SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 29, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-17827
ISP HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)
818 Washington Street, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 428-0847
(Not applicable)
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
As of May 8, 1998, 1,757,874 shares of International Specialty Products Inc.
common stock (par value, $.01 per share) were outstanding. There is no trading
market for the Registrant's common stock.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
ISP HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Quarter Ended
------------------------
March 30, March 29,
1997 1998
---------- ----------
(Thousands)
Net sales.................................. $ 191,157 $ 200,703
--------- ---------
Costs and expenses:
Cost of products sold.................... 114,161 119,177
Selling, general and administrative...... 37,336 40,421
Goodwill amortization.................... 3,317 3,339
--------- ---------
Total costs and expenses............... 154,814 162,937
--------- ---------
Operating income........................... 36,343 37,766
Interest expense........................... (18,597) (17,938)
Equity in earnings of joint venture........ 1,385 1,455
Other income, net.......................... 6,043 9,955
--------- ---------
Income before income taxes................. 25,174 31,238
Income taxes............................... (9,194) (11,354)
Minority interest in income of subsidiary.. (3,776) (4,212)
--------- ---------
Net income................................. $ 12,204 $ 15,672
========= =========
See Notes to Consolidated Financial Statements
1
<PAGE>
ISP HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
March 29,
December 31, 1998
1997
(Unaudited)
------------ ----------
ASSETS (Thousands)
Current Assets:
Cash and cash equivalents..........................$ 20,495 $ 16,319
Investments in trading securities.................. 67,943 39,678
Investments in available-for-sale securities....... 140,812 213,771
Investments in held-to-maturity securities......... 311 -
Other short-term investments....................... 26,682 28,220
Accounts receivable, trade, net.................... 67,077 83,390
Accounts receivable, other......................... 25,288 31,590
Receivable from related parties, net............... 4,124 7,015
Inventories........................................ 119,910 115,224
Other current assets............................... 16,773 18,430
---------- ----------
Total Current Assets................................. 489,415 553,637
Property, plant and equipment, net................... 518,922 523,625
Goodwill, net........................................ 409,886 406,553
Other assets......................................... 67,457 62,147
---------- ----------
Total Assets.........................................$1,485,680 $1,545,962
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt....................................$ 39,076 $ 51,928
Current maturities of long-term debt............... 684 200,609
Accounts payable................................... 46,283 51,185
Accrued liabilities................................ 74,092 76,448
Income taxes....................................... 7,200 7,812
---------- ----------
Total Current Liabilities........................ 167,335 387,982
---------- ----------
Long-term debt less current maturities............... 798,762 615,737
---------- ----------
Deferred income taxes................................ 67,918 74,563
---------- ----------
Other liabilities.................................... 63,493 64,386
---------- ----------
Minority interest in subsidiary...................... 126,331 130,547
- ---------- ----------
Stockholders' Equity:
Cumulative redeemable convertible preferred stock,
$.01 par value per share; 800,000,000 shares
authorized: no shares issued.................... - -
Common stock, $.01 par value per share;
3,000,000 shares authorized: 1,769,054 shares
issued........................................... 18 18
Additional paid-in capital......................... 213,772 214,007
Treasury stock, at cost - 9,900 and 11,180 shares.. (839) (1,169)
Retained earnings.................................. 40,080 55,752
Accumulated other comprehensive income............. 8,810 4,139
---------- ----------
Total Stockholders' Equity....................... 261,841 272,747
---------- ----------
Total Liabilities and Stockholders' Equity...........$1,485,680 $1,545,962
========== ==========
See Notes to Consolidated Financial Statements
2
<PAGE>
ISP HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Quarter Ended
--------------------
March 30, March 29,
1997 1998
--------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 17,938 $ 20,495
-------- --------
Cash provided by (used in) operating activities:
Net income............................................. 12,204 15,672
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation....................................... 10,006 10,639
Goodwill amortization.............................. 3,317 3,339
Deferred income taxes.............................. 6,626 7,488
Increase in working capital items...................... (17,996) (12,411)
Purchases of trading securities........................ (24,216) (23,173)
Proceeds from sales of trading securities.............. 6,406 50,724
Increase in net receivable from related parties........ (3,004) (2,891)
Change in cumulative translation adjustment............ (4,936) (2,661)
Change in minority interest in subsidiary.............. 2,881 3,745
Other, net............................................. 4,872 7,206
------- --------
Net cash provided by (used in) operating activities.. (3,840) 57,677
------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition................... (13,945) (75,139)
Proceeds from sale-leaseback transaction............... - 56,050
Purchases of available-for-sale securities............. (73,956) (157,285)
Purchases of held-to-maturity securities............... (1,623) -
Proceeds from sales of available-for-sale securities... 31,739 80,853
Proceeds from held-to-maturity securities.............. 1,386 311
-------- --------
Net cash used in investing activities................ (56,399) _(95,210)
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. - 3,126
Increase in short-term debt............................ 28,412 12,852
Increase in borrowings under revolving credit facility. 32,575 17,000
Other decrease in long-term debt....................... (140) (132)
Repurchases of common stock............................ (839) (330)
Financing fees and expenses............................ (492) (85)
Other.................................................. 705 926
-------- --------
Net cash provided by financing activities............ 60,221 33,357
-------- --------
Net change in cash and cash equivalents.................. (18) (4,176)
-------- --------
Cash and cash equivalents, end of period................. $ 17,920 $ 16,319
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)................. $ 16,570 $ 19,881
Income taxes......................................... 36 2,802
See Notes to Consolidated Financial Statements
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The "Company" refers to ISP Holdings Inc. and its subsidiaries, while
"ISP Holdings" refers to the ISP Holdings Inc. parent company. The
consolidated financial statements for the Company reflect, in the opinion
of management, all adjustments necessary to present fairly the financial
position of the Company at March 29, 1998, and the results of operations
and cash flows for the periods ended March 30, 1997 and March 29, 1998.
