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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
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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 Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 429-8554
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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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 Offices) (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
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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 Offices) (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
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
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<PAGE>
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 20, 1998, 96,057,477 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 20, 1998 WAS $275,958,356.63. 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 ($17 15/16). 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 20, 1998, 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 20, 1998, 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 1998 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.
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ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING ZIP CODE
STATE OR OTHER AND TELEPHONE
EXACT NAME OF JURISDICTION OF NO. I.R.S. EMPLOYER NUMBER, INCLUDING AREA CODE,
REGISTRANT AS SPECIFIED INCORPORATION OR OF SHARES IDENTIFICATION OF REGISTRANT'S
IN ITS CHARTER ORGANIZATION OUTSTANDING NO. PRINCIPAL EXECUTIVE OFFICE
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<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
(973) 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
(973) 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
(973) 628-3000
ISP REALTY CORPORATION .................. Delaware 1,000 13-2720081 1361 Alps Road
Wayne, NJ 07470
(973) 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>
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PART I
ITEM 1. BUSINESS
GENERAL
International Specialty Products Inc. ("ISP") is a leading multinational
manufacturer of specialty chemicals, mineral products and filter products.
ISP, incorporated in Delaware in 1991, operates its business exclusively
through 20 domestic subsidiaries, including ISP Chemicals Inc., ISP Technologies
Inc., ISP Van Dyk Inc., ISP Fine Chemicals Inc. and ISP Freetown Fine Chemicals
Inc., 37 international subsidiaries and a joint venture with Huls
Aktiengesellschaft, a German corporation ("Huls AG"), 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 84% 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., ISP Freetown
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 of 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 of 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 of 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
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
specialty chemicals 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 ten main groups of products: vinyl
ether polymers, polyvinyl pyrrolidone polymers, solvents, intermediates,
specialty preservatives, sunscreens, emollients, pearlescent pigments, fine
chemicals and advanced materials.
Vinyl ether polymers are used by the cosmetics, personal care,
pharmaceutical and health-related industries, 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, mousses, conditioners,
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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, electronics
coating and cleaning applications, petroleum extraction and specialty cleaners.
ISP's family of solvents includes, among others, N-methyl-2-pyrrolidone,
tetrahydrofuran, gamma-butyrolactone and 2-pyrrolidone, of which the last two
solvents also 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(R) 115, Germall(R) II,
Germall(R) Plus, Germaben(R) II, Germaben(R) II-E, Suttocide(R) A and
LiquaPar(R) 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(R),
Pearl-Glo(R) and Ceraphyl(R) products are widely recognized for their respective
sunscreen, pigment and emollient properties.
ISP's fine chemicals business 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's fine chemicals
business also provides a custom manufacturing capability serving the
pharmaceutical, biotechnology, agricultural and chemical process industries.
On February 19, 1998, ISP acquired from Polaroid Corporation ("Polaroid")
the assets of Polaroid's fine chemicals facility located in Freetown,
Massachusetts and entered into a long-term supply and license agreement with
Polaroid to produce the imaging chemicals and polymers used by Polaroid in its
instant film business. The Company currently plans to expand the production
capability at this facility to include the manufacture of certain specialty
chemical product lines for the personal care industry and to offer custom
manufacturing capability to the pharmaceutical, biotechnology, agricultural and
chemical process industries.
ISP manufactures a variety of advanced materials, consisting of high-purity
carbonyl iron powders, sold under ISP's trademark Micropowder(R), which are used
in a variety of advanced technology applications for the aerospace and defense,
electronics, powder metallurgy, pharmaceutical and food industries. Using
proprietary technology, ISP manufactures more than 50 different grades of
Micropowder(R) iron, one of which is sold under the trademark Ferronyl(R), for
use as a vitamin supplement. The primary markets for ISP's Micropowder(R) 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 metal
injection molding segment of the powder metallurgy industry. ISP believes it is
the sole domestic manufacturer of carbonyl iron powders. ISP also manufactures a
line of processless, electronically imaged film products, including Rad-Sure(R)
which is a radiation sensitive film strip affixed to blood bags to indicate
whether or not they have been properly irradiated.
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
customers' 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.
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International Operations. ISP markets all of its specialty chemicals
worldwide. ISP conducts its international operations through 37 subsidiaries and
41 sales offices located in 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 66% of its international sales in 1997 in countries
in 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 1997 of ISP's specialty chemicals, excluding sales
by GAF-Huls, were approximately 45% of ISP's total 1997 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.
Raw Materials. Because of the multi-step processes required to manufacture
ISP's specialty chemicals, ISP believes that its raw materials 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 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 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 AG, 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 ISP 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.
Availability of other raw materials, including methanol and methylamine,
remained adequate during 1997. ISP believes that in the event of a supply
interruption it could obtain adequate supplies of such raw materials 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 1997,
crude oil and natural gas supplies remained adequate, while prices generally
demonstrated seasonal variations.
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
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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 62% of ISP's mineral products net sales in 1997. See Item 13,
"Certain Relationships and Related Transactions" and Note 9 to Consolidated
Financial Statements.
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
ISP manufactures and sells filter products, consisting of pressure filter
vessels, filter bags and filter systems. 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 1997 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.
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 second competitor and a new entrant in the market). In
addition to ISP's competition 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 respect to advanced materials, ISP
believes it is the sole domestic manufacturer of carbonyl iron powders and one
of only two manufacturers worldwide.
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.
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.
RESEARCH AND DEVELOPMENT
ISP's worldwide research and development expenditures were $21.9 million,
$25.4 million and $27.3 million in 1995, 1996 and 1997, respectively.
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ISP's research and development activities are conducted 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, Freetown,
Massachusetts and Columbus, Ohio and technical centers in the United Kingdom,
Belgium, 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 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 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 or licenses approximately 342 domestic and 343 foreign patents or
patent applications and owns or licenses approximately 129 domestic and 1,337
foreign trademark registrations or applications related to the business of ISP.
While the Company believes the patent protection covering certain of its
products to be material to those products, 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 each of 1998 and 1999 will be approximately $4.0
million.
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.
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, 1997, the Company employed approximately 2,675 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 1998. 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
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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.
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LOCATION FACILITY PRODUCT LINE
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DOMESTIC
Alabama
Huntsville ....................... Plant* Specialty Chemicals
Kentucky
Calvert City ..................... Plant Specialty Chemicals
Maryland
Hagerstown ....................... Research Center, Design Center, Mineral Products
Sales Office
Massachusetts
Freetown.......................... Plant, Research Center Specialty Chemicals
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
Offices, Research Center
Ohio
Columbus......................... Plant, Research Center, Sales Office Specialty 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
INTERNATIONAL
Belgium
Sint-Niklaas...................... Plant, Sales Office, Research Center, Specialty Chemicals and
Distribution Center Filter Products
Brazil
Sao Paulo ........................ Plant*, Sales Office*, Distribution Center* Specialty Chemicals and
Filter Products
Canada
Mississauga, Ontario ............. Sales Office*, Distribution Center* Specialty Chemicals
Oakville, Ontario ................ Plant* Filter Products
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LOCATION FACILITY PRODUCT LINE
-------- -------- ------------
<S> <C> <C>
Germany
Cologne .......................... Research Center*, Sales Office* Specialty Chemicals
Hamburg .......................... Plant* Filter Products
Great Britain
Guildford ........................ European Headquarters*, Research Center* Specialty Chemicals
Manchester ....................... Sales Office, Distribution Center Specialty Chemicals and
Filter Products
India
Nagpur ........................... Plant Specialty Chemicals
Japan
Tokyo ............................ Sales Office* Specialty Chemicals and
Filter Products
Singapore
Southpoint ....................... Plant*, Sales Office*, Distribution Specialty Chemicals
Center*, Asia-Pacific Headquarters*, and 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 1997, the Company made capital expenditures in the amount of $68.5
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 (including those relating to its closed Linden, New Jersey plant
described below), and certain other environmental compliance expenses, as of
December 31, 1997, is $17.8 million, before reduction for insurance recoveries
reflected on its balance sheet (discussed below) of $7.2 million that relate to
both past expenses and estimated future liabilities ("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 that the
recoveries could be well in excess of the current estimated liability for all
Environmental Claims, although there can be no assurances in this regard. The
Company believes it is entitled to substantially full defense and indemnity
under its insurance policies for most Environmental Claims, although the
Company's insurers have not affirmed a legal obligation under the policies to
provide indemnity for such claims.
On March 8, 1995, GAF commenced litigation on behalf of itself and its
predecessors, successors, subsidiaries and related corporate entities in the
United States District Court for the District of New Jersey seeking amounts
substantially in excess of the estimated recoveries. The action was dismissed by
the court in December 1997 for lack of federal jurisdiction, and one defendant
insurer has filed a notice of appeal. On June 16, 1997, GAF filed a similar
action against the insurers in the Superior Court of New Jersey, Somerset
County, which action is pending. 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.
