SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 3, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
As of November 12, 1999, 68,742,610 shares of International Specialty Products
Inc. common stock (par value $.01 per share) were outstanding.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
--------------------- --------------------
Sept. 27, October 3, Sept. 27, October 3,
1998 1999 1998 1999
---------- ---------- --------- ----------
Net sales...........................$ 197,515 $ 188,172 $ 598,263 $ 583,003
Cost of products sold............... (114,202) (106,855) (347,855) (337,664)
Selling, general and administrative. (40,436) (37,317) (117,372) (116,322)
Gain on sale of assets.............. - - - 8,541
Provision for restructuring and
consolidation..................... (3,000) (1,473) (3,000) (1,473)
Merger-related expenses............. (11,324) - (12,661) -
Goodwill amortization............... (4,062) (4,010) (10,737) (12,296)
--------- ---------- --------- ----------
Operating income.................... 24,491 38,517 106,638 123,789
Interest expense.................... (18,884) (19,070) (55,864) (58,830)
Equity in earnings of joint venture. - - 1,455 -
Other income, net................... 12,141 4,057 33,171 1,228
--------- ---------- --------- ----------
Income from continuing operations
before income taxes............... 17,748 23,504 85,400 66,187
Income taxes........................ (6,697) (8,249) (31,933) (23,231)
Minority interest in income of
subsidiary........................ (1,087) - (10,279) -
--------- ---------- --------- ----------
Income from continuing operations... 9,964 15,255 43,188 42,956
--------- ---------- --------- ----------
Discontinued operation (Note 1):
Income from discontinued
operation, net of income taxes.. 341 369 1,829 1,769
Gain on sale of discontinued
operation, net of income taxes
of $13,246...................... - 24,491 - 24,491
--------- ---------- --------- ----------
Income from discontinued operation.. 341 24,860 1,829 26,260
--------- ---------- --------- ----------
Net income..........................$ 10,305 $ 40,115 $ 45,017 $ 69,216
========= ========== ========= ==========
1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - (Continued)
(Thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
--------------------- --------------------
Sept. 27, October 3, Sept. 27, October 3,
1998 1999 1998 1999
--------- ---------- --------- ----------
Earnings per common share:
Basic:
Continuing operations.......... $ .15 $ .23 $ .74 $ .63
Discontinued operation......... - .36 .03 .38
--------- ---------- --------- ----------
Net income..................... $ .15 $ .59 $ .77 $ 1.01
========= ========== ========= ==========
Diluted:
Continuing operations.......... $ .15 $ .23 $ .74 $ .63
Discontinued operation......... - .36 .03 .38
--------- ---------- --------- ----------
Net income..................... $ .15 $ .59 $ .77 $ 1.01
========= ========== ========= ==========
Weighted average number of common
and common equivalent shares
outstanding:
Basic............................ 66,757 68,341 58,189 68,470
========= ========== ========= ==========
Diluted.......................... 67,473 68,522 58,430 68,644
========= ========== ========= ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
October 3,
December 31, 1999
1998 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 23,130 $ 30,278
Investments in trading securities.............. 67,333 -
Investments in available-for-sale securities... 233,625 338,521
Investments in held-to-maturity securities..... 12,287 -
Other short-term investments................... 41,708 38,533
Accounts receivable, trade, net................ 74,839 95,406
Accounts receivable, other..................... 20,649 30,614
Receivable from related parties, net........... 7,769 18,718
Inventories.................................... 129,050 132,380
Net current assets of discontinued operation... 18,514 -
Other current assets........................... 19,197 20,831
---------- ----------
Total Current Assets............................. 648,101 705,281
Property, plant and equipment, net............... 547,555 558,011
Goodwill, net.................................... 526,928 514,626
Net noncurrent assets of discontinued operation.. 5,724 -
Other assets..................................... 35,562 32,589
---------- ----------
Total Assets..................................... $1,763,870 $1,810,507
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 87,937 $ 87,826
Current maturities of long-term debt........... 583 38,438
Accounts payable............................... 59,784 87,399
Accrued liabilities............................ 83,684 88,453
Income taxes................................... 9,459 10,394
---------- ----------
Total Current Liabilities.................... 241,447 312,510
---------- ----------
Long-term debt less current maturities........... 896,095 785,307
---------- ----------
Deferred income taxes............................ 60,282 80,208
---------- ----------
Other liabilities................................ 64,323 64,245
---------- ----------
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..................... 489,285 486,661
Treasury stock, at cost - 735,744 and
880,968 shares, respectively................. (8,388) (8,578)
Retained earnings.............................. 44,892 114,108
Accumulated other comprehensive loss........... (24,761) (24,649)
---------- ----------
Total Stockholders' Equity................... 501,723 568,237
---------- ----------
Total Liabilities and Stockholders' Equity....... $1,763,870 $1,810,507
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
--------------------
Sept. 27, October 3,
1998 1999
-------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 20,137 $ 23,130
-------- ---------
Cash provided by (used in) operating activities:
Net income............................................. 45,017 69,216
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operation................. (1,829) (26,260)
Gain on sale of assets............................. (1,189) (8,541)
Depreciation....................................... 34,301 35,983
Goodwill amortization.............................. 10,737 12,296
Deferred income taxes.............................. 11,272 1,672
Unrealized (gains) losses on trading securities and
other short-term investments..................... 10,325 (7,580)
Increase in working capital items...................... (3,042) (6,443)
Purchases of trading securities........................ (184,465) (157,071)
Proceeds from sales of trading securities.............. 194,312 179,096
(Increase) decrease in net receivable from related
parties.............................................. 1,832 (10,949)
Change in cumulative translation adjustment............ 4,070 (12,267)
Change in minority interest in subsidiary.............. 9,730 -
Other, net............................................. 431 4,008
-------- ---------
Net cash provided by operating activities................ 131,502 73,160
-------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. (140,468) (46,289)
Proceeds from sale-leaseback transaction............... 56,050 -
Proceeds from sale of assets........................... 2,400 11,533
Proceeds from sale of discontinued operation........... - 62,000
Cash flow from discontinued operation.................. 2,244 4,336
Purchases of available-for-sale securities............. (474,195) (342,453)
Purchases of held-to-maturity securities............... (11,917) (3,459)
Purchases of other short-term investments.............. (10,000) (5,600)
Proceeds from sales of available-for-sale securities... 359,101 300,252
Proceeds from held-to-maturity securities.............. 311 15,746
Proceeds from sales of other short-term investments.... - 14,717
-------- ---------
Net cash provided by (used in) investing activities...... (216,474) 10,783
-------- ---------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. 4,000 -
Decrease in short-term debt............................ (1,935) (111)
Increase in borrowings under revolving credit facility. 98,500 127,400
Repayments of long-term debt........................... (496) (200,285)
Repurchases of common stock............................ (1,037) (4,987)
Other, net............................................. 762 1,188
-------- ---------
Net cash provided by (used in) financing activities...... 99,794 (76,795)
-------- ---------
Net change in cash and cash equivalents.................. 14,822 7,148
-------- ---------
Cash and cash equivalents, end of period................. $ 34,959 $ 30,278
======== =========
4
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -- (Continued)
Nine Months Ended
--------------------
Sept. 27, October 3,
1998 1999
--------- ----------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)........... $ 59,617 $ 62,586
Income taxes................................... 9,461 21,688
Acquisition of remaining 50% interest in GAF-Huls
Chemie GmbH joint venture, net
of $23,732 cash acquired*:
Fair market value of assets acquired.......... $ 48,003
Purchase price of acquisition................. 23,381
--------
Liabilities assumed........................... $ 24,622
========
*The Company had a 50% equity interest in the cash held by the joint venture
prior to the acquisition, which was classified within Other Assets on the
Consolidated Balance Sheet.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for International Specialty Products
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company at October 3,
1999, and the results of operations and cash flows for the periods ended
September 27, 1998 and October 3, 1999. 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, 1998 (the
"Form 10-K").
