<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------------------
COMMISSION FILE NUMBER 1-10788
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333696
(State of Incorporation) (I.R.S. Employer
Identification No.)
818 WASHINGTON STREET
WILMINGTON, DELAWARE 19801
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 429-8554
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME ON EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------------------- -----------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
------------------------
COMMISSION FILE NUMBER 33-44862
ISP CHEMICALS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3416260
(State of Incorporation) (I.R.S. Employer
Identification No.)
RT. 95 INDUSTRIAL AREA, P.O. BOX 37
CALVERT CITY, KENTUCKY 42029
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (502) 395-4165
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
------------------------
COMMISSION FILE NUMBER 33-44862-01
ISP TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333795
(State of Incorporation) (I.R.S. Employer
Identification No.)
STATE HIGHWAY 146 & INDUSTRIAL ROAD
TEXAS CITY, TEXAS 77590
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 945-3411
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of International Specialty Products Inc., in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.__
As of March 21, 1997, 96,521,481 shares of common stock of International
Specialty Products Inc. were outstanding. The aggregate market value of the
voting stock held by non-affiliates of International Specialty Products Inc. as
of March 21, 1997 was $207,999,343.12. The aggregate market value was computed
by reference to the closing price on the New York Stock Exchange of Common Stock
of International Specialty Products Inc. on such date ($13 1/8). For purposes of
the computation, voting stock held by executive officers and directors of the
registrants and ISP Holdings Inc., an affiliate of International Specialty
Products Inc., has been excluded. Such exclusion is not intended, and shall not
be deemed, to be an admission that such executive officers and directors are
affiliates of International Specialty Products Inc.
As of March 21, 1997, ISP Chemicals Inc. and ISP Technologies Inc. each had
10 shares of common stock outstanding. No shares are held by non-affiliates.
As of March 21, 1997, each of the additional registrants had the number of
shares outstanding which is shown on the table below. No shares are held by
non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 1997 Annual Meeting of Stockholders of
International Specialty Products Inc. to be filed within 120 days after the
Registrants' fiscal year end (the 'Proxy Statement') is incorporated by
reference in Part III, Items 10, 11, 12 and 13.
ii
<PAGE>
ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING ZIP CODE
STATE OR OTHER AND TELEPHONE NUMBER
EXACT NAME OF JURISDICTION OF NO. I.R.S. EMPLOYER INCLUDING AREA CODE,
REGISTRANT AS SPECIFIED INCORPORATION OR OF SHARES IDENTIFICATION OF REGISTRANT'S
IN ITS CHARTER ORGANIZATION OUTSTANDING NO. PRINCIPAL EXECUTIVE OFFICE
- ------------------------- ---------------- ----------- --------------- ------------------------------
<S> <C> <C> <C> <C>
ISP (PUERTO RICO) INC.... Delaware 10 22-2934561 Mirador de Bairoa
Calle 27st-14
Caquas, Puerto Rico 00725-8900
(787) 744-3116
ISP ENVIRONMENTAL
SERVICES INC............. Delaware 10 51-0333801 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
ISP FILTERS INC.......... Delaware 10 51-0333796 4436 Malone Road
Memphis, TN 38118
(901) 795-2445
ISP GLOBAL TECHNOLOGIES
INC...................... Delaware 10 51-0333802 818 Washington Street
Wilmington, DE 19801
(302) 429-7492
ISP INTERNATIONAL CORP... Delaware 10 51-0333734 818 Washington Street
Wilmington, DE 19801
(302) 429-7493
ISP INVESTMENTS INC...... Delaware 10 51-0333803 818 Washington Street
Wilmington, DE 19801
(302) 429-7496
ISP MANAGEMENT COMPANY,
INC...................... Delaware 10 51-0333800 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
ISP MINERAL PRODUCTS
INC...................... Delaware 10 51-0333794 34 Charles Street
Hagerstown, MD 21740
(301) 733-4000
ISP MINERALS INC......... Delaware 10 51-0333798 Route 116
Blue Ridge Summit, PA 17214
(717) 794-2184
ISP REAL ESTATE COMPANY,
INC...................... Delaware 2 22-2886551 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
ISP REALTY CORPORATION... Delaware 1,000 13-2720081 1361 Alps Road
Wayne, NJ 07470
(201) 628-3000
VERONA INC............... Delaware 100 22-3036319 NCNB Plaza, Suite 300
7 North Laurens St.
Greenville, SC 29601
(803) 271-9194
BLUEHALL INCORPORATED.... Delaware 1 13-3335905 818 Washington Street
Wilmington, DE 19801
(302) 651-0165
</TABLE>
iii
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
International Specialty Products Inc. ('ISP') is a leading multinational
manufacturer of specialty chemicals, mineral products, filter products, and
advanced materials.
ISP, incorporated in Delaware in 1991, operates its business exclusively
through 19 domestic subsidiaries, including ISP Chemicals Inc., ISP Technologies
Inc., ISP Van Dyk Inc. and ISP Fine Chemicals Inc., 37 international
subsidiaries and a joint venture with Huls Aktiengesellschaft, a German
corporation ('Huls'), in which ISP has a 50% interest and which operates under
the name GAF-Huls Chemie GmbH ('GAF-Huls'). Except as the context otherwise
requires, 'ISP' or the 'Company' refers to International Specialty Products Inc.
and its subsidiaries and their predecessors.
ISP is an 83.5% owned subsidiary of ISP Holdings Inc. ('ISP Holdings'). ISP
is indirectly controlled by Samuel J. Heyman, Chairman of the Board of Directors
and Chief Executive Officer of ISP, ISP Holdings and GAF Corporation ('GAF'). On
January 1, 1997, GAF effected a series of transactions (collectively, the
'Separation Transactions') involving its subsidiaries that resulted in, among
other things, the capital stock of ISP Holdings being distributed to the
stockholders of GAF. As a result of the Separation Transactions, ISP Holdings
and ISP are no longer direct or indirect subsidiaries of GAF or G-I Holdings
Inc. ('G-I Holdings'), a subsidiary of GAF.
ISP Chemicals Inc. ('ISP Chemicals'), ISP Technologies Inc. ('ISP
Technologies') and the additional registrants are consolidated subsidiaries of
ISP and, together with ISP Van Dyk Inc., ISP Fine Chemicals Inc., International
Specialty Products Funding Corporation and ISP Newark Inc., constitute all of
the active domestic subsidiaries of ISP. ISP Chemicals was incorporated in
Delaware in 1987 under the name Nordenham Inc. ISP Technologies was incorporated
in Delaware in 1991 under the name ISP 6 Corp.
The address and telephone number for the principal executive offices of ISP
are: 818 Washington Street, Wilmington, Delaware 19801; (302) 429-8554 or (800)
526-5315. The address and telephone number for the principal executive offices
of ISP Chemicals are: Route 95 Industrial Area, P.O. Box 37, Calvert City,
Kentucky 42029; (502) 395-4165. The address and telephone number for the
principal executive offices of ISP Technologies are: State Highway 146 and
Industrial Road, Texas City, Texas 77590; (409) 945-3411.
Financial information concerning ISP's industry segments and foreign and
domestic operations required by Item 1 is included in Notes 10 and 11 to the
Consolidated Financial Statements contained in this Annual Report on Form 10-K.
SPECIALTY CHEMICALS
Products and Markets. ISP manufactures a broad spectrum of specialty
chemicals having numerous applications in consumer and industrial products. ISP
uses proprietary technology to convert various raw materials, through a chain of
one or more processing steps, into increasingly complex and higher value added
derivatives to meet specific customer requirements. The majority of ISP's
specialty chemical products are derived from acetylene, including intermediates,
solvents, vinyl ethers and polymers, and sales of these products represent the
majority of ISP's specialty chemical sales.
ISP's specialty chemicals consist of nine main groups of products: vinyl
ether polymers, polyvinyl pyrrolidone polymers, solvents, intermediates,
specialty preservatives, sunscreens, emollients, pearlescent pigments and fine
chemicals.
Vinyl ether polymers are used in cosmetics and personal care products and
pharmaceutical and health-related products, primarily in hair care and dental
care products. Vinyl ether monomers and oligomers are used in coatings and inks
for both consumer and industrial products.
Polyvinyl pyrrolidone (PVP) polymers are used primarily in cosmetics,
personal care, pharmaceutical and health-related products, food and beverages,
and detergent formulations. Examples are binders and disintegrants for tablets
and vitamins; clarifiers and chill-hazing elimination agents for beer, wine and
fruit juices; microbiocidal products for human and veterinary applications;
resins for hair care products such as hair sprays,
<PAGE>
mousses, conditioners, and gels; water proofing ingredients in mascaras,
sunscreens and lipsticks; multifunctional polymers for specialty coatings,
adhesives, ink jet inks and media for consumer and industrial applications; and
dispersants and binders in agricultural chemical formulations.
Solvents are sold to customers for use in agricultural chemicals,
pharmaceuticals, coatings, wire enamels, adhesives, plastics, electronic coating
and cleaning applications, petroleum extraction and specialty cleaners. ISP's
family of solvents includes, among others, N-methyl-2-pyrrolidone,
gamma-butyrolactone, 2-pyrrolidone and tetrahydrofuran, many of which are used
by ISP as raw materials in the manufacture of monomers and polymers.
Intermediates are manufactured primarily for use by ISP as raw materials in
manufacturing solvents and polymers. Some intermediates are also sold to
customers for use in the manufacture of engineering plastics and elastomers,
agricultural chemicals, oil production auxiliaries and other products.
Butanediol, an intermediate produced by ISP, is an essential raw material in the
manufacture of polybutylene terephthalate thermoplastic resins and polyurethane
elastomers, which are used in the automotive, electronics and appliance
industries.
Specialty preservatives are proprietary products that are marketed
worldwide to the cosmetics, personal care and household industries. ISP sells a
number of preservative products, including Germall(Registered) 115,
Germall(Registered) II, Germall(Registered) Plus, Germaben(Registered) II,
Germaben(Registered) II-E, Suttocide(Registered) A and LiquaPar(Registered) Oil.
Uses include infant care preparations, eye and facial makeup, after-shave and
nail, bath, hair and skin preparations.
ISP Van Dyk Inc. produces three multifunctional specialty chemical product
lines which ISP markets primarily to the cosmetics and personal care industry--
ultraviolet absorber chemicals, the principal active ingredients in sunscreens;
pearlescent pigments, which provide the pearly or lustrous color in lipsticks,
eye shadows and other cosmetics; and emollients and emulsifiers, which are used
as moisturizing and softening agents in a variety of creams and lotions, hair
care products and other cosmetics. ISP Van Dyk's Escalol(Registered),
Pearl-Glo(Registered) and Ceraphyl(Registered) products are widely recognized
for their respective sunscreen, pigment and emollient properties.
ISP Fine Chemicals Inc. produces a broad range of pharmaceutical
intermediates, biological buffers, pheromones and several bulk active
pharmaceuticals which serve the pharmaceutical, biotechnology, agricultural and
chemical process industries. Fine chemicals are extremely specialized products,
made in small quantities, which because of their complexity can be priced at
several hundred to several thousand dollars per kilogram. ISP Fine Chemicals
Inc. also provides a custom manufacturing capability serving the pharmaceutical,
biotechnology, agricultural and chemical process industries.
Marketing and Sales. ISP markets its specialty chemicals through a
worldwide marketing and sales force, typically chemists or chemical engineers,
who work closely with ISP's customers to familiarize themselves with their
customer's products, manufacturing processes and markets. ISP conducts its
marketing and domestic sales from ISP's headquarters in Wayne, New Jersey and
regional offices strategically located throughout the United States.
International Operations. ISP markets all of its specialty chemicals
worldwide. ISP conducts its international operations through 37 subsidiaries and
44 sales offices located in Western and Eastern Europe, Canada, Latin America
and the Asia-Pacific region. Services of local distributors are also used to
reach markets that might otherwise be unavailable to ISP.
ISP had approximately 60% of its international sales in 1996 in countries
in Western Europe and Japan which are subject to currency exchange rate
fluctuation risks. For a discussion of the Company's policy regarding the
management of these risks, see Item 7, 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Financial
Condition.' Other countries in which the Company has sales are subject to
additional risks, including high rates of inflation, exchange controls,
government expropriation and general instability.
International sales in 1996 of ISP's specialty chemicals, excluding sales
by GAF-Huls, were approximately 45% of ISP's total 1996 sales. GAF-Huls, a joint
venture in which ISP holds a 50% interest, produces certain intermediates and
solvents. The GAF-Huls plant is located in Marl, Germany.
2
<PAGE>
Raw Materials. Because of the multi-step processes required to manufacture
ISP's specialty chemicals, ISP believes that its raw material costs represent a
smaller percentage of the cost of goods sold than for most other chemical
companies. It is estimated that approximately one-third of ISP's manufacturing
costs are for raw materials (including energy and packaging). As a result,
fluctuations in the pricing of raw materials have less impact on ISP than on
those chemical companies for which raw materials costs represent a larger
percent of manufacturing costs.
The principal raw materials used in the manufacture of ISP's specialty
chemicals are acetylene, methanol and methylamine. Most of these raw materials
are obtained from outside sources pursuant to long-term supply agreements.
Acetylene, a significant raw material used in the production of most of ISP's
specialty chemicals, is obtained by ISP for domestic use from two unaffiliated
suppliers pursuant to long-term supply contracts. At ISP's Texas City and
Seadrift, Texas plants, acetylene is supplied via pipeline by a neighboring
large multinational company that generates this raw material as a by-product
from ethylene manufacture. At ISP's Calvert City, Kentucky facility, acetylene
is supplied via pipeline by a neighboring company that generates it from calcium
carbide. The acetylene utilized by GAF-Huls is produced by Huls, using a
proprietary electric arc process, sourced from various hydrocarbon feedstocks.
ISP believes that this diversity of supply sources, using a number of production
technologies (ethylene by-product, calcium carbide and electric arc), provides
the Company with a reliable supply of acetylene. In the event of a substantial
interruption in the supply of acetylene from current sources, no assurances can
be made that ISP would be able to obtain as much acetylene from other sources as
would be necessary to meet its supply requirements. ISP has a long-standing
agreement with GAF-Huls to import butanediol into the United States for use as a
feedstock for the production of ISP's solvents and polymers. ISP has not
experienced an interruption of its acetylene supply that has had a material
adverse effect on its sales of specialty chemicals. With regard to raw materials
other than acetylene, ISP believes that in the event of a supply interruption it
could obtain adequate supplies from alternate sources.
Natural gas and raw materials derived from petroleum are used in many of
ISP's manufacturing processes and, consequently, the price and availability of
petroleum and natural gas could be material to ISP's operations. During 1996,
crude oil and natural gas supplies remained adequate, while prices generally
demonstrated seasonal variations.
While methanol prices were extremely volatile in 1994 and 1995, during 1996
methanol availability remained ample and prices remained relatively constant.
MINERAL PRODUCTS
Products and Markets. ISP manufactures mineral products consisting of
ceramic-coated colored roofing granules, which are produced from rock deposits
that are mined and crushed at ISP's quarries and are colored and coated using a
proprietary process. ISP's mineral roofing granules are sold primarily to the
North American roofing industry for use in the manufacture of asphalt roofing
shingles, for which they provide weather resistance, decorative coloring, heat
deflection and increased weight. ISP is the second largest of only two major
suppliers of colored roofing granules in North America. ISP also markets granule
by-products for use in the construction and maintenance of fast dry, clay-like
tennis courts.
ISP estimates that more than 80% of the asphalt shingles currently produced
by the roofing industry are sold for the reroofing/replacement market, in which
demand is driven not by the pace of new home construction but by the needs of
homeowners to replace existing roofs. Homeowners generally replace their roofs
either because they are worn, thereby creating concerns as to weather-tightness,
or because of the homeowners desire to upgrade the appearance of their homes.
ISP estimates that the balance of the roofing industry's asphalt shingle
production historically has been sold primarily for use in new housing
construction. Sales of ISP's colored mineral granules have benefited from a
trend toward the increased use of heavyweight, three-dimensional laminated
roofing shingles which results in both functional and aesthetic improvements,
which require, on average, approximately 60% more granules than traditional
three-tab, lightweight roofing shingles.
Sales to Building Materials Corporation of America ('BMCA'), an affiliate
of the Company, and its subsidiary, U.S. Intec, Inc. ('USI'), constituted
approximately 59% of ISP's mineral products net sales in 1996. See Note 9 to
Consolidated Financial Statements.
3
<PAGE>
Raw Materials. ISP owns rock deposits that have specific performance
characteristics, including weatherability, the ability to reflect UV light,
abrasion-resistance, non-staining characteristics and the ability to absorb
pigments. ISP owns three quarries, each with proven reserves, based on current
production levels, of more than 20 years.
FILTER PRODUCTS AND ADVANCED MATERIALS
ISP manufactures and sells filter products, consisting of pressure filter
vessels, filter bags and filter systems, and sells cartridges and cartridge
housings. These filter products are designed for the removal of macroscopic
contaminants in the treatment of process liquids. The paint, automotive,
chemical, pharmaceutical, petroleum and food and beverage industries accounted
for almost all of ISP's 1996 net sales of filter products.
ISP manufactures pressure filter vessels at manufacturing facilities in
Brazil, Canada and Germany, which serve both local and international markets.
ISP also manufactures filter bags in Belgium, Canada, Singapore, Brazil and the
United States and supplies filter products worldwide through its subsidiaries,
sales offices and distributors.
ISP manufactures a variety of advanced materials, consisting of high-purity
carbonyl iron powders, sold under ISP's trademark Micropowder(Registered), which
are used in a variety of advanced technology applications. Using proprietary
technology, ISP manufactures more than 50 different grades of
Micropowder(Registered) iron, one of which is sold under the trademark
Ferronyl(Registered), for use as a vitamin supplement. The primary markets for
ISP's Micropowder(Registered) are the domestic defense industry, which employs
these products in a variety of coating systems for stealth purposes in aircraft
and naval ships, and the emerging metal injection molding segment of the powder
metallurgy industry. Other industries using ISP's carbonyl iron powders are the
aerospace, electronics, power metallurgy, pharmaceutical and food industries.
ISP is the sole domestic manufacturer of carbonyl iron powders.
ISP manufactures a line of processless, electronically imaged film products
including Rad-Sure(Registered), which is a radiation sensitive film strip
affixed to blood bags to indicate whether or not they have been properly
irradiated.
COMPETITION
ISP believes that it is either the first or second largest seller worldwide
of its specialty chemicals derived from acetylene other than butanediol and
tetrahydrofuran. Butanediol, which ISP produces primarily for use as a raw
material, is also manufactured by a limited number of companies in the United
States, Germany, Japan and Korea. Tetrahydrofuran is manufactured by a number of
companies throughout the world. While there are companies, other than ISP and
its principal competitor, that manufacture a limited number of ISP's other
specialty chemicals, the market position of these companies is much smaller than
that of ISP (other than as to solvents and intermediates, with respect to which
there is a significant third competitor). In addition to ISP's competitors as
noted above, there are other companies that produce substitutable products for a
number of ISP's specialty chemicals. These companies compete with ISP in the
personal care, pharmaceutical, beverage preservative and industrial markets and
have the effect of limiting ISP's market penetration and pricing flexibility.
With regard to its mineral products, ISP has only one major and one smaller
competitor and believes that competition has been limited by: (i) the
substantial capital expenditures associated with the construction of new mineral
processing and coloring plants and the acquisition of suitable rock reserves;
(ii) the limited availability of proven rock sources; (iii) the complexity
associated with the construction of a mineral processing and coloring plant,
together with the technical know-how required to operate such a plant; (iv) the
need to obtain, prior to commencing operations, reliable data over a substantial
period of time regarding the weathering of granules in order to assure the
quality and durability of the product; and (v) the difficulty in obtaining the
necessary permits to mine and operate a quarry.
With respect to filter products, ISP competes with a number of companies
worldwide. With respect to advanced materials, ISP is the sole domestic
manufacturer of carbonyl iron powders and one of only two manufacturers
worldwide.
Competition is largely based upon product and service quality, technology,
distribution capability and price. ISP believes that it is well positioned in
the marketplace as a result of its broad product lines, sophisticated technology
and worldwide distribution network.
4
<PAGE>
RESEARCH AND DEVELOPMENT
ISP's worldwide research and development expenditures were $20.3 million,
$21.9 million and $25.4 million in 1994, 1995 and 1996, respectively.
ISP's research and development department is located primarily at ISP's
worldwide technical center and laboratories in Wayne, New Jersey. Additional
research and development is conducted at plant sites in Calvert City, Kentucky,
Texas City, Texas, Chatham, New Jersey, Belleville, New Jersey, and Columbus,
Ohio and technical centers in the United Kingdom, Germany, China and Singapore.
ISP's mineral products research and development facility, together with its
customer design and color center, is located at Hagerstown, Maryland.
ENVIRONMENTAL SERVICES
ISP has received conditional site designation for the construction of a
hazardous waste treatment, storage and disposal facility at its Linden, New
Jersey property and has received approval from the New Jersey Turnpike Authority
for a direct access ramp from the New Jersey Turnpike to the site. If ISP is
successful in securing the site designation and the necessary permits to
construct and operate the hazardous waste facility, ISP intends to develop and
operate the facility in a separate subsidiary, either on its own or in a joint
venture with a suitable partner. ISP estimates that the cost of constructing the
facility will be approximately $100 million and, if approved, the facility is
anticipated to be in operation three years after commencement of construction.
ISP anticipates utilizing internally generated cash and/or seeking project or
other independent financing for this project.
PATENTS AND TRADEMARKS
ISP owns approximately 313 domestic and 123 foreign patents and owns or
licenses approximately 118 domestic and 1,350 foreign trademark registrations
related to the business of ISP. The Company does not believe that any single
patent, patent application or trademark is material to ISP's business or
operations.
The Company believes that the duration of the existing patents and patent
licenses is satisfactory.
ENVIRONMENTAL COMPLIANCE
Since 1970, a wide variety of federal, state and local environmental laws
and regulations relating to environmental matters (the 'Regulations') have been
adopted and amended. By reason of the nature of the operations of the Company
and its predecessor and certain of the substances that are or have been used,
produced or discharged at their plants or at other locations, the Company is
affected by the Regulations. The Company has made capital expenditures of less
than $3.9 million in each of the last three years in order to comply with the
Regulations (which expenditures are included in additions to property, plant and
equipment) and anticipates that aggregate capital expenditures relating to
environmental compliance in 1997 and 1998 will be approximately $4.7 million and
$3.8 million, respectively.
The Regulations deal with air and water emissions or discharges into the
environment, as well as the generation, storage, treatment, transportation and
disposal of solid and hazardous waste, and the remediation of any releases of
hazardous substances and materials to the environment. The Company believes that
its manufacturing facilities comply in all material respects with applicable
Regulations, and, while it cannot predict whether more burdensome requirements
will be adopted in the future, it believes that any potential liability for
compliance with the Regulations will not materially affect its business,
liquidity, results of operations, cash flows or financial position.
5
<PAGE>
The Company believes that its manufacturing facilities are being operated
in compliance in all material respects with applicable environmental, health and
safety laws and regulations, but cannot predict whether more burdensome
requirements will be imposed by governmental authorities in the future.
EMPLOYEES
At December 31, 1996, the Company employed approximately 2,700 people
worldwide. Approximately 740 employees in the United States and Canada were
subject to six union contracts. The Company expects to renegotiate one labor
contract during 1997. The Company believes that its relations with its employees
and their unions are satisfactory.
The Company has in effect various benefit plans, which include a
non-qualified retirement plan for a group of executives, a capital accumulation
plan for its salaried and certain hourly employees, a flexible benefit plan for
its salaried employees, a retirement plan for certain of its hourly employees,
and group insurance agreements providing life, accidental death, disability,
hospital, surgical, medical and dental coverage. In addition, the Company has
contracted with various health maintenance organizations to provide medical
benefits. The Company and, in many cases, its employees contribute to the cost
of these plans.
ITEM 2. PROPERTIES
The corporate headquarters and principal research and development
laboratories of ISP are located at a 100-acre campus-like office and research
park owned by a subsidiary of ISP at 1361 Alps Road, Wayne, New Jersey 07470.
The premises are subject to a first mortgage.
The principal domestic and foreign real properties either owned by, or
leased to, ISP are described below. Unless otherwise indicated, the properties
are owned in fee. In addition to the principal facilities listed below, ISP
maintains sales offices and warehouses in the United States and abroad,
substantially all of which are in leased premises under relatively short-term
leases.
