SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-17827
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)
818 Washington Street, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 428-0847
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
Commission File Number 33-44862-01
<PAGE>
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
See table of additional registrants.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
As of August 7, 1998, 69,510,851 shares of International Specialty Products
Inc. common stock (par value, $.01 per share) were outstanding.
As of August 7, 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 August 7, 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.
<PAGE>
ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
Commission
Address, including zip
File No./I.R.S
code, and telephone number,
No. of Employer
including area code, of
Exact name of registrant as State of Shares Identification
registrant's principal
specified in its charter Incorporation Outstanding No.
executive office
- --------------------------- ------------- ----------- --------------
- ---------------------------
<S> <C> <C> <C>
<C>
ISP (PUERTO RICO) INC. Delaware 10 33-44862-03/
Mirador de Bairoa
22-2934561
Calle 27st-14
Caguas, Puerto Rico 00725-8900
(787) 744-3116
ISP ENVIRONMENTAL SERVICES INC. Delaware 10 33-44862-04/
1361 Alps Road
51-0333801
Wayne, NJ 07470
(973) 628-3000
ISP FILTERS INC. Delaware 10 33-44862-05/
4436 Malone Road
51-0333796
Memphis, TN 38118
(901) 795-2445
ISP GLOBAL TECHNOLOGIES INC. Delaware 10 33-44862-06/
818 Washington Street
51-0333802
Wilmington, DE 19801
(302) 429-7492
ISP INTERNATIONAL CORP. Delaware 10 33-44862-07/
818 Washington Street
51-0333734
Wilmington, DE 19801
(302) 429-7493
ISP INVESTMENTS INC. Delaware 10 33-44862-08/
818 Washington Street
51-0333803
Wilmington, DE 19801
(302) 429-7496
ISP MANAGEMENT COMPANY, INC. Delaware 10 33-44862-09/
1361 Alps Road
51-0333800
Wayne, NJ 07470
(973) 628-3000
ISP MINERAL PRODUCTS INC. Delaware 10 33-44862-10/
34 Charles Street
51-0333794
Hagerstown, MD 21740
(301) 733-4000
ISP MINERALS INC. Delaware 10 33-44862-11/
Route 116
51-0333798
Blue Ridge Summit, PA 17214
(717) 794-2184
ISP REAL ESTATE COMPANY, INC. Delaware 2 33-44862-12/
1361 Alps Road
22-2886551
Wayne, NJ 07470
(973) 628-3000
ISP REALTY CORPORATION Delaware 1000 33-44862-13/
1361 Alps Road
13-2720081
Wayne, NJ 07470
(973) 628-3000
VERONA INC. Delaware 100 33-44862-16/
NCNB Plaza, Suite 300
22-3036319
7 North Laurens Street
Greenville, SC 29601
(803) 271-9194
BLUEHALL INCORPORATED Delaware 1 33-44862-15/
818 Washington Street
13-3335905
Wilmington, DE 19801
(302) 651-0165
ISP OPCO HOLDINGS INC. Delaware 100 Unassigned/
818 Washington Street
51-0382622
Wilmington, DE 19801
(302) 429-8641
</TABLE>
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Thousands, except per share amounts)
Second Quarter Ended Six Months Ended
-------------------- ------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
-------- -------- -------- --------
Net sales............................. $197,849 $219,775 $389,006 $420,478
-------- -------- -------- --------
Costs and expenses:
Cost of products sold............... 116,358 125,741 230,519 244,918
Selling, general and administrative. 39,156 42,591 76,492 83,012
Goodwill amortization............... 3,318 3,336 6,635 6,675
-------- -------- -------- --------
Total costs and expenses.......... 158,832 171,668 313,646 334,605
-------- -------- -------- --------
Operating income...................... 39,017 48,107 75,360 85,873
Interest expense...................... (18,933) (19,055) (37,530) (36,993)
Equity in earnings of joint venture... 1,361 - 2,746 1,455
Other income, net..................... 7,346 9,746 13,389 19,701
-------- -------- -------- --------
Income before income taxes............ 28,791 38,798 53,965 70,036
Income taxes.......................... (10,386) (14,778) (19,580) (26,132)
Minority interest in income of
subsidiary.......................... (3,923) (4,980) (7,699) (9,192)
-------- -------- -------- --------
Net income............................ $ 14,482 $ 19,040 $ 26,686 $ 34,712
======== ======== ======== ========
Earnings per common share:
Basic............................... $ .27 $ .35 $ .50 $ .64
======== ======== ======== ========
Diluted............................. $ .27 $ .35 $ .50 $ .64
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding:
Basic............................... 53,833 53,833 53,833 53,833
======== ======== ======== ========
Diluted............................. 53,833 53,833 53,833 53,833
======== ======== ======== ========
See Notes to Consolidated Financial Statements
1
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
June 28,
December 31, 1998
1997 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 20,495 $ 51,054
Investments in trading securities............. 67,943 7,633
Investments in available-for-sale securities.. 140,812 277,772
Investments in held-to-maturity securities.... 311 -
Other short-term investments.................. 26,682 29,541