Note 1. Discontinued Operation
On September 13, 1999, the Company announced that it had entered into a
contract to sell the stock of its Filter Products subsidiaries to Hayward
Industrial Products, Inc. The transaction was completed on October 1, 1999 for a
purchase price of $62 million, subject to adjustment pending completion of
certain conditions pursuant to the purchase agreement. The gain on disposal of
$24.5 million, after income taxes of $13.2 million, was recorded in the third
quarter of 1999.
Accordingly, the Filter Products business is reported as a discontinued
operation, and the consolidated financial statements have been reclassified to
report separately the net assets and operating results of the Filter Products
business. The Company's prior year financial statements have been restated to
reflect continuing operations.
Summary operating results for the Filter Products business for the third
quarter and first nine months of 1998 and 1999 are as follows:
Third Quarter Nine Months
---------------- ----------------
1998 1999 1998 1999
------- ------- ------- -------
(Thousands)
Sales............................. $ 9,418 $ 8,447 $29,148 $28,729
Income before income taxes........ 548 569 2,932 2,726
Income taxes...................... (207) (200) (1,103) (957)
Net income........................ 341 369 1,829 1,769
December 31,
1998
------------
(Thousands)
Assets
Current assets....................... $20,260
Other noncurrent assets.............. 5,731
-------
Total Assets........................... $25,991
=======
Liabilities
Current liabilities.................. $ 1,746
Other noncurrent liabilities......... 7
-------
Total liabilities...................... $ 1,753
=======
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Disposition of Assets
On April 2, 1999, the Company sold its 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 pigments product line accounted for $4.9
million of the Company's net sales in 1998. As a result, the sale will not have
a material impact on the Company's results of operations.
Note 3. Comprehensive Income
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------- --------------------
Sept. 27, October 3, Sept. 27, October 3,
1998 1999 1998 1999
--------- ---------- -------- ----------
(Thousands)
<S> <C> <C> <C> <C>
Net income.................................... $ 10,305 $ 40,115 $ 45,017 $ 69,216
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains (losses) arising
during the period, net of income tax
(provision) benefit of $10,564, $207,
$5,392 and $(4,708)....................... (24,938) (984) (13,834) 11,525
Less: reclassification adjustment
for gains (losses) included in net income,
net of income tax (provision) benefit of
$(260), $(2,583), $(6,600) and $(1,341).... (692) 4,395 13,723 (854)
-------- -------- -------- --------
Total....................................... (24,246) (5,379) (27,557) 12,379
Foreign currency translation adjustment..... 7,354 2,480 4,070 (12,267)
Effect of the merger on components of
accumulated other comprehensive income
(loss)...................................... (196) - (196) -
-------- -------- -------- --------
Total other comprehensive income (loss)....... (17,088) (2,899) (23,683) 112
-------- -------- -------- --------
Comprehensive income (loss)................... $ (6,783) $ 37,216 $ 21,334 $ 69,328
======== ======== ======== ========
</TABLE>
Changes in the components of "Accumulated other comprehensive loss" for the
nine months ended October 3, 1999 are as follows:
Unrealized Cumulative
Losses on Foreign Minimum Accumulated
Available- Currency Pension Other
for-sale Translation Liability Comprehensive
Securities Adjustment Adjustment Loss
---------- ----------- ---------- -------------
(Thousands)
Balance, December 31, 1998.. $(24,037) $ 3,991 $ (4,715) $(24,761)
Change for the period....... 12,379 (12,267) - 112
-------- -------- -------- --------
Balance, October 3, 1999.....$(11,658) $ (8,276) $ (4,715) $(24,649)
======== ======== ======== ========
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Business Segment Information
The Company operates its Specialty Chemicals business through three
reportable business segments, in addition to the Mineral Products segment. See
also Note 1. As of January 1, 1999, the Company transferred its solvents line of
products from the Pharmaceutical, Agricultural and Beverage ("PAB") segment to
the Performance Chemicals, Fine Chemicals and Industrial segment. Accordingly,
prior year financial information for these two segments have been reclassified
to conform to the 1999 presentation. The effect on the total year 1998 was to
reduce sales and operating income for the PAB segment by $41.7 and $7.2 million,
respectively, and increase sales and operating income for the Performance
Chemicals, Fine Chemicals and Industrial segment by like amounts.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------- --------------------
Sept. 27, October 3, Sept. 27, October 3,
1998 1999 1998 1999
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
Net sales:
Personal Care............................... $ 43,642 $ 43,707 $ 144,311 $ 143,366
Pharmaceutical, Agricultural and Beverage... 39,626 44,355 128,682 136,142
Performance Chemicals, Fine Chemicals and
Industrial................................ 90,022 76,833 252,766 231,779
--------- --------- --------- ---------
Total Specialty Chemicals................. 173,290 164,895 525,759 511,287
Mineral Products (1)........................ 24,225 23,277 72,504 71,716
--------- --------- --------- ---------
Net sales..................................... $ 197,515 $ 188,172 $ 598,263 $ 583,003
========= ========= ========= =========
Operating income:
Personal Care (2)........................... $ 6,942 $ 9,699 $ 28,869 $ 39,920
Pharmaceutical, Agricultural and Beverage... 6,785 12,891 29,818 38,282
Performance Chemicals, Fine Chemicals and
Industrial................................ 19,834 12,966 49,381 33,620
--------- --------- --------- ---------
Total Specialty Chemicals................. 33,561 35,556 108,068 111,822
Mineral Products............................ 6,521 4,895 16,482 14,872
--------- --------- --------- ---------
Total segment operating income.............. 40,082 40,451 124,550 126,694
Unallocated corporate office................ (1,267) (461) (2,251) (1,432)
Provision for restructuring and
consolidation............................. (3,000) (1,473) (3,000) (1,473)
Merger-related expenses..................... (11,324) - (12,661) -
--------- --------- --------- ---------
Total operating income........................ 24,491 38,517 106,638 123,789
Interest expense and other, net............... (6,743) (15,013) (21,238) (57,602)
--------- --------- --------- ---------
Income from continuing operations before
income taxes................................. $ 17,748 $ 23,504 $ 85,400 $ 66,187
========= ========= ========= =========
<FN>
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $15.9 and $15.2 million for the third quarter of
1998 and 1999, respectively, and $47.9 million for each of the first nine
months of 1998 and 1999.
(2) Personal Care operating income for the first nine months of 1999 includes a
pre-tax gain of $8.5 million from the sale of the pigments product line.