This Consent Order does not address any potential natural resource damage
claims. 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.
See Item 1, "Environmental Services."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age, position and other
information with respect to the executive officers of ISP and the executive
officers and directors of ISP Chemicals and ISP Technologies.
PRESENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AND POSITION HELD(1) AGE FIVE-YEAR EMPLOYMENT HISTORY
------------------------- --- ----------------------------
Samuel J. Heyman.................... 59 Mr. Heyman has been a director and
Chairman and Chief Executive Chairman and Chief Executive
Officer, International Officer of ISP since its
Specialty Products Inc. formation and Chief 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..................... 55 Dr. Heinze has been President,
President and Chief Operating Chief Operating Officer and a
Officer, International director of ISP, President and
Specialty Products Inc. Chief Operating Officer of ISP
Chemicals and Chief Operating
Officer of ISP Technologies
since November 1996. He was
Senior Vice President, Chemicals
of PPG Industries, Inc., a glass
products, coatings and resins,
and chemical manufacturer, 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, a
diversified chemical
manufacturing company.
8
<PAGE>
PRESENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AND POSITION HELD(1) AGE FIVE-YEAR EMPLOYMENT HISTORY
------------------------- --- ----------------------------
Carl R. Eckardt..................... 67 Mr. Eckardt was President and Chief
Executive Vice President- Operating Officer of ISP and ISP
Corporate Development Chemicals and Chief Operating
Officer of ISP Technologies from
January 1994 to November 1996.
He was Executive Vice President
of ISP from its formation to
January 1994 and of ISP
Chemicals and ISP Technologies
from December 1991 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 Chemicals Corporation 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..................... 47 Mr. Rogers has been Executive Vice
Executive Vice President-Finance of ISP, ISP
President-Finance Chemicals and ISP Technologies,
Executive Vice President and
Chief Financial Officer of ISP
Holdings, G-I Holdings, GAF and
certain of its subsidiaries and
Executive Vice President of BMCA
and USI since December 1996. He
was Senior Vice President and
Chief Financial Officer of ISP
Holdings, 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 of
USI since October 1995 and was
Senior Vice President of USI
from October 1995 to December
1996. 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.
Andrew G. Mueller................... 55 Mr. Mueller has been Executive Vice
Executive Vice President-Operations of ISP, ISP
President-Operations Chemicals and ISP Technologies
since May 1997. He was employed
by BASF Corporation as Group
Vice President, Colorants &
Textile/ Leather Chemicals from
December 1995 to April 1997 and
as Vice President, Fiber
Intermediates from April 1989 to
November 1995.
Richard A. Weinberg................. 38 Mr. Weinberg has been Senior Vice
Senior Vice President and President and General Counsel of
General Counsel ISP, ISP Technologies, ISP
Chemicals, GAF, G-I Holdings,
BMCA and certain of their
respective 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.
9
<PAGE>
PRESENT PRINCIPAL
OCCUPATION OR EMPLOYMENT AND
NAME AND POSITION HELD(1) AGE FIVE-YEAR EMPLOYMENT HISTORY
------------------------- --- ----------------------------
Randall R. Lay...................... 43 Mr. Lay has been Vice President and
Vice President and Chief Chief Financial Officer of ISP,
Financial ISP Chemicals and ISP
Technologies since April 1995.
From August Officer 1993 to
April 1995, he 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.
- --------
(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 March 4, 1998, there were 291 holders of
record of ISP's outstanding common stock.
<TABLE>
<CAPTION>
1997 BY QUARTER 1996 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 3/4 $14 3/8 $15 1/4 $16 1/2 $13 1/4 $12 5/8 $11 3/8 $12 3/4
Low............................... 11 3/4 11 1/2 13 1/2 13 7/8 10 1/8 10 3/4 9 5/8 9
</TABLE>
ISP announced in the second quarter of 1995 that its Board of Directors had
eliminated the 21/2 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 Item 7, "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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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-30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of ISP to be contained in the
Proxy Statement under the heading "Election of Directors" is incorporated by
reference herein. For information relating to the executive officers of ISP, ISP
Chemicals and ISP Technologies, see "Executive Officers of the Registrant" in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be contained in the Proxy Statement under the headings
"Compensation of Executive Officers of the Company" and "Election of Directors"
is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information to be contained in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be contained in the Proxy Statement under the captions
"Election of Directors" and "Certain Transactions" is incorporated by reference
herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a)(1) Financial Statements: See Index on page F-1.
(a)(2) Financial Statement Schedules: See Index on page F-1.
(a)(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
11
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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 --Amendment No. 7, dated as of December 31, 1997, to the Management
Agreement (incorporated by reference to Exhibit 10.10 to BMCA's
Registration Statement on Form S-4 (Registration No. 333-41531)
(the "BMCA Registration Statement")).
10.9 --Amendment No. 8, dated as of January 1, 1998, to the Management
Agreement (incorporated by reference to Exhibit 10.11 to the BMCA
Registration Statement).
10.10 --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).
10.11 --Non-Qualified Retirement Plan Letter Agreement (incorporated by
reference to Exhibit 10.11 to the Common Stock Registration
Statement).*
10.12 --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)).*
10.13 --Amendment No. 1 to the Incentive Plan (incorporated by reference
to Exhibit 10.11 to ISP's Annual Report on Form 10-K for the year
ended December 31, 1996 (the "1996 Annual Report")).*
10.14 --Amendment No. 2 to the Incentive Plan (incorporated by reference
to Exhibit 99 to ISP's Registration Statement on Form S-8
(Registration No. 333-27505)).
10.15 --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)).*
10.16 --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).*
10.17 --Form of Maintenance Agreement between ISP and ISP Chemicals
(incorporated by reference to Exhibit 10.18 to the 9% Note
Registration Statement).
10.18 --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).
10.19 --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).
10.20 --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).
10.21 --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).
10.22 --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).
12
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.23 --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).
10.24 --Form of Option Agreement relating to Cumulative Redeemable
Preferred Stock of ISP Holdings (incorporated by reference to
Exhibit 10.21 to the 1996 Annual Report).*
10.25 --Form of ISP Holdings Stock Appreciation Right Agreement
(incorporated by reference to Exhibit 10.22 of the 1996 Annual
Report).*
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 1997, which is submitted
electronically to the Securities and Exchange Commission for
information only.
- --------
* 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 1997.
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 27, 1998
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 below on March 27, 1998, by the following persons on
behalf of the Registrant and 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,
- ---------------------------------------- Corporate Development;
CARL R. ECKARDT Director
/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 27, 1998
ISP CHEMICALS INC.
ISP TECHNOLOGIES INC.
ISP FILTERS INC.
ISP GLOBAL TECHNOLOGIES INC.
ISP INTERNATIONAL CORP.
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 below on March 27, 1998, by the following persons on
behalf of the Registrant and 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
RICHARD A. WEINBERG Secretary; 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 27, 1998
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 below on March 27, 1998, by the following persons on
behalf of the Registrant and 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
RICHARD A. WEINBERG Secretary; 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 27, 1998
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 below on March 27, 1998, by the following persons on
behalf of the Registrant and 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; Director
PETER R. HEINZE
/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>
INTERNATIONAL SPECIALTY PRODUCTS INC.
FORM 10-K
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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, 1997.......................... F-8
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................... F-9
Consolidated Statements of Cash Flows for the three years ended December 31, 1997...................... F-10
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1997............ F-12
Notes to Consolidated Financial Statements............................................................. F-13
Supplementary Data (Unaudited):
Quarterly Financial Data (Unaudited)................................................................. F-30
SCHEDULES
Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts........................................................ S-1
Supplementary Financial Information--Guarantor Financial Data......................................... S-2
</TABLE>
F-1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 Compared With 1996
International Specialty Products Inc. (the "Company") recorded net income
in 1997 of $92.6 million (96 cents diluted earnings per share) compared with net
income of $80.7 million (82 cents diluted earnings per share) in 1996. The 15%
improvement in net income was attributable to higher operating income (up $7.3
million), an $8.5 million increase in other income, and a $2.6 million reduction
in interest expense.
Sales for 1997 were $749.2 million compared with $716.5 million for 1996.
The sales growth was attributable to increased sales of specialty chemicals (up
$35.2 million), primarily reflecting increased sales volumes ($66.7 million),
partially offset by the unfavorable effect ($22.5 million) of the stronger U.S.
dollar relative to other currencies in certain areas of the world. Sales for the
mineral products business decreased by $2.5 million due primarily to lower sales
volumes. The sales growth in 1997 reflected higher sales in the United States,
the Asia-Pacific region and the Western Hemisphere, partially offset by lower
sales in Europe due primarily to the unfavorable effect of the stronger U.S.
dollar.
