Edgar Filing: INTERNATIONAL SPECIALTY PRODUCTS INC /NEW/

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-29764

INTERNATIONAL SPECIALTY PRODUCTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)

300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (302) 427-5715

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

As of November 9, 2001, 65,121,309 shares of International Specialty
Products Inc. common stock (par value $.01 per share) were outstanding.

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

INTERNATIONAL SPECIALTY PRODUCTS INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- ------------------
OCTOBER 1, SEPT. 30, OCTOBER 1, SEPT. 30,
2000 2001 2000 2001
-------- --------- --------- ---------

Net sales............................ $ 195,886 $ 188,633 $ 594,084 $ 595,124
--------- --------- --------- ---------
Costs and Expenses:
Cost of products sold.............. 129,680 114,896 386,080 370,491
Selling, general and administrative 38,268 39,177 116,618 120,485
Goodwill amortization.............. 4,049 4,048 12,144 12,144
--------- --------- --------- ---------
Total costs and expenses ....... 171,997 158,121 514,842 503,120
--------- --------- --------- ---------
Operating income..................... 23,889 30,512 79,242 92,004
Interest expense..................... (21,810) (25,052) (62,725) (62,780)
Gain on contract settlement ......... - - 3,450 -
Other income (expense), net.......... 39,451 (8,326) 48,548 3,427
--------- --------- --------- ---------
Income (loss) before income taxes.... 41,530 (2,866) 68,515 32,651
Income tax (provision) benefit....... (14,566) 989 (24,020) (11,473)
--------- --------- --------- --------
Income (loss) before cumulative
effect of accounting change....... 26,964 (1,877) 44,495 21,178

Cumulative effect of change in
accounting principle, net of
income tax benefit of $216........ - - - (440)
--------- --------- --------- --------
Net income (loss).................... $ 26,964 $ (1,877) $ 44,495 $ 20,738
========= ========= ========= ========

INTERNATIONAL SPECIALTY PRODUCTS INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- ------------------
OCTOBER 1, SEPT. 30, OCTOBER 1, SEPT. 30,
2000 2001 2000 2001
-------- --------- -------- --------

Earnings per common share:
Basic:
Income (loss) before cumulative
Effect of accounting change... $ .40 $ (.03) $ .65 $ .32
Cumulative effect of accounting
change........................ - - - (.01)
--------- --------- --------- --------
Net income (loss)................ $ .40 $ (.03) $ .65 $ .31
========= ========= ========= ========
Diluted:
Income (loss) before cumulative
of accounting change.......... $ .40 $ (.03) $ .65 $ .32
Cumulative effect of accounting
change........................ - - - (.01)
--------- --------- --------- --------
Net income (loss)................ $ .40 $ (.03) $ .65 $ .31
========= ========= ========= ========

Weighted average number of common
and common equivalent shares outstanding:

Basic.............................. 67,951 65,641 68,518 66,050
========= ========= ======== ========
Diluted............................ 67,951 65,770 68,518 66,137
========= ========= ======== ========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

INTERNATIONAL SPECIALTY PRODUCTS INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30,
DECEMBER 31, 2000
2001 (UNAUDITED)
------------ -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 18,181 $ 30,168
Investments in trading securities.............. 303,103 26,000
Investments in available-for-sale securities... 222,327 331,189
Other short-term investments................... 19,129 2,220
Restricted cash................................ - 176,519
Accounts receivable, trade, net................ 89,173 89,784
Accounts receivable, other..................... 19,596 27,739
Receivable from related parties, net........... 11,624 15,698
Inventories.................................... 150,948 201,712
Other current assets........................... 36,928 36,637
---------- ----------
Total Current Assets........................ 871,009 937,666
Property, plant and equipment, net............... 562,973 558,786
Goodwill, net.................................... 494,386 488,153
Long-term restricted cash........................ - 81,130
Other assets..................................... 31,916 68,733
---------- ----------
Total Assets..................................... $1,960,284 $2,134,468
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 143,682 $ 116,645
Current maturities of long-term debt........... 224,419 182,446
Accounts payable............................... 58,238 51,555
Accrued liabilities............................ 91,309 109,006
Income taxes................................... 13,610 15,567
---------- ----------
Total Current Liabilities.................... 531,258 475,219
---------- ----------
Long-term debt less current maturities........... 524,780 912,540
---------- ----------
Deferred income taxes............................ 151,181 93,148
---------- ----------
Other liabilities................................ 61,730 65,439
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized:
no shares issued............................. - -
Common stock, $.01 par value per share;
300,000,000 shares authorized: 69,546,456
shares issued ............................... 695 695
Additional paid-in capital..................... 485,629 487,067
Unearned compensation - restricted stock awards (1,287) (1,072)
Treasury stock, at cost - 3,135,192 and
4,245,947 shares, respectively............... (19,631) (30,668)
Retained earnings.............................. 213,928 234,666
Accumulated other comprehensive income(loss)... 12,001 (102,566)
---------- ----------
Total Stockholders' Equity................... 691,335 588,122
---------- ----------

Total Liabilities and Stockholders' Equity....... $1,960,284 $2,134,468
========== ==========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED
--------------------
OCTOBER 1, SEPT. 30,
2000 2001
--------- ---------
(THOUSANDS)