<TABLE>
<CAPTION>
LOCATION FACILITY PRODUCT LINE
- ----------------------- ------------------------------------------- ---------------------------
<S> <C> <C>
DOMESTIC
Alabama
Huntsville........... Plant* Advanced Materials
Kentucky
Calvert City......... Plant Specialty Chemicals
Maryland
Hagerstown........... Research Center, Design Center, Mineral Products
Sales Office
Missouri
Annapolis............ Plant, Quarry Mineral Products
New Jersey
Belleville........... Plant, Sales Office, Research Specialty Chemicals
Center, Warehouse*
Bridgewater.......... Sales Office Specialty Chemicals
Chatham.............. Plant, Sales Office, Research Specialty Chemicals
Center, Warehouse*
Wayne................ Headquarters, Corporate Administrative Specialty Chemicals; Filter
Offices, Research Center Products and Advanced
Materials
Ohio
Columbus............. Plant, Sales Office Fine Chemicals
Pennsylvania
Blue Ridge Summit.... Plant, Quarry Mineral Products
Tennessee
Memphis.............. Plant*, Warehouse*, Distribution Center* Filter Products
Texas
Seadrift............. Plant Specialty Chemicals
Texas City........... Plant Specialty Chemicals
Wisconsin
Pembine.............. Plant, Quarry Mineral Products
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LOCATION FACILITY PRODUCT LINE
- ----------------------- ------------------------------------------- ---------------------------
<S> <C> <C>
INTERNATIONAL
Belgium
Sint-Niklaas......... Plant, Sales Office, Distribution Center Specialty Chemicals and
Filter Products
Brazil
Sao Paulo............ Plant*, Sales Office*, Distribution Center* Specialty Chemicals and
Filter Products
Canada
Mississauga,
Ontario............. Plant*, Sales Office*, Distribution Center* Specialty Chemicals
Oakville, Ontario.... Plant* Filter Products
Germany
Hamburg.............. Plant* Filter Products
Great Britain
Guildford............ European Headquarters*, Research Center* Specialty Chemicals
India
Nagpur............... Plant Specialty Chemicals
Singapore
Southpoint........... Plant*, Sales Office*, Distribution Specialty Chemicals and
Center*, Asia-Pacific Headquarters*, Filter Products
Warehouse*
Affiliate:
GAF-Huls Chemie GmbH
Marl, Germany........ Plant, Sales Office Specialty Chemicals
</TABLE>
- ------------------
* Leased Property
The Company believes that its plants and facilities, which are of varying
ages and are of different construction types, have been satisfactorily
maintained, are in good condition, are suitable for their respective operations
and generally provide sufficient capacity to meet production requirements. Each
plant has adequate transportation facilities for both raw materials and finished
products. In 1996, the Company made capital expenditures in the amount of $54.0
million relating to plant, property and equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ('Environmental
Claims') under the Comprehensive Environmental Response Compensation and
Liability Act ('CERCLA') and similar state laws, in which recovery is sought for
the cost of cleanup of contaminated sites, a number of which are in the early
stages or have been dormant for protracted periods.
The Company estimates that its liability in respect of all Environmental
Claims, and certain other environmental compliance expenses, as of December 31,
1996, will be $18.5 million, before reduction for insurance recoveries reflected
on its balance sheet (discussed below) of $6.9 million ('estimated recoveries').
In the opinion of management, the resolution of such matters 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 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.
After considering the relevant legal issues and other pertinent factors,
the Company believes that it will receive the estimated recoveries and it may
receive amounts substantially in excess thereof. The Company believes it is
entitled to substantially full defense and indemnity under its insurance
policies for most Environmental Claims, although the Company's insurers have not
affirmed a legal obligation under the policies to provide indemnity for such
claims.
The estimated recoveries are based in part upon interim agreements with
certain insurers. The Company terminated these agreements in 1995 and on March
8, 1995 commenced litigation in the United States District Court for the
District of New Jersey seeking amounts substantially in excess of the estimated
recoveries. While the Company believes that its claims are meritorious, there
can be no assurance that the Company will prevail in its efforts to obtain
amounts equal to, or in excess of, the estimated recoveries.
7
<PAGE>
In June 1989, ISP entered into a Consent Order with the New Jersey
Department of Environmental Protection ('NJDEP') requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee ISP's performance. In
April 1993, NJDEP issued orders which require the prevention of discharge of
contaminated groundwater and stormwater from the site and the elimination of
other potential exposure concerns. ISP believes, although there can be no
assurance, that, taking into account its plans for development of the site, it
can comply with the NJDEP order at a cost of no more than $7.5 million (in
connection with which ISP anticipates insurance recoveries of approximately $5
million). See 'Item 1, Environmental Services.'
Pursuant to an Order dated September 28, 1990 issued by the United States
Environmental Protection Agency (the 'EPA'), over 100 potentially responsible
parties, including the Company, have agreed to participate in the remediation of
a contaminated waste disposal site in Carlstadt, New Jersey. The EPA is
evaluating final remedies for the site. Total cleanup costs are unknown but the
Company estimates, based on information currently available to it, that the
insurance described above will cover a substantial portion of the Company's
share of such costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS
The following table sets forth the name, age, position and other
information with respect to the executive officers of ISP and the executive
officers and directors of ISP Chemicals and ISP Technologies. Each person listed
below is a citizen of the United States.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT
NAME AND POSITION HELD(1) AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------
<S> <C> <C>
Samuel J. Heyman................ 58 Mr. Heyman has been a director and
Chairman and Chief Executive Chairman and Chief Executive Officer of
Officer, International ISP since its formation and Chief
Specialty Products Inc. Executive Officer of ISP Chemicals and
ISP Technologies since November 1991.
Mr. Heyman has been a director and
Chairman and Chief Executive Officer of
ISP Holdings since its formation, of
G-I Holdings since August 1988 and of
GAF and certain of its subsidiaries
since April 1989, prior to which he
held the same position with the
predecessor to GAF (the 'Predecessor
Company') from December 1983 to April
1989. He has been a director and
Chairman of BMCA since its formation, a
director of USI since October 1995 and
Chief Executive Officer of BMCA since
June 1996. He is also the Chief
Executive Officer, Manager and General
Partner of a number of closely held
real estate development companies and
partnerships whose investments include
commercial real estate and a portfolio
of publicly traded securities.
Peter R. Heinze................. 54 Dr. Heinze has been President, Chief
President and Chief Operating Operating Officer and a director of
Officer, International ISP, President and Chief Operating
Specialty Products Inc. Officer of ISP Chemicals and Chief
Operating Officer of ISP Technologies
since November 1996. He was Senior Vice
President, Chemicals of PPG Industries,
Inc. from April 1993 to November 1996
and Group Vice President, Chemicals of
PPG Industries, Inc. from August 1992
to April 1993. From January 1988 to
August 1992, Dr. Heinze was President,
Chemicals Division, and an Executive
Vice President of BASF Corporation.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT
NAME AND POSITION HELD(1) AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------
<S> <C> <C>
Carl R. Eckardt................. 66 Mr. Eckardt was President and Chief
Executive Vice President, Operating Officer of ISP and ISP
Corporate Development, Chemicals and Chief Operating Officer
International Specialty of ISP Technologies from January 1994
Products Inc. to November 1996. He was Executive Vice
President of ISP from its formation to
January 1994 and has served as such
since November 1996. He has been a
director of ISP and Executive Vice
President of ISP Holdings since their
respective formations. Mr. Eckardt has
been Vice Chairman of GAF since
November 1996 and a director of GAF
since April 1987. He was Executive Vice
President of GAF from April 1989 to
November 1996 and held the same
position with the Predecessor Company
from January 1987 to April 1989. Mr.
Eckardt has been Executive Vice
President of G-I Holdings since March
1993. He was President of GAF
Fiberglass Corporation (formerly known
as GAF Chemicals Corporation) ('GFC')
and the Predecessor Company's chemicals
division from 1985 to 1987. Mr. Eckardt
was Senior Vice President Worldwide
Chemicals and Senior Vice President
International Chemicals of the
Predecessor Company from 1982 to 1985
and 1981 to 1982, respectively. Mr.
Eckardt joined the Predecessor Company
in 1974.
James P. Rogers................. 46 Mr. Rogers has been Executive Vice
Executive Vice President- President-Finance of ISP, ISP Chemicals
Finance, International and ISP Technologies, Executive Vice
Specialty Products Inc. President and Chief Financial Officer
of ISP Holdings, G-I Holdings, GAF and
certain of its subsidiaries and
Executive Vice President of BMCA since
December 1996. He was Senior Vice
President and Chief Financial Officer
of GAF, G-I Holdings and certain of
their subsidiaries, and Senior Vice
President-Finance of ISP, ISP
Technologies and ISP Chemicals from
November 1993 to December 1996 and of
BMCA from its formation to December
1996. Mr Rogers has been a director and
Senior Vice President of USI since
October 1995. He has served as
Treasurer of G-I Holdings, GAF and
certain of its subsidiaries since March
1992 and was Vice President-Finance of
such corporations from March 1992 to
October 1993. He was Treasurer of ISP
from March 1992 to December 1994 and
from September 1995 to December 1996.
From August 1987 to March 1992, Mr.
Rogers was Treasurer of Amphenol
Corporation, a manufacturer of
electronic connectors.
Richard A. Weinberg............. 37 Mr. Weinberg has been Senior Vice
Senior Vice President and President and General Counsel of ISP,
General Counsel, International ISP Technologies, ISP Chemicals, GAF,
Specialty Products Inc. G-I Holdings, BMCA and certain of their
subsidiaries since May 1996 and of ISP
Holdings since its formation. He has
been a director of ISP Chemicals and
ISP Technologies since May 1996. He was
Vice President and General Counsel of
BMCA from September 1994 to May 1996,
Vice President-Law of BMCA from May
1994 to September 1994 and Vice
President-Law of GAFBMC from April 1993
to May 1994. Mr. Weinberg was employed
by Reliance Group Holdings Inc., a
diversified insurance holding company,
as Staff Counsel from October 1987 to
January 1990 and as Assistant Vice
President and Corporate Counsel from
January 1990 to April 1993.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT
NAME AND POSITION HELD(1) AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------
<S> <C> <C>
Louis S. Goldberg............... 60 Mr. Goldberg has served as Senior Vice
Senior Vice President, President, Headquarters Administrative
Headquarters Administrative Services of ISP, ISP Chemicals and ISP
Services, International Technologies since July 1996. Mr.
Specialty Products Inc. Goldberg has been Senior Vice
President, Corporate Human Resources of
ISP Holdings since its formation and of
GAF and G-I Holdings and certain of
their subsidiaries since July 1996.
From January 1996 to July 1996, Mr.
Goldberg served as a senior consultant
to GAF. From January 1995 to January
1996, he was Commissioner of the
Department of Administrative Services
for the State of Connecticut, and from
January 1991 to December 1993 he served
as Connecticut's Commissioner of the
Department of Motor Vehicles. From
September 1989 to December 1990, he was
Senior Vice President of Staub,
Warmbold & Associates. From August 1984
to April 1989 he was Vice President-
Human Resources of Playtex, Inc. and
from February 1977 to January 1984 he
was Vice President Administration/
Human Resources of The Seagram Company
Ltd.
Richard B. Olsen................ 50 Mr. Olsen has been Senior Vice President
Senior Vice President and and General Manager, Mineral Products
General Manager, Mineral of ISP and ISP Technologies since April
Products, International 1995. From November 1993 to April 1995,
Specialty Products Inc. he served as Senior Vice President and
Chief Financial Officer of ISP, ISP
Chemicals and ISP Technologies. From
June 1991 to November 1993, he was Vice
President-Finance and Purchasing of
ISP, ISP Chemicals and ISP
Technologies. He was Vice President,
Finance of GFC from April 1989 to
November 1993 and held the same
positions with the Predecessor Company
from June 1986 to April 1989.
Randall R. Lay.................. 42 Mr. Lay has been Vice President and Chief
Vice President and Chief Financial Officer of ISP, ISP Chemicals
Financial Officer, and ISP Technologies since April 1995.
International Specialty From August 1993 to April 1995, he
Products Inc. served as Controller, Specialty
Derivatives of ISP. From March 1991 to
August 1993, he was Director, Financial
Planning of Otis Elevator Company and
from July 1989 to March 1991 he was
Director, Financial Planning of United
Technologies Corporation.
</TABLE>
- ------------------
(1) Under ISP's By-laws, each director and executive officer continues in office
until ISP's next annual meeting of stockholders and until his or her
successor is elected and qualified.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information pertains to ISP's common stock, which is traded
on the New York Stock Exchange. As of February 21, 1997, there were 297 holders
of record of ISP's outstanding common stock.
<TABLE>
<CAPTION>
1996 BY QUARTER 1995 BY QUARTER
---------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- ------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price Range of Common Stock:
High...................... $13 1/4 $12 5/8 $11 3/8 $12 3/4 $7 5/8 $8 5/8 $9 7/8 $11
Low....................... 10 1/8 10 3/4 9 5/8 9 6 3/8 6 5/8 8 3/8 8 1/8
</TABLE>
ISP announced in the second quarter of 1995 that its Board of Directors had
eliminated the 2 1/2 cents per share semi-annual dividend on ISP's common stock.
The declaration and payment of dividends is at the discretion of the Board of
Directors of ISP. See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 6 to Consolidated Financial
Statements for information regarding restrictions on the payment of dividends
set forth on pages F-2 to F-5 and page F-19, respectively. Any decision to
resume the payment of dividends, and the timing and amount thereof, is dependent
upon, among other things, ISP's
10
<PAGE>
results of operations, financial condition, cash requirements, prospects and
other factors deemed relevant by the Board of Directors. Accordingly, there can
be no assurance that the Board of Directors will resume the declaration and
payment of dividends or as to the amount thereof.
ITEM 6. SELECTED FINANCIAL DATA
See Page F-6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See Page F-2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on Page F-1 and Financial Statements and Supplementary Data on
Pages F-7 to F-29.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information relating to the directors of ISP to be contained in the
Proxy Statement under the heading 'Election of Directors' is incorporated by
reference herein. For information relating to the executive officers of ISP, ISP
Chemicals and ISP Technologies, see 'Executive Officers' in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be contained in the Proxy Statement under the headings
'Compensation of Executive Officers of the Company' and 'Election of Directors'
is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information to be contained in the Proxy Statement under the heading
'Security Ownership of Certain Beneficial Owners and Management' is incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be contained in the Proxy Statement under the captions
'Election of Directors' and 'Certain Transactions' is incorporated by reference
herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a)(1) Financial Statements: See Index on Page F-1.
(a)(2) Financial Statement Schedules: See Index on Page F-1.
(a)(3) Exhibits: (a) The following documents are filed as part of this
report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
<S> <C>
3.1 -- Certificate of Incorporation of ISP (incorporated by reference to
Exhibit 3.1 to ISP's Registration Statement on Form S-1,
Registration No. 33-40337) (the 'Common Stock Registration
Statement').
3.2 -- By-laws of ISP (incorporated by reference to Exhibit 3.2 to the
Common Stock Registration Statement).
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
<S> <C>
3.3 -- Certificate of Incorporation of ISP Chemicals (incorporated by
reference to Exhibit 3.3 to ISP's Registration Statement on Form
S-1, Registration No. 33-44862) (the '9% Note Registration
Statement').
3.4 -- By-laws of ISP Chemicals (incorporated by reference to Exhibit 3.4
to the 9% Note Registration Statement).
3.5 -- Certificate of Incorporation of ISP Technologies (incorporated by
reference to Exhibit 3.5 to the 9% Note Registration Statement).
3.6 -- By-laws of ISP Technologies (incorporated by reference to Exhibit
3.6 to the 9% Note Registration Statement).
4 -- Indenture, dated as of March 1, 1992, relating to ISP's 9% Senior
Notes due March 1, 1999 (incorporated by reference to Exhibit 4 to
the 9% Note Registration Statement).
10.1 -- Management Agreement, dated as of March 3, 1992 ('Management
Agreement'), among GAF, G-I Holdings, G Industries Corp., ISP, GAF
Building Materials Corporation and GAF Broadcasting Company, Inc.
(incorporated by reference to Exhibit 10.5 to ISP's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.2 -- Amendment No. 1, dated as of January 1, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.10 to ISP's
Annual Report on Form 10-K for the year ended December 31, 1993).
10.3 -- Amendment No. 2, dated as of May 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.1 to ISP's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1994).
10.4 -- Amendment No. 3, dated as of December 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.4 to ISP's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.5 -- Amendment No. 4, dated as of December 31, 1995, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-4 of G-I Holdings, Registration No.
333-2436).
10.6 -- Amendment No. 5, dated as of October 18, 1996, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to ISP
Holdings' Registration Statement on Form S-4, Registration No.
333-17827) (the 'ISP Holdings Registration Statement').
10.7 -- Amendment No. 6, dated as of January 1, 1997, to the Management
Agreement (incorporated by reference to Exhibit 10.8 to BMCA's
Registration Statement on Form S-4 (Registration No. 333-20859)).
10.8 -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP
Holdings, ISP and certain subsidiaries of ISP (incorporated by
reference to Exhibit 10.8 to the ISP Holdings Registration
Statement).
10.9 -- Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to ISP's Registration Statement on Form
S-1, Registration No. 33-40337).*
10.10 -- ISP Amended and Restated 1991 Incentive Plan for Key Employees and
Directors ('Incentive Plan')(incorporated by reference to Exhibit 99
to ISP's Registration Statement on Form S-8, Registration No.
33-92518).*
10.11 -- Amendment to the Incentive Plan.*
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
<S> <C>
10.12 -- Agreement, dated July 30, 1993, between ISP and Carl R. Eckardt
(incorporated by reference to Exhibit 10.16 to the Registration
Statement on Form S-4 of G-I Holdings (Registration No. 33-72220)).*
10.13 -- Letter Agreement, dated October 15, 1996, between GAF and Dr. Peter
Heinze (incorporated by reference to Exhibit 10.14 to the ISP
Holdings Registration Statement).*
10.14 -- Form of Maintenance Agreement between ISP and ISP Chemicals
(incorporated by reference to Exhibit 10.18 to the 9% Note
Registration Statement).
10.15 -- Form of Assignment and Assumption Agreement between G Industries
Corp. and ISP (incorporated by reference to Exhibit 10.19 to the 9%
Note Registration Statement).
10.16 -- Form of Assignment and Assumption Agreement among ISP, ISP Chemicals
and ISP Technologies (incorporated by reference to Exhibit 10.20 to
the 9% Note Registration Statement).
10.17 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Chemicals (incorporated by reference to Exhibit 10.21 to the 9% Note
Registration Statement).
10.18 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Technologies (incorporated by reference to Exhibit 10.22 to the 9%
Note Registration Statement).
10.19 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Chemicals (incorporated by reference to Exhibit 10.23 to the 9%
Note Registration Statement).
10.20 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Technologies (incorporated by reference to Exhibit 10.24 to the
9% Note Registration Statement).
10.21 -- Form of Option Agreement relating to Cumulative Redeemable Preferred
Stock of ISP Holdings.*
10.22 -- Form of ISP Holdings Stock Appreciation Right Agreement.*
21 -- Subsidiaries of ISP and ISP Chemicals; ISP Technologies has no
subsidiaries.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for fiscal year 1996, which is submitted
electronically to the Securities and Exchange Commission for
information only.
</TABLE>
- ------------------
* Management and/or compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1996.
13
<PAGE>
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.
Date: March 26, 1997 INTERNATIONAL SPECIALTY PRODUCTS INC.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chairman of the Board and Chief Executive Officer
Samuel J. Heyman
/s/ PETER R. HEINZE President and Chief Operating Officer; Director
Peter R. Heinze
/s/ CARL R. ECKARDT Executive Vice President; Director
Carl R. Eckardt
/s/ HARRISON J. GOLDIN Director
Harrison J. Goldin
/s/ CHARLES M. DIKER Director
Charles M. Diker
/s/ SANFORD KAPLAN Director
Sanford Kaplan
/s/ BURT MANNING Director
Burt Manning
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
14
<PAGE>
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.
Date: March 26, 1997 ISP CHEMICALS INC.
ISP TECHNOLOGIES INC.
ISP FILTERS INC.
ISP INVESTMENTS INC.
ISP MINERAL PRODUCTS INC.
ISP MINERALS INC.
ISP REAL ESTATE COMPANY, INC.
VERONA INC.
BLUEHALL INCORPORATED
ISP REALTY CORPORATION
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and Secretary;
Richard A. Weinberg Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
15
<PAGE>
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.
Date: March 26, 1997 ISP (PUERTO RICO) INC.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ JAMES M. POTTER President and Director
James M. Potter
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and Secretary;
Richard A. Weinberg Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
16
<PAGE>
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.
Date: March 26, 1997 ISP ENVIRONMENTAL SERVICES INC.
ISP MANAGEMENT COMPANY, INC.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ PETER R. HEINZE President and Chief Operating Officer;
Peter R. Heinze Director
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and
Richard A. Weinberg Secretary; Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
17
<PAGE>
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.
Date: March 26, 1997 ISP GLOBAL TECHNOLOGIES INC.
ISP INTERNATIONAL CORP.
By: /s/ RICHARD A. WEINBERG
Richard A. Weinberg
Senior Vice President,
General Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED ON MARCH 26, 1997, BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ SAMUEL J. HEYMAN Chief Executive Officer
Samuel J. Heyman
/s/ WILLIAM H. BAUM President and Director
William H. Baum
/s/ RICHARD A. WEINBERG Senior Vice President, General Counsel and Secretary;
Richard A. Weinberg Director
/s/ RANDALL R. LAY Vice President and Chief Financial Officer
Randall R. Lay (Principal Financial and Accounting Officer)
18
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
FORM 10-K
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-2
Selected Financial Data.................................................. F-6
Report of Independent Public Accountants................................. F-7
Consolidated Statements of Income for the three years ended December 31,
1996................................................................... F-8
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-9
Consolidated Statements of Cash Flows for the three years ended December
31, 1996............................................................... F-10
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1996...................................................... F-12
Notes to Consolidated Financial Statements............................... F-13
Supplementary Data (Unaudited):
Quarterly Financial Data (Unaudited)................................... F-29
SCHEDULES
Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts......................... S-1
Supplementary Financial Information--Guarantor Financial Data............ S-2
F-1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 Compared With 1995
International Specialty Products Inc. (the 'Company') recorded net income
in 1996 of $80.7 million (83 cents per share) compared with net income of $67.4
million (68 cents per share) in 1995. The 20% increase in net income was
attributable to higher operating income (up $8.9 million), a $4.4 million
reduction in interest expense, and a $6.4 million increase in other income.
Sales for 1996 were $716.5 million compared with $689 million for 1995. The
sales growth was attributable to increased sales of specialty chemicals (up
$25.2 million), primarily reflecting increased sales volumes ($31.3 million),
partially offset by the unfavorable effect ($7.7 million) of the stronger U.S.
dollar relative to other currencies in certain areas of the world, and also
reflected higher filter products sales (up $2.4 million) due to increased unit
sales. Sales for the mineral products business decreased by $.5 million due to
lower sales volumes (down $2.6 million) resulting from a lost customer and
adverse winter weather conditions in the first quarter of 1996. The sales growth
in 1996 reflected higher sales in all geographic regions.
Operating income for 1996 increased by 7% to $136 million compared with
$127.1 million for 1995, while the Company's operating margin improved from
18.4% to 19.0%. The increase in operating income was due to higher specialty
chemicals operating income (up $11.6 million or 11%), partially offset by lower
filter products results (down $3.3 million due to lower gross profit margins).
The higher specialty chemicals operating income resulted primarily from the
higher sales levels and improved gross margins (up 2.4 percentage points) due to
improved pricing and continued benefits from the Company's reengineering
program. The gross margin improvement was attributable to the Company's
increased focus on manufacturing process improvements through increased
production yields, improvements in first pass quality, and increased capacity
resulting from shorter production cycle times and increased on-line time for
equipment. In addition, raw material costs were lower in 1996 than in 1995.
Selling, general and administrative expenses in 1996 increased by $14.3
million (11%) compared with 1995, and, as a percent of sales, increased from
19.5% to 20.7%. The most significant factors for the increase in such expenses
were attributable to the Company's geographic expansion efforts ($3.0 million),
increased research and development spending ($3.5 million) and normal salary
increases ($3.0 million).
Of the $8.9 million increase in operating income in 1996, domestic
operating income increased by $6.5 million, due primarily to increased sales
volumes for specialty chemicals, as well as improved gross margins, while
operating income for the European region increased by $6.6 million, also as a
result of higher sales levels and improved gross margins for specialty
chemicals. Operating income for the Asia-Pacific region decreased by $2.6
million as higher sales volumes were more than offset by increased expenses
associated with the Company's geographic expansion program, and operating income
from other foreign operations declined by $1.5 million.
Interest expense for 1996 was $28.7 million, a decrease of $4.4 million
(13%) from $33.1 million in 1995. The decrease reflected lower average
borrowings (average borrowings of $389.2 million in 1996 versus $442.3 million
in 1995) and lower interest rates (average borrowing rate of 7.9% in 1996 versus
8.3% in 1995).
Other income (expense), net, comprises net investment income, foreign
exchange gains/losses resulting from the revaluation of foreign
currency-denominated accounts receivable and payable as a result of changes in
exchange rates, and other nonoperating and nonrecurring items of income and
expense. Other income, net was $13.1 million in 1996 compared with $6.7 million
in 1995. The increase in 1996 was due principally to higher net investment
income (up $3.6 million) and gains associated with the Company's program to
hedge certain of its foreign currency exposures. See Note 1 to Consolidated
Financial Statements.
1995 Compared With 1994
In 1995, the Company recorded net income of $67.4 million (68 cents per
share) compared with net income of $44.5 million (45 cents per share) in 1994.
Net income in 1994 included an extraordinary charge of $1.2 million (one cent
per share) related to the refinancing of the Company's bank debt.
F-2
<PAGE>
The results for 1995 reflected higher operating income (up $27.9 million),
$3.4 million higher equity income from the GAF-Huls Chemie GmbH joint venture
('GAF-Huls'), and a $6.8 million increase in other income, partially offset by a
$4.4 million increase in interest expense.