Operating income for 1997 increased by 5% to $143.3 million compared with
$136.0 million for 1996. The increase was due to higher operating income for
specialty chemicals (up $3.8 million) and filter products (up $3.4 million). The
higher specialty chemicals operating income reflected the higher sales levels,
partially offset by lower gross margins (down 0.5 percentage point) due to
unfavorable pricing and the unfavorable effect of the stronger U.S. dollar, and
by higher operating expenses which included a 7% increase in research and
development spending. The improvement in filter products results reflected
higher sales levels and improved gross margins (up 6.2 percentage points) due
mainly to improved pricing. Despite a drop in sales levels, operating income for
the mineral products business increased by $0.5 million due to higher gross
margins (up 1.4 percentage points) as a result of improved pricing, and lower
operating expenses.
Selling, general and administrative expenses in 1997 increased by $7.7
million (5%) compared with 1996 and, as a percent of sales, increased slightly
from 20.7% in 1996 to 20.8% in 1997. The increase in such expenses included a
$1.9 million (7.5%) increase in research and development spending.
Of the $7.3 million increase in operating income in 1997, domestic
operating income increased by $15.8 million (24.5%), due to increased sales
volumes and improved margins. Operating income for Europe decreased by $8.7
million (16%), primarily reflecting the effect of the stronger U.S. dollar,
while in the Asia-Pacific region, operating income decreased by $1.2 million, as
higher sales levels were offset by lower gross margins due to unfavorable
pricing. Operating income from other foreign operations increased by $1.4
million.
Interest expense for 1997 was $26.1 million, a decrease of $2.6 million
(9%) from $28.7 million in 1996. The decrease reflected lower average borrowings
(average borrowings of $393.9 million in 1997 versus $405.0 million in 1996),
partially offset by slightly higher interest rates (average borrowing rate of
7.1% in 1997 versus 6.9% in 1996).
Other income, 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 $21.6 million in 1997 compared with $13.1 million in 1996. The increase
in 1997 was due principally to higher net investment income (up $9.1 million).
1996 Compared With 1995
In 1996, the Company recorded net income of $80.7 million (82 cents diluted
earnings per share) compared with net income of $67.4 million (68 cents diluted
earnings 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.
F-2
<PAGE>
Sales for 1996 were $716.5 million compared with $689.0 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 $0.5 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 $136.0 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 materials 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 $405.0 million in 1996 versus $442.3 million
in 1995) and lower interest rates (average borrowing rate of 6.9% in 1996 versus
8.3% in 1995).
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.
LIQUIDITY AND FINANCIAL CONDITION
During 1997, the Company generated cash from operations of $80.3 million,
reinvested $68.5 million for capital programs and generated $26.2 million from
net sales of available-for-sale and held-to-maturity securities, for a net cash
inflow of $38.0 million before financing activities. Cash from operations in
1997 reflected a $58.6 million cash outlay for net purchases of trading
securities, $6.3 million of dividends received from the GAF-Huls Chemie GmbH
joint venture, and a $7.5 million cash refund from G-I Holdings Inc. ("G-I
Holdings") related to a previous tax sharing agreement between the Company and
G-I Holdings (see Note 2 to Consolidated Financial Statements). Cash invested in
additional working capital totaled $21.1 million during 1997. This principally
reflected an $11.3 million increase in inventories and a $12.5 million increase
in accounts receivable, other, due to a $6.2 million increase in the receivable
from the purchaser of the Company's trade receivables and a $5.8 million
receivable for investments sold but not settled, partially offset by $5.4
million higher payables and accrued liabilities.
Net cash used in financing activities in 1997 totaled $36.0 million,
primarily reflecting a $35.4 million reduction in borrowings under the Company's
bank revolving credit facility and an $8.6 million reduction in borrowings from
an affiliate, partially offset by a $15.9 million increase in short-term
borrowings. Cash used in financing activities also reflected $10.2 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, 1997,
4,394,900 shares of the Company's common stock have been repurchased pursuant to
the program.
F-3
<PAGE>
As a result of the foregoing factors, cash and cash equivalents increased
by $2.0 million during 1997 to $19.7 million (excluding $169.5 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, 1997, loans in the
amount of $35.0 million and letters of credit in the amount of $7.9 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, 1997.
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 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 84% of the Company's common
stock. As of December 31, 1997, 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 (the "9%
Notes") 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, 1997, the Company's scheduled repayments of long-term
debt for the twelve months ending December 31, 1998 aggregated $0.7 million. In
1999, scheduled repayments of long-term debt include $200 million relating to
the 9% Notes and a $38.1 million mortgage obligation.
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 $15.5 and $7.0 million in 1997 and 1996,
respectively, and a loss of $7.4 million in 1995. At December 31, 1997, the
equivalent U.S. dollar fair value of outstanding forward foreign exchange
contracts was $151.6 million, and the amount of unrealized gains and losses on
such instruments was immaterial. The equivalent U.S. dollar fair value of
foreign exchange contracts outstanding as of December 31, 1997 as a hedge of
non-local currency loans was $24.9 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, 1997, the total notional amount of interest
rate swaps outstanding was $300 million. During 1997, the Company entered into
five-year interest rate swap agreements with a total notional amount of $100
million in order to convert $100 million of its floating interest rate debt to
fixed rates. By utilizing interest rate swap agreements, the Company reduced its
interest expense by $2.1, $2.8 and $1.8 million in 1997, 1996 and 1995,
respectively. See Note 6 to Consolidated Financial Statements.
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 the Company 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'
F-4
<PAGE>
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% 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 announced in December 1997 that it had entered into an
agreement to purchase Polaroid Corporation's Freetown, Massachusetts fine
chemicals facility. The transaction was completed in February 1998. As part of
the transaction, the Company entered into a long-term supply and license
agreement with Polaroid for the imaging chemicals and polymers manufactured at
the facility and used by Polaroid in its instant film business.
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 during 1998.
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 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 is in the process of implementing a new global information
system for capturing, processing and analyzing data relating to manufacturing,
customer service, sales order entry, inventory control and financial systems.
The Company is addressing its "Year 2000" compliance issues in conjunction with
this initiative. The Company does not believe that the costs of addressing or
the impact of the Company's Year 2000 compliance issues will have a material
adverse effect on the operations, liquidity or capital resources of the Company.
At this time, the Company has no information concerning the impact of Year 2000
issues on its suppliers and customers.
The Company, together with other companies, is a party to a variety of
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
information 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. Forward-looking
statements contained herein are not historical facts, but only predictions. No
assurances can be given that projected results or events will be achieved.
F-5
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales .................................. $749,208 $716,481 $689,002 $600,047 $548,252
Gross profit ............................... 312,515 297,560 274,330 232,301 218,735
Operating income ........................... 143,297 136,024 127,096 99,245 65,091
Interest expense ........................... 26,126 28,729 33,091 28,676 24,500
Income before income taxes ................. 144,638 125,967 106,102 72,484 49,823
Net income ................................. 92,649 80,663 67,375 44,515 29,558
Earnings per common share:
Basic .................................... $ .96 $ .83 $ .68 $ .45 $ .30
Diluted .................................. $ .96 $ .82 $ .68 $ .45 $ .30
Dividends per common share ................. $ -- $ -- $ -- $ .05 $ .05
Other Data:
Gross profit margin ........................ 41.7% 41.5% 39.8% 38.7% 39.9%
Operating margin ........................... 19.1% 19.0% 18.4% 16.5% 11.9%
Depreciation ............................... $ 41,553 $ 38,279 $ 35,960 $ 32,753 $ 28,737
Goodwill amortization ...................... 13,176 13,200 13,223 13,400 13,856
Capital expenditures and
acquisitions ............................. 68,546 54,587 38,934 31,098 62,858
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total working capital ...................... $266,967 $219,702 $142,550 $121,803 $ 78,263
Total assets ............................... 1,395,584 1,316,914 1,312,938 1,251,304 1,243,315
Long-term debt ............................. 328,639 372,870 347,491 377,106 367,722
Stockholders' equity ....................... 784,230 701,493 643,244 582,368 534,012
</TABLE>
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 84% owned
subsidiary of ISP Holdings Inc.) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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-29 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, 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 23, 1998
F-7
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales ............................... $ 749,208 $ 716,481 $ 689,002
--------- --------- ---------
Costs and expenses:
Cost of products sold ................. 436,693 418,921 414,672
Selling, general and administrative ... 156,042 148,336 134,011
Goodwill amortization ................. 13,176 13,200 13,223
--------- --------- ---------
Total costs and expenses .......... 605,911 580,457 561,906
--------- --------- ---------
Operating income ........................ 143,297 136,024 127,096
Interest expense ........................ (26,126) (28,729) (33,091)
Equity in earnings of joint venture ..... 5,909 5,604 5,413
Other income, net ....................... 21,558 13,068 6,684
--------- --------- ---------
Income before income taxes .............. 144,638 125,967 106,102
Income taxes ............................ (51,989) (45,304) (38,727)
--------- --------- ---------
Net income .............................. $ 92,649 $ 80,663 $ 67,375
========= ========= =========
Earnings per common share:
Basic ................................. $ .96 $ .83 $ .68
========= ========= =========