Cash and cash equivalents, beginning of period........... $ 23,309 $ 18,181
-------- --------
Cash provided by operating activities:
Net income............................................. 44,495 20,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - 440
Depreciation....................................... 38,039 39,542
Goodwill amortization.............................. 12,144 12,144
Deferred income taxes.............................. 10,118 (785)
Unrealized (gains) losses on trading securities
and other short-term investments................. (20,191) 4,584
Increase in working capital items...................... (2,819) (46,949)
Purchases of trading securities........................ (41,740) (405,621)
Proceeds from sales of trading securities.............. 87,839 610,191
Increase in net receivable from related parties........ (1,337) (4,074)
Change in cumulative translation adjustment............ (12,790) (953)
Other, net............................................. 12,901 5,441
-------- --------
Net cash provided by operating activities................ 126,659 234,698
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions ................. (39,380) (58,716)
Purchases of available-for-sale securities............. (296,448) (298,850)
Proceeds from sales of available-for-sale securities... 217,388 92,456
Proceeds from sales of other short-term investments.... - 12,765
-------- --------
Net cash used in investing activities.................... (118,440) (252,345)
-------- --------
Cash provided by (used in) financing activities:
Proceeds (repayments) from sale of accounts receivable. (5,128) (7,791)
Increase (decrease) in short-term debt................. 5,766 (27,037)
Proceeds from issuance of debt......................... - 527,332
Increase (decrease) in borrowings under revolving
credit facilities.................................... 1,800 (115,400)
Repayments of long-term debt........................... (10,461) (65,059)
Increase in restricted cash............................ - (257,649)
Financing fees and expenses............................ - (13,789)
Repurchases of common stock............................ (8,616) (12,257)
Other, net............................................. 530 1,284
-------- --------
Net cash provided by (used in) financing activities...... (16,109) 29,634
-------- --------
Net change in cash and cash equivalents.................. (7,890) 11,987
-------- --------
Cash and cash equivalents, end of period................. $ 15,419 $ 30,168
======== ========

INTERNATIONAL SPECIALTY PRODUCTS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)-- (CONTINUED)

NINE MONTHS ENDED
-------------------
OCTOBER 1, SEPT. 30,
2000 2001
--------- ---------
(THOUSANDS)

Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 59,799 $ 49,874
Income taxes..................................... 10,212 7,114

Acquisition of FineTech Ltd.:
Fair market value of assets acquired............. $ 26,547
Purchase price of acquisition.................... 22,450
--------
Liabilities assumed.............................. $ 4,097
========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements for International Specialty Products
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company at September
30, 2001, and the results of operations and cash flows for the periods ended
October 1, 2000 and September 30, 2001. All adjustments are of a normal
recurring nature. These financial statements should be read in conjunction with
the annual financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the
"Form 10-K").

NOTE 1. FINANCING TRANSACTIONS AND RESTRUCTURING

On June 27, 2001, ISP Chemco Inc.("ISP Chemco"), an indirect
wholly-owned subsidiary of the Company, and three wholly-owned subsidiaries of
ISP Chemco issued $205.0 million aggregate principal amount of 10 1/4% Senior
Subordinated Notes due 2011 (the "2011 Notes"). The net proceeds of $197.3
million, after discount and fees, were placed in an escrow account and were used
to retire the Company's 9 3/4% Senior Notes due 2002 (the "2002 Notes") on or
prior to October 15, 2001. During the third quarter of 2001, the Company retired
$19.9 million of the 2002 Notes, and the remaining $180.0 million of 2002 Notes
were retired on or before October 15, 2001. On July 31, 2001, these four
subsidiaries issued an additional $100.0 million aggregate principal amount of
the 2011 Notes. These notes have the same terms as the 2011 Notes issued in
June. The net proceeds were $98.9 million, including $0.9 million of accrued
interest from June 27, 2001 to the date of issuance, of which $98.0 million was
placed in an escrow account to be used to retire a portion of the Company's 9%
Senior Notes due 2003 (the "2003 Notes") on or prior to their maturity. On
November 13, 2001, these four subsidiaries issued an additional $100.0 million
aggregate principal amount of the 2011 Notes. These notes have the same terms as
the 2011 Notes issued in June, except with respect to interest accrual and
registration rights. The net proceeds of $101.0 million were placed in an escrow
account to be used to retire a portion of the Company's 2003 Notes on or prior
to their maturity. During the third quarter of 2001, the Company retired $16.9
million principal amount of the 2003 Notes. All of the 2011 Notes were
guaranteed by substantially all of ISP Chemco's other domestic subsidiaries. The
2011 Notes were issued under an indenture which, among other things, places
limits on the ability of ISP Chemco and its subsidiaries to incur additional
debt, issue preferred stock, incur liens, and pay dividends or make certain
other restricted payments and restricted investments.

