UNITED STATES
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 June 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-29764
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)
300 Delaware Avenue, Suite 303, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 427-5715
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of August 9, 2002, 64,942,382 shares of International Specialty Products
Inc. common stock (par value $.01 per share) were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Thousands, except per share amounts)
Second Quarter Ended Six Months Ended
--------------------- --------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
--------- --------- --------- ---------
Net sales............................ $ 203,294 $ 214,724 $ 406,491 $ 433,848
--------- --------- --------- ---------
Costs and Expenses:
Cost of products sold.............. (122,332) (138,655) (255,595) (284,032)
Selling, general and administrative (41,331) (43,857) (81,308) (86,366)
Gain on sale of assets............. - 5,468 - 5,468
Gains on settlement of contracts... - 3,928 - 6,760
Amortization of goodwill and
intangibles...................... (4,048) (153) (8,096) (555)
--------- --------- --------- ---------
Total costs and expenses ....... (167,711) (173,269) (344,999) (358,725)
--------- --------- --------- ---------
Operating income..................... 35,583 41,455 61,492 75,123
Interest expense..................... (18,677) (21,189) (37,728) (44,035)
Investment income (loss), net of
investment-related expenses of
$1,529, $1,358, $2,560 and $2,498,
respectively....................... (13,884) 10,001 20,793 25,240
Other expense, net................... (2,862) (222) (9,040) (2,177)
--------- --------- --------- ---------
Income before income taxes........... 160 30,045 35,517 54,151
Income taxes......................... (60) (10,192) (12,462) (18,375)
--------- --------- --------- ---------
Income before extraordinary item and
cumulative effect of accounting
change............................ 100 19,853 23,055 35,776
Extraordinary item - loss on early
retirement of debt, net of income
tax benefit of $2,434.............. - - - (4,725)
Cumulative effect of change in
accounting principle, net of
income tax benefit of $216 in 2001. - - (440) (155,400)
--------- --------- --------- ---------
Net income (loss).................... $ 100 $ 19,853 $ 22,615 $(124,349)
========= ========= ========= =========
1
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - (CONTINUED)
(Thousands, except per share amounts)
Second Quarter Ended Six Months Ended
---------------------- --------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
---------- ---------- --------- --------
Earnings per common share:
Basic:
Income before extraordinary item
and cumulative effect of
accounting change.............. $ - $ .31 $ .35 $ .55
Extraordinary item............... - - - (.07)
Cumulative effect of accounting
change........................ - - (.01) (2.40)
--------- --------- --------- -------
Net income (loss)................ $ - $ .31 $ .34 $ (1.92)
========= ========= ========= =======
Diluted:
Income before extraordinary item
and cumulative effect of
accounting change.............. $ - $ .31 $ .35 $ .55
Extraordinary item............... - - - (.07)
Cumulative effect of accounting
change........................ - - (.01) (2.40)
--------- --------- --------- -------
Net income (loss)................ $ - $ .31 $ .34 $ (1.92)
========= ========= ========= =======
Weighted average number of common
and common equivalent shares
outstanding:
Basic.............................. 66,148 64,822 66,238 64,829
========= ========= ======== =======
Diluted............................ 66,263 64,888 66,314 64,901
========= ========= ======== =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
June 30,
December 31, 2002
2001 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 79,509 $ 122,828
Investments in trading securities.................. 54,437 98,024
Investments in available-for-sale securities....... 239,273 180,174
Other short-term investments....................... 2,299 -
Restricted cash.................................... 307,866 -
Accounts receivable, trade, net.................... 86,574 100,554
Accounts receivable, other......................... 20,357 27,384
Receivable from related parties, net............... 9,009 15,599
Inventories........................................ 190,582 167,299
Deferred income tax benefits....................... 32,929 35,591
Other current assets............................... 8,635 8,685
---------- ----------
Total Current Assets............................. 1,031,470 756,138
Property, plant and equipment, net................... 560,844 565,981
Goodwill, net........................................ 502,607 330,911
Intangible assets, net............................... 15,167 8,160
Other assets......................................... 62,480 61,483
---------- ----------
Total Assets......................................... $2,172,568 $1,722,673
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt.................................... $ 143 $ 1,624
Current maturities of long-term debt............... 310,265 2,319
Accounts payable................................... 49,088 50,317
Accrued liabilities................................ 97,659 85,940
Income taxes....................................... 9,799 12,474
---------- ----------
Total Current Liabilities........................ 466,954 152,674
---------- ----------
Long-term debt less current maturities............... 919,557 861,693
---------- ----------
Deferred income taxes................................ 109,297 131,454
---------- ----------
Other liabilities.................................... 72,703 67,777
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized:
no shares issued................................. - -
Common stock, $.01 par value per share; 300,000,000
shares authorized: 69,546,456 shares issued...... 695 695
Additional paid-in capital......................... 487,156 488,274
Unearned compensation - restricted stock awards.... (1,166) (3,170)
Treasury stock, at cost - 4,831,939 and
4,722,913 shares, respectively................... (35,621) (35,013)
Retained earnings.................................. 214,095 89,746
Accumulated other comprehensive loss............... (61,102) (31,457)
---------- ----------
Total Stockholders' Equity....................... 604,057 509,075
---------- ----------
Total Liabilities and Stockholders' Equity........... $2,172,568 $1,722,673
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
-------------------
July 1, June 30,
2001 2002
-------- ---------
(Thousands)
Cash and cash equivalents, beginning of period............... $ 18,181 $ 79,509
-------- --------
Cash provided by (used in) operating activities:
Net income (loss).......................................... 22,615 (124,349)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item..................................... - 4,725
Cumulative effect of change in accounting principle.... 440 155,400
Gain on sale of assets................................. - (5,468)
Depreciation........................................... 26,141 27,925
Amortization of goodwill and intangibles............... 8,096 555
Deferred income taxes.................................. 7,276 12,447
Unrealized (gains) losses on trading securities
and other short-term investments..................... 1,819 (9,554)
Increase in working capital items.......................... (44,451) (1,087)
Purchases of trading securities............................ (323,198) (325,455)