Diluted ............................... $ .96 $ .82 $ .68
========= ========= =========
Weighted average number of common and
common equivalent shares outstanding:
Basic ............................... 96,061 97,197 98,613
========= ========= =========
Diluted ............................. 97,010 97,813 98,819
========= ========= =========
</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,
--------------------------
1997 1996
----------- -----------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................... $ 19,730 $ 17,753
Investments in trading securities ........................... 53,489 1,273
Investments in available-for-sale securities ................ 107,949 114,323
Investments in held-to-maturity securities .................. 311 1,977
Other short-term investments ................................ 7,795 6,149
Accounts receivable, trade, less reserve of $2,724 and $2,840 67,077 66,875
Accounts receivable, other .................................. 25,288 12,835
Receivable from related parties, net ........................ 264 5,518
Inventories ................................................. 119,910 108,586
Other current assets ........................................ 16,751 13,239
----------- -----------
Total Current Assets .................................... 418,564 348,528
Property, plant and equipment, net ............................ 513,206 489,474
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $118,203 and $105,025 .... 404,082 417,258
Other assets .................................................. 59,732 61,654
----------- -----------
Total Assets .................................................. $ 1,395,584 $ 1,316,914
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ............................................. $ 38,172 $ 22,275
Current maturities of long-term debt ........................ 684 610
Accounts payable ............................................ 46,252 42,939
Accrued liabilities ......................................... 60,434 57,134
Income taxes ................................................ 6,055 5,868
----------- -----------
Total Current Liabilities ............................... 151,597 128,826
----------- -----------
Long-term debt less current maturities ........................ 274,642 310,294
----------- -----------
Long-term notes payable to related party ...................... 53,997 62,576
----------- -----------
Deferred income taxes ......................................... 70,253 52,665
----------- -----------
Other liabilities ............................................. 60,865 61,060
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized: no shares issued ............ -- --
Common stock, $.01 par value per share;
300,000,000 shares authorized: 99,888,646 shares issued ... 999 999
Additional paid-in capital .................................. 441,484 441,203
Treasury stock, at cost--3,945,352 and 3,451,522 shares ..... (38,229) (30,874)
Retained earnings ........................................... 372,946 280,297
Cumulative translation adjustment and other ................. 7,030 9,868
----------- -----------
Total Stockholders' Equity .............................. 784,230 701,493
----------- -----------
Total Liabilities and Stockholders' Equity .................... $ 1,395,584 $ 1,316,914
=========== ===========
</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,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents, beginning of year ............. $ 17,753 $ 14,080 $ 20,127
--------- --------- ---------
Cash provided by operating activities:
Net income ............................................. 92,649 80,663 67,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................... 41,553 38,279 35,960
Goodwill amortization .............................. 13,176 13,200 13,223
Deferred income taxes .............................. 14,080 (2,494) (18,809)
Increase in working capital items ...................... (21,140) (7,650) (5,105)
Purchases of trading securities ........................ (148,190) (42,002) (66,483)
Proceeds from sales of trading securities .............. 89,542 47,677 104,058
Decrease in other assets ............................... 1,804 780 56
Increase (decrease) in other liabilities ............... 4,518 (31) (1,343)
Change in net receivable from/payable to related parties 5,254 (14,947) 6,093
Change in cumulative translation adjustment ............ (7,483) (8,376) 6,918
Other, net ............................................. (5,449) (813) 1,868
--------- --------- ---------
Net cash provided by operating activities ................ 80,314 104,286 143,811
--------- --------- ---------
Cash used in investing activities:
Capital expenditures and acquisitions .................. (68,546) (54,587) (38,934)
Purchases of available-for-sale securities ............. (214,590) (287,361) (364,012)
Purchases of held-to-maturity securities ............... (1,623) (14,331) (5,592)
Purchases of other short-term investments .............. -- (1,264) (2,188)
Proceeds from sales of available-for-sale securities ... 239,177 291,408 257,197
Proceeds from held-to-maturity securities .............. 3,289 16,972 974
--------- --------- ---------
Net cash used in investing activities .................... (42,293) (49,163) (152,555)
--------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable .............. -- 2,000 3,768
Increase (decrease) in short-term debt ................. 15,897 (14,256) 36,199
Increase (decrease) in borrowings under
revolving credit facility ............................ (35,425) 29,625 (4,200)
Other increase (decrease) in long-term debt, net ....... (153) 543 (1,435)
Decrease in loans from related parties ................. (8,579) (55,258) (15,216)
Repurchases of common stock ............................ (10,240) (15,134) (16,614)
Other, net ............................................. 2,456 1,030 195
--------- --------- ---------
Net cash provided by (used in) financing activities ...... (36,044) (51,450) 2,697
--------- --------- ---------
Net change in cash and cash equivalents .................. 1,977 3,673 (6,047)
--------- --------- ---------
Cash and cash equivalents, end of year ................... $ 19,730 $ 17,753 $ 14,080
========= ========= =========
</TABLE>
F-10
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Effect on cash from (increase) decrease in working capital items*:
Accounts receivable ............................................ $(12,655) $ (8,884) $(10,892)
Inventories .................................................... (11,324) (575) 1,029
Other current assets ........................................... (2,525) (967) 2,105
Accounts payable ............................................... 4,189 1,186 (5,895)
Accrued liabilities ............................................ 1,104 1,738 8,389
Income taxes ................................................... 71 (148) 159
-------- -------- --------
Net effect on cash from increase in
working capital items .................................... $(21,140) $ (7,650) $ (5,105)
======== ======== ========
Cash paid during the period for:
Interest (net of amount capitalized) ........................... $ 28,938 $ 33,015 $ 36,776
Income taxes (including taxes paid pursuant
to the Tax Sharing Agreement) ................................ 22,973 61,701 44,489
</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 STOCKHOLDERS' EQUITY
<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, 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 gains 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) -- --
Reclassification to additional paid-in capital
of the excess of purchase price over the
adjusted historical cost of predecessor
company shares .......................................... (63,483) -- -- --
Change in unrealized gains on available-for-sale
securities, net of $48 income tax effect ................ -- -- (820) --
Issuances under stock option plan--
112,823 shares .......................................... -- 957 -- --
Issuances 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 ........................................... $ 442,202 $ (30,874) $ 9,868 $ 280,297
Net income ................................................ -- -- -- 92,649
Translation adjustment .................................... -- -- (7,483) --
Repurchases of common stock-800,000 shares ................ -- (10,240) -- --
Change in unrealized gains on available-for-sale
securities, net of $2,635 income tax effect ............. -- -- 5,338 --
Issuances under stock option plan--
305,670 shares .......................................... -- 2,880 -- --
Issuances of stock (500 shares) and options
as incentives ........................................... 696 5 -- --
Excess of cost of treasury stock issued
over proceeds ........................................... (415) -- -- --
Adjustment of unfunded pension liability .................. -- -- (693) --
--------- --------- --------- ---------
December 31, 1997 ........................................... $ 442,483 $ (38,229) $ 7,030 $ 372,946
========= ========= ========= =========
</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 and filter
products. See Notes 10 and 11 for financial information concerning the Company's
industry segments and foreign and domestic operations. Approximately 84% 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 in conformity with generally
accepted accounting principles 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
$34.3 and $38.2 million as of December 31, 1997 and 1996, respectively, and is
included in "Other assets". Dividends received by the Company from GAF-Huls
totaled $6.3, $5.7 and $0.3 million for 1997, 1996 and 1995, 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 and losses, net of income tax effect,
are included in a separate component of stockholders' equity, "Cumulative
translation adjustment and other", and amounted to $6.1 and $0.7 million as of
December 31, 1997 and 1996, respectively. Investments classified as
"held-to-maturity" securities are carried at amortized cost in the Consolidated
Balance Sheets.
"Other income, net", includes $31.9, $20.5 and $16.5 million of net
realized and unrealized gains on securities in 1997, 1996 and 1995,
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 were 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, 1997 and 1996, the market value of the Company's equity
securities held long was $160.2 and $115.1 million, respectively, and the
Company had $22.8 and $7.9 million, respectively, of short positions in common
stocks, based on market value. As of December 31, 1997 and 1996, the market
value of the Company's held-to-maturity securities was $0.3 and $2.0 million,
respectively. The market values referred to above are based
F-13
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
"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, net". Liquidation of partnership interests generally require a 30
to 45 day notice period.
Cash and cash equivalents include cash on deposit and debt securities
purchased with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for a substantial portion of the
Company's domestic inventories. All other inventories are determined principally
based on the FIFO (first-in, first-out) method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line method
based on the estimated economic lives of the assets. The Company uses an
economic life of 10-20 years for land improvements, 40 years for buildings, and
3-20 years for machinery and equipment, which includes furniture and fixtures.
Certain interest charges are capitalized during the period of construction as
part of the cost of property, plant and equipment.
