10-Q 1 chemco2q04.txt 2ND QUARTER 2004 10-Q 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 JULY 4, 2004 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 333-17827-01 ISP CHEMCO INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0382622 (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801 (Address of principal executive offices) (Zip Code) (302) 427-5818 (Registrant's telephone number, including area code) None (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) ----------------------------------- See Table of Additional Registrants Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes / / No /X/ As of August 17, 2004, 100 shares of the registrant's common stock (par value $.01 per share) were outstanding. There is no trading market for the common stock of the registrant. As of August 17, 2004, each of the additional registrants had the number of shares outstanding which is shown on the table below. There is no trading market for the common stock of the additional registrants. No shares of the registrant or the additional registrants were held by non-affiliates. THE REGISTRANT AND THE ADDITIONAL REGISTRANTS MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. ADDITIONAL REGISTRANTS

Address, including zip Commission File ~~No./~~ code and telephone Exact name of registrant as State or other ~~jurisdiction~~No. of No./ ~~of Shares~~ I.R.S. ~~Employer~~ number, including area specified in its charter ~~incorporation~~jurisdiction orof ~~organization~~Shares ~~Outstanding~~Employer ~~Identification No.~~ code, of registrant's incorporation or Outstanding Identification No. principal executive organization offices ---------------------------- ----------------~~--------------~~ ------------- ----------------- -- ----------------------- ISP Chemicals Inc. Delaware 10 333-70144-08/ Route 95 Industrial Area, 22-3807357 P.O. Box 37 Calvert City, KY 42029 (270) 395-4165 ISP Minerals Inc. Delaware 10 333-70144-07/ 34 Charles Street 22-3807370 Hagerstown, MD 21740 (301) 733-4000 ISP Technologies Delaware 10 333-70144-09/ 4501 Attwater Avenue Inc. 22-3807372 and State Highway 146 Texas City, TX 77590 (409) 945-3411

PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ISP CHEMCO INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

~~THIRD~~SECOND QUARTER ENDED ~~NINE~~SIX MONTHS ENDED --------------------- -------------------- ~~SEPT.~~JULY 294, ~~SEPT.~~JUNE 2829, ~~SEPT.~~JULY 294, ~~SEPT.~~JUNE 2829, ~~2002~~2004 2003 ~~2002~~2004 2003 --------- --------- -------- ---------- (THOUSANDS) Net sales............................ $ ~~208~~261,~~363~~670 $ ~~215~~229,~~125~~528 $ ~~642~~528,~~211~~565 $ ~~677~~462,~~229~~104 Cost of products sold................ (~~132~~166,~~105~~807) (~~140~~147,~~506~~215) (~~416~~335,~~137~~622) (~~440~~299,~~314~~808) Selling, general and administrative.. (4049,~~566~~175) (4245,~~404~~121) (~~126~~98,~~848~~326) (~~131~~88,~~318~~914) Other operating ~~gains and (~~charges~~), net~~..............~~.......~~ - - ~~12,228~~- (1,451) Amortization of intangible assets.... (~~125~~367) (144) (~~680~~439) (~~432~~288) --------- --------- --------- --------- Operating income..................... 3545,~~567~~321 3237,~~071~~048 ~~110~~94,~~774~~178 ~~103~~71,~~714~~643 Interest expense..................... (1412,~~050~~994) (13,~~077~~229) (4526,~~847~~596) (3926,~~727~~650) ~~Charge~~Other ~~for~~income ~~early retirement of debt.. - -~~ (~~4,294) - Other~~ expense), net..........~~.........~~ (42,~~245~~819) (1,~~983)~~412 (64,~~201~~512) ~~(1,908)~~75 --------- --------- --------- --------- Income before income taxes and cumulative effect of ~~changes~~change in accounting ~~principles~~principle............... 1729,~~272~~508 1725,~~011~~231 5463,~~432~~070 6245,~~079~~068 Income taxes......................... (610,~~407~~203) (59,~~925~~190) (1921,~~228~~892) (2115,~~718~~793) --------- --------- --------- --------- Income before cumulative effect of ~~changes~~change in accounting ~~principles~~principle..... 1019,~~865~~305 1116,~~086~~041 3541,~~204~~178 4029,~~361~~275 Cumulative effect of ~~changes~~change in accounting ~~principles~~principle, net of income tax benefit of $600 ~~in 2003~~......... - - ~~(155,400)~~- (1,021) --------- --------- --------- --------- Net income ~~(loss)~~........................... $ 1019,~~865~~305 $ 1116,~~086~~041 $~~(120~~ 41,~~196)~~178 $ 3928,~~340~~254 ========= ========= ========= =========