Accounts receivable, trade, net............... 67,077 102,736
Accounts receivable, other.................... 25,288 31,772
Receivable from related parties, net.......... 4,124 7,994
Inventories................................... 119,910 124,890
Other current assets.......................... 16,773 19,407
---------- ----------
Total Current Assets............................ 489,415 652,799
Property, plant and equipment, net.............. 518,922 585,705
Goodwill, net................................... 409,886 403,211
Other assets.................................... 67,457 32,820
---------- ----------
Total Assets.................................... $1,485,680 $1,674,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................... $ 39,076 $ 90,656
Current maturities of long-term debt.......... 684 38,576
Accounts payable.............................. 46,283 69,405
Accrued liabilities........................... 74,092 85,230
Income taxes.................................. 7,200 14,568
---------- ----------
Total Current Liabilities................... 167,335 298,435
---------- ----------
Long-term debt less current maturities.......... 798,762 798,569
---------- ----------
Deferred income taxes........................... 67,918 88,699
---------- ----------
Other liabilities............................... 63,493 63,813
---------- ----------
Minority interest in subsidiary................. 126,331 135,863
---------- ----------
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: 53,833,333
shares issued and outstanding............... 538 538
Additional paid-in capital.................... 212,413 211,611
Retained earnings............................. 40,080 74,792
Accumulated other comprehensive income........ 8,810 2,215
---------- ----------
Total Stockholders' Equity.................. 261,841 289,156
---------- ----------
Total Liabilities and Stockholders' Equity...... $1,485,680 $1,674,535
========== ==========
See Notes to Consolidated Financial Statements
2
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
--------------------
June 29, June 28,
1997 1998
--------- --------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 17,938 $ 20,495
-------- --------
Cash provided by operating activities:
Net income............................................. 26,686 34,712
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 20,285 22,949
Goodwill amortization.............................. 6,635 6,675
Deferred income taxes.............................. 14,184 13,034
Increase in working capital items...................... (7,220) (3,450)
Purchases of trading securities........................ (83,674) (100,297)
Proceeds from sales of trading securities.............. 23,110 130,878
Increase in net receivable from related parties........ (2,824) (3,870)
Change in cumulative translation adjustment............ (6,491) (3,284)
Change in minority interest in subsidiary.............. 6,651 8,646
Other, net............................................. 5,820 8,670
-------- --------
Net cash provided by operating activities............ 3,162 114,663
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. (31,184) (118,106)
Proceeds from sale-leaseback transaction............... - 56,050
Purchases of available-for-sale securities............. (140,454) (326,627)
Purchases of held-to-maturity securities............... (1,623) -
Proceeds from sales of available-for-sale securities... 137,197 210,850
Proceeds from held-to-maturity securities.............. 1,881 311
-------- --------
Net cash used in investing activities................. (34,183) (177,522)
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. - 4,000
Increase in short-term debt............................ 27,176 51,580
Increase in borrowings under revolving credit facility. 14,575 38,000
Repayments of long-term debt........................... (286) (366)
Subsidiary's repurchases of common stock............... (9,295) -
Other, net............................................. (622) 204
- -------- --------
Net cash provided by financing activities................ 31,548 93,418
-------- --------
Net change in cash and cash equivalents.................. 527 30,559
-------- --------
Cash and cash equivalents, end of period................. $ 18,465 $ 51,054
======== ========
See Notes to Consolidated Financial Statements
3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - (Continued)
Six Months Ended
--------------------
June 29, June 28,
1997 1998
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)........... $ 34,908 $ 38,302
Income taxes................................... 952 8,212
Acquisition of remaining 50% interest in
GAF-Huls Chemie GmbH joint venture, net of
$23,732 cash acquired*:
Fair market value of assets acquired............. $ 48,003
Purchase price of acquisition.................... 23,381
--------
Liabilities assumed.............................. $ 24,622
========
*The Company had a 50% equity interest in the cash held by the joint venture
prior to the acquisition, which was classified within Other Assets on the
consolidated Balance Sheet.
