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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 OCTOBER 3, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-17827-01
ISP CHEMCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0382622
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5818
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
-----------------------------------
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 / /
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes / / No /X/
As of November 16, 2004, 100 shares of the registrant's common stock (par
value $.01 per share) were outstanding. There is no trading market for the
common stock of the registrant. As of August 17, 2004, each of the additional
registrants had the number of shares outstanding which is shown on the table
below. There is no trading market for the common stock of the additional
registrants. No shares of the registrant or the additional registrants were held
by non-affiliates.
THE REGISTRANT AND THE ADDITIONAL REGISTRANTS MEET THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
ADDITIONAL REGISTRANTS
Address, including zip
Commission File code and telephone
Exact name of registrant as State or other No. of No./ I.R.S. number, including area
specified in its charter jurisdiction of Shares Employer code, of registrant's
incorporation or Outstanding Identification No. principal executive
organization offices
- --------------------------- ---------------- ----------- ------------------ -------------------------
ISP Chemicals Inc. Delaware 10 333-70144-08/ Route 95 Industrial Area,
22-3807357 P.O. Box 37
Calvert City, KY 42029
(270) 395-4165
ISP Minerals Inc. Delaware 10 333-70144-07/ 34 Charles Street
22-3807370 Hagerstown, MD 21740
(301) 733-4000
ISP Technologies Delaware 10 333-70144-09/ 4501 Attwater Avenue
Inc. 22-3807372 and State Highway 146
Texas City, TX 77590
(409) 945-3411
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- --------------------
OCTOBER 3, SEPT. 28, OCTOBER 3, SEPT. 28,
2004 2003 2004 2003
--------- --------- --------- ---------
(THOUSANDS)
Net sales............................ $ 252,773 $ 215,125 $ 781,338 $ 677,229
Cost of products sold................ (166,648) (140,506) (502,270) (440,314)
Selling, general and administrative.. (47,578) (42,404) (145,904) (131,318)
Other operating charges.............. - - - (1,451)
Amortization of intangible assets.... (336) (144) (775) (432)
--------- --------- --------- ---------
Operating income..................... 38,211 32,071 132,389 103,714
Interest expense..................... (12,851) (13,077) (39,447) (39,727)
Other expense, net................... (1,598) (1,983) (6,110) (1,908)
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle............... 23,762 17,011 86,832 62,079
Income taxes......................... (8,321) (5,925) (30,213) (21,718)
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle..... 15,441 11,086 56,619 40,361
Cumulative effect of change in
accounting principle, net of
income tax benefit of $600......... - - - (1,021)
--------- --------- --------- ---------
Net income........................... $ 15,441 $ 11,086 $ 56,619 $ 39,340
========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
ISP CHEMCO INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 3, DECEMBER 31,
2004 2003
--------- -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 35,246 $ 56,426
Accounts receivable, trade, less allowance of
$6,490 and $5,848 at October 3, 2004 and
December 31, 2003, respectively.................. 115,585 86,921
Accounts receivable, other......................... 30,335 19,681
Receivables from related parties................... 16,187 12,508
Inventories........................................ 188,493 187,805
Deferred income tax assets......................... 26,041 25,701
Prepaid expenses................................... 5,564 5,777
--------- ----------
Total Current Assets............................. 417,451 394,819
Property, plant and equipment, net................... 583,992 580,608
Goodwill, net of accumulated amortization of $180,486 337,398 331,101
Intangible assets, net of accumulated amortization of
$1,925 and $1,150 at October 3, 2004 and
December 31, 2003, respectively.................... 18,761 8,866
Long-term receivable from related party.............. 33,561 32,116
Long-term loan receivable from related party......... - 31,231
Other assets......................................... 62,961 57,479
---------- ----------
Total Assets......................................... $1,454,124 $1,436,220
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt................................... $ 67 $ 68
Current maturities of long-term debt.............. 3,028 2,722
Loan payable to related party..................... 15,000 -
Accounts payable.................................. 68,305 54,615
Accrued liabilities............................... 71,959 89,023
Income taxes payable.............................. 23,915 33,263
---------- ----------
Total Current Liabilities....................... 182,274 179,691
---------- ----------
Long-term debt less current maturities.............. 649,927 620,473
---------- ----------
Deferred income tax liabilities..................... 142,396 117,819
---------- ----------
Other liabilities................................... 135,426 123,855
---------- ----------
Shareholder's Equity:
Common stock, $.01 par value per share;
1,000 shares authorized; 100 shares issued
and outstanding ................................ - -
Additional paid-in capital........................ 310,762 399,474
Retained earnings (accumulated deficit)........... 34,746 (4,354)
Accumulated other comprehensive loss.............. (1,407) (738)
---------- ----------
Total Shareholder's Equity...................... 344,101 394,382
---------- ----------
Total Liabilities and Shareholder's Equity.......... $1,454,124 $1,436,220
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
--------------------
OCTOBER 3, SEPT. 28,
2004 2003
--------- ---------
(THOUSANDS)
Cash provided by (used in) operating activities:
Net income............................................. $ 56,619 $ 39,340
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - 1,021
Depreciation....................................... 47,944 44,803
Amortization of intangible assets.................. 775 432
Deferred income taxes.............................. 20,471 18,458
Increase in working capital items...................... (40,472) (32,244)
Proceeds (repayments) from sale of accounts receivable. 3,930 (2,560)
Increase in receivables from related parties........... (5,201) (13,109)
Other, net............................................. 2,549 1,700
--------- ---------
Net cash provided by operating activities................ 86,615 57,841
--------- ---------
Cash used in investing activities:
Capital expenditures and acquisitions.................. (74,940) (49,659)
--------- ---------
Net cash used in investing activities.................... (74,940) (49,659)
--------- ---------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................ (1) (76)
Proceeds from issuance of debt......................... 31,188 -
Repayments of long-term debt........................... (2,229) (1,554)
Loan from related party................................ 15,000 -
Increase in loan to related party...................... (7,760) -
Debt issuance costs.................................... (1,725) -
Dividend to parent company............................. (67,163) -
Capital contribution from parent company............... - 1,451
--------- ---------
Net cash used in financing activities.................... (32,690) (179)
--------- ---------
Effect of exchange rate fluctuations on cash
and cash equivalents................................... (165) 3,001
--------- ---------
Net change in cash and cash equivalents.................. (21,180) 11,004
Cash and cash equivalents, beginning of period........... 56,426 33,291
--------- ---------
Cash and cash equivalents, end of period................. $ 35,246 $ 44,295
========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
NINE MONTHS ENDED
---------------------
OCTOBER 3, SEPT. 28,
2004 2003
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............... $ 49,566 $ 49,242
Income taxes (including taxes paid pursuant to
the Tax Sharing Agreement)...................... 16,173 375
Acquisitions:
Estimated fair market value of assets acquired..... $ 30,421 $ 8,997
Purchase price of acquisitions..................... 27,280 8,564
--------- ---------
Liabilities assumed................................ $ 3,141 $ 433
========= =========
Supplemental disclosure of financing activities:
In April 2004, the Company made $39.0 million in dividends to its parent
company, International Specialty Holdings Inc. In connection with these
dividends, the Company's total long-term loan receivable of $39.0 million from a
related party was eliminated.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for ISP Chemco Inc. (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 October 3, 2004, and the results of operations and cash flows for the three
and nine month periods ended October 3, 2004 and September 28, 2003. All
adjustments are of a normal recurring nature. Certain amounts in the 2003
consolidated financial statements have been reclassified to conform to the 2004
presentation. 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, 2003 (the "2003 Form 10-K").
NOTE 1. AMENDED AND RESTATED SENIOR CREDIT FACILITIES
On April 2, 2004, the Company and three of its wholly owned subsidiaries
amended and restated its June 2001 $450.0 million senior secured credit
facilities (the "Senior Credit Facilities"). The Senior Credit Facilities
provide a $250.0 million term loan with a maturity in March 2011, which replaced
the $225.0 million term loan that was due to mature in June 2008. In connection
therewith, the Company borrowed an additional $31.2 million to bring the
outstanding balance of the term loan to $250.0 million. The Senior Credit
Facilities reduced the margin-based interest rate for term loan borrowings and
amended financial covenant ratios, including the elimination of the minimum
adjusted net worth covenant. For additional information relating to the Senior
Credit Facilities, reference is made to Note 14 to consolidated financial
statements contained in the 2003 Form 10-K.