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1 ISP CHEMCO INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) JULY 4, DECEMBER 31, 2004 2003 --------- ----------- (THOUSANDS) ASSETS Current Assets: Cash and cash equivalents.......................... $ 25,210 $ 56,426 Accounts receivable, trade, less allowance of $5,851 and $5,848 at July 4, 2004 and December 31, 2003, respectively.................. 114,885 86,921 Accounts receivable, other......................... 33,077 19,681 Receivables from related parties................... 15,027 12,508 Inventories........................................ 184,893 187,805 Deferred income tax assets......................... 25,316 25,701 Prepaid expenses................................... 7,119 5,777 --------- ---------- Total Current Assets............................. 405,527 394,819 Property, plant and equipment, net................... 582,066 580,608 Goodwill, net of accumulated amortization of $180,486 336,968 331,101 Intangible assets, net of accumulated amortization of $1,589 and $1,150 at July 4, 2004 and December 31, 2003, respectively.................... 19,102 8,866 Long-term receivable from related party.............. 33,079 32,116 Long-term loan receivable from related party......... - 31,231 Other assets......................................... 62,171 57,479 ---------- ---------- Total Assets......................................... $1,438,913 $1,436,220 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Short-term debt................................... $ 68 $ 68 Current maturities of long-term debt.............. 3,117 2,722 Loans payable to related party.................... 34,000 - Accounts payable.................................. 70,867 54,615 Accrued liabilities............................... 61,372 89,023 Income taxes payable.............................. 27,009 33,263 ---------- ---------- Total Current Liabilities....................... 196,433 179,691 ---------- ---------- Long-term debt less current maturities.............. 650,936 620,473 ---------- ---------- Deferred income tax liabilities..................... 135,335 117,819 ---------- ---------- Other liabilities................................... 130,332 123,855 ---------- ---------- Shareholder's Equity: Common stock, $.01 par value per share; 1,000 shares authorized; 100 shares issued and outstanding ................................ - - Additional paid-in capital........................ 310,762 399,474 Retained earnings (accumulated deficit)........... 19,305 (4,354) Accumulated other comprehensive loss.............. (4,190) (738) ---------- ---------- Total Shareholder's Equity...................... 325,877 394,382 ---------- ---------- Total Liabilities and Shareholder's Equity.......... $1,438,913 $1,436,220 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 ISP CHEMCO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED ------------------- JULY 4, JUNE 29, 2004 2003 -------- --------- (THOUSANDS) Cash provided by (used in) operating activities: Net income............................................. $ 41,178 $ 28,254 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle - 1,021 Depreciation....................................... 31,827 29,723 Amortization of intangible assets.................. 439 288 Deferred income taxes.............................. 14,135 8,304 Increase in working capital items...................... (50,316) (22,269) Proceeds (repayments) from sale of accounts receivable. 4,074 (688) Increase in receivables from related parties........... (3,559) (7,946) Other, net............................................. 2,122 2,157 --------- -------- Net cash provided by operating activities................ 39,900 38,844 --------- -------- Cash used in investing activities: Capital expenditures and acquisitions.................. (58,233) (33,005) --------- -------- Net cash used in investing activities.................... (58,233) (33,005) --------- -------- Cash provided by (used in) financing activities: Decrease in short-term debt............................ - (77) Proceeds from issuance of debt......................... 31,188 - Increase in borrowings under revolving credit facility. 400 - Repayments of long-term debt........................... (1,472) (879) Loans from related party............................... 34,000 - Increase in loan to related party...................... (7,760) - Debt issuance costs.................................... (1,725) - Dividend to parent company............................. (67,163) - Capital contribution from parent company............... - 1,451 --------- -------- Net cash provided by (used in) financing activities...... (12,532) 495 --------- -------- Effect of exchange rate fluctuations on cash and cash equivalents................................... (351) 2,420 --------- -------- Net change in cash and cash equivalents.................. (31,216) 8,754 Cash and cash equivalents, beginning of period........... 56,426 33,291 --------- -------- Cash and cash equivalents, end of period................. $ 25,210 $ 42,045 ========= ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 ISP CHEMCO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED) SIX MONTHS ENDED -------------------- JULY 4, JUNE 29, 2004 2003 -------- -------- (THOUSANDS) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized).................. $ 46,873 $ 26,202 Income taxes (including taxes paid pursuant to the Tax Sharing Agreement)......................... 11,056 5,774 Acquisitions: Estimated fair market value of assets acquired........ $ 30,425 $ 8,986 Purchase price of acquisitions........................ 27,284 8,553 -------- -------- Liabilities assumed................................... $ 3,141 $ 433 ======== ======== Supplemental disclosure of financing activities: In April 2004, the Company made $39.0 million in dividends to its parent company, International Specialty Holdings Inc. In connection with these dividends, the Company's total long-term loan receivable of $39.0 million from a related party was eliminated. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The consolidated financial statements for ISP Chemco Inc. (the "Company") reflect, in the opinion of management, all adjustments necessary to present fairly the financial position of the Company and its consolidated subsidiaries at July 4, 2004, and the results of operations and cash flows for the three and six month periods ended July 4, 2004 and June 29, 2003. All adjustments are of a normal recurring nature. Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to the 2004 presentation. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the "2003 Form 10-K"). NOTE 1. AMENDED AND RESTATED SENIOR CREDIT FACILITIES On April 2, 2004, the Company and three of its wholly owned subsidiaries amended and restated its June 2001 $450.0 million senior secured credit facilities (the "Senior Credit Facilities"). The Senior Credit Facilities provide a $250.0 million term loan with a maturity in March 2011, which replaces the $225.0 million term loan that was due to mature in June 2008. In connection therewith, the Company borrowed an additional $31.2 million to bring the outstanding balance of the term loan to $250.0 million. The Senior Credit Facilities reduced the margin-based interest rate for term loan borrowings and amended financial covenant ratios, including the elimination of the minimum adjusted net worth covenant. For additional information relating to the Senior Credit Facilities, reference is made to Note 14 to consolidated financial statements contained in the 2003 Form 10-K. On April 15, 2004, the $225.0 million revolving credit facility under the Senior Credit Facilities, which was to terminate in June 2006, was reduced to $200.0 million, including a borrowing capacity not in excess of $50.0 million for letters of credit, and the maturity was extended to April 15, 2009. In addition, the margin-based interest rate for revolving credit borrowings was reduced. NOTE 2. ACQUISITIONS During the first six months of 2004, the Company completed the following three acquisitions in Europe to further enhance the Company's global specialty chemicals business. The purchase price of these acquisitions totaled $27.3 million in cash, net of $0.8 million cash acquired. In February 2004, the Company acquired the assets and business of UK-based Red Carnation Gums Limited, a manufacturer of emulsifiers, stabilizers and gelling systems for food and oral care markets. In March 2004, the Company acquired the assets and business of Germany-based Biochema Schwaben, a formulator of preservatives and biocides with applications in industrial and personal care markets, primarily in printing, paints and coatings, polymer emulsions, skin care and hair care markets. Also in March 2004, the Company acquired the assets and business of UK-based Hallcrest Limited and its U.S. affiliate, a manufacturer and marketer of custom microencapsulation and liquid crystal technologies for the personal care, home care, oral care and food industries. The total purchase price of these acquisitions was allocated to the estimated fair value of the identifiable assets acquired, including $10.7 million of intangible assets, and the excess of $5.1 million was recorded as goodwill. 5 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) The results of the three acquisitions are included in the Company's results of operations from the respective dates of acquisition. NOTE 3. NEW ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board issued a revised FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities," replacing FIN 46 which had originally been issued in January 2003. FIN No. 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. The Company will be required to apply FIN 46R to variable interests in variable interest entities created after December 31, 2003. The effective dates of FIN 46R for public enterprises vary based on the type of variable interest entity and whether FIN 46 was applied to a variable interest entity prior to the effective date of FIN 46R. For any variable interest entities that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interest of the variable interest entities initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the variable interest entities. The Company does not currently have an interest in a variable interest entity. Therefore, FIN 46R will not have an immediate impact on the Company's consolidated financial statements. In May 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-2 to provide guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") for employers that sponsor postretirement health care plans which provide prescription drug benefits. In addition, the FSP requires those employers to provide certain disclosures in their financial statements regarding the effect of the Act and the related subsidy on postretirement health obligations and net periodic postretirement benefit cost. FSP FAS No. 106-2 applies only to sponsors of single-employer defined benefit postretirement health care plans for which (1) the employer has concluded that prescription drug benefits available under the plan to some or all participants, for some or all future years, are "actuarially equivalent" to Medicare Part D and thus qualify for the subsidy under the Act, and (2) the expected subsidy will offset or reduce the employer's share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based. The Company will adopt the provisions of FSP FAS No. 106-2 effective for the quarterly period beginning July 5, 2004. The impact on the Company's financial statements will be insignificant. 6 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 4. COMPREHENSIVE INCOME