Sales for 1995 were $689 million compared with $600 million for 1994. The
15% sales growth was attributable to increased sales in all product lines,
particularly specialty chemicals (up $74.8 million), and reflected double-digit
sales increases in all regions of the world. The sales increase was primarily
the result of increased sales volumes in all product lines (up $49.6 million)
and higher selling prices and, to a lesser extent, the favorable effect ($14.3
million) of the weaker U.S. dollar relative to other currencies in certain areas
of the world.
Operating income for 1995 increased by 28% to $127.1 million compared with
$99.2 million for 1994. The increase was attributable to higher sales in all
product lines and improved gross margins (up 1.1 percentage points) due
primarily to higher selling prices, partially offset by higher manufacturing
costs. The gross margin improvement was attributable to the Company's increased
focus on manufacturing process improvements through increased production yields,
improvements in first pass quality, and increased capacity resulting from
shorter production cycle times and increased on-line time for equipment. In
addition, raw material costs increased in the latter half of 1994 and continued
through the first half of 1995. Operating income for the specialty chemicals
business increased by $25.7 million (32%), reflecting the above factors.
Selling, general and administrative expenses for 1995 increased $14.4 million
(12%) over 1994 due to operating expenses associated with higher sales levels;
however, such expenses as a percent of sales decreased from 23% in 1993 to 19.9%
and 19.5% in 1994 and 1995, respectively, primarily as a result of the Company's
cost reduction and productivity programs announced in 1993. The Company's
operating margin improved from 16.5% in 1994 to 18.4% in 1995.
Of the $27.9 million increase in operating income in 1995, domestic
operating income increased by $16.6 million, due primarily to higher selling
prices and increased sales volumes for specialty chemicals, as well as improved
gross margins, while operating income for the European region increased by $9.4
million as a result of higher sales levels and improved gross margins. Operating
income for the Asia-Pacific region increased by $3.6 million, with higher sales
volumes partially offset by increased expenses associated with the Company's
geographic expansion program, and operating income from other foreign operations
declined by $1.7 million as higher sales were offset by additional expenses
attributable to the geographic expansion program and a nonrecurring 1994 benefit
resulting from the Brazilian government's economic program. To help offset the
effects of inflation, this program allowed companies to add normal billing
surcharges in 1994. The operating income benefit to the Company in 1994 of such
surcharges was approximately $1.2 million. As inflation rates dropped, this
program was discontinued in 1995. See Note 11 to Consolidated Financial
Statements.
Interest expense for 1995 was $33.1 million, an increase of $4.4 million
from $28.7 million in 1994. The increase was primarily the result of higher
interest rates (average borrowing rate of 8.3% in 1995 versus 6.6% in 1994).
Other income (expense), net, comprises net investment income, foreign
exchange gains/losses resulting from the revaluation of foreign
currency-denominated accounts receivable and payable as a result of changes in
exchange rates, and other nonoperating and nonrecurring items of income and
expense. Other income, net was $6.7 million in 1995 compared with other expense,
net of $.1 million in 1994. The increase in 1995 was due principally to higher
net investment income (up $10.5 million). See Note 1 to Consolidated Financial
Statements.
LIQUIDITY AND FINANCIAL CONDITION
During 1996, the Company generated cash from operations of $104.3 million,
reinvested $54.6 million for capital programs and generated $5.4 million from
net sales of available-for-sale and held-to-maturity securities and other
short-term investments, for a net cash inflow of $55.1 million before financing
activities. Cash from operations in 1996 included $5.7 million in dividends
received from GAF-Huls and $5.7 million in proceeds from net sales of trading
securities. Cash invested in additional working capital totaled $7.7 million
during 1996. This principally reflected an $8.9 million increase in receivables
due to higher sales levels, partially offset by $2.9 million higher payables and
accrued liabilities.
Net cash used in financing activities in 1996 totaled $51.4 million,
primarily reflecting a $55.3 million reduction in borrowings from affiliates and
a $14.3 million decrease in short-term borrowings, partially offset by a $30.2
million increase in long-term debt which principally reflected increased
borrowings under the Company's
F-3
<PAGE>
bank revolving credit facility. Cash used in financing activities also reflected
$15.1 million of expenditures in connection with the Company's common stock
repurchase program. The Company's program, begun in 1994, involves open market
repurchases from time to time of up to a total of 4,500,000 shares of its common
stock. The repurchased shares are held for general corporate purposes, including
issuance of shares under the Company's stock option plan. Through December 31,
1996, 3,594,900 shares of the Company's common stock had been repurchased
pursuant to the program.
As a result of the foregoing factors, cash and cash equivalents increased
by $3.7 million during 1996 to $17.8 million (excluding $123.7 million of
trading, available-for-sale and held-to-maturity securities and other short-term
investments).
The Company's investment strategy is to seek returns in excess of money
market rates on its available cash while minimizing market risks. There can be
no assurance that the Company will be successful in implementing such a
strategy. The Company invests primarily in international and domestic arbitrage
and securities of companies involved in acquisition or reorganization
transactions, including at times, common stock short positions which are offsets
against long positions in securities which are expected, under certain
circumstances, to be exchanged or converted into the short positions. With
respect to its equity positions, the Company is exposed to the risk of market
loss. See Note 1 to Consolidated Financial Statements.
In July 1996, the Company entered into a new five-year revolving credit
facility (the 'Credit Agreement') with a group of banks, which provides for
loans of up to $400 million and letters of credit of up to $75 million (see Note
6 to Consolidated Financial Statements). As of December 31, 1996, loans in the
amount of $70.4 million and letters of credit in the amount of $8.0 million were
outstanding under the Credit Agreement. The Credit Agreement permits the Company
to make loans to affiliates and to make available letters of credit for the
benefit of affiliates in an aggregate amount of up to $75 million, none of which
had been utilized as of December 31, 1996.
Borrowings by the Company, including those under the Credit Agreement, are
subject to the application of certain financial covenants contained in such
agreement and the indentures relating to the 9% Senior Notes due 2003 and 9 3/4%
Senior Notes due 2002, both issued by ISP Holdings Inc. ('ISP Holdings'), the
Company's parent and owner of approximately 83.5% of the Company's common stock.
As of December 31, 1996, the Company was in compliance with such covenants, and
the application of such covenants would not have restricted the amount available
for borrowing under the Credit Agreement. The Credit Agreement and the indenture
relating to the Company's 9% Senior Notes due 1999 limit the amount of cash
dividends, purchases of treasury stock, and other restricted payments (as
defined) by the Company. See Note 6 to Consolidated Financial Statements.
As of December 31, 1996, the Company's scheduled repayments of long-term
debt for the twelve months ending December 31, 1997 aggregated $.6 million.
Fluctuations in the value of foreign currencies may cause U.S. dollar
translated amounts to change in comparison with previous periods and,
accordingly, the Company cannot estimate in any meaningful way the possible
effect of such fluctuations upon future income. The Company has a policy to
manage these exposures to minimize the effects of fluctuations in foreign
currencies, which includes entering into foreign exchange contracts in order to
hedge its exposure. In respect of its foreign exchange contracts, the Company
recognized pre-tax gains of $7.0 million during 1996 and losses of $7.4 and $6.6
million during 1995 and 1994, respectively. At December 31, 1996, the equivalent
U.S. dollar fair value of outstanding forward foreign exchange contracts was
$174.5 million, and the amount of deferred gains and losses on such instruments
was immaterial. The equivalent U.S. dollar fair value of foreign exchange
contracts outstanding as of December 31, 1996 as a hedge of non-local currency
loans was $30.2 million, representing 100% of the Company's foreign currency
exposure with respect to such loans. See Note 1 to Consolidated Financial
Statements.
The objectives of the Company in utilizing interest rate swap agreements
are to lower funding costs, diversify sources of funding and manage interest
rate exposure. As of December 31, 1996, the total notional amount of interest
rate swaps outstanding was $200 million and the amount of underlying debt
relating to such swaps was $200 million. By utilizing interest rate swap
agreements, the Company reduced its interest expense by $2.8, $1.8 and $5.3
million in 1996, 1995 and 1994, respectively. See Note 6 to Consolidated
Financial Statements.
F-4
<PAGE>
ISP Holdings was a wholly owned subsidiary of GAF Corporation ('GAF') until
January 1, 1997, when its stock was distributed to the stockholders of GAF in a
series of transactions involving GAF's subsidiaries. As a result, ISP Holdings
and ISP are no longer direct or indirect subsidiaries of GAF or its subsidiary,
G-I Holdings Inc.
ISP Holdings is a holding company without independent businesses or
operations and, as such, is dependent upon the cash flows of the Company in
order to satisfy its obligations. Such obligations include $325 million
principal amount of ISP Holdings' 9% Senior Notes due 2003 and $199.9 million
principal amount of ISP Holdings' 9 3/4% Senior Notes due 2002. ISP Holdings
expects to satisfy such obligations from, among other things, refinancings of
debt, dividends and loans from the Company, as to which there are restrictions
under the Credit Agreement and the indenture relating to the Company's 9% Senior
Notes (see Note 6 to Consolidated Financial Statements), and payments pursuant
to the Tax Sharing Agreement between ISP Holdings and the Company (see Note 2 to
Consolidated Financial Statements). The Company does not believe that the
dependence of ISP Holdings on the cash flows of the Company should have a
material adverse effect on the operations, liquidity or capital resources of the
Company.
As the Company's stock price appreciates, ISP Holdings may at some future
time consider selling shares of the Company's common stock, although it has no
current intention to do so. If ISP Holdings were to own less than 80% of the
outstanding common stock of the Company, payments pursuant to the Tax Sharing
Agreement would not be available to it.
For information with respect to income taxes, see Note 2 to Consolidated
Financial Statements.
The Company does not believe that inflation has had an effect on its
results of operations during the past three years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
The Company intends to acquire or develop a European manufacturing facility
to meet the needs of the Company's European business. While the originally
anticipated commencement date of the European project has been deferred because
the Company has been able to implement cost efficient capacity expansions at its
existing manufacturing facilities, based upon its current analyses of additional
opportunities for expansion of existing capacity, end-use demand, and other
relevant factors, the Company intends to proceed with the project by the end of
1997. Costs capitalized to date related to this project are included in
'Construction in progress'. The Company anticipates utilizing internally
generated funds, existing credit facilities and/or independent financing to fund
the cost of the project.
The Company has received conditional site designation from the New Jersey
Hazardous Waste Facilities Siting Commission for the construction of a hazardous
waste treatment, storage and disposal facility at its Linden, New Jersey
property, and has received approval from the New Jersey Turnpike Authority for a
direct access ramp from the Turnpike to the site. Both the site designation and
the access ramp approval have been appealed to the Courts by the City of Linden.
The Company estimates that the cost of constructing the facility will be
approximately $100 million and, if approved, the facility is anticipated to be
in operation three years after commencement of construction. The Company
anticipates utilizing internally generated cash and/or seeking project or other
independent financing therefor. Accordingly, the Company would not expect such
facility to impact materially its liquidity or capital resources.
The Company, together with other companies, is a party to a variety of
administrative proceedings and lawsuits involving environmental matters. See
Note 12 to Consolidated Financial Statements for further information.
FORWARD-LOOKING STATEMENTS
The discussions in this Annual Report on Form 10-K contain both historical
and forward-looking statements. Although the Company believes that any such
forward-looking statements are based on reasonable assumptions, these statements
involve uncertainties that affect, among other things, the Company's operations,
markets, products, services and prices. These uncertainties include economic,
competitive, governmental and technological factors.
F-5
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales........................ $ 716,481 $ 689,002 $ 600,047 $ 548,252 $ 570,757
Operating income................. 136,024 127,096 99,245 65,091 107,664
Interest expense................. 28,729 33,091 28,676 24,500 30,595
Income before income taxes....... 125,967 106,102 72,484 49,823 85,782
Income before extraordinary item
and cumulative effect of
accounting change............. 80,663 67,375 45,752 29,558 57,182
Net income....................... 80,663 67,375 44,515 29,558 50,113
Earnings per common share:
Income before extraordinary item
and cumulative effect of
accounting change............. $ .83 $ .68 $ .46 $ .30 $ .57
Net income....................... $ .83 $ .68 $ .45 $ .30 $ .50
Dividends per common share....... $ -- $ -- $ .05 $ .05 $ .05
OTHER DATA:
Operating margin................. 19.0% 18.4% 16.5% 11.9% 18.9%
Depreciation..................... $ 38,279 $ 35,960 $ 32,753 $ 28,737 $ 25,610
Goodwill amortization............ 13,200 13,223 13,400 13,856 13,706
Capital expenditures and
acquisitions.................. 54,587 38,934 31,098 62,858 70,464
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total working capital............ $ 219,702 $ 142,550 $ 121,803 $ 78,263 $ 179,310
Total assets..................... 1,316,914 1,312,938 1,251,304 1,243,315 1,270,418
Long-term debt................... 372,870 347,491 377,106 367,722 493,025
Stockholders' equity............. 701,493 643,244 582,368 534,012 516,999
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To International Specialty Products Inc.:
We have audited the accompanying consolidated balance sheets of
International Specialty Products Inc. (a Delaware corporation and an 83.5% owned
subsidiary of ISP Holdings Inc.) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements and the schedule and supplementary financial
information referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements, schedule and supplementary financial information based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, appearing on
pages F-8 to F-28 of this Form 10-K, present fairly, in all material respects,
the financial position of International Specialty Products Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule and supplementary financial
information appearing on pages S-1 to S-4 of this Form 10-K are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 10, 1997
F-7
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net sales................................... $716,481 $689,002 $600,047
-------- -------- --------
Costs and expenses:
Cost of products sold..................... 418,921 414,672 367,746
Selling, general and administrative....... 148,336 134,011 119,656
Goodwill amortization..................... 13,200 13,223 13,400
-------- -------- --------
Total costs and expenses.................. 580,457 561,906 500,802
-------- -------- --------
Operating income............................ 136,024 127,096 99,245
Interest expense............................ (28,729) (33,091) (28,676)
Equity in earnings of joint venture......... 5,604 5,413 2,034
Other income (expense), net................. 13,068 6,684 (119)
-------- -------- --------
Income before income taxes and extraordinary
item...................................... 125,967 106,102 72,484
Income taxes................................ (45,304) (38,727) (26,732)
-------- -------- --------
Income before extraordinary item............ 80,663 67,375 45,752
Extraordinary item, net of $733 income tax
benefit................................... -- -- (1,237)
-------- -------- --------
Net income.................................. $ 80,663 $ 67,375 $ 44,515
-------- -------- --------
-------- -------- --------
Earnings per common share:
Income before extraordinary item.......... $ .83 $ .68 $ .46
Extraordinary item........................ -- -- (.01)
-------- -------- --------
Net income................................ $ .83 $ .68 $ .45
-------- -------- --------
-------- -------- --------
Weighted average number of common shares
outstanding............................... 97,197 98,613 99,888
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-8
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 17,753 $ 14,080
Investments in trading securities................. 1,273 17,183
Investments in available-for-sale securities...... 114,323 109,214
Investments in held-to-maturity securities........ 1,977 4,618
Other short-term investments...................... 6,149 4,885
Accounts receivable, trade, less reserve of $2,840
and $2,879..................................... 66,875 60,327
Accounts receivable, other........................ 12,835 12,356
Receivable from related parties, net.............. 5,518 --
Inventories....................................... 108,586 107,969
Other current assets.............................. 13,239 12,920
---------- ----------
Total Current Assets......................... 348,528 343,552
Property, plant and equipment, net.................. 489,474 475,550
Excess of cost over net assets of businesses
acquired, net of accumulated amortization of
$105,025 and $91,825.............................. 417,258 430,458
Other assets........................................ 61,654 63,378
---------- ----------
Total Assets........................................ $1,316,914 $1,312,938
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................... $ 22,275 $ 36,199
Current maturities of long-term debt.............. 610 398
Loan payable to related party..................... -- 50,597
Accounts payable.................................. 42,939 41,727
Accrued liabilities............................... 57,134 56,538
Payable to related parties, net................... -- 9,429
Income taxes...................................... 5,868 6,114
---------- ----------
Total Current Liabilities.................... 128,826 201,002
---------- ----------
Long-term debt less current maturities.............. 310,294 280,254
---------- ----------
Long-term notes payable to related parties.......... 62,576 67,237
---------- ----------
Deferred income taxes............................... 52,665 55,743
---------- ----------
Other liabilities................................... 61,060 65,458
---------- ----------
Commitments and contingencies.......................
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized: 0 shares
issued......................................... -- --
Common stock, $.01 par value per share;
300,000,000 shares authorized: 99,888,646
shares issued.................................. 999 999
Additional paid-in capital........................ 504,686 504,544
Treasury stock, at cost--3,451,522 and 2,122,395
shares......................................... (30,874) (16,718)
Excess of purchase price over the adjusted
historical cost of predecessor company shares
owned by GAF's stockholders.................... (63,483) (63,483)
Retained earnings................................. 280,297 199,634
Cumulative translation adjustment and other....... 9,868 18,268
---------- ----------
Total Stockholders' Equity................... 701,493 643,244
---------- ----------
Total Liabilities and Stockholders' Equity.......... $1,316,914 $1,312,938
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-9
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents, beginning of
year...................................... $ 14,080 $ 20,127 $ 11,022
-------- -------- --------
Cash provided by operating activities:
Net income................................ 80,663 67,375 44,515
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation........................... 38,279 35,960 32,753
Goodwill amortization.................. 13,200 13,223 13,400
Deferred income taxes.................. (2,494) (18,809) (16,494)
(Increase) decrease in working capital
items.................................. (7,650) (5,105) (12,010)
Purchases of trading securities........... (42,002) (66,483) (267,181)
Proceeds from sales of trading
securities............................. 47,677 104,058 284,520
(Increase) decrease in other assets....... 780 56 (2,311)
Decrease in other liabilities............. (31) (1,343) (2,090)
Change in net receivable from/payable to
related parties........................ (14,947) 6,093 (247)
Change in cumulative translation
adjustment............................. (8,376) 6,918 8,306
Other, net................................ (813) 1,868 (4,555)
-------- -------- --------
Net cash provided by operating activities... 104,286 143,811 78,606
-------- -------- --------
Cash used in investing activities:
Capital expenditures and acquisitions..... (54,587) (38,934) (31,098)
Purchases of available-for-sale
securities............................. (287,361) (364,012) (953)
Purchases of held-to-maturity
securities............................. (14,331) (5,592) --
Purchases of other short-term
investments............................ (1,264) (2,188) (2,697)
Proceeds from sales of available-for-sale
securities............................. 291,408 257,197 742
Proceeds from held-to-maturity
securities............................. 16,972 974 --
-------- -------- --------
Net cash used in investing activities....... (49,163) (152,555) (34,006)
-------- -------- --------
Cash provided by (used in) financing
activities:
Proceeds (repayments) from sale of
accounts receivable.................... 2,000 3,768 (1,052)
Increase (decrease) in short-term debt.... (14,256) 36,199 (12,848)
Increase (decrease) in borrowings under
revolving credit facility.............. 29,625 (4,200) (82,250)
Other increase (decrease) in long-term
debt................................... 543 (1,435) (798)
Increase (decrease) in loans from related
parties................................ (55,258) (15,216) 66,263
Dividends................................. -- -- (4,994)
Repurchases of common stock............... (15,134) (16,614) (327)
Other, net................................ 1,030 195 511
-------- -------- --------
Net cash provided by (used in) financing
activities................................ (51,450) 2,697 (35,495)
-------- -------- --------
Net change in cash and cash equivalents..... 3,673 (6,047) 9,105
-------- -------- --------
Cash and cash equivalents, end of year...... $ 17,753 $ 14,080 $ 20,127
-------- -------- --------
-------- -------- --------
</TABLE>
F-10
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Effect on cash from (increase) decrease in
working capital items*:
Accounts receivable........................ $(8,884) $(10,892) $(14,161)
Inventories................................ (575) 1,029 (5,087)
Other current assets....................... (967) 2,105 1,688
Accounts payable........................... 1,186 (5,895) 8,187
Accrued liabilities........................ 1,738 8,389 (4,162)
Income taxes............................... (148) 159 1,525
------- -------- --------
Net effect on cash from (increase)
decrease in working capital items..... $(7,650) $ (5,105) $(12,010)
------- -------- --------
------- -------- --------
Cash paid during the year for:
Interest (net of amount capitalized)....... $33,015 $ 36,776 $ 31,140
Income taxes (including taxes paid pursuant
to the Tax Sharing Agreement)........... 61,701 44,489 44,499
</TABLE>
- ------------------
* Working capital items exclude cash and cash equivalents, short-term
investments, short-term debt and payables to and receivables from related
parties. Working capital acquired in connection with acquisitions is reflected
within 'Capital expenditures and acquisitions.' The effects of
reclassifications between noncurrent and current assets and liabilities are
excluded from the amounts shown above. In addition, the increase in accounts
receivable shown above does not reflect the cash proceeds from the sale of the
Company's domestic trade accounts receivable (see Note 3); such proceeds are
reflected in cash from financing activities.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-11
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CAPITAL
STOCK AND CUMULATIVE
ADDITIONAL TREASURY TRANSLATION
PAID-IN STOCK ADJUSTMENT RETAINED
CAPITAL AT COST AND OTHER EARNINGS
---------- -------- ----------- --------
(THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1993....................... $ 505,571 $ -- $ (814) $ 92,738
Net income............................ -- -- -- 44,515
Translation adjustment................ -- -- 8,306 --
Dividends declared ($.05 per common
share)............................. -- -- -- (4,994)
Repurchases of common stock--49,000
shares............................. -- (327) -- --
Unrealized loss on available-for-sale
securities, net of $621 income tax
benefit............................ -- -- (1,063) --
Adjustment of unfunded pension
liability.......................... -- -- 1,919 --
---------- -------- ----------- --------
December 31, 1994....................... $ 505,571 $ (327) $ 8,348 $132,259
Net income............................ -- -- -- 67,375
Translation adjustment................ -- -- 6,918 --
Repurchases of common stock--2,102,200
shares............................. -- (16,614) -- --
Change in unrealized gain on
available-for-sale securities, net
of $1,198 income tax effect........ -- -- 2,618 --
Issuances under stock option
plan--28,805 shares................ -- 223 -- --
Excess of cost of treasury stock
issued over proceeds............... (28) -- -- --
Adjustment of unfunded pension
liability.......................... -- -- 384 --
---------- -------- ----------- --------
December 31, 1995....................... $ 505,543 $(16,718) $18,268 $199,634
Net income............................ -- -- -- 80,663
Translation adjustment................ -- -- (8,376) --
Repurchases of common stock--1,443,700
shares............................. -- (15,134) -- --
Change in unrealized gain on
available-for-sale securities, net
of $48 income tax effect........... -- -- (820) --
Issuances under stock option plan--
112,823 shares..................... -- 957 -- --
Issuance of stock (1,750 shares) and
options as incentives.............. 323 21 -- --
Excess of cost of treasury stock
issued over proceeds............... (181) -- -- --
Adjustment of unfunded pension
liability.......................... -- -- 796 --
---------- -------- ----------- --------
December 31, 1996....................... $ 505,685 $(30,874) $ 9,868 $280,297
---------- -------- ----------- --------
---------- -------- ----------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-12
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Specialty Products Inc. (the 'Company') is a multinational
manufacturer of a wide range of specialty chemicals, mineral products, filter
products and advanced materials. See Notes 10 and 11 for financial information
concerning the Company's industry segments and foreign and domestic operations.
Approximately 83.5% of the Company's common stock is owned by ISP Holdings Inc.
('ISP Holdings').
ISP Holdings was a wholly owned subsidiary of GAF Corporation ('GAF') until
January 1, 1997, when its stock was distributed to the stockholders of GAF in a
series of transactions involving GAF's subsidiaries (the 'Separation
Transactions'). As a result, ISP Holdings and the Company are no longer direct
or indirect subsidiaries of GAF or its subsidiary, G-I Holdings Inc. ('G-I
Holdings').
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All subsidiaries are consolidated and intercompany transactions have been
eliminated.
Financial Statement Estimates
The preparation of financial statements requires management to make certain
estimates. Actual results could differ from those estimates. In the opinion of
management, the financial statements herein contain all adjustments necessary to
present fairly the financial position and the results of operations and cash
flows of the Company for the periods presented. The Company has a policy to
review the recoverability of long-lived assets and identify and measure any
potential impairments. The Company does not anticipate any changes in management
estimates that would have a material impact on operations, liquidity or capital
resources.
Investment in Joint Venture
The Company's 50% ownership of GAF-Huls Chemie GmbH ('GAF-Huls'), a joint
venture which operates a chemical manufacturing plant in Germany, is accounted
for by the equity method. The Company's equity in the net assets of GAF-Huls was
$38.2 and $41.2 million as of December 31, 1996 and 1995, respectively, and is
included in 'Other assets'. Dividends received by the Company from GAF-Huls
totaled $5.7, $.3 and $4.4 million for 1996, 1995 and 1994, respectively.