See Note 2.
</FN>
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Inventories
Inventories comprise the following:
December 31, October 3,
1998 1999
------------ ----------
(Thousands)
Finished goods................ $ 83,124 $ 83,425
Work in process............... 23,736 19,714
Raw materials and supplies.... 25,526 31,603
-------- --------
Total......................... 132,386 134,742
Less LIFO reserve............. (3,280) (2,362)
-------- --------
Inventories................... $129,106 $132,380
======== ========
Note 6. Long-term Debt
On March 1, 1999, the Company repaid its 9% Senior Notes due March 1999
with $200 million of long-term borrowings under the Company's bank revolving
credit facility. In addition, $200 million notional value of fixed to floating
interest rate swaps matured on March 1, 1999. On March 1, 1999, the Company also
terminated forward-starting interest rate swaps entered into in 1998 in the
aggregate notional amount of $125 million. The cost to the Company to terminate
such swaps was insignificant. On March 18, 1999, the Company received a one-year
extension, to April 11, 2000, on its $38.1 million mortgage obligation.
Note 7. Restructuring Reserves
The Company recorded $73.0 million in 1998 for provisions for restructuring
and impairment loss, primarily related to its decision to shut down its
butanediol production unit at its Calvert City, Kentucky manufacturing facility
and a writedown to fair value of certain butanediol assets at its Texas City and
Seadrift, Texas manufacturing facilities. The total charge included an accrual
of $7.5 million for cash costs to be incurred, mainly over the next six to nine
months, principally for decommissioning, demolition and remediation, and
severance costs. During the first nine months of 1999, $3.7 million of costs
were charged to this accrual, principally for decommissioning activities and
severance. In the third quarter of 1999, it was determined that the initial
reserve for demolition was overestimated, and, accordingly, the Company reversed
$0.8 million of this reserve, leaving a reserve balance of $3.0 million as of
the end of the third quarter. In addition, in the third quarter of 1998, the
Company reserved $3.0 million for the consolidation of offices in its European
operations, consisting of costs incurred for lease obligations, severance costs
and for relocation of headquarters operations and other related expenses. This
program was completed during the third quarter of 1999.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Restructuring Reserves (Continued)
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 80 positions were eliminated in the third
quarter, for which the Company recorded a pre-tax provision for severance of
$2.3 million. The applicable severance reserve remaining as of the end of the
third quarter was $2.1 million. The overall staff reduction program will result
in the elimination of a total of 101 positions by year-end 1999 through normal
attrition or termination.
Note 8. New Accounting Standard
In June 1998, the FASB issued 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
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the 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.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000,
but may be adopted earlier. The Company has not yet determined the effect of
adoption of SFAS No. 133 and has not determined the timing or method of adoption
of the statement. Adoption of SFAS No. 133 could increase volatility in earnings
and other comprehensive income.
Note 9. 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, results of
operations or financial position of the Company. However, adverse decisions or
events, particularly as to the liability and the financial responsibility of the
Company's insurers and of the other parties involved at each site and their
insurers, could cause the Company to increase its estimate of its liability in
respect of such matters. It is not currently possible to estimate the amount or
range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 16 to Consolidated Financial Statements contained in the Form 10-K.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Contingencies (Continued)
Tax Claim against GAF
Certain subsidiaries of the Company 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 the Company 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 "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 a subsidiary of GAF, GAF Fiberglass Corporation, held an
interest. The claim of the IRS for interest and penalties, after taking into
account the effect on the use of net operating losses and foreign tax credits,
could result in GAF incurring liabilities significantly in excess of the
deferred tax liability of $131.4 million that it recorded in 1990 in connection
with this matter. GAF has advised the Company that it believes that it 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 business, financial position or results of
operations. GAF 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 current and former subsidiaries of GAF, should GAF
be unable to satisfy such liability.
Note 10. Subsequent Event
The Company announced on October 18, 1999 that it has completed the
acquisition of Monsanto Company's algins business. As part of the transaction,
the Company acquired substantially all of the assets of Monsanto's Kelco
Alginates division, including manufacturing facilities in San Diego, California
and Girvan, Scotland and a research facility in Tadworth, England. The business
is a world leader in algin manufacturing and application technology. Algin is a
naturally occuring hydrocolloid, derived from brown seaweeds, and is used in
food, pharmaceutical and industrial applications.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As discussed in Note 1 to Consolidated Financial Statements, on October 1,
1999, the Company completed the sale of its Filter Products business.
Accordingly, the results of operations and assets and liabilities of the Filter
Products business have been classified as a Discontinued Operation within the
financial statements for all periods presented. The following discussion is on a
continuing operations basis.
Results of Operations - Third Quarter 1999 Compared With
Third Quarter 1998
The Company recorded third quarter 1999 income from continuing operations
of $15.3 million (23 cents diluted earnings per share) compared with $10.0
million (15 cents diluted earnings per share) in the third quarter of 1998. The
improved results were attributable to higher operating income partially offset
by lower other income and slightly higher interest expense. Last year's third
quarter results included $14.3 million of nonrecurring charges associated with
the merger of the predecessor company with and into the Company and the
restructuring of the Company's European operations. Operating income for the
third quarter of 1999 reflected a $2.3 million charge related to a staff
reduction program (see Note 7 to Consolidated Financial Statements).
Net sales for the third quarter of 1999 were $188.2 million compared with
$197.5 million for the same period in 1998. The decline in sales was
attributable to lower sales in the Company's Industrial business within the
Performance Chemicals, Fine Chemicals and Industrial business segment, and, to a
lesser extent, the Mineral Products segment, partially offset by increased sales
volumes for each of the other specialty chemicals segments. The lower sales
principally reflected sales declines in Europe, due to the lower Industrial
sales, the U.S. and Latin America, partially offset by a sales increase in the
Asia-Pacific region.
Operating income for the third quarter of 1999 was $38.5 million compared
with $24.5 million for the third quarter of 1998. Excluding the nonrecurring
charges in both 1998 and 1999 discussed above, operating income was $40.8
million for the third quarter of 1999 compared with $38.8 million in last year's
quarter. Operating income was impacted by lower profits in the Company's
Industrial business and, to a lesser extent, lower profits in the Mineral
Products segment, offset by higher profits in the Company's other specialty
chemicals business segments.
Interest expense for the third quarter of 1999 was $19.1 million versus
$18.9 million for the same period last year, with the increase due to higher
average borrowings, partially offset by lower average interest rates. Other
income, net, for the quarter was $4.1 million compared with $12.1 million in the
third quarter of 1998, with the decrease resulting from lower investment income.
12
<PAGE>
Business Segment Review
A discussion of operating results for each of the Company's business
segments follows. The Company operates its Specialty Chemicals business through
three reportable business segments, in addition to the Mineral Products segment.
Personal Care
Sales in the third quarter of 1999 were $43.7 million compared with $43.6
million for the same period last year. The higher sales reflected higher sales
volumes for both hair and skin care products, partially offset by unfavorable
pricing for certain skin care products and the absence of the pigments business
which was sold in the first quarter of 1999. In addition, sales were up in the
Asia-Pacific region due to improving Asia economies.