Foreign Exchange Contracts
The Company enters into forward foreign exchange instruments 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, 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, 1997 and 1996, the equivalent dollar fair value of
outstanding forward foreign exchange contracts was $151.6 and $174.5 million,
respectively, and the amount of unrealized 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, 1997 as a hedge of non-local currency loans was $24.9 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 $1.7 and $9.1 million as of December 31, 1997 and 1996,
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, 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. Such amount has been reclassified to be reflected as a reduction
of additional paid-in capital.
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 $27.3, $25.4 and $21.9 million for 1997, 1996 and 1995,
respectively.
Earnings per Common Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", which requires the Company to present Basic Earnings per Share and
Diluted Earnings per Share. Earnings per Share data for the years 1996 and 1995
have been restated to conform with the provisions of SFAS No. 128. Diluted
Earnings per Share give effect to all dilutive potential common shares that were
outstanding during the period under the Company's 1991 Incentive Plan for Key
Employees and Directors (see Note 8).
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, 1997, is $17.8 million,
before reduction for
F-15
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
insurance recoveries reflected on its balance sheet of $7.2 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.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting comprehensive income and its
components in annual and interim financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods is required. The adoption of SFAS No.
130 will have no impact on the Company's consolidated results of operations,
financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
companies to report information about operating segments in annual financial
statements, based on the approach that management utilizes to organize the
segments within the Company for management reporting and decision making. In
addition, SFAS No. 131 requires that companies report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The adoption of SFAS No. 131 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
NOTE 2. INCOME TAXES
Income tax (provision) benefit consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS)
Federal:
Current ............... $(30,299) $(38,968) $(48,955)
Deferred .............. (13,342) 2,071 17,794
-------- -------- --------
Total Federal ........... (43,641) (36,897) (31,161)
-------- -------- --------
Foreign--current ........ (5,394) (6,648) (6,432)
-------- -------- --------
State and local:
Current ............... (2,216) (2,182) (2,149)
Deferred .............. (738) 423 1,015
-------- -------- --------
Total state and local ... (2,954) (1,759) (1,134)
-------- -------- --------
Income tax provision .... $(51,989) $(45,304) $(38,727)
======== ======== ========
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,
--------------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Statutory tax provision ........................... $(50,545) $(44,045) $(37,136)
Impact of:
Foreign operations .............................. 2,541 1,848 3,633
State and local taxes, net of Federal benefits .. (1,920) (1,143) (737)
Nondeductible goodwill amortization ............. (4,611) (4,620) (4,628)
Percentage depletion ............................ 1,680 1,668 1,824
Other, net ...................................... 866 988 (1,683)
-------- -------- --------
Income tax provision .............................. $(51,989) $(45,304) $(38,727)
======== ======== ========
</TABLE>
F-16
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INCOME TAXES (CONTINUED)
The compon ents of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
(THOUSANDS)
Deferred tax liabilities related to:
<S> <C> <C>
Property, plant and equipment ........................ $ 93,601 $ 90,103
Other ................................................ 803 1,948
-------- --------
Total deferred tax liabilities ....................... 92,798 92,051
-------- --------
Deferred tax assets related to:
Expenses not yet deducted for tax purposes ........... (12,559) (16,798)
Deferred income ...................................... (11,092) (22,921)
Other ................................................ (5,748) (5,534)
-------- --------
Total deferred tax assets ............................ (29,399) (45,253)
-------- --------
Net deferred tax liability ............................. 63,399 46,798
Deferred tax assets reclassified to other current assets 6,854 5,867
-------- --------
Noncurrent deferred tax liability ...................... $ 70,253 $ 52,665
======== ========
</TABLE>
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 Internal Revenue Service (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
F-17
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INCOME TAXES (CONTINUED)
tax liabilities of the Company for periods subsequent to the Separation
Transactions. 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.
On September 15, 1997, GAF received a notice from the IRS of a deficiency
in the amount of $84.4 million (after taking into account the use of net
operating losses and foreign tax credits otherwise available for use in later
years) in connection with the formation in 1990 of Rhone-Poulenc Surfactants and
Specialties, L.P. (the "surfactants partnership"), a partnership in which a
subsidiary of GAF, GAF Fiberglass Corporation ("GFC"), holds an interest. The
claim of the IRS for interest and penalties, after taking into account the
effect on the use of net operating losses and foreign tax credits, could result
in GFC incurring liabilities significantly in excess of the deferred tax
liability of $131.4 million that GAF recorded in 1990 in connection with this
matter. GAF has advised the Company that it believes that GFC will prevail in
this matter, although there can be no assurance in this regard. The Company
believes that the ultimate disposition of this matter will not have a material
adverse effect on its financial position or results of operations. GAF, G-I
Holdings and certain subsidiaries of GAF have agreed to jointly and severally
indemnify the Company against any tax liability associated with the surfactants
partnership, which the Company would be severally liable for, together with GAF
and several subsidiaries of GAF, should GFC be unable to satisfy such liability.
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. The agreement under which the Company sells its domestic trade accounts
receivable has been renewed each year for one-year periods on substantially the
same terms and conditions, and the maximum purchase amount has been increased
and provides for up to $29 million in cash as of December 31, 1997. In January
1998, the maximum purchase amount was increased to $33 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, net" and amounted to
$1.8, $1.6 and $1.7 million in 1997, 1996 and 1995, respectively.
NOTE 4. INVENTORIES
At December 31, 1997 and 1996, $52.0 and $49.2 million, respectively, of
domestic inventories were valued using the LIFO method. Inventories comprise the
following:
DECEMBER 31,
---------------------------
1997 1996
--------- ---------
(THOUSANDS)
Finished goods ................... $ 84,912 $ 68,436
Work in process .................. 20,088 24,261
Raw materials and supplies ....... 18,408 17,814
--------- ---------
Total .......................... 123,408 110,511
Less LIFO reserve ................ (3,498) (1,925)
--------- ---------
Inventories ...................... $ 119,910 $ 108,586
========= =========
F-18
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprises the following:
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
(THOUSANDS)
Land and land improvements ........... $ 72,710 $ 71,653
Buildings and building equipment ..... 87,574 85,693
Machinery and equipment .............. 503,206 475,917
Construction in progress ............. 65,651 45,341
--------- ---------
Total .............................. 729,141 678,604
Less accumulated depreciation ........ (215,935) (189,130)
--------- ---------
Property, plant and equipment, net ... $ 513,206 $ 489,474
========= =========
See Note 12 for information regarding capital leases.
NOTE 6. LONG-TERM DEBT
Long-term debt comprises the following:
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
(THOUSANDS)
9% Senior Notes due 1999 ................. $ 200,000 $ 200,000
Borrowings under revolving credit facility 35,000 70,425
Obligation on mortgaged property, due 1999 38,125 38,125
Obligations under capital leases (Note 12) 1,939 2,068
Other .................................... 262 286
--------- ---------
Total long-term debt ................... 275,326 310,904
Less current maturities .................. (684) (610)
--------- ---------
Long-term debt less current maturities ... $ 274,642 $ 310,294
========= =========
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. During 1997, the Company entered into five-year swaps
with banks in the aggregate notional principal amount of $100 million in order
to fix a portion of its interest expense and reduce its exposure to floating
interest rates. These swaps require the Company to pay a fixed rate and receive
LIBOR for a period of five years. Based on the fair value of the swaps at
December 31, 1997 and 1996, the Company would have incurred losses of $3.3 and
$4.8 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 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.
Borrowings under the Credit Agreement bear interest at a floating rate (6.15% on
December 31, 1997) based on the
F-19
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
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, 1997, letters of credit in the amount of $7.9 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, 1997.
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 93/4% Senior Notes due 2002. As of December 31, 1997, 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, 1997, under
the most restrictive of such limitations, the Company could have paid dividends
in the aggregate amount of $108.8 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 transactions, and
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, 1997 and 1996 was $205.5 and $207.8
million, respectively.
The aggregate maturities of long-term debt as of December 31, 1997 for the
next five years are as follows:
(THOUSANDS)
---------
1998......................................... $ 684
1999......................................... 238,563
2000......................................... 414
2001......................................... 39,343
2002......................................... 287
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 $35.0
million of borrowings outstanding under the Credit Agreement as of December 31,
1997, based on the expiration of the Credit Agreement in July 2001, and $4.0
million of borrowings from ISP Holdings pursuant to a note agreement maturing in
July 2001 (see Note 9).
At December 31, 1997, the Company's foreign subsidiaries had total
available short-term lines of credit aggregating $29.0 million, of which $14.8
million were unused, and the Company also had domestic bank lines of credit
totaling $15.0 million, of which $13.7 million were unused. The weighted average
interest rate on the Company's short-term borrowings as of December 31, 1997 and
1996 was 5.7% and 4.6%, respectively.
F-20
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (any portion of
which can be contributed, at the participants' option, 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 $7.0, $6.4 and $6.3 million for 1997, 1996 and
1995, 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.