On April 15, 2004, the $225.0 million revolving credit facility under the
Senior Credit Facilities, which was to terminate in June 2006, was reduced to
$200.0 million, including a borrowing capacity not in excess of $50.0 million
for letters of credit, and the maturity was extended to April 15, 2009. In
addition, the margin-based interest rate for revolving credit borrowings was
reduced.
NOTE 2. ACQUISITIONS
During the first quarter of 2004, the Company completed three acquisitions
in Europe to further enhance the Company's global specialty chemicals business.
The purchase price of the assets and businesses acquired totaled $27.3 million
in cash.
NOTE 3. NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board issued a revised
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities," replacing FIN 46 which had originally been issued in January 2003.
FIN No. 46R addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. The Company will be
required to apply FIN 46R to variable interests in variable interest entities
created after December 31, 2003. The Company does not currently have an interest
in a variable interest entity. Therefore, FIN 46R will not have an immediate
impact on the Company's consolidated financial statements.
5
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. NEW ACCOUNTING STANDARDS - (CONTINUED)
In May 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-2 to
provide guidance on accounting for the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act") for employers that
sponsor postretirement health care plans which provide prescription drug
benefits. In addition, the FSP requires those employers to provide certain
disclosures in their financial statements regarding the effect of the Act and
the related subsidy on postretirement health obligations and net periodic
postretirement benefit cost. The Company adopted the provisions of FSP FAS No.
106-2 effective for the quarterly period beginning July 5, 2004. The impact on
the Company's financial statements was insignificant.
NOTE 4. COMPREHENSIVE INCOME
Third Quarter Ended Nine Months Ended
-------------------- ----------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
--------- --------- ---------- ----------
(Thousands)
Net income.................................... $ 15,441 $ 11,086 $ 56,619 $ 39,340
-------- -------- --------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.... 2,783 (234) (669) 9,363
-------- -------- --------- ----------
Total other comprehensive income (loss)....... 2,783 (234) (669) 9,363
-------- -------- --------- ----------
Comprehensive income.......................... $ 18,224 $ 10,852 $ 55,950 $ 48,703
======== ======== ========= ==========
Changes in the components of accumulated other comprehensive loss for the
nine months ended October 3, 2004 are as follows:
Cumulative Additional
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Loss
---------- ---------- -------------
(Thousands)
Balance, December 31, 2003....... $ 5,382 $ (6,120) $ (738)
Change for the period............ (669) - (669)
---------- --------- ---------
Balance, October 3, 2004......... $ 4,713 $ (6,120) $ (1,407)
========== ========= =========
6
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. INVENTORIES
Inventories comprise the following:
October 3, December 31,
2004 2003
--------- ------------
(Thousands)
Finished goods................ $110,345 $113,227
Work-in-process............... 35,285 36,415
Raw materials and supplies.... 42,863 38,163
-------- --------
Inventories................... $188,493 $187,805
======== ========
At October 3, 2004 and December 31, 2003, $64.0 and $62.7 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 $6.7 and $4.2 million higher at October 3, 2004 and
December 31, 2003, respectively.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
The following schedule reconciles the changes in the carrying amount of
goodwill, by business segment, for the nine months ended October 3, 2004.
Specialty Industrial Mineral Synthetic Total
Chemicals Chemicals Products Elastomers Goodwill
--------- ---------- -------- ---------- ---------
(Thousands)
Balance, December 31, 2003........ $ 279,562 $ - $ 51,539 $ - $ 331,101
Acquisitions and valuation
adjustment..................... 6,212 - - - 6,212
Translation adjustment............ 85 - - - 85
--------- --------- --------- ---------- ---------
Balance, October 3, 2004.......... $ 285,859 $ - $ 51,539 $ - $ 337,398
========= ========= ========= ========== =========
The following is information as of October 3, 2004 and December 31,
2003 related to the Company's acquired intangible assets:
October 3, 2004 December 31, 2003
Range of ---------------------------- -----------------------------
Amortizable Gross Carrying Accumulated Gross Carrying Accumulated
Lives Amount Amortization Amount Amortization
----------- -------------- ------------ -------------- ------------
(Dollars in Thousands)
Intangible assets subject to amortization:
Patents.................................... 5- 20 years $ 669 $ (155) $ 669 $ (113)
Formulations............................... 5- 10 years 2,740 (203) - -
Unpatented technology...................... 10-15 years 1,100 (44) - -
Customer base.............................. 10-15 years 2,348 (105) - -
Non-compete agreements..................... 2- 5 years 3,419 (1,327) 1,571 (971)
EPA registrations.......................... 5 years 166 (91) 166 (66)
---------- -------- ---------- --------
Total amortizable intangible assets...... 10,442 (1,925) 2,406 (1,150)
---------- -------- ---------- --------
Intangible assets not subject to amortization:
Trademarks................................. 5,596 - 2,962 -
EPA registrations.......................... 4,648 - 4,648 -
---------- -------- ---------- --------
Total unamortized intangible assets...... 10,244 - 7,610 -
---------- -------- ---------- --------
Total intangible assets......................... $ 20,686 $ (1,925) $ 10,016 $ (1,150)
========== ======== ========== ========
7
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. GOODWILL AND INTANGIBLE ASSETS - (CONTINUED)
Estimated amortization expense: (Thousands)
Year ended December 31, ----------
2004................................................ $ 1,100
2005................................................ 1,301
2006................................................ 1,301
2007................................................ 1,037
2008................................................ 1,037
NOTE 7. LOANS PAYABLE TO RELATED PARTY
In April 2004, the Company borrowed a total of $34.0 million from a
subsidiary of its parent company, International Specialty Holdings Inc.,
pursuant to two note agreements. One loan, for $30.0 million, has a maturity
date of October 30, 2004, and the second loan, for $4.0 million has a maturity
date of April 30, 2005. Interest is payable on each loan at the rate of 1.65%
per annum. The balance of such loans outstanding at October 3, 2004 was $15.0
million, which was repaid in October 2004.
NOTE 8. ASSET RETIREMENT OBLIGATIONS
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations," effective
January 1, 2003. SFAS No. 143 established 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. The Company holds long-lived assets that have legal
obligations associated with their retirement, including deep wells that require
capping, minerals quarries that require reclamation and other plant assets
subject to certain environmental regulations. As a result of adopting SFAS No.
143, effective January 1, 2003, the Company recognized an after-tax charge of
$1.0 million ($1.6 million before an income tax benefit of $0.6 million) as the
cumulative effect of a change in accounting principle, and recorded an asset
retirement obligation of $1.9 million and a net increase in property, plant and
equipment of $0.3 million.
NOTE 9. DIVIDENDS TO PARENT COMPANY
In April 2004, the Company dividended a total of $106.2 million to its
parent company, International Specialty Holdings Inc., including cash dividends
of $67.2 million. The dividends were accounted for as a charge to retained
earnings of $17.5 million and a charge to additional paid-in capital of $88.7
million. In connection with these dividends, the Company's total long-term loan
receivable of $39.0 million from a related party was eliminated.
8
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. OTHER OPERATING CHARGES
In February 2003, the Company's indirect parent company, International
Specialty Products Inc., completed a going private transaction. As a result, the
Company's stock-based compensation plans were terminated and payments were made
in accordance with the terms of that transaction. Accordingly, holders of
approximately 2.7 million vested, in-the-money stock options outstanding and
exercisable on February 28, 2003 received cash amounts aggregating $1.5 million
that were recorded as compensation expense in the first quarter of 2003.
NOTE 11. BENEFIT PLANS
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan
for certain hourly employees in the United States (the "Hourly Retirement
Plan"). Benefits under this plan are based on stated amounts for each year of
service. The Company's funding policy is consistent with the minimum funding
requirements of ERISA.