Operating income for the third quarter of 1999 was $9.7 million compared
with $6.9 million in last year's quarter. The 40% increase in operating income
primarily resulted from higher hair care profits due to an improved gross margin
and lower operating expenses.
Pharmaceutical, Agricultural and Beverage ("PAB")
Sales for the PAB segment were $44.4 million for the third quarter of 1999,
a 12% increase compared with $39.6 million for the third quarter of 1998, while
operating income increased by 90% to $12.9 million versus $6.8 million last
year. The increased sales primarily reflected higher sales volumes for the
Pharmaceutical business. The increased operating results reflected the higher
sales levels, an improved gross margin due primarily to favorable manufacturing
costs, and lower operating expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the third quarter of 1999 were $76.8 million compared with $90.0
million in the third quarter of 1998. The decline in sales was attributable to
the Industrial business where lower sales of intermediates and solvents products
resulted in a 29% decrease in sales for the Industrial business. Sales for the
Fine Chemicals and Performance Chemicals businesses were up 15% and 12%,
respectively, due to higher sales volumes.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $13.0 million for the third quarter of 1999 versus $19.8
million for the same period last year. The shortfall in operating profits was
attributable to the Industrial business, which experienced an $11.4 million
decline in profits for the quarter due to the decreased sales of its
intermediates and solvents products. This decline was partially offset by
improved operating profits for the Fine Chemicals business due to higher sales
and lower costs due to higher product yields and increased manufacturing
efficiencies, and also to lower operating expenses. Operating profits for the
Performance Chemicals business also improved for the quarter, due primarily to
an improved gross margin as a result of favorable manufacturing cost variances,
and lower operating expenses.
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Mineral Products
Sales for the Mineral Products segment for the third quarter of 1999 were
$23.3 million compared with $24.2 million for the third quarter of 1998. Sales
to Building Materials Corporation of America, an affiliate, decreased by $0.7
million to $15.2 million due to lower sales volumes, while sales to trade
customers decreased by $0.2 million (3%), also due to sales volume decreases.
Operating income for the third quarter of 1999 was $4.9 million compared with
$6.5 million for the same period in 1998, with the decrease resulting from the
lower sales volumes and a lower gross margin.
Results of Operations - Nine Months 1999 Compared With
Nine Months 1998
For the first nine months of 1999, the Company recorded income from
continuing operations of $43.0 million (63 cents diluted earnings per share),
compared with $43.2 million (74 cents diluted earnings per share) for the first
nine months of 1998. The results reflected higher operating income offset by
lower other income and higher interest expense. The results for the first nine
months of 1998 included $15.7 million of nonrecurring charges associated with
the merger of the predecessor company with and into the Company and the
restructuring of the Company's European operations. Operating income for the
first nine months of 1999 included an $8.5 million gain from the sale of a
product line and a $2.3 million charge related to a staff reduction program (see
Note 7 to Consolidated Financial Statements).
Net sales for the first nine months of 1999 were $583.0 million compared
with $598.3 million for the same period in 1998. The decrease in sales was
attributable to lower sales in the Company's Industrial business, and, to a
lesser extent, the Mineral Products segment, partially offset by sales increases
in the Fine Chemicals, Pharmaceuticals and Performance Chemicals businesses. The
lower sales principally reflected sales declines in Europe, as a result of the
lower Industrial sales, and also in the U.S. and Latin America, partially offset
by sales increases in the Asia-Pacific region.
Operating income for the first nine months of 1999 was $123.8 million and
included a pre-tax gain of $8.5 million from the sale of the Company's pigments
business, a non-core product line that was part of the Personal Care business
segment. Excluding this gain and the nonrecurring charges discussed above in
both 1998 and 1999, operating income for the first nine months of 1999 was
$117.5 million compared with $122.3 million for the first nine months of 1998.
The decrease was principally attributable to lower profits in the Industrial
business as a result of decreased sales, and, to a lesser extent, lower profits
in the Mineral Products segment, partially offset by improved profits in all
other specialty chemicals businesses.
Interest expense for the first nine months of 1999 was $58.8 million versus
$55.9 million for the same period last year, with the increase due
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to higher average borrowings, partially offset by lower average interest
rates. Other income, net, for the first nine months was $1.2 million compared
with $33.2 million in the first nine months of 1998, with the decrease resulting
principally from lower investment income.
Business Segment Review
A discussion of operating results for each of the Company's business
segments follows. The Company operates its Specialty Chemicals business through
three reportable business segments, in addition to the Mineral Products segment.
Personal Care
Sales for the first nine months of 1999 were $143.4 million compared with
$144.3 million for the same period last year. The lower sales were attributable
to skin care products which experienced lower average price levels in some
products and also lower sales volumes as a result of the first quarter sale of
the pigments business. Sales of hair care products increased due to strong U.S.
sales in hair care preservatives and polymers, and also due to higher sales in
the Asia-Pacific region as a result of improving Asian economies.
Operating income for the first nine months of 1999 was $39.9 million and
included a pre-tax gain of $8.5 million from the sale of the pigments business.
Excluding this gain, operating income for the first nine months was $31.4
million compared with $28.9 million for the first nine months of 1998. Operating
profits for skin care products were down due to lower sales and a lower gross
margin due to unfavorable pricing, while hair care profits increased by 19% due
to an improved gross margin and lower operating expenses.
Pharmaceutical, Agricultural and Beverage ("PAB")
Sales for the PAB segment were $136.1 million for the first nine months of
1999, a 6% increase compared with $128.7 million for the first nine months of
1998, while operating income increased by 28% to $38.3 million versus $29.8
million last year. The increased sales reflected favorable pricing and higher
sales volumes, primarily in the Pharmaceuticals business. The increased
operating results reflected the higher sales levels, an improved gross margin
due to the favorable pricing and favorable manufacturing costs, and lower
operating expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first nine months of 1999 were $231.8 million compared with
$252.8 million in the first nine months of 1998. The decrease in sales was
attributable to the Industrial business where lower sales of intermediates and
solvents products, reflecting lower sales volumes and unfavorable pricing,
principally in Europe, resulted in a 22% decrease in sales for the Industrial
business. Sales for the Fine Chemicals and Performance Chemicals businesses were
up 29% and 8%, respectively, due to higher sales volumes partially offset by
unfavorable pricing for Fine Chemicals.
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Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $33.6 million for the first nine months of 1999 versus
$49.4 million for the same period last year. The lower operating profits were
attributable to the Industrial business, which experienced a $26.4 million
decrease for the period due to the decreased sales of its intermediates and
solvents products. This decrease was partially offset by improved operating
profits for the Fine Chemicals business due to the higher sales volumes,
partially offset by unfavorable pricing. Operating profits for the Performance
Chemicals business also improved due to increased sales volumes, an improved
gross margin due to favorable manufacturing cost variances, and lower operating
expenses, partially offset by the unfavorable effect of the stronger U.S.
dollar.
Mineral Products
Sales for the Mineral Products segment for the first nine months of 1999
were $71.7 million compared with $72.5 million for the first nine months of
1998. Sales to Building Materials Corporation of America, an affiliate, remained
flat at $47.9 million, while sales to trade customers decreased by $0.8 million
(3%) due to lower sales volumes. Operating income for the first nine months of
1999 was $14.9 million compared with $16.5 million for the same period in 1998,
resulting from the lower trade sales volumes, a lower gross margin and increased
operating expenses.