NOTE 1. FINANCING TRANSACTIONS AND RESTRUCTURING - (CONTINUED)

includes a borrowing capacity not in excess of $50.0 million for letters of
credit. All borrowings under the Senior Credit Facilities will be based on
either an alternate base rate (based on the banks' base rate or on the federal
funds rate) or on the eurodollar rate plus a margin based on the ratio of ISP
Chemco's total consolidated debt to EBITDA (as defined in the Senior Credit
Facilities). The Senior Credit Facilities require compliance with various
financial covenants, including a total debt leverage maintenance ratio, a senior
debt leverage maintenance ratio, an interest coverage ratio and a minimum
adjusted net worth. As of September 30, 2001, $80.6 million of borrowings and
$5.6 million of letters of credit were outstanding under the revolving credit
facility.

In connection with the above transactions, the Company also completed a
restructuring of its business in order to separate its investment assets from
its specialty chemicals business. As part of the restructuring, ISP Chemco
transferred all of its investment assets to a newly formed subsidiary of the
Company, Newco Holdings Inc., which is a parent company of ISP Chemco. Newco
Holdings, in turn, transferred those assets to its newly formed subsidiary, ISP
Investco LLC. As a result of the restructuring, ISP Chemco's assets consist
solely of those related to the Company's specialty chemicals business.

NOTE 2. ACQUISITION

On June 7, 2001, the Company completed the acquisition of FineTech Ltd.
("FineTech"), a pharmaceutical research company based in Haifa, Israel. FineTech
specializes in the design of proprietary synthetic routes and methodologies used
in the production of highly complex and valuable organic compounds for the
pharmaceutical industry. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated to the
estimated fair value of the identifiable net assets acquired, and the excess was
recorded as goodwill. The results of FineTech are included in the Company's
results from the date of acquisition and are not expected to be material to the
Company's results of operations for the year 2001. FineTech recorded revenues of
$3.5 million in the year 2000.

NOTE 3. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset

NOTE 3. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - (CONTINUED)

or liability measured at its fair value. SFAS No. 133 requires that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement.

The Company adopted SFAS No. 133 as of January 1, 2001. Accounting for
interest rate swaps and foreign exchange forward contracts held by the Company
is affected by implementation of this standard. The earnings impact of the
transition adjustments related to the initial adoption of the standard was an
after-tax loss of $0.4 million, which was recorded in the first quarter of 2001
as the cumulative effect of a change in accounting principle.

NOTE 4. HEDGING AND DERIVATIVES

As discussed in Note 1, in June 2001, ISP Chemco entered into the $450.0
million Senior Credit Facilities, which include a $225.0 million term loan.
Borrowings against this term loan will be based on either an alternate base rate
or on the eurodollar rate plus a margin based on the ratio of ISP Chemco's total
consolidated debt to EBITDA. The Company has designated interest rate swaps,
with a notional amount of $100 million, as a hedge of its exposure to changes in
the eurodollar rate. The interest rate swaps are structured to receive interest
based on the eurodollar rate and pay interest on a fixed rate basis. A cash flow
hedging relationship has been established whereby the interest rate swaps hedge
the risk of changes in the eurodollar rate related to forecasted borrowings
against the term loan. The interest rate swaps hedge forecasted exposure to
changes in the eurodollar rate through July 2002.

During the first nine months of 2001, a $1.0 million charge related to the
reduction in the fair market value of the interest rate swaps was reclassified
and charged against interest expense, of which $0.2 million represents hedge
ineffectiveness. As of September 30, 2001, the reclassification charge to
earnings related to interest accruals over the next twelve months is estimated
to be $2.1 million.

Derivatives held by the Company not designated as hedging instruments
include total return equity swaps and forward foreign exchange instruments. The
total return equity swaps are held for investment income purposes. Foreign
exchange forward contracts are held to offset exposure to changes in exchange
rates affecting intercompany loans.

NOTE 5. COMPREHENSIVE INCOME

Third Quarter Ended Nine Months Ended
------------------- -------------------
October 1, Sept 30, October 1, Sept 30,
2000 2001 2000 2001
--------- -------- --------- -------
(Thousands)

Net income (loss)............................ $ 26,964 $(1,877) $ 44,495 $ 20,738
-------- ------- -------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses) arising
during the period, net of income tax
(provision) benefit of $(26,933), $17,154,
$(44,297) and $58,890..................... 54,748 (33,478) 90,644 (114,365)
Less: reclassification adjustment for
losses included in net income,
net of income tax benefit of $(13,228),
$1,223, $(2,583) and $1,534............... 24,390 (1,526) 20,675 (2,100)
-------- ------- -------- --------
Total change for the period................. 30,358 (31,952) 69,969 (112,265)
-------- ------- -------- --------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of tax effect
of $443 and $1,070........................ - (819) - (1,979)
Less: reclassification adjustment for
losses included in net income, net of
tax effect of $151 and $341............... - (280) - (630)
-------- ------- -------- -------
Total change for the period................. - (539) - (1,349)
Foreign currency translation adjustment....... (6,081) 8,023 (12,790) (953)
-------- ------- -------- --------
Total other comprehensive income (loss)....... 24,277 (24,468) 57,179 (114,567)
-------- ------- -------- --------
Comprehensive income (loss)................... $ 51,241 $(26,345) $101,674 $(93,829)
======== ======= ======== ========

Changes in the components of "Accumulated other comprehensive income
(loss)" for the nine months ended September 30, 2001 are as follows:

