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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 MARCH 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-82822
INTERNATIONAL SPECIALTY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3807354
(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) 427-5715
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 May 13, 2003, 100 shares of the registrant's common stock (par value
$.001 per share) were outstanding. There is no trading market for the common
stock of the registrant. No shares of the registrant were held by
non-affiliates.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter Ended
---------------------
March 31, March 30,
2002 2003
--------- ----------
(Thousands)
Net sales........................................ $ 219,124 $ 232,576
Cost of products sold............................ (145,377) (152,593)
Selling, general and administrative.............. (42,381) (43,734)
Other operating gains and (charges), net......... 2,832 (1,451)
Amortization of intangible assets................ (402) (144)
--------- ----------
Operating income................................. 33,796 34,654
Interest expense................................. (22,842) (19,850)
Investment income, net........................... 15,154 20,875
Charge for early retirement of debt.............. (7,159) -
Other expense, net............................... (1,956) (1,382)
--------- ----------
Income before income taxes and cumulative effect
of changes in accounting principles........... 16,993 34,297
Income taxes..................................... (5,765) (11,655)
--------- ----------
Income before cumulative effect of changes in
accounting principles.......................... 11,228 22,642
Cumulative effect of changes in accounting
principles, net of income tax benefit of
$600 in 2003................................... (155,400) (1,021)
--------- ----------
Net income (loss)................................ $(144,172) $ 21,621
========= ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
March 30,
December 31, 2003
2002 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 35,060 $ 25,449
Investments in trading securities.................. 253,660 372,134
Investments in available-for-sale securities....... 274,639 224,291
Accounts receivable, trade, less allowance of
$6,022 and $6,050 at December 31, 2002 and
March 30, 2003, respectively.................... 79,780 100,438
Accounts receivable, other......................... 16,934 18,840
Receivables from related parties................... 12,518 17,577
Inventories........................................ 176,217 167,171
Deferred income tax assets......................... 34,687 36,636
Prepaid expenses................................... 9,912 11,218
---------- ----------
Total Current Assets............................. 893,407 973,754
Property, plant and equipment, net................... 565,713 561,546
Goodwill, net of accumulated amortization of $180,486 325,706 325,706
Intangible assets, net............................... 9,442 9,298
Loan receivable from parent company.................. - 94,020
Other assets......................................... 48,045 48,938
---------- ----------
Total Assets......................................... $1,842,313 $2,013,262
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt.................................... $ 125,802 $ 329,822
Current maturities of long-term debt............... 2,732 2,796
Accounts payable................................... 54,655 65,837
Accrued liabilities................................ 95,925 78,514
Payable to parent company.......................... 43,773 -
Income taxes payable............................... 37,260 36,350
---------- ----------
Total Current Liabilities........................ 360,147 513,319
---------- ----------
Long-term debt less current maturities............... 823,008 822,881
---------- ----------
Deferred income taxes................................ 70,678 74,667
---------- ----------
Other liabilities.................................... 103,727 107,366
---------- ----------
Shareholder's Equity:
Common stock, $.001 par value per share;
100 shares issued and outstanding................ - -
Additional paid-in capital......................... 640,816 642,267
Accumulated deficit................................ (127,368) (105,747)
Accumulated other comprehensive loss............... (28,695) (41,491)
---------- ----------
Total Shareholder's Equity....................... 484,753 495,029
---------- ----------
Total Liabilities and Shareholder's Equity........... $1,842,313 $2,013,262
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Quarter Ended
------------------
March 31, March 30,
2002 2003
-------- ---------
(Thousands)
Cash and cash equivalents, beginning of period............... $ 77,863 $ 35,060
-------- --------
Cash provided by (used in) operating activities:
Net income (loss).......................................... (144,172) 21,621
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of changes in accounting principles.. 155,400 1,021
Depreciation........................................... 13,653 14,847
Amortization of intangible assets...................... 402 144
Deferred income taxes.................................. 3,007 8,000
Unrealized gains on securities and other
short-term investments............................... (9,162) (14,018)
Increase in working capital items.......................... (7,453) (20,073)
Purchases of trading securities............................ (154,685) (146,698)
Proceeds from sales of trading securities.................. 166,999 42,242
Proceeds (repayments) from sale of accounts receivable..... 1,410 (1,339)
Change in receivable from/payable to related parties....... 3,708 (48,832)
Change in cumulative translation adjustment................ 78 52
Other, net................................................. 6,500 167
-------- --------
Net cash provided by (used in) operating activities.......... 35,685 (142,866)
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures ...................................... (8,778) (9,657)
Purchases of available-for-sale securities................. (65,012) (28,504)
Proceeds from sales of available-for-sale securities....... 199,995 58,669
-------- --------
Net cash provided by investing activities.................... 126,205 20,508
-------- --------
Cash provided by (used in) financing activities:
Increase (decrease) in short-term debt..................... (60) 204,020
Decrease in borrowings under revolving credit facility..... (7,850) -
Repayments of long-term debt............................... (308,706) (128)
Loan to parent company..................................... - (94,020)
Call premium on redemption of debt......................... (4,621) -
Decrease in restricted cash................................ 307,866 -
Debt issuance costs........................................ (745) -
Dividends and distributions to parent company.............. (16,850) -
Capital contribution from parent company................... 11,687 1,451
-------- --------
Net cash provided by (used in) financing activities.......... (19,279) 111,323
-------- --------
Effect of exchange rate changes on cash...................... (57) 1,424
-------- --------
Net change in cash and cash equivalents...................... 142,554 (9,611)
-------- --------
Cash and cash equivalents, end of period..................... $220,417 $ 25,449
======== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -- (Continued)
Quarter Ended
--------------------
March 31, March 30,
2002 2003
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)................. $ 29,116 $ 23,965
Income taxes (including taxes paid pursuant to the
Tax Sharing Agreement)............................ 2,000 3,954
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for International Specialty Holdings
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 March 30, 2003, and the results of operations and
cash flows for the periods ended March 31, 2002 and March 30, 2003. All
adjustments are of a normal recurring nature. Certain amounts in the 2002
Consolidated Financial Statements presented herein have been reclassified to
conform to the 2003 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, 2002 (the "2002 Form 10-K").