Liquidity and Financial Condition
During the first nine months of 1999, the Company's net cash flow before
financing activities was $83.9 million, including $73.2 million of cash
generated from continuing operations, the reinvestment of $46.3 million for
capital programs, $11.5 million of cash generated from the sale of assets (see
Note 2 to Consolidated Financial Statements), the use of $20.8 million of cash
for net purchases of available-for-sale and held-to-maturity securities and
other short-term investments, and $66.3 million of cash generated from
discontinued operations, including $62.0 million of proceeds from the sale of
the Filter Products business (see Note 1 to Consolidated Financial Statements).
Cash invested in additional working capital totaled $6.4 million during the
first nine months of 1999, mainly reflecting a $30.5 million increase in
receivables and a $6.3 million increase in inventories, partially offset by a
$29.4 million increase in payables and accrued liabilities. The increase in
receivables reflected a $20.6 million increase in trade receivables due to
higher sales in September 1999 versus December 1998, a $5.1 million increase in
the receivable from the purchaser of the Company's domestic trade accounts
receivable, and a $4.8 million increase in other receivables. The net cash
generated from operating activities also included a $22.0 million cash inflow
from net sales of trading securities.
Net cash used in financing activities during the first nine months of 1999
totaled $76.8 million, reflecting a $127.4 million increase in borrowings under
the Company's bank revolving credit facility and the repayment of the Company's
$200 million 9% Senior Notes due March 1999. In addition, financing activities
included a $5.0 million cash outlay for repurchases of common stock pursuant to
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the Company's repurchase program. The Company announced in March 1999 that its
Board of Directors had approved the repurchase of an additional 1.5 million
shares of its common stock. This amount is in addition to the repurchase of one
million shares, announced in September 1998, which has been completed. The
repurchased shares will be held for general purposes, including the issuance of
shares under the Company's stock option plan.
As a result of the foregoing factors, cash and cash equivalents increased
by $7.1 million during the first nine months of 1999 to $30.3 million, excluding
$377.1 million of available-for-sale securities and other short-term
investments.
The Company recorded $73.0 million in 1998 for provisions for restructuring
and impairment loss, primarily related to its decision to shut down its
butanediol production unit at its Calvert City, Kentucky manufacturing facility
and a writedown to fair value of certain butanediol assets at its Texas City and
Seadrift, Texas manufacturing facilities. The total charge included an accrual
of $7.5 million for cash costs to be incurred, mainly over the next six to nine
months, principally for decommissioning, demolition and remediation, and
severance costs. During the first nine months of 1999, $3.7 million of costs
were charged to this accrual, principally for decommissioning activities and
severance. In the third quarter of 1999, it was determined that the initial
reserve for demolition was overestimated, and, accordingly, the Company reversed
$0.8 million of this reserve, leaving a reserve balance of $3.0 million as of
the end of the third quarter. In the third quarter of 1998, the Company reserved
$3.0 million for the consolidation of offices in its European operations,
consisting of costs incurred for lease obligations, severance costs and for
relocation of headquarters operations and other related expenses. This program
was completed during the third quarter of 1999.
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 80 positions were eliminated in the third
quarter, for which the Company recorded a pre-tax provision for severance of
$2.3 million. The applicable severance reserve remaining as of the end of the
third quarter was $2.1 million. The overall staff reduction program will result
in the elimination of a total of 101 positions by year-end 1999 through normal
attrition or termination.
See Note 9 to Consolidated Financial Statements for information regarding
contingencies.
Year 2000 Compliance
The Company has implemented a formal Year 2000 program (the "Year 2000
Program") to (i) address the inability of some of its information technology
("IT") and "non-IT" equipment that the Company believes is significant to its
business, including certain devices with embedded technology, to accurately read
and process certain dates, including dates in the Year 2000 and afterwards) (the
"Year 2000 Issues"); (ii) investigate Year 2000 Issues of third parties
significant to the Company's business; and (iii) establish contingency plans
where appropriate.
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The Company has completed the installation of a new Enterprise Resource
Planning System ("ERP System") and has replaced or remediated most of its
personal computers and other IT equipment that may have Year 2000 Issues.
Although the ERP System was implemented for purposes other than remediating Year
2000 Issues, management believes that the ERP System is Year 2000 compliant. In
this regard, the Company has performed Year 2000 testing of the ERP system and
did not discover any major Year 2000 Issues. With respect to its non-IT
equipment, the Company and its consultants have inventoried, evaluated,
remediated and tested this equipment other than certain equipment acquired in
the Company's recent acquisition of its algins business (see Note 10 to
Consolidated Financial Statements) which it is in the process of evaluating. The
Company has substantially completed its Year 2000 Program for IT and non-IT
equipment as of the end of the third quarter of 1999.
The Company is also requesting information on the Year 2000 Issues of third
parties significant to the Company's business. The Company has evaluated the
responses from many of these entities and has requested more information as
appropriate. The Company has substantially completed these activities as of the
end of the third quarter of 1999. Based on the information gathered from its
Year 2000 Program, the Company has developed contingency plans to minimize the
impact of Year 2000 Issues on its business. These contingency plans generally
include, as management believes appropriate: emergency response contacts,
unscheduled shutdowns, raw material requirements, computer operations, new year
shutdowns, and emergency response teams. The Company will continue to review its
contingency plans and will modify such plans as conditions dictate.
The Company does not believe that the costs of its Year 2000 Program will
be material to its financial position or results of operations. While the
Company believes that it addressed most of its IT Year 2000 Issues by installing
the ERP System and replacing or remediating personal computers, neither the
timing nor extent of these activities were directly related to the Company's
Year 2000 Program. The Company also has incurred outside costs of approximately
$600,000 in connection with evaluating Year 2000 compliance of its non-IT
systems. The Company expects that the aggregate costs to remediate should
approximate no more than $1.0 million. The Company has paid the costs of
addressing its Year 2000 Issues from cash balances or cash generated from
operations. The Company has charged such costs against earnings as the costs
have been incurred.
Management believes that it has taken reasonable steps in developing its
Year 2000 Program. Notwithstanding these actions, there can be no assurance that
all of the Company's Year 2000 Issues or those of its key suppliers, service
providers or customers will be resolved or addressed satisfactorily before the
Year 2000 commences. Management believes that the most reasonably likely "worst
case scenario" resulting from Year 2000 Issues could be the failure by the
Company's key suppliers, service providers, customers and other third parties to
address their Year 2000 Issues. If this were to occur, and there were no
alternatives available to the Company, then the Company's usual channels of
supply and distribution could be disrupted, in which event the Company could
experience a material adverse impact on its business, results of operations or
financial position.
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* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee" or other words or
phrases of similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. The Company's
operations are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement. The forward-looking statements included herein are
made only as of the date of this Quarterly Report on Form 10-Q and the Company
undertakes 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." As of December 31, 1998,
equity-related financial instruments employed by the Company to reduce market
risk included long contracts valued at $56.1 million and short contracts valued
at $276.7 million. All such short contracts were terminated as of May 6, 1999.