All adjustments are of a normal recurring nature. These financial
statements should be read in conjunction with the annual financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (the "Form 10-K").
Note 1. Merger of International Specialty Products Inc. into ISP Holdings
On March 30, 1998, the Board of Directors of International Specialty
Products Inc. ("ISP") approved the merger of ISP with and into ISP
Holdings, the owner of 80,500,000 shares of ISP's common stock
(approximately 84% of the outstanding shares). ISP Holdings will be the
surviving corporation of the merger. In the merger, each outstanding share
of ISP's common stock, other than shares held in treasury or by ISP
Holdings, will be converted into one share of common stock of the surviving
corporation, whose name will be changed to International Specialty Products
Inc. The merger is subject to, among other things, the approval of the
holders of a majority of each of the respective companies' outstanding
shares of common stock. As part of the transaction, the ownership of ISP
Holdings' shareholders in the surviving corporation will be reduced by
26,666,667 shares, to 53,833,333 shares. As a result of the merger, in
addition to the assets and liabilities of ISP, ISP Holdings' assets and
liabilities will remain with the surviving corporation.
Note 2. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods is required. In the Company's case, comprehensive income includes
net income, unrealized gains and losses from currency translation and
investments in available-for-sale securities, and pension liability
adjustments.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Comprehensive Income (Continued)
Quarter Ended
--------------------
March 30, March 29,
1997 1998
--------- ---------
(Thousands)
Net income........................................$ 12,204 $ 15,672
-------- ---------
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities:
Unrealized holding gains arising during
the period, net of income tax effect
of $3,615 and $2,838.......................... 7,895 6,306
Less: reclassification adjustment for
gains included in net income, net of
income tax effect of $1,065 and $3,690........ (2,831) (8,316)
- -------- ---------
Total........................................... 5,064 (2,010)
-------- ---------
Foreign currency translation adjustment......... (4,936) (2,661)
Minimum pension liability adjustment............ 83 -
-------- ---------
Total other comprehensive income (loss) .......... 211 (4,671)
-------- ---------
Comprehensive income..............................$ 12,415 $ 11,001
======== =========
Changes in the components of "Accumulated other comprehensive income"
for the quarter ended March 29, 1998 are as follows:
Unrealized Cumulative
Gains on Foreign Minimum Accumulated
Available- Currency Pension Other
for-sale Translation Liability Comprehensive
Securities Adjustment Adjustment Income
---------- ----------- ---------- -------------
(Thousands)
Balance, December 31, 1997....$ 8,007 $ 1,385 $ (582) $ 8,810
Change for the period......... (2,010) (2,661) - (4,671)
-------- -------- -------- --------
Balance, March 29, 1998.......$ 5,997 $ (1,276) $ (582) $ 4,139
======== ======== ======== ========
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Acquisition
In February 1998, ISP acquired Polaroid Corporation's Freetown,
Massachusetts fine chemicals facility. In connection with the acquisition, ISP
entered into a sale-leaseback arrangement of the facility's equipment with a
third party. The lease is to be accounted for as an operating lease, with an
initial term of four years and, at ISP's option, up to three one-year renewal
periods. As part of the transaction, ISP entered into a long-term supply and
license agreement with Polaroid for the imaging chemicals and polymers
manufactured at the facility and used by Polaroid in its instant film business.