Unrealized Unrealized Cumulative
Gains (Losses) Losses on Foreign Accumulated
on Available- Derivative Currency Other
for-Sale Hedging Translation Comprehensive
Securities Instruments Adjustment Income (Loss)
------------ ---------- --------- -------------
(Thousands)

Balance, December 31, 2000.. $ 34,020 $ - $ (22,019) $ 12,001
Change for the period....... (112,265) (1,349) (953) (114,567)
------------ ---------- --------- ---------
Balance, September 30, 2001. $ (78,245) $ (1,349) $ (22,972) $(102,566)
============ ========== ========= =========

NOTE 6. BUSINESS SEGMENT INFORMATION

Third Quarter Ended Nine Months Ended
--------------------- --------------------
October 1, Sept. 30, October 1, Sept. 30,
2000 2001 2000 2001
--------- --------- --------- ---------
(Thousands)

Net sales:
Personal Care............................. $ 44,532 $ 45,454 $ 139,999 $ 150,509
Pharmaceutical, Food and Beverage......... 55,616 59,635 174,589 175,452
Performance Chemicals, Fine Chemicals and
Industrial.............................. 75,530 59,754 222,551 205,351
--------- --------- --------- ---------
Total Specialty Chemicals............... 175,678 164,843 537,139 531,312
Mineral Products (1)...................... 20,208 23,790 56,945 63,812
--------- --------- --------- ---------
Net sales................................... $ 195,886 $ 188,633 $ 594,084 $ 595,124
========= ========= ========= =========

Operating income(2):
Personal Care............................. $ 7,314 $ 5,746 $ 22,824 $ 27,003
Pharmaceutical, Food and Beverage......... 12,191 12,146 37,341 38,779
Performance Chemicals, Fine Chemicals and
Industrial.............................. 726 7,603 10,184 17,505
--------- --------- --------- ---------
Total Specialty Chemicals............... 20,231 25,495 70,349 83,287
Mineral Products.......................... 3,358 5,078 8,661 8,434
--------- --------- --------- ---------
Total segment operating income............ 23,589 30,573 79,010 91,721
Unallocated corporate office.............. 300 (61) 232 283
--------- --------- --------- ---------
Total operating income...................... 23,889 30,512 79,242 92,004
Interest expense and other, net............. 17,641 (33,378) (10,727) (59,353)
--------- --------- --------- ---------
Income (loss) before income taxes........... $ 41,530 $ (2,866) $ 68,515 $ 32,651
========= ========= ========= =========

(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $15.7 and $18.7 million for the third quarter of
2000 and 2001, respectively, and $47.6 and $50.5 million for the first
nine months of 2000 and 2001, respectively.

(2) Operating income for the third quarter and first nine months of 2000 for
the three Specialty Chemicals business segments have been reclassified to
conform to the 2001 presentation, based on a reallocation of certain
manufacturing costs.

NOTE 7. INVENTORIES

Inventories comprise the following:

December 31, September 30,
2000 2001
------------ ------------
(Thousands)
Finished goods................ $ 93,356 $ 127,489
Work-in-process............... 29,022 41,131
Raw materials and supplies.... 28,570 33,092
-------- ---------
Inventories................... $150,948 $ 201,712
======== =========

At December 31, 2000 and September 30, 2001, $38.7 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, they would have been
$0.1 million lower at December 31, 2000 and $4.9 million higher at September 30,
2001.

NOTE 8. RESTRUCTURING RESERVES

In December 2000, the Company shut down its Seadrift, Texas butanediol
manufacturing facility and shut down production of butanediol at its Texas City,
Texas manufacturing facility in the first quarter of 2001. Accordingly, the
Company recorded a one-time restructuring charge against operating income in
2000 of $2.5 million, including an accrual of $2.1 million for cash costs to be
incurred in 2001 for severance and for decommissioning and remediation costs.
During the first nine months of 2001, $2.0 million of such costs were charged
against this reserve, leaving a reserve balance of $0.1 million as of the end of
the third quarter of 2001.

In connection with the relocation of certain of the Company's production
lines for Personal Care products to the Company's Freetown, Massachusetts
facility, the Company shut down its manufacturing operation in Belleville, New
Jersey in the first quarter of 2001. Accordingly, the Company recorded a
restructuring charge against operating income in 2000 of $11.9 million, which
included a $10.4 million write-off of production assets. The total charge
included an accrual of $1.5 million for cash costs to be incurred in 2001,
mainly for severance and other shutdown-related costs. During the first nine
months of 2001, $1.1 million of costs were charged against this reserve, leaving
a reserve balance of $0.4 million as of the end of the third quarter of 2001,
primarily for remaining severance costs.

NOTE 9. SALE OF ACCOUNTS RECEIVABLE

In October 2001, the Company entered into a new agreement for the
sale of its domestic receivables. This agreement replaces a previous agreement
which terminated in October 2001. The agreement has a termination date of
October 2004 and provides for up to $40.0 million in cash to be made available
to the Company based on eligible domestic receivables outstanding from time to
time.

NOTE 10. CONTINGENCIES

Environmental Litigation

The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims") under the Comprehensive Environmental Response Compensation and
Liability Act, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed, a number of which Environmental Claims are in
the early stages or have been dormant for protracted periods.