Since the Company marks-to-market such instruments each month, there was no
economic cost to the Company to terminate these instruments. At October 3, 1999,
the value of long contracts was $20.0 million and the value of short contracts
was $1.4 million. In addition, the Company's 9% Senior Notes and $200 million
notional value of fixed to floating interest rate swaps matured on March 1,
1999, and the Company terminated $125 million notional amount of floating to
fixed forward-starting interest rate swaps on March 1, 1999. The cost to the
Company to terminate such swaps was insignificant.
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PART II
OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
Effective September 29, 1999, the Company sold 318,599 shares of common
stock to its President and Chief Executive Officer at a purchase price of $9.563
per share, or an aggregate purchase price of $3,046,762, pursuant to an
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. Such shares were issued to such officer in connection with
such officer's employment with the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 - Letter Agreement, dated September 29, 1999, between the Company
and Sunil Kumar.
27.l - Financial Data Schedule for the nine months ended October 3, 1999,
which is submitted electronically to the Securities and Exchange
Commission for information only.
27.2 - Restated Financial Data Schedules for the three months ended April
4, 1999 and the six months ended July 4,1999, which are submitted
electronically to the Securities and Exchange Commission for
information only.
27.3 - Restated Financial Data Schedules for the three months ended March
29, 1998, six months ended June 28, 1998, nine months ended
September 27, 1998 and the year ended December 31, 1998, which are
submitted electronically to the Securities and Exchange Commission
for information only.
27.4 - Restated Financial Data Schedules for the year ended December 31,
1996 and the year ended December 31, 1997, which are submitted
electronically to the Securities and Exchange Commission for
information only.
(b) No Reports on Form 8-K were filed during the quarter ended October 3, 1999.
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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.
DATE: November 16, 1999 BY: /s/Randall R. Lay
----------------- -----------------
Randall R. Lay
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT 10
INTERNATIONAL SPECIALTY PRODUCTS INC.
c/o ISP MANAGEMENT COMPANY, INC.
1361 Alps Road
Wayne, New Jersey 07470
September 29, 1999
Mr. Sunil Kumar
301 Westgate Road
Ridgewood, New Jersey 07450
Dear Mr. Kumar:
1. Grant of Right to Purchase Shares. Subject to the terms and conditions
hereof, International Specialty Products Inc. (the "Company" or "ISP") hereby
grants you the right to purchase 318,599 shares of common stock, $.01 par value,
of the Company (the "Shares") held in the Company's treasury for the purchase
price of $9.563 per share, or an aggregate of $3,046,762.24 (the "Purchase
Price"), and you hereby agree to purchase the Shares with the proceeds of the
loan from the Company to you described below.
2. Loan from Company. (a) In order to enable you to purchase the Shares pursuant
to paragraph 1 hereof, the Company hereby agrees, on the terms and conditions
hereinafter set forth, to make a loan to you in the principal amount of
$3,046,762.24 (the "Loan"). The Loan shall be evidenced by your promissory note
made payable to the Company in substantially the form of Exhibit A hereto (the
"Note"). The Note shall bear interest on the unpaid principal amount
outstanding, from the date thereof until the Note is paid in full or cancelled
as provided in paragraph 2(g) hereof, at a rate of six percent (6%) per annum,
payable annually in arrears on February 15 of each year, commencing on February
15, 2000. If the rate of interest payable in accordance with the Note would at
any time exceed the maximum permitted by any law applicable at that time to a
commercial loan of the kind evidenced by the Note, then for such period as such
rate would exceed the maximum permitted by such law (and no longer) the rate of
interest payable under the Note shall be reduced to the maximum permitted by
such law. Principal shall be payable in four installments on each June 11 of the
years 2001, 2002 and 2003 and on January 11, 2004 (each, an "Installment Payment
Date"), the first three of which shall be in the amount of $761,691 each and the
last of which shall be for the balance of the then outstanding principal amount;
provided, however, that the entire principal amount outstanding, together with
all interest accrued thereon, shall become, at the Company's election,
immediately due and
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payable upon your cessation of employment by the Company or any of its
subsidiaries for any reason whatsoever.
(b) Application of Loan Proceeds. The proceeds of the Loan shall be
applied, and you hereby authorize and direct the Company to apply such proceeds,
to pay the Purchase Price for the Shares.
(c) Optional Prepayment. You may prepay the Note in whole or in part, with
accrued interest to the date of prepayment on the amount prepaid, without
premium or penalty.
(d) Payments and Computations. You shall make each payment under the Note
and this Agreement on the date when due, in lawful money of the United States of
America and in funds immediately available to the Company at its address stated
above. You hereby authorize the Company, if and to the extent payment is not
made when due and payable under this Agreement or the Note, at any time and from
time to time, without notice to you, to offset against the amount so due any
amounts now or hereafter due to you from the Company or its subsidiaries or
affiliates and you specifically authorize the Company to withhold such amounts
from any wages, salary, severance, bonus payment or other compensation payable
to you in connection with your employment by the Company or its subsidiaries to
the extent permitted by applicable law. All computations of interest under the
Note and this Agreement shall be made on the basis of a year of 360 days for the
actual number of days elapsed in a given period (including the first day but
excluding the last day of such period). If any payment to be made under the Note
or this Agreement shall be due on a Saturday, Sunday or a legal holiday under
the laws of the State of New Jersey, such payment shall be made on the next
succeeding business day and such extension of time shall be included in
computation of the interest or other payment due.
(e) Conditions to Closing. The obligation of the Company to make the Loan
is subject to the conditions precedent that on the Closing Date (as hereinafter
defined):
(i) the Company shall have received this Agreement and the Note, each duly
executed by you;
(ii) the representations and warranties contained in this Agreement and the
Note are true and correct as though made on and as of the Closing Date;
(iii) no event has occurred and is continuing, or would result from the
Loan, which constitutes an Event of
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Default or would constitute an Event of Default with the giving of notice,
lapse of time or other conditions; and
(iv) the Company shall have received a certificate dated the Closing Date,
signed by you, confirming the matters set forth in the preceding subsections
(ii) and (iii).
(f) Events of Default. Each of the following shall constitute an event of
default ("Event of Default") under this Agreement and the Note:
(i) You shall fail to pay when due any principal of, or interest on, the
Note or any other amount payable under this Agreement or the Note, whether at
any stated maturity or by acceleration or otherwise; or
(ii) Any of your representations or warranties made herein or otherwise in
connection with this Agreement, the Note or the Loan is incorrect in any
material respect when made; or
(iii) You fail to perform or observe any other term or covenant in this
Agreement or the Note; or
(iv) You shall permit any judgment or attachment or execution against any
of your property to remain unstayed, unpaid or undismissed for a period of more
than thirty (30) days, or you shall make an assignment for the benefit of
creditors, or shall admit in writing your inability to pay your debts as they
become due, or there shall have been filed by or against you a petition for
relief under any federal or state bankruptcy or insolvency law, or any other
petition or similar request with a court having competent jurisdiction, looking
to reorganization, arrangement, composition, readjustment, liquidation,
custodianship, receivership or similar relief under any federal or state
bankruptcy law or regulation, or you shall be adjudicated a bankrupt or
insolvent, or there shall be an appointment of a trustee, receiver or custodian
of all or any substantial part of your properties or assets, provided that with
respect to the filing against you of any involuntary petition for relief under
any federal or state bankruptcy or insolvency law, such petition shall not have
been discharged within thirty (30) days of its filing.