~~Specialty~~Second ~~Industrial~~Quarter ~~Mineral~~Ended ~~Total~~Six ~~Chemicals~~Months ~~Chemicals~~Ended ~~Products Goodwill~~ -------------------- --------------------- July 4, June 29, July 4, June 29, 2004 2003 2004 2003 -------- -------- -------- --------- (Thousands) ~~Balance,~~Net ~~December 31, 2002~~income.................................... $ ~~274~~19,~~167~~305 $ -16,041 $ 5141,~~539~~178 $ ~~325~~28,~~706~~254 ~~Acquisition~~-------- -------- --------- --------- Other comprehensive income (loss), net of ~~Germinal~~tax: ~~S.A.~~Foreign currency translation adjustment..... 5(2,~~537~~467) 8,107 (3,452) 9,597 -------- -------- ~~5,537~~--------- ~~Translation~~--------- ~~adjustment~~Total other comprehensive income (loss).......~~.....~~ (~~142~~2,467) -8,107 - (~~142~~3,452) 9,597 --------- -------- --------- --------- ~~Balance,~~Comprehensive ~~September 28, 2003~~income.......................... $ ~~279~~16,~~562~~838 $ -24,148 $ 5137,~~539~~726 $ ~~331~~37,~~101~~851 ========= ======== ========= =========