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 such matters. It is not
currently possible to estimate the amount or range of any additional liability.

For further information regarding environmental matters, reference is made
to Note 19 to Consolidated Financial Statements contained in the Form 10-K.

Tax Claim Against G-I Holdings Inc.

The Company and certain of its subsidiaries were members of the
consolidated group (the "G-I Holdings Group") for Federal income tax purposes
that included G-I Holdings Inc. ("G-I Holdings") in certain prior years and,
accordingly, would be severally liable for any tax liability of the G-I Holdings
Group in respect of those prior years. Effective as of January 1, 1997, neither
the Company nor any of its subsidiaries are members of the G-I Holdings Group.

On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million

NOTE 10. CONTINGENCIES - (CONTINUED)

(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 in the G-I Holdings bankruptcy. If such proof of claim is sustained,
the Company and/or some of the Company's subsidiaries, together with G-I
Holdings and several current and former subsidiaries of G-I Holdings, would be
severally liable for such taxes and interest in the amount of approximately
$250.0 million should G-I Holdings be unable to satisfy such liability. In
January 2001, G-I Holdings filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related bodily injury
claims relating to the inhalation of asbestos fiber. For additional information
relating to G-I Holdings, reference is made to Notes 8, 16 and 19 to
Consolidated Financial Statements contained in the Form 10-K.

NOTE 11. NEW ACCOUNTING STANDARDS

On June 30, 2001, the FASB issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and eliminates the pooling
method of accounting. SFAS No. 141 will not have an impact on the Company's
business since the Company has historically accounted for all business
combinations using the purchase method of accounting. With the adoption of SFAS
No. 142, effective January 1, 2002, goodwill will no longer be subject to
amortization over its estimated useful life. However, goodwill will be subject
to at least an annual assessment for impairment and more frequently if
circumstances indicate a possible impairment. Companies must perform a
fair-value-based goodwill impairment test. In addition, under SFAS No. 142, an
acquired intangible asset should be separately recognized if the benefit of the
intangible is obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged.
Intangible assets will be amortized over their useful lives. Early adoption of
SFAS No. 142 is not permitted. On an annualized basis, effective January 1,
2002, the Company's net income will increase by approximately $16.2 million
($.24 diluted earnings per share), unless any impairment charges are necessary.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - THIRD QUARTER 2001 COMPARED WITH
THIRD QUARTER 2000

The Company recorded a third quarter 2001 net loss of $1.9 million ($.03
diluted earnings per share) compared with net income of $27.0 million ($.40
diluted earnings per share) in the third quarter of 2000. The results were
attributable to investment losses in the quarter and higher interest expense
partially offset by higher operating income.

Net sales for the third quarter of 2001 were $188.6 million compared with
$195.9 million for the same period in 2000. The decrease in sales resulted
primarily from lower volumes in the Industrial, Performance Chemicals and Fine
Chemicals businesses, partially offset by higher volumes in the Pharmaceutical
and Mineral Products businesses and improved pricing in the Industrial business.
Volumes in the Industrial business were lower than last year's quarter due to
the impact of discontinuing butanediol production at the Company's Texas City,
Texas plant in March 2001.

Operating income for the third quarter of 2001 improved 28% to $30.5
million compared with $23.9 million for the third quarter of 2000. The increase
was attributable to improvements in operating profits in the Industrial,
Pharmaceutical, Fine Chemicals and Mineral Products businesses, reflecting
higher gross margins in each business as a result of favorable manufacturing
costs, improved pricing in the Industrial business, the effect of favorable
volume in the Pharmaceutical business and the favorable impact of the
acquisition of FineTech Ltd. which was completed in the second quarter of 2001
(see Note 2 to Consolidated Financial Statements). These improved results were
partially offset by unfavorable volumes in the Industrial and Performance
Chemicals businesses, higher manufacturing costs in the Alginates business and
lower margins in the Personal Care business segment.

Interest expense for the third quarter of 2001 was $25.1 million versus
$21.8 million for the same period last year. The increase was due to higher
average borrowings, primarily reflecting the issuance of $305 million aggregate
principal amount of 10 1/4% Senior Subordinated Notes in June and July 2001.
Other expense, net, for the quarter was $8.3 million compared with other income
of $39.5 million in last year's third quarter. The decrease was attributable to
investment losses in the third quarter of 2001 of $7.3 million compared with
investment income of $43.9 million in the third quarter of 2000, which reflected
a net gain of $36.8 million from the sale of the Company's investments in Dexter
Corporation and Life Technologies, Inc.

Business Segment Review

A discussion of operating results for each of the Company's business
segments follows. The Company operates its Specialty Chemicals business through
three reportable business segments, in addition to the Mineral Products segment.

Personal Care

Sales in the third quarter of 2001 were $45.5 million compared with
$44.5 million for the same period last year, while operating income for the
third quarter of 2001 decreased to $5.7 million from $7.3 million in last year's
quarter. The increase in sales resulted primarily from higher volumes in the
North America hair care markets, reflecting strong mass market sales of hair
gels and styling aids, partially offset by the lower volumes in the North
America and Asia skin care markets. The $1.6 million decrease in operating
income mainly reflected an unfavorable product mix in the North America hair
care markets and higher operating expenses, partially offset by the effect of
favorable volumes.