Proceeds from sales of trading securities.................. 500,119 276,504
Proceeds (repayments) from sale of accounts receivable..... (2,918) (3,883)
Increase in net receivable from related parties............ (4,550) (6,434)
Change in cumulative translation adjustment................ (8,101) 10,678
Other, net................................................. 9,014 (4,921)
-------- --------
Net cash provided by operating activities.................... 192,302 7,083
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions...................... (44,079) (30,666)
Net proceeds from sale of assets........................... - 27,271
Purchases of available-for-sale securities................. (130,671) (128,518)
Proceeds from sales of available-for-sale securities....... 19,768 229,369
Proceeds from sales of other short-term investments........ 12,765 2,299
-------- --------
Net cash provided by (used in) investing activities.......... (142,217) 99,755
-------- --------
Cash provided by (used in) financing activities:
Increase (decrease) in short-term debt..................... (104,532) 1,481
Proceeds from issuance of debt............................. 426,864 -
Decrease in borrowings under revolving credit facility..... (122,000) (56,850)
Repayments of long-term debt............................... (28,236) (309,309)
Call premium on redemption of debt......................... - (4,621)
(Increase) decrease in restricted cash..................... (197,251) 307,866
Financing fees and expenses................................ (10,389) (1,412)
Repurchases of common stock................................ (4,123) (1,506)
Other, net................................................. 730 278
-------- --------
Net cash used in financing activities........................ (38,937) (64,073)
-------- --------
Effect of exchange rate changes on cash...................... (875) 554
-------- --------
Net change in cash and cash equivalents...................... 10,273 43,319
-------- --------
Cash and cash equivalents, end of period..................... $ 28,454 $122,828
======== ========
4
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)-- (CONTINUED)
Six Months Ended
-------------------
July 1, June 30,
2001 2002
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)................. $ 36,893 $ 45,962
Income taxes......................................... 4,696 4,065
Acquisition of FineTech Ltd.:
Fair market value of assets acquired................. $ 23,547
Purchase price of acquisition........................ 22,450
--------
Liabilities assumed.................................. $ 1,097
========
Acquisition of mineral products facility:
Fair market value of assets acquired................. $ 11,421
Purchase price of acquisition........................ 11,421
--------
Liabilities assumed.................................. $ -
========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for International Specialty Products
Inc. and its consolidated subsidiaries (the "Company") reflect, in the opinion
of management, all adjustments necessary to present fairly the financial
position of the Company and its consolidated subsidiaries at June 30, 2002, and
the results of operations and cash flows for the periods ended July 1, 2001 and
June 30, 2002. All adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the
"Form 10-K").
NOTE 1. RETIREMENT OF DEBT
On January 14, 2002, the Company redeemed the remaining $307.9 million
aggregate principal amount of its 9% Senior Notes due 2003 (the "2003 Notes").
The 2003 Notes were redeemed at a redemption price of 101.5% of the principal
amount plus accrued and unpaid interest to the redemption date. As a result, the
Company recorded an extraordinary loss on the early retirement of debt of $4.7
million ($7.1 million before income tax benefit of $2.4 million), or $.07 per
diluted share. The extraordinary charge was comprised of $4.6 million of call
premium, $0.2 million of remaining discount amortization and the write-off of
$2.3 million of unamortized deferred financing fees. The redemption was funded
utilizing a restricted cash escrow account which had been established in 2001 in
connection with the issuances of long-term debt.
NOTE 2. RECENT ACCOUNTING DEVELOPMENT
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life. However, goodwill will
be subject to at least an annual assessment for impairment and more frequently
if circumstances indicate a possible impairment. Companies must perform a
fair-value-based goodwill impairment test. In addition, under SFAS No. 142, an
acquired intangible asset should be separately recognized if the benefit of the
intangible is obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged.
Intangible assets will be amortized over their useful lives. The Company adopted
SFAS No. 142 effective as of January 1, 2002. Accordingly, the Company completed
a transitional impairment test, effective January 1, 2002, and recognized a
goodwill impairment loss of $155.4 million as the cumulative effect of a change
in accounting principle. The Statement of Operations for the first quarter of
2002 has been restated to reflect this loss. The write-off represents the
goodwill associated with the Company's Performance Chemicals, Fine Chemicals and
Industrial business segment and was based upon the Company's estimate of fair
value for these businesses, considering expected future cash flows and
profitability. The Company intends to complete its annual test for impairment by
the end of the year 2002.
6
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. RECENT ACCOUNTING DEVELOPMENT - (CONTINUED)
Following is a reconciliation showing "Income before extraordinary item and
cumulative effect of accounting change," "Net income" and related earnings per
share, as reported for the second quarters and six months ended July 1, 2001 and
June 30, 2002, and as adjusted to exclude amortization of goodwill.
Second Quarter Ended Six Months Ended
-------------------- ------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
-------- --------- -------- --------
(Thousands, except per share amounts)
Income before extraordinary item
and cumulative effect of
accounting change, as reported..... $ 100 $ 19,853 $23,055 $ 35,776
Add back: goodwill amortization...... 4,048 - 8,096 -
--------- -------- ------- ---------
Income before extraordinary item and
cumulative effect of accounting
change, as adjusted................ $ 4,148 $ 19,853 $31,151 $ 35,776
========= ======== ======= =========
Net income (loss), as reported....... $ 100 $ 19,853 $22,615 $(124,349)
Add back: goodwill amortization...... 4,048 - 8,096 -
--------- -------- ------- ---------
Net income (loss), as adjusted....... $ 4,148 $ 19,853 $30,711 $(124,349)
========= ======== ======= =========
Earnings per common share:
Basic:
Net income (loss), as reported .. $ - $ .31 $ .34 $ (1.92)
Goodwill amortization ........... .06 - .12 -
--------- -------- -------- ---------
Net income (loss), as adjusted... $ .06 $ .31 $ .46 $ (1.92)
========= ======== ======= =========
Diluted:
Net income (loss), as reported .. $ - $ .31 $ .34 $ (1.92)
Goodwill amortization ........... .06 - .12 -
--------- ------- ------- ---------
Net income (loss), as adjusted... $ .06 $ .31 $ .46 $ (1.92)
========= ======= ======= =========
7
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. GAIN ON SALE OF ASSETS
In April 2002, the Company sold its Haifa, Israel-based FineTech, Ltd.
business to Pharmaceutical Resources, Inc. ("PRI") for $32 million. The Company
recorded a second quarter pre-tax gain, after expenses, of $5.5 million related
to this transaction. Also see Note 4.