ISP Marl GmbH, a wholly owned German subsidiary of the Company, provides
a noncontributory defined benefit retirement plan for its hourly and salaried
employees (the "ISP Marl Plan"). Benefits under this plan are based on average
earnings over each employee's career with the Company.
The Company's net periodic pension cost for the third quarter and first
nine months of 2004 and 2003 for the Hourly Retirement Plan included the
following components:
Third Quarter Ended Nine Months Ended
------------------------ --------------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
---------- -------- ---------- ---------
(Thousands)
Service cost............................. $ 69 $ 60 $ 207 $ 180
Interest cost............................ 523 525 1,569 1,574
Expected return on plan assets........... (736) (716) (2,208) (2,148)
Amortization of actuarial losses......... 126 98 378 294
Amortization of unrecognized prior
service cost........................... 60 69 180 208
------- -------- -------- -------
Net periodic pension cost................ $ 42 $ 36 $ 126 $ 108
======= ======== ======== =======
The Company's net periodic pension cost for the third quarter and first
nine months of 2004 and 2003 for the ISP Marl Plan included the following
components:
Third Quarter Ended Nine Months Ended
------------------------ --------------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
---------- --------- ---------- ---------
(Thousands)
Service cost............................. $ 23 $ 20 $ 69 $ 60
Interest cost............................ 48 39 144 117
Amortization of unrecognized prior
service cost........................... 1 1 3 3
------- -------- -------- -------
Net periodic pension cost................ $ 72 $ 60 $ 216 $ 180
======= ======== ======== =======
9
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. BENEFIT PLANS - (CONTINUED)
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees.
The net periodic postretirement benefit (income) cost for the third
quarter and first nine months of 2004 and 2003 included the following
components:
Third Quarter Ended Nine Months Ended
------------------------ --------------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
---------- --------- ---------- ---------
(Thousands)
Service cost............................. $ (9) $ 32 $ 8 $ 96
Interest cost............................ 75 156 281 467
Amortization of actuarial (gains) losses. (33) 7 (66) 21
Amortization of unrecognized prior
service cost........................... (71) (71) (213) (213)
------- -------- -------- -------
Net periodic postretirement benefit
(income) cost......................... $ (38) $ 124 $ 10 $ 371
======= ======== ======== =======
NOTE 12. BUSINESS SEGMENT INFORMATION
Third Quarter Ended Nine Months Ended
--------------------- -----------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
--------- --------- --------- ----------
(Thousands)
Net sales:
Specialty Chemicals....................... $ 168,725 $ 153,464 $ 532,979 $ 470,378
Industrial Chemicals...................... 50,521 35,047 148,283 128,574
Mineral Products (1)...................... 33,527 26,614 100,076 78,277
--------- --------- --------- ---------
Net sales................................... $ 252,773 $ 215,125 $ 781,338 $ 677,229
========= ========= ========= =========
Operating income (loss):
Specialty Chemicals....................... $ 33,760 $ 29,760 $ 121,564 $ 96,697
Industrial Chemicals...................... (736) (1,221) (2,322) (5,342)
Mineral Products.......................... 5,528 3,496 13,580 12,233
--------- --------- --------- ---------
Total segment operating income............ 38,552 32,035 132,822 103,588
Unallocated corporate office.............. (341) 36 (433) 126
--------- --------- --------- ---------
Total operating income...................... 38,211 32,071 132,389 103,714
Interest expense and other expense, net..... (14,449) (15,060) (45,557) (41,635)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle.. $ 23,762 $ 17,011 $ 86,832 $ 62,079
========= ========= ========= =========
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $24.2 and $19.5 million for the third quarter of
2004 and 2003, respectively, and $73.3 and $59.2 million for the first nine
months of 2004 and 2003, respectively.
10
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION
In 2001, the Company and three of its wholly owned subsidiaries jointly
issued, in three separate transactions, a total of $405.0 million aggregate
principal amount of 10 1/4% Senior Subordinated Notes due 2011 (the "2011
Notes"). The 2011 Notes are guaranteed by all of the Company's domestic
subsidiaries, other than certain immaterial subsidiaries and the Company's
accounts receivable financing subsidiary. These guarantees are full,
unconditional and joint and several.
ISP Global Technologies Inc., which is a guarantor of the 2011 Notes, is
party to a License and Royalty Agreement with non-guarantor foreign affiliates.
Under this agreement, ISP Global Technologies granted a license to certain
non-guarantor foreign affiliates for the use of the Patent Rights, Know-how and
Trademarks in connection with the manufacture, use and sale of the Company's
products.
Presented below is condensed consolidating financial information for the
Company, the guarantor subsidiaries and the non-guarantor subsidiaries. This
financial information should be read in conjunction with the consolidated
financial statements and other notes related thereto.
11
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRD QUARTER ENDED OCTOBER 3, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales................................. $ - $ 118,097 $ 134,676 $ - $ 252,773
Intercompany net sales.................... - 61,187 4,471 (65,658) -
-------- ---------- ---------- ---------- ----------
Total net sales........................ - 179,284 139,147 (65,658) 252,773
-------- ---------- ---------- ---------- ----------
Cost of products sold..................... - (132,049) (100,257) 65,658 (166,648)
Selling, general and administrative....... - (28,414) (19,164) (47,578)
Amortization of intangible assets......... - (336) - (336)
-------- ---------- ---------- ---------- ----------
Operating income.......................... - 18,485 19,726 - 38,211
Equity in income of subsidiaries.......... 16,465 - - (16,465) -
Intercompany royalty income (expense)..... - 9,953 (9,953) -
Intercompany dividend income.............. - 1,436 - (1,436) -
Interest income (expense), net............ 635 (14,031) 545 (12,851)
Other expense, net........................ (1) (1,535) (62) (1,598)
-------- ---------- ---------- ---------- ----------
Income before income taxes................ 17,099 14,308 10,256 (17,901) 23,762
Income taxes.............................. (222) (6,135) (1,964) (8,321)
-------- ---------- ---------- ---------- ----------
Net income................................ $ 16,877 $ 8,173 $ 8,292 $ (17,901) $ 15,441
======== ========== ========== ========== ==========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 28, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales................................. $ - $ 104,870 $ 110,255 $ - $ 215,125
Intercompany net sales.................... - 55,860 2,224 (58,084) -
-------- ---------- ---------- ---------- ----------
Total net sales........................ - 160,730 112,479 (58,084) 215,125
-------- ---------- ---------- ---------- ----------
Cost of products sold..................... - (118,366) (80,224) 58,084 (140,506)
Selling, general and administrative....... - (23,985) (18,419) (42,404)
Amortization of intangible assets......... - (144) - (144)
-------- ---------- ---------- ---------- ----------
Operating income.......................... - 18,235 13,836 - 32,071
Equity in income of subsidiaries.......... 10,641 - - (10,641) -
Intercompany royalty income (expense), net - 8,241 (8,241) -
Intercompany dividend income.............. - 60 - (60) -
Interest income (expense), net............ 779 (14,553) 697 (13,077)
Other expense, net........................ (1) (471) (1,511) (1,983)
-------- ---------- ---------- ---------- ----------
Income before income taxes................ 11,419 11,512 4,781 (10,701) 17,011
Income taxes.............................. (273) (3,302) (2,350) (5,925)
-------- ---------- ---------- ---------- ----------
Net income................................ $ 11,146 $ 8,210 $ 2,431 $ (10,701) $ 11,086
======== ========== ========== ========== ==========
12
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 3, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales................................. $ - $ 366,444 $ 414,894 $ - $ 781,338
Intercompany net sales.................... - 183,833 12,981 (196,814) -
-------- ---------- ---------- ---------- ----------
Total net sales........................ - 550,277 427,875 (196,814) 781,338
-------- ---------- ---------- ---------- ----------
Cost of products sold..................... - (404,391) (294,693) 196,814 (502,270)
Selling, general and administrative....... - (90,172) (55,732) (145,904)
Amortization of intangible assets......... - (775) - (775)
-------- ---------- ---------- ---------- ----------
Operating income.......................... - 54,939 77,450 - 132,389
Equity in income of subsidiaries.......... 59,897 - - (59,897) -
Intercompany royalty income (expense)..... - 31,357 (31,357) -
Intercompany dividend income.............. - 4,611 - (4,611) -
Interest income (expense), net............ 2,056 (43,199) 1,696 (39,447)
Other expense, net........................ (5) (3,760) (2,345) (6,110)