Pharmaceutical, Food and Beverage ("PFB")

Sales for the PFB segment were $59.6 million for the third quarter of
2001 compared with $55.6 million for the third quarter of 2000, while operating
income was $12.1 million versus $12.2 million in last year's quarter. Sales for
the Pharmaceutical and Beverage business increased by 12% in the third quarter
of 2001, reflecting higher volumes in both Pharmaceutical (excipients markets)
and Beverage. Sales for the Alginates business decreased by 6% due to lower
volumes in the industrial markets.

Operating income for the Pharmaceutical and Beverage business increased 37%
in the third quarter of 2001 compared with the same period in 2000, while the
operating margin improved from 21.4% in the third quarter of 2000 to 26.2% in
this year's quarter. The improvement reflected the higher volumes. Operating
income for the Alginates business decreased in the third quarter of 2001 due to
the lower volumes and unfavorable manufacturing costs related to lower
production volumes.

Performance Chemicals, Fine Chemicals and Industrial

Sales in the third quarter of 2001 were $59.8 million compared with
$75.5 million in the third quarter of 2000. The 21% lower sales reflected lower
volumes in each of the three businesses, partially offset by improved pricing in
the Industrial business. Lower volumes in the Performance Chemicals business
primarily reflected declines in the specialty coatings market. Lower Fine
Chemicals volumes were related to contract sales to Polaroid. The lower contract
sales were partially offset by sales of $1.2 million for the FineTech business
which was was acquired in the second quarter.

Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment improved in the third quarter of 2001 to $7.6 million versus
$0.7 million for the same period last year, primarily reflecting higher
Industrial operating income due to improved pricing and favorable manufacturing
costs resulting from lower raw material and energy costs. Higher operating
income for the Fine Chemicals business was attributable to an improved gross
margin due to favorable manufacturing costs and the favorable impact of the
FineTech acquisition. The Performance Chemicals business experienced a loss in
the third quarter of 2001 as a result of the lower volumes and an unfavorable
product mix.

On October 12, 2001, Polaroid filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. As a result, Polaroid may choose to either assume or
reject the supply agreement it has with the Company. Polaroid has stated that it
is reviewing this contract and will determine some time in the future whether it
will elect to assume it or propose certain modifications to the contract. If it
rejects that contract and no longer purchases product from the Company, or the
Company accepts modifications to the contract, which would reduce the amounts to
be paid by Polaroid, the Company's Performance Chemicals, Fine Chemicals and
Industrial business segment could experience a reduction in sales and operating
income which could be material to that business segment's results.

Mineral Products

Sales for the Mineral Products segment for the third quarter of 2001
were $23.8 million compared with $20.2 million for the third quarter of 2000.
The 18% higher sales were attributable to a $3.0 million (19%) increase in sales
to Building Materials Corporation of America, an affiliate, and a 13% increase
in trade sales, both due to higher volumes. Operating income for the third
quarter of 2001 was $5.1 million compared with $3.4 million for the third
quarter of 2000, reflecting a higher gross margin due to favorable manufacturing
costs, partially offset by an unfavorable product mix.

RESULTS OF OPERATIONS - FIRST NINE MONTHS 2001 COMPARED WITH
FIRST NINE MONTHS 2000

For the first nine months of 2001, the Company recorded net income of $20.7
million ($.31 diluted earnings per share) compared with $44.5 million ($.65
diluted earnings per share) in the first nine months of 2000. The results for
the first nine months of 2001 include an after-tax charge of $0.4 million ($.01
diluted earnings per share), representing the cumulative effect of adopting
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Excluding the effect of such charge and a
one-time gain of $3.5 million in the first nine months of 2000 from a contract
settlement, net income for the first nine months of 2001 was $21.1 million ($.32
diluted earnings per share) versus $42.3 million ($.62 diluted earnings per
share) in the same period last year. On a comparable basis, the lower results
were attributable to lower investment income, partially offset by improved
operating income.

Net sales for the first nine months of 2001 were $595.1 million compared
with $594.1 million for the same period in 2000. The increase in sales resulted
from higher volumes in the Personal Care, Pharmaceutical and Mineral Products
businesses and improved pricing in the Industrial business, partially offset by
lower volumes in the Industrial, Alginates and Fine Chemicals businesses and by
the adverse effect of the stronger U.S. dollar in Europe.

Operating income for the first nine months of 2001 was $92.0 million
compared with $79.2 million for the first nine months of 2000. The 16% increase
in operating income was attributable to improvements in operating profits in all
Specialty Chemicals business segments, primarily resulting from higher volumes
and favorable manufacturing costs in the Personal Care and Pharmaceutical
businesses and improved pricing in the Industrial business. These gains were
partially offset by lower volumes in the Industrial and Performance Chemicals
businesses, unfavorable manufacturing costs in the Alginates business and by the
adverse effect of the stronger U.S. dollar in Europe.