Changes in the components of accumulated other comprehensive loss for the six months ended July 4, 2004 are as follows: Cumulative Additional Foreign Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustment Adjustment Loss ----------- --------- ------------- (Thousands) Balance, December 31, 2003....... $ 5,382 $ (6,120) $ (738) Change for the period............ (3,452) - (3,452) ---------- --------- --------- Balance, July 4, 2004............ $ 1,930 $ (6,120) $ (4,190) ========== ========= ========= NOTE 5. INVENTORIES Inventories comprise the following: July 4, December 31, 2004 2003 --------- ------------ (Thousands) Finished goods................ $110,150 $113,227 Work-in-process............... 32,842 36,415 Raw materials and supplies.... 41,901 38,163 -------- -------- Inventories................... $184,893 $187,805 ======== ======== 7 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 5. INVENTORIES - (CONTINUED) At July 4, 2004 and December 31, 2003, $62.2 and $62.7 million, respectively, of domestic inventories were valued using the LIFO method. If the FIFO inventory method had been used for these inventories, the value of inventories would have been $6.9 and $4.2 million higher at July 4, 2004 and December 31, 2003, respectively. NOTE 6. GOODWILL AND INTANGIBLE ASSETS The following schedule reconciles the changes in the carrying amount of goodwill, by business segment, for the six months ended July 4, 2004.

~~December~~Specialty ~~31,~~Industrial ~~2002~~Mineral ~~September~~Total ~~28,~~Chemicals ~~2003~~Chemicals ~~Range~~Products ofGoodwill ---------~~-------------------~~ ----------~~------------------~~ ~~Amortizable Gross Carrying Accumulated Gross Carrying Accumulated Lives Amount Amortization Amount Amortization~~ ----------- ---------~~-----~~ ~~------------ -------------- ------------~~ (~~Dollars in~~ Thousands) ~~Intangible~~Balance, ~~assets~~December ~~subject~~31, ~~to amortization: Patents~~2003........~~.............................~~ ~~5-20~~$ ~~years~~279,562 $ ~~669~~- $ ~~(57)~~51,539 $ ~~669~~331,101 $Acquisitions ~~(99)~~and ~~Non-compete~~valuation ~~agreements~~adjustment...................... 26,201 - 5- ~~years 1~~6,~~571~~201 ~~(485)~~Translation ~~1,571 (850) EPA registrations~~adjustment............~~...............~~ ~~5 years 167~~ (33334) ~~167 (58)~~ -~~-----------~~ -~~---------~~ ~~---------- ----------- Total amortized intangible assets......... 2,407~~ (~~575~~334) ~~2,407 (1,007)~~ ---------~~---~~ ---------- ---------- ----------- ~~Intangible assets not subject to amortization: Trademarks.................................. 2~~Balance,~~962~~ -July ~~2,962 - EPA registrations...........................~~ 4,~~648~~ ~~- 4,648 - ------------ ---------- ---------- ----------- Total unamortized intangible assets~~2004....... ~~7,610 - 7,610 - ------------ ---------- ---------- ----------- Total intangible assets~~......~~.................~~ $ 10285,~~017~~429 $ ~~(575)~~- $ 1051,~~017~~539 $ (1336,~~007)~~968 =========~~===~~ ========== ========== ===========

The following is information as of July 4, 2004 and December 31, 2003 related to the Company's acquired intangible assets.