-------- ---------- ---------- ---------- ----------
Income before income taxes................ 61,948 43,948 45,444 (64,508) 86,832
Income taxes.............................. (718) (21,351) (8,144) (30,213)
-------- ---------- ---------- ---------- ----------
Net income................................ $ 61,230 $ 22,597 $ 37,300 $ (64,508) $ 56,619
======== ========== ========== ========== ==========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 28, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales................................. $ - $ 321,510 $ 355,719 $ - $ 677,229
Intercompany net sales.................... - 171,216 8,662 (179,878) -
-------- ---------- ---------- ---------- ----------
Total net sales........................ - 492,726 364,381 (179,878) 677,229
-------- ---------- ---------- ---------- ----------
Cost of products sold..................... - (356,402) (263,790) 179,878 (440,314)
Selling, general and administrative....... - (81,479) (49,839) (131,318)
Other operating charges................... - (1,376) (75) (1,451)
Amortization of intangible assets......... - (432) - (432)
-------- ---------- ---------- ---------- ----------
Operating income.......................... - 53,037 50,677 - 103,714
Equity in income of subsidiaries.......... 41,021 - - (41,021) -
Intercompany royalty income (expense), net - 26,293 (26,293) -
Intercompany dividend income.............. - 3,270 - (3,270) -
Interest income (expense), net............ 2,448 (44,073) 1,898 (39,727)
Other income (expense), net............... (4) (3,552) 1,648 (1,908)
-------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 43,465 34,975 27,930 (44,291) 62,079
Income taxes.............................. (855) (14,271) (6,592) (21,718)
-------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................. 42,610 20,704 21,338 (44,291) 40,361
Cumulative effect of change in accounting
principle, net of income tax benefit of
$600 ................................... - (583) (438) (1,021)
-------- ---------- ---------- ---------- ----------
Net income ............................... $ 42,610 $ 20,121 $ 20,900 $ (44,291) $ 39,340
======== ========== ========== ========== ==========
13
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 3, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 3 $ 11,400 $ 23,843 $ - $ 35,246
Accounts receivable, trade, net........ - 6,059 109,526 115,585
Accounts receivable, other............. - 3,025 27,310 30,335
Receivables from related parties....... 182 16,005 - 16,187
Inventories............................ - 108,272 80,221 188,493
Deferred income tax assets............. - 21,420 4,621 26,041
Prepaid expenses....................... - 3,612 1,952 5,564
-------- ---------- ---------- ---------- ----------
Total Current Assets................. 185 169,793 247,473 - 417,451
Investment in subsidiaries................ 307,822 248,811 - (556,633) -
Intercompany loans........................ 16,021 (7,679) (8,342) -
Due from (to) subsidiaries, net........... - 15,934 (15,934) -
Property, plant and equipment, net........ - 494,907 89,085 583,992
Goodwill.................................. 89,931 240,927 6,540 337,398
Intangible assets, net.................... - 18,761 - 18,761
Long-term receivable from related party... - - 33,561 33,561
Other assets.............................. - 62,516 445 62,961
-------- ---------- ---------- ---------- ----------
Total Assets.............................. $413,959 $1,243,970 $ 352,828 $ (556,633) $1,454,124
======== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt........................ $ - $ - $ 67 $ - $ 67
Current maturities of long-term debt... - 2,884 144 3,028
Loan payable to related party.......... - - 15,000 15,000
Accounts payable....................... - 31,898 36,407 68,305
Accrued liabilities.................... - 49,137 22,822 71,959
Income taxes payable................... 12,488 3,574 7,853 23,915
-------- ---------- ---------- ---------- ----------
Total Current Liabilities............ 12,488 87,493 82,293 - 182,274
Long-term debt less current maturities ... - 649,501 426 649,927
Deferred income tax liabilities........... - 126,681 15,715 142,396
Other liabilities......................... 57,370 72,473 5,583 135,426
Total Shareholder's Equity................ 344,101 307,822 248,811 (556,633) 344,101
-------- ---------- ---------- ---------- ----------
Total Liabilities and Shareholder's
Equity................................. $413,959 $1,243,970 $ 352,828 $ (556,633) $1,454,124
======== ========== ========== ========== ==========
14
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 5 $ 29,009 $ 27,412 $ - $ 56,426
Accounts receivable, trade, net........ - 2,807 84,114 86,921
Accounts receivable, other............. - 3,152 16,529 19,681
Receivables from related parties....... 183 12,795 (470) 12,508
Inventories............................ - 102,364 85,441 187,805
Deferred income tax assets............. - 21,421 4,280 25,701
Prepaid expenses....................... - 3,847 1,930 5,777
-------- ---------- ---------- ---------- ----------
Total Current Assets................. 188 175,395 219,236 - 394,819
Investment in subsidiaries................ 367,837 223,261 - (591,098) -
Intercompany loans........................ 16,021 (8,185) (7,836) -
Due from (to) subsidiaries, net........... - 41,670 (41,670) -
Property, plant and equipment, net........ - 494,451 86,157 580,608
Goodwill.................................. 89,931 235,775 5,395 331,101
Intangible assets, net.................... - 8,866 - 8,866
Long-term receivable from related party... - - 32,116 32,116
Long-term loan receivable from related
party................................... - 31,231 - 31,231
Other assets.............................. - 56,912 567 57,479
-------- ---------- ---------- ---------- ----------
Total Assets.............................. $473,977 $1,259,376 $ 293,965 $ (591,098) $1,436,220
======== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt........................ $ - $ - $ 68 $ - $ 68
Current maturities of long-term debt... - 2,715 7 2,722
Accounts payable....................... - 29,103 25,512 54,615
Accrued liabilities.................... - 67,591 21,432 89,023
Income taxes payable................... 21,350 3,489 8,424 33,263
-------- ---------- ---------- ---------- ----------
Total Current Liabilities............ 21,350 102,898 55,443 - 179,691
Long-term debt less current maturities ... - 620,447 26 620,473
Deferred income tax liabilities........... - 103,847 13,972 117,819
Other liabilities......................... 58,245 64,347 1,263 123,855
Total Shareholder's Equity................ 394,382 367,837 223,261 (591,098) 394,382
-------- ---------- ---------- ---------- ----------
Total Liabilities and Shareholder's
Equity................................. $473,977 $1,259,376 $ 293,965 $ (591,098) $1,436,220
======== ========== ========== ========== ==========
15
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
NINE MONTHS ENDED OCTOBER 3, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income............................................. $ (3,278) $ 22,597 $ 37,300 $ 56,619
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................ - 37,533 10,411 47,944
Amortization of intangible assets................... - 775 - 775
Deferred income taxes............................... - 19,069 1,402 20,471
Increase in working capital items...................... (5,096) (22,457) (12,919) (40,472)
Proceeds from sale of accounts receivable.............. - - 3,930 3,930
Increase in receivables from related parties........... 1 (3,287) (1,915) (5,201)
Change in amounts due to (from) subsidiaries........... - 25,736 (25,736) -
Change in investment in and advances to affiliates..... 9,246 (2,776) (6,470) -
Other, net............................................. (875) 3,636 (212) 2,549
--------- ---------- ----------- ----------
Net cash provided by (used in) operating activities...... (2) 80,826 5,791 86,615
--------- ---------- ----------- ----------
Cash used in investing activities:
Capital expenditures and acquisitions.................. - (54,920) (20,020) (74,940)
--------- ---------- ----------- ----------
Net cash used in investing activities.................... - (54,920) (20,020) (74,940)
--------- ---------- ----------- ----------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................ - - (1) (1)
Proceeds from issuance of debt......................... - 31,188 - 31,188
Repayments of long-term debt........................... - (69) (2,229)
Loan from related party................................ - - 15,000 15,000
Increase in loan to related party...................... - (7,760) - (7,760)
(Increase) decrease in intercompany loans.............. - (506) 506 -
Debt issuance costs.................................... - (1,725) - (1,725)
Intercompany dividends................................. 67,163 (62,552) (4,611) -
Dividend to parent company............................. (67,163) - - (67,163)
--------- ---------- ----------- ----------
Net cash provided by (used in) financing activities...... - (43,515) 10,825 (32,690)
--------- ---------- ----------- ----------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................ - - (165) (165)
--------- ---------- ----------- ----------
Net change in cash and cash equivalents.................. (2) (17,609) (3,569) (21,180)
Cash and cash equivalents, beginning of period........... 5 29,009 27,412 56,426
--------- ---------- ----------- ----------