NOTE 1. ADOPTION OF NEW ACCOUNTING STANDARDS
On January 14, 2002, the Company's parent company, International Specialty
Products Inc. ("ISP"), redeemed the remaining $307.9 million aggregate principal
amount of its 9% Senior Notes due 2003 (the "2003 Notes"). As a result, the
Company recorded an extraordinary loss on the early retirement of debt of $4.7
million ($7.2 million before income tax benefit of $2.5 million). In April 2002,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("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 Accounting Principles Board Opinion No. 30 for
classification as extraordinary. The Company adopted SFAS No. 145 effective
January 1, 2003 and, as a result, the first quarter 2002 Consolidated Statement
of Operations was restated to reclassify the pre-tax extraordinary charge of
$7.2 million on the early retirement of debt to a separate line item of pre-tax
income. The tax benefit of $2.5 million related to the extraordinary charge has
been reclassified and is included in "Income taxes."
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 is
subject to at least an annual assessment for impairment and more frequently if
circumstances indicate a possible impairment. The Company adopted SFAS No. 142
effective as of January 1, 2002. Accordingly, during the second quarter of 2002,
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 Consolidated Statement of
Operations for the first quarter of 2002 has been restated to reflect this loss.
NOTE 2. ASSET RETIREMENT OBLIGATIONS
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. 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. The Company holds long-lived
assets that have legal
5
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. ASSET RETIREMENT OBLIGATIONS - (CONTINUED)
obligations associated with their retirement. These assets include deep wells
that require capping, minerals quarries that require reclamation and other
plant assets subject to certain environmental regulations. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation ("ARO") 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. Subsequent to the initial measurement of the ARO, the obligation will be
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. If the obligation is
settled for other than the carrying amount of the liability, the Company would
then recognize a gain or loss on settlement. 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 ARO of
$1.9 million and a net increase in property, plant and equipment of $0.3
million. The ongoing expense on an annual basis resulting from the initial
adoption of SFAS No. 143 is approximately $0.2 million.
The change in the ARO during the quarter ended March 30, 2003 is as
follows:
(Thousands)
ARO liability recognized as of January 1, 2003....... $ 1,871
Liabilities incurred, quarter ended March 30, 2003... 8
ARO liability accretion.............................. 53
--------
ARO liability balance, March 30, 2003................ $ 1,932
========
NOTE 3. NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, and concludes that an entity's
commitment to an exit plan does not by itself create a present obligation that
meets the definition of a liability. This Statement also establishes that fair
value is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. As the Company has no plans at this time for any exit or disposal
activities, the adoption of SFAS No. 146 will not have any immediate effect on
the Company's Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of
6
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. NEW ACCOUNTING STANDARDS - (CONTINUED)
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends disclosure requirements of SFAS No. 123 for both annual and
interim reporting periods by requiring disclosures in a tabular format to
reconcile net income as reported to pro forma net income as if the fair value
method was used. Certain of the disclosure modifications required for fiscal
years ending after December 15, 2002 were disclosed in the Company's 2002 Form
10-K. However, as discussed in Note 4, with the completion of the going private
transaction by ISP in February 2003, the Company's stock-based compensation
plans were terminated and payments were made in accordance with the terms of the
merger agreement. Therefore, the provisions of SFAS No. 148 are no longer
applicable to the Company as it relates to those plans. In addition, the Company
currently accounts for incentive units granted to eligible Company employees
pursuant to ISP's Long-Term Incentive Plan under the accounting prescribed by
FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option and Award Plans" ("FIN 28"), which requires an entity to
measure compensation as the amount by which the Book Value of the incentive
units covered by the grant exceeds the option price or value specified of such
incentive units at the date of grant. Changes, either increases or decreases,
in the Book Value of those incentive units between the date of grant and the
measurement date result in a change in the measure of compensation for the right
or award. The Company expects to continue to account for its long-term incentive
units under the accounting prescribed by FIN 28 and has adopted the additional
disclosure provisions of SFAS No. 148. Since compensation expense related to
such incentive units is included in the actual Consolidated Statements of
Operations, the Company's pro forma net income under SFAS No. 123 would have
been the same as actual net income.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosures of certain
guarantees issued and outstanding. The provisions of FIN 45 apply to guarantee
contracts that contingently require the guarantor to make payments (in cash,
financial instruments, other assets, shares of stock or provision of services)
to the guaranteed party for guarantees such as a financial standby letter of
credit, a market value guarantee on either a financial or nonfinancial asset
owned by the guaranteed party and a guarantee of the collection of the scheduled
contractual cash flows from financial assets held by a special-purpose entity.
