SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 27, 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
<PAGE>
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
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 November 6, 1998, 68,769,317 shares of International Specialty Products
Inc. common stock (par value $.01 per share) were outstanding.
As of November 6, 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 November 6, 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 100 333-17827-01/ 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)
Third Quarter Ended Nine Months Ended
-------------------- ------------------
Sept. 28, Sept. 27, Sept. 28, Sept. 27,
1997 1998 1997 1998
-------- -------- -------- --------
Net sales............................. $183,600 $206,933 $572,606 $627,411
-------- -------- -------- --------
Costs and expenses:
Cost of products sold............... 105,861 119,612 336,380 364,530
Selling, general and administrative. 39,782 43,896 116,274 126,908
Goodwill amortization............... 3,345 4,062 9,980 10,737
Merger related and consolidation
expenses (Note 2) ................ - 13,543 - 13,543
-------- -------- -------- --------
Total costs and expenses.......... 148,988 181,113 462,634 515,718
-------- -------- -------- --------
Operating income...................... 34,612 25,820 109,972 111,693
Interest expense...................... (17,975) (18,884) (55,505) (55,877)
Equity in earnings of joint venture... 1,517 - 4,263 1,455
Other income, net..................... 10,414 11,360 23,803 31,061
-------- -------- -------- --------
Income before income taxes............ 28,568 18,296 82,533 88,332
Income taxes.......................... (10,548) (6,904) (30,128) (33,036)
Minority interest in income of
subsidiary.......................... (3,594) (1,087) (11,293) (10,279)
-------- -------- -------- --------
Net income............................ $ 14,426 $ 10,305 $ 41,112 $ 45,017
======== ======== ======== ========
Earnings per common share:
Basic............................... $ .27 $ .15 $ .76 $ .77
======== ======== ======== ========
Diluted............................. $ .27 $ .15 $ .76 $ .77
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding:
Basic............................... 53,833 66,757 53,833 58,189
======== ======== ======== ========
Diluted............................. 53,833 67,473 53,833 58,430
======== ======== ======== ========
See Notes to Consolidated Financial Statements
1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
Sept. 27,
December 31, 1998
1997 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 20,495 $ 37,948
Investments in trading securities............. 67,943 69,362
Investments in available-for-sale securities.. 140,812 193,405
Investments in held-to-maturity securities.... 311 11,917
Other short-term investments.................. 26,682 37,143
Accounts receivable, trade, net............... 67,077 115,584
Accounts receivable, other.................... 25,288 39,758
Receivable from related parties, net.......... 4,124 2,292
Inventories................................... 119,910 137,437
Other current assets.......................... 16,773 16,989
---------- ----------
Total Current Assets............................ 489,415 661,835
Property, plant and equipment, net.............. 518,922 599,310
Goodwill, net................................... 409,886 536,972
Other assets.................................... 67,457 35,667
---------- ----------
Total Assets.................................... $1,485,680 $1,833,784
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................... $ 39,076 $ 37,141
Current maturities of long-term debt.......... 684 38,772
Accounts payable.............................. 46,283 76,833
Accrued liabilities........................... 74,092 103,117
Income taxes.................................. 7,200 20,224
---------- ----------
Total Current Liabilities................... 167,335 276,087
---------- ----------
Long-term debt less current maturities.......... 798,762 859,068
---------- ----------
Deferred income taxes........................... 67,918 77,597
---------- ----------
Other liabilities............................... 63,493 61,755
---------- ----------
Minority interest in subsidiary................. 126,331 -
---------- ----------
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
and 69,546,456 shares issued ............... 538 695
Additional paid-in capital.................... 212,413 489,275
Treasury stock, at cost - 70,874 shares ...... - (917)
Retained earnings............................. 40,080 85,097
Accumulated other comprehensive income (loss). 8,810 (14,873)
---------- ----------
Total Stockholders' Equity.................. 261,841 559,277
---------- ----------
Total Liabilities and Stockholders' Equity...... $1,485,680 $1,833,784
========== ==========
See Notes to Consolidated Financial Statements
2
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
--------------------
Sept. 28, Sept. 27,
1997 1998
--------- --------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 17,938 $ 20,495
-------- --------
Cash provided by operating activities:
Net income............................................. 41,112 45,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 30,936 34,790
Goodwill amortization.............................. 9,980 10,737
Deferred income taxes.............................. 23,521 11,272
Increase in working capital items...................... (6,713) (217)
Purchases of trading securities........................ (132,330) (184,465)
Proceeds from sales of trading securities.............. 96,278 194,312
