authorized:
69,546,456 shares issued ....................................................... 695 695
Additional paid-in capital ....................................................... 485,629 487,156
Unearned compensation-- restricted stock awards .................................. (1,287) (1,166)
Treasury stock, at cost-- 3,135,192 and 4,831,939 shares ......................... (19,631) (35,621)
Retained earnings ................................................................ 213,928 214,095
Accumulated other comprehensive income (loss) .................................... 12,001 (61,102)
----------- -----------
Total Stockholders' Equity ..................................................... 691,335 604,057
----------- -----------
Total Liabilities and Stockholders' Equity ......................................... $ 1,960,284 $ 2,172,568
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-15
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
----------- --------- ----------
(THOUSANDS)
Cash and cash equivalents, beginning of year .............................. $ 23,130 $ 23,309 $ 18,181
--------- --------- ---------
Cash provided by (used in) operating activities:
Net income .............................................................. 74,930 94,106 167
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle ................... -- -- 440
Income from discontinued operation .................................... (25,298) -- --
Gain on sale of assets ................................................ (8,541) -- --
Provision (benefit) for restructuring ................................. 410 14,429 (471)
Depreciation .......................................................... 48,590 51,293 53,120
Amortization of goodwill and intangibles .............................. 16,344 16,192 17,229
Deferred income taxes ................................................. 6,064 26,652 (8,738)
Unrealized (gains) losses on securities and
other short-term investments ........................................ (6,778) (7,293) 44,239
Increase in working capital items ....................................... (11,851) (4,087) (48,073)
Purchases of trading securities ......................................... (209,649) (528,862) (509,914)
Proceeds from sales of trading securities ............................... 225,291 395,434 696,513
Proceeds (repayments) from sale of
accounts receivable ................................................. 5,558 (2,485) (423)
(Increase) decrease in other assets ..................................... (513) 5,807 1,437
Increase (decrease) in other liabilities ................................ 503 115 (1,494)
Other decreases in property, plant and equipment ........................ 5,875 10,746 6,724
(Increase) decrease in receivable from related parties .................. (9,132) 2,600 2,615
Change in cumulative translation adjustment ............................. (18,035) (8,268) (5,180)
Other, net .............................................................. 1,386 5,276 6,100
--------- --------- ---------
Net cash provided by continuing operations .............................. 95,154 71,655 254,291
Net cash provided by discontinued operation ............................. 5,293 -- --
--------- --------- ---------
Net cash provided by operating activities ................................. 100,447 71,655 254,291
--------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions ................................... (108,955) (58,382) (101,375)
Proceeds from sale of assets ............................................ 11,533 -- --
Proceeds from sale of discontinued operation ............................ 62,000 -- --
Purchases of available-for-sale securities .............................. (432,782) (479,401) (309,469)
Purchases of held-to-maturity securities ................................ (3,459) -- --
Purchases of other short-term investments ............................... (5,600) -- --
Proceeds from sales of available-for-sale securities .................... 395,659 495,096 212,006
Proceeds from held-to-maturity securities ............................... 15,746 -- --
Proceeds from sales of other short-term investments ..................... 14,716 27,795 12,765
--------- --------- ---------
Net cash used in investing activities ..................................... (51,142) (14,892) (186,073)
--------- --------- ---------
Cash provided by (used in) financing activities:
Increase (decrease) in short-term debt .................................. (6,866) 62,483 (143,539)
Proceeds from issuance of debt .......................................... -- -- 828,332
Increase (decrease) in borrowings under revolving credit facility ....... 162,400 (99,000) (100,750)
Repayments of long-term debt ............................................ (200,378) (10,615) (245,982)
Increase in restricted cash ............................................. -- -- (307,866)
Financing fees and expenses ............................................. -- -- (20,470)
Repurchases of common stock ............................................. (4,987) (15,458) (17,610)
Other, net .............................................................. 2,037 557 1,491
--------- --------- ---------
Net cash used in financing activities ..................................... (47,794) (62,033) (6,394)
--------- --------- ---------
Effect of exchange rate changes on cash ................................... (1,332) 142 (496)
--------- --------- ---------
Net change in cash and cash equivalents ................................... 179 (5,128) 61,328
--------- --------- ---------
Cash and cash equivalents, end of year .................................... $ 23,309 $ 18,181 $ 79,509
========= ========= =========
F-16
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
-------- -------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Effect on cash from (increase) decrease in working capital items*:
Accounts receivable .................................................... $(17,276) $ (279) $ 3,262
Inventories ............................................................ 7,627 (4,459) (34,466)
Other current assets ................................................... 156 279 (336)
Accounts payable ....................................................... 3,972 (5,614) (9,385)
Accrued liabilities .................................................... (1,616) (1,761) (3,341)
Income taxes ........................................................... (4,714) 7,747 (3,807)
-------- -------- ---------
Net effect on cash from increase in working capital items $(11,851) $ (4,087) $ (48,073)
======== ======== =========
Cash paid during the period for:
Interest (net of amount capitalized) ................................... $ 83,948 $ 80,338 $ 71,132
Income taxes paid ...................................................... 23,957 15,289 13,130
Acquisition of Kelco Alginates business, net of $269 cash acquired:
Fair market value of assets acquired ................................... $ 41,619
Purchase price of acquisition** ........................................ 39,731
--------
Liabilities assumed .................................................... $ 1,888
========
Acquisition of FineTech Ltd.:
Fair market value of assets acquired ................................... $ 26,575
Purchase price of acquisition .......................................... 22,450
---------
Liabilities assumed .................................................... $ 4,125
=========
Acquisition of industrial biocides business:
Fair market value of assets acquired ................................... $ 25,879
Purchase price of acquisition .......................................... 25,879
---------
Liabilities assumed .................................................... $ --
=========
----------
* Working capital items exclude cash and cash equivalents, short-term
investments, restricted cash, short-term debt and receivables from related
parties. Working capital acquired in connection with acquisitions is
reflected within "Capital expenditures and acquisitions." The effects of
reclassifications between noncurrent and current assets and liabilities are
excluded from the amounts shown. In addition, the increase in accounts
receivable shown above does not reflect the cash proceeds from the sale of
the Company's domestic trade accounts receivable (see Note 10); such
proceeds are reflected separately in cash from operating activities.
** The Company received a cash arbitration award in 2000 of $4.9 million which
lowered the purchase price of the acquisition to $34.8 million.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-17
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL STOCK,
ADDITIONAL ACCUMULATED
PAID-IN CAPITAL TREASURY OTHER
AND UNEARNED STOCK COMPREHENSIVE RETAINED COMPREHENSIVE
COMPENSATION AT COST INCOME (LOSS) EARNINGS INCOME (LOSS)
------------ ----------- ----------- --------- -----------
(THOUSANDS)
Balance, December 31, 1998 ............................. $489,980 $ (8,388) $ (24,761) $ 44,892
Comprehensive income, year ended
December 31, 1999:
Net income ......................................... -- -- -- 74,930 $ 74,930
---------
Other comprehensive income, net of tax:
Unrealized holding gains, net of income taxes
of $12,054 ....................................... -- -- 27,949 -- 27,949
Less: Reclassification adjustment for gains included
in net income, net of income taxes of $2,544 ..... -- -- 2,068 -- 2,068
---------- ---------
Unrealized gains on available-for-sale securities .. -- -- 25,881 -- 25,881
---------- ---------
Translation adjustment ............................. -- -- (19,367) -- (19,367)
Less: Reclassification adjustment for translation
adjustment included in net income,
net of income tax effect of $521 ................. -- -- (1,483) -- (1,483)
---------- ---------
Net translation adjustment ......................... -- -- (17,884) -- (17,884)
Minimum pension liability adjustment ............... -- -- 4,715 -- 4,715
---------
Comprehensive income ................................. $ 87,642
=========
Repurchases of common stock -- 629,000 shares ........ -- (4,987) -- --
Issuances under stock option plan -- 291,946 shares.. -- 2,931 -- --
Excess of cost of treasury stock issued over proceeds (890) -- -- --
Stock issued pursuant to executive
purchase agreement-- 318,599 shares .................. (3,100) 3,100 -- --
Effect of issuances of stock options as incentives ... 842 -- -- --
--------- --------- ---------- --------
Balance, December 31, 1999 ............................. $ 486,832 $ (7,344) $(12,049) $119,822
Comprehensive income, year ended
December 31, 2000:
Net income ......................................... -- -- -- 94,106 $ 94,106
---------
Other comprehensive income, net of tax:
Unrealized holding gains, net of income
taxes of $71,382 ................................. -- -- 142,995 142,995
Less: Reclassification adjustment for gains included
in net income, net of income taxes of $53,430 .... -- -- 110,819 -- 110,819
---------- ---------
Unrealized gains on available-for-sale securities .. -- -- 32,176 -- 32,176
Translation adjustment ............................. -- -- (8,126) -- (8,126)
---------
Comprehensive income ................................. $ 118,156
=========
Repurchases of common stock -- 2,772,938 shares -- (15,458) -- --
Issuances under stock option plan -- 86,945 shares -- 831 -- --
Excess of cost of treasury stock issued over proceeds (274) -- -- --
Issued for executive stock
bonus awards -- 75,000 shares ..................... (275) 730 -- --
Loans to executives .................................. (167) -- -- --
Stock issued for executive restricted stock plans--
230,000 shares ..................................... (323) 1,610 -- --
Unearned compensation related to restricted
stock awards ....................................... (1,287) -- -- --
Effect of issuances of stock options as incentives ... 531 -- -- --
--------- -------- ---------- ---------
F-18
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-- (CONTINUED)
CAPITAL STOCK,
ADDITIONAL ACCUMULATED
PAID-IN CAPITAL TREASURY OTHER
AND UNEARNED STOCK COMPREHENSIVE RETAINED COMPREHENSIVE
COMPENSATION AT COST INCOME (LOSS) EARNINGS INCOME (LOSS)
------------ ----------- ------------- --------- -----------
(THOUSANDS)
Balance, December 31, 2000 ........................... $485,037 $(19,631) $ 12,001 $213,928
Comprehensive income (loss), year ended
December 31, 2001:
Net income ........................................ -- -- -- 167 $ 167
--------
Other comprehensive income (loss), net of tax:
Unrealized holding losses, net of income
tax benefit of $43,928 .......................... -- -- (82,084) -- (82,084)
Less: Reclassification adjustment for losses
included in net income, net of income
tax benefit of $7,985 ........................... -- -- (15,621) -- (15,621)
------- --------
Unrealized losses on available-for-sale securities. -- -- (66,463) -- (66,463)
------- ---------
Change in unrealized losses on derivative hedging
instruments -- cash flow hedges:
Net derivative losses, net of tax effect of $1,189.. -- -- (2,198) -- (2,198)
Less: Reclassification adjustment for losses
included in net income, net of tax effect
of $667 ......................................... -- -- (1,234) -- (1,234)
-------- ---------
Unrealized losses on derivative hedging
instruments ..................................... -- -- (964) -- (964)
--------- ---------
Translation adjustment ............................ -- -- (5,676) -- (5,676)
--------
Comprehensive loss .................................. $(72,936)
=========
Repurchases of common stock -- 1,937,800 shares ..... -- (17,610) --
Issuances under stock option plan -- 207,998 shares . -- 1,392 --
Excess of proceeds of treasury stock issued over cost 98 -- -- --
Issued for executive stock bonus award --
13,055 shares ..................................... 18 82 -- --
Change in loans to executives ....................... 7 -- -- --
Amortization of executive stock loan ................ 762 -- -- --
Stock issued for executive restricted stock plan--
20,000 shares ..................................... 33 146 -- --
Unearned compensation related to restricted
stock awards ...................................... (179) -- -- --
Amortization of restricted stock awards
compensation ...................................... 300 -- -- --
Effect of issuances of stock options as incentives 609 -- -- --
--------- ------- -------- --------
Balance, December 31, 2001 ............................ $486,685 $(35,621) $ (61,102) $214,095
========= ======== ========= ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-19
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. FORMATION OF THE COMPANY, MERGER OF INTERNATIONAL SPECIALTY PRODUCTS
INC. INTO ISP HOLDINGS INC. AND CORPORATE RESTRUCTURING
On July 15, 1998, International Specialty Products Inc. ("Old ISP") merged
(the "Merger") with and into ISP Holdings Inc. ("ISP Holdings"). In connection
with the Merger, ISP Holdings changed its name to International Specialty
Products Inc. (the "Company"). In the Merger, each outstanding share of Old
ISP's common stock, other than those held by ISP Holdings, was converted into
one share of common stock of the Company, and the outstanding shares of Old
ISP's common stock which were held by ISP Holdings were converted into an
aggregate of 53,833,333 shares (or approximately 78%) of the outstanding shares
of common stock of the Company.