FIN 45 also applies to indemnification contracts and indirect guarantees of
indebtedness of others. The requirements of FIN 45 for the initial recognition
and measurement of the liability for a guarantor's obligations are to be applied
only on a prospective basis to guarantees issued or modified after December 31,
2002. The Company currently does not have any guarantees, indemnification
contracts or indirect guarantees of indebtedness of others that would be subject
to the initial recognition and measurement provisions of FIN 45. The 10 1/4%
Senior Subordinated Notes due 2011 of ISP Chemco Inc. ("ISP Chemco"), the
Company's wholly owned subsidiary, are guaranteed by all of ISP Chemco's
domestic subsidiaries, other than certain immaterial subsidiaries and the
Company's accounts receivable financing subsidiary.
7
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. NEW ACCOUNTING STANDARDS - (CONTINUED)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." In accordance with FIN 46, a variable interest entity will
be consolidated if either the total equity investment at risk is not sufficient
to permit the entity to finance its activities without additional subordinated
financial support from other parties, or as a group, the holders of the equity
investment at risk lack any one of the following three characteristics of a
controlling financial interest: (1) the direct or indirect ability to make
decisions about an entity's activities; (2) the obligation to absorb the
expected losses of the entity if they occur; (3) the right to receive the
expected residual returns of the entity if they occur. All companies with
variable interests in variable interest entities created after January 31, 2003
shall apply the provisions of FIN 46 immediately. A public entity with a
variable interest in a variable interest entity created before February 1, 2003
shall apply the provisions of FIN 46 to that entity no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
The Company does not have an interest in a variable interest entity. Therefore,
FIN 46 does not currently have an impact on the Company's Consolidated Financial
Statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company does not expect that the adoption of
SFAS No. 149 will have an immediate impact on the Company's Consolidated
Financial Statements.
NOTE 4. GOING PRIVATE TRANSACTION BY ISP
On February 28, 2003, at a Special Meeting of Stockholders of ISP, a
majority of the holders of the shares of ISP common stock outstanding and
entitled to vote at that meeting and a majority of the minority holders (being
those shares not owned beneficially by Mr. Samuel J. Heyman, Chairman of ISP, or
the officers and directors of ISP) of shares of common stock outstanding and
entitled to vote at that meeting approved the Agreement and Plan of Merger dated
as of November 8, 2002 of International Specialty Products Holdings Inc. with
and into ISP and pursuant to which holders of ISP common stock received $10.30
per share in cash for each share of ISP common stock owned (except as otherwise
provided in the merger agreement). Mr. Heyman formed International Specialty
Products Holdings, Inc. for purposes of entering into this transaction and was
deemed to be the sole "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of all of International Specialty Products
Holdings Inc.'s common stock and, at the time of the Special Meeting,
approximately 81% of ISP's common stock. As a result, ISP's common stock is no
longer publicly traded and its common stock has been delisted from the New York
Stock Exchange and deregistered with the Securities and Exchange Commission. Mr.
Heyman may now be deemed to beneficially own (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) 100% of ISP's common stock.
8
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. GOING PRIVATE TRANSACTION BY ISP - (CONTINUED)
As a result of ISP completing the going private transaction, the Company's
stock-based compensation plans were terminated and payments were made in
accordance with the terms of the merger agreement. As a result, holders of
approximately 2.7 million vested, in-the-money stock options outstanding and
exercisable on February 28, 2003 received a cash amount equal to the excess of
$10.30 over the exercise price of such stock options, aggregating $1.5 million
(see Note 5). In addition, outstanding restricted common stock awards will be
replaced with long-term incentive units of comparable value and vesting.
The total consideration for the going private transaction of approximately
$138.0 million was paid out of the Company's funds. ISP borrowed a total of
$94.0 million pursuant to five loan agreements, dated March 3, 2003, with the
Company's wholly owned subsidiary, ISP Investco LLC ("ISP Investco"), and its
indirect, wholly owned subsidiary, ISP Ireland. The loans have various maturity
dates to March 2005 and accrue interest at a fixed rate of 1.65% per annum. In
addition, ISP Investco paid down $43.8 million of its intercompany payables to
ISP. In accordance with the SEC's Staff Accounting Bulletin No. 54, Application
of "Push Down" Basis of Accounting in Financial Statements of Subsidiaries
Acquired by Purchase, ISP has not applied push down accounting for the going
private transaction to its subsidiaries.
NOTE 5. OTHER OPERATING GAINS AND CHARGES
As a result of ISP completing the going private transaction discussed in
Note 4, compensation expense of $1.5 million related to the payment for stock
option terminations was recorded in the first quarter of 2003 and is included in
"Other operating gains and (charges), net." First quarter 2002 results included
an other operating gain of $2.8 million for a contract termination related to
the sale of the Company's FineTech business. For additional information,
reference is made to Note 6 to Consolidated Financial Statements contained in
the 2002 Form 10-K.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Goodwill by business segment is as follows. There were no changes in
the carrying amount of goodwill in the quarter ended March 30, 2003. However,
see Note 8 for a discussion of a change in the composition of the Company's
business segments, effective January 1, 2003.