NOTE 4. GAINS ON SETTLEMENT OF CONTRACTS
In December 2001, the Company entered into a letter agreement to sell its
pharmaceutical fine chemicals business, including its Haifa, Israel-based
FineTech Ltd. business and its Columbus, Ohio manufacturing facility to PRI. In
February 2002, the Company received a $250,000 payment from PRI in consideration
of extending the negotiations pursuant to the letter agreement. In March 2002,
the Company announced that the sale would not be consummated due to the failure
of PRI to proceed with the transaction in a timely manner. Under the terms of
the letter agreement, the Company received a $3.0 million break-up fee.
Accordingly, the Company recognized a first quarter 2002 pre-tax gain of $2.8
million, representing the total cash received in February and March of $3.25
million less related expenses of $0.4 million.
In the second quarter of 2002, the Company received $4.0 million in
settlement of a manufacturing and supply contract with a customer of the Fine
Chemicals business. After related expenses, a pre-tax gain of $3.9 million was
recognized.
NOTE 5. ACQUISITION
In April 2002, the Company acquired the roofing granules manufacturing
operations in Ione, California of Reed Minerals, a division of Harsco
Corporation. In a related transaction, the Company also acquired the adjacent
quarry operations and certain mining assets from Hanson Aggregates Mid-Pacific,
Inc. The total purchase price of the acquisitions was $11.4 million.
8
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. COMPREHENSIVE INCOME (LOSS)
Second Quarter Ended Six Months Ended
-------------------- -----------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
------- -------- --------- --------
(Thousands)
Net income (loss)............................ $ 100 $19,853 $ 22,615 $(124,349)
-------- ------- -------- ---------
Other comprehensive income (loss), net of tax:
Change in unrealized losses on
available-for-sale securities:
Unrealized holding gains (losses) arising
during the period, net of income tax
(provision) benefit of $18,869, $4,079,
$41,736 and $(12,074), respectively....... (38,580) (6,831) (80,887) 26,950
Less: reclassification adjustment for gains
(losses) included in net income, net of
of income tax (provision) benefit of $594,
$(483), $311 and $(2,682), respectively... (1,098) 1,195 (574) 9,501
-------- ------- -------- ---------
Total change for the period................. (37,482) (8,026) (80,313) 17,449
-------- ------- -------- ---------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of income tax
benefit of $133, $11, $627
and $12, respectively..................... (246) (20) (1,160) (22)
Less: reclassification adjustment for
losses included in net income, net of
income tax benefit of $161, $316, $189
and $534, respectively.................... (299) (611) (350) (986)
-------- ------- -------- ---------
Total change for the period................. 53 591 (810) 964
-------- ------- -------- ---------
Foreign currency translation adjustment....... (3,883) 11,211 (8,976) 11,232
-------- ------- -------- ---------
Total other comprehensive income (loss)....... (41,312) 3,776 (90,099) 29,645
-------- ------- -------- ---------
Comprehensive income (loss)................... $(41,212) $23,629 $(67,484) $ (94,704)
======== ======= ======== =========
Changes in the components of "Accumulated other comprehensive loss" for the
six months ended June 30, 2002 are as follows:
Unrealized Unrealized Cumulative
Gains (Losses) Losses on Foreign Accumulated
On Available- Derivative Currency Other
for-Sale Hedging Translation Comprehensive
Securities Instruments Adjustment Loss
------------ ----------- ----------- -------------
(Thousands)
Balance, December 31, 2001.. $ (32,443) $ (964) $ (27,695) $ (61,102)
Change for the period....... 17,449 964 11,232 29,645
------------ -------- --------- ---------
Balance, June 30, 2002...... $ (14,994) $ - $ (16,463) $ (31,457)
============ ======== ========= ==========
9
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. BUSINESS SEGMENT INFORMATION
Second Quarter Ended Six Months Ended
--------------------- --------------------
July 1, June 30, July 1, June 30,
2001 2002 2001 2002
--------- --------- -------- ---------
(Thousands)
Net sales (1):
Personal Care............................. $ 48,851 $ 51,821 $ 105,112 $ 105,117
Pharmaceutical, Food and Beverage......... 56,293 58,351 111,800 118,770
Performance Chemicals, Fine Chemicals and
Industrial.............................. 76,560 78,877 149,557 160,258
--------- --------- --------- ---------
Total Specialty Chemicals............... 181,704 189,049 366,469 384,145
Mineral Products (2)...................... 21,590 25,675 40,022 49,703
--------- --------- --------- ---------
Net sales................................... $ 203,294 $ 214,724 $ 406,491 $ 433,848
========= ========= ========= =========
Operating income(1):
Personal Care............................. $ 9,093 $ 10,574 $ 21,283 $ 18,093
Pharmaceutical, Food and Beverage......... 14,021 12,911 26,924 26,439
Performance Chemicals, Fine Chemicals and
Industrial (3).......................... 9,732 10,762 9,585 17,817
--------- --------- --------- --------
Total Specialty Chemicals............... 32,846 34,247 57,792 62,349
Mineral Products.......................... 2,782 7,219 3,356 12,888
--------- --------- --------- --------
Total segment operating income............ 35,628 41,466 61,148 75,237
Unallocated corporate office.............. (45) (11) 344 (114)
--------- --------- --------- ---------
Total operating income...................... 35,583 41,455 61,492 75,123
Interest expense, investment income (loss)
and other expense, net.................... (35,423) (11,410) (25,975) (20,972)
--------- --------- --------- ---------
Income before income taxes.................. $ 160 $ 30,045 $ 35,517 $ 54,151
========== ========= ========= =========
(1) Net sales and operating income for the second quarter and the first six
months of 2001 for the three Specialty Chemicals business segments have
been restated to conform to the 2002 presentation. In 2002, the Company
realigned its Alginates business based on the markets for its products.
Sales and operating income for the Alginates business are now included in
the Personal Care, Pharmaceutical, Food and Performance Chemicals
businesses. Prior to 2001, the sales and operating income of the Alginates
business represented the Food business of the Pharmaceutical, Food and
Beverage business segment.