The Company's net periodic pension cost (income) for the Hourly Retirement
Plan included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Service cost ................................ $ 284 $ 315 $ 287
Interest cost ............................... 1,481 1,439 1,349
Actual income on plan assets ................ (2,152) (1,733) (976)
Net deferral and amortization of unrecognized
prior service cost ........................ 174 174 275
------- ------- -------
Net periodic pension cost (income) .......... $ (213) $ 195 $ 935
======= ======= =======
</TABLE>
The following table sets forth the funded status of the Hourly Retirement
Plan:
DECEMBER 31,
---------------------
1997 1996
-------- --------
(THOUSANDS)
Accumulated benefit obligation:
Vested ............................................. $ 18,338 $ 16,914
Nonvested .......................................... 3,380 3,117
-------- --------
Total accumulated benefit obligation ................. $ 21,718 $ 20,031
======== ========
Projected benefit obligation ......................... $ 21,718 $ 20,031
Fair value of plan assets, primarily listed stocks and
U.S. Government securities ......................... (21,426) (19,076)
-------- --------
Projected benefit obligation in excess of plan assets 292 955
Unrecognized prior service cost ...................... (1,409) (1,202)
Unrecognized net loss ................................ (693) --
-------- --------
Prepaid pension cost ................................. $ (1,810) $ (247)
======== ========
At December 31, 1997, the difference between the "Projected benefit
obligation in excess of plan assets" and the "Prepaid pension cost", in the
amount of $2,102,000, has been recorded by the Company as an intangible asset in
the amount of $1,409,000 and a reduction of stockholders' equity in the amount
of $693,000. The foregoing amounts 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.
F-21
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BENEFIT PLANS (CONTINUED)
In determining the projected benefit obligation, the weighted average
assumed discount rate was 7.25% and 7.75% for 1997 and 1996, respectively. The
expected long-term rate of return on assets, used in determining net periodic
pension cost (income), was 11% for 1997 and 1996.
The Company also provides a nonqualified defined benefit retirement plan
for certain key employees. Expense accrued for this plan was $0.6, $0.6 and $1.4
million for 1997, 1996 and 1995, 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.
The following table shows the components of the accrued postretirement
health care cost obligation as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees, dependents and beneficiaries eligible for benefits $ 8,465 $ 8,141
Active employees fully eligible for benefits ............... 1,738 1,941
Active employees not fully eligible for benefits ........... 121 123
------- -------
Total accumulated postretirement benefit obligation .......... 10,324 10,205
Fair value of plan assets .................................... -- --
Unrecognized prior service cost and unrecognized net losses .. 180 573
------- -------
Accrued postretirement benefit obligation .................... $10,504 $10,778
======= =======
</TABLE>
The net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
----- ----- -----
(THOUSANDS)
<S> <C> <C> <C>
Service cost .................................. $ 4 $ 4 $ 3
Interest cost ................................. 752 805 884
Amortization of unrecognized prior service cost (179) (39) (145)
----- ----- -----
Net periodic postretirement benefit cost ...... $ 577 $ 770 $ 742
===== ===== =====
</TABLE>
For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. Retirees as of December 31,
1997 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 12% and 6% annual rate of increase in the Company's per
capita cost of providing postretirement medical benefits was assumed for 1998
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 assumed discount rate used
in determining the accumulated postretirement benefit obligation was 7.25% and
7.75% for 1997 and 1996, 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, 1997 by $416,000 and the aggregate of the
service and interest cost components of the net periodic postretirement benefit
cost for the year 1997 by $34,000.
F-22
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 7,000,000
shares of the Company's common stock. In 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 1997, 1996 and 1995, the Company granted
options to certain employees to purchase 264,344, 338,645 and 215,500 shares,
respectively, of the Company's common stock at exercise prices ranging from
$.625 to $5.625 below the fair market value of such shares on the date of grant.
The difference between the exercise price and the fair market value of such
shares on the date of grant is recognized as compensation expense over the
vesting periods of 21/2 to 3 years. Compensation expense for such options was
$0.7 million, $0.3 million and $0 in 1997, 1996 and 1995, respectively. 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 under the Plan
at grant dates, the Company's pro forma net income for the years 1997, 1996 and
1995 would have been $90.5, $80.0 and $67.2 million, respectively, and pro forma
basic earnings per share would have been $.94, $.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 24%; and dividend yield of 0%.
The following is a summary of transactions pertaining to the Plan:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------ ------- ----- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 .................. 5,014 $ 9.32 3,277 $ 7.86 2,200 $7.72
Granted ................................. 515 11.99 2,110 11.31 1,355 8.05
Exercised ............................... (306) 8.08 (113) 6.90 (29) 6.76
Forfeited ............................... (490) 9.37 (260) 8.17 (249) 7.79
----- ----- -----
Outstanding, December 31 ................ 4,733 9.68 5,014 9.32 3,277 7.86
===== ===== =====
Options exercisable, December 31 ........ 1,294 8.37 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 1997 and 1996 under the Plan
for which the exercise price equaled the fair market value of such shares on the
date of grant was $4.17 and $3.50 per share, respectively, and such weighted
average fair value of options granted in 1997 and 1996 for which the exercise
price was less than the fair market value of such shares on the date of grant
was $7.93 and $5.99 per share, respectively.
F-23
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTION PLAN (CONTINUED)
The following is a summary of the status of stock options outstanding and
exercisable under the Plan as of December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
-------------------------------------- -----------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
EXERCISE PRICES (000'S) PRICE LIFE (000'S) PRICE
- ----------- ----- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
$5.00-$ 7.50............................. 1,586 $ 6.71 5.01 years 726 $ 6.77
$7.51-$11.25............................. 1,104 9.40 6.58 years 278 8.84
$11.26-$15.19............................ 2,043 12.15 7.42 years 290 11.92
----- -----
Total ................................... 4,733 9.68 6.42 years 1,294 8.37
===== =====
</TABLE>
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 granules requirements from the Company (except for the
requirements of its California roofing plant) under a requirements contract. In
addition, in December 1995, U.S. Intec, Inc. ("USI"), 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.
Each such requirements contract was renewed for 1998 and is subject to annual
renewal unless terminated by either party to the respective agreement. In 1997,
BMCA and USI purchased a total of $51.1 million of mineral products from the
Company, representing approximately 7% of the Company's total net sales and
approximately 62% of the Company's net sales of mineral products. Sales by the
Company to BMCA and USI totaled $50.5 and $45.8 million for 1996 and 1995,
respectively. The receivable from BMCA and USI for sales of mineral products as
of December 31, 1997 and 1996 was $2.8 and $3.3 million, respectively.
Pursuant to a Management Agreement, the Company has provided certain
general management, administrative, legal, telecommunications, information and
facilities services to ISP Holdings and certain of its affiliates, including
GAF, BMCA, G-I Holdings and GFC. Charges by the Company for providing such
services aggregated $5.6, $6.2 and $5.4 million for 1997, 1996 and 1995,
respectively, and are reflected as reductions of "Selling, general and
administrative" expense. Such charges consist of management fees and other
reimbursable expenses attributable to, or incurred by the Company for the
benefit of, the respective parties, which are based on an estimate of the costs
the Company incurs to provide such services. Effective January 1, 1998, the term
of the Management Agreement was extended through the end of 1998, and the
management fees payable thereunder were adjusted, including an adjustment to
reflect the direct payment by BMCA of the costs for certain services rendered by
third parties that were previously included in the management fees payable to
the Company. The Company and BMCA further modified the agreement to allocate a
portion of the management fees payable by BMCA under the Management Agreement to
separate lease payments for the use of BMCA's headquarters. Based on the
services provided by the Company in 1997, after taking into account the
modifications to the agreement described above, the aggregate amount payable to
the Company under the Management Agreement for 1998 is expected to be
approximately $5.6 million. BMCA also is expected to pay directly certain third
party costs, which aggregated approximately $0.4 million in 1997, that were
previously included in the management fees. In addition, the Company currently
anticipates that in 1998 BMCA will require additional space for its headquarters
and will pay additional rent based on the square footage to be occupied.
See Note 2 for a discussion of the Tax Sharing Agreement.
F-24
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
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 make loans to and borrow from ISP
Holdings at the same rates available to the Company under the Credit Agreement.
At December 31, 1997 and 1996, the Company had $50.0 million in borrowings from
ISP Holdings pursuant to a note agreement maturing in December 2006 and $4.0 and
$12.6 million, respectively, in borrowings 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 $0.8 million in 1997 and was $0 for each of 1996 and
1995.