International Specialty Holdings Inc. ("Holdings"), a wholly owned
subsidiary of the Company, was formed on June 5, 2001 in connection with the
corporate restructuring discussed below. ISP Opco Holdings Inc., which changed
its name on June 5, 2001 to ISP Chemco Inc. ("ISP Chemco"), a wholly owned
subsidiary of Holdings, was formed on June 24, 1998 in connection with the
Merger and 100 shares of its common stock were issued to the Company. At the
time of the Merger, substantially all of the assets and liabilities of Old ISP
were transferred to ISP Chemco. In connection with the financing transactions
discussed in Note 13, the Company completed a corporate restructuring (the
"Restructuring") of its business in June 2001 in order to separate its
investment assets from its specialty chemicals business. As part of the
Restructuring, ISP Chemco transferred net assets of approximately $235.7
million, consisting of all of its investment assets, totaling $336.7 million,
associated short-term debt and the outstanding stock of certain subsidiaries to
Holdings, which, in turn, transferred those assets to its newly formed
subsidiary, ISP Investco LLC ("ISP Investco"). After completing these
transactions, ISP Chemco's assets consist solely of those related to the
Company's specialty chemicals business.
The Company is engaged principally in the manufacture and sale of a wide
range of specialty chemicals and mineral products. See Notes 17 and 18 for a
description of and financial information relating to the Company's business
segments and foreign and domestic operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All subsidiaries are consolidated and intercompany transactions have been
eliminated.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates. Actual results could differ from those estimates. In the
opinion of management, the financial statements herein contain all adjustments
necessary to present fairly the financial position and the results of operations
and cash flows of the Company for the periods presented. The Company has a
policy to review the recoverability of long-lived assets and identify and
measure any potential impairments. The Company does not anticipate any changes
in management estimates that would have a material impact on operations,
liquidity or capital resources.
SHORT-TERM INVESTMENTS
For securities classified as "trading" (including short positions),
unrealized gains and losses are reflected in the results of operations. For
securities classified as "available-for-sale," unrealized gains and losses, net
of income tax effect, are included in a separate component of stockholders'
equity, "Accumulated other comprehensive income (loss)," and amounted to $34.0
and $(32.4) million as of December 31, 2000 and 2001, respectively. The Company
periodically reviews available-for-sale securities for other than temporary
impairment when the cost basis of a security exceeds the market value.
F-20
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
"Other short-term investments" are investments in limited partnerships which
are accounted for by the equity method. Gains and losses are reflected in "Other
income (expense), net." Liquidation of partnership interests generally require a
30 to 45 day notice period.
Cash and cash equivalents include cash on deposit and debt securities
purchased with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for a substantial portion of the
Company's domestic inventories. All other inventories are determined principally
based on the FIFO (first-in, first-out) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line method
based on the estimated economic lives of the assets. The Company uses an
economic life of 10-20 years for land improvements, 40 years for buildings, and
3-20 years for machinery and equipment, which includes furniture and fixtures.
Certain interest charges are capitalized during the period of construction as
part of the cost of property, plant and equipment.
FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange instruments in order to
hedge a portion of both its borrowings denominated in foreign currency and
transactions related to the operations of foreign subsidiaries. All forward
contracts are reflected on the Company's Consolidated Balance Sheets at their
fair market value.
Forward contract agreements require the Company and the counterparty to
exchange fixed amounts of U.S. dollars for fixed amounts of foreign currency on
specified dates. The market value of such contracts varies with changes in the
market exchange rates. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the forward contract agreements.
However, the Company does not anticipate nonperformance by the counterparties.
The Company does not generally require collateral or other security to support
these financial instruments.
As of December 31, 2000 and 2001, the U.S. dollar equivalent notional value
of outstanding forward foreign exchange contracts was $20.9 and $17.7 million,
respectively. All forward contracts are in major currencies with highly liquid
markets and mature within one year. The Company uses quoted market prices
obtained from major financial institutions to determine the market value of its
outstanding forward exchange contracts. In addition, the U.S. dollar equivalent
notional value of foreign exchange contracts outstanding as of December 31, 2000
and 2001, which were entered into as a hedge of intercompany loans, was $17.0
and $17.7 million, respectively, representing 100% of the Company's foreign
currency exposure with respect to such loans. See "Derivatives and Hedging"
below.
The Company continually monitors its risk from the effects of foreign
currency fluctuations on its operations and on the derivative products used to
hedge its risk. The Company utilizes real-time, on-line foreign exchange data
and news as well as evaluation of economic information provided by financial
institutions. Mark-to-market valuations are made on a regular basis. Hedging
strategies are approved by senior management before being implemented.
DERIVATIVES AND HEDGING
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in
F-21
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement.
The Company adopted SFAS No. 133 as of January 1, 2001. Accounting for
interest rate swaps and foreign exchange forward contracts held by the Company
is affected by implementation of this standard. The earnings impact of the
transition adjustments related to the initial adoption of the standard was an
after-tax loss of approximately $0.4 million, which was recorded in the first
quarter of 2001 as the cumulative effect of a change in accounting principle.
As discussed in Note 13, in June 2001, ISP Chemco Inc. ("ISP Chemco"), an
indirect wholly owned subsidiary of the Company, entered into $450.0 million of
Senior Credit Facilities, which include a $225.0 million term loan. The Company
has designated interest rate swaps, with a total notional amount of $100
million, as a hedge of its exposure to changes in the eurodollar rate under the
term loan. The interest rate swaps are structured to receive interest based on
the eurodollar rate and pay interest on a fixed rate basis. A cash flow hedging
relationship has been established whereby the interest rate swaps hedge the risk
of changes in the eurodollar rate related to borrowings against the term loan.
The interest rate swaps hedge exposure to changes in the eurodollar rate through
July 2002.
At December 31, 2001, the fair value of the interest rate swaps was $3.1
million and is included within "Accrued liabilities" on the Company's
Consolidated Balance Sheet. During 2001, $1.6 million related to the interest
rate swaps was reclassified and charged against interest expense. In addition,
$0.3 million, representing hedge ineffectiveness, was also charged against
interest expense. As of December 31, 2001, included in Accumulated Other
Comprehensive Loss is a $1.5 million pre-tax loss related to these interest rate
swaps.
Derivatives held by the Company not designated as hedging instruments
include total return equity swaps and forward foreign exchange instruments.
These derivatives are being marked-to-market each period, with unrealized gains
and losses included in results of operations. The total return equity swaps are
held for investment income purposes. Foreign exchange forward contracts are held
to offset exposure to changes in exchange rates affecting intercompany loans.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates. Income and expenses are translated at average exchange rates
prevailing during the year. The effects of these translation adjustments are
reported in a separate component of stockholders' equity, "Accumulated other
comprehensive income (loss)," and amounted to $(22.0) and $(27.7) million as of
December 31, 2000 and 2001, respectively. Exchange gains and losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved, principally related to the revaluation of payables and
receivables, are included in "Other income (expense), net" and amounted to $4.9,
$(1.7) and $(4.2) million in 1999, 2000 and 2001, respectively.
NEW ACCOUNTING STANDARDS
On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and eliminates the pooling method of
accounting. SFAS No. 141 will not have an impact on the Company's business since
the Company has historically accounted for all business combinations using the
purchase method of accounting. With the adoption of SFAS No. 142, goodwill will
no longer be subject to amortization over its estimated useful life. However,
goodwill will be subject to at least an annual assessment for impairment and
more frequently if circumstances indicate a possible impairment. Companies must
perform a fair-value-based goodwill impairment test. In addition, under SFAS No.
142, an
F-22
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged.
Intangible assets will be amortized over their useful lives. SFAS No. 142 is
effective as of January 1, 2002. On an annualized basis, the Company's net
income will increase by approximately $16.6 million, unless any impairment
charges are necessary.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED ("GOODWILL")
Goodwill, which arose principally from the 1989 management-led buyout of the
predecessor company to the Company's former parent company, G-I Holdings, and as
a result of the Merger (see Note 1), is amortized on the straight-line method
over a period of approximately 40 years. The Company believes that the goodwill
is recoverable. To determine if goodwill is recoverable, the Company compares
the net carrying amount to undiscounted projected cash flows of the underlying
businesses to which the goodwill pertains. If goodwill is not recoverable, the
Company would record an impairment based on the difference between the net
carrying amount and fair value. See "New Accounting Standards" above.
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped to the customer.
SHIPPING AND HANDLING COSTS
Shipping and handling costs included in "Selling, general and
administrative" expenses amounted to $24.8, $30.3 and $29.1 million for 1999,
2000 and 2001, respectively.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized to expense over the life of the related
debt. Unamortized debt issuance costs of $3.8 and $21.3 million are included in
"Other assets" in the Consolidated Balance Sheets at December 31, 2000 and 2001,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred and
amounted to $23.0, $25.6 and $25.4 million for 1999, 2000 and 2001,
respectively.
EARNINGS PER COMMON SHARE
Basic Earnings per Share are calculated based on the total weighted average
number of shares of the Company's common stock outstanding during the period.
Diluted Earnings per Share for periods subsequent to the Merger give effect to
all potential dilutive common shares outstanding during the period under the
Company's stock option plans (see Note 15).
ENVIRONMENTAL LIABILITY
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters. The Company estimates
that its liability with respect to such environmental matters, and certain other
environmental compliance expenses, as of December 31, 2001, is $26.6 million,
before reduction for insurance recoveries reflected on its Consolidated Balance
Sheet of $21.7 million. The Company's liability is reflected on an undiscounted
basis. The gross environmental liability is included within "Accrued
liabilities" and "Other liabilities," and the estimated recoveries are included
within "Other assets." See Note 19 for further discussion with respect to
environmental liabilities and estimated insurance recoveries.
F-23
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive Income (Loss) includes net income, unrealized gains and losses
from investments in available-for-sale securities, net of income tax effect,
unrealized gains and losses from derivative hedging instruments, net of income
tax effect, foreign currency translation adjustments, and minimum pension
liability adjustments. The Company has chosen to disclose Comprehensive Income
(Loss) in the Consolidated Statements of Stockholders' Equity.