Short-term Investments
For securities classified as 'trading' (including short positions),
unrealized gains and losses are reflected in income. For securities classified
as 'available-for-sale', unrealized gains (losses), net of income tax effect,
are included in a separate component of stockholders' equity, 'Cumulative
translation adjustment and other', and amounted to $.7 and $1.6 million as of
December 31, 1996 and 1995, respectively. Investments classified as
'held-to-maturity' securities are carried at amortized cost in the Consolidated
Balance Sheets.
'Other income (expense), net', includes $20.5, $16.5 and $6.2 million of
net realized and unrealized gains on securities in 1996, 1995 and 1994,
respectively. The determination of cost in computing realized gains and losses
is based on the specific identification method.
During the fourth quarter of 1995, the Company redesignated certain equity
securities held long (which are offsets against short positions in certain other
securities), with a fair market value of $18.1 million, as 'trading' and
recorded unrealized gains on such securities, through the date of redesignation,
in the amount of $2.1 million as 'Other income'.
As of December 31, 1996 and 1995, the market value of the Company's equity
securities held long was $115.1 and $127.3 million, respectively, and the
Company had $7.9 and $22 million, respectively, of short positions in common
stocks. As of December 31, 1996 and 1995, the market value of the Company's
held-to-maturity securities was $2.0 and $4.6 million, respectively. The market
values referred to above are based on quotations as reported by various stock
exchanges and major broker dealers. With respect to its investments in
securities, the Company is exposed to the risk of market loss.
F-13
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
'Other short-term investments' are investments in limited partnerships
which are accounted for by the equity method. Gains and losses are reflected in
'Other income (expense), net'. Liquidation of partnership interests generally
require a 30 to 45 day notice period.
Cash and cash equivalents include cash on deposit and debt securities
purchased with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for a substantial portion of the
Company's domestic inventories. All other inventories are determined principally
based on the FIFO (first-in, first-out) method.
Property, Plant and Equipment
Depreciation is computed principally on the straight-line method based on
the estimated economic lives of the assets. The Company uses an economic life of
10-20 years for land improvements, 40 years for buildings, and 3-20 years for
machinery and equipment, which includes furniture and fixtures. Certain interest
charges are capitalized during the period of construction as part of the cost of
property, plant and equipment.
Foreign Exchange Contracts
The Company enters into forward foreign exchange instruments with
off-balance-sheet risk in order to hedge a portion of both its borrowings
denominated in foreign currency and its firm or anticipated purchase commitments
related to the operations of foreign affiliates. Gains and losses on instruments
used to hedge firm purchase commitments are deferred, and amortization is
included in the measurement of the foreign currency transactions hedged. Gains
and losses on instruments used to hedge anticipated purchases are recognized
within 'Other income (expense), net'.
Forward contract agreements require the Company and the counterparty to
exchange fixed amounts of U.S. dollars for fixed amounts of foreign currency on
specified dates. The market value of such contracts varies with changes in the
market exchange rates. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the forward contract agreements.
However, the Company does not anticipate nonperformance by the counterparties.
The Company does not generally require collateral or other security to support
these financial instruments.
As of December 31, 1996 and 1995, the equivalent dollar fair value of
outstanding forward foreign exchange contracts was $174.5 and $183.1 million,
respectively, and the amount of deferred gains and losses on such instruments
was immaterial at each of such dates. All forward contracts are in major
currencies with highly liquid markets and mature within one year. The Company
uses quoted market prices obtained from major financial institutions to
determine the market value of its outstanding forward exchange contracts. The
U.S. dollar equivalent fair value of foreign exchange contracts outstanding as
of December 31, 1996 as a hedge of non-local currency loans was $30.2 million,
representing 100% of the Company's foreign currency exposure with respect to
such loans.
The Company continually monitors its risk from the effect of foreign
currency fluctuations on its operations and on the derivative products used to
hedge its risk. The Company utilizes real-time, on-line foreign exchange data
and news as well as evaluation of economic information provided by financial
institutions. Mark-to-market valuations are made on a regular basis. Hedging
strategies are approved by senior management before being implemented.
F-14
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, other than those located in
highly inflationary countries, are translated at year-end exchange rates. The
effects of these translation adjustments are reported in a separate component of
stockholders' equity, 'Cumulative translation adjustment and other', and
amounted to $9.1 and $17.5 million as of December 31, 1996 and 1995,
respectively. Income and expenses are translated at average exchange rates
prevailing during the year. Exchange gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity
involved, and translation adjustments of subsidiaries in countries with highly
inflationary economies, are included in 'Other income (expense), net'.
Excess of Purchase Price Over the Adjusted Historical Cost of Predecessor
Company Shares
Stockholders' equity reflects a reduction of $63.5 million which arose from
a management-led buyout in March 1989 of the predecessor company to the
Company's former parent company, GAF (the 'Acquisition'), because certain
members of the management group owned shares of the predecessor company's common
stock before the Acquisition and own shares of GAF after the Acquisition.
Accordingly, a step-up in asset values to fair value as required by the purchase
method of accounting (which was applied to the Acquisition) does not apply to
their shares.
Excess of Cost Over Net Assets of Businesses Acquired ('Goodwill')
Goodwill, which arose principally from the Acquisition, is amortized on the
straight-line method over a period of approximately 40 years. The Company
believes that the goodwill is recoverable. The primary financial indicator to
assess recoverability of goodwill is operating income before amortization of
goodwill. The assessment is based on an undiscounted analysis.
Debt Issuance Costs
Debt issuance costs are amortized to expense over the life of the related
debt.
Interest Rate Swaps
Gains (losses) on interest rate swap agreements ('swaps') are deferred and
amortized as a reduction (increase) of interest expense over the remaining life
of the debt issue with respect to which the swaps were entered.
Research and Development
Research and development costs are charged to operations as incurred and
amounted to $25.4, $21.9 and $20.3 million for 1996, 1995 and 1994,
respectively.
Environmental Liability
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters. The Company estimates
that its liability in respect of such environmental matters, and certain other
environmental compliance expenses, as of December 31, 1996, is $18.5 million,
before reduction for insurance recoveries reflected on its balance sheet of $6.9
million. The Company's liability is reflected on an undiscounted basis. See Note
12 for further discussion with respect to environmental liabilities and
estimated insurance recoveries.
Reclassifications
Certain amounts in the 1995 and 1994 Consolidated Financial Statements and
Notes to Consolidated Financial Statements have been reclassified to conform to
the 1996 presentation.
F-15
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INCOME TAXES
Income tax (provision) benefit consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Federal:
Current..................... $(38,968) $(48,955) $(36,055)
Deferred.................... 2,071 17,794 16,051
-------- -------- --------
Total Federal............... (36,897) (31,161) (20,004)
-------- -------- --------
Foreign--current.............. (6,648) (6,432) (6,019)
-------- -------- --------
State and local:
Current..................... (2,182) (2,149) (1,152)
Deferred.................... 423 1,015 443
-------- -------- --------
Total state and local....... (1,759) (1,134) (709)
-------- -------- --------
Income tax provision.......... $(45,304) $(38,727) $(26,732)
-------- -------- --------
-------- -------- --------
</TABLE>
The differences between the income tax provision computed by applying the
statutory Federal income tax rate to pre-tax income, and the income tax
provision reflected in the Consolidated Statements of Income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Statutory tax provision..................... $(44,045) $(37,136) $(25,369)
Impact of:
Foreign operations........................ 1,848 3,633 1,657
Nondeductible goodwill amortization....... (4,620) (4,628) (4,690)
Percentage depletion...................... 1,668 1,824 1,684
Other, net................................ (155) (2,420) (14)
-------- -------- --------
Income tax provision........................ $(45,304) $(38,727) $(26,732)
-------- -------- --------
-------- -------- --------
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Deferred tax liabilities related to:
Property, plant and equipment........................ $ 90,103 $ 90,854
Other................................................ 1,948 6,019
-------- --------
Total deferred tax liabilities....................... 92,051 96,873
-------- --------
Deferred tax assets related to:
Expenses not yet deducted for tax purposes........... (16,798) (14,099)
Deferred income...................................... (22,921) (19,912)
Foreign tax credits not yet utilized under the Tax
Sharing Agreement................................. -- (3,326)
Other................................................ (5,534) (10,389)
-------- --------
Total deferred tax assets............................ (45,253) (47,726)
-------- --------
Net deferred tax liability............................. 46,798 49,147
Deferred tax assets reclassified to other current
assets............................................... 5,867 6,596
-------- --------
Noncurrent deferred tax liability...................... $ 52,665 $ 55,743
-------- --------
-------- --------
</TABLE>
F-16
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INCOME TAXES--(CONTINUED)
Effective January 1, 1997, the Company and its domestic subsidiaries
entered into a Tax Sharing Agreement with ISP Holdings with respect to the
payment of Federal income taxes and certain related matters (the 'Tax Sharing
Agreement'). During the term of the Tax Sharing Agreement, which extends as long
as the Company or any of its domestic subsidiaries, as the case may be, are
included in a consolidated Federal income tax return filed by ISP Holdings, or a
successor entity, the Company is obligated to pay to ISP Holdings an amount
equal to those Federal income taxes the Company would have incurred if, subject
to certain exceptions, the Company (on behalf of itself and its domestic
subsidiaries) filed its own consolidated Federal income tax return. These
exceptions include, among others, that the Company may utilize certain favorable
tax attributes i.e., losses, deductions and credits (except for a certain amount
of foreign tax credits and, in general, net operating losses) only at the time
such attributes reduce the Federal income tax liability of ISP Holdings and its
consolidated subsidiaries (the 'ISP Holdings Group'); and that the Company may
carry back or carry forward its favorable tax attributes only after taking into
account current tax attributes of the ISP Holdings Group. In general, subject to
the foregoing limitations, unused tax attributes carry forward for use in
reducing amounts payable by the Company to ISP Holdings in future years. Subject
to certain exceptions, actual payment for such attributes will be made by ISP
Holdings to the Company only when ISP Holdings receives an actual refund of
taxes from the IRS or, under certain circumstances, the earlier of (i) the dates
of the filing of Federal income tax returns of the Company for taxable years of
the Company following the last taxable year in which it was a member of the ISP
Holdings Group, or (ii) when ISP Holdings no longer owns more than 50% of the
Company. Foreign tax credits not utilized by the Company in computing its tax
sharing payments will be refunded by ISP Holdings to the Company, if such
credits expire unutilized, upon the termination of the statute of limitations
for the year of expiration.
The Tax Sharing Agreement provides for analogous principles to be applied
to any consolidated, combined or unitary state or local income taxes. Under the
Tax Sharing Agreement, ISP Holdings makes all decisions with respect to all
matters relating to taxes of the ISP Holdings Group. The provisions of the Tax
Sharing Agreement take into account both the Federal income taxes the Company
would have incurred if it filed its own separate Federal income tax return and
the fact that the Company is a member of the ISP Holdings Group for Federal
income tax purposes.
The Company was a party to tax sharing agreements with members of the GAF
consolidated group (the 'GAF Group'). As a result of the Separation
Transactions, the Company is no longer included in the consolidated Federal
income tax returns of GAF, and therefore, such tax sharing agreements are no
longer applicable with respect to the future tax liabilities of the Company. The
Company remains obligated, however, with respect to tax liabilities imposed or
that may be imposed for periods prior to the Separation Transactions. Among
other things, those tax sharing agreements provide for the sharing of the GAF
Group's consolidated tax liability based on each member's share of the tax as if
such member filed on a separate basis. Accordingly, a payment of tax would be
made to GAF equal to the Company's allocable share of the GAF Group's
consolidated tax liability. Alternatively, the Company would be entitled to
refunds if losses or other attributes reduce the GAF Group's consolidated tax
liability. Moreover, foreign tax credits generated by the Company not utilized
by GAF will be refunded by GAF or its subsidiary to the Company, if such credits
expire unutilized upon termination of the statute of limitations for the year of
expiration. Furthermore, those tax sharing agreements provide for an
indemnification to the Company for any tax liability attributable to another
member of the GAF Group.
In connection with Rhone-Poulenc Surfactants and Specialties, L.P. (the
'Surfactants Partnership'), GAF Fiberglass Corporation ('GFC') (formerly known
as GAF Chemicals Corporation, and an indirect subsidiary of GAF), has recorded a
deferred tax liability in the amount of $131.4 million, which is reflected as a
liability on the consolidated balance sheet of G-I Holdings. Payment of this
liability (subject to reduction to reflect utilization of the tax attributes of
GAF and its subsidiaries) is not expected earlier than 1999 under present
circumstances. In certain circumstances, GFC could be required to satisfy this
liability earlier than 1999. GAF, G-I Holdings and certain subsidiaries of GAF
have agreed to jointly and severally indemnify the Company against such tax
liability. Prior to the Separation Transactions, the Company was a member of the
same consolidated Federal
F-17
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INCOME TAXES--(CONTINUED)
income tax group as GFC. Subject to such indemnification, the Company would be
severally liable for any tax liability imposed in connection with the
Surfactants Partnership should GAF, G-I Holdings and such subsidiaries be unable
to satisfy such liability. GAF has advised the Company that, in the event the
tax liability becomes payable, GAF believes that it will have access to
sufficient funds to satisfy this liability if so required.
NOTE 3. SALE OF ACCOUNTS RECEIVABLE
In June 1993, the Company sold its domestic trade accounts receivable,
without recourse, for a maximum of $25 million in cash to be made available to
the Company based on eligible domestic receivables outstanding from time to
time. As of November 6, 1996, the agreement under which the Company sells its
domestic trade accounts receivable was extended for one year on substantially
the same terms and conditions, and the maximum purchase amount was increased to
$29 million. The excess of accounts receivable sold over the net proceeds
received is included in 'Accounts receivable, other'. The effective cost to the
Company varies with LIBOR or commercial paper rates and is included in 'Other
income (expense), net'.
In 1996, the Financial Accounting Standards Board issued SFAS No. 125,
relating to accounting for transfers and servicing of financial assets and
extinguishments of liabilities, which will be adopted in 1997. The Company does
not anticipate that the implementation of SFAS No. 125 will have a material
effect on the Company's results of operations or financial position.
NOTE 4. INVENTORIES
At December 31, 1996 and 1995, $49.2 and $56.2 million, respectively, of
domestic inventories were valued using the LIFO method. Inventories comprise the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Finished goods................ $ 68,436 $ 71,431
Work in process............... 24,261 20,540
Raw materials and supplies.... 17,814 18,634
-------- --------
Total.................... 110,511 110,605
Less LIFO reserve............. (1,925) (2,636)
-------- --------
Inventories................... $108,586 $107,969
-------- --------
-------- --------
</TABLE>
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprises the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(THOUSANDS)
<S> <C> <C>
Land and land improvements.............. $ 71,653 $ 69,504
Buildings and building equipment........ 85,693 80,880
Machinery and equipment................. 475,917 438,579
Construction in progress................ 45,341 46,547
--------- ---------
Total.............................. 678,604 635,510
Less accumulated depreciation........... (189,130) (159,960)
--------- ---------
Property, plant and equipment, net...... $ 489,474 $ 475,550
--------- ---------
--------- ---------
</TABLE>
See Note 12 for information regarding capital leases.
F-18
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt comprises the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
9% Senior Notes due 1999................................ $200,000 $200,000
Borrowings under revolving credit facility.............. 70,425 40,800
Obligation on mortgaged property due 1999............... 38,125 38,125
Obligations under capital leases (Note 12).............. 2,068 1,727
Other................................................... 286 --
-------- --------
Total long-term debt............................... 310,904 280,652
Less current maturities................................. (610) (398)
-------- --------
Long-term debt less current maturities.................. $310,294 $280,254
-------- --------
-------- --------
</TABLE>
In connection with the issuance of the 9% Senior Notes due 1999 (the '9%
Notes'), the Company entered into interest rate swap agreements ('swaps') with
banks in an aggregate notional principal amount of $200 million. In 1993, the
Company terminated the swaps, resulting in gains of $25.1 million, and entered
into new swaps. The gains were deferred and are being amortized as a reduction
of interest expense over the remaining life of the 9% Notes. As a result of the
new swaps, the effective interest cost to the Company of the 9% Notes varies at
a fixed spread over LIBOR. Based on the fair value of the swaps at December 31,
1996 and 1995, the Company would have incurred losses of $4.8 and $2.8 million,
respectively, representing the estimated amount that would be payable by the
Company if the swaps were terminated at such dates.
The Company may be considered to be at risk, to the extent of the costs of
replacing such swaps at current market rates, in the event of nonperformance by
counterparties. However, since the counterparties are major financial
institutions, the credit ratings of which are continually monitored by the
Company, the risk of such nonperformance is considered by the Company to be
remote.
In connection with the refinancing of the Company's bank facility in
October 1994, the Company recorded an extraordinary charge of $1.2 million
(after an income tax benefit of $.7 million), representing the write-off of
deferred financing fees related to the previous bank credit agreement. In July
1996, the Company refinanced this credit facility with a $400 million five-year
revolving credit facility (the 'Credit Agreement'). Borrowings under the Credit
Agreement bear interest at a floating rate (6.67% on December 31, 1996) based on
the banks' base rate, federal funds rate, Eurodollar rate or a competitive bid
rate (which may be based on LIBOR or money market rates), at the option of the
Company.
As of December 31, 1996, letters of credit in the amount of $8.0 million
were outstanding under the Credit Agreement. The Credit Agreement permits the
Company to make loans to affiliates, and to make available letters of credit for
the benefit of affiliates, in an aggregate amount of up to $75 million, none of
which had been utilized as of December 31, 1996.
The Company has a $38.1 million mortgage obligation, due 1999, on its
headquarters property. Interest on the mortgage is at a floating rate based on
LIBOR.
Borrowings by the Company, including those under the Credit Agreement, are
subject to the application of certain financial covenants contained in such
agreement and in the indentures relating to ISP Holdings' 9% Senior Notes due
2003 and 9 3/4% Senior Notes due 2002. As of December 31, 1996, the Company was
in compliance with such covenants, and the application of such covenants would
not have restricted the amount available for borrowing under the Credit
Agreement. The Credit Agreement and the indenture relating to the 9% Notes also
limit the amount of cash dividends, purchases of treasury stock, and other
restricted payments (as defined) by the Company. As of December 31, 1996, under
the most restrictive of such limitations, the Company could have paid dividends
in the aggregate amount of $80.2 million.
The Credit Agreement and the indenture relating to the 9% Notes contain
additional affirmative and negative covenants, including restrictions on liens,
investments, transactions with affiliates, sale-leaseback
F-19
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. LONG-TERM DEBT--(CONTINUED)
transactions, and restrictions on mergers and transfers of all or substantially
all of the assets of the Company or its subsidiaries. The Credit Agreement also
provides for a default if there is a change in control (as defined) of the
Company.
Neither the Credit Agreement nor the 9% Notes are secured by any assets of
the Company or its subsidiaries. The indenture governing the 9% Notes provides,
subject to certain exceptions, that if the Company issues any debt secured by a
lien on the stock of certain of its subsidiaries or upon any principal property,
then such notes must be equally and ratably secured.
The Company believes that the fair value of its non-public variable rate
indebtedness approximates the book value of such indebtedness because the
interest rates on such indebtedness are at floating short-term rates. The Credit
Agreement also provides for adjustments to the interest rate if there is a
change in the credit rating of the Company. With respect to the Company's
publicly traded debt securities, the Company has obtained estimates of fair
values from an independent source believed to be reliable. The estimated fair
value of the 9% Notes as of December 31, 1996 and 1995 was $207.8 and $214.6
million, respectively.
The aggregate maturities of long-term debt as of December 31, 1996 for the
next five years are as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
1997.... $ 610
1998.... 628
1999.... 238,503
2000.... 350
2001.... 83,277
</TABLE>
In the above table, 1999 maturities include the $200 million of 9% Notes
and the $38.1 million mortgage obligation. Maturities in 2001 include the $70.4
million of borrowings outstanding under the Credit Agreement as of December 31,
1996, based on the expiration of the Credit Agreement in July 2001, and $12.6
million of borrowings from ISP Holdings pursuant to a note agreement maturing in
July 2001 (see Note 9).
At December 31, 1996, the Company's foreign subsidiaries had total
available short-term lines of credit aggregating $38.5 million, of which $16.2
million were unused, and the Company also had a domestic bank line of credit of
$10 million, none of which was utilized. The weighted average interest rate on
the Company's short-term borrowings as of December 31, 1996 and 1995 was 4.6%
and 5.8%, respectively.
NOTE 7. BENEFIT PLANS
Eligible, full-time employees of the Company are covered by various benefit
plans, as described below.
Defined Contribution Plan
The Company provides a defined contribution plan for eligible employees.
The Company contributes up to 7% of participants' compensation (of which up to
4% of participants' compensation, at the participants' option, is contributed in
the form of the Company's common stock at a $.50 per share discount from the
market price on the date of contribution), and also contributes fixed amounts,
ranging from $50 to $750 per year depending on age, to the accounts of
participants who are not covered by a Company-provided postretirement medical
benefit plan. The aggregate contributions by the Company were $6.4, $6.3 and
$6.1 million for 1996, 1995 and 1994, respectively.
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan for
certain hourly employees (the 'Hourly Retirement Plan'). Benefits under this
plan are based on stated amounts for each year of service. The Company's funding
policy is consistent with the minimum funding requirements of ERISA.
F-20
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. BENEFIT PLANS--(CONTINUED)
The Company's net periodic pension cost for the Hourly Retirement Plan
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Service cost..................................... $ 315 $ 287 $ 363
Interest cost.................................... 1,439 1,349 1,253
Actual income on plan assets..................... (1,733) (976) (924)
Net deferral and amortization of unrecognized
prior service cost and actuarial losses........ 174 275 343
------- ------ ------
Net periodic pension cost........................ $ 195 $ 935 $1,035
------- ------ ------
------- ------ ------
</TABLE>
The following table sets forth the funded status of the Hourly Retirement
Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested................................................ $ 16,914 $ 16,919
Nonvested............................................. 3,117 2,273
-------- --------
Total accumulated benefit obligation.................... $ 20,031 $ 19,192
-------- --------
-------- --------
Projected benefit obligation............................ $ 20,031 $ 19,192
Fair value of plan assets, primarily listed stocks and
U.S. Government securities............................ (19,076) (15,314)
-------- --------
Projected benefit obligation in excess of plan assets... 955 3,878
Unrecognized prior service cost......................... (1,202) (1,956)
Unrecognized net loss................................... -- (796)
-------- --------
Unfunded (prepaid) accrued pension cost................. $ (247) $ 1,126)
-------- --------
-------- --------
</TABLE>
At December 31, 1996, the difference between the 'Projected benefit
obligation in excess of plan assets' and the 'Unfunded (prepaid) accrued pension
cost', in the amount of $1,202,000, has been recorded by the Company as an
intangible asset. The foregoing amount will be amortized to expense over a
period of approximately 15 years, as the Company continues to fund the benefits
under the Hourly Retirement Plan.
In determining the projected benefit obligation, the weighted average
assumed discount rate was 7.75% and 7.5% for 1996 and 1995, respectively. The
expected long-term rate of return on assets, used in determining net periodic
pension cost, was 11% for 1996 and 9% for 1995.
The Company also provides a nonqualified defined benefit retirement plan
for certain key employees. Expense accrued for this plan was $.6, $1.4 and $1.2
million for 1996, 1995 and 1994, respectively.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997.
F-21
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. BENEFIT PLANS--(CONTINUED)
The following table shows the components of the accrued postretirement
health care cost obligation as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees, dependents and beneficiaries eligible for
benefits............................................. $ 8,141 $ 9,053
Active employees fully eligible for benefits............ 1,941 2,042
Active employees not fully eligible for benefits........ 123 121
------- -------
Total accumulated postretirement benefit obligation....... 10,205 11,216
Fair value of plan assets................................. -- --
Unrecognized prior service cost and unrecognized net gains
(losses)................................................ 573 (241)
------- -------
Accrued postretirement benefit obligation................. $10,778 $10,975
------- -------
------- -------
</TABLE>
The net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
(THOUSANDS)
<S> <C> <C> <C>
Service cost......................................... $ 4 $ 3 $ 39
Interest cost........................................ 805 884 845
Amortization of unrecognized prior service cost...... (39) (145) (25)
----- ----- -----
Net periodic postretirement benefit cost............. $ 770 $ 742 $ 859
----- ----- -----
----- ----- -----
</TABLE>
For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. Retirees as of December 31,
1996 who were formerly salaried employees (with certain exceptions) were assumed
to receive a Company subsidy of $700 to $1,000 per year. For retirees over age
65, this subsidy may be replaced by participation in a managed care program.
With respect to retirees who were formerly hourly employees, most such retirees
are subject to a $5,000 per person lifetime maximum benefit. Subject to such
lifetime maximum, a 13% and 7% annual rate of increase in the Company's per
capita cost of providing postretirement medical benefits was assumed for 1997
for such retirees under and over age 65, respectively. To the extent that the
lifetime maximum benefits have not been reached, the foregoing rates were
assumed to decrease gradually to 7% and 6%, respectively, by the year 2003 and
remain at that level thereafter. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.75% and 7.5%
for 1996 and 1995, respectively.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by $877,000 and the aggregate of the
service and interest cost components of the net periodic postretirement benefit
cost for the year 1996 by $118,000.