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 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,
------------------------------------
1997 1996 1995
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Net sales:
Specialty Chemicals ................. $ 622.4 $ 587.2 $ 562.0
Mineral Products(1) ................. 83.1 85.6 86.1
Other ............................... 43.7 43.7 40.9
-------- -------- --------
Net sales ............................. $ 749.2 $ 716.5 $ 689.0
======== ======== ========
Operating income:
Specialty Chemicals(2) .............. $ 121.7 $ 117.9 $ 106.3
Mineral Products .................... 17.0 16.5 16.3
Other ............................... 4.6 1.6 4.5
-------- -------- --------
Total operating income ................ $ 143.3 $ 136.0 $ 127.1
======== ======== ========
Identifiable assets:
Specialty Chemicals(3) .............. $ 985.2 $ 958.1 $ 953.5
Mineral Products .................... 155.2 154.5 154.6
Other ............................... 23.8 27.7 25.0
General Corporate(4) ................ 231.4 176.6 179.8
-------- -------- --------
Total assets .......................... $1,395.6 $1,316.9 $1,312.9
======== ======== ========
Capital expenditures and acquisitions:
Specialty Chemicals ................. $ 56.2 $ 41.6 $ 31.1
Mineral Products .................... 11.2 9.5 6.0
Other ............................... 1.1 3.5 1.8
-------- -------- --------
Total ................................. $ 68.5 $ 54.6 $ 38.9
======== ======== ========
Depreciation and goodwill amortization:
Specialty Chemicals ................. $ 43.6 $ 41.0 $ 38.6
Mineral Products .................... 10.1 9.6 9.7
Other ............................... 1.0 0.9 0.9
-------- -------- --------
Total ................................. $ 54.7 $ 51.5 $ 49.2
======== ======== ========
</TABLE>
F-25
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. BUSINESS SEGMENT INFORMATION (CONTINUED)
(1) Includes sales to BMCA and USI of $51.1, $50.5 and $45.8 million for 1997,
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'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 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 60% of the Company's sales of mineral products are to
BMCA (see Note 9). The Company also manufactures filter products.
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,
--------------------------------------
1997 1996 1995
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Net sales:
Domestic operations(1) .......... $ 390.6 $ 361.0 $ 345.2
Europe(2) ....................... 201.4 212.3 209.1
Asia-Pacific .................... 112.5 102.9 101.2
Other foreign operations ........ 44.7 40.3 33.5
-------- -------- --------
Net sales ......................... $ 749.2 $ 716.5 $ 689.0
======== ======== ========
Operating income:
Domestic operations ............. $ 80.2 $ 64.4 $ 57.9
Europe .......................... 44.4 53.1 46.5
Asia-Pacific .................... 16.3 17.5 20.2
Other foreign operations ........ 2.4 1.0 2.5
-------- -------- --------
Operating income .................. 143.3 136.0 127.1
Equity in earnings of joint venture 5.9 5.6 5.4
Interest expense and other, net ... (4.6) (15.6) (26.4)
-------- -------- --------
Income before income taxes ........ $ 144.6 $ 126.0 $ 106.1
======== ======== ========
Identifiable assets:
Domestic operations ............. $ 965.0 $ 948.4 $ 954.1
Europe(3) ....................... 134.3 130.8 133.1
Asia-Pacific .................... 43.2 41.4 32.2
Other foreign operations ........ 21.7 19.7 13.7
General Corporate(4) ............ 231.4 176.6 179.8
-------- -------- --------
Total assets ...................... $1,395.6 $1,316.9 $1,312.9
======== ======== ========
</TABLE>
(1) Net sales--domestic operations exclude sales by the Company's domestic
subsidiaries to foreign-based subsidiaries of $180.6, $160.1 and $140.9
million for 1997, 1996 and 1995, respectively.
(2) Net sales--Europe exclude sales by the Company's European subsidiaries to
domestic and other foreign-based subsidiaries of $21.2, $20.7 and $19.9
million for 1997, 1996 and 1995, 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.
F-26
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. GEOGRAPHIC INFORMATION (CONTINUED)
Approximately 66% of the Company's international sales in 1997 were in
countries in 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' 93/4% 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 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 has advised the Company that, as of December 27, 1997, it had been
named as a defendant in approximately 79,300 pending lawsuits involving alleged
asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber ("Asbestos Claims"), having resolved approximately 234,500 Asbestos
Claims. During 1997, GAF resolved approximately 11,000 Asbestos Claims and
received notice of approximately 30,900 new Asbestos Claims. Of the Asbestos
Claims resolved in 1997, approximately 8,900 were resolved (including Asbestos
Claims disposed of at no cost to GAF) for an average cost of approximately
$3,700 per claim. GAF's share of the costs with respect to approximately 2,100
Asbestos Claims resolved in 1997 has not yet been determined. There can be no
assurance, however, that the actual costs of resolving pending and future
Asbestos Claims will approximate GAF's historic average costs.
GAF has stated that it is committed to effecting a comprehensive resolution
of Asbestos Claims, that it is exploring a number of options, both judicial and
legislative, to accomplish such resolution, but there can be no assurance that
this effort will be successful.
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 involved in the manufacture or sale of asbestos products. The Company
believes that it should have no legal responsibility for damages in connection
with asbestos-related claims. Should GAF, however, be unable to satisfy
judgments against it in asbestos-related lawsuits, its judgment creditors might
seek to enforce their judgments against the assets of GAF and, in that regard,
seek to recapture assets recently distributed by GAF, including assets
distributed in the Separation Transactions. Although the Company does not
believe any such action to unwind the Separation Transactions would be
successful, there can be no assurance in that regard. If a creditor were
successful in recapturing assets distributed in the Separation Transactions,
such creditor could seek to enforce any asbestos-related judgment against GAF's
holdings of common stock of ISP Holdings and its indirect holdings of common
stock of the Company, and such enforcement could result in a change of control
of the Company. See Note 6 for discussion of the Credit Agreement.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
The Company estimates that its liability in respect of all Environmental
Claims (including those relating to its closed Linden, New Jersey plant
described below), as of December 31, 1997, is approximately $17.8 million,
before reduction for insurance recoveries reflected on the Company's balance
sheet (discussed below) of $7.2
F-27
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
million that relate to both past expenses and estimated future liabilities
("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 that the
recoveries could be well in excess of the current estimated liability for all
Environmental Claims, although there can be no assurances in this regard. The
Company believes it is entitled to substantially full defense and indemnity
under its insurance policies for most Environmental Claims, although the
Company's insurers have not affirmed a legal obligation under the policies to
provide indemnity for such claims.
In March 1995, GAF commenced litigation on behalf of itself and its
predecessors, successors, subsidiaries and related corporate entities seeking
amounts substantially in excess of the estimated recoveries. While the Company
believes that its claims are meritorious, there can be no assurance that the
Company will prevail in its efforts to obtain amounts equal to, or in excess of,
the estimated recoveries.
In June 1989, the Company entered into a Consent Order with the New Jersey
Department of Environmental Protection ("NJDEP") requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee the Company's
performance. This Consent Order does not address any potential natural resource
damage claims. 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.
Lease Commitments
Leases for certain equipment at the Company's mineral products plants are
accounted for as capital leases and are included in "Property, plant and
equipment, net", at December 31, 1997 and 1996 in the amount of $2.1 and $2.3
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 $9.7, $8.7 and $8.2 million for 1997, 1996 and
1995, respectively. Future minimum lease payments for properties which were held
under long-term noncancelable leases as of December 31, 1997 were as follows:
CAPITAL OPERATING
LEASES LEASES
------ ------
(THOUSANDS)
1998............................................ $ 782 $3,590
1999............................................ 487 2,409
2000............................................ 434 1,582
2001............................................ 339 625
2002............................................ 255 449
Later years .................................... -- 733
------ ------
Total minimum payments ......................... 2,297 $9,388
======
Less interest included above ................... (358)
------
Present value of net minimum lease payments .... $1,939
======
F-28
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Matters
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 during 1998.
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 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.
See Note 2 for information regarding additional contingencies.
NOTE 13. SUBSEQUENT EVENT
The Company announced in December 1997 that it had entered into an
agreement to purchase Polaroid Corporation's Freetown, Massachusetts fine
chemicals facility. The transaction was completed in February 1998. In
connection with the purchase, the Company entered into a sale-leaseback
arrangement of the facility's equipment with a third party. The lease is to be
accounted for as an operating lease, with an initial term of four years and, at
the Company's option, up to three one-year renewal periods. As part of the
transaction, the Company entered into a long-term supply and license agreement
with Polaroid for the imaging chemicals and polymers manufactured at the
facility and used by Polaroid in its instant film business.