Changes in the components of "Accumulated other comprehensive income (loss)"
for the years 1999, 2000 and 2001 are as follows:
UNREALIZED UNREALIZED CUMULATIVE
GAINS (LOSSES) LOSSES ON FOREIGN MINIMUM ACCUMULATED
ON AVAILABLE- DERIVATIVE CURRENCY PENSION OTHER
FOR-SALE HEDGING TRANSLATION LIABILITY COMPREHENSIVE
SECURITIES INSTRUMENTS ADJUSTMENT ADJUSTMENT INCOME (LOSS)
---------- ------------ ----------- ----------- --------------
Balance, December 31, 1998 $(24,037) $ -- $ 3,991 $ (4,715) $(24,761)
Change for the year 1999 25,881 -- (17,884) 4,715 12,712
-------- ------- -------- -------- --------
Balance, December 31, 1999 $ 1,844 $ -- $(13,893) $ -- $(12,049)
Change for the year 2000 32,176 -- (8,126) -- 24,050
-------- ------- -------- -------- --------
Balance, December 31, 2000 $ 34,020 $ -- $(22,019) $ -- $ 12,001
Change for the year 2001 (66,463) (964) (5,676) -- (73,103)
-------- ------- -------- -------- --------
Balance, December 31, 2001 $(32,443) $ (964) $(27,695) $ -- $(61,102)
======== ======= ======== ======== ========
RECLASSIFICATIONS
Certain amounts in the 1999 and 2000 Consolidated Financial Statements have
been reclassified to conform to the 2001 presentation.
NOTE 3. SHORT-TERM INVESTMENTS
At December 31, 1999, the Company held an investment of $149.5 million
(based on market value) in Life Technologies, Inc. ("Life Technologies"), a
75%-owned subsidiary of Dexter Corporation ("Dexter"). Such investment
represented approximately 14% of the outstanding common stock of Life
Technologies at December 31, 1999. At December 31, 1999, the Company also held
an investment of $91.4 million (based on market value) in Dexter, representing
approximately 10% of the outstanding common stock of Dexter at that date. Dexter
and Life Technologies were acquired by Invitrogen Corporation ("Invitrogen") in
a merger completed in September 2000. The Company sold its shares of Dexter
common stock prior to the merger and also sold all of the Invitrogen common
stock that it received in the merger for its Life Technologies shares, resulting
in net gains, after expenses, in 2000 of $127.6 million. The total gain related
to these investments was approximately $150 million, prior to expenses, of which
a total of $16.4 million was recognized in 1998 and 1999.
The total market value of available-for-sale securities at December 31, 2001
was $239.3 million, consisting of $226.9 million of equity securities and $12.4
million of debt securities with maturities of between five and ten years.
Included in available-for-sale securities at December 31, 2001 is a $107.2
million investment in Hercules Incorporated ("Hercules"). Such investment
represented approximately 9.9% of the outstanding common stock of Hercules at
December 31, 2001.
F-24
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 3. SHORT-TERM INVESTMENTS -- (CONTINUED)
"Other income (expense), net," includes total investment income (losses) of
$16.1, $157.1 and $(9.4) million in 1999, 2000 and 2001, respectively. The
investment income (losses) consist of $17.9, $163.3 and $(10.3) million of net
realized and certain unrealized gains (losses) on securities in 1999, 2000 and
2001, respectively, and $(1.8), $(6.2) and $0.9 million, respectively, of net
interest, dividends and investment-related expenses. In 2001, investment losses
include a write-down to fair value of $29.1 million for certain
available-for-sale securities sold shortly after the balance sheet date. The
determination of cost in computing realized and unrealized gains and losses is
based on the specific identification method.
As of December 31, 2000 and 2001, the market value of the Company's equity
securities held long was $486.8 and $296.0 million, respectively, and the
Company had $251.2 and $57.5 million, respectively, of short positions in common
stocks, based on market value. The Company enters into equity-related financial
instruments as a means to manage its exposure to market fluctuations on its
short-term investments. As of December 31, 2000 and 2001, the value of
equity-related long contracts was $40.1 and $13.5 million, respectively, and the
value of equity-related short contracts was $0 and $7.2 million, respectively,
both of which are marked-to-market each month, with unrealized gains and losses
included in the results of operations. The market values referred to above are
based on quotations as reported by various stock exchanges and major
broker/dealers. With respect to its investments in securities, the Company is
exposed to the risk of market loss.
NOTE 4. (PROVISION) BENEFIT FOR RESTRUCTURING
In January 1999, the Company announced a restructuring program that included
the shutdown of its butanediol production unit at its Calvert City, Kentucky
manufacturing facility, the write-down to fair value of the butanediol
production assets at its Texas City and Seadrift, Texas manufacturing
facilities, the write-off of fixed asset costs related to a terminated European
expansion project and the consolidation of offices in its European operations.
Accordingly, the Company recorded a one-time provision for restructuring and
impairment loss against operating income in 1998 totaling $73.0 million.
In 1999, the Company reversed $1.9 million of such previously recorded
restructuring reserves, representing an excess demolition reserve of $0.8
million and $1.1 million of other reserves, mainly for raw material contract
terminations, which were no longer required. This program was completed in the
third quarter of 2000. In the third quarter of 1999, the Company implemented a
staff reduction program impacting corporate and worldwide executive and
administrative staff positions. As a result, a total of 79 positions were
eliminated in 1999 through normal attrition or termination, for which the
Company recorded a pre-tax provision for severance of $2.3 million. This program
was completed in the second quarter of 2000.
As part of the 1998 restructuring program, the Company wrote down to fair
value the butanediol production assets at its Texas City and Seadrift, Texas
manufacturing facilities. In December 2000, the Company shut down production at
the Seadrift facility and shut down production of butanediol at the Texas City
facility in the first quarter of 2001. Accordingly, the Company recorded a
one-time restructuring charge against operating income in 2000 of $2.5 million,
as detailed below. Also, in connection with the relocation of certain of the
Company's production lines for personal care products to the Company's Freetown,
Massachusetts facility, the Company shut down its manufacturing operation in
Belleville, New Jersey in the first quarter of 2001. Accordingly, the Company
recorded a restructuring charge against operating income in 2000 of $11.9
million, as detailed below.
F-25
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 4. (PROVISION) BENEFIT FOR RESTRUCTURING -- (CONTINUED)
The components of the $14.4 million provision for restructuring in 2000 are
as follows:
TEXAS CITY/
BELLEVILLE SEADRIFT
------------ -----------
(MILLIONS)
Write-off of production assets ................. $10.4 $0.4
Accrual for severance costs .................... 0.9 0.7
Accrual for decommissioning and remediation .... -- 1.4
Accrual for other related costs ................ 0.6 --
--------- ------
Total provision ................................ $11.9 $2.5
========= ======
Of the total $14.4 million restructuring provision, $3.6 million represented
cash costs to be incurred, including severance costs of $0.9 million for 33
plant management, supervisors and operators to be terminated at the Belleville
plant and severance costs of $0.7 million for 10 supervisors and operators at
the Texas City and Seadrift plants. As a result of the write-off of property,
plant and equipment, the Company's depreciation expense was lowered by
approximately $1.4 million per year.
In 2001, $1.1 million of costs were charged against the Belleville reserve
and $0.4 million of this reserve was reversed, representing an excess severance
reserve and reserve for other related costs. This program was completed in the
fourth quarter of 2001. In 2001, $2.0 million of costs were charged against the
Texas City/Seadrift reserve and $0.1 million of this reserve was reversed,
representing an excess severance reserve. This program was completed in the
fourth quarter of 2001.
NOTE 5. GAINS ON CONTRACT AND INSURANCE SETTLEMENTS
In the first quarter of 2000, the Company received $3.5 million from the
settlement of a pre-1997 contract termination dispute relating to the Company's
Mineral Products segment. In 2001, the Company recorded a $1.6 million gain for
an anticipated receipt of an insurance settlement related to an industrial
accident in 2001 at one of the Company's manufacturing facilities.
NOTE 6. DISPOSITION OF ASSETS
On April 2, 1999, the Company sold its pearlescent pigments business, a
non-core product line that was part of the Personal Care business segment, which
resulted in a pre-tax gain of $8.5 million. The pearlescent pigments product
line accounted for $4.9 million of the Company's net sales in 1998. As a result,
the sale did not have a material impact on the Company's results of operations
for the year 1999.
NOTE 7. DISCONTINUED OPERATION
On October 1, 1999, the Company sold the stock of its Filter Products
subsidiaries to Hayward Industrial Products, Inc. for a purchase price of $62.0
million. The gain on the sale was $23.5 million, after income taxes of $12.7
million. Accordingly, the Filter Products business segment is reported as a
discontinued operation in the Consolidated Financial Statements.
F-26
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 7. DISCONTINUED OPERATION -- (CONTINUED)
Summary operating results for the Filter Products business are as follows:
YEAR ENDED
DECEMBER 31,
1999
-----------
(THOUSANDS)
Net sales ............................................. $28,730
========
Income before income taxes ............................ $ 2,726
Income taxes .......................................... (957)
--------
Net income ............................................ $ 1,769
========
NOTE 8. INCOME TAXES
Income tax (provision) benefit from continuing operations consists of the
following:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
------- --------- -------
(THOUSANDS)
Federal:
Current ................................. $ (1,342) $ (3,296) $ (930)
Deferred ................................ (10,403) (35,258) 8,794
-------- -------- -------
Total Federal ......................... (11,745) (38,554) 7,864
-------- -------- -------
Foreign:
Current ................................. (16,830) (17,466) (7,318)
Deferred ................................ 5,185 9,076 416
------- ------- ------
Total foreign ......................... (11,645) (8,390) (6,902)
-------- ------- ------
State and local:
Current ................................. (2,586) (3,455) (840)
Deferred ................................ (846) (470) (472)
-------- ------- ------
Total state and local ................. (3,432) (3,925) (1,312)
-------- ------- ------
Income tax provision ...................... $(26,822) $(50,869) $ (350)
======== ======== ======
The differences between the income tax provision computed by applying the
statutory Federal income tax rate to pre-tax income, and the income tax
provision reflected in the Consolidated Statements of Income are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
------- --------- -------
(THOUSANDS)
Statutory tax provision ....................... $(26,746) $(50,741) $ (335)
Impact of:
Foreign operations .......................... 4,388 5,768 5,787
State and local taxes, net of Federal benefits (2,231) (2,552) (853)
Nondeductible goodwill amortization .......... (5,723) (5,668) (5,826)
Percentage depletion ......................... 1,943 1,521 659
Other, net .................................. 1,547 803 218
--------- -------- --------
Income tax provision .......................... $(26,822) $(50,869) $ (350)
========== ========= =========
F-27
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 8. INCOME TAXES -- (CONTINUED)
The components of the net deferred tax liability are as follows:
DECEMBER 31,
--------------------------
2000 2001
-------- ----------
(THOUSANDS)
Deferred tax liabilities related to:
Property, plant and equipment ................... $101,959 $107,818
Other ........................................... 78,212 30,102
-------- --------
Total deferred tax liabilities ................ 180,171 137,920
-------- --------
Deferred tax assets related to:
Expenses not yet deducted for tax purposes ...... (23,742) (22,478)
Carryover AMT and R&D credits ................... (11,970) (14,391)
Other ........................................... (22,672) (24,683)
-------- --------
Total deferred tax assets ..................... (58,384) (61,552)
-------- --------
Net deferred tax liability ........................ 121,787 76,368
Deferred tax assets reclassified to other
current assets ................................... 29,394 32,929
-------- --------
Noncurrent deferred tax liability ................. $151,181 $109,297
======== ========
The Company and certain of its subsidiaries were parties to tax sharing
agreements with members of the consolidated group for Federal income tax
purposes that included G-I Holdings Inc., (the "G-I Holdings Group"), in certain
prior years and, accordingly, would be severally liable for any tax liability of
the G-I Holdings Group in respect of those prior years. Until January 1, 1997,
the Company and its subsidiaries were members of the G-I Holdings Group.