Cash and cash equivalents, end of period................. $ 3 $ 11,400 $ 23,843 $ 35,246
========= ========== =========== ==========
16
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 28, 2003
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income............................................. $ (1,681) $ 20,121 $ 20,900 $ 39,340
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle. - 583 438 1,021
Depreciation........................................ - 36,144 8,659 44,803
Amortization of intangible assets................... - 432 - 432
Deferred income taxes............................... - 13,773 4,685 18,458
(Increase) decrease in working capital items........... 1,839 (16,176) (17,907) (32,244)
Proceeds (repayments) from sale of accounts receivable. - - (2,560) (2,560)
Increase in receivable from related parties............ (215) (385) (12,509) (13,109)
Change in amounts due to (from) subsidiaries........... - (2,665) 2,665 -
Change in investment in and advances to affiliates..... (1,353) (10,365) 11,718 -
Other, net............................................. (40) 584 1,156 1,700
-------- ---------- ----------- ----------
Net cash provided by (used in) operating activities...... (1,450) 42,046 17,245 57,841
-------- ---------- ----------- ----------
Cash used in investing activities:
Capital expenditures and acquisition................... - (32,638) (17,021) (49,659)
-------- ---------- ----------- ----------
Net cash used in investing activities.................... - (32,638) (17,021) (49,659)
-------- ---------- ----------- ----------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................ - - (76) (76)
Repayments of long-term debt........................... - (1,577) 23 (1,554)
(Increase) decrease in intercompany loans.............. - (7,967) 7,967 -
Intercompany dividends................................. - 3,270 (3,270) -
Capital contribution from parent company............... 1,451 - - 1,451
-------- ---------- ----------- ----------
Net cash provided by (used in) financing activities...... 1,451 (6,274) 4,644 (179)
-------- ---------- ----------- ----------
Effect of exchange rate changes on cash and cash
equivalents........................................... - - 3,001 3,001
-------- ---------- ----------- ----------
Net change in cash and cash equivalents.................. 1 3,134 7,869 11,004
Cash and cash equivalents, beginning of period........... 6 17,735 15,550 33,291
-------- ---------- ----------- ----------
Cash and cash equivalents, end of period................. $ 7 $ 20,869 $ 23,419 $ 44,295
======== ========== =========== ==========
17
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES
For information regarding contingencies, reference is made to Note 22 to
consolidated financial statements contained in the 2003 Form 10-K.
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 these 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, plans for
development of the Company's Linden, New Jersey property, 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 or decrease its estimate of insurance recoveries
in respect of those matters. It is not currently possible to estimate the amount
or range of any additional liability.
Tax Claim Against G-I Holdings Inc.
The predecessor of ISP and certain of its domestic subsidiaries were
parties to tax sharing agreements with 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. Until January 1, 1997, ISP and its domestic
subsidiaries were included in the consolidated Federal income tax returns of the
G-I Holdings Group and, accordingly, would be severally liable for any tax
liability of the G-I Holdings Group in respect of those prior years. Those tax
sharing agreements are no longer applicable with respect to the tax liabilities
of ISP for periods subsequent to January 1, 1997, because neither the Company
nor any of its domestic subsidiaries are members of the G-I Holdings Group for
periods after January 1, 1997. 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.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service ("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. On
September 21, 2001, the IRS filed a proof of claim with respect to such
deficiency in the G-I Holdings bankruptcy against G-I Holdings and ACI Inc., a
subsidiary of G-I Holdings which also held an interest in the surfactants
partnership and also has
18
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. If the proof of claim is sustained, ISP and/or certain of its
subsidiaries together with G-I Holdings and several current and former
subsidiaries of G-I Holdings would be severally liable for taxes and interest in
the amount of approximately $291 million, computed as of October 3, 2004. On May
7, 2002, G-I Holdings, together with ACI Inc., filed an objection to the proof
of claim, which objection will be heard by the United States District Court for
the District of New Jersey overseeing the G-I Holdings bankruptcy. G-I Holdings
has advised the Company that it believes that it will prevail in this tax matter
involving 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. For additional information relating to G-I Holdings,
reference is made to Notes 8 and 22 to consolidated financial statements
contained in the 2003 Form 10-K.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us" and "our" refer to
ISP Chemco Inc. and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our critical accounting
policies during the first nine months of 2004. For a discussion of our critical
accounting policies, reference is made to the "- Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
RESULTS OF OPERATIONS - THIRD QUARTER 2004 COMPARED WITH
THIRD QUARTER 2003
Overview
We recorded net income of $15.4 million for the third quarter of 2004
compared with net income of $11.1 million in the third quarter of 2003. The
improved results for the third quarter of 2004 were attributable to
significantly higher operating income.
Net Sales. Net sales by business segment for the third quarter of 2004 and
2003 were:
Third Quarter Ended
--------------------------
October 3, Sept. 28,
2004 2003
---------- ---------
(Millions)
Specialty chemicals.................... $ 168.7 $ 153.5
Industrial chemicals................... 50.5 35.0
Mineral products....................... 33.6 26.6
--------- ---------
Net sales............................ $ 252.8 $ 215.1
========= =========
Net sales for the third quarter of 2004 were $252.8 million compared
with $215.1 million in the third quarter of 2003. The $37.7 million (18%)
increase in sales resulted from higher unit volumes in all business segments
(totaling $32.4 million) and the favorable impact of the weaker U.S. dollar
($5.2 million), primarily in Europe. Specialty chemicals sales also benefited
from the three acquisitions made during the first quarter of 2004.
Gross Margin. Our gross margin in the third quarter of 2004 was 34.1%
compared with 34.7% in the third quarter of 2003. The overall margin was reduced
due to a lower margin for the industrial chemicals segment, which decreased to
11.2% from 13.9% in the third quarter of 2003 primarily due to the adverse
impact of the stronger Euro on European-based manufacturing costs. The gross
margin for the specialty chemicals segment increased to 42.4% in the third
quarter of 2004 from 41.5% in the same period of 2003 as a result of the
favorable impact of higher volumes and the weaker U.S. dollar, partially offset
by higher manufacturing costs, while the gross margin for the mineral
20
products segment increased to 26.4% from 23.0% in the third quarter of 2003 as
a result of favorable pricing and the impact of higher unit volumes.
Selling, General and Administrative. Selling, general and administrative
expenses increased 12% in the third quarter of 2004 to $47.6 million from $42.4
million in the third quarter of 2003, however, as a percent of sales, decreased
to 18.8% from 19.7% in the third quarter of 2003. The increase in selling,
general and administrative expenses in the third quarter of 2004 related
primarily to higher selling and distribution costs as a result of the higher
sales levels.
Operating Income. Operating income (loss) by business segment for the
third quarter of 2004 and 2003 was:
Third Quarter Ended
--------------------------
October 3, Sept. 28,
2004 2003
---------- ---------
(Millions)
Specialty chemicals.................... $ 33.8 $ 29.8
Industrial chemicals................... (0.7) (1.2)
Mineral products....................... 5.5 3.5
--------- ---------
Total segment operating income....... 38.6 32.1
Unallocated corporate office items..... (0.4) -
--------- ---------
Operating income..................... $ 38.2 $ 32.1
========= =========
Operating income for the third quarter of 2004 was $38.2 million, a 19%
increase compared with $32.1 million in the third quarter of 2003. Operating
income for the specialty chemicals segment was $33.8 million for the third
quarter of 2004, a 13% improvement compared with $29.8 million in the third
quarter of 2003. The improved results were attributable to higher unit volumes
in the personal care product line and an improved product mix and manufacturing
efficiencies achieved in the fine chemicals product line. Operating income for
the specialty chemicals segment in the third quarter of 2004 was also favorably
impacted by the weaker U.S. dollar and, to a lesser extent, by the contribution
to income from the three specialty chemical niche acquisitions made during the
first quarter of 2004 (see "-Liquidity and Financial Condition" below).