NOTE 8. STOCK OPTION PLAN
The 1991 Incentive Plan for Key Employees and Directors, as amended ('the
Plan'), authorizes the grant of options to purchase a maximum of 5,000,000
shares of the Company's common stock. In December 1996, the Company's Board of
Directors approved an amendment to the Plan, subject to stockholder approval,
increasing the number of shares as to which options may be granted under the
Plan to 7,000,000. In December 1995, the Company's Board of Directors approved
an amendment to the Plan, which was approved by the Company's stockholders in
1996, to permit the Compensation Committee of the Board of Directors (the
'Committee') to determine the exercise price and vesting schedule of options
granted under the Plan. In December 1995 and December 1996, the Company granted
options to certain employees to purchase 215,500 and 338,645 shares,
respectively, of the Company's common stock at exercise prices ranging from
$.625 to $5.625 below the fair
F-22
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. STOCK OPTION PLAN--(CONTINUED)
market value of such shares on the date of grant. The difference between the
exercise price and the fair market value of such shares on the date of grant is
recognized as compensation expense over the vesting periods of 2 1/2 to 3 years.
Compensation expense was $.3 million and $0 in 1996 and 1995, respectively, for
such options. All other employee options granted under the Plan have a term of
nine years, have an exercise price equal to the fair market value of such shares
on the date of grant and become exercisable at a rate determined by the
Committee at the time of grant. Special vesting rules apply to options granted
to non-employee directors.
The Company has elected the disclosure-only provisions of SFAS No. 123,
'Accounting for Stock-Based Compensation', and applies APB Opinion No. 25 and
related interpretations in accounting for the Plan. If the Company had elected
to recognize compensation cost based on the fair value of awards at grant dates,
the Company's pro forma net income for the years 1996 and 1995 would have been
$80.0 and $67.2 million, respectively, and pro forma earnings per share would
have been $.82 and $.68, respectively. The SFAS No. 123 method of accounting has
not been applied to options granted prior to January 1, 1995, and the resulting
pro forma compensation expense may not be indicative of pro forma expense in
future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share is the estimated present value at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 6%; expected life of 6
years; expected volatility of 27%; and dividend yield of 0%.
The following is a summary of transactions pertaining to the Plan:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000's) PRICE (000's) PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, January 1............. 3,277 $ 7.86 2,200 $ 7.72
Granted............................ 2,110 11.31 1,355 8.05
Exercised.......................... (115) 6.90 (29) 6.76
Forfeited.......................... (258) 8.17 (249) 7.79
------- -------
Outstanding, December 31........... 5,014 $ 9.32 3,277 $ 7.86
------- -------
------- -------
Options exercisable, December 31... 1,140 $ 8.45 708 $ 8.65
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
Based on calculations using the Black-Scholes option-pricing model, the
weighted-average fair value of options granted in 1996 for which the exercise
price equaled the fair market value of such shares on the date of grant was
$3.50 per share, and such weighted average fair value of options granted in 1996
for which the exercise price was less than the fair market value of such shares
on the date of grant was $5.99 per share.
The following is a summary of the status of stock options outstanding and
exercisable under the Plan as of December 31, 1996:
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING STOCK OPTIONS
---------------------------------- EXERCISABLE
WEIGHTED -------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
EXERCISE PRICES (000's) PRICE LIFE (000's) PRICE
- ----------------- ------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 5.00-$ 7.50.... 1,945 $ 6.71 5.99 years 654 $ 6.76
$ 7.51-$11.25.... 1,023 9.15 7.75 years 186 8.71
$11.26-$14.00.... 2,046 11.88 8.17 years 300 11.96
------- -------
Total............ 5,014 $ 9.32 7.24 years 1,140 $ 8.45
------- -------- ----------- ------- --------
------- -------- ----------- ------- --------
</TABLE>
F-23
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS
Building Materials Corporation of America ('BMCA'), an indirect wholly
owned subsidiary of GAF and an affiliate of the Company, purchases all of its
colored roofing granule requirements from the Company (except for the
requirements of its California roofing plant) under a requirements contract
which was renewed for 1997 and is subject to annual renewal unless terminated by
the Company or BMCA. In addition, in December 1995, U.S. Intec, Inc. ('USI') an
indirect subsidiary of GAF and, as of January 1, 1997, a subsidiary of BMCA,
commenced purchasing substantially all of its requirements for colored roofing
granules from the Company (except for the requirements of its Stockton,
California and Corvallis, Oregon plants) pursuant to a requirements contract
which expires December 31, 1997. In 1996, BMCA and USI purchased a total of
$50.5 million of mineral products from the Company, representing approximately
7% of the Company's total net sales and approximately 59% of the Company's net
sales of mineral products. Sales by the Company to BMCA and USI totaled $45.8
and $42.5 million for 1995 and 1994, respectively.
The receivable from BMCA for sales of mineral products as of December 31,
1996 and 1995 was $3.5 and $2.7 million, respectively, and the receivable from
USI for sales of mineral products at each of December 31, 1996 and 1995 was $.1
million.
Pursuant to a Management Agreement, which expires at the end of 1997, the
Company provides certain general management, administrative, and facilities
services to ISP Holdings and certain of its affiliates, including GAF, BMCA,
USI, G-I Holdings and GFC. Charges by the Company for providing such services
aggregated $4.9, $4.5 and $4.4 million for 1996, 1995 and 1994, respectively,
and are reflected as reductions of 'Selling, general and administrative'
expense. The basis for such charges is an estimate of the costs the Company
incurs to provide management services, including, but not limited to, executive,
legal, tax, treasury and accounting services, and the costs to the Company of
providing and maintaining facilities services at the corporate headquarters,
which is owned by a subsidiary of the Company. In addition to the management
services charge, BMCA paid approximately $.8 million to the Company in 1996 and
$.7 million in each of 1995 and 1994, primarily for telecommunications and
information services, and ISP Holdings, G-I Holdings and BMCA paid an aggregate
of approximately $.5, $.2 and $.3 million in 1996, 1995 and 1994, respectively,
to the Company for certain legal services, which in each case were not
encompassed within the Management Agreement. In connection with the Separation
Transactions, the Management Agreement was modified to incorporate such
services, and, in that connection, the total charges for management fees were
increased to an annual rate of $5.5 million, effective January 1, 1997.
See Note 2 for a discussion of the Tax Sharing Agreement.
Under the terms of the Credit Agreement, the Company or any of its
subsidiaries are permitted to make loans to affiliates, and provide letters of
credit issued for the benefit of such affiliates, up to an aggregate amount not
to exceed $75 million outstanding at any time (see Note 6).
The Company and its subsidiaries also borrow from ISP Holdings and G-I
Holdings and its subsidiaries at the same rates available to the Company under
the Credit Agreement. Such borrowings outstanding from G-I Holdings at December
31, 1995 comprised $50.6 million, classified as current, and $67.2 million,
classified as long-term pursuant to an interest-bearing note maturing in July
2001. Such borrowings from G-I Holdings were repaid in 1996, and, as a result of
the Separation Transactions, loans between the Company and G-I Holdings are
prohibited by ISP Holdings' debt instruments. At December 31, 1996, the Company
had total borrowings from ISP Holdings of $62.6 million, $50 million pursuant to
a note agreement maturing in December 2006 and $12.6 million pursuant to a note
agreement maturing in July 2001.
Certain executive officers of the Company were granted stock appreciation
rights relating to ISP Holdings' common stock. Compensation expense in
connection with such stock appreciation rights is reflected in ISP Holdings'
operating expense and was immaterial for 1996, 1995 and 1994, respectively.
ISP Holdings has issued options to certain employees to purchase shares of
its Redeemable Convertible Preferred Stock; such shares are convertible, at the
holder's option, into shares of common stock of ISP Holdings at a formula price.
The common stock is subject to repurchase by ISP Holdings under certain
circumstances at a
F-24
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS--(CONTINUED)
price equal to current Book Value as defined. No expense is accrued in
connection with the preferred stock options.
NOTE 10. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Net sales:
Specialty Chemicals....................... $ 587.2 $ 562.0 $ 487.2
Mineral Products(1)....................... 85.6 86.1 81.1
Other..................................... 43.7 40.9 31.7
-------- -------- --------
Net sales................................... $ 716.5 $ 689.0 $ 600.0
-------- -------- --------
-------- -------- --------
Operating income:
Specialty Chemicals(2).................... $ 117.9 $ 106.3 $ 80.6
Mineral Products.......................... 16.5 16.3 14.6
Other 1.6 4.5 4.0
-------- -------- --------
Total operating income...................... $ 136.0 $ 127.1 $ 99.2
-------- -------- --------
-------- -------- --------
Identifiable assets:
Specialty Chemicals(3).................... $ 958.1 $ 953.5 $ 962.5
Mineral Products.......................... 154.5 154.6 158.5
Other..................................... 27.7 25.0 20.0
General Corporate(4)...................... 176.6 179.8 110.3
-------- -------- --------
Total assets................................ $1,316.9 $1,312.9 $1,251.3
-------- -------- --------
-------- -------- --------
Capital expenditures and acquisitions:
Specialty Chemicals....................... $ 41.6 $ 31.1 $ 22.5
Mineral Products.......................... 9.5 6.0 8.3
Other..................................... 3.5 1.8 .3
-------- -------- --------
Total....................................... $ 54.6 $ 38.9 $ 31.1
-------- -------- --------
-------- -------- --------
Depreciation and goodwill amortization:
Specialty Chemicals....................... $ 41.0 $ 38.6 $ 36.1
Mineral Products.......................... 9.6 9.7 9.3
Other..................................... .9 .9 .8
-------- -------- --------
Total....................................... $ 51.5 $ 49.2 $ 46.2
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------
(1) Includes sales to BMCA of $48.1, $45.7 and $42.5 million for 1996, 1995 and
1994, respectively, and sales to USI of $2.4 and $.1 million for 1996 and
1995, respectively.
(2) Does not include operating income of the Company's 50% ownership of
GAF-Huls. The Company's equity in the earnings of GAF-Huls is reflected in
the Consolidated Statements of Income as 'Equity in earnings of joint
venture' below Operating Income.
(3) Identifiable assets of Specialty Chemicals include the Company 50% ownership
of GAF-Huls. See Note 1.
(4) General Corporate assets primarily represent the Company's investments in
trading, available-for-sale and held-to-maturity securities and other
short-term investments, which are held for general corporate purposes and
are not allocated to industry segments.
The Company manufactures a broad spectrum of specialty chemicals having
numerous applications in consumer and industrial products encompassing such
worldwide markets as pharmaceuticals, hair and skin care, plastics,
agricultural, coatings and adhesives. The Company's mineral products business
manufactures ceramic-coated colored roofing granules which are sold primarily to
the North American roofing industry for use in the manufacture of asphalt
roofing shingles. Over 50% of the Company's sales of mineral products are to
BMCA (see Note 9). The Company also manufactures filter products and advanced
materials.
F-25
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
NOTE 11. GEOGRAPHIC INFORMATION
Results set forth below for foreign operations represent sales and
operating income of foreign-based subsidiaries.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Net sales:
Domestic operations(1).................... $ 361.0 $ 345.2 $ 306.4
Europe(2)................................. 212.3 209.1 180.9
Asia-Pacific.............................. 102.9 101.2 83.4
Other foreign operations.................. 40.3 33.5 29.3
-------- -------- --------
Net sales................................... $ 716.5 $ 689.0 $ 600.0
-------- -------- --------
-------- -------- --------
Operating income:
Domestic operations....................... $ 64.4 $ 57.9 $ 41.3
Europe.................................... 53.1 46.5 37.1
Asia-Pacific.............................. 17.5 20.2 16.6
Other foreign operations.................. 1.0 2.5 4.2
-------- -------- --------
Operating income............................ 136.0 127.1 99.2
Equity in earnings of joint venture......... 5.6 5.4 2.0
Interest expense and other, net............. (15.6) (26.4) (28.7)
-------- -------- --------
Income before income taxes and extraordinary
item...................................... $ 126.0 $ 106.1 $ 72.5
-------- -------- --------
-------- -------- --------
Identifiable assets:
Domestic operations....................... $ 948.4 $ 954.1 $ 974.3
Europe(3)................................. 130.8 133.1 128.9
Asia-Pacific.............................. 41.4 32.2 28.5
Other foreign operations.................. 19.7 13.7 9.3
General Corporate(4)...................... 176.6 179.8 110.3
-------- -------- --------
Total assets................................ $1,316.9 $1,312.9 $1,251.3
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------
(1) Net sales--domestic operations excludes sales by the Company's domestic
subsidiaries to foreign-based subsidiaries of $160.1, $140.9 and $135.1
million for 1996, 1995 and 1994, respectively.
(2) Net sales--Europe excludes sales by the Company's European subsidiaries to
domestic and other foreign-based subsidiaries of $20.7, $19.9 and $12.8
million for 1996, 1995 and 1994, respectively.
(3) Identifiable assets--Europe include the Company's 50% ownership of GAF-Huls.
See Note 1.
(4) General Corporate assets primarily represent the Company's investments in
trading, available-for-sale and held-to-maturity securities and other
short-term investments, which are held for general corporate purposes.
Approximately 60% of the Company's international sales in 1996 were in
countries in Western Europe and Japan which are subject to currency exchange
rate fluctuation risks. See Note 1 for a discussion of the Company's policy to
manage these risks. Other countries in which the Company has sales are subject
to additional risks, including high rates of inflation, exchange controls,
government expropriation and general instability.
NOTE 12. COMMITMENTS AND CONTINGENCIES
ISP Holdings is a holding company without independent businesses or
operations and, as such, is dependent upon the cash flows of the Company in
order to satisfy its obligations. Such obligations include $325 million
principal amount of ISP Holdings' 9% Senior Notes due 2003 and $199.9 million
principal amount of ISP Holdings' 9 3/4% Senior Notes due 2002. ISP Holdings
expects to satisfy such obligations from, among other things, refinancings of
debt, dividends and loans from the Company, as to which there are restrictions
under the Credit Agreement and the indenture relating to the 9% Notes (see Note
6), and payments pursuant to the Tax
F-26
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Sharing Agreement (see Note 2). The Company does not believe that the dependence
of ISP Holdings on the cash flows of the Company should have a material adverse
effect on the operations, liquidity or capital resources of the Company.
Asbestos Litigation Against GAF
GAF and G-I Holdings have established reserves for asbestos bodily injury
claims, as of December 31, 1996, in the amount of $333.8 million (before
estimated present value of recoveries from products liability insurance policies
of $190.5 million and related deferred tax benefits of $51.7 million). GAF and
G-I Holdings have advised the Company that certain components of the
asbestos-related liability and the related insurance recoveries have been
reflected on a discounted basis in their financial statements, and that the
aggregate undiscounted liability as of December 31, 1996, before estimated
recoveries from products liability insurance policies, was $370.6 million. GAF
and G-I Holdings have also advised the Company that they believe that their
reserves adequately reflect their asbestos-related liabilities. GAF's and G-I
Holdings' estimate of liability for asbestos claims is based on a pending
settlement of future asbestos bodily injury claims (the 'Settlement') becoming
effective and on assumptions which relate, among other things, to the number of
new cases filed, the cost of resolving (either by settlement or litigation or
through the mechanism established by the Settlement) pending and future claims,
the realization of related tax benefits, the favorable resolution of pending
litigation against certain insurance companies and the amount of recoveries from
various insurance companies.
Neither the Company nor the assets or operations of the Company, which was
operated as a division of a corporate predecessor of GAF prior to July 1986,
have been employed in the manufacture or sale of asbestos products. The Company
believes that it should have no legal responsibility for damages in connection
with asbestos-related claims.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
administrative 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 are in the early stages or have been
dormant for protracted periods.
The Company estimates that its liability in respect of all Environmental
Claims, as of December 31, 1996, will be approximately $18.5 million, before
reduction for insurance recoveries reflected on the Company's balance sheet
(discussed below) of $6.9 million ('estimated recoveries'). The gross
environmental liability is included within 'Accrued liabilities' and 'Other
liabilities', and the estimated recoveries are included within 'Other current
assets' and 'Other assets'.
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
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.
After considering the relevant legal issues and other pertinent factors,
the Company believes that it will receive the estimated recoveries and it may
receive amounts substantially in excess thereof. The Company believes it is
entitled to substantially full defense and indemnity under its insurance
policies for the Environmental Claims, although the Company's insurers have not
affirmed a legal obligation under the policies to provide indemnity for such
claims.
The estimated recoveries are based in part upon interim agreements with
certain insurers. The Company terminated these agreements in 1995 and commenced
litigation seeking amounts substantially in excess of the estimated recoveries.
While the Company believes that its claims are meritorious, there can be no
assurance that the Company will prevail in its efforts to obtain amounts at or
in excess of the estimated recoveries.
F-27
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
In June 1989, the Company entered into a Consent Order with the New Jersey
Department of Environmental Protection (NJDEP) requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee the Company's
performance. In April 1993, NJDEP issued orders which require the prevention of
discharge of contaminated groundwater and stormwater from the site and the
elimination of other potential exposure concerns. The Company believes, although
there can be no assurance, that, taking into account its plans for development
of the site, it can comply with the NJDEP order at a cost of no more than $7.5
million (in connection with which the Company anticipates insurance recoveries
of approximately $5 million).
Lease Commitments
Leases for certain equipment at two of the Company's mineral products
plants are accounted for as capital leases and are included in 'Property, plant
and equipment, net', at December 31, 1996 and 1995 in the amount of $2.3 and
$2.1 million, respectively. The Company also has operating leases for
transportation, production and data processing equipment and for various
buildings. Rental expense on operating leases was $8.7, $8.2 and $7.4 million
for 1996, 1995 and 1994, respectively. Future minimum lease payments for
properties which were held under long-term noncancelable leases as of December
31, 1996 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(THOUSANDS)
<S> <C> <C>
1997........................................... $ 735 $ 2,865
1998........................................... 694 1,985
1999........................................... 399 1,330
2000........................................... 346 756
2001........................................... 251 598
Later years.................................... 49 988
------- ---------
Total minimum payments......................... 2,474 $ 8,522
---------
Less interest included above................... (406) ---------
-------
Present value of net minimum lease payments.... $ 2,068
-------
-------
</TABLE>
Other Commitments
The Company intends to acquire or develop a European manufacturing
facility to meet the needs of the Company's European business. While the
originally anticipated commencement date of the European project has been
deferred because the Company has been able to implement cost efficient capacity
expansions at its existing manufacturing facilities, based upon its current
analyses of additional opportunities for expansion of existing capacity, end-use
demand, and other relevant factors, the Company intends to proceed with the
project by the end of 1997. Costs capitalized to date related to this project
are included in 'Construction in progress'. The Company anticipates utilizing
internally generated funds, existing credit facilities and/or independent
financing to fund the cost of the project.
The Company has received conditional site designation from the New Jersey
Hazardous Waste Facilities Siting Commission for the construction of a hazardous
waste treatment, storage and disposal facility at its Linden, New Jersey
property, and has received approval from the New Jersey Turnpike Authority for a
direct access ramp from the Turnpike to the site. Both the site designation and
the access ramp approval have been appealed to the Courts by the City of Linden.
The Company estimates that the cost of constructing the facility will be
approximately $100 million and, if approved, the facility is anticipated to be
in operation three years after commencement of construction. The Company
anticipates utilizing internally generated cash and/or seeking project or other
independent financing therefor. Accordingly, the Company would not expect such
facility to impact materially its liquidity or capital resources.
F-28
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996 BY QUARTER 1995 BY QUARTER
------------------------------------ ------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------ ------ ------ ------ ------ ------ ------ ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $185.6 $185.0 $173.6 $172.3 $179.9 $182.6 $167.8 $158.7
Cost of products sold.......... 112.9 107.1 100.3 98.6 113.2 109.2 99.9 92.4
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... $ 72.7 $ 77.9 $ 73.3 $ 73.7 $ 66.7 $ 73.4 $ 67.9 $ 66.3
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Operating income............... $ 34.2 $ 38.0 $ 33.5 $ 30.3 $ 31.2 $ 36.2 $ 31.8 $ 27.9
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes..... $ 31.3 $ 35.6 $ 31.3 $ 27.8 $ 24.1 $ 29.6 $ 27.5 $ 24.9
Income taxes................... (11.4) (13.0) (11.2) (9.7) (9.0) (11.1) (9.9) (8.7)
------ ------ ------ ------ ------ ------ ------ ------
Net income..................... $ 19.9 $ 22.6 $ 20.1 $ 18.1 $ 15.1 $ 18.5 $ 17.6 $ 16.2
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Earnings per common share(1)... $ .20 $ .23 $ .21 $ .19 $ .15 $ .19 $ .18 $ .17
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
- ------------------
(1) Earnings per share are calculated separately for each quarter and the full
year. Accordingly, annual earnings per share will not necessarily equal the
total of the quarters.
F-29
<PAGE>
SCHEDULE II
INTERNATIONAL SPECIALTY PRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1996 EXPENSES DEDUCTIONS 1996
- ----------------------------------------------- ---------- ---------- ---------- ------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Valuation and Qualifying Accounts
Deducted from Assets to Which
They Apply:
Allowance for doubtful accounts........... $ 2,879 $ 272 $ 311(a) $ 2,840
Reserve for inventory market valuation.... 13,978 8,329 9,495 12,812
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1995 EXPENSES DEDUCTIONS 1995
- ----------------------------------------------- ---------- ---------- ---------- ------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Valuation and Qualifying Accounts
Deducted from Assets to Which
They Apply:
Allowance for doubtful accounts........... $ 2,292 $ 681 $ 94(a) $ 2,879
Reserve for inventory market valuation.... 9,631 8,861 4,514 13,978
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1994 EXPENSES DEDUCTIONS 1994
- ----------------------------------------------- ---------- ---------- ---------- ------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Valuation and Qualifying Accounts
Deducted from Assets to Which
They Apply:
Allowance for doubtful accounts........... $ 2,313 $ 325 $ 346(a) $ 2,292
Reserve for inventory market valuation.... 8,991 7,052 6,412 9,631
</TABLE>
- ------------------
Notes:
(a) Represents write-offs of uncollectible accounts net of recoveries.
S-1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
GUARANTOR FINANCIAL DATA (FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS)
The 9% Senior Notes discussed in Note 6 to Consolidated Financial
Statements were issued by ISP Chemicals Inc. and ISP Technologies Inc., domestic
subsidiaries of ISP (the 'Issuers') and are guaranteed by ISP and certain of its
domestic subsidiaries (the 'Subsidiary Guarantors'). Presented below is combined
condensed financial information for the Issuers and the Subsidiary Guarantors,
which together are interdependent and with their subsidiaries constitute all of
the domestic subsidiaries of ISP, except for International Specialty Products
Funding Corporation, a special purpose subsidiary of ISP which is the seller of
the Company's accounts receivable. See Note 3 to Consolidated Financial
Statements. This financial information should be read in conjunction with ISP's
Consolidated Financial Statements and related notes included in this Form 10-K.
Financial information for ISP's foreign subsidiaries, including its investment
in GAF-Huls, is reflected in the following financial information by the equity
method of accounting.
COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net sales......................................... $521.1 $486.0 $441.6
------ ------ ------
Costs and expenses:
Cost of products sold........................... 355.2 333.7 309.9
Selling, general and administrative............. 88.3 81.2 77.0
Goodwill amortization........................... 13.2 13.2 13.4
------ ------ ------
Total costs and expenses..................... 456.7 428.1 400.3
------ ------ ------
Operating income.................................. 64.4 57.9 41.3
Interest expense.................................. (27.3) (34.3) (28.6)
Equity in income from foreign subsidiaries and 50%
owned joint venture............................. 61.8 53.3 39.4
Other income, net................................. 20.2 22.4 14.3
------ ------ ------
Income before income taxes and extraordinary
item............................................ 119.1 99.3 66.4
Income taxes...................................... (38.6) (31.9) (20.7)
------ ------ ------
Income before extraordinary item.................. 80.5 67.4 45.7
Extraordinary item, net of related income tax
benefit......................................... -- -- (1.2)
------ ------ ------
Net income........................................ $ 80.5 $ 67.4 $ 44.5
------ ------ ------
------ ------ ------
</TABLE>
S-2
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
GUARANTOR FINANCIAL DATA (FOR THE ISSUERS AND
THE SUBSIDIARY GUARANTORS)--(CONTINUED)
COMBINED CONDENSED BALANCE SHEETS
FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 5.3 $ 3.3
Investments in trading securities....................... .7 17.3
Investments in available-for-sale securities............ 59.8 71.4
Other short-term investments............................ 6.1 4.9
Accounts receivable, net................................ 4.9 10.4
Receivable from related parties, net.................... 5.0 --
Loan receivable from related party...................... 2.6 --
Inventories............................................. 67.5 72.5
Other current assets.................................... 11.0 10.1
-------- --------
Total Current Assets................................. 162.9 189.9
Property, plant and equipment, net........................ 459.7 449.8
Excess of cost over net assets of businesses acquired,
net..................................................... 417.3 430.5
Advances to and equity in investment in foreign
subsidiaries and 50% owned joint venture................ 192.2 161.1
Other assets.............................................. 22.1 21.4
-------- --------
Total Assets......................................... $1,254.2 $1,252.7
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt......................................... $ -- $ 13.0
Current maturities of long-term debt.................... .6 .4
Loan payable to related party........................... -- 50.6
Accounts payable........................................ 29.7 26.3
Accrued liabilities..................................... 39.9 42.0
Payable to related parties, net......................... -- 9.4
-------- --------
Total Current Liabilities............................ 70.2 141.7
Long-term debt less current maturities.................... 310.0 280.3
Long-term notes payable to related parties................ 62.6 67.2
Deferred income taxes..................................... 52.7 55.7
Other liabilities......................................... 59.7 64.6
Stockholders' Equity...................................... 699.0 643.2
-------- --------
Total Liabilities and Stockholders' Equity........... $1,254.2 $1,252.7
-------- --------
-------- --------
</TABLE>
S-3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
GUARANTOR FINANCIAL DATA (FOR THE ISSUERS AND
THE SUBSIDIARY GUARANTORS)--(CONTINUED)
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE ISSUERS AND THE SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------- -------
(MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents, beginning of year.... $ 3.3 $ 9.9 $ 1.1
------ ------- -------
Cash provided by operating activities:
Net income.................................... 80.5 67.4 44.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 35.4 33.6 30.6
Goodwill amortization...................... 13.2 13.2 13.4
Deferred income taxes...................... (2.5) (18.8) (16.5)
(Increase) decrease in working capital
items...................................... 9.4 (7.1) (.6)
Purchases of trading securities............... (10.3) (66.5) (267.2)
Proceeds from sales of trading securities..... 19.5 104.1 284.5
Change in advances to and equity in investment
in foreign subsidiaries and 50% owned joint
venture.................................... (34.4) (26.8) (10.5)
Change in net receivable from/payable to
related parties............................ (14.5) 6.1 (.2)
Change in cumulative translation adjustment... (8.4) 6.9 8.3
Other, net.................................... (4.6) 8.1 (10.0)
------ ------- -------
Net cash provided by operating activities..... 83.3 120.2 76.3
------ ------- -------
Cash used in investing activities:
Capital expenditures.......................... (45.5) (34.4) (29.2)
Purchases of available-for-sale securities.... (170.0) (325.3) (.9)
Purchases of other short-term investments..... (1.3) (2.2) (2.7)
Proceeds from sales of available-for-sale
securities................................. 188.9 255.6 .7
------ ------- -------
Net cash used in investing activities......... (27.9) (106.3) (32.1)
------ ------- -------
Cash provided by (used in) financing activities:
Proceeds (repayments) from sale of accounts
receivable................................. 2.0 3.7 (1.1)
Increase (decrease) in short-term debt........ (13.0) 13.0 (12.7)
Increase (decrease) in borrowings under
revolving credit facility.................. 29.6 (4.2) (82.3)
Other increase (decrease) in long-term debt... .4 (1.4) (.8)
Increase (decrease) in loans from related
parties.................................... (57.9) (15.2) 66.3
Dividends..................................... -- -- (5.0)
Repurchases of common stock................... (15.1) (16.6) (.3)
Other, net.................................... .6 .2 .5
------ ------- -------
Net cash used in financing activities......... (53.4) (20.5) (35.4)
------ ------- -------
Net change in cash and cash equivalents......... 2.0 (6.6) 8.8
------ ------- -------
Cash and cash equivalents, end of year.......... $ 5.3 $ 3.3 $ 9.9
------ ------- -------
------ ------- -------
</TABLE>
The advances to and equity in investment in foreign subsidiaries and 50%
owned joint venture and the related equity in income from foreign subsidiaries
and 50% owned joint venture include the net assets and operating results,
respectively, of ISP's wholly owned foreign subsidiaries and its 50% owned joint
venture, GAF-Huls. Domestic operating income includes $39.4, $28.4 and $32.1
million of profits on sales made by ISP's domestic subsidiaries to its
foreign-based subsidiaries for 1996, 1995 and 1994, respectively. Profits earned
on sales to the foreign-based subsidiaries which were included in the
foreign-based subsidiaries' inventories at the end of each period have been
eliminated from domestic operating income and from advances to and equity in
investment in foreign subsidiaries.
Dividends received from foreign-based subsidiaries and GAF-Huls aggregated
$18.7, $26 and $59.8 million for 1996, 1995 and 1994, respectively.
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
<S> <C>
3.1 -- Certificate of Incorporation of ISP (incorporated by reference to
Exhibit 3.1 to ISP's Registration Statement on Form S-1,
Registration No. 33-40337) (the 'Common Stock Registration
Statement').
3.2 -- By-laws of ISP (incorporated by reference to Exhibit 3.2 to the
Common Stock Registration Statement).
3.3 -- Certificate of Incorporation of ISP Chemicals (incorporated by
reference to Exhibit 3.3 to ISP's Registration Statement on Form
S-1, Registration No. 33-44862) (the '9% Note Registration
Statement').
3.4 -- By-laws of ISP Chemicals (incorporated by reference to Exhibit 3.4
to the 9% Note Registration Statement).
3.5 -- Certificate of Incorporation of ISP Technologies (incorporated by
reference to Exhibit 3.5 to the 9% Note Registration Statement).
3.6 -- By-laws of ISP Technologies (incorporated by reference to Exhibit
3.6 to the 9% Note Registration Statement).
4 -- Indenture, dated as of March 1, 1992, relating to ISP's 9% Senior
Notes due March 1, 1999 (incorporated by reference to Exhibit 4 to
the 9% Note Registration Statement).
10.1 -- Management Agreement, dated as of March 3, 1992 ('Management
Agreement'), among GAF, G-I Holdings, G Industries Corp., ISP, GAF
Building Materials Corporation and GAF Broadcasting Company, Inc.
(incorporated by reference to Exhibit 10.5 to ISP's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.2 -- Amendment No. 1, dated as of January 1, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.10 to ISP's
Annual Report on Form 10-K for the year ended December 31, 1993).
10.3 -- Amendment No. 2, dated as of May 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.1 to ISP's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1994).
10.4 -- Amendment No. 3, dated as of December 31, 1994, to the Management
Agreement (incorporated by reference to Exhibit 10.4 to ISP's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.5 -- Amendment No. 4, dated as of December 31, 1995, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-4 of G-I Holdings, Registration No.
333-2436).
10.6 -- Amendment No. 5, dated as of October 18, 1996, to the Management
Agreement (incorporated by reference to Exhibit 10.6 to ISP
Holdings' Registration Statement on Form S-4, Registration No.
333-17827) (the 'ISP Holdings Registration Statement').
10.7 -- Amendment No. 6, dated as of January 1, 1997, to the Management
Agreement (incorporated by reference to Exhibit 10.8 to BMCA's
Registration Statement on Form S-4 (Registration No. 333-20859)).
10.8 -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP
Holdings, ISP and certain subsidiaries of ISP (incorporated by
reference to Exhibit 10.8 to the ISP Holdings Registration
Statement).
10.9 -- Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to ISP's Registration Statement on Form
S-1, Registration No. 33-40337).*
10.10 -- ISP Amended and Restated 1991 Incentive Plan for Key Employees and
Directors ('Incentive Plan')(incorporated by reference to Exhibit 99
to ISP's Registration Statement on Form S-8, Registration No.
33-92518).*
10.11 -- Amendment to the Incentive Plan.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
<S> <C>
10.12 -- Agreement, dated July 30, 1993, between ISP and Carl R. Eckardt
(incorporated by reference to Exhibit 10.16 to the Registration
Statement on Form S-4 of G-I Holdings (Registration No. 33-72220)).*
10.13 -- Letter Agreement, dated October 15, 1996, between GAF and Dr. Peter
Heinze (incorporated by reference to Exhibit 10.14 to the ISP
Holdings Registration Statement).*
10.14 -- Form of Maintenance Agreement between ISP and ISP Chemicals
(incorporated by reference to Exhibit 10.18 to the 9% Note
Registration Statement).
10.15 -- Form of Assignment and Assumption Agreement between G Industries
Corp. and ISP (incorporated by reference to Exhibit 10.19 to the 9%
Note Registration Statement).
10.16 -- Form of Assignment and Assumption Agreement among ISP, ISP Chemicals
and ISP Technologies (incorporated by reference to Exhibit 10.20 to
the 9% Note Registration Statement).
10.17 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Chemicals (incorporated by reference to Exhibit 10.21 to the 9% Note
Registration Statement).
10.18 -- Form of Intercompany Term Note of ISP payable to the order of ISP
Technologies (incorporated by reference to Exhibit 10.22 to the 9%
Note Registration Statement).
10.19 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Chemicals (incorporated by reference to Exhibit 10.23 to the 9%
Note Registration Statement).
10.20 -- Form of Intercompany Revolving Note of ISP payable to the order of
ISP Technologies (incorporated by reference to Exhibit 10.24 to the
9% Note Registration Statement).
10.21 -- Form of Option Agreement relating to Cumulative Redeemable Preferred
Stock of ISP Holdings.*
10.22 -- Form of ISP Holdings Stock Appreciation Right Agreement.*
21 -- Subsidiaries of ISP and ISP Chemicals; ISP Technologies has no
subsidiaries.
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for fiscal year 1996, which is submitted
electronically to the Securities and Exchange Commission for
information only.
</TABLE>
- ------------------
* Management and/or compensation plan or arrangement.
<PAGE>
AMENDMENT TO THE
INTERNATIONAL SPECIALTY PRODUCTS INC.
1991 INCENTIVE PLAN FOR KEY EMPLOYEES
AND DIRECTORS, AS AMENDED
1. This Amendment (the "Amendment") to the International Specialty
Products Inc. 1991 Incentive Plan for Key Employees and Directors, as
amended (the "Plan"), is effective as of December 31, 1995, subject to
stockholder approval.
2. Section 9 of the Plan is hereby amended by deleting such section in its
entirety and substituting in lieu thereof a new Section 9 to read in
its entirety as follows:
"9. KEY EMPLOYEE OPTION PRICE.
Except as otherwise provided in this Section 9, the
Committee shall have full authority, in its discretion, to
determine the Option price per share at which Options granted
under the Plan shall be exercisable; provided, however, that
(a) the Option price of any Non-Qualified Option shall be not
less than 50% of the Fair Market Value of the shares of Common
Stock subject to such Option on the date such Option is
granted and (b) the Option price of any Qualified Option shall
be not less than 100% of the Fair Market Value of the shares
of Common Stock subject to such Option on the date such Option
is granted; and provided further that the Option price of any
Qualified Option granted to a Key Employee who is an
Over-Ten-Percent Shareholder shall be not less than 110% of
the Fair Market Value of the shares of Common Stock subject to
such Option on the date such Option is granted. In any event,
the Option price shall not be less than the par value of the
shares subject to the Option."
3. Section 11 of the Plan is hereby amended by deleting such section in
its entirety and substituting in lieu thereof a new Section 11 to read
in its entirety as follows:
"11. EXERCISE OF OPTIONS BY KEY EMPLOYEES.
Subject to Section 16 hereof, and except as otherwise provided
in this Section 11, the Committee shall have full authority,
in its discretion, to determine the expiration date of any
Option granted under the Plan and the vesting period, if any,
over which an Option shall be exercisable by a Key Employee;
provided, however, that the Committee may, in its discretion,
on a case-by-case basis, amend each outstanding Option
exercisable by a Key Employee to allow the exercise of such
Option, in whole or in part, upon, a Change in Control of the
Corporation. No Qualified Option granted to a Key Employee who
is an Over-Ten-Percent Shareholder shall be exercisable as to
all or any portion of the shares of Common Stock subject
thereto more than five years after the date of grant."
<PAGE>
ISP Holdings Inc.
c/o ISP Management Company, Inc.
1361 Alps Road
Wayne, New Jersey 07470
January 1, 1997
[NAME]
[ADDRESS]
Dear Optionee:
ISP Holdings Inc. (the "Company") hereby agrees with you as follows:
1. Option to Purchase.
(a) Subject to the terms and conditions of this Agreement, the Company
hereby grants you the option (the "Option") to purchase ______ shares of the
Company's Series A Cumulative Redeemable Convertible Preferred Stock ("Preferred
Stock"), $.01 par value (the "Preferred Shares"), for a purchase price per
Preferred Share equal to the product of (i) $100 multiplied by (ii) a fraction
(1) the numerator of which is the Book Value (as hereinafter defined)
immediately after giving effect to the Spin-Off Transactions (as hereinafter
defined) and (2) the denominator of which is the GAF Book Value (as hereinafter
defined) (such product being referred to herein as the "Exercise Price"). The
Preferred Shares shall have the rights and preferences set forth in the
Certificate of Designation, the form of which is attached as Exhibit A hereto
(the "Certificate of Designation"). The Company agrees to file the Certificate
of Designation with the Secretary of State of the State of Delaware on or prior
to March 31, 1997. For purposes of Section 6 of the Certificate of Designation,
(i) the "Applicable Date" with respect to any Preferred Shares purchased by you
upon exercise of the Option shall be [date of initial grant of GAF option or GAF
SAR in connection with which ISP Holdings option is being granted], (ii) the
"Applicable Rate" shall mean six percent (6%) per annum and (iii) the "Base Book
Value" shall mean the ISPHI Book Value as defined in that certain agreement (the
"GAF SAR Agreement"), dated as of the date hereof, pursuant to which GAF (as
hereinafter defined) granted to you a stock appreciation right (the "GAF SAR")
<PAGE>
based upon the appreciation in value of _____ shares of GAF Common Stock (as
hereinafter defined).
(b) For purposes of this Agreement, the following terms have the meanings
specified in this Section 1(b):
(i) "Book Value" means, as of any date of determination, the book
value per share of the common stock ("Common Stock"), par value $.001 per share,
of the Company as of that date, as determined in accordance with generally
accepted accounting principles after charges such as declaration of dividends on
any capital stock of the Company or payments with respect to repurchases by the
Company of any capital stock from holders thereof but excluding (1) any amounts
reflecting the liquidation preferences of any outstanding preferred stock of the
Company, (2) any reductions resulting from purchases of GAF's capital stock by
persons who participated in promoting the "Acquisition" referred to in the
Prospectus dated March 24, 1989 relative to the GAF Common Stock and certain
other securities of GAF (predecessor cost basis adjustment), (3) any charges
relating to amortization of goodwill and other intangibles arising from the
Acquisition and related transactions, (4) that portion of depreciation charges
attributable to the write-up of assets as a result of the application of
purchase accounting in connection with the Acquisition and (5) any charges
relating to amortization of deferred financing costs and expenses incurred in
connection with the Acquisition; provided, however, that (i) any adjustments to
the Book Value shall include the tax effects, if any, associated therewith, (ii)
any charges specified in subclauses (3), (4) or (5) above, relating to a
business or assets of the Company or any of its subsidiaries, which charges
shall have been incurred on or after the date of the Acquisition but which,
because of the operation of said subclauses (3), (4) and/or (5), shall not
theretofore have been included in the calculation of the Book Value, shall be so
included following a transaction involving such business or assets that, in
accordance with the next sentence, is deemed a sale or disposition thereof, and
(iii) for purposes of clause (ii), an asset, liability or charge not exclusively
attributable to the specific business or assets deemed to have been sold or
otherwise disposed of shall, if attributable to such business or assets and to
other businesses or assets, be deemed to relate to the business or assets sold
or otherwise disposed of and to such other businesses or assets pro rata based
on relative business and assets values immediately following consummation of the
Acquisition; and provided further, that, in calculating the Book Value, if any
stock appreciation rights issued by the Company based upon appreciation in value
of
2
<PAGE>
shares of Common Stock are outstanding at the time of calculation, the shares of
Common Stock upon which such appreciation in value is based ("SAR Shares") shall
be deemed outstanding. The Board of Directors of the Company shall determine (i)
whether a transaction involving a business or assets of the Company or any of
its subsidiaries is a sale or disposition for purposes of the definition and
calculation of the Book Value and (ii) if such transaction is a sale or
disposition, the amount of the gain or loss thereon. The gain or loss on any
sale or disposition shall be the actual economic benefit to GAF from such
transaction, as determined by the Board of Directors of the Company.
(ii) "GAF" means GAF Corporation, a Delaware corporation.
(iii) "GAF Book Value" means the book value per share of GAF Common
Stock immediately prior to the consummation of the Spin-Off Transactions, as
determined in accordance with the GAF SAR Agreement.
(iv) "GAF Common Stock" means common stock, par value $.001 per
share, of GAF.
(v) "Market Price" as of any date means the average of the daily
market prices per share of Common Stock for the fifteen (15) consecutive
business days immediately preceding such date. The daily market price for each
such business day shall be (1) the last sale price on such day on the principal
stock exchange on which the Common Stock is then listed or admitted to trading,
(2) if no sale takes place on such day on any such exchange, the average of the
last reported closing bid and asked prices on such day as officially quoted on
any such exchange, (3) if the Common Stock is not then listed or admitted to
trading on any stock exchange, the average of the last reported closing bid and
asked prices furnished by the National Association of Securities Dealers
Automated Quotation System or the National Quotation Bureau, Inc., (iv) if
neither such corporation at the time is engaged in the business of reporting
such prices, as furnished by any similar firm then engaged in such business or
(v) if there is no such firm, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company.
(vi) "Spin-Off Transactions" means the series of transactions that
shall result in, among other things, each holder of a share of GAF Common Stock
receiving one share of Common Stock for each share of GAF Common Stock held by
such holder.
3
<PAGE>
(c) The Option shall vest and become exercisable commencing on the
following dates: as to 25% of the Preferred Shares on [two and one-half years
from date of grant](1) , as to an additional 15% of the Preferred Shares on
_____ in each of [three and one-half years after date of grant] through [six and
one-half years after date of grant] and as to the remainder of the Preferred
Shares on [seven years after date of grant], in each case to the extent that you
are employed by the Company or its affiliates on such date.
(d) The Option will terminate on the earlier of (i) 30 days after the
termination of your employment with the Company and its affiliates for any
reason other than your death or permanent disability or (ii) one year after the
termination of your employment with the Company and its affiliates as a result
of your death or permanent disability. You will be deemed to be permanently
disabled if you become physically or mentally incapacitated or disabled to the
extent that you are unable to perform for the Company or its affiliates
substantially the same services as you performed prior to incurring such
incapacity or disability (the Company, at its option and expense, being entitled
to retain a physician reasonably acceptable to you to confirm the existence of
the incapacity or disability, and the determination of that physician being
binding upon the Company and you), and your incapacity or disability continues
for a period of six consecutive months; provided, however, that if at the time
of your permanent disability you are a party to an employment agreement with the
Company or any of its affiliates that contains a definition of disability that
is inconsistent with the provisions hereof, the definition contained in that
employment agreement shall govern for purposes of this Section 1(d). In the
event of your death or disability, the Option may be exercised by your executors
or personal representatives; provided, however, that such persons shall be bound
by the provisions of this Agreement, including, without limitation, Sections 3
and 4, as if they were parties to this Agreement.
(e) If a Sale Transaction (as hereinafter defined) occurs with respect to
International Specialty Products Inc. ("ISP") or its direct or indirect parent
or Building Materials Corporation of America or its direct or indirect parent
and you are employed by the entity with respect to which such Sale Transaction
shall have occurred or any subsidiary thereof and you are not offered
- ---------------
(1) For all purposes, the date of grant is deemed to be the date of initial
grant of the GAF SAR or option in connection with which ISP Holdings option is
being granted.
4
<PAGE>
employment by an entity controlled by Samuel J. Heyman, a member of Mr. Heyman's
immediate family, a partnership, limited liability company, trust or other
entity established for the benefit of a member or members of Mr. Heyman's
immediate family or their respective affiliates (a "Heyman Entity") on terms
substantially similar to those pursuant to which you were employed prior to such
Sale Transaction then, irrespective of any other provision of this Agreement,
the Option shall vest and become fully exercisable upon consummation of such
Sale Transaction. If you are offered employment with a Heyman Entity following
such Sale Transaction on the terms specified in the immediately preceding
sentence, you accept such employment, such employment is terminated by the
Heyman Entity (other than for Cause (as hereinafter defined)) [and such
termination occurs (i)]2 within twelve (12) months following the consummation of
such Sale Transaction, then, irrespective of any other provision of this
Agreement, the Option shall vest and become fully exercisable upon such
termination of your employment [or (ii) more than twelve (12) months following
the consummation of such Sale Transaction, but prior to [two and one half years
after date of grant], then, irrespective of any other provision of this
Agreement, the Option shall vest and become exercisable as to 25% of the
Preferred Shares]2. Any of the events specified in the two immediately preceding
sentences shall be referred to herein as an "Acceleration Event".
Notwithstanding any provision contained in the Certificate of Designation, if an
Acceleration Event shall have occurred and you shall convert any Preferred
Shares into Common Shares (as defined in Section 2) on a date on which, absent
the occurrence of such Acceleration Event, the Option would not have been fully
vested [(or, in the case of clause (ii) of the immediately preceding sentence,
vested as to 25% of the Preferred Shares)]2, the date of such conversion shall
be deemed to be, for purposes of determining the Interest Amount pursuant to
Section 6 of the Certificate of Designation, the date on which the Option would
have been fully vested [(or, in the case of clause (ii) of the immediately
preceding sentence, vested as to 25% of the Preferred Shares)](2) absent the
occurrence of such Acceleration Event. "Sale Transaction" shall mean, with
respect to any entity, the sale by such entity (by stock sale, asset sale
(including, without limitation, by sale of stock or assets of a subsidiary of
such entity), merger or consolidation or otherwise) of all or substantially all
of such entity's assets. "Cause"
- ----------
(2) Provided in certain agreements
5
<PAGE>
shall mean (i) 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, (ii) substantial and repeated failure by you to perform your duties,
(iii) gross negligence or willful misconduct with respect to your employer or
any affiliate thereof or (iv) a material breach of any of the terms or
provisions of any employment agreement to which you may be party; provided,
however, that if at the time of termination of the Grantee's employment the
Grantee is a party to an employment agreement with the Heyman Entity 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.
(f) The Option shall not be exercisable after its expiration. Prior
thereto, the vested portion of the Option may be exercised in whole or in part
at any time or from time to time.
(g) Unless otherwise agreed to by the Company and you, the purchase price
for the Preferred Shares shall be paid by you to the Company in full upon
exercise of the Option, in cash or by certified or official bank check or wire
transfer.
(h) The Company hereby represents and warrants to you that, upon the
issuance and purchase of (and payment for) the Preferred Shares, the Preferred
Shares shall be duly authorized, validly issued, fully paid and nonassessable.
2. Legend on Certificates. Each stock certificate of the Company issued to
represent any Preferred Shares, or shares of the Common Stock issued upon
conversion of the Preferred Shares (the shares of Common Stock issued upon
conversion of the Preferred Shares being referred to herein as the "Common
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
Option Agreement, dated as of January 1, 1997, and any amendments thereto,
a copy of which is available for inspection at the office of the Company."
6
<PAGE>
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 opinion of counsel acceptable to the Company (which
counsel may be an employee of the Company or its affiliates), the Preferred
Shares or Common Shares, as the case may be, represented thereby are no longer
subject to the restrictions referred to in such legend. For purposes of this
Agreement, the term "Preferred Shares" and "Common Shares" shall mean any
securities or property into which the Preferred Shares or Common Shares, as the
case may be, may be converted or exchanged pursuant to a recapitalization, stock
split, combination, reorganization, merger, exchange or similar transaction
occurring after the date hereof.
3. Transfer of Preferred Shares.
(a) You agree that you will not, prior to [seventh anniversary after date
of grant], directly or indirectly, sell, pledge, give, bequeath, transfer,
assign or in any other way whatsoever encumber or dispose of (hereinafter
collectively called "transfer") any Preferred Shares or Common Shares or any
interest therein, or any stock certificate representing, or any voting trust
certificate issued with respect to, any Preferred Shares or Common Shares
(voluntarily, involuntarily, by operation of law or otherwise), except as
otherwise permitted by this Agreement or as may be specifically authorized by
the Board of Directors of the Company.
(b) If, after [seventh anniversary after date of grant], you desire to sell
any of your Preferred Shares or Common Shares, you must first offer to sell to
the Company such Preferred Shares at the Exercise Price, plus accrued and unpaid
dividends to the purchase date, and such Common Shares at their Book Value or,
if securities of the same class of the Common Shares are then registered under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Market
Price, in either case determined as of the end of the calendar quarter in which
the offer is made. You must notify the Company in writing of the number of
Preferred Shares and/or Common Shares you wish to sell (the "Sale Notice"). Upon
receipt of your Sale Notice, the Company shall have the option, exercisable for
30 days after the Company receives the Sale Notice (the "Option Period"), to
purchase all (but not less than all) of the Preferred Shares and Common Shares
specified in the Sale Notice. The option may be exercised by giving notice to
you within the Option Period. If the Company elects to purchase the Preferred
Shares and Common Shares you have offered, it
7
<PAGE>
shall be obligated to purchase, and you will be obligated to sell, those
Preferred Shares and Common Shares at the price and on the terms described
above. If the Company does not elect to purchase the Preferred Shares and Common
Shares you have offered, and if otherwise permitted under this Section 3, you
may, at any time thereafter within a period of 120 days after the expiration of
the Option Period, transfer those Preferred Shares and Common Shares to any
party; provided, however, that, in the event that you have not transferred the
Preferred Shares and Common Shares within 120 days after expiration of the
Option Period, then any transfer of those Preferred Shares and Common Shares
shall thereafter again be subject to all of the restrictions contained in this
Section 3.