Therefore, such tax sharing agreements are no longer applicable with respect to
the tax liabilities of the Company and its subsidiaries for periods subsequent
to January 1, 1997. The Company and certain of its subsidiaries remain
obligated, however, with respect to tax liabilities imposed or that may be
imposed for periods prior to such date. Among other things, those tax sharing
agreements provide for the sharing of the G-I Holdings Group's consolidated tax
liability based on each member's share of the tax as if such member filed on a
separate basis. Accordingly, a payment of tax would be made to G-I Holdings
equal to the Company's allocable share of the G-I Holdings Group's consolidated
tax liability.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in the tax matter arising out of the surfactants partnership, although
there can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. On September 21, 2001,
the IRS filed a proof of claim with respect to such deficiency against G-I
Holdings in the G-I Holdings bankruptcy. If such proof of claim is sustained,
the Company and/or some of the Company's subsidiaries, together with G-I
Holdings and several current and former subsidiaries of G-I Holdings would be
severally liable for such taxes and interest in the amount of approximately
$250.0 million should G-I Holdings be unable to satisfy such liability. 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. See Note 19.
F-28
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 9. ACQUISITIONS
On October 15, 1999, the Company acquired substantially all of the assets of
the Kelco Alginates division of Monsanto Company, including manufacturing
facilities in San Diego, California and Girvan, Scotland, a research facility in
Tadworth, England and equity investments in three seaweed processing joint
ventures in Ireland, Iceland and Tasmania. The alginates business manufactures
sodium alginate, propylene glycol alginate and other alginate derivatives. The
results of the alginates business, including sales of $12.8 million for 1999,
are included in the Company's financial statements from the date of its
acquisition and were not material to 1999 operations.
On June 7, 2001, the Company completed the acquisition of substantially all
of the assets of FineTech Ltd. ("FineTech"), a pharmaceutical research company
based in Haifa, Israel. FineTech specializes in the design of proprietary
synthetic routes and methodologies used in the production of highly complex and
valuable organic compounds for the pharmaceutical industry. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the purchase
price was allocated to the estimated fair value of the identifiable assets
acquired, including $9.5 million of intangible assets, and the excess was
recorded as goodwill, pending management's valuation of the fair values of the
net assets acquired as of the date of acquisition. The results of the FineTech
business, including sales of $2.2 million in 2001, are included in the Company's
results from the date of its acquisition and were not material to 2001
operations.
On December 31, 2001, the Company's wholly owned subsidiary, ISP (Canada)
Inc. completed the acquisition of the industrial biocides business of Degussa
Corporation. The industrial biocides business manufactures FUNGITROL(R)
fungicides, NUOSEPT(R) preservativES, NUOCIDE(R) fungicides and algaecides, and
BIOTREND(R) biocides. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated to the
estimated fair value of the identifiable assets acquired, including $6.3 million
of intangible assets, and the excess was recorded as goodwill, pending
management's valuation of the fair values of the net assets acquired as of the
date of acquisition. The results of the industrial biocides business will be
included in the Company's results from the date of its acquisition. This
business had sales of approximately $27 million in 2001.
NOTE 10. SALE OF ACCOUNTS RECEIVABLE
In October 2001, the Company entered into a new agreement for the sale of
its domestic receivables, under which the company sells certain of its trade
accounts receivable without recourse. This agreement replaces the previous
agreement which terminated in October 2001. The new agreement has a termination
date of October 2004 and provides for up to $40.0 million in cash to be made
available to the Company based on eligible receivables outstanding from time to
time. The excess of accounts receivable sold over the net proceeds received is
included in "Accounts receivable, other." The effective cost to the Company
varies with LIBOR or commercial paper rates and is included in "Other income
(expense), net" and amounted to $2.5, $2.3 and $1.9 million in 1999, 2000 and
2001, respectively.
NOTE 11. INVENTORIES
Inventories comprise the following:
DECEMBER 31,
---------------------------
2000 2001
-------- --------
(THOUSANDS)
Finished goods ........................ $ 93,356 $119,124
Work-in-process ....................... 29,022 37,332
Raw materials and supplies ............ 28,570 34,126
-------- --------
Inventories ........................... $150,948 $190,582
======== ========
F-29
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 11. INVENTORIES -- (CONTINUED)
At December 31, 2000 and 2001, $38.7 and $60.1 million, respectively, of
domestic inventories were valued using the LIFO method. If the FIFO inventory
method had been used to value these inventories, they would have been $0.1
million lower at December 31, 2000 and $3.7 million higher at December 31, 2001.
NOTE 12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, comprises the following:
DECEMBER 31,
--------------------------
2000 2001
-------- --------
(THOUSANDS)
Land and land improvements ................. $ 78,236 $ 80,594
Buildings and building equipment ........... 105,279 111,347
Machinery and equipment .................... 630,751 689,132
Construction in progress ................... 60,326 45,592
---------- --------
Total .................................... 874,592 926,665
Less accumulated depreciation .............. (311,619) (365,821)
---------- --------
Property, plant and equipment, net ......... $ 562,973 $560,844
========== ========
See Note 19 for information regarding capital leases.
NOTE 13. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt comprises the following:
DECEMBER 31,
----------------------------
2000 2001
----------- ----------
(THOUSANDS)
9 3/4% Senior Notes due February 2002 ........... $199,871 $ --
9% Senior Notes due October 2003 ................ 324,638 307,858
Senior Credit Facilities: .......................
Term loan expiring June 2008 .................. -- 223,875
Revolving credit facility ..................... 196,000 95,250
10 5/8% Senior Secured Notes due 2009 ........... -- 200,000
10 1/4% Senior Subordinated Notes due 2011 ...... -- 402,536
Obligation on mortgaged property, due January 2001 28,125 --
Obligations under capital leases (Note 19) ...... 533 271
Other ........................................... 32 32
--------- ----------
Total long-term debt .......................... 749,199 1,229,822
Less current maturities ......................... (224,419) (310,265)
--------- ----------
Long-term debt less current maturities .......... $524,780 $ 919,557
========= ==========
On June 27, 2001, ISP Chemco and three of its wholly owned subsidiaries
jointly issued $205.0 million aggregate principal amount of 10 1/4% Senior
Subordinated Notes due 2011 (the "2011 Notes"). The net proceeds of $197.3
million, after discount and fees, were placed in a restricted cash escrow
account and used to retire the Company's 9 3/4% Senior Notes due 2002 (the "2002
Notes"). During the third quarter of 2001, the Company retired $19.9 million of
the 2002 Notes, and the remaining $180.0 million of the 2002 Notes were retired
on or prior to October 15, 2001. On July 31, 2001, ISP Chemco and those same
three wholly owned subsidiaries jointly issued an additional $100.0 million
aggregate principal amount of the 2011 Notes. These notes have the same
F-30
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 13. LONG-TERM DEBT AND LINES OF CREDIT -- (CONTINUED)
terms as the 2011 Notes issued in June 2001. The net proceeds were $98.9
million, including $0.9 million of accrued interest from June 27, 2001 to the
date of issuance, of which $98.0 million were placed in a restricted cash escrow
account and used to retire a portion of the Company's 9% Senior Notes due 2003
(the "2003 Notes").
On November 13, 2001, ISP Chemco and those same three wholly owned
subsidiaries jointly issued an additional $100.0 million aggregate principal
amount of the 2011 Notes. These notes have the same terms as the 2011 Notes
issued in June 2001 except with respect to interest accrual and registration
rights. The net proceeds of $101.0 million were placed in a restricted cash
escrow account and used to retire a portion of the 2003 Notes. The Company
retired $16.9 million aggregate principal amount of the 2003 Notes in 2001. On
January 14, 2002, the Company redeemed the remaining $307.9 million aggregate
principal amount of the 2003 Notes. The Company will record an after-tax
extraordinary charge of $4.7 million in the first quarter of 2002 in connection
with this redemption.
The 2011 Notes are guaranteed by substantially all of ISP Chemco's domestic
subsidiaries. The 2011 Notes were issued under an indenture which, among other
things, limits the ability of ISP Chemco and its subsidiaries, except its
accounts receivable subsidiary and certain immaterial subsidiaries, to incur
additional debt, issue preferred stock, incur liens, and pay dividends or make
certain other restricted payments and restricted investments.
In a related transaction, ISP Chemco and its three subsidiaries which issued
the 2011 Notes also entered into $450.0 million of new senior secured credit
facilities (the "Senior Credit Facilities"), the initial borrowings under which
were used to repay amounts outstanding under the Company's previous credit
facility. The Senior Credit Facilities are comprised of a $225.0 million term
loan with a maturity of seven years and a $225.0 million revolving credit
facility which will terminate in five years. The revolving credit facility
includes a borrowing capacity not in excess of $50.0 million for letters of
credit. All borrowings under the Senior Credit Facilities are based on either an
alternate base rate (based on the banks' base rate or on the federal funds rate)
or on the eurodollar rate plus a margin based on the ratio of ISP Chemco's total
consolidated debt to EBITDA (as defined in the Senior Credit Facilities). The
average interest rate at December 31, 2001 on borrowings under the Senior Credit
Facilities was 5.3%. The Senior Credit Facilities require compliance with
various financial covenants, including a total debt leverage maintenance ratio,
a senior debt leverage maintenance ratio, an interest coverage ratio and a
minimum adjusted net worth. At December 31, 2001, ISP Chemco and its
subsidiaries were in compliance with these covenants. As of December 31, 2001,
$95.3 million of borrowings and $5.6 million of letters of credit were
outstanding under the revolving credit facility. In addition, the Senior Credit
Facilities limit the ability of ISP Chemco and its subsidiaries, except its
accounts receivable subsidiary and certain immaterial subsidiaries, to incur
additional debt, issue preferred stock, incur liens, and pay dividends or make
certain other restricted payments and restricted investments. ISP Chemco and
substantially all of its domestic subsidiaries are designated as obligors under
the Senior Credit Facilities. The obligations of the obligors under the Senior
Credit Facilities are secured by a first-priority security interest in 100% of
the capital stock of ISP Chemco's domestic subsidiaries and 66% of the capital
stock of some of ISP Chemco's foreign subsidiaries, and substantially all of the
real and personal property of the obligors, except for the Company's accounts
receivable subsidiary and certain immaterial subsidiaries.
On December 13, 2001, Holdings issued $200.0 million principal amount of
10 5/8% Senior Secured Notes due 2009 (the "2009 Notes"). The net proceeds from
this issuance were approximately $194.3 million, of which $125.7 million were
placed in a restricted cash escrow account and used to retire the remaining 2003
Notes on January 14, 2002. The 2009 Notes are secured by a first priority lien
on all of the outstanding capital stock of ISP Chemco. The 2009 Notes are
structurally subordinated to all liabilities of Holdings' subsidiaries. The 2009
Notes were issued under an indenture which, among other things, limits the
ability of Holdings and its subsidiaries, except unrestricted subsidiaries, to
incur additional debt, issue preferred stock, incur liens, and pay dividends or
F-31
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 13. LONG-TERM DEBT AND LINES OF CREDIT -- (CONTINUED)
make certain other restricted payments and restricted investments. ISP Investco,
its subsidiaries, the Company's accounts receivable subsidiary and certain
immaterial subsidiaries have been designated as unrestricted subsidiaries under
the indenture related to the 2009 Notes.
In October 1996, the Company issued $325 million principal amount of the
2003 Notes. As discussed above, the Company redeemed the remaining 2003 Notes on
January 14, 2002.
Borrowings by the Company's subsidiaries, including those under the Senior
Credit Facilities, are subject to the application of certain financial covenants
contained in such agreement and in the indentures relating to the 2009 and 2011
Notes. As of December 31, 2001, the Company's subsidiaries were in compliance
with such covenants, and the application of such covenants would not have
restricted available borrowings under the Senior Credit Facilities.