(2) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $16.6 and $19.7 million for the second quarter of
2001 and 2002, respectively, and $31.8 and $38.8 million for the first six
months of 2001 and 2002, respectively.
(3) Operating income for the Performance Chemicals, Fine Chemicals and
Industrial business segment for the second quarter and six months of 2002
includes a gain of $5.5 million from the sale of the FineTech business (see
Note 3) and a $3.9 million gain from the settlement of a manufacturing and
supply contract (see Note 4). For the six months of 2002, operating income
for the Performance Chemicals, Fine Chemicals and Industrial business
segment also includes a first quarter gain of $2.8 million from the
termination of a contract related to the sale of the FineTech business (see
Note 4).
10
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. HEDGING AND DERIVATIVES
In June 2001, ISP Chemco Inc., an indirect wholly owned subsidiary of the
Company, entered into $450.0 million of Senior Credit Facilities, which include
a $225.0 million term loan. The Company designated interest rate swaps, with a
notional amount of $100 million, as a hedge of its exposure to changes in the
eurodollar rate under the term loan. The interest rate swaps are structured to
receive interest based on the eurodollar rate and pay interest on a fixed rate
basis. A cash flow hedging relationship was established whereby the interest
rate swaps hedged the risk of changes in the eurodollar rate related to
borrowings against the term loan. The interest rate swaps hedge exposure to
changes in the eurodollar rate through July 2002.
At June 30, 2002, the fair value of the interest rate swaps was $(1.1)
million and is included within "Accrued liabilities" on the Company's
Consolidated Balance Sheet. During the first six months of 2002, $1.9 million
related to the interest rate swaps was reclassified and charged against interest
expense. Of the original $100 million notional amount of the interest rate
swaps, $50 million matured in June 2002, and the remaining $50 million matured
in July 2002. Accordingly, the fair market value of these swaps has been
recognized in earnings.
NOTE 9. INVENTORIES
Inventories comprise the following:
December 31, June 30,
2001 2002
------------ --------
(Thousands)
Finished goods................ $120,797 $105,545
Work-in-process............... 36,960 32,574
Raw materials and supplies.... 32,825 29,180
-------- --------
Inventories................... $190,582 $167,299
======== ========
At December 31, 2001 and June 30, 2002, $60.1 and $53.2 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, the value of
inventories would have been $3.7 and $2.2 million higher at December 31, 2001
and June 30, 2002, respectively.
11
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. CONTINGENCIES
Environmental Litigation
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, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed, a number of which Environmental Claims are in
the early stages or have been dormant for protracted periods.
While the Company cannot predict whether adverse decisions or events can
occur in the future, 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 increases in remedial costs,
discovery of new contamination, assertion of natural resource damages, and 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 those 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 19 to Consolidated Financial Statements contained in the Form 10-K.
Tax Claim Against G-I Holdings Inc.
The Company and certain of its subsidiaries were members of a consolidated
group for Federal income tax purposes that included G-I Holdings Inc., (the "G-I
Holdings Group") in certain prior years and, accordingly, would be severally
liable for any tax liability of the G-I Holdings Group in respect of those prior
years. Effective as of January 1, 1997, neither the Company nor any of its
subsidiaries are members of the G-I Holdings Group.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in the tax matter arising out of the surfactants partnership, 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. On September 21, 2001,
the IRS filed a
12
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. CONTINGENCIES - (CONTINUED)
proof of claim with respect to such deficiency against G-I Holdings in the
G-I Holdings bankruptcy. On May 7, 2002, G-I Holdings filed an objection to that
proof of claim. If such proof of claim is sustained, the Company and/or some of
the Company's subsidiaries, together with G-I Holdings and several current and
former subsidiaries of G-I Holdings, would be severally liable for such taxes
and interest in the amount of approximately $250.0 million should G-I Holdings
be unable to satisfy such liability. In January 2001, G-I Holdings filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code due to its asbestos-related bodily injury claims relating to the inhalation
of asbestos fiber. For additional information relating to G-I Holdings,
reference is made to Notes 8, 16 and 19 to Consolidated Financial Statements
contained in the Form 10-K.
NOTE 11. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting and reporting
standards for legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and the
normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred. Upon initial recognition of such liability, an
entity must capitalize the asset retirement cost by increasing the carrying
amount of the related long-lived asset and subsequently depreciating the asset
retirement cost over the useful life of the related asset. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, although earlier
application is encouraged. The Company does not expect that the adoption of SFAS
No. 143 will have a material impact on its consolidated results of operations,
financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement of SFAS No. 4 that gains
and losses on the early extinguishments of debt be recorded as an extraordinary
item unless such gains and losses meet the criteria of APB No. 30 for
classification as extraordinary. The rescission of SFAS No. 4 is effective for
fiscal years beginning after May 15, 2002, although early application is
encouraged. The Company intends to adopt SFAS No. 145 effective January 1, 2003,
which will likely result in the Company's first quarter 2002 pre-tax loss of
$7.1 million on the early extinguishment of debt being reclassified to other
expense, net.
NOTE 12. SUBSEQUENT EVENT
On July 8, 2002, the Company announced that its Board of Directors had
received a letter from Samuel J. Heyman, the Chairman of the Board,
13
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. SUBSEQUENT EVENT - (CONTINUED)
proposing that the Board consider a transaction whereby holders of shares
of the Company's common stock (other than those shares beneficially owned by Mr.
Heyman) would receive $10 in cash per share. Such shares total approximately
12.5 million shares, or approximately 19% of the Company's outstanding shares.
The total consideration for such shares of approximately $125 million would be
paid out of available Company funds. The Board of Directors has formed a special
committee of independent Directors to evaluate this proposal.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us," "our," and "ISP"
refer to International Specialty Products Inc. and its consolidated
subsidiaries.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosure
of contingent liabilities. On an on-going basis, we evaluate our estimates,
including but not limited to those related to doubtful accounts, inventory
valuation, investments, environmental liabilities, goodwill and intangible
assets, pensions and other postemployment benefits, and contingent liabilities.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions. We do not anticipate any changes in management
estimates that would have a material impact on our operations, liquidity or
capital resources. See Note 2 to Consolidated Financial Statements in the Form
10-K for our significant accounting policies.