Specialty Industrial Mineral Total
Chemicals Chemicals Products Goodwill
----------- ----------- --------- ---------
(Thousands)
Balance, December 31, 2002 and
March 30, 2003.................. $ 274,167 $ -- $ 51,539 $ 325,706
========= ========== ========= =========
Intangible assets at December 31, 2002 and March 30, 2003 relate to the
Company's biocides business, which was acquired on December 31, 2001. The
following is information as of December 31, 2002 and March 30, 2003 related to
the Company's acquired intangible assets:
9
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. GOODWILL AND INTANGIBLE ASSETS - (CONTINUED)
December 31, 2002 March 30, 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 $ (57) $ 669 $ (71)
Non-compete agreements......................... 2- 5 years 1,571 (485) 1,571 (607)
EPA registrations.............................. 5 years 167 (33) 167 (41)
---------- ---------- ---------- ----------
Total amortized intangible assets............ 2,407 (575) 2,407 (719)
---------- ---------- ---------- ----------
Intangible assets not subject to amortization:
Trademarks..................................... 2,962 -- 2,962 --
EPA registrations.............................. 4,648 -- 4,648 --
---------- ---------- ---------- ----------
Total unamortized intangible assets.......... 7,610 -- 7,610 --
----------- ---------- ---------- ----------
Total intangible assets.......................... $ 10,017 $ (575) $ 10,017 $ (719)
========== ========== ========== ==========
Estimated amortization expense:
Year ended December 31, (Thousands)
------------
2003....................................... $ 575
2004....................................... 290
2005....................................... 290
2006....................................... 290
2007....................................... 26
10
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. COMPREHENSIVE INCOME (LOSS)
Quarter Ended
--------------------
March 31, March 30,
2002 2003
--------- ---------
(Thousands)
Net income (loss)..................................... $(144,172) $ 21,621
--------- --------
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 $(16,139) and $5,584................... 33,753 (13,054)
Less: reclassification adjustment
for gains included in net income (loss),
net of income taxes of $2,185 and $327............. 8,278 1,218
--------- ---------
Total change for the period......................... 25,475 (14,272)
--------- ---------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of income tax
benefit of $1..................................... (2) -
Less: reclassification adjustment for losses
included in net income (loss), net of income tax
benefit of $218................................... (375) -
--------- ---------
Total change for the period......................... 373 -
Foreign currency translation adjustment............. 21 1,476
--------- ---------
Total other comprehensive income (loss)............... 25,869 (12,796)
--------- ---------
Comprehensive income (loss)........................... $(118,303) $ 8,825
========= =========
Changes in the components of "Accumulated other comprehensive loss" for the
quarter ended March 30, 2003 are as follows:
Unrealized Cumulative Additional
Gains (Losses) Foreign Minimum Accumulated
on Available- Currency Pension Other
for-Sale Translation Liability Comprehensive
Securities Adjustment Adjustment Income (Loss)
------------- ------------ ------------ -------------
(Thousands)
Balance, December 31, 2002... $ (13,200) $ (10,091) $ (5,404) $ (28,695)
Change for the period........ (14,272) 1,476 -- (12,796)
--------- --------- --------- ---------
Balance, March 30, 2003...... $ (27,472) $ (8,615) $ (5,404) $ (41,491)
========= ========= ========= =========
11
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. BUSINESS SEGMENT INFORMATION
Quarter Ended
---------------------
March 31, March 30,
2002 2003
--------- ---------
(Thousands)
Net sales (1):
Specialty Chemicals.................................. $ 159,571 $ 157,913
Industrial Chemicals................................. 35,525 49,136
Mineral Products (2)................................. 24,028 25,527
--------- ---------
Net sales.............................................. $ 219,124 $ 232,576
========= =========
Operating income (1):
Specialty Chemicals ................................. $ 25,441 $ 33,243
Industrial Chemicals................................. 2,661 (2,728)
Mineral Products..................................... 5,669 3,998
--------- ---------
Total segment operating income....................... 33,771 34,513
Unallocated corporate office......................... 25 141
--------- --------
Total operating income................................. 33,796 34,654
Interest expense and other, net........................ (16,803) (357)
--------- ---------
Income before income taxes and cumulative effect of
changes in accounting principles.................... $ 16,993 $ 34,297
========= =========
(1) Effective January 1, 2003, the Company changed the composition of its
reportable segments to be consistent with the current structure of the
Company's businesses. Over the last several years, the Company has focused
its efforts on its higher margin consumer-oriented businesses while
deemphasizing its low margin industrial business. Consistent with that
business focus, the Company will now report three business segments:
Specialty Chemicals, Industrial Chemicals and Mineral Products. The
Company's Specialty Chemicals segment will consist of the personal care,
pharmaceutical, food, beverage, performance chemicals and fine chemicals
product lines. Sales and operating income by business segment for the
quarter ended March 31, 2002 have been restated to conform with the 2003
presentation.
(2) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $19.1 and $19.7 million for the first quarter of
2002 and 2003, respectively.
12
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. INVENTORIES
Inventories comprise the following:
December 31, March 30,
2002 2003
------------ --------
(Thousands)
Finished goods................ $113,912 $105,794
Work-in-process............... 32,407 33,197
Raw materials and supplies.... 29,898 28,180
-------- --------
Inventories................... $176,217 $167,171
======== ========
At December 31, 2002 and March 30, 2003, $62.0 and $57.0 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 $2.8 and $3.7 million higher at December 31, 2002
and March 30, 2003, respectively.
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 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, 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 20 to Consolidated Financial Statements contained in the 2002 Form 10-K.