(c) You understand that neither the Preferred Shares nor the Common Shares
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of certain states, in reliance upon
specific exemptions from registration thereunder, and you agree that your
Preferred Shares and Common Shares may not be sold, offered for sale,
transferred, pledged, hypothecated or otherwise disposed of except in compliance
with the Securities Act and applicable state securities laws and the
restrictions of this Agreement on the transfer thereof. You have been advised
that the Company has no obligation and does not intend to cause the Preferred
Shares or Common Shares to be registered under the Securities Act or to comply
with any exemption under the Securities Act, including but not limited to that
set forth in Rule 144 promulgated under the Securities Act, that would permit
them to be sold by you. You understand that it is not anticipated that there
will be any market for resale of the Preferred Shares or Common Shares and that
it may not be possible for you to liquidate an investment in the Preferred
Shares or Common Shares. You understand the legal consequences of the foregoing
to mean that you must bear the economic risk of your investment therein except
as otherwise provided in this Agreement. You agree that you will not transfer
any Preferred Shares or Common Shares except in compliance with the Securities
Act. The Company will not transfer on its books any certificate representing
Preferred Shares or Common Shares in violation of the provisions of this
Agreement.
4. Purchase and Sale of Common Stock.
(a) In the event that you are not employed by the Company and its
affiliates for any reason on or after the date hereof (any such date of leaving
is called the "Termination Date"), you may, at your
8
<PAGE>
option, exercisable by a notice delivered to the Company during the Put/Call
Period, elect to sell and, upon the giving of the notice, you shall be obligated
to sell, and the Company shall be obligated to purchase all, but not less than
all, the Common Shares owned by you at the time such notice is given, at their
Book Value or, if securities of the same class as the Common Shares are then
registered under the Exchange Act, the Market Price, in either case determined
as of the last day of the calendar quarter during which such notice is given to
the Company.
(b) In each calendar year you may, at your option, exercisable by notice
delivered to the Company on or before March 31 of that year, elect to sell and,
upon the giving of the notice, the Company shall be obligated to purchase and
you shall be obligated to sell, as many Common Shares owned by you as you may
elect to sell, at their Book Value or, if securities of the same class of the
Common Shares are then registered under the Exchange Act, the Market Price, in
either case determined as of the last day of the preceding year, provided that
you have owned such Common Shares for at least six months prior to the date on
which you make such election.
(c) In the event that you are not employed by the Company and its
affiliates for any reason on or after the date hereof, the Company may, at its
option, exercisable by notice delivered to you during the Put/Call Period, elect
to purchase and, upon the giving of the notice, you shall be obligated to sell
and the Company shall be obligated to purchase all, but not less than all, the
Common Shares owned by you at the time such notice is given, at their Book Value
or, if securities of the same class of the Common Shares are then registered
under the Exchange Act, the Market Price, in either case determined as of the
last day of the calendar quarter during which such notice is given to you. This
Section 4(c) shall not apply to Common Shares that are freely tradeable under
the Securities Act.
(d) As used herein, the "Put/Call Period" shall mean the 30-day period
commencing with the later of (i) the date which is six months after the date on
which the Common Shares are issued to you upon conversion of Preferred Shares
owned by you or (ii) the Termination Date.
(e) Notwithstanding the foregoing, you shall not be entitled to require the
Company to purchase the Common Shares or any portion thereof under Section 4(a)
or 4(b), and the Company shall not be entitled to purchase Common Shares
pursuant to Section 4(c), unless
<PAGE>
you exercise the comparable right to require GAF to purchase a like portion of,
or GAF exercises the comparable right to purchase, as applicable, the GAF SAR.
Any negative value of either the Common Shares or the GAF SAR shall be offset
against the purchase price of the other security; provided, however, that (i)
any negative value of the GAF SAR shall not be offset against the value of the
Common Shares if a Sale Transaction with respect to the Company shall have
occurred and (ii) if such offset is effected and the aggregate net value of such
securities is less than zero, then the aggregate value of both securities shall
be deemed to be zero.
(f) In the event that a purchase of Common Shares by the Company pursuant
to this Section 4 shall be prohibited or would cause a default under the terms
of any institutional credit agreement, indenture or other like instrument with
respect to the borrowing of money (in each case as the same may be amended from
time to time), or in the opinion of the Board of Directors of the Company would
not be feasible due to the impairment of the financial ability of the Company
that would result from the satisfaction of all notices then and theretofore
given under similar provisions of agreements with other holders of Preferred
Shares or similar provisions of agreements between the Company and holders of
Common Stock and holders of stock appreciation rights based on shares of Common
Stock, then your obligation to deliver Common Shares and the Company's
obligation to pay the purchase price shall be suspended until such prohibition,
default or impairment lapses or is waived or cured. In such event the price to
be paid by the Company for your Common Shares shall be the greater of (i) the
price that would have been paid had the purchase been completed without deferral
or (ii) the Book Value as of the last day of the calendar quarter preceding the
quarter during which such prohibition, default or impairment lapses or is cured.
5. Terms of Payment, Etc.
(a) Any sales and purchases pursuant to Section 3 or 4 shall take place at
the principal executive offices of the Company within thirty (30) days after the
later of (i) if applicable, the date on which the Book Value or Market Price, as
the case may be, on which the purchase price is based is determined or (ii) the
date on which the right to sell or purchase is exercised.
(b) The purchase price payable by the Company under Section 3 or 4 shall be
paid by the Company to you in full, in cash or by
10
<PAGE>
certified or official bank check or wire transfer, at the closing pursuant to
such Section.
(c) Any Preferred Shares or Common Shares sold pursuant to Section 3 or
Section 4 shall be delivered by you to the Company at the closing, free and
clear of all liens, charges and encumbrances of any kind. In addition, you shall
take such actions as the Company shall request as may be necessary to vest in
the Company at the closing good and marketable title to the Preferred Shares
and/or Common Shares being sold, free and clear of all liens, charges and
encumbrances.
6. Deposit of Amount in Trust.
If a Sale Transaction shall have occurred with respect to ISP or its
direct or indirect parent and the Option is not fully vested or does not become
fully vested at the time of the consummation of such Sale Transaction, then the
Company shall place in trust, for your benefit, an amount (the "Trust Amount")
equal to the amount, if any, by which the product of (i) the number of Common
Shares into which the Preferred Shares issuable upon exercise of such unvested
portion of the Option are convertible, multiplied by (ii) the Sale Value (as
hereinafter defined), exceeds the Exercise Price of such unvested portion of the
Option. "Sale Value" shall mean (i) if the Company is the entity with respect to
which the Sale Transaction shall have occurred and such Sale Transaction is the
sale of the stock of, or a merger or consolidation with respect to, the Company,
the aggregate consideration received by the holders of Common Stock, divided by
the number of shares of Common Stock outstanding (treating as outstanding any
SAR Shares) on the date of the consummation of such Sale Transaction or (ii) in
the case of any other Sale Transaction, the Book Value immediately after giving
effect to the consummation of such Sale Transaction or, if securities of the
same class as the Common Shares are then registered under the Exchange Act, the
Market Price for the period ending with the date of the consummation of such
Sale Transaction. Upon the repurchase by the Company of any Common Shares into
which the Preferred Shares issuable upon exercise of such unvested portion of
the Option have been converted, you shall be entitled to receive the purchase
price therefor shall be the Trust Amount as the sole consideration for the
repurchase thereof. The terms of the trust shall provide that if the Option or
any portion thereof, any stock appreciation rights relating to the Common Stock
or any other stock options relating to the Preferred Stock shall expire
unexercised,
11
<PAGE>
the Trust Amount and any other amounts deposited for the benefit of persons who
as of such date hold any such stock appreciation rights or stock options shall
be allocated pro rata among such persons and holders of shares of Common Stock
as of the date the Sale Transaction is consummated, subject to the vesting of
such stock appreciation rights and stock options.
7. Tag-Along Rights.
(a) At least ten (10) days prior to the consummation, prior to [seven years
after date of grant] and after the Option is exercisable (or if the Option would
be exercisable as a result of an Acceleration Event arising from the
contemplated sale), of any sale or transfer by any member of the Heyman Group of
shares of the Company's Common Stock to any unrelated third party, the Company
shall cause those members of the Heyman Group (the "Selling Members") to deliver
to you a written notice (a "Sale Notice"), which shall fully disclose the
identity of the prospective transferee and the terms and conditions of the
proposed sale. The Company shall cause the Selling Members not to consummate any
such sale until ten (10) days after the Sale Notice has been mailed to you. You
may elect to sell Common Shares owned by you in the contemplated sale by
delivering written notice to the Selling Members within seven (7) days of
receipt of such Sale Notice. If you elect to sell Common Shares owned by you in
the contemplated sale, you will be entitled to sell in the contemplated sale, at
the same price and on the same terms applicable to the Selling Members, in
amounts bearing the same proportion to your holdings of Common Shares (including
shares issuable upon exercise of vested Options, including vesting arising in
connection with a related Acceleration Event) as the amounts to be so
transferred by the Selling Members bear to the Heyman Group's aggregate holdings
of shares of the Company's Common Stock. This Section 7(a) shall apply to any
sales or transfers of the Company's Common Stock, excluding sales pursuant to a
registration statement in accordance with the Securities Act or in brokerage
transactions on a national securities exchange or in the over-the-counter
market. The "Heyman Group" shall mean Samuel J. Heyman, Heyman Holdings
Associates Limited Partnership (a Connecticut limited partnership the general
partner of which is Mr. Heyman and the limited partners of which are
partnerships and trusts as to which the children or further issue of Mr. Heyman
have the beneficial interests), or any other person or entity controlled by or
under common control with Mr. Heyman.
12
<PAGE>
(b) The Company will cause the Heyman Group not to sell any shares of
Common Stock unless the purchaser of such stock agrees to purchase all of the
Common Shares that you have elected, and are permitted, to sell pursuant to
Section 7(a).
8. Notices. All notices or other communications under this Agreement shall be
given in writing and shall be deemed duly given and received on the third full
business day following the date of its mailing by registered or certified mail,
return receipt requested, or when delivered personally, as follows:
(a) if to the Company:
ISP Holdings Inc.
c/o ISP Management Company, Inc.
1361 Alps Road
Wayne, New Jersey 07470
Attention: Chief Executive Officer
or at such other place as the Company shall have designated by notice as
herein provided to you; and
(b) if to you, at your address as it appears below your name on the first
page of this Agreement, or at such other address as you shall have designated by
notice as herein provided to the Company.
9. Delivery of Notice of Base Book Value. On or prior to March 31, 1997, the
Company shall deliver to you a written notice setting forth the Base Book Value.
10. Specific Performance. It is acknowledged that the Company will be
irreparably damaged in the event that this Agreement is not specifically
enforced. In the event of a breach or threatened breach of the terms, covenants
and/or conditions of this Agreement by you, the Company shall, in addition to
all other remedies, be entitled (without any bond or other security being
required) to a temporary and/or permanent injunction, without showing any actual
damage or that monetary damages would not provide an adequate remedy, and/or a
decree for specific performance, enjoining such breach or ordering compliance
with the provisions of this Agreement.
13
<PAGE>
11. Miscellaneous.
(a) This Agreement, together with the instruments referred to herein,
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) 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.
(c) Except as otherwise expressly provided in this Agreement, this
Agreement, as amended (including any waivers or consents pursuant to Section
10(b) hereof), 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 the
Option or 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 your Preferred Shares or
Common Shares except in accordance with this Agreement.
(d) 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.
(e) The section headings contained herein are for convenience only and are
not intended to define or limit the contents of any section.
(f) Nothing in this Agreement 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
14
<PAGE>
between you and the Company or any such subsidiary, affiliate or successor.
(g) 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.
(h) Whenever the pronouns "he" or "his" are used in this Agreement,
they shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable. Words in the singular shall be read and construed as though in the
plural and words in the plural shall be read and construed as though in the
singular in all cases where they would so apply.
(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 York 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.
[Remainder of page intentionally left blank]
15
<PAGE>
If you are in agreement with the foregoing, please sign and return the
extra copy of this Agreement, whereupon this Agreement shall become a binding
agreement between you and the Company.
Very truly yours,
ISP HOLDINGS INC.
By:____________________
Name:__________________
Title:_________________
AGREED AND ACCEPTED:
- ------------------------
16
<PAGE>
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATIONS
OF ISP HOLDINGS INC.
-----------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
-----------------
We, the undersigned, Senior Vice President and Secretary,
respectively, of ISP Holdings Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law"), in accordance with the provisions of Section 151
thereof, do hereby certify that the Board of Directors of the Corporation duly
adopted the following resolutions by unanimous consent dated as of
_____________, 1996:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of the
Certificate of Incorporation of the Corporation, this Board of Directors hereby
creates and authorizes the issuance of a series of Series A Cumulative
Redeemable Convertible Preferred Stock, par value $.01 per share, and hereby
fixes the designation, dividend rate, redemption provisions, voting powers,
rights on liquidation, dissolution or winding up, and other preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations, or restrictions thereof, as follows:
3. Designation. The Preferred Stock created and authorized hereby shall be
designated as the "Series A Cumulative Redeemable Convertible Preferred Stock"
(the "Series A Preferred Stock"). The number of shares of Series A Preferred
Stock shall be ________. The liquidation preference of the Series A Preferred
Stock shall be $_____(1) per share (the "Liquidation Preference").
- --------------------
(1) $100 multiplied by ISP Holdings Adjustment Factor.
<PAGE>
4. Dividends.
(a) Each holder of a share of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of the funds of
the Corporation legally available therefor pursuant to the General Corporation
Law (the "Legally Available Funds"), cumulative cash dividend payments of
$______(2) per share for each full Quarterly Dividend Period (as defined in
Section 2(f) hereof) that such share of Series A Preferred Stock is outstanding;
provided, however, that if a share of Series A Preferred Stock is not
outstanding for a full Quarterly Dividend Period, the dividend payment per share
in respect of such partial Quarterly Dividend Period shall be equal to
$______(3) multiplied by a fraction, the numerator of which is the number of
days such share was outstanding (but not more than thirty (30) days for any
calendar month fully occurring in such portion), and the denominator of which is
90. Such dividends, if and to the extend declared, shall be payable quarterly in
arrears on January 1, April 1, July 1 and October 1 of each year (each, a
"Dividend Payment Date"); provided, however, that if any such date is not a
Business Day (as defined in Section 2(f) hereof), then the applicable dividend
shall be payable, if and to the extent declared, on the next succeeding Business
Day. Such dividends shall be fully cumulative.
(b) Dividends shall accrue (whether or not declared or paid) on each share
of Series A Preferred Stock from the date on which such share is issued.
(c) Quarterly dividends, if and to the extent declared, shall be paid to
the holders of record of shares of Series A Preferred Stock as they appear on
the stock register of the Corporation on the record date therefor, which record
date shall be the December 15, March 15, June 15 and September 15 immediately
preceding the Dividend Payment Date relating thereto.
(d) If dividends are not paid in full, or not declared in full and sums set
apart for the payment thereof, on the Series A Preferred Stock and any Capital
Stock (as defined in Section 2(f) hereof) of the Corporation ranking on a parity
with the Series A Preferred Stock as to the payment of dividends, all dividends
- ---------------------
(2) [1.5]% of Liquidation Preference.
(3) [1.5]% of Liquidation Preference.
2
<PAGE>
declared upon shares of Series A Preferred Stock and shares of such other stock
shall be declared pro rata so that in all cases the amount of dividends declared
per share on the Series A Preferred Stock and such other stock share bear to
each other the same ratio that accumulated, unpaid dividends per share on the
Series A Preferred Stock and such other stock shall bear to each other. Except
as provided in the preceding sentence, unless full cumulative dividends on the
Series A Preferred Stock have been paid or declared in full and sums set aside
for the payment thereof, no dividends shall be declared or paid or set aside for
payment, or other distribution made, on any Capital Stock of the Corporation
ranking on a parity with or junior to the Series A Preferred Stock as to the
payment of dividends, nor shall any such stock be purchased, redeemed or
otherwise acquired, except as provided in Section 2(e) hereof, for any
consideration (or any payment made to or available for a sinking fund for the
redemption of any such stock).
(e) Except as provided in Section 2(d) hereof, the Corporation may not pay
cash dividends or make cash distributions on, or repurchase, redeem or otherwise
acquire (except in exchange for shares of Capital Stock ranking junior to the
Series A Preferred Stock as to the payment of dividends and as to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation or options, rights or warrants to acquire such shares) any of its
Capital Stock other than Capital Stock ranking senior to the Series A Preferred
Stock as to the payment of dividends, if, at such date, there are accumulated,
unpaid dividends on the Series A Preferred Stock; provided, however, that the
Corporation may purchase outstanding shares of Common Stock from the holders
thereof in accordance with the terms and conditions of the Employee Stockholder
Agreements (as defined in Section 2(f) hereof).
(f) The following terms shall have the meanings set forth below:
"Applicable Date," "Applicable Rate" and "Base Book Value" shall have the
respective meanings specified in each Stock Option Agreement entered into
between the Corporation and the optionee party thereto.
3
<PAGE>
"Business Day" means any day other than a Saturday, a Sunday or any
other day on which commercial banking institutions in the City of New York are
authorized by law to be closed.
"Capital Stock" of any person means any and all shares, interests,
participations or other equivalents (however designated) of equity interests in
such person.
"Common Stock" means the Corporation's common stock, par value $.001
per share, and any securities or property into which the Corporation's Common
Stock may be converted or exchanged pursuant to a recapitalization, stock split,
combination, reorganization, merger, exchange or similar transaction.
"Corporation" means the party named as such in the preamble to this
Certificate.
"Employee Stockholder Agreements" means the agreements among the
Company and holders of Common Stock, other than Samuel J. Heyman and his
affiliates, and the option agreements relating to the Series A Preferred Stock.
"person" means any individual, partnership, limited liability
company, joint venture, firm, corporation, association, trust or other
enterprise or any government or political subdivision or agency, department or
instrumentality thereof.
"Quarterly Dividend Period" means the applicable period from January
1 through the next March 31, from April 1 through the next June 30, from July 1
through the next September 30 or from October 1 through the next December 31.
5. Redemption.
(a) The Series A Preferred Stock shall be redeemable, at any time in whole
or from time to time in part, out of Legally Available Funds, at the option of
the Corporation, upon giving notice as provided in Section 3(b) hereof, at the
Liquidation Preference thereof plus accumulated but unpaid dividends to the date
of redemption.
(b) At least thirty (30) days but not more than sixty (60) days prior to
the date fixed for the redemption of shares of the Series A Preferred Stock
pursuant to Section 3(a) hereof (each a
4
<PAGE>
"Redemption Date"), written notice of such redemption shall be mailed to each
holder of record of shares of Series A Preferred Stock to be redeemed in a
postage prepaid envelope addressed to such holder at his mailing address as
shown on the records of the Corporation; provided, however, that no failure of
any holder of Series A Preferred Stock to receive such notice nor any defect
therein shall affect the validity of the proceeding for the redemption of the
shares of Series A Preferred Stock to be redeemed. Each such notice shall state:
(i) the Redemption Date; (ii) the number of shares of Series A Preferred Stock
to be redeemed and, if fewer than all of the shares held by such holder are to
be redeemed from such holder, the number of shares to be redeemed from such
holder; (iii) the cash redemption price being paid; (iv) the place or places
where certificates for such shares are to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed shall
cease to accrue on the Redemption Date. On or after the Redemption Date, each
holder of shares of Series A Preferred Stock to be redeemed shall present and
surrender his certificate or certificates for such shares to the Corporation at
the place designated in such notice and thereupon the redemption price of such
shares shall be paid to the person whose name appears on such certificate or
certificates as the owner thereof and each surrendered certificate shall be
cancelled. In case fewer than all of the shares represented by such certificate
are redeemed, a new certificate shall be issued representing the unredeemed
shares. From and after the Redemption Date (unless default shall be made by the
Corporation in payment of the redemption price) all dividends on the shares of
Series A Preferred Stock designated for redemption in such notice shall cease to
accrue and all rights of the holders thereof as stockholders of the Corporation,
except the right to receive the redemption price thereof, without interest, upon
the surrender of certificates representing the same, shall cease and terminate
and such shares shall not thereafter be transferred (except with the written
consent of the Corporation) on the books of the Corporation and such shares
shall not be deemed to be outstanding for any purpose whatsoever.
(c) If fewer than all of the shares of Series A Preferred Stock are to be
redeemed, the Board of Directors of the Corporation shall select the shares to
be redeemed on such basis as the Board of Directors shall determine in its sole
discretion. The Board of Directors shall not be required to redeem shares of
Series A Preferred Stock on a pro rata basis. The Board of
5
<PAGE>
Directors may elect to redeem shares of Series A Preferred Stock held by one
holder or group of holders and elect not to redeem shares of Series A Preferred
Stock held by other holders. Regardless of the method used, the calculation of
the number of shares to be redeemed shall be based upon whole shares, such that
the Corporation shall in no event be required to issue fractional shares of
Series A Preferred Stock or cash in lieu thereof. In the event a method
requiring proration is used, the number of shares to be redeemed from a holder
shall be rounded downward to the nearest whole number of shares. The holders of
Series A Preferred Stock shall have no right to request the Corporation to
redeem such shares at any time, and the Corporation shall have no obligation to
honor any such request if made.
6. Voting Rights. The holders of Series A Preferred Stock shall be entitled to
one vote for each share held on all matters to be voted on by the stockholders
of the Corporation and shall vote together as a single class with the holders of
Common Stock and the holders of any other class of stock entitled to vote in
such manner. The holders of Series A Preferred Stock shall not, except as
required by law, be entitled to vote as a separate class. Without limiting the
generality of the preceding sentence, a class vote or the consent of the holders
of the outstanding shares of Series A Preferred Stock as a separate class shall
not be required in connection with: (i) the creation of any class or series of
Capital Stock of the Corporation; (ii) any merger, consolidation or transfer of
all or substantially all the assets of the Corporation or other transaction
involving the Corporation and a third party in which the Corporation is the
survivor or in which the Corporation is not the survivor and in which the Series
A Preferred Stock shall (a) remain outstanding as an equivalent security of the
survivor with no adverse change to the powers, preferences or special rights
provided for in this Certificate or (B) be redeemed for an amount per share
equal to the Liquidation Preference plus accrued and unpaid dividends; or (iii)
any increase in the total number of authorized or issued shares of Capital Stock
of any class, including without limitation Series A Preferred Stock.
7. Priority of Series A Preferred Stock in Event of Liquidation, Dissolution or
Winding Up. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
holders of the
6
<PAGE>
Series A Preferred Stock shall be entitled to receive, out of the remaining net
assets of the Corporation, an amount per share in cash equal to the Liquidation
Preference plus all dividends accrued and unpaid on each such share up to the
date fixed for distribution before any distribution shall be made to the holders
of any Capital Stock of the Corporation ranking junior to the Series A Preferred
Stock as to the distribution of assets upon the liquidation, dissolution or
winding up of the Corporation. If, upon any liquidation, dissolution or winding
up of the Corporation, the assets distributable among the holders of Series A
Preferred Stock and any Capital Stock of the Corporation ranking on a parity
with the Series A Preferred Stock as to the distribution of assets upon the
liquidation, dissolution or winding up of the Corporation shall be insufficient
to permit the payment in full to the holders of the Series A Preferred Stock and
such other stock of all preferential amounts payable to all such holders, then
the assets thus distributable shall be distributed ratably among the holders of
the Series A Preferred Stock and any Capital Stock of the Corporation ranking on
a parity with the Series A Preferred Stock as to the distribution of assets upon
liquidation, dissolution or winding up of the Corporation in proportion to the
respective amounts that would be payable per share if such assets were
sufficient to permit payment in full. Except as otherwise provided in this
Section 5, holders of Series A Preferred Stock shall not be entitled to any
distribution in the event of liquidation, dissolution or winding up of the
affairs of the Corporation. For the purposes of this Section 5, neither the
voluntary sale, lease, conveyance, exchange or transfer (for cash, securities or
other consideration) of all or substantially all the property or assets of the
Corporation, nor the consolidation or merger of the Corporation with one or more
other corporations, shall be deemed to be a liquidation, dissolution or winding
up, voluntary or involuntary.
8. Conversion.
(a) The holders of shares of Series A Preferred Stock shall have the right,
at any time or from time to time, at their option, to convert all or any portion
of such shares into shares of Common Stock on the following basis: Each share of
Series A Preferred Stock shall be convertible into the number of shares of
Common Stock equal to ______(4) divided by the sum of (i) an amount equal
- ----------------
(4) Liquidation Preference.
7
<PAGE>
to the Base Book Value and (ii) the Interest Amount (as hereinafter defined).
"Interest Amount" means interest on such Base Book Value at the Applicable Rate
per annum from the Applicable Date to the date of conversion. The Corporation
may, at its option, pay to any holder cash in lieu of any fractional share of
Common Stock issuable upon conversion of shares of Series A Preferred Stock.
(b) In the case of a redemption pursuant to Section 3 hereof of any shares
of Series A Preferred Stock, the right of conversion under this Section 6 shall
cease and terminate, as to the shares to be redeemed, at the close of business
on the second day preceding the date fixed for such redemption, unless default
shall be made in the payment of the Redemption Price for the shares to be so
redeemed.