See Notes to Consolidated Financial Statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for International Specialty
Products Inc. (the "Company"), formerly ISP Holdings Inc. ("ISP Holdings")
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position of the Company at June 28, 1998, and the
results of operations and cash flows for the periods ended June 29, 1997
and June 28, 1998. All adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the annual
financial statements and notes thereto included in ISP Holdings' Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 (the "Form
10-K").
Note 1. Merger of International Specialty Products Inc. into ISP Holdings
Inc.
On July 15, 1998, International Specialty Products Inc. ("Old ISP")
merged (the "Merger") with and into ISP Holdings. In connection with the
Merger, ISP Holdings changed its name to International Specialty Products
Inc. In the Merger, each outstanding share of Old ISP's common stock,
other than those held by ISP Holdings, was converted into one share of
common stock of the Company, and the outstanding shares of ISP Holdings
were converted into an aggregate of 53,833,333 shares (or approximately
78%) of the outstanding shares of common stock of the Company.
Note 2. Acquisitions
Effective April 1, 1998, the Company acquired the remaining 50% interest
in its joint venture with Huls AG, GAF-Huls Chemie GmbH ("GhC"). GhC consists
of a manufacturing facility that produces primarily butanediol and
tetrahydrofuran. As part of the transaction, the Company also acquired Huls'
production facility that supplies GhC with its primary raw material, acetylene.
The results of GhC are included in the Company's financial statements on a
consolidated basis from the date of acquisition, including sales of $20.0
million and operating income of $6.7 million for the second quarter of 1998.
In February 1998, the Company acquired Polaroid Corporation's Freetown,
Massachusetts fine chemicals facility. In connection with the acquisition, the
Company entered into a sale-leaseback arrangement of the facility's equipment
with a third party. The lease has been 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.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods is required. In the Company's case,
comprehensive income includes net income, unrealized gains and losses from
currency translation and investments in available-for-sale securities, and
pension liability adjustments.
Second Quarter Ended Six Months Ended
--------------------- -------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
-------- -------- -------- --------
(Thousands)
Net income........................... $ 14,482 $ 19,040 $ 26,686 $ 34,712
-------- -------- -------- --------
Other comprehensive income, net of
tax:
Unrealized gains on available-for-
sale securities:
Unrealized holding gains (losses)
arising during the period, net of
income tax (provision) benefit of
$806, $(2,334), $(2,809), and
$(5,172),.......................... (2,907) 4,798 4,988 11,104
Less: reclassification adjustment
for gains included in net income,
net of income tax effect of
$2,198, $2,650, $3,263 and
$6,340 ........................... (4,156) (6,099) (6,987) (14,415)
-------- -------- -------- -------
Total.............................. (7,063) (1,301) (1,999) (3,311)
Foreign currency translation
adjustment........................ (938) (623) (5,874) (3,284)
Minimum pension liability
adjustment........................ - - 83 -
-------- -------- -------- -------
Total other comprehensive income
(loss).............................. (8,001) (1,924) (7,790) (6,595)
-------- -------- -------- --------
Comprehensive income................. $ 6,481 $ 17,116 $ 18,896 $ 28,117
======== ======== ======== ========
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Comprehensive Income (Continued)
Changes in the components of "Accumulated other comprehensive income"
for the six months ended June 28, 1998 are as follows:
Unrealized Cumulative
Gains on Foreign Minimum Accumulated
Available- Currency Pension Other
for-sale Translation Liability Comprehensive
Securities Adjustment Adjustment Income
---------- ----------- ---------- -------------
(Thousands)
Balance, December 31, 1997. $ 8,007 $ 1,385 $ (582) $ 8,810
Change for the period...... (3,311) (3,284) - (6,595)
-------- -------- -------- --------
Balance, June 28, 1998..... $ 4,696 $ (1,899) $ (582) $ 2,215
======== ======== ======== ========
Note 4. Earnings per Common Share
Earnings per share data for all periods prior to the Merger are calculated
based on the 53,833,333 shares of the Company's common stock held by ISP
Holdings' stockholders. For periods subsequent to the Merger, "Basic Earnings
per Share" will be calculated based on the total weighted average number of
shares of the Company's common stock outstanding during the period. "Diluted
Earnings per Share" for periods subsequent to the Merger will give effect to
all potential dilutive common shares outstanding during the period under the
Company's stock option plan.