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
13
INTERNATIONAL SPECIALTY HOLDINGS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. CONTINGENCIES - (CONTINUED)
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 (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 proof of claim with respect to such deficiency against G-I
Holdings and one of its subsidiaries, ACI Inc., that also had filed for
protection under Chapter 11 of the Bankruptcy Code, in the G-I Holdings
bankruptcy. If such 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
an amount of approximately $273 million, computed as of March 30, 2003. On May
7, 2002, G-I Holdings filed an objection to that proof of claim. Such objection
will be heard by the United States District Court for the District of New Jersey
which oversees the G-I Holdings bankruptcy court. For additional information
relating to G-I Holdings, reference is made to Notes 9 and 20 to Consolidated
Financial Statements contained in the 2002 Form 10-K.
14
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
International Specialty Holdings Inc. and its consolidated subsidiaries.
RESULTS OF OPERATIONS - FIRST QUARTER 2003 COMPARED WITH
FIRST QUARTER 2002
We have restated our previously issued consolidated financial statements
for the first quarter of 2002. See Note 1 to consolidated financial statements
for further information.
We recorded first quarter 2003 net income of $21.6 million compared with a
net loss of $144.2 million in the first quarter of 2002. First quarter 2003
results include a $1.0 million after-tax 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." The first quarter 2002 results included a $155.4
million goodwill impairment charge, effective January 1, 2002, for the
cumulative effect of a change in accounting principle related to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets."
Income before the cumulative effect of changes in accounting principles was
$22.6 million for the first quarter of 2003 compared with $11.2 million in the
first quarter of 2002. The improved results for the first quarter of 2003
reflects $5.7 million higher investment income, $3.0 million lower interest
expense, $0.9 million higher operating income and $0.6 million lower other
expense, net. In addition, first quarter 2002 results included a $7.2 million
pre-tax charge for the early retirement of debt and an other operating gain of
$2.8 million related to a contract termination, while first quarter 2003 results
include an other operating charge of $1.5 million for stock option payments
related to a going private transaction by our parent company, International
Specialty Products Inc., which we refer to as ISP.
Effective January 1, 2003, we changed the composition of our reportable
segments to be consistent with the current structure of our businesses. Over the
last several years, we have focused our efforts on our higher margin
consumer-oriented businesses while deemphasizing our low margin industrial
business. Consistent with that business focus, we will now report three business
segments: Specialty Chemicals, Industrial Chemicals and Mineral Products. Our
Specialty Chemicals segment will consist of the personal care, pharmaceutical,
food, beverage, performance chemicals and fine chemicals product lines. Sales
and operating income by business segment for the quarter ended March 31, 2002
have been restated to conform with the 2003 presentation.
Net sales for the first quarter of 2003 were $232.6 million compared with
$219.1 million for the first quarter of 2002. The $13.5 million (6%) increase in
sales resulted from higher unit volumes in Industrial Chemicals and the personal
care and pharmaceuticals product lines (totaling $15.5 million) and the
favorable impact of the weaker U.S. dollar in Europe ($11.7 million). These
sales gains
15
were partially offset by lower pricing in Industrial Chemicals and
the personal care product line (totaling $4.2 million) and lower volumes ($10.0
million) in the fine chemicals product line as a result of the loss of sales due
to the Polaroid bankruptcy.
The gross margin for the first quarter of 2003 was 34.4% compared with
33.7% in the first quarter of 2002. The improved margin resulted primarily from
favorable manufacturing efficiencies and the favorable impact of the weaker U.S.
dollar in the Specialty Chemicals business segment. Lower gross margins for the
Industrial Chemicals and Mineral Products segments were adversely impacted by
higher energy costs.
Operating income for the first quarter of 2003 was $34.7 million compared
with $33.8 million for the first quarter of 2002. Excluding the other operating
gains and charges in each period mentioned above, operating income on a
comparable basis was $36.2 million and $31.0 million for the first quarter of
2003 and 2002, respectively (see reconciliation of non-GAAP financial measures
below). The higher operating income includes improved results in the Specialty
Chemicals business segment, partially offset by losses in the Industrial
Chemicals segment and lower results in the Mineral Products segment.
On a comparable basis, excluding the aforementioned other operating gains
and charges, operating income for the Specialty Chemicals segment improved 52%
to $34.4 million compared with $22.6 million in last year's first quarter. The
improved results were primarily attributable to improved manufacturing
efficiencies, lower operating expenses and the favorable impact of the weaker
U.S. dollar. The improved results in Specialty Chemicals were adversely impacted
by the lack of sales to Polaroid.
The Industrial Chemicals segment recorded an operating loss of $2.7 million
in the first quarter of 2003 compared with operating income of $2.7 million in
the first quarter of 2002. The results were mainly attributable to lower pricing
and unfavorable manufacturing costs, which were adversely impacted by higher
energy costs.
Operating income for the Mineral Products business segment decreased by
$1.7 million (30%) to $4.0 million in the first quarter of 2003 because of
unfavorable manufacturing costs as a result of higher energy costs.
Selling, general and administrative expenses for the first quarter of 2003
increased 3% to $43.7 million from $42.4 million in the same period last year as
a result of higher selling and distribution costs, but those expenses as a
percentage of sales were 18.8% compared with 19.3% in last year's first quarter.