The only update to our critical accounting policies since December 31, 2001
relates to the amortization of goodwill. In accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," goodwill is no longer amortized over its estimated useful
life, but rather will be subject to at least an annual assessment for
impairment. We adopted SFAS No. 142 on January 1, 2002. Accordingly, we
completed a transitional impairment test, effective January 1, 2002, and
recognized a goodwill impairment loss of $155.4 million as the cumulative effect
of a change in accounting principle. We will perform our annual test for
impairment before the end of the year 2002.
RESULTS OF OPERATIONS - SECOND QUARTER 2002 COMPARED WITH
SECOND QUARTER 2001
We recorded second quarter 2002 net income of $19.9 million ($.31 diluted
earnings per share) compared with $0.1 million in the second quarter of 2001.
Second quarter 2002 results include pre-tax gains of $5.5 million from the sale
of our FineTech business and $3.9 million from a contract settlement. Second
quarter 2001 results reflected $4.0 million of goodwill amortization. Net
income, adjusted to exclude the nonrecurring gains in the second quarter of 2002
and goodwill amortization in the second quarter of 2001, would have been
15
$13.7 million ($.21 diluted earnings per share) in the second quarter of
2002 versus $4.1 million ($.06 diluted earnings per share) in the second quarter
of 2001. On a comparable basis, the results for the second quarter of 2002
reflected $23.9 million higher investment income and $2.6 million lower other
expense, net, partially offset by $7.5 million lower operating income (excluding
the nonrecurring gains) and $2.5 million higher interest expense.
Net sales for the second quarter of 2002 were $214.7 million compared with
$203.3 million for the same period in 2001. The 6% increase in sales in the
second quarter of 2002 resulted primarily from the contribution to sales from
the biocides business ($9.9 million), which was acquired on December 31, 2001,
higher unit volumes in the Mineral Products, Personal Care, Pharmaceutical and
Industrial businesses (totaling $12.1 million), and the favorable impact of the
weaker U.S. dollar in Europe ($1.3 million), partially offset by lower unit
volumes in the Fine Chemicals and Performance Chemicals businesses (totaling
$9.5 million) and lower pricing in the Industrial business ($3.0 million).
Gross margins for the second quarter of 2002 were 35.4% compared with 39.8%
in the second quarter of 2001. The decline in margins resulted primarily from a
reduction in the Fine Chemicals business due to the Polaroid bankruptcy and
price declines in the Industrial business.
Operating income for the second quarter of 2002 was $41.5 million compared
with $35.6 million for the second quarter of 2001. Excluding the nonrecurring
gains totaling $9.4 million in the second quarter of 2002 and $4.0 million of
goodwill amortization in the second quarter of 2001, operating income was $32.1
million for the second quarter of 2002 compared with $39.6 million for the
second quarter of 2001. On a comparable basis, the decrease in operating income
in the second quarter of 2002 was attributable to lower operating results in the
Fine Chemicals and Industrial businesses (totaling $10.0 million), partially
offset by improvements in operating profits in the Mineral Products and the
Personal Care business segments (totaling $5.9 million). Selling, general and
administrative expenses for the second quarter of 2002 increased 6% to $43.9
million from $41.3 million in the same period last year, primarily due to the
biocides acquisition and to higher selling and distribution costs, but those
expenses as a percentage of sales were 20.4% compared with 20.3% in last year's
second quarter.
Interest expense for the second quarter of 2002 was $21.2 million versus
$18.7 million for the same period last year. The increase was due to higher
average interest rates, partially offset by lower average borrowings. Investment
income in the second quarter of 2002 was $10.0 million compared with investment
losses of $13.9 million in the same period last year, which mainly reflected
unrealized losses. Other expense, net, for the second quarter of 2002 was $0.2
million compared with other expense, net, of $2.9 million in last year's second
quarter, with the lower expense due to the impact of the weaker U.S. dollar in
Europe and Asia.
16
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our Specialty Chemicals business through three reportable
business segments, in addition to the Mineral Products segment. Each business
segment was favorably impacted in the second quarter of 2002 by the absence of
goodwill amortization. Goodwill amortization in the second quarter of 2001 by
business segment was as follows:
(Millions)
----------
Personal Care $1.2
Pharmaceutical, Food and Beverage 1.0
Performance Chemicals, Fine Chemicals
and Industrial 1.0
Mineral Products 0.8
Personal Care
Sales in the second quarter of 2002 were $51.8 million compared with $48.9
million for the same period last year, while operating income for the second
quarter of 2002 increased to $10.6 million from $9.1 million in last year's
quarter. The 6% increase in sales resulted from higher unit volumes ($2.9
million), mainly in hair care products in North America. The higher operating
income resulted from the favorable goodwill impact in addition to favorable
volume and mix ($2.2 million), partially offset by unfavorable manufacturing
costs ($1.6 million).
Pharmaceutical, Food and Beverage
Sales for the Pharmaceutical, Food and Beverage segment were $58.4 million
for the second quarter of 2002, a 4% increase compared with $56.3 million for
the second quarter of 2001. Sales for the Pharmaceutical business increased by
6% in the second quarter of 2002, reflecting higher unit volumes ($1.7 million),
primarily in the excipients market in Europe.
Operating income for the Pharmaceutical, Food and Beverage segment was
$12.9 million in the second quarter of 2002 compared with $14.0 million in the
same period last year. The earnings decline primarily resulted from unfavorable
manufacturing costs ($2.2 million) and higher administrative and selling
expenses, which more than offset the favorable impact of the increased sales
volumes.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the second quarter of 2002 were $78.9 million compared with $76.6
million in the second quarter of 2001. The 3% higher sales were attributable to
the biocides business ($9.9 million), which was acquired on December 31, 2001,
and also to higher Industrial volumes ($4.1 million). These sales increases were
offset by 10% lower Performance Chemicals sales due to lower volumes ($2.6
million), 56% lower Fine Chemicals sales reflecting the lack of sales to
Polaroid,
17
and lower Industrial pricing ($3.0 million). Market selling prices of
butanediol decreased in the second quarter of 2002 compared with average 2001
levels due to weakening demand and in anticipation of new capacity coming on
stream in Europe later in 2002.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $10.8 million in the second quarter of 2002 compared with
$9.7 million for the second quarter of 2001. Excluding the $9.4 million of
nonrecurring gains discussed earlier, operating income for the second quarter of
2002 was $1.4 million. The reduction in operating income was attributable to
losses from the Fine Chemicals business due to the loss of sales to Polaroid and
lower Industrial profits due to the impact of unfavorable pricing and product
mix ($6.5 million), partially offset by the increased Industrial volumes and the
contribution to income from the biocides business.