Note 4. Inventories
Inventories comprise the following:
December 31, March 29,
1997 1998
------------ ---------
(Thousands)
Finished goods................ $ 84,912 $ 74,941
Work in process............... 20,088 21,553
Raw materials and supplies.... 18,408 21,606
- -------- -------
Total......................... 123,408 118,100
Less LIFO reserve............. (3,498) (2,876)
- -------- --------
Inventories................... $119,910 $115,224
======== ========
Note 5. Contingencies
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, liquidity, results
of operations, cash flows or financial position of the Company. However,
adverse decisions or events, particularly as to the liability and the financial
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Contingencies (Continued)
responsibility of the Company's insurers and of the other parties involved at
each site and their insurers, could cause the Company to increase its estimate
of its liability in respect of such matters. It is not currently possible to
estimate the amount or range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 13 to Consolidated Financial Statements contained in the Form 10-K.
Tax Claim against GAF
Certain subsidiaries of ISP Holdings were members of the GAF Corporation
("GAF") consolidated Federal income tax group (the "GAF Group") in 1990 and,
accordingly, would be severally liable for any tax liability of the GAF Group
in respect of such year. Effective as of January 1, 1997, neither ISP
Holdings nor any of its subsidiaries are members of the GAF Group.
On September 15, 1997, GAF received a notice from the Internal Revenue
Service (the "Service") 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 a subsidiary of GAF, GAF Fiberglass
Corporation ("GFC"), holds an interest. The claim of the Service for interest
and penalties, after taking into account the effect on the use of net
operating losses and foreign tax credits, could result in GFC incurring
liabilities significantly in excess of the deferred tax liability of $131.4
million that GAF recorded in 1990 in connection with this matter. GAF has
advised the Company that it believes that GFC will prevail in this matter,
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 financial position or results of operations. GAF, G-I Holdings
Inc. and certain subsidiaries of GAF have agreed to jointly and severally
indemnify the Company against any tax liability associated with the
surfactants partnership, which the Company would be severally liable for,
together with GAF and several subsidiaries of GAF, should GFC be unable to
satisfy such liability.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - First Quarter 1998 Compared With
First Quarter 1997
The Company recorded first quarter 1998 net income of $15.7
million compared with $12.2 million in the first quarter of 1997. The
28% increase in net income was attributable to higher operating and
other income and, to a lesser extent, lower interest expense.
Net sales for the first quarter of 1998 were $200.7 million, a 5%
increase compared with $191.2 million for the first quarter of 1997.
The higher sales principally reflected higher sales of specialty
chemicals (up $8.0 million) as a result of increased sales volumes (up
$14.6 million), partially offset by the unfavorable effect of the
stronger U.S. dollar relative to other currencies in certain areas of
the world ($4.9 million), and, to a lesser extent, by unfavorable
selling prices. Sales of mineral products increased $1.7 million (8%)
for the first quarter due equally to increased sales volumes and
favorable pricing, while sales of filter products decreased slightly
for the quarter. The sales growth in the first quarter reflected
increased sales in the U.S., Europe and the Western Hemisphere,
partially offset by lower sales in the Asia-Pacific region.
Operating income for the first quarter of 1998 was $37.8 million
compared with last year's $36.3 million. The increase in operating
income reflected improved income from specialty chemicals (up $0.9
million) as a result of the increased sales and higher gross profit
margins, partially offset by the impact of the stronger U.S. dollar.
Operating income for the mineral products business increased $0.6
million (14%) due to higher sales levels and improved gross profit
margins.
Interest expense for the first quarter was $17.9 million compared
with $18.6 million in the first quarter of 1997, with the decrease due
primarily to lower average borrowings. Other income, net, for the
first quarter of 1998 was $10.0 million compared with $6.0 million in
the first quarter of 1997, principally reflecting higher investment
income, partially offset by foreign exchange losses and miscellaneous
nonrecurring expenses.
Liquidity and Financial Condition
During the first quarter of 1998, the Company generated cash from
operations of $57.7 million, reinvested $75.1 million for capital
programs and an acquisition, generated $56.1 million from a sale-
leaseback transaction related to the acquisition (see below and Note 3
to Consolidated Financial Statements), and used $76.1 million for net
8
<PAGE>
purchases of available-for-sale and held-to-maturity securities, for a
net cash outflow of $37.5 million before financing activities. Cash
from operations reflected a $27.6 million cash inflow from net sales of
trading securities and also included $5.5 million of dividends received
from the GAF-Huls Chemie GmbH joint venture. Working capital increased
by $12.4 million, primarily reflecting a $16.3 million increase in
trade accounts receivable due to $25.9 million higher sales in March
1998 versus December 1997, and a $6.3 million increase in accounts
receivable, other, mainly due to an increase in the receivable from the
purchaser of the Company's domestic trade accounts receivable,
partially offset by a $7.0 million decrease in inventories and an $8.0
million increase in payables.