The industrial chemicals segment recorded an operating loss of $0.7 million
in the third quarter of 2004 compared with an operating loss of $1.2 million in
the third quarter of 2003. The results were attributable to favorable unit
volumes and pricing, partially offset by the adverse impact of the stronger Euro
on European-based manufacturing costs.
Operating income for the mineral products segment was $5.5 million in the
third quarter of 2004 compared with $3.5 million in the third quarter of 2003.
The 57% improvement in operating income from the third quarter of 2003 was due
to higher unit volumes and favorable pricing, partially offset by increased
manufacturing costs and higher freight and distribution expenses.
Interest Expense. Interest expense for the third quarter of 2004 was
$12.9 million compared with $13.1 million in the same period in 2003. The lower
interest expense was attributable to lower average interest rates ($0.5 million
impact), partially offset by higher average borrowings ($0.3 million impact),
both as a result of the refinancing of our senior secured credit facility in
April 2004 (see "-Liquidity and Financial Condition" below).
21
Other Expense, net. Other expense, net, comprises foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating items of expense. Other expense, net, was $1.6 million in the
third quarter of 2004 compared with $2.0 million in the third quarter of 2003.
Income Taxes. In the third quarter of 2004, we recorded a provision for
income taxes of $8.3 million. Our effective tax rate for the third quarter of
2004 was 35.0%, which was consistent with an effective tax rate of 34.8% in the
third quarter of 2003.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through three reportable business segments:
specialty chemicals; industrial chemicals; and mineral products.
Specialty Chemicals
Sales in the third quarter of 2004 were $168.7 million compared with $153.5
million in the same period in 2003. The 10% increase in sales was mainly
attributable to higher unit volumes ($15.1 million), primarily in the personal
care and performance chemicals product lines. The favorable impact of the weaker
U.S. dollar ($3.6 million), primarily in Europe, also benefited sales. The
personal care product line experienced strong volume growth in its skin care and
oral care markets in Europe and North America. Sales for the performance
chemicals, food and personal care product lines also benefited from the three
acquisitions made during the first quarter of 2004.
Operating income for the specialty chemicals segment improved 13% to $33.8
million for the third quarter of 2004 compared with $29.8 million in the third
quarter of 2003. The improved results were attributable to the favorable effect
of higher unit volumes (totaling $10.6 million), mainly in the personal care and
performance chemicals product lines, and an improved product mix and
manufacturing efficiencies achieved in the fine chemicals product line.
Operating income for the specialty chemicals segment in the third quarter of
2004 was also favorably impacted by the weaker U.S. dollar ($1.2 million) and,
to a lesser extent, from the contribution to income from the three acquisitions
made during the first quarter of 2004. Partially offsetting these favorable
factors was unfavorable pricing ($3.5 million) across all product lines and
higher manufacturing costs in all product lines other than fine chemicals
(totaling $3.6 million).
Industrial Chemicals
Sales in the third quarter of 2004 were $50.5 million compared with
$35.0 million in the third quarter of 2003. The 44% increase in sales resulted
from higher unit volumes ($12.5 million), favorable pricing ($1.4 million) and
by the favorable effect of the weaker U.S. dollar ($1.6 million).
The industrial chemicals segment recorded an operating loss of $0.7 million
in the third quarter of 2004 compared with an operating loss of $1.2 million in
the third quarter of 2003. The results were attributable to the favorable impact
of higher unit volumes and favorable pricing (totaling $2.4 million), partially
offset by the adverse impact of the stronger Euro on European-based
manufacturing costs.
22
Mineral Products
Sales for the mineral products segment for the third quarter of 2004 were
$33.6 million compared with $26.6 million for the third quarter of 2003. The 26%
increase was due to higher unit volumes ($4.8 million) as a result of
industry-wide growth and also favorable pricing ($2.1 million). The sales growth
included 24% higher sales to Building Materials Corporation of America, an
affiliate which we refer to as "BMCA."
Operating income for the mineral products segment was $5.5 million in the
third quarter of 2004 compared with $3.5 million for the third quarter of 2003.
The 57% improvement from the third quarter of 2003 was primarily due to the
impact of the higher unit volumes and favorable pricing (totaling $3.4 million),
partially offset by increased manufacturing costs and higher freight and
distribution expenses (totaling $1.4 million).
RESULTS OF OPERATIONS - FIRST NINE MONTHS 2004 COMPARED WITH
FIRST NINE MONTHS 2003
Overview
We recorded net income of $56.6 million for the first nine months of
2004 compared with net income of $39.3 million in the first nine months of 2003.
The improved results for the first nine months of 2004 were attributable to
significantly higher operating income. Net income for the first nine months 2003
included a $1.0 million after-tax charge for the cumulative effect of a change
in accounting principle from the adoption of Statement of Financial Accounting
Standards, which we refer to as "SFAS," No. 143, "Accounting for Asset
Retirement Obligations."
Net Sales. Net sales by business segment for the first nine months of 2004
and 2003 were:
Nine Months Ended
-------------------------
October 3, Sept. 28,
2004 2003
--------- ---------
(Millions)
Specialty chemicals.................... $ 533.0 $ 470.4
Industrial chemicals................... 148.3 128.5
Mineral products....................... 100.1 78.3
--------- ---------
Net sales............................ $ 781.3 $ 677.2
========= =========
Net sales for the first nine months of 2004 were $781.3 million compared
with $677.2 million in the first nine months of 2003. The $104.1 million (15%)
increase in sales resulted primarily from higher unit volumes in all business
segments (totaling $84.4 million). The favorable impact of the weaker U.S.
dollar ($25.8 million), primarily in Europe, also benefited sales.
Gross Margin. Our gross margin in the first nine months of 2004 was
35.7% compared with 35.0% in the first nine months of 2003. The gross margin for
the specialty chemicals segment increased to 44.5% in the first nine months of
2004 from 43.1% in the same period of 2003 as a result of the favorable impact
of higher volumes and the weaker U.S. dollar, partially offset by unfavorable
pricing. Also, the gross margin for the industrial chemicals segment increased
to 11.5% in the first nine months of 2004 from 10.7% in the same period of 2003
due to higher unit volumes and manufacturing efficiencies, partially
23
offset by the adverse impact of the stronger Euro on European-based
manufacturing costs. The overall improved margin was adversely impacted by a
lower gross margin for the mineral products segment, which decreased to 24.9%
from 26.2% in the first nine months of 2003 as a result of higher manufacturing
costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased 11% in the first nine months of 2004 to $145.9 million from
$131.3 million in the first nine months of 2003, however, as a percent of sales,
decreased to 18.7% from 19.4% in the first nine months of 2003. The increase in
selling, general and administrative expenses in the first nine months of 2004
related primarily to higher selling and distribution costs as a result of the
higher sales levels.
Other operating charges. Other operating charges of $1.5 million in the
first nine months of 2003 represented a charge for compensation expense for
stock option payments related to ISP's going private transaction in February
2003.
Operating Income. Operating income (loss) by business segment for the first
nine months of 2004 and 2003 was:
Nine Months Ended
-------------------------
October 3, Sept. 28,
2004 2003
--------- ---------
(Millions)
Specialty chemicals.................... $ 121.6 $ 96.7
Industrial chemicals................... (2.3) (5.3)
Mineral products....................... 13.6 12.2
--------- ---------
Total segment operating income....... 132.9 103.6
Unallocated corporate office items..... (0.5) 0.1
--------- ---------
Operating income..................... $ 132.4 $ 103.7
========= =========
Operating income for the first nine months of 2004 was $132.4 million
compared with $103.7 million in the first nine months of 2003. Excluding the
other operating charges discussed above, operating income increased 26% to
$132.4 million from $105.2 million in the first nine months of 2003 (see
"Non-GAAP Financial Measures" below).