(Increase) decrease in net receivable from related
parties.............................................. (2,687) 1,832
Change in cumulative translation adjustment............ (7,343) 4,070
Change in minority interest in subsidiary.............. 10,113 9,730
Other, net............................................. 5,530 10,287
-------- --------
Net cash provided by operating activities............ 68,397 137,365
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. (45,834) (141,456)
Proceeds from sale-leaseback transaction............... - 56,050
Proceeds from sale of assets........................... - 2,400
Purchases of available-for-sale securities............. (213,708) (474,195)
Purchases of held-to-maturity securities............... (1,623) (11,917)
Purchases of other short-term investments.............. - (10,000)
Proceeds from sales of available-for-sale securities... 239,317 359,101
Proceeds from held-to-maturity securities.............. 3,075 311
-------- --------
Net cash used in investing activities................. (18,773) (219,706)
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. - 4,000
Decrease in short-term debt............................ (5,686) (1,935)
Increase (decrease) in borrowings under revolving
credit facility...................................... (21,425) 98,500
Repayments of long-term debt........................... (429) (496)
Repurchases of common stock............................ (10,240) (1,037)
Other, net............................................. 1 762
-------- --------
Net cash provided by (used in) financing activities...... (37,779) 99,794
-------- --------
Net change in cash and cash equivalents.................. 11,845 17,453
-------- --------
Cash and cash equivalents, end of period................. $ 29,783 $ 37,948
======== ========
3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -- (Continued)
Nine Months Ended
--------------------
Sept. 28, Sept. 27,
1997 1998
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)........... $ 54,276 $ 59,630
Income taxes................................... 3,261 9,461
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 September 27, 1998, and the results of
operations and cash flows for the periods ended September 28, 1997 and September
27, 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' common stock 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. Merger Related and Consolidation Expenses
In the third quarter of 1998, the Company incurred $13.5 million of charges
against operating income related to the Merger and the consolidation of offices
in the Company's European operations. The Merger related expenses consisted of a
$7.9 million charge in connection with the termination of ISP Holdings' stock
appreciation rights and preferred stock option programs and a $2.6 million
charge related to purchase accounting adjustments.
Note 3. 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 $38.8 million for the second and
third quarters of 1998.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Acquisitions (Continued)
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.
Note 4. 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 investments in available-for-sale securities,
foreign currency translation adjustments, and pension liability adjustments.
Third Quarter Ended Nine Months Ended
--------------------- -------------------
Sept. 28, Sept. 27, Sept. 28, Sept. 27,
1997 1998 1997 1998
-------- -------- -------- --------
(Thousands)
Net income........................... $ 14,426 $ 10,305 $ 41,112 $ 45,017
-------- -------- -------- --------
Other comprehensive income, net of
tax:
Unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains (losses)
arising during the period, net of
income tax (provision) benefit of
$866, $10,564, $(1,943), and
$5,392........................... (1,499) (24,938) 3,489 (13,834)
Less: reclassification adjustment
for gains (losses) included in net
income, net of income tax
(provision) benefit of $1,118,
$(260), $(2,145), and $(6,600).... (2,003) (692) 4,984 13,723
-------- -------- -------- -------
Total.............................. 504 (24,246) (1,495) (27,557)
Foreign currency translation
adjustment........................ (852) 7,354 (6,726) (4,070)
Minimum pension liability
adjustment........................ - - 83 -
Effect of the Merger on components
of accumulated other
comprehensive income (loss)...... - (196) - (196)
-------- -------- -------- -------
Total other comprehensive income
(loss).............................. (348) (17,088) (8,138) (23,683)
-------- -------- -------- --------
Comprehensive income (loss).......... $ 14,078 $ (6,783) $ 32,974 $ 21,334
======== ======== ======== ========
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Comprehensive Income (Continued)
Changes in the components of "Accumulated other comprehensive income
(loss)" for the nine months ended September 27, 1998 are as follows:
Unrealized
Gains Cumulative
(Losses)on Foreign Minimum Accumulated
Available- Currency Pension Other
for-sale Translation Liability Comprehensive
Securities Adjustment Adjustment Income (Loss)
---------- ----------- ---------- -------------
(Thousands)
Balance, December 31, 1997.. $ 8,007 $ 1,385 $ (582) $ 8,810
Change for the period....... (27,273) 3,701 (111) (23,683)
-------- -------- -------- --------
Balance, September 27, 1998. $(19,266) $ 5,086 $ (693) $(14,873)
======== ======== ======== ========
Note 5. 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" are 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 give effect to all potential
dilutive common shares outstanding during the period under the Company's stock
option plan.