Upon the occurrence of any Event of Default, the Company may (in addition to all
of the rights and remedies which it may otherwise have), at its option, declare
all amounts then owing under this Agreement or the Note, and all of your other
obligations to the Company, to be immediately due and payable, whereupon the
same shall become immediately due and
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payable, without presentment, demand, protest or further notice of any kind
whatsoever, all of which are hereby expressly waived by you, and the Company
shall be entitled to exercise forthwith (to the extent and in such order as the
Company may elect, in its sole discretion) any or all rights and remedies
provided for in this Agreement or the Note or that may otherwise be available to
the Company at law, in equity, by contract or otherwise, which rights and
remedies shall be cumulative and not exclusive.
(g) Forgiveness of Principal. (i) If, during the period commencing on the
date hereof and ending at the close of business on each Installment Payment
Date, you remain continuously employed by the Company or any of its
subsidiaries, the principal amount of the Loan due and payable on such
Installment Payment Date shall be forgiven, so that if, during the period
commencing on the date hereof and ending at the close of business on January 11,
2004, you have remained continuously employed by the Company or any of its
subsidiaries, the Loan and the Note shall be cancelled and discharged in full;
provided that all interest due on the Note shall have been paid. Any forgiveness
of principal shall be applied in the order of maturity.
(ii) If a Change of Control (as defined in ISP's 1991 Incentive Plan for
Key Employees and Directors, as amended (the "Plan")) of ISP shall occur and at
any time following such Change of Control, ISP (or any successor thereto)
terminates without Cause your employment, your employment is terminated as a
result of your death or Disability (as defined in the Plan) or you terminate
your employment for Good Reason (as defined in the Plan), the principal amount
of the Loan then outstanding shall be immediately forgiven and the Loan and the
Note shall be cancelled and discharged in full. You hereby acknowledge your
receipt of the Plan. For purposes of this Agreement, the term "Cause" shall mean
(w) the commission of a felony, the commission of a misdemeanor involving moral
turpitude or the commission of any other act involving dishonesty, disloyalty or
fraud with respect to your employer or any affiliate thereof, (x) substantial
and repeated failure by you to perform your duties, (y) gross negligence or
willful misconduct with respect to your employer or any affiliate thereof or (z)
a material breach of any of the terms or provisions of any employment agreement
to which you may be a party; provided, however, that if at the time of
termination of your employment you are a party to an employment agreement with
an entity controlled by or under common control with Samuel J. Heyman that
contains a definition of "Cause" that is inconsistent with the provisions
hereof, the definition contained in that employment agreement shall govern for
purposes of this Agreement.
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3. Representations and Warranties. You represent and warrant as follows:
(a) You have the legal right, power, authority and capacity to execute,
deliver and perform this Agreement and the Note.
(b) The execution, delivery and performance by you of this Agreement and
the Note do not and will not (i) violate any applicable law or regulation, or
any judgment, order, writ, injunction or decree of any judicial or other
governmental agency or body to or by which you or any of your properties or
assets are subject or bound, (ii) constitute a breach of, or default under, any
agreement, undertaking or instrument to which you are a party or by which you
may be affected, or (iii) result in the imposition of any lien, encumbrance or
restriction on any of your assets.
(c) This Agreement is, and, when executed and delivered pursuant hereto,
the Note will be, your legal, valid and binding obligations, enforceable against
you in accordance with their respective terms.
(d) After giving effect to the Loan and the application of the proceeds
thereof to purchase the Shares, your assets (excluding the Shares), net of your
liabilities, exceed the principal amount of the Loan. You have good and
marketable title to, or valid leasehold interests in, all of your assets,
subject only to possible minor imperfections of title that do not impair the use
of any asset or materially detract from its value.
(e) There are no pending or threatened claims, actions, proceedings or
investigations before any court, arbitrator, or governmental body or agency that
may, singly or in the aggregate, have a material adverse effect on the validity
or enforceability of this Agreement or the Note or on your financial condition
or your properties.
All of the representations and warranties contained in this Agreement, or in any
other writing delivered to the Company in connection with this Agreement,
including the Note, shall survive so long as any amount remains unpaid under
this Agreement or the Note or you have any other obligation under this Agreement
or the Note.
4. Restrictions on Transferability. (a) You covenant and agree that, so long as
any amount remains unpaid under the Note or this Agreement, unless the Company
shall otherwise
5
<PAGE>
consent in writing, you shall not, directly or indirectly, sell, pledge,
give, bequeath, transfer, assign or in any other way whatsoever encumber or
dispose of (hereinafter collectively called "transfer") any Shares or any
interest in any Shares, or any stock certificate representing, or any voting
trust certificate issued with respect to, any Shares, except that, subject to
paragraph 4(b) hereof, the restrictions imposed by this paragraph 4 shall lapse
and terminate as to that number of Shares (expressed as a percentage of all
Shares) that is equal to the portion (expressed as a percentage) of the
aggregate principal amount of the Loan that either has theretofore been repaid
or forgiven as provided in paragraph 2 hereof or will be repaid concurrently
with such transfer from the cash proceeds of such transfer.
(b) Notwithstanding anything to the contrary contained herein, you agree
that you will not transfer any of the Shares except in compliance with all
federal and state securities laws. The Company agrees that it will file a
registration statement on Form S-8 (or any successor form) with respect to the
Shares.
5. Closing. The closing of the transactions contemplated hereby shall occur on
such date, not later than October 3, 1999, as you and the Company shall agree
(the "Closing Date"), provided that you have fulfilled the conditions set forth
in paragraph 2(e) hereof.
6. Legend on Certificates. Each stock certificate issued to represent any of the
Shares shall bear the following (or a substantially equivalent) legend on its
face or reverse side:
"These securities have not been registered under the Securities Act of
1933, as amended, or under the applicable securities laws of any other
jurisdiction. These securities may not be sold unless registered under
the Securities Act of 1933, as amended, and any other applicable
securities laws, unless an exemption from such registration is
available. In addition, the transfer of these securities is subject to
restrictions set forth in an Agreement, dated as of September 29, 1999,
and any amendments thereto, a copy of which is available for inspection
at the office of the Company."
Any stock certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear the same legend, unless and to
the extent, in the
6
<PAGE>
opinion of counsel acceptable to the Company (which counsel may be an
employee of the Company or its affiliates), the Shares represented thereby are
no longer subject to the restrictions referred to in such legend.
7. Miscellaneous. (a) This Agreement, together with the Note, constitutes the
entire agreement of the parties to this Agreement with respect to the subject
matter hereof and may not be modified or amended except by a written agreement
signed by the Company (following the specific approval of such modification or
amendment by the Company's Board of Directors) and you.
(b) Each party to this Agreement shall cooperate and shall take such
further action and shall execute and deliver such further documents as may be
reasonably requested by any other party in order to carry out the provisions and
purposes of this Agreement.
(c) No waiver of any breach or default hereunder shall be considered valid
unless in writing, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or similar nature.