Operating income for the specialty chemicals segment was $121.6 million for
the first nine months of 2004 compared with $96.7 million in the first nine
months of 2003. On a comparable basis, excluding the aforementioned charges
pertaining to specialty chemicals, operating income for the segment improved 24%
to $121.6 million compared with $97.8 million in the first nine months of 2003.
The improved results were attributable to higher unit volumes in the personal
care and performance chemicals product lines and an improved product mix and
manufacturing efficiencies achieved in the fine chemicals product line.
Operating income for the specialty chemicals segment in the first nine months of
2004 was also favorably impacted by the weaker U.S. dollar ($13.0 million) and,
to a lesser extent, by the contribution to income from the three specialty
chemical niche acquisitions made during the first quarter of 2004 (see
"-Liquidity and Financial Condition" below).
The industrial chemicals segment recorded an operating loss of $2.3 million
in the first nine months of 2004. Excluding the aforementioned other operating
charges in the first nine months of 2003 pertaining to industrial chemicals, the
operating loss in the first nine months of 2003 was $5.1 million. The lower
losses were attributable to higher unit volumes and
24
manufacturing efficiencies, partially offset by the adverse impact of the
stronger Euro on European-based manufacturing costs.
Operating income for the mineral products segment was $13.6 million in the
first nine months of 2004. On a comparable basis, excluding other operating
charges in the first nine months of 2003 pertaining to mineral products,
operating income was $12.4 million for the first nine months of 2003. The
improvement in operating income was due to the favorable impact of higher unit
volumes and favorable pricing, partially offset by increased manufacturing costs
and higher freight and distribution expenses.
Interest Expense. Interest expense for the first nine months of 2004 was
$39.4 million compared with $39.7 million in the same period in 2003. The lower
interest expense was attributable to lower average interest rates ($1.5 million
impact), partially offset by higher average borrowings ($1.2 million impact),
both as a result of the refinancing of our senior secured credit facility in
April 2004 (see "-Liquidity and Financial Condition" below).
Other Expense, net. Other expense, net, comprises foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating items of expense. Other expense, net, was $6.1 million in the
first nine months of 2004 compared with $1.9 million in the first nine months of
2003. The higher expense in the first nine months of 2004 was due to unfavorable
foreign exchange.
Income Taxes. In the first nine months of 2004, we recorded a provision for
income taxes of $30.2 million. Our effective tax rate for the first nine months
of 2004 and 2003 was 34.8% and 35.0%, respectively.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through four reportable business segments:
specialty chemicals; industrial chemicals; synthetic elastomers; and mineral
products. The operating income for the first nine months of 2003 for each
business segment discussed below is adjusted for the non-GAAP financial measures
in the table below.
Non-GAAP Financial Measures
The business segment review below and the discussion of operating
income above contain information regarding non-GAAP financial measures contained
within the meaning of Item 10 of Regulation S-K promulgated by the Securities
and Exchange Commission. As used herein, "GAAP" refers to U.S. generally
accepted accounting principles. We use non-GAAP financial measures to eliminate
the effect of certain other operating gains and charges on reported operating
income. Management believes that these financial measures are useful to
bondholders and financial institutions because such measures exclude
transactions that are unusual due to their nature or infrequency and therefore
allow bondholders and financial institutions to more readily compare our
company's performance from period to period. Management uses this information in
monitoring and evaluating our company's performance and the performance of
individual business segments. The non-GAAP financial measures included herein
have been reconciled to the most directly comparable GAAP financial measure as
is required under Item 10 of Regulation S-K regarding the use of such financial
measures. These non-GAAP financial measures should be considered in addition to,
and not as a substitute, or superior to, operating income or
25
other measures of financial performance in accordance with U.S. generally
accepted accounting principles.
Nine Months Ended
-------------------------
October 3, September 28,
2004 2003
---------- ------------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................ $ 132.4 $ 103.7
Non-GAAP adjustments:
Add: Other operating charges(1)................. - 1.5
--------- ---------
Operating income as adjusted......................... $ 132.4 $ 105.2
========= =========
Supplemental Business Segment Information:
Operating income (loss):
Operating income per GAAP - Specialty Chemicals.... $ 121.6 $ 96.7
Non-GAAP adjustments (1)........................... - 1.1
--------- ---------
Operating income - Specialty Chemicals as adjusted. $ 121.6 $ 97.8
========= =========
Operating loss per GAAP - Industrial Chemicals..... $ (2.3) $ (5.3)
Non-GAAP adjustments (1)........................... - 0.2
--------- ---------
Operating loss - Industrial Chemicals as adjusted.. $ (2.3) $ (5.1)
========= =========
Operating income per GAAP - Mineral Products....... $ 13.6 $ 12.2
Non-GAAP adjustments (1)........................... - 0.2
--------- ---------
Operating income - Mineral Products as adjusted.... $ 13.6 $ 12.4
========= =========
Total segment operating income as adjusted......... $ 132.9 $ 105.1
Unallocated corporate office per GAAP.............. (0.5) 0.1
--------- ---------
Operating income as adjusted....................... $ 132.4 $ 105.2
========= =========
(1) Non-GAAP adjustments for the first nine months of 2003 represent an
other operating charge of $1.5 million for stock option payments related
to ISP's going private transaction.
Specialty Chemicals
Sales in the first nine months of 2004 were $533.0 million compared with
$470.4 million for the same period in 2003. The 13% increase in sales was mainly
attributable to higher unit volumes ($52.0 million), primarily in the personal
care and performance chemicals product lines. The favorable impact of the weaker
U.S. dollar ($19.3 million), primarily in Europe, also benefited sales. The
personal care product line experienced strong volume growth in each of its skin
care and oral care markets in Europe and North America. Sales for the
performance chemicals, food and personal care product lines also benefited from
the three acquisitions made during the first quarter of 2004.
Operating income for the specialty chemicals segment was $121.6 million for
the first nine months of 2004 compared with $96.7 million in the first nine
months of 2003. On a comparable basis, excluding the aforementioned other
operating charges pertaining to specialty chemicals, operating income for the
segment improved 24% to $121.6 million compared with $97.8 million in the first
nine months of 2003. The improved results were attributable to the favorable
effect of higher unit volumes ($31.3 million), primarily in the personal care
and performance chemicals product lines, and an improved product mix and
manufacturing efficiencies achieved in the fine chemicals product
26
line. Operating income for the specialty chemicals segment in the first nine
months of 2004 was also favorably impacted by the weaker U.S. dollar ($13.0
million) and, to a lesser extent, from the contribution to income from the three
acquisitions made during the first quarter of 2004. Partially offsetting these
favorable factors was unfavorable pricing ($8.7 million), higher manufacturing
costs in product lines other than fine chemicals (totaling $6.4 million) and
higher selling and distribution expenses ($7.4 million) resulting from the
higher sales levels.
Industrial Chemicals
Sales in the first nine months of 2004 were $148.3 million compared
with $128.5 million in the first nine months of 2003. The 15% increase in sales
was attributable to higher unit volumes ($12.7 million) and the favorable effect
of the weaker U.S. dollar ($6.5 million).
The industrial chemicals segment recorded an operating loss of $2.3 million
in the first nine months of 2004. Excluding the aforementioned other operating
charges in the first nine months of 2003 pertaining to industrial chemicals, the
operating loss in the first nine months of 2003 was $5.1 million. The lower
losses were attributable to the higher unit volumes and manufacturing
efficiencies (totaling $6.2 million), partially offset by the adverse impact of
the stronger Euro on European-based manufacturing costs ($4.2 million).
Mineral Products
Sales for the Mineral Products segment for the first nine months of
2004 were $100.1 million compared with $78.3 million for the first nine months
of 2003. The 28% increase was due to higher unit volumes ($19.6 million) as a
result of industry-wide growth and included 24% higher sales to BMCA.