Interest expense for the first quarter of 2003 was $19.9 million versus
$22.8 million for the same period last year. The $2.9 million (13%) decrease was
due to lower average borrowings ($2.1 million impact) and, to a lesser extent,
lower average interest rates ($0.8 million impact). Investment income in the
first quarter of 2003 was $20.9 million compared with $15.2 million in the same
period last year, with the increase resulting from both higher realized and
unrealized gains on securities. Other expense, net, for the first quarter of
2003 was $1.4 million compared with $2.0 million in last
16
year's first quarter, with the lower expense due to favorable foreign exchange
as a result of the weaker U.S. dollar.
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. As discussed
above and in Note 8 to consolidated financial statements, we changed the
composition of our reportable segments, effective January 1, 2003. Sales and
operating income by business segment for the first quarter of 2002 have been
restated to conform to the 2003 presentation.
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 accounting principles
generally accepted in the United States of America. 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 investors and financial institutions because such measures exclude
transactions that are unusual due to their nature or infrequency and therefore
allow investors 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 measures should be considered in addition to, and not
as a substitute, or superior to, operating income or other measures of financial
performance in accordance with generally accepted accounting principles.
First Quarter
----------------
2002 2003
------ ------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................... $ 33.8 $ 34.7
Non-GAAP adjustments:
Less: Other operating (gains) charges(1)........... (2.8) 1.5
------ ------
Operating income, as adjusted........................... $ 31.0 $ 36.2
====== ======
Supplemental Business Segment Information:
Operating income:
Operating Income per GAAP - Specialty Chemicals.... $ 25.4 $ 33.3
Non-GAAP adjustments (1)........................... (2.8) 1.1
------ ------
Operating Income - Specialty Chemicals as adjusted. $ 22.6 $ 34.4
====== ======
Operating Income per GAAP - Industrial Chemicals... $ 2.7 $ (2.7)
Non-GAAP adjustments (1)........................... - 0.2
------ ------
Operating Income - Industrial Chemicals as adjusted $ 2.7 $ (2.5)
====== ======
17
Operating Income per GAAP - Mineral Products....... $ 5.7 $ 4.0
Non-GAAP adjustments (1)........................... - 0.2
------ ------
Operating Income - Mineral Products as adjusted.... $ 5.7 $ 4.2
====== ======
Total segment operating income as adjusted......... $ 31.0 $ 36.1
Unallocated corporate office per GAAP.............. - 0.1
------ ------
Operating income, as adjusted...................... $ 31.0 $ 36.2
====== ======
(1) Non-GAAP adjustments in the first quarter of 2003 represent an other
operating charge of $1.5 million for stock option payments related to
ISP's going private transaction, which is also presented by business
segment. In 2002, non-GAAP adjustments represented an other operating
gain of $2.8 million related to a contract termination, which related
to the Specialty Chemicals business segment.
Specialty Chemicals
Sales in the first quarter of 2003 were $157.9 million compared with
$159.6 million for the same period last year, while operating income for the
first quarter of 2003 increased by 31% to $33.3 million from $25.4 million in
last year's first quarter. The decrease in sales was attributable to lower unit
volumes ($10.0 million) in the fine chemicals product line as a result of the
loss of sales due to the termination of the supply and license agreement with
Polaroid, and unfavorable pricing ($1.5 million) in the personal care product
line in both the skin care and hair care markets. Offsetting these unfavorable
impacts on sales were the favorable effect of the weaker U.S. dollar ($8.2
million) and higher unit volumes in the personal care and pharmaceutical product
lines (totaling $2.7 million). The higher volumes in personal care products were
due to strong growth in the sunscreens and cosmetics markets, mostly in Europe.
Favorable pharmaceutical volumes were primarily attributable to strong growth in
the excipients markets (Plasdones for tablet binders and Polyplasdones for
tablet disintegrants).
Excluding the other operating gains and charges discussed above,
operating income for the Specialty Chemicals segment increased by 52% for the
first quarter of 2003 to $34.4 million compared with $22.6 million in last
year's first quarter. The improvement resulted primarily from favorable
manufacturing efficiencies ($6.0 million), the favorable effect of the weaker
U.S. dollar ($5.0 million), the impact of higher unit volumes ($1.1 million) and
lower operating expenses ($1.1 million), partially offset by unfavorable pricing
and mix ($1.1 million). The improved results for this segment were adversely
impacted by the lack of sales to Polaroid.
Industrial Chemicals
Sales in the first quarter of 2003 were $49.1 million compared with
$35.5 million in the first quarter of 2002. The 38% increase in sales was
attributable to higher unit volumes ($12.8 million) and the favorable effect of
the weaker U.S. dollar ($3.5 million), partially offset by the continuing
adverse effect of unfavorable pricing ($2.7 million) for butanediol.
The Industrial Chemicals segment recorded an operating loss of $2.7 million
in the first quarter of 2003, compared with operating income of $2.7 million in
the first quarter of 2002. The unfavorable
18
results were primarily due to higher manufacturing costs ($2.7 million), which
were adversely impacted by higher energy costs, and the unfavorable pricing
($2.7 million).
Mineral Products
Sales for the Mineral Products segment for the first quarter of 2003
were $25.5 million compared with $24.0 million for the first quarter of 2002.
The 6% increase was due to higher unit volumes ($0.8 million) and favorable
pricing and included $0.9 million (19%) higher third party sales and $0.6
million (3%) higher sales to Building Materials Corporation of America, an
affiliate.
Operating income for the first quarter of 2003 was $4.0 million compared
with $5.7 million for the first quarter of 2002. The 30% decrease in operating
income was primarily due to unfavorable manufacturing costs as a result of
higher energy costs.