(d) Except as otherwise expressly provided in this Agreement, this
Agreement shall be binding upon and inure to the benefit of the Company, its
successors and assigns, and you and your heirs, personal representatives and
assigns; provided, however, that you shall not have the right to assign any of
your rights under this Agreement except as expressly provided herein; and
provided, further, that nothing contained in this Agreement shall be construed
as granting you the right to transfer any of the Shares except in accordance
with this Agreement.
(e) If any provision of this Agreement shall be invalid or unenforceable,
such invalidity or unenforceability shall attach only to such provision and
shall not in any manner affect or render invalid or unenforceable any other
severable provision of this Agreement, and this Agreement shall be carried out
as if any such invalid or unenforceable provision were not contained in this
Agreement.
(f) All determinations by the Board of Directors of the Company (or its
successors) hereunder shall be binding and conclusive.
7
<PAGE>
(g) The paragraph headings contained herein are for convenience only and
are not intended to define or limit the contents of any paragraph.
(h) Nothing in this Agreement or the Note shall confer on you any right to
continue in the employ of the Company or any subsidiary or affiliate of the
Company or any successor to any of them, affect the right of the Company or any
such subsidiary, affiliate or successor to terminate your employment at any
time, or be deemed a waiver or modification of any provision contained in any
agreement between you and the Company or any such subsidiary, affiliate or
successor.
(i) This Agreement may be executed in counterparts, all of which taken
together shall be deemed one original.
(j) This Agreement shall be deemed to be a contract under the laws of the
State of New Jersey and for all purposes shall be construed and enforced in
accordance with the internal laws of that state without regard to the principles
of conflicts of law.
If you are in agreement with the foregoing, please sign and return the extra
copy of this Agreement to the Company, whereupon this Agreement shall become a
binding agreement between you and the Company.
Very truly yours,
INTERNATIONAL SPECIALTY PRODUCTS INC.
By: /s/Samuel J. Heyman
-------------------
Name: Samuel J. Heyman
Title: Chairman
AGREED AND ACCEPTED:
/s/Sunil Kumar
- --------------
Sunil Kumar
8
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 1999 10-Q OF INTERNATIONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> OCT-03-1999
<CASH> 30,278
<SECURITIES> 338,521
<RECEIVABLES> 95,406
<ALLOWANCES> 0
<INVENTORY> 132,380
<CURRENT-ASSETS> 705,281
<PP&E> 558,011
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,810,507
<CURRENT-LIABILITIES> 312,510
<BONDS> 785,307
0
0
<COMMON> 695
<OTHER-SE> 567,542
<TOTAL-LIABILITY-AND-EQUITY> 1,810,507
<SALES> 583,003
<TOTAL-REVENUES> 583,003
<CGS> 337,664
<TOTAL-COSTS> 337,664
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,830
<INCOME-PRETAX> 66,187
<INCOME-TAX> 23,231
<INCOME-CONTINUING> 42,956
<DISCONTINUED> 26,260
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,216
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> APR-04-1999 JUL-04-1999
<CASH> 28,211 33,702
<SECURITIES> 342,174 293,280
<RECEIVABLES> 88,360 89,167
<ALLOWANCES> 0 0
<INVENTORY> 126,012 125,585
<CURRENT-ASSETS> 713,055 666,830
<PP&E> 550,415 552,564
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1,825,305 1,776,510
<CURRENT-LIABILITIES> 302,637 289,636
<BONDS> 902,944 819,329
0 0
0 0
<COMMON> 695 695
<OTHER-SE> 497,155 529,731
<TOTAL-LIABILITY-AND-EQUITY> 1,825,305 1,776,510
<SALES> 201,648 394,831
<TOTAL-REVENUES> 201,648 394,831
<CGS> 119,385 230,809
<TOTAL-COSTS> 119,385 230,809
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,240 39,760
<INCOME-PRETAX> 17,687 42,683
<INCOME-TAX> 6,205 14,982
<INCOME-CONTINUING> 11,482 27,701
<DISCONTINUED> 540 1,400
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,022 29,101
<EPS-BASIC> .17 .42
<EPS-DILUTED> .17 .42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-29-1998 JUN-28-1998 SEP-27-1998 DEC-31-1998
<CASH> 12,627 49,471 34,959 23,130
<SECURITIES> 253,449 285,405 274,684 313,245
<RECEIVABLES> 76,116 96,131 108,591 74,839
<ALLOWANCES> 0 0 0 2,494
<INVENTORY> 105,646 115,423 127,608 129,050
<CURRENT-ASSETS> 550,312 648,760 657,737 648,102
<PP&E> 515,965 580,564 594,142 547,555
<DEPRECIATION> 0 0 0 205,790
<TOTAL-ASSETS> 1,542,631 1,670,367 1,829,548 1,763,871
<CURRENT-LIABILITIES> 384,657 294,396 271,989 241,448
<BONDS> 615,737 798,569 859,068 896,095
0 0 0 0
0 0 0 0
<COMMON> 18 538 695 695
<OTHER-SE> 272,729 288,618 558,582 501,028
<TOTAL-LIABILITY-AND-EQUITY> 1,542,631 1,670,367 1,829,548 1,763,871
<SALES> 191,165 400,748 598,263 784,616
<TOTAL-REVENUES> 191,165 400,748 598,263 784,616
<CGS> 113,511 233,653 347,855 462,322
<TOTAL-COSTS> 113,511 233,653 347,855 462,322
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 17,931 36,980 55,864 75,577
<INCOME-PRETAX> 30,544 67,652 85,400 26,843
<INCOME-TAX> 11,102 25,236 31,933 14,026
<INCOME-CONTINUING> 15,230 33,224 43,188 2,538
<DISCONTINUED> 442 1,488 1,829 2,274
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 15,672 34,712 45,017 4,812
<EPS-BASIC> .29 .64 .77 .08
<EPS-DILUTED> .29 .64 .77 .08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 17,477 20,137
<SECURITIES> 163,009 209,066
<RECEIVABLES> 61,017 58,881
<ALLOWANCES> 2,710 2,609
<INVENTORY> 98,667 109,676
<CURRENT-ASSETS> 615,543 487,712
<PP&E> 488,066 513,649
<DEPRECIATION> 187,034 212,969
<TOTAL-ASSETS> 1,600,114 1,483,977
<CURRENT-LIABILITIES> 138,697 165,632
<BONDS> 834,284 798,762
0 0
0 0
<COMMON> 0 18
<OTHER-SE> 42,653 261,823
<TOTAL-LIABILITY-AND-EQUITY> 1,600,114 1,483,977
<SALES> 676,951 708,971
<TOTAL-REVENUES> 676,951 708,971
<CGS> 393,765 413,772
<TOTAL-COSTS> 393,765 413,772
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 38,333 73,612
<INCOME-PRETAX> 116,388 104,219
<INCOME-TAX> 41,992 37,825
<INCOME-CONTINUING> 60,683 51,702
<DISCONTINUED> 24,200 2,303
<EXTRAORDINARY> (30,950) 0
<CHANGES> 0 0
<NET-INCOME> 53,933 54,005
<EPS-BASIC> 1.00 1.00
<EPS-DILUTED> 1.00 1.00
</TABLE>