F-29
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 BY QUARTER 1996 BY QUARTER
--------------------------- ---------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ----- ----- ------ ----- ----- ----- ------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .......................... $191.2 $197.8 $183.6 $176.6 $185.6 $185.0 $173.6 $172.3
Cost of products sold .............. 114.2 116.2 105.8 100.5 112.9 107.1 100.3 98.6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit ....................... $ 77.0 $ 81.6 $ 77.8 $ 76.1 $ 72.7 $ 77.9 $ 73.3 $ 73.7
====== ====== ====== ====== ====== ====== ====== ======
Operating income ................... $ 36.8 $ 39.5 $ 35.2 $ 31.8 $ 34.2 $ 38.0 $ 33.5 $ 30.3
====== ====== ====== ====== ====== ====== ====== ======
Income before income taxes.......... $ 36.2 $ 39.9 $ 35.6 $ 32.9 $ 31.3 $ 35.6 $ 31.3 $ 27.8
Income taxes ....................... (13.0) (14.4) (12.8) (11.8) (11.4) (13.0) (11.2) (9.7)
------ ------ ------ ------ ------ ------ ------ ------
Net income ......................... $ 23.2 $ 25.5 $ 22.8 $ 21.1 $ 19.9 $ 22.6 $ 20.1 $ 18.1
====== ====== ====== ====== ====== ====== ====== ======
Earnings per common share(1):
Basic ............................ $ .24 $ .27 $ .24 $ .22 $ .20 $ .23 $ .21 $ .19
====== ====== ====== ====== ====== ====== ====== ======
Diluted .......................... $ .24 $ .26 $ .23 $ .22 $ .20 $ .23 $ .21 $ .19
====== ====== ====== ====== ====== ====== ====== ======
</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. Previously reported earnings per share data have
been restated to present "Basic Earnings per Share" and "Diluted Earnings
per Share", in accordance with the provisions of SFAS No. 128, "Earnings
per Share". See Note 1 to Consolidated Financial Statements.
F-30
<PAGE>
SCHEDULE II
INTERNATIONAL SPECIALTY PRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
(THOUSANDS)
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1997 EXPENSES DEDUCTIONS 1997
- ----------- ---- -------- ---------- ----
<S> <C> <C> <C> <C>
Valuation and Qualifying Accounts Deducted
from Assets to Which They Apply:
Allowance for doubtful accounts ................. $ 2,840 $ 338 $ 454(a) $ 2,724
Reserve for inventory market valuation .......... 12,812 7,631 6,360 14,083
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
(THOUSANDS)
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1996 EXPENSES DEDUCTIONS 1996
- ----------- ---- -------- ---------- ----
<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
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
(THOUSANDS)
BALANCE CHARGED TO BALANCE
JANUARY 1, COSTS AND DECEMBER 31,
DESCRIPTION 1995 EXPENSES DEDUCTIONS 1995
- ----------- ---- -------- ---------- ----
<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>
- --------
Note:
(a) Represents write-off 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
ISP'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
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
Net sales .................................. $571.2 $521.1 $486.0
------ ------ ------
Costs and expenses:
Cost of products sold .................... 384.6 355.2 333.7
Selling, general and administrative ...... 96.3 88.3 81.2
Goodwill amortization .................... 13.2 13.2 13.2
------ ------ ------
Total costs and expenses ............. 494.1 456.7 428.1
------ ------ ------
Operating income ........................... 77.1 64.4 57.9
Interest expense ........................... (25.7) (27.3) (34.3)
Equity in income of foreign subsidiaries and
50% owned joint venture .................. 54.4 61.8 53.3
Other income, net .......................... 27.0 20.2 22.4
------ ------ ------
Income before income taxes ................. 132.8 119.1 99.3
Income taxes ............................... (42.5) (38.6) (31.9)
------ ------ ------
Net income ................................. $ 90.3 $ 80.5 $ 67.4
====== ====== ======
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,
----------------------
1997 1996
-------- --------
(MILLIONS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 7.2 $ 5.3
Investments in trading securities .............................. 28.8 0.7
Investments in available-for-sale securities ................... 70.4 59.8
Other short-term investments ................................... 7.8 6.1
Accounts receivable, net ....................................... 10.6 4.9
Receivable from related parties, net ........................... 6.3 5.0
Loan receivable from related party ............................. -- 2.6
Inventories .................................................... 74.4 67.5
Other current assets ........................................... 13.7 11.0
-------- --------
Total Current Assets ....................................... 219.2 162.9
Property, plant and equipment, net ............................. 481.7 459.7
Excess of cost over net assets of businesses acquired, net ..... 404.1 417.3
Advances to and equity in investment in foreign subsidiaries and
50% owned joint venture ...................................... 203.6 192.2
Other assets ................................................... 24.2 22.1
-------- --------
Total Assets ................................................... $1,332.8 $1,254.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt ................................................ $ 17.2 $ --
Current maturities of long-term debt ........................... 0.6 0.6
Accounts payable ............................................... 32.2 29.7
Accrued liabilities ............................................ 44.8 39.9
-------- --------
Total Current Liabilities .................................. 94.8 70.2
Long-term debt less current maturities ........................... 274.4 310.0
Long-term notes payable to related party ......................... 54.0 62.6
Deferred income taxes ............................................ 70.3 52.7
Other liabilities ................................................ 59.9 59.7
Stockholders' Equity ............................................. 779.4 699.0
-------- --------
Total Liabilities and Stockholders' Equity ....................... $1,332.8 $1,254.2
======== ========
</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,
--------------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents, beginning of year .............. $ 5.3 $ 3.3 $ 9.9
------ ------ ------
Cash provided by operating activities:
Net income .............................................. 90.3 80.5 67.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................ 38.4 35.4 33.6
Goodwill amortization ............................... 13.2 13.2 13.2
Deferred income taxes ............................... 14.1 (2.5) (18.8)
(Increase) decrease in working capital items ............ (8.4) 9.4 (7.1)
Purchases of trading securities ......................... (92.8) (10.3) (66.5)
Proceeds from sales of trading securities ............... 58.1 19.5 104.1
Change in advances to and equity in investment in foreign
subsidiaries and 50% owned joint venture .............. (10.3) (34.4) (26.8)
Change in net receivable from/payable to related parties (1.2) (14.5) 6.1
Change in cumulative translation adjustment ............. (7.5) (8.4) 6.9
Other, net .............................................. (3.5) (4.6) 8.1
------ ------ ------
Net cash provided by operating activities ................. 90.4 83.3 120.2
------ ------ ------
Cash used in investing activities:
Capital expenditures .................................... (61.4) (45.5) (34.4)
Purchases of available-for-sale securities .............. (146.7) (170.0) (325.3)
Purchases of other short-term investments ............... -- (1.3) (2.2)
Proceeds from sales of available-for-sale securities .... 151.7 188.9 255.6
------ ------ ------
Net cash used in investing activities ..................... (56.4) (27.9) (106.3)
------ ------ ------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable ............... -- 2.0 3.7
Increase (decrease) in short-term debt .................. 17.2 (13.0) 13.0
Increase (decrease) in borrowings under
revolving credit facility ............................. (35.4) 29.6 (4.2)
Other increase (decrease) in long-term debt, net ........ (0.2) 0.4 (1.4)
Decrease in loans from related parties .................. (6.0) (57.9) (15.2)
Repurchases of common stock ............................. (10.2) (15.1) (16.6)
Other, net .............................................. 2.5 0.6 0.2
------ ------ ------
Net cash used in financing activities ..................... (32.1) (53.4) (20.5)
------ ------ ------
Net change in cash and cash equivalents ................... 1.9 2.0 (6.6)
------ ------ ------
Cash and cash equivalents, end of year .................... $ 7.2 $ 5.3 $ 3.3
====== ====== ======
</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 $43.3, $39.4 and $28.4
million of profits on sales made by ISP's domestic subsidiaries to its
foreign-based subsidiaries for 1997, 1996 and 1995, 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
$23.4, $18.7 and $26.0 million for 1997, 1996 and 1995, respectively.
S-4
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
21 List of Subsidiaries
23 Consent of Independent Public Accountants
27 Financial Data Schedule
EXHIBIT 21
INTERNATIONAL SPECIALTY PRODUCTS INC.
LIST OF SUBSIDIARIES
STATE OF
COMPANY INCORPORATION
- ------- -------------
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 Freetown Fine Chemicals Inc. Delaware
ISP Investments Inc. Delaware
ISP Global Technologies Inc. Delaware
ISP International Filters Inc. Delaware
ISP International Corp. Delaware
ISP (Puerto Rico) Inc. Delaware
GAF Huls Chemie GmbH Germany
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 Colombia Ltda. Colombia
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
- --------
(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.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 23, 1998, included in or made part of this Form
10-K, into International Specialty Products Inc.'s previously filed Registration
Statements on Form S-8 File Nos. 33-54724, 33-92518, 33-94020 and 333-27505.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 27, 1998
<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-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,730
<SECURITIES> 161,749
<RECEIVABLES> 67,077
<ALLOWANCES> 2,724
<INVENTORY> 119,910
<CURRENT-ASSETS> 418,564
<PP&E> 513,206
<DEPRECIATION> 215,935
<TOTAL-ASSETS> 1,395,584
<CURRENT-LIABILITIES> 151,597
<BONDS> 274,642
0
0
<COMMON> 999
<OTHER-SE> 783,231
<TOTAL-LIABILITY-AND-EQUITY> 1,395,584
<SALES> 749,208
<TOTAL-REVENUES> 749,208
<CGS> 436,693
<TOTAL-COSTS> 436,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,126
<INCOME-PRETAX> 144,638
<INCOME-TAX> 51,989
<INCOME-CONTINUING> 92,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,649
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