Mineral Products
Sales for the Mineral Products segment for the second quarter of 2002 were
$25.7 million compared with $21.6 million for the second quarter of 2001. The
$4.1 million (19%) increase reflected $3.1 million (19%) higher sales to
Building Materials Corporation of America, an affiliate, and $1.0 million (20%)
higher third party sales. The increased sales reflected higher unit volumes
($3.4 million) resulting from an increased demand for roofing granules.
Operating income for the second quarter of 2002 was $7.2 million compared with
$2.8 million for the second quarter of 2001, reflecting favorable manufacturing
efficiencies as well as the impact of the higher volumes.
RESULTS OF OPERATIONS - FIRST SIX MONTHS 2002 COMPARED WITH
FIRST SIX MONTHS 2001
For the first six months of 2002, we recorded a net loss of $124.3 million
($1.92 per diluted share) compared with net income of $22.6 million ($.34
diluted earnings per share) in the first six months of 2001. In accordance with
the adoption of SFAS No. 142, we completed a transitional test for impairment of
goodwill, and, accordingly, recorded a $155.4 million ($2.40 per diluted share)
charge, effective January 1, 2002, for the cumulative effect of a change in
accounting principle. The write-off represents the goodwill associated with our
Performance Chemicals, Fine Chemicals and Industrial business segment and was
based upon our estimate of fair value for these businesses, considering expected
future cash flows and profitability.
First six months 2002 results also include a $5.5 million pre-tax gain from
the sale of the FineTech business, $6.8 million of pre-tax gains from contract
settlements and an after-tax extraordinary charge of $4.7 million ($.07 per
diluted share) on the early retirement of debt. First six months 2001 results
included $8.1 million of goodwill amortization, prior to the adoption of SFAS
No. 142, and an after-tax charge of $0.4 million ($.01 per diluted share) for
the cumulative effect of adopting SFAS No. 133, "Accounting for
18
Derivative Instruments and Hedging Activities." Excluding such charges and
nonrecurring gains discussed above, adjusted "Income before extraordinary item
and cumulative effect of accounting change" for the first six months of 2002 was
$27.7 million ($.43 diluted earnings per share) compared with $31.2 million
($.47 diluted earnings per share) for the first six months of 2001. On a
comparable basis, the lower results for the first six months of 2002 were
attributable to $6.7 million lower operating income (excluding the nonrecurring
gains) and $6.3 million higher interest expense, partially offset by $4.4
million higher investment income and $6.9 million lower other expense, net.
Net sales for the first six months of 2002 were $433.8 million compared
with $406.5 million for the same period in 2001. The 7% increase in sales in the
first six months of 2002 resulted primarily from the contribution to sales from
the biocides business ($17.7 million), which was acquired on December 31, 2001,
and by higher unit volumes in the Mineral Products, Pharmaceutical, Personal
Care and Industrial businesses (totaling $20.4 million), partially offset by
lower unit volumes in the Performance Chemicals and Fine Chemicals businesses
(totaling $4.1 million), and lower pricing in the Industrial business ($4.8
million).
Gross margins for the first six months of 2002 were 34.5% compared with
37.1% in the first six months of 2001. The decline in margins resulted primarily
from a reduction in the Fine Chemicals business due to the Polaroid bankruptcy,
unfavorable manufacturing costs, and price declines in the Industrial business.
Operating income for the first six months of 2002 was $75.1 million
compared with $61.5 million for the first six months of 2001. Excluding the
$12.2 million of nonrecurring pre-tax gains on the sale of the FineTech business
and the settlements of contracts in the first six months of 2002 and $8.1
million of goodwill amortization in the first six months of 2001, operating
income was $62.9 million for the first six months of 2002 compared with $69.6
million for the first six months of 2001. On a comparable basis, the $6.7
million decrease in operating income in the first six months of 2002 was
primarily attributable to lower results in the Fine Chemicals, Personal Care,
Pharmaceutical, Food and Beverage, and Industrial businesses, partially offset
by a significant improvement in operating profits in the Mineral Products
business segment and the contribution to income from the biocides business.
Selling, general and administrative expenses increased 6% in the first six
months of 2002 to $86.4 million from $81.3 million in the same period last year,
primarily due to the biocides acquisition and higher selling and distribution
costs, but those expenses as a percentage of sales were 19.9% compared with
20.0% last year.
Interest expense for the first six months of 2002 was $44.0 million versus
$37.7 million for the same period last year. The increase was due principally to
higher average interest rates and, to a lesser extent, slightly higher average
borrowings. Investment income in the first six months of 2002 was $25.2 million
compared with $20.8 million in the same period last year. Other expense, net,
19
for the first six months of 2002 was $2.2 million compared with other
expense, net, of $9.0 million in last year's period, with the lower expense due
to the impact of a weaker U.S. dollar in Europe and Asia and a $2.0 million
higher provision for environmental liability in last year's first six months.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our Specialty Chemicals business through three reportable
business segments, in addition to the Mineral Products segment. Each business
segment was favorably impacted in the first six months of 2002 by the absence of
goodwill amortization. Goodwill amortization in the first six months of 2001 by
business segment was as follows:
(Millions)
----------
Personal Care $2.4
Pharmaceutical, Food and Beverage 2.1
Performance Chemicals, Fine Chemicals
and Industrial 2.1
Mineral Products 1.5
Personal Care
Sales in the first six months of 2002 were $105.1 million, level with the
same period last year, while operating income for the first six months of 2002
decreased to $18.1 million from $21.3 million in the same period last year.
Sales reflected higher unit volumes in hair care products offset by unfavorable
pricing and unfavorable foreign exchange. The lower operating income resulted
from lower gross margins due to unfavorable manufacturing costs.