Note 5. Inventories
Inventories comprise the following:
December 31, June 28,
1997 1998
------------ --------
(Thousands)
Finished goods................ $ 84,912 $ 76,642
Work in process............... 20,088 25,268
Raw materials and supplies.... 18,408 26,788
-------- --------
Total......................... 123,408 128,698
Less LIFO reserve............. (3,498) (3,808)
-------- --------
Inventories................... $119,910 $124,890
======== ========
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Contingencies
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, liquidity, results
of operations, cash flows or financial position of the Company. However,
adverse decisions or events, particularly as to the liability and the financial
responsibility of the Company's insurers and of the other parties involved at
each site and their insurers, could cause the Company to increase its estimate
of its liability in respect of such matters. It is not currently possible to
estimate the amount or range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 13 to Consolidated Financial Statements contained in the Form 10-K.
Tax Claim against GAF
Certain subsidiaries of the Company were members of the GAF Corporation
("GAF") consolidated Federal income tax group (the "GAF Group") in 1990 and,
accordingly, would be severally liable for any tax liability of the GAF Group
in respect of such year. Effective as of January 1, 1997, neither the Company
nor any of its subsidiaries are members of the GAF Group.
On September 15, 1997, GAF received a notice from the Internal Revenue
Service (the "Service") of a deficiency in the amount of $84.4 million (after
taking into account the use of net operating losses and foreign tax credits
otherwise available for use in later years) in connection with the formation in
1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants
partnership"), a partnership in which a subsidiary of GAF, GAF Fiberglass
Corporation ("GFC"), holds an interest. The claim of the Service for interest
and penalties, after taking into account the effect on the use of net operating
losses and foreign tax credits, could result in GFC incurring liabilities
significantly in excess of the deferred tax liability of $131.4 million that
GAF recorded in 1990 in connection with this matter. GAF has advised the
Company that it believes that GFC will prevail in this matter, although there
can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
financial position or results of operations. GAF 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.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be adopted earlier. The Company has not yet determined the effect of
adoption of SFAS No. 133 and has not determined the timing or method of
adoption of the statement. Adoption of SFAS No. 133 could increase volatility
in earnings and other comprehensive income.
Note 8. Long-term Debt
The Company intends to refinance its $200 million 9% Senior Notes due
March 1999; accordingly, such notes are classified as long-term debt on the
Consolidated Balance Sheet.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter 1998 Compared With
Second Quarter 1997
The Company recorded second quarter 1998 net income of $19.0 million
(35 cents diluted earnings per share) versus $14.5 million (27 cents
diluted earnings per share) in the second quarter of 1997. The 31%
increase in net income was attributable to higher operating and other
income.
Net sales for the second quarter of 1998 were $219.8 million, an 11%
increase compared with $197.8 million for the second quarter of 1997. The
increase in sales was primarily attributable to the GhC acquisition (see
Note 2 to Consolidated Financial Statements), which accounted for $20.0
million of the sales increase, and also reflected a $2.1 million (9%)
increase in sales of mineral products due to increased sales volumes,
partially offset by the unfavorable effect of the stronger U.S. dollar
relative to other currencies in certain areas of the world ($3.6 million).