The Senior Credit Facilities and the indentures governing the 2009 and 2011
Notes contain additional affirmative and negative covenants affecting some of
the Company's subsidiaries, including restrictions on transactions with
affiliates, sale-leaseback transactions, mergers and transfers of all or
substantially all of those subsidiaries' assets. Additionally, in the event the
holders of the 2009 Notes were to foreclose on ISP Chemco's capital stock
following an event of default under those notes, the sale of the capital stock
would constitute a change of control of ISP Chemco. Under the indenture
governing the 2011 Notes, if a change of control of ISP Chemco occurs, ISP
Chemco is obligated to make an offer to repurchase the 2011 Notes from their
respective holders. The terms of the Senior Credit Facilities, however, prohibit
the repayment of the 2011 Notes in that event, unless and until such time as the
indebtedness under the Senior Credit Facilities is repaid in full. Failure to
make such repayment upon a change of control would result in a default under the
2011 Notes. A change of control of ISP Chemco would also result in a default
under the Senior Credit Facilities. In the event of a default under the
indenture governing the 2011 Notes or under the Senior Credit Facilities, the
holders of the 2011 Notes or the lenders under the Senior Credit Facilities, as
the case may be, could elect to accelerate the maturity of all the 2011 Notes or
the loans under the Senior Credit Facilities. Those events could have a material
adverse effect on the Company's financial condition and results of operations.
At December 31, 2000, the Company had a $28.1 million mortgage obligation on
its headquarters property. This mortgage was repaid in January 2001. Interest on
the mortgage was at a floating rate based on LIBOR.
The Company believes that the fair value of its non-public variable rate
indebtedness approximates the book value of such indebtedness because the
interest rates on such indebtedness are at floating short-term rates. With
respect to the Company's publicly traded debt securities, the Company has
obtained estimates of fair values from an independent source believed to be
reliable. The estimated fair value of the 2002 Notes as of December 31, 2000 was
$165.9 million, the estimated fair value of the 2003 Notes as of December 31,
2000 and 2001 was $246.7 and $312.5 million, respectively, and the estimated
fair value of the 2009 Notes and the 2011 Notes as of December 31, 2001 was
$200.3 and $418.6 million, respectively.
The aggregate maturities of long-term debt as of December 31, 2001 for the
next five years are as follows:
(THOUSANDS)
-------------------
2002 ................................................ $310,265
2003 ............................................... 2,390
2004 ............................................... 2,253
2005 ............................................... 2,252
2006 ............................................... 149,812
F-32
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 13. LONG-TERM DEBT AND LINES OF CREDIT -- (CONTINUED)
In the above table, maturities in 2002 include the $307.9 million of 2003
Notes which were redeemed on January 14, 2002, based on their accreted value as
of December 31, 2001. Maturities in 2006 include the $95.3 million of borrowings
outstanding under the revolving credit facility, based on the expiration of the
revolving credit facility in June 2006, and $54.6 million of maturities relating
to the term loan under the Senior Credit Facilities. Maturities for each of the
years 2002 through 2005 include $2.3 million of maturities relating to such term
loan.
At December 31, 2001, the Company's foreign subsidiaries had total available
short-term lines of credit aggregating $2.8 million, of which $2.7 million were
unused. Short-term borrowings at December 31, 2000 were $143.7 million. The
weighted-average interest rate on those borrowings was 7.0%. Short-term
borrowings at December 31, 2001 were not significant.
NOTE 14. BENEFIT PLANS
Eligible, full-time employees of the Company are covered by various benefit
plans, as described below.
DEFINED CONTRIBUTION PLAN
The Company provides a defined contribution plan for eligible employees. The
Company contributes up to 7% of participants' compensation (any portion of which
can be contributed, at the participants' option, in the form of the Company's
common stock), and also contributes fixed amounts, ranging from $50 to $750 per
year depending on age, to the accounts of participants who are not covered by a
Company-provided postretirement medical benefit plan. The aggregate
contributions by the Company were $8.1, $7.7 and $7.3 million for 1999, 2000 and
2001, respectively.
DEFINED BENEFIT PLANS
The Company provides a noncontributory defined benefit retirement plan for
certain hourly employees in the United States (the "Hourly Retirement Plan").
Benefits under this plan are based on stated amounts for each year of service.
The Company's funding policy is consistent with the minimum funding requirements
of ERISA.
ISP Marl GmbH, a wholly owned subsidiary of the Company, provides a
noncontributory defined benefit retirement plan for its hourly and salaried
employees (the "ISP Marl Plan"). Benefits under this plan are based on average
earnings over each employee's career with the Company.
The Company's net periodic pension cost (income) for the Hourly Retirement
Plan and the ISP Marl Plan included the following components:
HOURLY RETIREMENT PLAN ISP MARL PLAN
------------------------ ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
1999 2000 2001 1999 2000 2001
------ ------ ------ ------ ----- ----
(THOUSANDS)
Service cost ............. $ 310 $ 247 $ 247 $176 $ 99 $133
Interest cost ............ 1,678 1,811 1,932 236 132 220
Expected return on
plan assets ............ (2,314) (2,633) (3,084) -- -- --
Amortization of
actuarial losses ....... 215 40 36 12 -- --
Amortization of
unrecognized
prior service cost ..... 174 190 190 11 7 8
------ ------- ------- ----- ---- ----
Net periodic pension
cost (income) ......... $ 63 $ (345) $ (679) $435 $238 $361
====== ======= ======= ===== ==== ====
F-33
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 14. BENEFIT PLANS -- (CONTINUED)
The following tables set forth, for the years 2000 and 2001, reconciliations
of the beginning and ending balances of the benefit obligation, fair value of
plan assets, funded status and amounts recognized in the Consolidated Balance
Sheets related to the Hourly Retirement Plan and the ISP Marl Plan:
HOURLY RETIREMENT PLAN ISP MARL PLAN
--------------------- -------------------
DECEMBER 31, DECEMBER 31,
------------------ --------------------
2000 2001 2000 2001
-------- -------- -------- ------
(THOUSANDS)
Change in benefit obligation:
Benefit obligation at
beginning of year ................ $23,429 $25,406 $ 3,796 $ 3,165
Service cost ....................... 247 247 99 133
Interest cost ...................... 1,811 1,932 132 220
Plan amendments .................... 236 -- -- --
Actuarial (gains) losses ........... 1,028 1,707 (862) 128
Benefits paid ...................... (1,345) (1,416) -- --
---------- -------- ------- -------
Benefit obligation at end of year 25,406 27,876 3,165 3,646
--------- -------- ------- -------
Change in plan assets:
Fair value of plan assets
at beginning of year ............... 23,661 28,132 -- --
Actual return on plan assets ....... 3,959 2,467 -- --
Employer contributions ............. 1,857 1,308 -- --
Benefits paid ...................... (1,345) (1,416) -- --
--------- -------- ------- -------
Fair value of plan assets at
end of year ...................... 28,132 30,491 -- --
--------- -------- ------- -------
Reconciliation of funded status:
Funded status ...................... 2,726 2,615 (3,165) (3,646)
Transition obligation .............. -- -- 96 123
Unrecognized prior service cost .... 1,109 919 -- --
Unrecognized actuarial (gains) losses 2,299 4,587 (64) 110
--------- -------- ------- -------
Net amount recognized in
Consolidated Balance Sheets
as (accrued) prepaid benefit cost .. $ 6,134 $ 8,121 $(3,133) $(3,413)
========= ======== ======= =======
In determining the projected benefit obligation, the weighted-average
assumed discount rate was 7.50% and 7.25% for 2000 and 2001, respectively, for
the Hourly Retirement Plan, and was 6.5% for each year for the ISP Marl Plan.
The expected long-term rate of return on assets, used in determining net
periodic pension cost (income) for the Hourly Retirement Plan, was 11% for 2000
and 2001 and was 7% for each year for the ISP Marl Plan.
The Company also provides a nonqualified defined benefit retirement plan for
certain key employees. Expense accrued for this plan was $0.9, $1.2 and $0.7
million for 1999, 2000 and 2001, respectively.
In connection with the Company's Supplemental Executive Retirement Plan and
postretirement medical and life insurance plan, the Company owns certain life
insurance policies with a face value of $98.9 million at December 31, 2001.
These policies had a cash surrender value of $38.3 and $41.4 million at December
31, 2000 and 2001, respectively, and policy loans of $36.8 and $39.7 million,
respectively. The net cash surrender value at December 31, 2000 and 2001 was
$1.5 and $1.7 million, respectively, and is included in "Other assets."
F-34
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 14. BENEFIT PLANS -- (CONTINUED)
POSTRETIREMENT MEDICAL AND LIFE INSURANCE
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced as of January 1, 2000.
The net periodic postretirement benefit cost included the following
components:
YEAR ENDED DECEMBER 31,
---------------------------
1999 2000 2001
------- -------- -------
(THOUSANDS)
Service cost ................................... $ 7 $ 109 $ 123
Interest cost .................................. 608 576 679
Amortization of actuarial loss ................ -- -- 64
Amortization of unrecognized prior service cost (179) (284) (284)
----- ----- -----
Net periodic postretirement benefit cost ...... $ 436 $ 401 $ 582
===== ===== =====
The following table sets forth, for the years 2000 and 2001, reconciliations
of the beginning and ending balances of the postretirement benefit obligation,
funded status and amounts recognized in the Consolidated Balance Sheets related
to postretirement medical and life insurance benefits:
DECEMBER 31,
---------------------
2000 2001
------- --------
(THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year .............. $ 7,640 $ 8,168
Service cost ......................................... 109 123
Interest cost ........................................ 576 679
Effect of plan amendments ............................ (1,750) --
Actuarial losses ..................................... 2,051 1,356
Benefits paid, net of participant contributions ...... (458) (565)
------- -------
Benefit obligation at end of year .................... 8,168 9,761
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year ....... -- --
Employer contributions ............................... 458 565
Benefits paid, net of participant contributions ...... (458) (565)
------- -------
Fair value of plan assets at end of year ............. -- --
------- -------
Reconciliation of funded status:
Funded status ........................................ (8,168) (9,761)
Unrecognized prior service cost ...................... (2,440) (2,157)
Unrecognized actuarial losses ........................ 842 2,135
------- -------
Net amount recognized in Consolidated
Balance Sheets as accrued
benefit cost ..................................... $(9,766) $(9,783)
======= =======
For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. Retirees as of December 31,
2001 who were formerly salaried employees (with certain exceptions) were assumed
to receive a Company subsidy of $400 to $1,000 per year. For retirees over age
65, this subsidy may be replaced by participation in a managed care program.
With respect to retirees who were formerly hourly
F-35
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 14. BENEFIT PLANS -- (CONTINUED)
employees, most such retirees are subject to a $5,000 per person lifetime
maximum benefit. Subject to such lifetime maximum, a 9% and 6% annual rate of
increase in the Company's per capita cost of providing postretirement medical
benefits was assumed for 2001 for such retirees under and over age 65,
respectively. To the extent that the lifetime maximum benefits have not been
reached, the foregoing rates were assumed to decrease gradually to an ultimate
rate of 5% and 6%, respectively, by the year 2009 and remain at that level
thereafter. The weighted-average assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7.50% and 7.25% for 2000 and
2001, respectively.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 2000 and 2001 by $156,000 and $25,000,
respectively, and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the years 2000 and 2001 by
$11,000 and $2,000, respectively. A decrease of one percentage point in each
year would decrease the accumulated postretirement benefit obligation as of
December 31, 2000 and 2001 by $138,000 and $22,000, respectively, and the
aggregate of the service and interest cost components of the net periodic
postretirement benefit cost for the years 2000 and 2001 by $10,000 and $2,000,
respectively.