Interest expense for the first nine months of 2001 was $62.8 million versus
$62.7 million for the same period last year, as the effect of higher average
borrowings reflecting the issuance of $305 million aggregate principal amount of
10 1/4% Senior Subordinated Notes in June and July 2001 was offset by lower
average interest rates. Other income, net, for the first nine months of 2001 was
$3.4 million compared with $48.5 million for the same period last year, with the
decrease due to lower investment income. Investment income in the first nine
months of 2001 was $13.5 million compared with $56.1 million in the first nine
months of 2000, which included the net gain of $36.8 million from the sale of
the Company's investments in Dexter Corporation and Life Technologies, Inc.

Business Segment Review

Personal Care

Sales in the first nine months of 2001 were $150.5 million compared
with $140.0 million for the same period last year, while operating income for
the first nine months of 2001 increased to $27.0 million from $22.8 million in
the same period last year. The 7.5% increase in sales resulted principally from
higher volumes in the North American and European hair care markets, reflecting
strong mass market sales of hair gels and styling aids, partially offset by the
adverse effect ($3.3 million) of the stronger U.S. dollar in Europe. Operating
profits improved 18% as a result of the higher volumes and a higher gross margin
which was attributable to favorable manufacturing costs.

Pharmaceutical, Food and Beverage ("PFB")

Sales for the PFB segment were $175.5 million for the first nine
months of 2001 compared with $174.6 million for the first nine months of 2000,
while operating income increased to $38.8 million versus $37.3 million last
year. Sales for the Pharmaceutical and Beverage business increased by 7.5% in
the first nine months of 2001, primarily reflecting higher Pharmaceutical
volumes in the excipients market and, to a lesser extent, higher Beverage
volumes. Sales for the Alginates business decreased by 17% due to lower volumes
across all regions and markets.

Operating income for the Pharmaceutical and Beverage business increased 29%
in the first nine months of 2001 compared with the same period in 2000, while
the operating margin improved from 23% in the first nine months of 2000 to 28%
for the same period this year. The improvement reflected the higher unit volumes
and higher gross margins as a result of favorable manufacturing costs, partially
offset by the adverse effect of the stronger U.S. dollar in Europe. Operating
income for the Alginates business decreased in the first nine months of 2001 due
to the lower volumes and unfavorable manufacturing costs related to lower
production volumes.

Performance Chemicals, Fine Chemicals and Industrial

Sales in the first nine months of 2001 were $205.4 million compared
with $222.6 million in the first nine months of 2000. The lower sales were
primarily attributable to an 11% sales decline in the Industrial business due to
lower volumes and the unfavorable impact ($4.0 million) of the stronger U.S.
dollar in Europe, partially offset by improved pricing. Sales for the Fine
Chemicals business decreased by 9%, reflecting unit volume decreases related to
contract sales to Polaroid (see discussion relating to Polaroid in "Results of
Operations - Third Quarter 2001 Compared With Third Quarter 2000 - Performance
Chemicals, Fine Chemicals and Industrial"). The lower contract sales were
partially offset by sales of $1.6 million for the FineTech business which was
acquired in the second quarter. Sales for the Performance Chemicals business
decreased slightly, as small volume gains and favorable pricing were offset by
the adverse effect ($1.4 million) of the stronger U.S. dollar in Europe.

Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment increased 72% for the first nine months of 2001 to $17.5
million compared with $10.2 million for the same period last year. The improved
results were primarily attributable to higher Industrial operating income due to
improved pricing. In addition, operating income for the Fine Chemicals business
improved by 80% due to favorable manufacturing costs and the favorable impact of
the FineTech acquisition, partially offset by increased operating expenses.
Offsetting these improved results was an 84% decline in operating income for the
Performance Chemicals business as a result of an unfavorable product mix and
higher operating expenses.

Mineral Products

Sales for the Mineral Products segment for the first nine months of
2001 were $63.8 million compared with $56.9 million for the first nine months of
2000. The higher sales were attributable to a $3.9 million (42%) increase in
trade sales and a 6% increase in sales to Building Materials Corporation of
America, an affiliate, due primarily to higher volumes. Operating income for the
first nine months of 2001 was $8.4 million compared with $8.7 million for the
first nine months of 2000, reflecting an unfavorable product mix and also higher
operating expenses due mainly to an increased provision for doubtful accounts.

LIQUIDITY AND FINANCIAL CONDITION

During the first nine months of 2001, the Company's net cash outflow
before financing activities was $17.6 million, including $234.7 million of cash
generated from operations, the reinvestment of $58.7 million for capital
programs and the acquisition of FineTech Ltd. (see Note 2 to Consolidated
Financial Statements) and the use of $193.6 million of cash for net purchases of
available-for-sale securities and other short-term investments.

Cash generated from operations in the first nine months of 2001
reflected a $204.6 million net cash inflow related to net sales of trading
securities. Excluding this cash flow, cash provided from operations totaled
$30.1 million. Cash invested in additional working capital totaled $46.9 million
during the first nine months of 2001, primarily reflecting a $50.7 million
increase in inventories, mainly due to higher production levels in line with
increased sales, partially offset by a $2.5 million net increase in payables and
accrued liabilities.