LIQUIDITY AND FINANCIAL CONDITION
During the first quarter of 2003, our net cash outflow before financing
activities was $122.4 million and included $142.9 million of cash used in
operations, the reinvestment of $9.7 million for capital programs and $30.2
million of cash generated from net sales of available-for-sale securities.
Cash used in operations in the first quarter of 2003 of $142.9 million
included a $104.5 million net cash outflow related to net purchases of trading
securities. Cash utilized for a reduction of payables to related parties totaled
$48.8 million (see discussion below of the going private transaction of our
parent, ISP). Cash invested in additional working capital items totaled $20.1
million during the first quarter of 2003, mainly reflecting a $21.2 million
increase in receivables as a result of $29.5 million higher sales in the first
quarter of 2003 compared with the fourth quarter of 2002 and a $6.6 million
decrease in payables and accrued liabilities mainly due to interest payments.
Partially offsetting this increase in working capital items was a $9.0 million
decrease in inventories.
Net cash provided by financing activities during the first quarter of
2003 totaled $111.3 million, primarily reflecting a $204.0 million increase in
short-term borrowings, partially offset by a loan to ISP of $94.0 million.
During the first quarter of 2003, ISP completed a going private transaction
whereby holders of ISP common stock received $10.30 per share in cash for each
share of ISP common stock owned. The total consideration for the going private
transaction of approximately $138.0 million was paid out of our funds. Pursuant
to five loan agreements with our wholly owned subsidiary, ISP Investco LLC,
which we refer to as ISP Investco, and its wholly owned subsidiary, ISP Ireland,
ISP borrowed a total of $94.0 million. The loans have various maturity dates to
March 2005 and accrue interest at a fixed rate of 1.65% per annum. In addition,
ISP Investco paid down $43.8 million of its intercompany payables to ISP. Cash
provided from financing activities also includes a $1.5 million capital
contribution from ISP for the payment of stock options related to ISP's going
private transaction.
19
As a result of the foregoing factors, cash and cash equivalents
decreased by $9.6 million during the first quarter of 2003 to $25.4 million. In
addition, the consolidated balance sheet reflects $596.4 million of trading and
available-for-sale securities.
As of March 30, 2003, our current maturities of long-term debt, scheduled
to be repaid during the twelve month period ended March 2004, totaled $2.8
million, including $2.3 million related to the term loan under our senior credit
facilities.
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 the third quarter of
2002, the majority of Polaroid's assets were acquired by a new owner. As a
result, we no longer have a long-term supply contract with Polaroid. These
events have negatively impacted the sale of our fine chemicals products and
reduced the utilization of our Freetown plant.
We have an operating lease for a sale-leaseback transaction related to
equipment at 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 first renewal term commenced during 2002. 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. We are obligated to pay a
maximum guaranteed payment amount upon the return of the equipment, currently
$32.6 million, reduced by 50% of any proceeds from the subsequent sale of the
equipment in excess of $4.8 million. Under generally accepted accounting
principles, we cannot recognize this future obligation or recognize an
impairment loss relative to the Freetown equipment since, as an operating lease,
the Freetown equipment 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 option at
the end of any future renewal period or at the termination of the lease in 2005,
we would then perform a review for possible impairment of the Freetown assets.
We are working toward increasing the utilization of the Freetown plant with
additional production of certain personal care products.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, and concludes that an entity's
commitment to an exit plan does not by itself create a present obligation that
meets the definition of a liability. This Statement also establishes that fair
value is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. As we have no plans at this time for any exit or
20
disposal activities, the adoption of SFAS No. 146 will not have any immediate
effect on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends disclosure requirements of SFAS No. 123 for both
annual and interim reporting periods by requiring disclosures in a tabular
format to reconcile net income as reported to pro forma net income as if the
fair value method was used. Certain of the disclosure modifications required for
fiscal years ending after December 15, 2002 were disclosed in our 2002 Form
10-K. However, as discussed above, with the completion of the going private
transaction by ISP in February 2003, our stock-based compensation plans were
terminated and payments were made in accordance with the terms of the merger
agreement. Therefore, the provisions of SFAS No. 148 are no longer applicable
to us as it relates to those plans. In addition, we currently account for
incentive units granted to our eligible employees pursuant to ISP's Long-Term
Incentive Plan under the accounting prescribed by FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option and
Award Plans" ("FIN 28"), which requires an entity to measure compensation as
the amount by which the Book Value of the incentive units covered by the grant
exceeds the option price or value specified of such incentive units at the date
of grant. Changes, either increases or decreases, in the Book Value of those
incentive units between the date of grant and the measurement date result in a
change in the measure of compensation for the right or award. We expect to
continue to account for our long-term incentive units under the accounting
prescribed by FIN 28 and have adopted the additional disclosure provisions of
SFAS No. 148. Since compensation expense related to such incentive units is
included in the actual consolidated statements of operations, our pro forma net
income under SFAS No. 123 would have been the same as actual net income.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosures of certain
guarantees issued and outstanding. The provisions of FIN 45 apply to guarantee
contracts that contingently require the guarantor to make payments (in cash,
financial instruments, other assets, shares of stock or provision of services)
to the guaranteed party for guarantees such as a financial standby letter of
credit, a market value guarantee on either a financial or nonfinancial asset
owned by the guaranteed party and a guarantee of the collection of the scheduled
contractual cash flows from financial assets held by a special-purpose entity.