Sales of filter products decreased slightly for the quarter. The sales
growth in the second quarter resulted from higher sales of specialty
chemicals and mineral products in the U.S. and higher sales of specialty
chemicals in the Western Hemisphere, partially offset by lower sales in the
Asia-Pacific region and Europe (excluding GhC) reflecting the unfavorable
effect of the stronger U.S. dollar.
Operating income for the second quarter of 1998 was $48.1 million
compared with last year's $39.0 million. The 23% increase in operating
income primarily resulted from the GhC acquisition, which accounted for
$6.7 million of the increase, as well as the results from the acquisition
of Polaroid Corporation's Freetown, Massachusetts fine chemicals facility
($1.6 million) (see Note 2 to Consolidated Financial Statements). The
improved operating income also reflected higher gross margins in specialty
chemicals, partially offset by the impact of the stronger U.S. dollar.
Operating income for the mineral products business decreased slightly as
the higher sales levels were offset by lower gross profit margins.
Interest expense for the second quarter increased slightly to $19.1
million from $18.9 million in the second quarter of 1997. Other income,
net, for the second quarter of 1998 was $9.7 million compared with $7.3
million in the second quarter of 1997, principally reflecting higher
investment income, partially offset by foreign exchange losses.
Results of Operations - Six Months 1998 Compared With
Six Months 1997
For the first six months of 1998, the Company recorded net income of
$34.7 million (64 cents diluted earnings per share) compared with $26.7
million (50 cents diluted earnings per share), for the first six months of
1997. The 30% increase in net income was attributable to higher operating
and other income and, to a lesser extent, lower interest expense.
10
<PAGE>
Net sales for the first six months of 1998 were $420.5 million versus
net sales of $389.0 million for the same period in 1997, with the increase
attributable to the GhC acquisition ($20.0 million) and to increased sales
of specialty chemicals (excluding GhC sales) (up $8.1 million) and mineral
products (up $3.9 million), partially offset by lower filter products sales
(down $0.5 million). The higher sales of specialty chemicals (excluding
GhC) resulted from increased sales volumes (up $16.1 million), partially
offset by the unfavorable effect of the stronger U.S. dollar ($8.0
million). The 9% increase in mineral products was due to increased sales
volumes (up $3.2 million) and, to a lesser extent, favorable pricing. The
sales growth resulted from sales increases in the U.S. and the Western
Hemisphere, partially offset by lower sales in the Asia-Pacific region and
Europe (excluding GhC), reflecting the unfavorable effect of the stronger
U.S. dollar.
Operating income for the first six months of 1998 was $85.9 million, a
14% increase over the $75.4 million recorded in the first six months of
1997. The increase in operating income was primarily attributable to the
acquisition of the remaining interest in GhC ($6.7 million) and improved
operating results in all business segments. Specialty chemicals operating
income (excluding GhC) increased $3.1 million, of which $2.6 million was
attributable to the Freetown, Massachusetts fine chemicals acquisition, and
also reflected higher gross profit margins, offset by the negative impact
of the stronger U.S. dollar. Operating income for the mineral products
business increased $0.6 million (6%) due to the higher sales levels.
Interest expense for the first six months was $37.0 million compared
with $37.5 million in the same period in 1997, with the decrease due
primarily to lower average borrowings. Other income, net, for the first
six months of 1998 was $19.7 million compared with $13.4 million last year,
principally reflecting higher investment income, partially offset by
foreign exchange losses.
Liquidity and Financial Condition
During the first six months of 1998, the Company's net cash outflow
before financing activities was $62.9 million, including $114.7 million of
cash generated from operations, the reinvestment of $118.1 million for
capital programs and acquisitions (see below and Note 2 to Consolidated
Financial Statements), $56.1 million of cash generated from a sale-
leaseback related to an acquisition, and the use of $115.5 million of cash
for net purchases of available-for-sale and held-to-maturity securities.