NOTE 15. STOCK OPTION AND AWARD PLANS, LONG TERM INCENTIVE PLAN AND
STOCK APPRECIATION RIGHTS
The 1991 Incentive Plan for Key Employees and Directors, as amended (the
"1991 Plan"), authorized the grant of options to purchase a maximum of
13,000,000 shares of the Company's common stock. The Compensation Committee of
the Board of Directors (the "Committee") determined the exercise price and
vesting schedule of options granted under the 1991 Plan. In 1995 through 1999,
the Company granted options to certain employees to purchase an aggregate of
3,217,020 shares of the Company's common stock at exercise prices ranging from
$.625 to $5.625 below the fair market value of such shares on the date of grant.
The difference between the exercise price and the fair market value of such
shares on the date of grant is being recognized as compensation expense over the
vesting period of 2 1/2 to 5 years. Compensation expense for such options was
$0.8, $0.5 and $0.6 million in 1999, 2000 and 2001, respectively. All other
employee options granted under the 1991 Plan have a term of nine years, have an
exercise price equal to the fair market value of such shares on the date of
grant and become exercisable at a rate determined by the Committee at the time
of grant. Special vesting rules apply to options granted to non-employee
directors. The 1991 Plan expired in accordance with its terms in June 2000, and
no additional options will be granted under the 1991 Plan.
Effective July 1, 2000, the Company adopted the 2000 Stock Option Plan for
Non-Employee Directors (the "2000 Plan"), which was approved by stockholders in
May 2001. The 2000 Plan authorizes the grant of options to purchase a maximum of
200,000 shares of the Company's common stock. Under the 2000 Plan, each
non-employee director is granted a non-qualified stock option to purchase 5,000
shares of common stock (the "Initial Option") on the date such person becomes an
eligible director and an additional non-qualified option to purchase 3,000
shares of common stock (an "Additional Option") on each anniversary of the date
of grant of the Initial Option. The term of each option granted is nine years.
Initial Options are subject to a three-year vesting period, commencing on the
first anniversary of the date of grant, and Additional Options are subject to a
one-year vesting period, becoming exercisable in full on the first anniversary
of the date of grant. The exercise price of the options is equal to the fair
market value of such shares on the date of grant. During 2000 and 2001, the
Company granted 15,000 and 19,000 options, respectively, pursuant to the 2000
Plan, of which 28,000 options were outstanding at December 31, 2001.
F-36
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 15. STOCK OPTION AND AWARD PLANS, LONG TERM INCENTIVE PLAN AND
STOCK APPRECIATION RIGHTS -- (CONTINUED)
The Company has elected the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 and
related interpretations in accounting for the 1991 Plan and the 2000 Plan
(collectively, the "Plans"). If the Company had elected to recognize
compensation cost based on the fair value of awards under the Plans at grant
dates, the Company's pro forma net income (loss) for the years 1999, 2000 and
2001 would have been $71.2, $91.8 and $(1.3) million, respectively, and pro
forma basic earnings (loss) per share would have been $1.04, $1.35 and $(.02),
respectively. The SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, and the resulting pro forma
compensation expense may not be indicative of pro forma expense in future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share is the estimated present value at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 6%; expected life of 6
years; expected volatility of 24%; and dividend yield of 0%.
The following is a summary of transactions pertaining to the Plans:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001
-------------------- ---------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- -------- --------
Outstanding, January 1 6,989 $12.06 8,028 $10.93 4,625 $10.50
Granted .............. 3,468 9.47 20 6.12 19 8.68
Exercised ............ (292) 7.03 (87) 6.40 (208) 7.17
Exchanged for Incentive
Plan Units.......... -- -- (2,033) 10.94 -- --
Forfeited ............ (2,137) 12.78 (1,303) 11.62 (570) 11.71
------- ------- ------
Outstanding,
December 31 ......... 8,028 10.93 4,625 10.50 3,866 10.49
======= ======= =======
Options exercisable,
December 31 ........ 3,162 10.81 2,669 10.24 3,158 10.48
======= ======= =======
Based on calculations using the Black-Scholes option-pricing model, the
weighted-average fair value of options granted in 1999, 2000 and 2001 under the
Plans for which the exercise price equaled the fair market value of such shares
on the date of grant was $2.91, $1.81 and $4.06 per share, respectively, and
such weighted-average fair value of options granted in 1999 for which the
exercise price was less than the fair market value of such shares on the date of
grant was $5.64; all options granted in 2000 and 2001 were at exercise prices
equal to the fair market value at the date of grant.
F-37
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 15. STOCK OPTION AND AWARD PLANS, LONG TERM INCENTIVE PLAN AND
STOCK APPRECIATION RIGHTS -- (CONTINUED)
The following is a summary of the status of stock options outstanding and
exercisable under the Plans as of December 31, 2001:
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
-------------------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
EXERCISE PRICES (000'S) PRICE LIFE (000'S) PRICE
--------------- --------- ---------- ----------- ------- ---------
$ 3.781 - $ 5.875 ...... 270 $ 4.69 3.65 years 153 $ 4.83
$ 5.876 - $ 8.938 ...... 882 7.47 2.01 years 866 7.46
$ 8.939 - $13.313 ...... 2,031 10.84 5.29 years 1,609 11.00
$13.314 - $18.625 ...... 683 15.64 5.45 years 530 15.50
------ ------
Total ................. 3,866 10.49 4.45 years 3,158 10.48
====== ======
In February 2000, the Company adopted the 2000 Long Term Incentive Plan (the
"Incentive Plan"), which authorizes the grant of incentive units ("Incentive
Units") to eligible Company employees. The Incentive Plan is administered by the
Committee, which in its sole discretion determines the number of Incentive Units
to be granted to each employee. Generally, Incentive Units vest cumulatively, in
20% increments over five years, or in 10% increments every six months over five
years. The value of Incentive Units is determined at the end of each fiscal
quarter based on total Stockholders' Equity (excluding accumulated other
comprehensive income and losses) divided by total common shares outstanding. The
Incentive Plan will terminate five years after its effective date of February
2000, unless terminated sooner by the Committee.
In 2000, employees exchanged an aggregate of 2,032,994 stock options granted
under the 1991 Plan (discussed above) for an aggregate of 1,508,062 Incentive
Units. An additional 2,052,725 Incentive Units were granted during 2000. At
December 31, 2000, 3,342,049 Incentive Units were outstanding. In 2001,
1,272,751 Incentive Units were granted, and as of December 31, 2001, 4,206,614
Incentive Units were outstanding. Compensation expense for such Incentive Units
was $2.0 and $3.8 million in 2000 and 2001, respectively.
In 2000 and 2001, the Company issued restricted stock awards to two
executives for 230,000 and 20,000 shares, respectively, of the Company's common
stock pursuant to individual plan agreements. Such shares were issued subject to
certain conditions with respect to transfer and other restrictions as prescribed
by the plans. The restricted shares vest over a period of four to five years.
Upon the issuance of the restricted shares, unearned compensation, equivalent to
the market price of the shares on the date of grant, in the amount of $1.3 and
$0.2 million in 2000 and 2001, respectively, was charged to Stockholders' Equity
and is being amortized to compensation expense as the shares vest. Compensation
expense in 2001 related to these restricted shares was $0.3 million. Also in
2000 and 2001, the Company granted two executives stock bonus awards totaling
75,000 and 13,055 shares, respectively, of the Company's common stock and, in
connection with such awards and the vesting of the restricted stock awards, also
made loans totaling $167,000 and $160,000, respectively, to such executives to
enable them to satisfy certain withholding tax obligations. These loans are
evidenced by recourse promissory notes that bear interest at the rate of 6.45%
per annum. The loans in 2000 for $167,000 were repaid on April 15, 2001. The
loans in 2001 for $160,000 were converted to demand notes with interest at the
Applicable Federal Rate for Short Term Instruments. The value of the stock
awards on the date of issuance, totaling $455,000 and $100,000, was charged to
compensation expense in 2000 and 2001, respectively. The excess of the cost of
the treasury stock issued over the market value of the shares on the date of the
awards, totaling $275,000 and $18,000, respectively, and the loans of $167,000
and $160,000, were reflected as reductions of "Additional paid-in capital."
F-38
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 15. STOCK OPTION AND AWARD PLANS, LONG TERM INCENTIVE PLAN AND
STOCK APPRECIATION RIGHTS - (CONTINUED)
ISP Holdings issued options in 1996 to certain employees to purchase 138,983
shares of ISP Holdings' redeemable convertible preferred stock ("Preferred
Stock"), exercisable at a price of $111.44 per share. Each share of Preferred
Stock was convertible, at the holder's option, into shares of common stock of
ISP Holdings at a formula price based on the sum of the determined initial Book
Value (as defined) plus interest on such Book Value at a specified rate. The
options vested over seven years, subject to earlier vesting under certain
circumstances including in connection with a change of control.
ISP Holdings also issued stock appreciation rights ("SARs") in 1996 related
to 27,748 shares of ISP Holdings' common stock. The SARs represented the right
to receive a cash payment based upon the appreciation in value of the specified
number of shares of common stock of ISP Holdings over the sum of the determined
initial Book Value (as defined) per share of common stock of ISP Holdings plus
interest on such Book Value at a specified rate. The SARs vested over a
five-year period, subject to earlier vesting under certain circumstances
including in connection with a change of control.
As a result of the Merger (see Note 1), ISP Holdings' Preferred Stock option
and SAR programs were terminated, and the Company charged $7.9 million against
operating income for cash payments made in 1998 for amounts vested at that time.
Additional expense is being recorded over the remaining vesting period from the
date of the Merger through 2003, including $0.9 million in 1999, $0.4 million in
2000 and $0 in 2001.
NOTE 16. RELATED PARTY TRANSACTIONS
Included in the Consolidated Balance Sheets are the following net receivable
balances with related parties, which arise from operating transactions between
the Company and its affiliates, including the sales of mineral products and the
management agreement, as discussed below:
DECEMBER 31,
----------------------
2000 2001
---------- -----------
(THOUSANDS)
Building Materials Corporation of America ("BMCA") ... $10,253 $9,301
G-I Holdings ........................................ 1,610 2
Other ............................................... (239) (294)
---------- -----------
Receivable from related parties, net ................ $11,624 $9,009
========== ===========
As discussed in Notes 8 and 19, 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 claims. As a result, the Company, as of
December 31, 2000, established a reserve for doubtful receivables from G-I
Holdings of $2.7 million, representing $0.6 million of unpaid management fees
(see below) and $2.1 million of other payments which the Company made on behalf
of G-I Holdings.
BMCA, an indirect subsidiary of G-I Holdings and an affiliate of the
Company, and its subsidiaries purchase all of their colored roofing granules
requirements from the Company under a requirements contract, except for the
requirements of certain of their roofing plants which are supplied by a third
party. Effective January 1, 2002, this contract was extended by the parties to
expire on December 31, 2002. In 2001, BMCA and its subsidiaries purchased a
total of $63.4 million of mineral products from the Company, representing 8.1%
of the Company's total net sales and 78.6% of the Company's net sales of mineral
products. Sales by the Company to BMCA and its subsidiaries totaled $57.3 and
$59.3 million for 1999 and 2000, respectively. The receivable from BMCA and its
subsidiaries for sales of mineral products as of December 31, 2000 and 2001 was
$7.7 and $8.8 million, respectively.
F-39
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 16. RELATED PARTY TRANSACTIONS -- (CONTINUED)
Pursuant to a management agreement (the "Management Agreement"), the
Company, through a subsidiary, provides certain general management,
administrative, legal, telecommunications, information and facilities services
to BMCA. Charges by the Company for providing such services aggregated $6.1,
$6.1 and $6.8 million for 1999, 2000 and 2001, respectively, and are reflected
as reductions of "Selling, general and administrative" expense. Such charges
consist of management fees and other reimbursable expenses attributable to, or
incurred by the Company for the benefit of, the respective parties, which are
based on an estimate of the costs the Company incurs to provide such services.