FIN 45 also applies to indemnification contracts and indirect guarantees of
indebtedness of others. The requirements of FIN 45 for the initial recognition
and measurement of the liability for a guarantor's obligations are to be applied
only on a prospective basis to guarantees issued or modified after December 31,
2002. We currently do not have any guarantees, indemnification contracts or
indirect guarantees of indebtedness of others that would be subject to the
initial recognition and measurement provisions of FIN 45. The 10 1/4% Senior
Subordinated Notes due 2011 of ISP Chemco Inc., our wholly owned subsidiary, are
guaranteed
21
by all of ISP Chemco's domestic subsidiaries, other than certain immaterial
subsidiaries and our accounts receivable financing subsidiary.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." In accordance with FIN 46, a variable interest entity will
be consolidated if either the total equity investment at risk is not sufficient
to permit the entity to finance its activities without additional subordinated
financial support from other parties, or as a group, the holders of the equity
investment at risk lack any one of the following three characteristics of a
controlling financial interest: (1) the direct or indirect ability to make
decisions about an entity's activities; (2) the obligation to absorb the
expected losses of the entity if they occur; (3) the right to receive the
expected residual returns of the entity if they occur. All companies with
variable interests in variable interest entities created after January 31, 2003
shall apply the provisions of FIN 46 immediately. A public entity with a
variable interest in a variable interest entity created before February 1, 2003
shall apply the provisions of FIN 46 to that entity no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
We do not have an interest in a variable interest entity. Therefore, FIN 46 does
not currently have an impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments
and hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. We do not expect that the
adoption of SFAS No. 149 will have an immediate impact on our consolidated
financial statements.
We have a contract with a multinational supplier to supply a substantial
amount of our acetylene needs to our Texas City, Texas facility. This supplier
generates this raw material as a by-product from the manufacture of ethylene.
Pricing under the contract is on a fixed basis and we are obligated to purchase
a specified amount of acetylene under the contract. This supplier has announced
the closure of its facility by the end of June 2003. The supplier has an
obligation to provide product to us until the end of March 2004 and has
confirmed that it will meet this obligation through that date by delivering
product from another of its facilities. We have identified several alternative
sources of supply of acetylene for the Texas City facility for the period after
March 2004. The annualized, incremental cost of acetylene from these sources is
estimated to be less than $2.0 million. Although we believe that these
alternative sources of supply will be sufficient for our projected needs, there
can be no assurance in this regard.
We also have a contract with another supplier for the delivery of
additional amounts of acetylene to our Texas City facility. We are obligated to
purchase a specified amount of acetylene under this contract, which expires June
30, 2003. We have secured an alternative source to this agreement and have
entered into a five-year contract under which we are obligated to purchase
specified quantities of acetylene. Pricing is fixed with escalators tied to the
Producer Price Index.
We anticipate ongoing pressure on our pricing and revenue related to
commodity type butanediol and related solvents and intermediates. A key
22
competitor in this market completed construction of additional production
capacity in Europe for these products during the third quarter of 2002. Another
competitor is expected to complete construction of additional capacity in Asia
during the third quarter of 2003. With the opening of these two facilities, the
increase in the supply of these products to the merchant market is anticipated
to result in increasing downward pressure on pricing.
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 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.
23
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, 2002 for a discussion of "Market-Sensitive
Instruments and Risk Management." As of December 31, 2002, equity-related
financial instruments employed by us to reduce market risk included long
contracts valued at $3.9 million and short contracts valued at $0.4 million. At
March 30, 2003, the value of long contracts was $4.0 million and the value of
short contracts was $0.4 million. Such instruments are marked-to-market each
month, with unrealized gains and losses included in the results of operations.
The unrealized gains (losses) on equity-related long contracts at December 31,
2002 and March 30, 2003 was $(145,000) and $(112,000), respectively, and the
unrealized gains on equity-related short contracts was $6,000 and $10,000 at
December 31, 2002 and March 30, 2003, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer are responsible
for the design, maintenance and effectiveness of disclosure controls and
procedures (as defined in the Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934).
The effectiveness of the disclosure controls and procedures have been
evaluated by the Chief Executive Officer and Chief Financial Officer within 90
days of the filing date of this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure
controls and procedures are adequate and effective.
There have been no significant changes in internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of the evaluation in connection with the preparation of this
Quarterly Report on Form 10-Q.
24
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
--------------
10.1 Amendment No. 5 to the Amended and Restated Management
Agreement, dated as of January 1, 2003, by and among G-I
Holdings Inc., Merick Inc., International Specialty Products
Inc., ISP Investco LLC, GAF Broadcasting Company, Inc.,
Building Materials Corporation of America and ISP Management
Company, Inc. as assignee of ISP Chemco Inc.
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:
No reports on Form 8-K were filed during the three-month period ended
March 30, 2003.
25
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 HOLDINGS INC.
DATE: May 13, 2003 BY: /s/Neal E. Murphy
------------ -----------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: May 13, 2003 BY: /s/Kenneth M. McHugh
------------ --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
26
CERTIFICATION
I, Sunil Kumar, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of International Specialty
Holdings Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Sunil Kumar
- ----------------------------
Name: Sunil Kumar
Title: President and Chief Executive Officer
27
CERTIFICATION
I, Neal E. Murphy, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of International Specialty
Holdings Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Neal E. Murphy
- -------------------------------
Name: Neal E. Murphy
Title: Senior Vice President and
Chief Financial Officer
28