Pharmaceutical, Food and Beverage
Sales for the Pharmaceutical, Food and Beverage segment were $118.8 million
for the first six months of 2002, a 6% increase compared with $111.8 million for
the first six months of 2001. Sales for the Pharmaceutical business increased by
12% in the first quarter of 2002, reflecting higher unit volumes ($8.4 million),
primarily in the excipients markets in Europe and North America. Sales for the
Beverage and alginates food businesses decreased by 8% and 6%, respectively, due
to lower unit volumes (totaling $2.1 million) in North America, Europe and Latin
America.
Operating income for the Pharmaceutical, Food and Beverage segment was
$26.4 million in the first six months of 2002 compared with $26.9 million in the
same period last year. Operating income for the Pharmaceutical business
increased 6% in the first six months of 2002 compared with the same period in
2001. The improvement reflected the higher unit volumes, partially offset by
unfavorable manufacturing costs ($1.4 million), an unfavorable product mix ($1.4
million) and higher administrative and selling expenses ($2.8 million).
Operating results for the Beverage and alginates food businesses decreased by a
total of $2.4 million in the first six
20
months of 2002 due to unfavorable manufacturing costs and the lower
volumes.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first six months of 2002 were $160.3 million compared with
$149.6 million in the first six months of 2001. The 7% higher sales were
attributable to the biocides business ($17.7 million), which was acquired on
December 31, 2001. Sales for the Performance Chemicals, Fine Chemicals and
Industrial businesses, excluding biocides, decreased by a total of $7.0 million
(5%) due to unfavorable volumes (totaling $4.1 million) in the Performance
Chemicals and Fine Chemicals businesses and lower pricing in Industrial ($4.8
million), partially offset by higher Industrial volumes ($1.6 million). Market
selling prices of butanediol decreased in the first six months of 2002 compared
with average 2001 levels due to weakening demand and in anticipation of new
capacity coming on stream in Europe later in 2002. Sales for the Fine Chemicals
business were unfavorably impacted due to the loss of Polaroid sales as a result
of Polaroid's bankruptcy.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $17.8 million in the first six months of 2002 compared
with $9.6 million for the first six months of 2001. Excluding the $5.5 million
gain on the sale of the FineTech business and the $6.8 million of gains on
contract settlements, operating income for the first six months of 2002 was $5.6
million. The decline in operating profits was primarily attributable to lower
results in the Fine Chemicals and Performance Chemicals businesses (totaling
$6.7 million) due to the unfavorable volumes and manufacturing costs, partially
offset by the contribution to income from the biocides business. Operating
profits for the Industrial business were slightly lower for the first six
months, as the impact of lower pricing and an unfavorable product mix (totaling
$9.4 million) was mostly offset by favorable manufacturing efficiencies due to
consolidation of our butanediol production at our Marl, Germany facility,
together with lower methanol and natural gas prices.
Mineral Products
Sales for the Mineral Products segment for the first six months of 2002
were $49.7 million compared with $40.0 million for the first six months of 2001.
The $9.7 million (24%) increase reflected $7.0 million (22%) higher sales to
Building Materials Corporation of America, an affiliate, and $2.7 million (33%)
higher third party sales. The increased sales reflected higher unit volumes
($9.7 million) resulting from an increased demand for roofing granules.
Operating income for the first six months of 2002 was $12.9 million compared
with $3.4 million for the same period in 2001, reflecting favorable
manufacturing efficiencies and lower natural gas costs, as well as the impact of
the higher volumes.
21
LIQUIDITY AND FINANCIAL CONDITION
During the first six months of 2002, our net cash inflow before financing
activities was $106.8 million, reflecting $7.1 million of cash generated from
operations, the reinvestment of $30.7 million for capital programs and the
acquisition of a Mineral Products manufacturing facility, net cash proceeds of
$27.3 million from the sale of the FineTech business and $103.2 million of cash
generated from net sales of available-for-sale securities and other short-term
investments.
Cash generated from operations in the first six months of 2002 included a
$58.5 million net cash outflow related to investments in trading securities.
Excluding this cash outflow, cash provided from operations totaled $65.6
million. Cash invested in additional working capital totaled $1.1 million during
the first six months of 2002, reflecting a $17.7 million increase in receivables
and a $7.4 million net decrease in payables and accrued liabilities, primarily
due to payments of accrued interest, partially offset by a $24.1 million
decrease in inventories. The higher receivables resulted from $22.6 million
higher sales in the second quarter of 2002 versus the fourth quarter of 2001 and
the reduced inventories resulted from our inventory reduction program that was
substantially completed in the first half of 2002.
Net cash used in financing activities during the first six months of 2002
totaled $64.1 million, primarily reflecting a $56.9 million decrease in
borrowings under our bank revolving credit facility and a $4.6 million call
premium on the redemption of debt. On January 14, 2002, we redeemed the
remaining $307.9 million aggregate principal amount of our 9% Senior Notes due
2003, which we refer to as the "2003 Notes." The 2003 Notes were redeemed at a
redemption price of 101.5% of the principal amount plus accrued and unpaid
interest to the redemption date. The redemption was funded utilizing a
restricted cash escrow account which had been established in 2001 in connection
with the issuances of long-term debt. In addition, financing activities included
a $1.5 million cash outlay for repurchases of 177,600 shares of our common stock
pursuant to our repurchase program. At June 30, 2002, 771,462 shares of common
stock remained available for purchase under our repurchase program.
As a result of the foregoing factors, cash and cash equivalents increased
by $43.3 million during the first six months of 2002 to $122.8 million,
excluding $278.2 million of trading and available-for-sale securities.
On July 8, 2002, we announced that our Board of Directors had received a
letter from Samuel J. Heyman, the Chairman of the Board, proposing that the
Board consider a transaction whereby holders of shares of our common stock
(other than those shares beneficially owned by Mr. Heyman) would receive $10 in
cash per share. Such shares total approximately 12.5 million shares, or
approximately 19% of our outstanding shares. The total consideration for such
shares of approximately $125 million would be paid out of our available funds.
The Board of Directors
22
has formed a special committee of independent Directors to evaluate this
proposal.