Operating income for the mineral products segment was $13.6 million in the
first nine months of 2004. On a comparable basis, excluding other operating
charges in the first nine months of 2003 pertaining to mineral products,
operating income was $12.4 million for the first nine months of 2003. The 10%
improvement from the third quarter of 2003 was primarily due to the impact of
the higher unit volumes and favorable pricing (totaling $5.9 million), partially
offset by increased manufacturing costs and higher freight and distribution
expenses (totaling $4.7 million).
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
During the first nine months of 2004, our net cash flow before financing
activities was $11.7 million, including $86.6 million of cash generated from
operations, partially offset by the reinvestment of $74.9 million for capital
programs and acquisitions.
Operating Activities. Net cash generated from operating activities totaled
$86.6 million for the first nine months of 2004, compared with $57.8 million in
the first nine months of 2003. Cash from operations for the first nine months of
2004 included a cash investment of $40.5 million in additional working capital,
including a $37.8 million increase in receivables as a result of higher sales
and a $5.8 million net decrease in payables and accrued
27
liabilities, partially offset by a $2.8 million decrease in inventories.
Operating activities also included a $5.2 million cash outflow from related
party transactions, principally due to increased receivables from BMCA as a
result of higher sales of mineral products to BMCA.
Investing Activities. Net cash used in investing activities in the first
nine months of 2004 totaled $74.9 million. Capital expenditures in the first
nine months of 2004 were $46.3 million compared with $42.4 million in the first
nine months of 2003. During the first nine months of 2004, we completed three
acquisitions in Europe to further enhance our global specialty chemicals
business. The purchase price of these acquisitions totaled $27.3 million in
cash.
Financing Activities. Net cash used in financing activities in the first
nine months of 2004 totaled $32.7 million. In April 2004, we dividended a total
of $106.2 million to our parent company, International Specialty Holdings Inc.,
including cash dividends of $67.2 million. In connection with these dividends,
our total long-term loan receivable of $39.0 million from a related party was
eliminated. Financing activities also included a cash inflow of $31.2 million
from a refinancing of our senior secured credit facilities (see below) and $15.0
million in short-term borrowings from a related party, partially offset by an
increase of $7.8 million in a loan to a related party. In April 2004, we
borrowed a total of $34.0 million from a subsidiary of our parent company
pursuant to two note agreements. One loan, for $30.0 million, has a maturity
date of October 30, 2004, and the second loan, for $4.0 million has a maturity
date of April 30, 2005. Interest is payable on each loan at the rate of 1.65%
per annum. The balance of these loans outstanding at October 3, 2004 was $15.0
mllion, which was repaid in October 2004.
On April 2, 2004, we and three of our wholly owned subsidiaries amended and
restated our June 2001 $450.0 million senior secured credit facilities, which we
refer to as the "Senior Credit Facilities" in order to extend the term, increase
future flexibility and reduce the effective interest rate on borrowings. The
Senior Credit Facilities provide a $250.0 million term loan with a maturity in
March 2011, which replaced the $225.0 million term loan that was due to mature
in June 2008. In connection therewith, we borrowed an additional $31.2 million
to bring the outstanding balance of the term loan to $250.0 million. The Senior
Credit Facilities reduced the margin-based interest rate for term loan
borrowings and amended financial covenant ratios, including the elimination of
the minimum adjusted net worth covenant.
On April 15, 2004, the $225.0 million revolving credit facility under the
Senior Credit Facilities, which was to terminate in June 2006, was reduced to
$200.0 million, including a borrowing capacity not in excess of $50.0 million
for letters of credit, and the maturity was extended to April 15, 2009. In
addition, the margin-based interest rate for revolving credit borrowings was
reduced.
As a result of the foregoing factors, cash and cash equivalents decreased
by $21.2 million during the first nine months of 2004 to $35.2 million.
Current Maturities of Long-Term Debt
As of October 3, 2004, our current maturities of long-term debt, scheduled
to be repaid during the twelve month period ended September 2005, totaled $3.0
million, including $2.5 million related to the term loan under
28
the Senior Credit Facilities. In addition, as discussed above, we have
short-term loans payable to a related party totaling $15.0 million.
Operating Lease Obligation
We entered into an operating lease in 1998 for an equipment sale-leaseback
transaction related to equipment at our Freetown, Massachusetts facility. The
lease had an initial term of four years and, at our option, up to three one-year
renewal periods. The third and final renewal option was exercised during the
first quarter of 2004. The lease provides for a substantial guaranteed payment
by us, adjusted 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
equipment, or the equipment can be returned to the lessor and sold to a third
party. It is our current intention to exercise the purchase option and to
maintain the Freetown plant and business, and we will be evaluating financing
alternatives in that regard. Upon exercise of the purchase option in the first
quarter of 2005, we will be obligated to pay a fixed purchase price of $33.6
million.
Contractual Obligations
A contract with a multinational supplier to supply a substantial amount of
our acetylene needs to our Texas City, Texas facility expired in March 2004. As
a result, we reduced our acetylene requirements at the Texas City plant by 50%
through shifting production of acetylene-consuming products to our Calvert City,
Kentucky plant. We also entered into a long-term supply contract for the
remaining Texas City plant requirements with a local producer. Under this
contract, we are obligated to purchase specified quantities of acetylene through
the end of 2013. Pricing under this contract is on a fixed basis with escalators
related to changes in the Producer Price Index.
We also have an acetylene supply contract for our requirements of acetylene
delivery via pipeline to our Calvert City facility. The current term of this
contract expires December 31, 2009 and allows us, at our sole option, to extend
the agreement for two additional terms of five years each. We are required by
the contract to pay a monthly non-cancelable facility fee. Pricing under the
contract is on a fixed basis with escalators related to changes in the Producer
Price Index.
The annual unconditional purchase obligation related to the long-term
acetylene supply contract at the Texas City plant, together with the
non-cancelable facility fee associated with the Calvert City plant acetylene
contract is $5.1 million.
Contingencies
See Note 14 to consolidated financial statements for information regarding
contingencies.
New Accounting Standards
In December 2003, the Financial Accounting Standards Board issued a revised
FASB Interpretation No. 46R, which we refer to as "FIN 46R," "Consolidation of
Variable Interest Entities," replacing FIN 46 which had originally been issued
in January 2003. FIN 46R addresses how a business enterprise should evaluate
whether it has a controlling financial interest in
29
an entity through means other than voting rights and accordingly should
consolidate the entity. We will be required to apply FIN 46R to variable
interests in variable interest entities created after December 31, 2003. Our
company does not currently have an interest in a variable interest entity.
Therefore, FIN 46R will not have an immediate impact on our consolidated
financial statements.
In May 2004, the FASB issued FASB Staff Position, which we refer to as
"FSP," No. FAS 106-2 to provide guidance on accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, which we
refer to as the "Act" for employers that sponsor postretirement health care
plans which provide prescription drug benefits. In addition, the FSP requires
those employers to provide certain disclosures in their financial statements
regarding the effect of the Act and the related subsidy on postretirement health
obligations and net periodic postretirement benefit cost. We adopted the
provisions of FSP FAS No. 106-2 effective for the quarterly period beginning
July 5, 2004. The impact on our financial statements was insignificant.
* * *
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 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.
30
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, 2003, for a discussion of "Market-Sensitive
Instruments and Risk Management." At December 31, 2003 and October 3, 2004,
there were no equity-related financial instruments employed by us to reduce
market risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of our Chief Executive Officer (principal executive officer) and
Vice President and Controller (principal financial officer), conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Based on this evaluation, our Chief Executive
Officer and Vice President and Controller have each concluded that, as of the
end of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act.
Internal Control Over Financial Reporting: There have not been any
changes in our internal control over financial reporting during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
31
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits:
Exhibit Number
--------------
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Principal
Executive Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Principal
Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISP CHEMCO INC.
ISP CHEMICALS INC.
ISP MINERALS INC.
ISP TECHNOLOGIES INC.
DATE: November 17, 2004 BY: /s/ Sunil Kumar
----------------- ---------------
Sunil Kumar
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: November 17, 2004 BY: /s/Kenneth M. McHugh
----------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Financial and Chief
Accounting Officer)
33