Cash from operations reflected a $30.6 million cash inflow from net
sales of trading securities and also included $6.1 million of dividends
received from the GhC joint venture prior to the Company's acquisition of
the remaining interest in GhC. Working capital increased by $3.5 million,
primarily reflecting a $28.1 million increase in receivables due to $33.9
million higher sales in June 1998 versus December 1997 and an increase in
the receivable from the purchaser of the Company's domestic trade accounts
receivable, partially offset by a $0.8 million decrease in inventories and
a $26.4 million increase in payables.
11
<PAGE>
Net cash provided by financing activities in the six months of 1998
totaled $93.4 million, mainly reflecting a $51.6 million increase in short-term
borrowings, a $38.0 million increase in borrowings under the Company's bank
revolving credit facility and $4.0 million proceeds from the sale of the
Company's accounts receivable.
As a result of the foregoing factors, cash and cash equivalents increased
by $30.6 million during the first six months of 1998 to $51.1 million
(excluding $314.9 million of trading and available-for-sale securities and
other short-term investments).
As of June 28, 1998, the Company's scheduled repayments of long-term debt
for the twelve months ending June 30, 1999 aggregated $38.6 million, excluding
$200 million relating to the Company's 9% Senior Notes due March 1999. The
Company intends to refinance the 9% Senior Notes; accordingly, such notes are
classified as long-term debt on the Consolidated Balance Sheet.
In February 1998, the Company acquired Polaroid Corporation's Freetown,
Massachusetts fine chemicals facility. In connection with the acquisition, the
Company entered into a sale-leaseback arrangement of the facility's equipment
with a third party. The lease has been 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.
Effective April 1, 1998, the Company acquired the remaining 50% interest
in the GhC joint venture. As part of the transaction, the Company also
acquired Huls' production facility that supplies GhC with its primary raw
material, acetylene. See Note 2 to Consolidated Financial Statements.
On July 15, 1998, Old ISP merged with and into the Company.
See Note 1 to Consolidated Financial Statements.
On July 22, 1998, the Company filed a shelf Registration Statement on Form
S-3 with the U.S. Securities and Exchange Commission for $1 billion of debt and
equity securities. In addition to debt refinancing, the net proceeds of any
offering, if consummated, are expected to be used for general corporate
purposes.
The Company is in the process of implementing a new global information
system for capturing, processing and analyzing data relating to manufacturing,
customer service, sales order entry, inventory control and financial systems.
In conjunction with this initiative, the Company is addressing its "Year 2000"
compliance issues and does not believe that the costs associated with, or the
impact of, these issues will have a material adverse effect on the operations,
liquidity or capital resources of the Company. At this time, the Company is in
the process of reviewing the Year 2000 compliance issues of its major suppliers
and customers.
See Note 6 to Consolidated Financial Statements for information regarding
contingencies.
12
<PAGE>
Forward-looking Statements
This Form 10-Q may contain certain "forward-looking statements" intended
to qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
generally can be identified by use of statements that include phrases such as
the Company or its management "believes," "expects," "anticipates," "intends,"
"plans," "foresees" or other words or phrases of similar import. Similarly,
statements that describe the Company's objectives, plans or goals also are
forward-looking statements. All such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
Stockholders, investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements. The forward-looking
statements included herein are made only as of the date of this Form 10-Q and
the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
13
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
(b) Old ISP filed a Report on Form 8-K, dated March 30, 1998, reporting events
under Items 5 and 7 thereof.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the Registrants listed below has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL SPECIALTY PRODUCTS INC.
ISP CHEMICALS INC.
ISP TECHNOLOGIES INC.
ISP (PUERTO RICO) INC.
ISP ENVIRONMENTAL SERVICES INC.
ISP FILTERS INC.
ISP GLOBAL TECHNOLOGIES INC.
ISP INTERNATIONAL CORP.
ISP INVESTMENTS INC.
ISP MANAGEMENT COMPANY, INC.
ISP MINERAL PRODUCTS INC.
ISP MINERALS INC.
ISP REAL ESTATE COMPANY, INC.
ISP REALTY CORPORATION
VERONA INC.
BLUEHALL INCORPORATED
ISP OPCO HOLDINGS INC.
DATE: August 11, 1998 BY: /s/Randall R. Lay
--------------- -----------------
Randall R. Lay
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 1998 10-Q OF INTERNATIONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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