In April 2002, we sold our Haifa, Israel-based FineTech, Ltd. business to
Pharmaceutical Resources Incorporated, which we refer to as "PRI," for $32
million. We recorded a second quarter pre-tax gain, after expenses, of $5.5
million related to this sale. In December 2001, we entered into a letter
agreement to sell our pharmaceutical fine chemicals business to PRI, including
the Haifa-based business and our Columbus, Ohio manufacturing facility. In
February 2002, we received a $250,000 payment from PRI in consideration of
extending the negotiations pursuant to the letter agreement. In March 2002, we
announced that the sale would not be consummated due to the failure of PRI to
proceed with the transaction in a timely manner. Under the terms of the letter
agreement, we received a $3.0 million break-up fee, which was recorded as income
in the first quarter of 2002 (see Note 4 to Consolidated Financial Statements).
In April 2002, we acquired the roofing granules manufacturing operations in
Ione, California of Reed Minerals, a division of Harsco Corporation. In a
related transaction, we also acquired the adjacent quarry operations and certain
mining assets from Hanson Aggregates Mid-Pacific, Inc. The total purchase price
of the acquisitions was $11.4 million.
As part of our acquisition of our Freetown, Massachusetts plant in 1998, we
entered into a multi-year agreement to supply the imaging dyes and polymers used
by Polaroid in its instant film business. In October 2001, Polaroid filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. In April 2002, an
announcement was made regarding the possible sale of Polaroid that could
negatively impact our ongoing relationship with Polaroid and the utilization of
our Freetown plant. As a result of the Polaroid announcement, the sale of the
FineTech business and the retention of the Columbus facility (as discussed
above), we currently have excess production capacity at the Freetown and
Columbus facilities. We are in the process of evaluating the optimal utilization
of these facilities. An impairment of long-lived assets at our Columbus facility
is not required at this time based upon our estimates of future cash flows
related to those assets.
We have an operating lease for a sale-leaseback transaction related to the
Freetown facility, which was entered into in 1998. The lease had an initial term
of four years and, at our option, up to three one-year renewal periods. The
lease provides for a substantial guaranteed payment by us at the end of each
renewal period and includes purchase and return options at fair market values
determined at the inception of the lease. We have the right to exercise a
purchase option with respect to the leased facility, or the facility can be
returned to the lessor and sold to a third party. We are obligated to pay a
maximum guaranteed payment amount upon the return of the facility, currently
$35.8 million, reduced by 50% of any proceeds from the subsequent sale of the
facility in excess of $5.2 million. Under generally accepted accounting
principles, we cannot recognize this future obligation or recognize an
impairment loss relative to the Freetown facility since, as an operating lease,
the Freetown facility is not carried as a long-lived asset on our balance sheet.
However, given the current utilization of the Freetown facility as a result of
the Polaroid bankruptcy, if we should exercise the purchase
23
option at the end of any future renewal period or at the termination of the
lease in 2005, we would anticipate having to recognize a material impairment
charge.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting and reporting
standards for legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and the
normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred. Upon initial recognition of such liability, an
entity must capitalize the asset retirement cost by increasing the carrying
amount of the related long-lived asset and subsequently depreciating the asset
retirement cost over the useful life of the related asset. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, although earlier
application is encouraged. The Company does not expect that the adoption of SFAS
No. 143 will have a material impact on its consolidated results of operations,
financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement of SFAS No. 4 that gains
and losses on the early extinguishments of debt be recorded as an extraordinary
item unless such gains and losses meet the criteria of APB No. 30 for
classification as extraordinary. The rescission of SFAS No. 4 is effective for
fiscal years beginning after May 15, 2002, although early application is
encouraged. We intend to adopt SFAS No. 145 effective January 1, 2003, which
will likely result in our first quarter 2002 pre-tax loss of $7.1 million on the
early extinguishment of debt being reclassified to other expense, net.
See Note 10 to Consolidated Financial Statements for information regarding
contingencies.
* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or
phrases of similar import. Similarly, statements that describe our objectives,
plans or goals also are forward-looking statements. Our operations are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
The forward-looking statements included herein are made only as of
24
the date of this Quarterly Report on Form 10-Q and we undertake no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances. No assurances can be given that projected
results or events will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, for a discussion of "Market-Sensitive
Instruments and Risk Management." As of December 31, 2001, equity-related
financial instruments employed by us to reduce market risk included long
contracts valued at $13.5 million and short contracts valued at $7.2 million. At
June 30, 2002, the value of long contracts was $1.2 million and there were no
short contracts outstanding. Such instruments are marked-to-market each month,
with unrealized gains and losses included in the results of operations. The
unrealized gain on equity-related long contracts at December 31, 2001 and June
30, 2002 was $176,000 and $72,000, respectively, and the unrealized gain on
equity-related short contracts was $45,000 at December 31, 2001.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 8, 2002 , the Company announced that its Board of Directors had
received a letter from Samuel J. Heyman, the Chairman of the Board, proposing
that the Board consider a transaction whereby holders of shares of the Company's
common stock (other than those shares beneficially owned by Mr. Heyman) would
receive $10 in cash per share. Subsequent to the July 8, 2002 announcement, six
purported class actions were filed in Chancery Court in New Castle County,
Delaware, and one purported class action was filed in the United States District
Court for the District of New Jersey against the Company and the individual
members of the Board of Directors. These various actions allege generally that
the defendants breached their fiduciary duties to the Company's public
shareholders with respect to the proposed transaction and seek to enjoin or
rescind the transaction and obtain unspecified damages and attorneys' fees. The
Company believes these actions are without merit and intends, and has been
advised that the individual directors also intend, to vigorously defend against
them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 16, 2002, each
nominated director was reelected with at least 60,731,980 votes in favor of and
not more than 606,417 votes withheld from, each nominee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
--------------
99.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K filed during the current quarter:
During the three-month period ending June 30, 2002, the Company filed a
Report on Form 8-K under Item 4 - Changes in Registrant's Certifying
Accountant, dated June 20, 2002 and filed June 24, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL SPECIALTY PRODUCTS INC.
DATE: August 13, 2002 BY: /s/Neal E. Murphy
--------------- -----------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: August 13, 2002 BY: /s/Kenneth M. McHugh
--------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
27