Net cash provided by financing activities in the first quarter of 1998
totaled $33.4 million, principally reflecting a $17.0 million increase in
borrowings under ISP's bank revolving credit facility, a $12.9 million
increase in short-term borrowings and $3.1 million proceeds from the sale
of ISP's accounts receivable.
As a result of the foregoing factors, cash and cash equivalents
decreased by $4.2 million during the first quarter of 1998 to $16.3 million
(excluding $281.7 million of trading and available-for-sale securities and
other short-term investments).
As of March 29, 1998, the Company's scheduled repayments of long-term
debt for the twelve months ending March 31, 1999 aggregated $200.6 million,
including $200 million relating to ISP's 9% Senior Notes due 1999.
In February 1998, ISP acquired Polaroid Corporation's Freetown,
Massachusetts fine chemicals facility. In connection with the acquisition,
ISP entered into a sale-leaseback arrangement of the facility's equipment
with a third party. The lease is to be accounted for as an operating
lease, with an initial term of four years and, at ISP's option, up to three
one-year renewal periods. As part of the transaction, ISP entered into a
long-term supply and license agreement with Polaroid for the imaging
chemicals and polymers manufactured at the facility and used by Polaroid in
its instant film business.
On March 30, 1998, ISPs Board of Directors approved the merger of ISP
with and into ISP Holdings, the owner of 80,500,000 shares of ISP's common
stock (approximately 84% of the outstanding shares). ISP Holdings will be
the surviving corporation of the merger. As a result of the merger, in
addition to the assets and liabilities of ISP, ISP Holdings' assets and
liabilities will remain with the surviving corporation. See Note 1 to
Consolidated Financial Statements.
ISP Holdings is a holding company without independent businesses or
operations and, as such, is dependent upon the cash flow of its
approximately 84%-owned subsidiary, ISP, in order to satisfy its
9
<PAGE>
obligations. ISP Holdings expects to satisfy such obligations from, among
other things, refinancing of debt, dividends and loans from ISP, as to
which there are restrictions under ISP's revolving credit facility and the
indenture relating to ISP's 9% Senior Notes, and payments pursuant to the
Tax Sharing Agreement between ISP Holdings and ISP. As of March 29, 1998,
it would have been permissible for ISP to pay dividends in the aggregate
amount of $118.4 million, of which $99.2 million would have been available
to ISP Holdings, and to make loans to affiliates of $75 million. In
addition, as of March 29, 1998, loans in the aggregate amount of $50.0
million were owed by ISP to ISP Holdings.
The Company is in the process of implementing a new global information
system for capturing, processing and analyzing data relating to
manufacturing, customer service, sales order entry, inventory control and
financial systems. In conjunction with this initiative, the Company is
addressing its "Year 2000" compliance issues and does not believe that the
costs associated with, or the impact of, these issues will have a material
adverse effect on the operations, liquidity or capital resources of the
Company. At this time, the Company has no information concerning the
impact of Year 2000 issues on its suppliers and customers.
See Note 5 to Consolidated Financial Statements for information
regarding contingencies.
10
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
(b) No Reports on Form 8-K were filed during the quarter ended March 29,
1998.
11
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the Registrants listed below has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ISP HOLDINGS INC.
DATE: May 12, 1998 BY: /s/James P. Rogers
------------ -----------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: May 12, 1998 BY: /s/Jonathan H. Stern
------------ ---------------------------
- --
Vice President and Controller
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 1998 10-Q OF ISP HOLDINGS INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-29-1998
<CASH> 16,319
<SECURITIES> 253,449
<RECEIVABLES> 83,390
<ALLOWANCES> 0
<INVENTORY> 115,224
<CURRENT-ASSETS> 553,637
<PP&E> 523,625
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,545,962
<CURRENT-LIABILITIES> 387,982
<BONDS> 615,737
0
0
<COMMON> 18
<OTHER-SE> 272,729
<TOTAL-LIABILITY-AND-EQUITY> 1,545,962
<SALES> 200,703
<TOTAL-REVENUES> 200,703
<CGS> 119,177
<TOTAL-COSTS> 119,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,938
<INCOME-PRETAX> 31,238
<INCOME-TAX> 11,354
<INCOME-CONTINUING> 15,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,672
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