The receivable for such management fees as of December 31, 2000 and 2001 was
$1.5 and $0.5 million, respectively. The Management Agreement also provides that
the Company pay to a subsidiary of G-I Holdings lease payments for the use of
one of the Company's sales offices. Effective January 1, 2001, the Management
Agreement was amended to extend the term of the agreement through December 31,
2002, to provide for the automatic extension of the agreement for successive
quarterly periods unless the agreement is terminated by a party, and to adjust
the management fees payable thereunder. The Company and BMCA also allocate a
portion of the management fees payable by BMCA under the Management Agreement to
separate lease payments for the use of BMCA's headquarters. Based on the
services provided by the Company in 2001 under the Management Agreement, the
aggregate amount payable to the Company under the Management Agreement for 2002,
net of the lease payments to the subsidiary of G-I Holdings, is expected to be
approximately $6.0 million.
In September 1999, the Company granted its President and Chief Executive
Officer the right to purchase, and such officer purchased, 318,599 shares of its
common stock held in treasury for a purchase price of $9.563 per share, or an
aggregate of $3.047 million. Pursuant to the purchase agreement, the Company
loaned such officer $3.047 million to purchase the shares of common stock, which
loan is evidenced by a recourse demand note with interest at the Applicable
Federal Rate for Short Term Instruments. The principal amount of the note is
payable in four installments from June 2001 through January 2004. However, if
this officer remains continuously employed by the Company through each
installment date, the principal amount due on such installment date will be
forgiven. As the loan is forgiven, compensation expense is being recorded,
including $762,000 in the year 2001. The loan balance outstanding, $2.3 million
at December 31, 2001, is reflected as a reduction of "Additional paid-in
capital". The difference between the market value of the shares issued of $9.563
per share and the average cost per share in treasury of $9.73 per share,
amounting to $53,000, was also reflected as a reduction of "Additional paid-in
capital."
NOTE 17. BUSINESS SEGMENT INFORMATION
The Company is a leading multinational manufacturer of a broad spectrum of
specialty chemicals and mineral products. In addition to the Mineral Products
business segment, the Company operates its Specialty Chemicals business through
three reportable business segments, organized based upon the markets for their
products and the internal management of the Company, as follows:
PERSONAL CARE products serve as critical ingredients in the formulation of
many well-known skin care, hair care, toiletry and cosmetic products. Skin care
ingredients include sunscreen actives, waterproofing agents, preservatives,
emollients and moisturizers. Hair care ingredients include a number of specially
formulated fixative resins for hairsprays, mousses and gels, as well as
thickeners and stabilizers for shampoos and conditioners.
PHARMACEUTICAL, FOOD AND BEVERAGE products are sold to these three
government-regulated industries. In the pharmaceutical market, the Company's
products serve as key ingredients in prescription and over-the-counter tablets,
injectable prescription drugs and serums, cough syrups, antiseptics, toothpastes
and denture adhesives. The Company's food products are comprised of the
alginates business which was acquired in October 1999 (see Note 9). The
Company's alginates products are used as stabilizers in many well-known consumer
products. The Company's specialty polymers serve the beverage market by assuring
the clarity and extending the shelf life of beer, wine and fruit juices.
F-40
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 17. BUSINESS SEGMENT INFORMATION -- (CONTINUED)
PERFORMANCE CHEMICALS, FINE CHEMICALS AND INDUSTRIAL. The Company's
Performance Chemicals business includes acetylene-based polymers, vinyl ether
monomers, and advanced materials for consumer, agricultural and industrial
applications. The Company's acetylene-based chemistry produces a number of
performance polymers for use in a wide range of markets including coatings,
agriculture, imaging, detergents, electronics and metalworking. The Company
manufactures a broad range of highly specialized fine chemicals which are sold
to the pharmaceutical, biotechnology, agricultural and imaging markets,
including bulk pharmaceuticals, pharmaceutical intermediates, and pheromones for
use in insect population measurement and control. The Company's Industrial
business markets several intermediate and solvent products, such as butanediol,
tetrahydrofuran (THF) and N-methyl pyrrolidone (NMP), which are sold primarily
to industrial markets for use in high performance plastics, lubricating oil and
chemical processing, electronics cleaning, and coatings.
MINERAL PRODUCTS. The Company manufactures ceramic-coated colored roofing
granules that are sold primarily to the North American roofing industry for use
in the production of asphalt roofing shingles.
The following segment data are presented based on the Company's internal
management reporting system for the four reportable business segments. The
Company evaluates segment performance based on operating income. Therefore, the
measure of profit or loss that is reported to management for each segment is
operating income. Interest expense, other income items and income taxes are not
allocated to the business segments for management reporting. At this time, the
Company's internal management reporting system does not report assets by segment
for the three specialty chemicals reportable segments (Personal Care;
Pharmaceutical, Food and Beverage; and Performance Chemicals, Fine Chemicals and
Industrial), as many of the Company's plant assets are utilized by several of
the segments. Therefore, the following asset-related segment data are presented
only for Specialty Chemicals and Mineral Products.
Sales of Mineral Products to BMCA and its subsidiaries in 1999, 2000 and
2001 accounted for 65.7%, 82.5% and 78.6%, respectively, of the Company's net
sales of Mineral Products, representing 7.3%, 7.6% and 8.1%, respectively, of
the Company's total net sales. No other customer accounted for more than 5% of
the Company's total net sales in 1999, 2000 or 2001.
F-41
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 17. BUSINESS SEGMENT INFORMATION -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 2000 2001
------------- ------------- -------------
(MILLIONS)
Net sales:
Personal Care ....................................................... $ 187.1 $ 189.0 $ 196.2
Pharmaceutical, Food and Beverage ................................... 177.3 232.8 234.6
Performance Chemicals, Fine Chemicals
and Industrial ................................................... 335.7 290.2 275.7
------------ ------------ ------------
Total Specialty Chemicals ......................................... 700.1 712.0 706.5
Mineral Products(1) ................................................. 87.3 71.9 80.7
------------ ------------ ------------
Net sales ............................................................. $ 787.4 $ 783.9 $ 787.2
============ ============ ============
Operating income(2):
Personal Care(3) .................................................... $ 47.1 $ 33.2 $ 34.0
Pharmaceutical, Food and Beverage ................................... 40.7 48.0 48.5
Performance Chemicals, Fine Chemicals and Industrial ................ 44.0 4.4 18.5
------------ ------------ ------------
Total Specialty Chemicals ......................................... 131.8 85.6 101.0
Mineral Products .................................................... 16.1 9.4 10.7
------------ ------------ ------------
Total segment operating income .................................... 147.9 95.0 111.7
Unallocated corporate office (expenses) income ...................... (1.5) 0.8 0.4
(Provision) benefit for restructuring(4) ............................ (0.4) (14.4) 0.5
------------- ------------ ------------
Total operating income ................................................ 146.0 81.4 112.6
Interest expense and other income (expense), net ...................... (69.5) 63.6 (111.6)
------------ ------------ ------------
Income from continuing operations before income taxes ................. $ 76.5 $ 145.0 $ 1.0
============= ============ ============
Assets:
Specialty Chemicals ................................................. $ 1,182.0 $ 1,173.3 $ 1,251.3
Mineral Products .................................................... 153.3 152.9 147.5
General Corporate(5) ................................................ 500.0 634.1 773.8
------------- ------------ ------------
Total assets .......................................................... $ 1,835.3 $ 1,960.3 $ 2,172.6
============ ============ ============
Capital expenditures and acquisitions:
Specialty Chemicals ................................................. $ 101.5 $ 53.8 $ 95.9
Mineral Products .................................................... 7.5 4.6 5.5
------------ ------------ ------------
Total ................................................................. $ 109.0 $ 58.4 $ 101.4
============ ============ ============
Depreciation and amortization of goodwill and intangibles:
Specialty Chemicals ................................................. $ 53.1 $ 55.9 $ 59.1
Mineral Products .................................................... 11.4 11.0 10.7
Unallocated corporate office ........................................ 0.4 0.6 0.5
------------ ------------ ------------
Total ................................................................. $ 64.9 $ 67.5 $ 70.3
============ ============ ============
-------
(1) Includes sales to BMCA and its subsidiaries of $57.3, $59.3 and $63.4
million for 1999, 2000 and 2001, respectively.
(2) Operating income for 1999 and 2000 for the three Specialty Chemicals
business segments has been reclassified to conform to the 2001
presentation, based on a reallocation of certain manufacturing costs.
F-42
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 17. BUSINESS SEGMENT INFORMATION -- (CONTINUED)
(3) Personal Care operating income for the year 1999 includes a pre-tax gain of
$8.5 million from the sale of the pearlescent pigments product line. See
Note 6.
(4) Of the $14.4 million provision for restructuring in 2000, $11.9 million
relates to the Personal Care business segment and $2.5 million relates to
the Performance Chemicals, Fine Chemicals and Industrial business segment.
Of the $0.5 million reversal of restructuring reserves in 2001, $0.4 million
relates to the Personal Care business segment and $0.1 million relates to
the Performance Chemicals, Fine Chemicals and Industrial business segment.
(5) General Corporate assets primarily represent the Company's investments in
trading and available-for-sale securities and other short-term investments
which, in 2001, are held in a separate wholly owned subsidiary of the
Company, ISP Investco Inc., for general corporate purposes and are not
allocated to business segments. The year 2001 also includes $307.9 million
of restricted cash which was used to redeem the remaining 2003 Notes on
January 14, 2002 (see Note 13).
NOTE 18. GEOGRAPHIC INFORMATION
Financial information set forth below for foreign operations represents
sales and long-lived assets (property, plant and equipment) of foreign-based
subsidiaries. Net sales are attributed to countries based on the location of
customers and reflect the Company's internal management reporting system.
YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
--------- --------- ---------
(MILLIONS)
Net sales:
North America:
United States .............................. $410.5 $389.5 $376.9
Canada ..................................... 16.9 21.1 22.0
----------- -------- --------
Total North America ...................... 427.4 410.6 398.9
------------ -------- --------
Europe:
Germany .................................... 89.0 73.0 78.6
United Kingdom ............................. 39.8 35.6 33.3
France ..................................... 17.3 19.7 21.5
Italy ...................................... 15.9 14.1 15.8
Spain ...................................... 11.4 11.2 13.0
Belgium .................................... 5.6 10.5 13.1
Switzerland ................................ 7.7 9.3 11.3
Other European countries ................... 47.4 54.0 54.0
------------ --------- --------
Total Europe ............................. 234.1 227.4 240.6
------------ --------- --------
Asia-Pacific:
Japan ...................................... 24.7 26.3 27.2
South Korea ................................ 9.3 13.9 16.0
China ...................................... 12.7 15.9 9.2
Australia .................................. 11.5 10.9 10.2
Taiwan ..................................... 9.6 11.7 8.8
Other Asia-Pacific countries ............... 21.1 21.6 26.8
------------ --------- -------
Total Asia-Pacific ....................... 88.9 100.3 98.2
------------ --------- -------
F-43
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 18. GEOGRAPHIC INFORMATION -- (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------
1999 2000 2001
-------- ------- ------
(MILLIONS)
Latin America:
Mexico .................................... 12.3 19.6 19.4
Brazil .................................... 12.7 16.6 16.4
Other Latin American countries ............ 12.0 9.4 13.7
-------- ------- ------
Total Latin America ..................... 37.0 45.6 49.5
-------- ------- ------
Total net sales ............................... $787.4 $783.9 $787.2
======== ======= ======
Property, plant and equipment, net:
United States ............................... $496.1 $495.1 $493.9
Germany ..................................... 48.0 43.7 36.9
United Kingdom .............................. 11.3 11.3 12.1
All other foreign countries ................. 14.8 12.9 17.9
-------- ------- ------
Total property, plant and equipment, net ...... $570.2 $563.0 $560.8
======== ======= ======
Approximately 52% of the Company's sales in 2001 were in foreign countries
which are subject to currency exchange rate fluctuation risks. See Note 2 for a
discussion of the Company's policy to manage these risks. Certain countries in
which the Company has sales are subject to additional risks, including high
rates of inflation, exchange controls, government expropriation and general
instability.