(c) In order to convert shares of Series A Preferred Stock into shares of
Common Stock pursuant to the right of conversion set forth in Section 6(a), the
holder thereof shall surrender the certificate or certificates representing
Series A Preferred Stock, duly endorsed to the Corporation or in blank, at the
principal office of the Corporation and shall give written notice to the
Corporation that such holder elects to convert the same. Within five (5)
business days, the Corporation shall deliver at said office to such holder of
Series A Preferred Stock a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Shares of
Series A Preferred Stock shall be deemed to have been converted as of the date
of the surrender of such shares for conversion as provided above, and the person
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares of Common
Stock on such date. Upon conversion of only a portion of the number of shares
covered by a certificate representing shares of Series A Preferred Stock
surrendered for conversion, the Corporation shall issue and deliver to the
holder of the certificate so surrendered for conversion, at the expense of the
Corporation, a new certificate covering the number of shares of Series A
Preferred Stock representing the unconverted portion of the certificate so
surrendered, which new certificate shall entitle the holder thereof to the
rights of the shares of Series A Preferred Stock represented thereby to the same
extent as if the certificate theretofore covering such unconverted shares had
not been surrendered for conversion.
8
<PAGE>
(d) The issuance of certificates for shares of Common Stock upon the
conversion of shares of Series A Preferred Stock shall be made without charge to
the converting stockholder for any original issue or transfer tax in respect of
the issuance of such certificates and any such tax shall be paid by the
Corporation.
(e) The Corporation shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of Series A Preferred
Stock, the full number of shares of Common Stock then deliverable upon the
conversion of all shares of Series A Preferred Stock at the time outstanding.
The Corporation shall take at all times such corporate action as shall be
necessary in order that the Corporation may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the conversion of Series A
Preferred Stock in accordance with the provisions hereof, free from all taxes,
liens, charges and security interests with respect to the issue thereof. The
Corporation will, at its expense, use its best efforts to cause such shares to
be listed (subject to issuance or notice of issuance) on all stock exchanges, if
any, on which the Common Stock may become listed.
9. Cancellation of Reacquired Series A Preferred Stock. Shares of Series A
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed, shall (upon compliance with any applicable
provisions of the laws of the State of Delaware) have the status of authorized
and unissued shares of
9
<PAGE>
preferred stock undesignated as to series and may be redesignated and reissued
as part of any series of preferred stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to
be duly executed on its behalf, this ___ day of _____________, 1997.
ISP HOLDINGS INC.
By:________________________
Senior Vice President
ATTEST:
- ---------------------------
Secretary
(Corporate Seal)
<PAGE>
Stock Appreciation Right
ISP Holdings Inc., a Delaware corporation ("ISPHI"), hereby grants
____________(the "Grantee") the right to receive ("SAR") an amount in cash based
upon the appreciation in value of ______ shares (the "Shares") of common stock
("Common Stock"), par value $.001 per share, of ISPHI. The SAR shall be on the
following terms:
1. Capitalized terms used herein that are not defined elsewhere herein shall
have the following meanings:
(a) "Appreciation Value" means an amount equal to the Base Book
Value, multiplied by the number of Shares, plus interest on
such product from [date of grant](1) at the rate of ____% per
annum.
(b) "Base Book Value" means the product of (1) [initial base book
value of GAF SAR] multiplied by (2) a fraction (i) the
numerator of which is the Book Value immediately after giving
effect to the Spin-Off Transactions and (ii) the denominator
of which is the GAF Book Value immediately prior to the
Spin-Off Transactions.
(c) "Book Value" means, as of any date of determination, the book
value per share of Common Stock as of that date, as determined
in accordance with generally accepted accounting principles
after charges such as declaration of dividends on any capital
stock of ISPHI or payments with respect to repurchases by
ISPHI of any capital stock from holders thereof but excluding
(1) any amounts reflecting the liquidation preferences of any
outstanding preferred stock of ISPHI, (2) any reductions
resulting from purchases of GAF's capital stock by persons who
participated in promoting the "Acquisition" referred to in the
Prospectus dated March 24, 1989 relative to the GAF Common
Stock and certain other securities of GAF (predecessor cost
basis adjustment), (3) any charges relating to amortization
- --------
(1) For all purposes, the date of grant is deemed to be the date of initial
grant of the GAF SAR or option in connection with which the ISP Holdings SAR is
being granted.
<PAGE>
of goodwill and other intangibles arising from the Acquisition
and related transactions, (4) that portion of depreciation
charges attributable to the write-up of assets as a result of
the application of purchase accounting in connection with the
Acquisition and (5) any charges relating to amortization of
deferred financing costs and expenses incurred in connection
with the Acquisition; provided, however, that (i) any
adjustments to the Book Value shall include the tax effects,
if any, associated therewith, (ii) any charges specified in
subclauses (3), (4) or (5) above, relating to a business or
assets of ISPHI or any of its subsidiaries, which charges
shall have been incurred on or after the date of the
Acquisition but which, because of the operation of said
subclauses (3), (4) and/or (5), shall not theretofore have
been included in the calculation of the Book Value, shall be
so included following a transaction involving such business or
assets that, in accordance with the next sentence, is deemed a
sale or disposition thereof, and (iii) for purposes of clause
(ii), an asset, liability or charge not exclusively
attributable to the specific business or assets deemed to have
been sold or otherwise disposed of shall, if attributable to
such business or assets and to other businesses or assets, be
deemed to relate to the business or assets sold or otherwise
disposed of and to such other businesses or assets pro rata
based on relative business and assets values immediately
following consummation of the Acquisition; and provided
further, that, in calculating the Book Value, if any stock
appreciation rights issued by ISPHI based upon appreciation in
value of shares of Common Stock are outstanding at the time of
calculation, the shares of Common Stock upon which such
appreciation in value is based ("SAR Shares") shall be deemed
outstanding. The Board of Directors of ISPHI shall determine
(i) whether a transaction involving a business or assets of
ISPHI or any of its subsidiaries is a sale or disposition for
purposes of the definition and calculation of the Book Value
and (ii) if such transaction is a sale or disposition, the
amount of the gain or loss thereon. The gain or loss on any
sale or disposition shall be the actual economic benefit to
ISPHI from such transaction, as determined by the Board of
Directors of ISPHI.
2
<PAGE>
(d) "Current Value" means an amount equal to the Book Value as of
the date of determination multiplied by the number of Shares
increased by an amount equal to any cash dividends or
distributions that would have been paid on the Shares from the
date hereof through the date of determination if they had been
outstanding; provided, however, that, if securities of the
same class as the Shares are then registered under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), Market Price shall be substituted for Book Value in
calculating Current Value.
(e) "Exercise Value" means (i) zero if the grantee's employment
with ISPHI and its affiliates is terminated prior to [two and
one half years after date of grant], (ii) 40% of the Spread if
the grantee's employment with ISPHI and its affiliates is
terminated on or after [two and one half years after date of
grant] but prior to [three years after date of grant], (iii)
60% of the Spread if the Grantee's employment with ISPHI and
its affiliates is terminated on or after [three years after
date of grant] but prior to [four years after date of grant];
(iv) 80% of the Spread if the Grantee's employment is
terminated on or after [four years after date of grant] but
prior to [five years after date of grant]; and (v) 100% of the
Spread if the Grantee's employment is terminated on or after
[five years after date of grant].
(f) "GAF" means GAF Corporation, a Delaware corporation.
(g) "GAF Book Value" means the book value per share of GAF Common
Stock as determined in accordance with that certain agreement,
dated as of the date hereof, pursuant to which GAF granted to
the Grantee a stock appreciation right based upon the
appreciation in value of ____ shares of GAF Common Stock.
(h) "GAF Common Stock" means common stock, par value $.001 per
share, of GAF.
(i) "Market Price" as of any date means the average of the daily
market prices per Share for the fifteen (15) consecutive
business days immediately preceding such
3
<PAGE>
date. The daily market price for each such business day shall
be (i) the last sale price on such day on the principal stock
exchange on which the Shares are then listed or admitted to
trading, (ii) if no sale takes place on such day on any such
exchange, the average of the last reported closing bid and
asked prices on such day as officially quoted on any such
exchange, (iii) if the Shares are not then listed or admitted
to trading on any stock exchange, the average of the last
reported closing bid and asked prices furnished by the
National Association of Securities Dealers Automated Quotation
System or the National Quotation Bureau, Inc., (iv) if neither
such corporation at the time is engaged in the business of
reporting such prices, as furnished by any similar firm then
engaged in such business or (v) if there is no such firm, as
furnished by any member of the National Association of
Securities Dealers, Inc. selected by ISPHI.
(j) The "Restricted Period" means the period commencing on [date
of grant] and ending [seven years after date of grant].
(k) "Spin-Off Transactions" means the series of transactions that
shall result in, among other things, each holder of a share of
GAF Common Stock receiving one share of Common Stock for each
share of GAF Common Stock held by such holder.
(l) The "Spread" as of any date of determination means the excess,
if any, of the Current Value over the Appreciation Value.
2. In the event that the Grantee is not employed by ISPHI and its affiliates for
any reason on or after the date hereof, ISPHI shall have the right, but not the
obligation, exercisable by notice to the Grantee within thirty (30) days after
termination of employment, to repurchase the SAR for an amount in cash equal to
the Exercise Value, with the Current Value determined as of the last day of the
calendar quarter next preceding the calendar quarter in which termination of
employment occurs.
3. In the event that the Grantee is not employed by ISPHI and its affiliates for
any reason on or after the date hereof, the Grantee shall have the right,
exercisable by notice to ISPHI
4
<PAGE>
within thirty (30) days after termination of employment, to require ISPHI to
repurchase the SAR for an amount in cash equal to the Exercise Value, with the
Current Value based upon the lowest amount thereof determined as of the last day
of the following calendar quarters: the calendar quarter (the "Quarter")
immediately preceding the calendar quarter in which the termination of
employment occurred and the first, second and third calendar quarter immediately
succeeding the Quarter.
4. In each calendar year the Grantee may, at the Grantee's option, exercisable
by notice delivered to ISPHI on or before March 31 of that year, elect to cause
ISPHI to repurchase the SAR (or any portion thereof) for an amount in cash equal
to the Exercise Value determined as of the last day of the preceding year.
5. (a) Notwithstanding the foregoing, ISPHI shall not be entitled to
repurchase the SAR under paragraph 2, and the Grantee shall not be
entitled to cause ISPHI to repurchase the SAR or any portion thereof
under paragraph 3 or 4, unless GAF exercises the comparable right to
repurchase, or the Grantee exercises the comparable right to cause GAF
to repurchase a like portion of, as applicable, the stock appreciation
right ("GAF SAR") with respect to ____ shares of GAF Common Stock
granted by GAF to the Grantee on the date hereof. Any negative value of
either the SAR or the GAF SAR shall be offset against the purchase
price of the other security; provided, however, that (i) any negative
value of the GAF SAR shall not be offset against the value of the SAR
if a Sale Transaction (as hereinafter defined) with respect to ISPHI
shall have occurred and (ii) if such offset is effected and the
aggregate net value of such securities is less than zero, then the
value of both securities shall be deemed to be zero.
(b) The closing of any repurchase by ISPHI of the SAR or a portion
thereof shall be held at the principal offices of ISPHI within thirty
(30) days after the later of (i) if applicable, the date on which the
Book Value or Market Price, as the case may be, on which the Current
Value is based is determined or (ii) the date on which the right to
sell or repurchase is exercised. The purchase price shall be paid by
delivery to the Grantee of a certified or official bank check or wire
transfer.
5
<PAGE>
(c) In the event a repurchase of the SAR or a portion thereof pursuant
to paragraph 2, 3 or 4 hereof shall be prohibited, or would cause a
default, under the terms of any institutional credit agreement,
indenture or other like instrument with respect to borrowed money to
which ISPHI or any of its affiliates may be a party or be bound, in
each case as the same may be amended from time to time, or shall be
prohibited by law, the rights and obligations of the Grantee and ISPHI
pursuant to paragraph 2, 3 or 4 hereof, as the case may be, shall be
suspended until the prohibition lapses or is waived and no default
would be caused. If the Board of Directors of ISPHI shall determine in
good faith that, in light of the financial condition or financial
resources of ISPHI, it would be imprudent for ISPHI to repurchase the
SAR or a portion thereof pursuant to paragraph 3 or 4, the rights and
obligations of the Grantee and ISPHI pursuant to paragraph 3 or 4 shall
be suspended until the Board of Directors determines that such
repurchase would be prudent in such light. Upon the lapse or waiver of
the restrictions or upon such determination that the purchase would be
prudent, as the case may be, the purchase price to be paid by ISPHI for
the SAR or such portion thereof shall be determined as of the last day
of the calendar quarter in which such restrictions are waived or lapse
or such determination occurs, and the purchase price shall be paid with
interest thereon at the rate of ___% per annum from the first
anniversary of the event giving rise to the repurchase obligation to
the date of payment.
6. At least ten (10) days prior to the consummation during the Restricted Period
of any sale or transfer by any member of the Heyman Group (as hereinafter
defined) to any unrelated third party of securities of the same class as Shares,
ISPHI shall cause those members of the Heyman Group (the "Selling Members") to
deliver to the Grantee a written notice (a "Sale Notice"), which shall fully
disclose the identity of the prospective transferee and the terms and conditions
of the proposed sale. The Grantee may elect to participate in the contemplated
sale by delivering written notice to the Selling Members within seven (7) days
of receipt of such Sale Notice. If the Grantee elects to participate in the
contemplated sale, he will be entitled to sell in the contemplated sale or, if
ISPHI elects, to ISPHI or to ISPHI's designee, for an amount per Share equal to
the sales price per Share received by the Selling Members minus the Appreciation
Value per Share and, to the extent applicable, on
6
<PAGE>
the same terms applicable to the Selling Members, that portion of the SAR
bearing the same relationship to the number of Shares represented hereby of the
class being transferred as the amounts to be so transferred by the Selling
Members bear to the Heyman Group's aggregate holdings of securities of such
class. This paragraph 6 shall apply to any sales or transfers of Shares, whether
or not made pursuant to an effective registration statement in accordance with
the Securities Act of 1933, as amended, and shall not apply to any sale of
securities of the same class as Shares in brokerage transactions on a national
securities exchange or in the over-the-counter market. The term "Heyman Group"
shall mean Samuel J. Heyman, Heyman Holdings Associates Limited Partnership or
any other person or entity controlled by or under common control with Mr.
Heyman.
7. If a Sale Transaction (as hereinafter defined) occurs with respect to
International Specialty Products Inc. ("ISP") or its direct or indirect parent
or Building Materials Corporation of America or its direct or indirect parent
and the Grantee is employed by the entity with respect to which such Sale
Transaction shall have occurred or any subsidiary thereof and the Grantee is not
offered employment by an entity controlled by Samuel J. Heyman, a member of Mr.
Heyman's immediate family, a partnership, limited liability company, trust or
other entity established for the benefit of a member or members of Mr. Heyman's
immediate family or their respective affiliates (a "Heyman Entity") on terms
substantially similar to those pursuant to which he was employed prior to such
Sale Transaction then, irrespective of any other provision of this Agreement,
the Exercise Value shall be deemed to be 100% of the Spread following such Sale
Transaction. If the Grantee is offered employment with a Heyman Entity following
such Sale Transaction on the terms specified in the immediately preceding
sentence, the Grantee accepts such employment and such employment is terminated
by the Heyman Entity (other than for Cause (as hereinafter defined)) within
twelve (12) months following the consummation of such Sale Transaction, then,
irrespective of any other provision of this Agreement, the Exercise Value shall
be deemed to be 100% of the Spread. Either of the events specified in the two
immediately preceding sentences shall be referred to herein as an "Acceleration
Event". If an Acceleration Event shall have occurred and ISPHI shall repurchase
the SAR on a date on which, absent the occurrence of such Acceleration Event,
the Exercise Value of the SAR would have been less than 100% of the Spread, the
date of such repurchase shall be deemed to be, for purposes
7
<PAGE>
of determining the interest accrual in calculation of the Appreciation Value as
of such date, the date on which the Exercise Value of the SAR would have been
100% of the Spread absent the occurrence of such Acceleration Event. "Sale
Transaction" shall mean, with respect to any entity, the sale by such entity (by
stock sale, asset sale (including, without limitation, by sale of stock or
assets of a subsidiary of such entity), merger or consolidation or otherwise) of
all or substantially all of such entity's assets. "Cause" shall mean (i) 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 the Grantee's employer or any affiliate thereof, (ii)
substantial and repeated failure by the Grantee to perform his duties, (iii)
gross negligence or willful misconduct with respect to the Grantee's employer or
any affiliate thereof or (iv) a material breach of any of the terms or
provisions of any employment agreement to which the Grantee may be party;
provided, however, that if at the time of termination of the Grantee's
employment the Grantee is a party to an employment agreement with the Heyman
Entity 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.
8. If a Sale Transaction shall have occurred with respect to ISP or its direct
or indirect parent and the Exercise Value of the SAR is not 100% of the Spread
at the time of the consummation of such Sale Transaction, then ISPHI shall place
in trust, for the benefit of the Grantee, an amount (the "Trust Amount") equal
to 100% less the percentage of the Spread on which the Exercise Value would have
been based if the Exercise Value were calculated on the date on which such Sale
Transaction is consummated, multiplied by the Sale Value (as hereinafter
defined). "Sale Value" shall mean (i) if ISPHI is the entity with respect to
which the Sale Transaction shall have occurred and such Sale Transaction is the
sale of the stock of, or a merger or consolidation with respect to, ISPHI, the
product of (x) the aggregate consideration received by the holders of Common
Stock divided by the number of shares of Common Stock outstanding (treating as
outstanding any SAR Shares) on the date of the consummation of such Sale
Transaction multiplied by (y) the number of Shares or (ii) in the case of any
other Sale Transaction, the Current Value, with the Book Value calculated
immediately after giving effect to the consummation of such Sale Transaction or,
if securities of the same class as the Shares are
8
<PAGE>
then registered under the Exchange Act, Market Value calculated for the period
ending with the date of the consummation of such Sale Transaction. Upon the
repurchase of the SAR, the Grantee shall be entitled to receive from such trust
the Trust Amount as the sole consideration for the repurchase thereof. The terms
of the trust shall provide that if the SAR or any portion thereof, any other
stock appreciation rights relating to the Common Stock or any stock options
relating to the Series A Cumulative Redeemable Convertible Preferred Stock, par
value $.01 per share, of ISPHI shall expire unexercised, the Trust Amount and
any other amounts deposited for the benefit of persons who as of such date hold
any such stock appreciation rights or stock options shall be allocated pro rata
among such persons and holders of shares of Common Stock as of the date the Sale
Transaction was consummated, subject to the vesting of such stock appreciation
rights and stock options.
9. The Shares shall include any securities that would have been received by the
Grantee, if the Shares had been outstanding, in any split-up, recapitalization,
combination, dividend, distribution, merger or exchange of or relating to the
Common Stock, including any securities of a subsidiary of ISPHI distributed to
stockholders of ISPHI, and if any such event shall occur the Board of Directors
of ISPHI shall make such adjustments in Book Value, Appreciation Value and
Current Value as they determine in good faith are appropriate.
10. The Grantee may not sell, pledge, give, transfer, assign, encumber or
dispose of the SAR (or any interest herein or therein) except by will or
intestacy.
11. All determinations by the Board of Directors of ISPHI hereunder shall be
made in good faith and shall be binding and conclusive.
12. (a) All notices or other communications hereunder shall be given in
writing and shall be deemed duly given and received on the third full
business day following the date of mailing by registered or certified
mail, return receipt requested, or when delivered personally, as
follows:
9
<PAGE>
(i) if to ISPHI:
ISP Holdings Inc.
c/o ISP Management Company, Inc.
1361 Alps Road
Wayne, New Jersey 07470
Attention: Chief Executive Officer
or at such other place as ISPHI shall have designated by
notice as herein provided to the Grantee;
(ii) if to the Grantee, at his last address appearing in
ISPHI's records or at such other place as the Grantee
shall have designated by notice as herein provided to
ISPHI.
(b) On or prior to March 31, 1997, ISPHI shall deliver to the
Grantee a written notice setting forth the Base Book Value.
(c) This writing constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof, supersedes
all agreements between the parties with respect to the subject
matter hereof and may not be modified or amended except by a
written agreement signed by ISPHI (following the specific
approval of such modification or amendment by ISPHI's Board of
Directors) and the Grantee. This Agreement shall be binding
upon and inure to the benefit of ISPHI its successors and
assigns and the Grantee and his heirs and personal
representatives.
(d) Nothing in this Agreement shall confer on you any right to
continue in the employ of ISPHI or any subsidiary or affiliate
of ISPHI or any successor to any of them, affect the right of
ISPHI 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 ISPHI or any such subsidiary, affiliate or
successor.
(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
10
<PAGE>
invalid or unenforceable provision were not contained in this
Agreement.
(f) This Agreement shall be deemed to be a contract under the laws
of the State of New York and for all purposes shall be
construed and enforced in accordance with the internal laws of
that state without regard to principles of conflicts of law.
IT WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of January, 1997.
ISP HOLDINGS INC.
By:______________________
Name:____________________
Title:___________________
AGREED AND ACCEPTED:
________________________
11
<PAGE>
LIST OF SUBSIDIARIES
--------------------
<TABLE>
<CAPTION>
STATE OF
COMPANY INCORPORATION
- ------- -------------
<S> <C>
International Specialty Products Inc. Delaware
ISP Management Company, Inc. Delaware
ISP Minerals Inc. Delaware
ISP Filters Inc. Delaware
ISP Technologies Inc. Delaware
ISP Mineral Products Inc. Delaware
ISP Environmental Services Inc. Delaware
Bluehall Incorporated Delaware
Verona Inc. Delaware
ISP Realty Corporation Delaware
ISP Real Estate Company, Inc. Delaware
International Specialty Products Funding Corporation Delaware
ISP Chemicals Inc. Delaware
ISP Newark Inc. Delaware
ISP Van Dyk Inc. Delaware
ISP Fine Chemicals Inc. Delaware
ISP Investments Inc. Delaware
ISP Global Technologies Inc. Delaware
ISP International Corp. Delaware
ISP (Puerto Rico) Inc. Delaware
GAF Huls Chemie GmbH Germany
ISP International Filters Inc. Delaware
ISP Andina, C.A. Venezuela
ISP Argentina S.A. Argentina
ISP Asia Pacific Pte Ltd. Singapore
ISP (Australasia) Pte Ltd. Australia
ISP (Belgium) N.V. Belgium
ISP (Belgium) International N.V. Belgium
ISP do Brasil Ltda. Brazil
ISP (Canada) Inc. Canada
ISP Ceska Republika Spol, S.R.O. Czech. Rep.
ISP (China) Limited China
ISP Filters (Canada) Inc. Canada
ISP Filters Pte Ltd. Singapore
ISP Freight Service N.V. Belgium
ISP Global Operations (Barbados) Inc. Barbados
ISP Global Technologies (Belgium) S.A. Belgium
ISP Global Technologies (Germany) Holding GmbH Germany
ISP Global Technologies Deutschland GmbH Germany
HPF-Hanseatic Filterprodukte GmbH Germany
International Specialty Products ISP (France) S.A France
<PAGE>
ISP Ireland(1) Ireland
ISP (Great Britain) Co. Ltd. England
ISP (Hong Kong) Limited Hong Kong
ISP (Italia) S.r.l. Italy
ISP (Japan) Ltd. Japan
ISP (Korea) Limited Korea
ISP Mexico, S.A. de C.V. Mexico
ISP (Norden) A.B. Sweden
ISP (Osterreich) Ges.m.g.h. Austria
ISP (Polska) Sp.z. o.p. Poland
ISP Sales (Barbados) Inc. Barbados
ISP Sales (U.K.) Limited Ireland
ISP (Singapore) Pte Ltd. Singapore
ISP (Switzerland) A.G. Switzerland
ISP (Thailand) Co., Ltd. Thailand
Chemfields Pharmaceuticals Private Limited(2) India
<FN>
- --------
(1) 25% owned by ISP (Italia) S.r.l.; 75% owned by International Specialty
Products ISP (France) S.A.
(2) 50.1% owned by ISP Global Technologies Inc.
</FN>
</TABLE>
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report dated February 10, 1997, included in or made part of this Form 10-K, into
International Specialty Products Inc.'s previously filed Registration Statements
on Forms S-8 File Nos. 33-54724, 33-92518 and 33-94020.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K OF INTERNATIONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874578
<NAME> INTERNATIONAL SPECIALTY PRODUCTS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,753
<SECURITIES> 117,573
<RECEIVABLES> 66,875
<ALLOWANCES> 2,840
<INVENTORY> 108,586
<CURRENT-ASSETS> 348,528
<PP&E> 489,474
<DEPRECIATION> 189,130
<TOTAL-ASSETS> 1,316,914
<CURRENT-LIABILITIES> 128,826
<BONDS> 310,294
0
0
<COMMON> 999
<OTHER-SE> 700,494
<TOTAL-LIABILITY-AND-EQUITY> 1,316,914
<SALES> 716,481
<TOTAL-REVENUES> 716,481
<CGS> 418,921
<TOTAL-COSTS> 418,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,729
<INCOME-PRETAX> 125,967
<INCOME-TAX> 45,304
<INCOME-CONTINUING> 80,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,663
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