Note 6. Inventories
Inventories comprise the following:
December 31, Sept. 27,
1997 1998
------------ ---------
(Thousands)
Finished goods................ $ 84,912 $ 85,658
Work in process............... 20,088 27,553
Raw materials and supplies.... 18,408 26,569
-------- --------
Total......................... 123,408 139,780
Less LIFO reserve............. (3,498) (2,343)
-------- --------
Inventories................... $119,910 $137,437
======== ========
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. 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.
Note 8. New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement.
SFAS No. 133 is effective for fiscal years beginning after June 15, 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 9. Contingencies
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, results of
operations or financial position of the Company. However, adverse decisions or
events, particularly as to the liability and the financial responsibility of the
Company's insurers and of the other parties involved at each site and their
insurers, could cause the Company to increase its estimate of its liability in
respect of such matters. It is not currently possible to estimate the amount or
range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 13 to Consolidated Financial Statements contained in the Form 10-K.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. Contingencies (Continued)
Tax Claim against GAF
Certain subsidiaries of the Company were members of the GAF Corporation
("GAF") consolidated Federal income tax group (the "GAF Group") in 1990 and,
accordingly, would be severally liable for any tax liability of the GAF Group in
respect of such year. Effective as of January 1, 1997, neither the Company nor
any of its subsidiaries are members of the GAF Group.
On September 15, 1997, GAF received a notice from the Internal Revenue
Service (the "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 business, financial
position or results of operations. GAF and certain subsidiaries of GAF have
agreed to jointly and severally indemnify the Company against any tax liability
associated with the surfactants partnership, which the Company would be
severally liable for, together with GAF and several subsidiaries of GAF, should
GFC be unable to satisfy such liability.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Third Quarter 1998 Compared With
Third Quarter 1997
The Company recorded third quarter 1998 net income of $10.3 million
(15 cents diluted earnings per share) versus $14.4 million (27 cents diluted
earnings per share) in the third quarter of 1997. The results for the third
quarter of 1998 reflect $13.5 million of pre-tax charges related to the Merger
and the consolidation of offices in the Company's European operations (see Note
2 to Consolidated Financial Statements). Excluding the effect of these charges,
the Company's results reflected higher operating and other income, partially
offset by increased interest expense.
Net sales for the third quarter of 1998 were $206.9 million, a 13%
increase compared with $183.6 million for the third quarter of 1997. The
increase in sales was attributable to increased sales volumes, principally due
to the acquisitions of GhC and the Freetown, Massachusetts fine chemicals
facility (see Note 3 to Consolidated Financial Statements), and, to a lesser
extent, also reflected a $2.5 million (11%) 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 ($1.9 million). The sales growth in the third quarter resulted from
higher sales of fine chemicals and mineral products in the United States,
partially offset by lower sales in the Asia-Pacific region.
Operating income for the third quarter of 1998 was $25.8 million compared
with last year's $34.6 million. Excluding $13.5 million of charges related to
the Merger and consolidation, operating income for the third quarter of 1998
increased $4.8 million (14%), resulting principally from the acquisitions of GhC
and the Freetown, Massachusetts fine chemicals facility, partially offset by the
impact of the stronger U.S. dollar and lower gross margins for specialty
chemicals. Operating income for the mineral products business increased $1.4
million (28%) as a result of the higher sales levels and higher gross profit
margins.
Interest expense for the third quarter increased to $18.9 million from
$18.0 million in the third quarter of 1997, primarily due to higher average
borrowings. Other income, net, for the third quarter of 1998 was $11.4 million
compared with $10.4 million in the third quarter of 1997, principally reflecting
higher investment income.