NOTE 19. COMMITMENTS AND CONTINGENCIES
ASBESTOS LITIGATION AGAINST G-I HOLDINGS
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 ("Asbestos Claims").
Neither the Company nor the assets or operations of the Company, which was
operated as a division of a corporate predecessor of G-I Holdings prior to July
1986, have been involved in the manufacture or sale of asbestos products. The
Company believes that it should have no legal responsibility for damages in
connection with Asbestos Claims.
The Company has been advised by its Chairman of the Board, Samuel J. Heyman,
that in 2000, three actions were commenced by creditors or potential creditors
of G-I Holdings, two of which were filed against Mr. Heyman and the third
against Mr. Heyman and certain other stockholders of G-I Holdings. Two of the
actions commenced in 2000 were effectively stayed and the third was dismissed as
a result of the G-I Holdings Chapter 11 filing. In September 2001, the Official
Committee of Unsecured Creditors of G-I Holdings filed a substantially similar
action against Mr. Heyman. The actions allege, among other things, that the
distribution by G-I Holdings of the capital stock of the Company to Mr. Heyman
and certain G-I Holdings stockholders in January 1997 was without fair
consideration and a fraudulent conveyance. These actions seek, among other
things, to set aside such distribution and to require Mr. Heyman and such other
stockholders to return to G-I Holdings the capital stock of the Company held by
them as well as an unspecified amount of damages. The defendants in such actions
have advised the Company that they believe these actions are without merit and
that the defendants intend to vigorously oppose them. However, if such actions
were successful, the plaintiffs could seek to undo such distribution, which
could result in a change of control of the Company. See Note 13 for a discussion
of the Senior Credit Facilities.
F-44
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 19. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
ENVIRONMENTAL LITIGATION
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), under the Comprehensive Environmental Response Compensation and
Liability Act, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed, a number of which Environmental Claims are in
the early stages or have been dormant for protracted periods.
The Company estimates that its liability with respect to all Environmental
Claims (including those relating to its closed Linden, New Jersey plant
described below), and certain other environmental compliance expenses, as of
December 31, 2001, is approximately $26.6 million, before reduction for
insurance recoveries reflected on the Company's Consolidated Balance Sheet
(discussed below) of $21.7 million that relate to both past expenses and
estimated future liabilities ("estimated recoveries"). 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, plans for development of
the Linden, New Jersey property, 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.
After considering the relevant legal issues and other pertinent factors, the
Company believes that it will receive the estimated recoveries and that the
recoveries could be in excess of the current estimated liability for all
Environmental Claims, although there can be no assurance in this regard. The
Company believes it is entitled to substantially full defense and indemnity
under its insurance policies for most Environmental Claims, although the
Company's insurers have not affirmed a legal obligation under the policies to
provide indemnity for those claims.
In June 1997, G-I Holdings commenced litigation against the insurers on
behalf of itself and its predecessors, successors, subsidiaries and related
corporate entities seeking amounts substantially in excess of the estimated
recoveries. While the Company believes that its claims are meritorious, there
can be no assurance that the Company will prevail in its efforts to obtain
amounts equal to, or in excess of, the estimated recoveries.
In June 1989, the Company entered into a Consent Order with the New Jersey
Department of Environmental Protection ("NJDEP") requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee the Company's
performance. This Consent Order does not address any potential natural resource
damage claims for which an estimate cannot currently be made. In April 1993, the
NJDEP issued orders which require the prevention of discharge of contaminated
groundwater and stormwater from the site and the elimination of other potential
exposure concerns. The Company believes, although it cannot be certain, that,
taking into account its plans for development of the site, it can comply with
the NJDEP order at a cost of approximately $17.0 million.
LEASE COMMITMENTS
Leases for certain equipment at the Company's mineral products plants are
accounted for as capital leases and are included in "Property, plant and
equipment, net," at December 31, 2000 and 2001 in the amount of $0.9 and $0.4
million, respectively. The Company also has operating leases for a
sale-leaseback transaction related to its Freetown, Massachusetts manufacturing
facility, which was entered into in 1998, and for transportation, production and
data processing equipment and for various buildings and offices. Rental expense
on operating
F-45
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
NOTE 19. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
leases was $17.3, $17.9 and $17.4 million for 1999, 2000 and 2001, respectively.
Future minimum lease payments for properties which were held under long-term
noncancelable leases as of December 31, 2001 were as follows:
CAPITAL OPERATING
LEASES LEASES
------------- ----------
(THOUSANDS)
2002 ......................................... $140 $10,585
2003 ......................................... 144 9,739
2004 ......................................... 4 8,542
2005 ......................................... 1 7,251
2006 ......................................... -- 1,223
Later years .................................. -- 7,009
--------- ---------
Total minimum payments ....................... 289 $44,349
=========
Less interest included above ................. (18)
--------
Present value of net minimum lease payments .. $271
========
OTHER MATTERS
The Company has received site designation for the construction of a
hazardous waste treatment, storage and disposal facility at its Linden, New
Jersey property and has received approval from the New Jersey Turnpike Authority
for a direct access ramp extension from the New Jersey Turnpike to the site. If
the Company is successful in securing the necessary permits to construct and
operate the hazardous waste facility and decides to proceed with this project,
the Company would develop and operate the facility in a separate subsidiary,
either on its own or in a joint venture with a suitable partner. The Company
estimates that the cost of constructing the facility will be approximately $100
million and, if approved, the facility is anticipated to be in operation three
years after commencement of construction. The Company anticipates utilizing
internally generated cash and/or seeking project or other independent financing
for this project. Accordingly, the Company would not expect such facility to
impact materially its liquidity or capital resources. The Company is also
investigating other development opportunities at this site consistent with a
plan by the County of Union to re-develop the Tremley Point area of Linden. The
Company expects that related planning and evaluation efforts will continue
through 2002. The net book value of the Linden property at December 31, 2001 was
$15.8 million.
See Note 8 for information regarding additional contingencies.
F-46
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 BY QUARTER 2001 BY QUARTER
------------------------------------- --------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------- ------ ------ ------- ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net sales .................. $197.9 $200.3 $195.9 $189.8 $203.2 $203.3 $188.6 $192.1
Cost of products sold ...... 129.4 127.0 129.7 128.8 133.3 122.3 114.9 130.3
------ ------- ------ ------ ------ ------ ------ ------
Gross profit ............... $ 68.5 $ 73.3 $ 66.2 $ 61.0 $ 69.9 $ 81.0 $ 73.7 $ 61.8
====== ======= ====== ====== ====== ====== ====== ======
Operating income(1) ........ $ 25.6 $ 29.8 $ 23.9 $ 2.1 $ 25.9 $ 35.6 $ 30.5 $ 20.6
====== ======= ====== ====== ====== ====== ====== ======
Income (loss) before
income taxes ............ $ 11.8 $ 15.2 $ 41.5 $ 76.5 $ 35.4 $ 0.2 $ (2.9) $(31.7)
Income tax (provision)
benefit ................. (4.1) (5.4) (14.5) (26.9) (12.4) (0.1) 1.0 11.1
------ ------- ------ ----- ----- ------ ------ ------
Income (loss) before
cumulative effect of
change in accounting
principle ............... 7.7 9.8 27.0 49.6 23.0 0.1 (1.9) (20.6)
Cumulative effect of change
in accounting principle,
net of income tax benefit -- -- -- -- (0.4) -- -- --
----- ------- ----- ----- ----- ----- ------ ------
Net income (loss) ......... $ 7.7 $ 9.8 $27.0 $ 49.6 $ 22.6 $ 0.1 $ (1.9) $(20.6)
===== ======= ===== ====== ====== ===== ====== ======
Earnings per common
share(2):
Basic:
Income (loss) before
cumulative effect
of accounting change . $ .11 $ .14 $ .40 $ .74 $ .35 $-- $(.03) $ (.32)
Cumulative effect of
accounting change ... -- -- -- -- (.01) -- -- --
----- ------- ----- ----- ----- ----- ----- -------
Net income (loss) ..... $ .11 $ .14 $ .40 $ .74 $ .34 $-- $(.03) $ (.32)
===== ======= ===== ===== ===== ===== ===== =======
Diluted:
Income (loss) before
cumulative effect
of accounting change $ .11 $ .14 $ .40 $ .74 $ .34 $-- $(.03) $ (.32)
Cumulative effect
of accounting
change .............. -- -- -- -- (.01) -- -- --
----- ----- ----- ----- ----- ----- ------ ------
Net income (loss) ..... $ .11 $ .14 $ .40 $ .74 $ .34 $-- $ (.03) $ (.32)
===== ===== ===== ===== ===== ===== ====== =======
-------
(1) Operating income for the fourth quarter of 2000 reflects a provision for
restructuring of $14.4 million. See Note 4 to Consolidated Financial
Statements.
(2) Earnings per share are calculated separately for each quarter and the full
year. Accordingly, annual earnings per share will not necessarily equal the
total of the quarters.
F-47
SCHEDULE II
INTERNATIONAL SPECIALTY PRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1999
(THOUSANDS)
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
1999 EXPENSES DEDUCTIONS 1999
---------- ----------- ----------- -------------
DESCRIPTION
Valuation and Qualifying
Accounts Deducted
From Assets
to Which They Apply:
Allowance for doubtful
accounts ............... $ 2,494 $ 2,026 $ 1,109(a) $ 3,411
Reserve for inventory
market valuation. .... 21,360 5,063 11,275(a) 15,148
Reserves for
restructuring
and staff reduction . 9,342 2,273(c) 10,291(d) 1,324
YEAR ENDED DECEMBER 31, 2000
(THOUSANDS)
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
2000 EXPENSES DEDUCTIONS OTHER 2000
---------- ----------- ----------- -------- -------------
DESCRIPTION
Valuation and Qualifying
Accounts Deducted From
Assets to
which They Apply:
Allowance for doubtful
accounts ............. $ 3,411 $ 1,934 $ 434(a) $ -- $ 4,911
Reserve for inventory
market valuation ... 15,148 11,902 8,535(a) 3,798(b) 22,313
Reserves for restructuring
and staff reduction . 1,324 3,613 1,324 -- 3,613
YEAR ENDED DECEMBER 31, 2001
(THOUSANDS)
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
2001 EXPENSES DEDUCTIONS 2001
---------- ----------- ----------- -------------
DESCRIPTION
Valuation and Qualifying
Accounts Deducted From
Assets to
which They Apply:
Allowance for doubtful
accounts ............ $ 4,911 $ 2,474 $ 1,913(a) $ 5,472
Reserve for inventory
market valuation ... 22,313 10,427 4,708(a) 28,032
Reserves for restructuring
and staff reduction . 3,613 -- 3,613(e) --
----------
(a) Represents write-off of uncollectible accounts net of recoveries, and the
effects of foreign currency translation.
(b) Represents balance acquired in acquisitions.
(c) Reflects a reserve established for a staff reduction program in 1999 (see
Note 4 to Consolidated Financial Statements).
(d) Includes $1,863 of excess reserves which were reversed and credited to the
Consolidated Statement of Income (see Note 4 to Consolidated Financial
Statements).
(e) Includes $471 of excess reserves which were reversed and credited to the
Consolidated Statement of Income (see Note 4 to Consolidated Financial
Statements).
S-1