Net cash provided by financing activities during the first nine
months of 2001 totaled $29.6 million, reflecting the debt financing transactions
discussed below, financing fees and expenses of $13.8 million related to the
financing transactions, repayments of long-term debt totaling $65.1 million and
a $27.0 million decrease in short-term borrowings. In addition, financing
activities included a $12.3 million cash outlay for repurchases of 1,296,900
shares of the Company's common stock pursuant to the Company's repurchase
program. On May 15, 2001, the Company's Board of Directors approved the
repurchase of an additional 2.5 million shares of its common stock pursuant to
its share repurchase program. At September 30, 2001, 1,589,962 shares of common
stock remained to be purchased under the Company's repurchase program.

On June 27, 2001, ISP Chemco Inc.("ISP Chemco"), an indirect
wholly-owned subsidiary of the Company, and three wholly-owned subsidiaries of
-ISP Chemco issued $205.0 million aggregate principal amount of 10 1/4% Senior
Subordinated Notes due 2011 (the "2011 Notes"). The net proceeds of $197.3
million, after discount and fees, were placed in an escrow account and were used
to retire the Company's 9 3/4% Senior Notes due 2002 (the "2002 Notes") on or
prior to October 15, 2001. During the third quarter of 2001, the Company retired
$19.9 million of the 2002 Notes, and the remaining $180.0 million of 2002 Notes
were retired on or before October 15, 2001. On July 31, 2001, these four
subsidiaries issued an additional $100.0 million aggregate principal amount of
the 2011 Notes. These notes have the same terms as the 2011 Notes issued in
June. The net proceeds were $98.9 million, including $0.9 million of accrued
interest from June 27, 2001 to the date of issuance, of which $98.0 million was
placed in an escrow account to be used to retire a portion of the Company's 9%
Senior Notes due 2003 (the "2003 Notes") on or prior to their maturity. On
November 13, 2001, these four subsidiaries issued an additional $100.0 million
aggregate principal amount of the 2011 Notes. These notes have the same terms as
the 2011 Notes issued in June, except with respect to interest accrual and
registration rights. The net proceeds of $101.0 million were placed in an escrow
account to be used to retire a portion of the Company's 2003 Notes on or prior
to their maturity. During the third quarter of 2001, the Company retired $16.9
million principal amount of the 2003 Notes. All of the 2011 Notes were
guaranteed by substantially all of ISP Chemco's other domestic subsidiaries. The
2011 Notes were issued under an indenture which, among other things, places
limits on the ability of ISP Chemco and its subsidiaries to incur additional
debt, issue preferred stock, incur liens, and pay dividends or make certain
other restricted payments and restricted investments.

In a related transaction, ISP Chemco and its three subsidiaries which
issued the notes also entered into $450.0 million of new senior secured credit
facilities (the "Senior Credit Facilities"), the initial borrowings under which
were used to repay amounts outstanding under the Company's previous credit
facility. The Senior Credit Facilities are comprised of a $225.0 million term
loan with a maturity of seven years and a $225.0 million revolving credit
facility which will terminate in five years. The revolving credit facility
includes a borrowing capacity not in excess of $50.0 million for letters of
credit. All borrowings under the Senior Credit Facilities will be based on
either an alternate base rate (based on the banks' base rate or on the federal
funds rate) or on the eurodollar rate plus a margin based on the ratio of ISP
Chemco's total consolidated debt to EBITDA (as defined in the Senior Credit
Facilities). The Senior Credit Facilities require compliance with various
financial covenants, including a total debt leverage maintenance ratio, a senior
debt leverage maintenance ratio, an interest coverage ratio and a minimum
adjusted net worth. As of September 30, 2001, $80.6 million of borrowings and
$5.6 million of letters of credit were outstanding under the revolving credit
facility.

As a result of the foregoing factors, cash and cash equivalents increased
by $12.0 million during the first nine months of 2001 to $30.2 million,
excluding $359.4 million of trading and available-for-sale securities and other
short-term investments.

In December 2000, the Company shut down its Seadrift, Texas butanediol
manufacturing facility and shut down production of butanediol at its Texas City,
Texas manufacturing facility in the first quarter of 2001. Accordingly, the
Company recorded a one-time restructuring charge against operating income in
2000 of $2.5 million, including an accrual of $2.1 million for cash costs to be
incurred in 2001 for severance and for decommissioning and remediation costs.
During the first nine months of 2001, $2.0 million of costs were charged against
this reserve, leaving a reserve balance of $0.1 million as of the end of the
third quarter of 2001.

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 the Company's
objectives, plans or goals also are forward-looking statements. The Company's
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 the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." As of December 31, 2000,
equity-related financial instruments employed by the Company to reduce market
risk included long contracts valued at $40.1 million. At September 30, 2001, the
value of long contracts was $57.4 million. Such instruments are marked-to-market
each month, with unrealized gains and losses included in the results of
operations. As such, there is no economic cost to the Company at July 1, 2001 to
terminate these instruments and therefore the fair market value is zero.

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) No reports on Form 8-K were filed during the quarter ended September 30,
2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

INTERNATIONAL SPECIALTY PRODUCTS INC.

DATE: November 14, 2001 BY: /s/ Susan B. Yoss
----------------- ---------------------------------------
Susan B. Yoss
Executive Vice President - Finance
and Treasurer
(Principal Financial Officer)

DATE: November 14, 2001 BY: /s/ Jon W. Rushatz
----------------- ---------------------------------------
Jon W. Rushatz
Vice President - Finance
(Principal Accounting Officer)