10
<PAGE>
Results of Operations -- Nine Months 1998 Compared With
Nine Months 1997
For the first nine months of 1998, the Company recorded net income of
$45.0 million (77 cents diluted earnings per share) compared with $41.1 million
(76 cents diluted earnings per share), for the first nine months of 1997. The
results for the first nine months of 1998 reflect $13.5 million of pre-tax
charges related to the Merger and the consolidation of offices in the Company's
European operations (see Note 2 to Consolidated Financial Statements). Excluding
the effect of these charges, the Company's results reflected higher operating
and other income, partially offset by slightly higher interest expense and lower
equity income due to the GhC acquisition.
Net sales for the first nine months of 1998 were $627.4 million compared
with net sales of $572.6 million for the same period in 1997, with the increase
attributable to increased sales volumes, principally due to the acquisitions of
GhC and the Freetown, Massachusettes fine chemicals facility, and, to a lesser
extent, higher sales of mineral products (up $6.3 million), partially offset by
the unfavorable effect of the stronger U.S. dollar ($11.5 million). The 10%
increase in mineral products was due to increased sales volumes (up $5.7
million) and, to a lesser extent, favorable pricing. The sales growth resulted
from higher sales of fine chemicals and mineral products in the United States,
partially offset by lower sales in the Asia-Pacific region.
Operating income for the first nine months of 1998 was $111.7 million
compared with $110.0 million in the first nine months of 1997. Excluding the
$13.5 million of charges related to the Merger and consolidation, operating
income for the first nine months increased $15.2 million (14%) to $125.2
million, with the increase primarily attributable to the acquisitions of GhC and
the Freetown, Massachusetts fine chemicals facility, partially offset by the
adverse effect of the stronger U.S. dollar in certain regions of the world.
Operating income for the mineral products business increased $2.0 million (14%)
due to the higher sales levels and improved gross profit margins.
Interest expense for the first nine months of 1998 was $55.9 million
compared with $55.5 million in the same period in 1997, with the increase due
primarily to higher average borrowings. Other income, net, for the first nine
months of 1998 was $31.1 million compared with $23.8 million last year,
principally reflecting higher investment income, partially offset by foreign
exchange losses.
Liquidity and Financial Condition
During the first nine months of 1998, the Company's net cash outflow before
financing activities was $82.3 million, including $137.4 million of cash
generated from operations, the reinvestment of $141.5 million for capital
programs and acquisitions (see below and Note 3 to Consolidated Financial
Statements), $56.1 million of cash generated from a sale-leaseback related to an
acquisition, and the use of $136.7 million of cash for net purchases of
available-for-sale and held-to-maturity securities and other short-term
investments.
11
<PAGE>
Cash from operations reflected a $9.8 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 $0.2 million, primarily reflecting a $48.8
million increase in receivables due to $27.9 million higher sales in September
1998 versus December 1997 and an increase in the receivable from the purchaser
of the Company's domestic trade accounts receivable, and a $9.4 million increase
in inventories, offset by a $58.1 million increase in payables and accrued
liabilities.
Net cash provided by financing activities in the first nine months of 1998
totaled $99.8 million, mainly reflecting a $98.5 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, partially offset by a $1.9
million reduction in short-term borrowings and $1.0 million of repurchases of
common stock pursuant to the Company's repurchase program. The Company announced
in September 1998 that its Board of Directors had approved the repurchase of an
additional one million shares of its common stock. This amount is in addition to
a share repurchase program of one million shares, announced in October 1996,
which is expected to be completed shortly. The repurchased shares will be held
for general purposes, including the issuance of shares under the Company's stock
option plan.
As a result of the foregoing factors, cash and cash equivalents increased
by $17.5 million during the first nine months of 1998 to $37.9 million
(excluding $311.8 million of trading, available-for-sale and held-to-maturity
securities and other short-term investments).
As of September 27, 1998, the Company's scheduled repayments of long-term
debt for the twelve months ending September 30, 1999 aggregated $38.8 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 3 to Consolidated Financial Statements.
On July 15, 1998, Old ISP merged with and into the Company. See Note 1 to
Consolidated Financial Statements.
12
<PAGE>
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.
See Note 9 to Consolidated Financial Statements for information regarding
contingencies.
Year 2000 Compliance
The Company has implemented a formal Year 2000 program (the "Year 2000
Program") to (i) address its Year 2000 issues (i.e., the inability of some
information technology ("IT") and "non-IT" equipment, including devices with
embedded technology, to accurately read and process certain dates, including all
dates in the Year 2000 and afterwards) (the "Year 2000 Issues"); (ii)
investigate Year 2000 Issues of third parties significant to the Company's
business; and (iii) establish contingency plans where appropriate.
The Company is in the final stages of installing a new Enterprise Resource
Planning System ("ERP System") and has replaced or remediated most of its
personal computers and other IT equipment that may have Year 2000 Issues.
Although the ERP System was implemented for purposes other than remediating Year
2000 Issues, management believes that the ERP System is Year 2000 compliant.
With respect to its non-IT equipment, the Company and its consultants are
presently inventorying, evaluating, remediating and testing this equipment. The
Company expects to complete its Year 2000 Program for IT and non-IT equipment by
mid-1999.
The Company is also requesting information on the Year 2000 Issues of third
parties significant to the Company's business. The Company is evaluating the
responses from many of these entities and is requesting more information as
appropriate. Based on the information gathered from its Year 2000 Program, the
Company is developing contingency plans to minimize the impact of Year 2000
Issues on its business. The Company expects to substantially complete these
activities by mid-1999.
The Company does not believe that the costs of its Year 2000 Program will
be material to its financial position or results of operations. While the
Company believes that it addressed most of its IT Year 2000 Issues by installing
the ERP System and replacing or remediating personal computers, neither the
timing nor extent of these activities were directly related to the Company's
Year 2000 Program. The Company also has incurred outside costs of approximately
$100,000 in connection with evaluating Year 2000 compliance of its non-IT
systems. The Company expects that the source of any funds that may be necessary
to pay the costs of addressing its Year 2000 Issues will be provided from cash
balances or cash generated from operations. The Company intends to charge such
costs against earnings or a depreciating capital account, as the case may be, as
the costs are incurred.
13
<PAGE>
Management believes that it has taken reasonable steps in developing its
Year 2000 Program. Notwithstanding these actions, there can be no assurance that
all of the Company's Year 2000 Issues or those of its key suppliers, service
providers or customers will be resolved or addressed satisfactorily before the
Year 2000 commences. If the Company's key suppliers, service providers,
customers and other third parties fail to address their Year 2000 Issues, and
there are no alternates available to the Company, then the Company's usual
channels of supply and distribution could be disrupted, in which event the
Company could experience a material adverse impact on its business, results of
operations or financial position.
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.
14
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of Old ISP held on July 15, 1998, the
Merger was approved, with 92,512,253 votes in favor, 102,512 votes against and
8,087 abstentions; the proposed amendment to the 1991 Incentive Plan for Key
Employees and Directors was approved, with 84,277,312 votes in favor, 8,328,976
votes against and 16,564 abstentions; and each nominated director was reelected,
with at least 91,934,256 votes in favor of, and not more than 2,619,763 votes
withheld from, each nominee.
Item 5. Other Information
The Securities and Exchange Commission has recently amended Rules 14a-4 and
14a-5 promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), in respect of the Company's exercise of discretionary voting
authority in connection with annual stockholder meetings, and in particular with
respect to matters not submitted in accordance with the stockholder proposal
rule set forth in Rule 14a-8 under the 1934 Act. Under the amended Rules, with
respect to a stockholder proposal submitted outside of the processes of Rule
14a-8 for which notice is not received by the Company at its principal executive
offices prior to February 26, 1999, the proxy to be solicited on behalf of the
Company's Board of Directors for the 1999 Annual Meeting may confer
discretionary authority to vote on any such proposal properly coming before the
1999 Annual Meeting.
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) The Company filed a Report on Form 8-K, dated August 5, 1998, reporting
events under Items 5 and 7 thereof.
15
<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: November 10, 1998 BY: /s/Randall R. Lay
----------------- -----------------
Randall R. Lay
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 1998 10-Q OF INTERNATIONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> INTERNATIONAL SPECIALTY PRODUCTS INC.
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-27-1998
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<SECURITIES> 274,684
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