~~Third~~July ~~Quarter~~4, ~~Ended~~2004 ~~Nine~~December ~~Months~~31, ~~Ended~~2003 Range of ---------------------------- ---------------------------- ~~Sept.~~Amortizable ~~29,~~Gross ~~Sept.~~Carrying ~~28,~~Accumulated ~~Sept.~~Gross ~~29,~~Carrying ~~Sept.~~Accumulated ~~28,~~Lives ~~2002~~Amount ~~2003~~Amortization ~~2002~~Amount ~~2003~~Amortization ----------- -------------- ------------ -------------- ------------ (Dollars in Thousands) ~~Net~~Intangible ~~income~~assets ~~(loss)~~subject to amortization: Patents.................................... $5- ~~10,865~~20 years $ ~~11,086~~669 $ (~~120,196~~141) $ ~~39,340~~669 ~~--------~~$ ~~--------~~(113) ~~---------~~Formulations............................... 5-~~--------~~ ~~Change~~10 inyears ~~unrealized~~2,740 ~~losses~~(115) on- ~~derivative~~- ~~hedging~~Unpatented ~~instruments~~technology...................... 10-15 ~~cash~~years ~~flow hedges: Net derivative losses~~1,100 ~~net~~(22) of- ~~income~~- ~~tax~~Customer ~~benefit of $0, $0, $12 and $0, respectively~~base.............................. 10-15 -years 2,353 (2244) - ~~Less:~~- ~~reclassification~~Non-compete ~~adjustment~~agreements..................... ~~for~~2- ~~losses~~5 ~~included~~years ~~in net income~~3,419 ~~net of income tax benefit of $0~~(1,184) $01,571 ~~$534~~(971) ~~and~~EPA ~~$0, respectively~~registrations.......................... -5 -years 166 (~~986~~83) -166 (66) ---------- -------- ---------- --------- Total ~~change~~amortizable ~~for~~intangible ~~the period~~assets......~~...........~~ -10,447 -(1,589) ~~964~~2,406 -(1,150) ---------- -------- ---------- --------- ~~Foreign~~Intangible ~~currency~~assets ~~translation~~not ~~adjustment~~subject to amortization: Trademarks................................. (15,~~128)~~596 ~~(234)~~- 102,~~010~~962 9- EPA registrations.......................... 4,~~363~~648 - 4,648 - ---------- -------- ---------- --------- Total ~~other~~unamortized ~~comprehensive~~intangible ~~income (loss)~~assets....... (110,~~128)~~244 ~~(234)~~- 107,~~974~~610 ~~9,363~~- ---------- -------- ---------- --------- ~~Comprehensive~~Total ~~income~~intangible ~~(loss)~~assets...................... $ 920,~~737~~691 $ 10(1,~~852~~589) $~~(109~~ 10,~~222)~~016 $ 48(1,~~703~~150) ========== ======== ========== =========

Estimated amortization expense: (Thousands) Year ended December 31, ---------- 2004................................................ $ 1,100 2005................................................ 1,301 2006................................................ 1,301 2007................................................ 1,037 2008................................................ 1,037 8 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 7. LOANS PAYABLE TO RELATED PARTY In April 2004, the Company borrowed a total of $34.0 million from a subsidiary of its parent company, International Specialty Holdings Inc., pursuant to two note agreements. One loan, for $30.0 million, has a maturity date of October 30, 2004, and the second loan, for $4.0 million has a maturity date of April 30, 2005. Interest is payable on each loan at the rate of 1.65% per annum. NOTE 8. ASSET RETIREMENT OBLIGATIONS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. SFAS No. 143 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 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. NOTE 9. DIVIDENDS TO PARENT COMPANY In April 2004, the Company dividended a total of $106.2 million to its parent company, International Specialty Holdings Inc., including cash dividends of $67.2 million. The dividends were accounted for as a charge to retained earnings of $17.5 million and a charge to additional paid-in capital of $88.7 million. In connection with these dividends, the Company's total long-term loan receivable of $39.0 million from a related party was eliminated. 9 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 10. OTHER OPERATING CHARGES In February 2003, the Company's indirect parent company, International Specialty Products Inc., completed a going private transaction. As a result, the Company's stock-based compensation plans were terminated and payments were made in accordance with the terms of that transaction. Accordingly, holders of approximately 2.7 million vested, in-the-money stock options outstanding and exercisable on February 28, 2003 received cash amounts aggregating $1.5 million that were recorded as compensation expense in the first quarter of 2003. NOTE 11. BENEFIT PLANS Defined Benefit Plans The Company provides a noncontributory defined benefit retirement plan for certain hourly employees in the United States (the "Hourly Retirement Plan"). Benefits under this plan are based on stated amounts for each year of service. The Company's funding policy is consistent with the minimum funding requirements of ERISA. ISP Marl GmbH, a wholly owned German subsidiary of the Company, provides a noncontributory defined benefit retirement plan for its hourly and salaried employees (the "ISP Marl Plan"). Benefits under this plan are based on average earnings over each employee's career with the Company. The Company's net periodic pension cost for the second quarter and first six months of 2004 and 2003 for the Hourly Retirement Plan included the following components:

~~Third~~Second Quarter Ended ~~Nine~~Six Months Ended ----------------------- ------------------------ ~~Sept.~~July 294, ~~Sept.~~June 2829, ~~Sept.~~July 294, ~~Sept.~~June 2829, ~~2002~~2004 2003 ~~2002~~2004 2003 --------- --------- --------- --------- (Thousands) ~~Net~~Service ~~sales (1): Specialty Chemicals~~cost....................... ~~$ 149,309 $ 153,464 $ 455,591 $ 470,378 Industrial Chemicals~~......~~................~~ ~~34,500~~$ ~~35,047~~69 ~~112,363~~$ ~~128,574~~60 ~~Mineral~~$ ~~Products~~138 ~~(2)......................~~$ ~~24,554~~120 ~~26,614~~Interest ~~74,257 78,277 --------- --------- --------- --------- Net sales~~cost............................~~.......~~ $523 ~~208,363~~524 ~~$ 215~~1,~~125~~046 ~~$ 642,211 $ 677,229 ========= ========= ========= ========= Operating income (~~1~~): Specialty Chemicals....................... $ 27~~,~~838~~049 $Expected ~~29,760~~return $on ~~87,123~~plan ~~$ 96,697 Industrial Chemicals~~assets...........~~...........~~ ~~2,119~~(736) (716) (1,~~221~~472) ~~5,183~~ (51,~~342~~432) ~~Mineral~~Amortization ~~Products~~of actuarial losses.........~~.................~~ ~~5,540~~126 ~~3,496~~98 ~~18,428~~252 ~~12,233~~196 ~~---------~~Amortization ~~---------~~of ~~---------~~unrecognized ~~--------~~prior ~~Total~~service ~~segment operating income~~cost............ ~~35,497 32,035 110,734 103,588 Unallocated corporate office~~............... 60 70 36120 40139 ~~126~~ --------- --------- --------- --------- ~~Total~~Net ~~operating~~periodic ~~income~~pension cost................~~......~~ 35,567 32,071 110,774 103,714 Interest expense and other, net............. (18,295) (15,060) (56,342) (41,635) --------- --------- --------- --------- Income before income taxes and cumulative effect of changes in accounting principles $ ~~17,272~~42 $ ~~17,011~~36 $ ~~54,432~~84 $ ~~62,079~~72 ========= ========= ========= =========

The Company's net periodic pension cost for the second quarter and first six months of 2004 and 2003 for the ISP Marl Plan included the following components:

10 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 11. BENEFIT PLANS - (CONTINUED) Postretirement Medical and Life Insurance The Company generally does not provide postretirement medical and life insurance benefits, although it subsidizes such benefits for certain employees and certain retirees. The net periodic postretirement benefit (income) cost for the second quarter and first six months of 2004 and 2003 included the following components:

NOTE 12. BUSINESS SEGMENT INFORMATION

~~Non-~~Second ~~Parent~~Quarter ~~Guarantor~~Ended ~~Guarantor~~Six ~~Company~~Months ~~Subsidiaries~~Ended ~~Subsidiaries Eliminations Consolidated~~ -------- ------------ -~~-----------~~ ------------ ---------~~---~~ ~~Net~~July ~~sales ................................ $ - $ 334~~4,~~509~~ $June ~~307~~29,~~702~~ $July ~~- $ 642~~4,~~211~~ ~~Intercompany~~June ~~net sales ................... - 156~~29,~~093~~ ~~7,927~~2004 ~~(164,020)~~2003 -2004 ~~---------~~2003 ---------- ---------- ---------- ---------- ~~Total~~(Thousands) ~~net~~Net sales: Specialty Chemicals....................... -$ ~~490~~178,~~602~~085 ~~315,629~~$ ~~(164~~159,~~020)~~001 ~~642~~$ 364,~~211~~254 ~~---------~~$ ~~----------~~316,914 ~~----------~~Industrial ~~---------- ---------- Cost of products sold~~ Chemicals...................... ~~- (343~~49,~~362)~~074 ~~(236~~44,~~795)~~391 ~~164~~97,~~020~~762 ~~(416~~93,~~137)~~527 ~~Selling,~~Mineral ~~general~~Products ~~and administrative~~ (1)...... ~~- (85,538) (41,310) (126,848) Other operating gains and (charges), net~~.. ~~- 9,149 3,079 12,228 Amortization of intangible assets~~.............. -34,511 ~~(680)~~26,136 -66,549 ~~(680)~~51,663 --------- ---------- ---------- ---------- ~~----------~~Net ~~Operating income~~ sales......................... ~~- 70,171 40,603 - 110,774 Equity in loss of subsidiaries~~ ........... ~~(71~~$ 261,~~230)~~670 -$ ~~- 71~~229,~~230~~528 -$ ~~Intercompany royalty income (expense)~~528,565 ~~net~~$ ~~- 22~~462,~~514~~104 ~~(22,514)~~========= -========= ~~Intercompany~~========= ~~dividend~~========= Operating income: Specialty Chemicals....................... -$ 441,~~408~~610 -$ (433,~~408)~~694 -$ ~~Interest~~87,804 ~~income~~$ ~~(expense)~~66,937 Industrial Chemicals...................... 2(1,~~332~~825) (501,~~069~~393) (1,~~890~~586) (454,~~847~~121) ~~Charge~~Mineral ~~for early retirement of debt~~Products....... ~~(4,294) - - (4,294) Other income (expense), net~~ ................... ~~(810) (~~5,~~247)~~638 ~~(144)~~4,739 (68,~~201)~~052 ~~---------~~8,737 ---------- ---------- ---------- ---------- ~~Income~~Total ~~before~~segment ~~income~~operating ~~taxes and cumulative effect of change in accounting principle (74,002) 41,777 19,835 66,822 54,432 Income taxes~~ income............ 45,423 37,040 94,270 71,553 Unallocated corporate office..............~~...~~ ~~927~~ (~~17,148~~102) ~~(3,007)~~8 (~~19,228~~92) ~~---------~~90 ---------- ---------- ---------- ---------- ~~Income~~Total ~~before~~operating ~~cumulative effect of change in accounting principle~~income...................... ~~(73~~45,~~075)~~321 2437,~~629~~048 1694,~~828~~178 6671,~~822~~643 ~~35,204~~Interest ~~Cumulative~~expense ~~effect~~and ofother, ~~change in accounting principle~~net.............~~.................~~ (4215,~~713~~813) (~~112~~11,~~687~~817) -(31,108) (~~155~~26,~~400~~575) --------- ---------- ---------- ---------- ~~----------~~Income ~~Net~~before income ~~(loss)~~taxes and cumulative effect of change in accounting principle..~~......................~~ $~~(115,788)~~ ~~$ (88~~29,~~058)~~508 $ 1625,~~828~~231 $ 6663,~~822~~070 $ ~~(120~~45,~~196)~~068 ========= ========== ========== =========~~= ==========~~

(1) Includes sales to Building Materials Corporation of America, an affiliate, and its subsidiaries, of $24.9 and $20.0 million for the second quarter of 2004 and 2003, respectively, and $49.1 and $39.7 million for the first six months of 2004 and 2003, respectively. 11 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION In 2001, the Company and three of its wholly owned subsidiaries jointly issued, in three separate transactions, a total of $405.0 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2011 (the "2011 Notes"). The 2011 Notes are guaranteed by all of the Company's domestic subsidiaries, other than certain immaterial subsidiaries and the Company's accounts receivable financing subsidiary. These guarantees are full, unconditional and joint and several. ISP Global Technologies Inc., which is a guarantor of the 2011 Notes, is party to a License and Royalty Agreement with non-guarantor foreign affiliates. Under this agreement, ISP Global Technologies granted a license to certain non-guarantor foreign affiliates for the use of the Patent Rights, Know-how and Trademarks in connection with the manufacture, use and sale of the Company's products. Presented below is condensed consolidating financial information for the Company, the guarantor subsidiaries and the non-guarantor subsidiaries. This financial information should be read in conjunction with the consolidated financial statements and other notes related thereto. 12 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) ISP CHEMCO INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SECOND QUARTER ENDED JULY 4, 2004 (THOUSANDS)

Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ Net sales ................................ $ - $ ~~321~~122,~~510~~988 $ ~~355~~138,~~719~~682 $ - $ ~~677~~261,~~229~~670 Intercompany net sales ................... - ~~171~~61,~~216~~901 84,~~662~~175 (~~179~~66,~~878~~076) - -------- ---------- ---------- ---------- ---------- Total net sales ....................... - ~~492~~184,~~726~~889 ~~364~~142,~~381~~857 (~~179~~66,~~878~~076) ~~677~~261,~~229~~670 -------- ---------- ---------- ---------- ---------- Cost of products sold .................... - (~~356~~133,~~402~~564) (~~263~~99,~~790~~319) ~~179~~66,~~878~~076 (~~440~~166,~~314~~807) Selling, general and administrative ...... - (8129,~~479~~850) (4919,~~839~~325) (~~131~~49,~~318~~175) ~~Other operating gains and (charges), net.. - (1,376) (75) (1,451)~~ Amortization of intangible assets......... - (~~432~~367) - (~~432~~367) -------- ---------- ---------- ---------- ---------- Operating income ......................... - 5321,~~037~~108 5024,~~677~~213 - ~~103~~45,~~714~~321 Equity in income of subsidiaries .......... 4120,~~021~~406 - - (4120,~~021~~406) - Intercompany royalty income (expense),..... ~~net~~ - 2610,~~293~~320 (2610,~~293~~320) - Intercompany dividend income ............. - 31,~~270~~493 - (31,~~270~~493) - Interest ~~income (~~expense) ................ ~~2,448 (44,073) 1,898 (39,727) Other income (expense), net~~ .........~~.....~~ ~~(4)~~606 (314,~~552~~068) ~~1,648~~468 (112,~~908~~994) ~~--------~~Other ~~---------- ---------- ---------- ---------- Income before income taxes and cumulative effect of change in accounting principle 43~~expense,~~465~~ ~~34,975~~net ~~27,930 (44,291) 62,079 Income taxes~~ .......................~~......~~ (~~855~~3) (141,~~271~~420) (61,~~592~~396) (212,~~718~~819) -------- ---------- ---------- ---------- ---------- Income before ~~cumulative~~income ~~effect~~taxes ~~of change in accounting principle~~................. 4221,~~610~~009 2017,~~704~~433 2112,~~338~~965 (4421,~~291~~899) 4029,~~361~~508 ~~Cumulative~~Income ~~effect~~taxes ~~of change in accounting principle, net of income tax benefit of $600~~ .............................~~......~~ -(211) (~~583~~7,492) (~~438~~2,500) (110,~~021~~203) -------- ---------- ---------- ---------- ---------- Net income ............................... $ 4220,~~610~~798 $ 209,~~121~~941 $ 2010,~~900~~465 $ (4421,~~291~~899) $ 3919,~~340~~305 ======== ========== ========== ========== ==========

ISP CHEMCO INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SECOND QUARTER ENDED JUNE 29, 2003 (THOUSANDS)

Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ ~~ASSETS~~Net ~~Current~~sales ~~Assets: Cash and cash equivalents~~ ............. ~~$ 6 $ 17,735 $ 15,550 $ - $ 33,291 Accounts receivable, trade, net~~ ....... ~~- 6,025 73,755 79,780 Accounts receivable, other~~ ............ $ - ~~4,835~~$ 10109,~~536~~001 15$ 120,~~371~~527 ~~Receivables~~$ ~~from~~- ~~related~~$ ~~parties....... (32) 12~~229,~~875~~528 ~~(431)~~Intercompany ~~12,412~~net ~~Inventories~~sales ...................~~........~~ - ~~104~~58,~~000~~669 723,~~217~~805 ~~176~~(62,~~217~~474) ~~Deferred~~- ~~income~~-------- ~~taxes..................~~---------- ---------- ~~19,313~~---------- ~~15,374~~---------- ~~34,687~~Total ~~Prepaid~~net ~~expenses~~sales ....................... - 4167,~~948~~670 4124,~~874~~332 9(62,~~822~~474) 229,528 --------- ---------- ---------- ---------- ----------- ~~Total~~Cost ~~current~~of ~~assets~~products sold ................ ~~(26) 169,731 191,875 - 361,580 Investment in subsidiaries~~ ....~~...........~~ ~~294,505 171,977~~ - (~~466~~121,~~482~~243) ~~- Intercompany loans ....................... 16,021~~ (1688,~~354~~446) ~~333 - Due from (to) subsidiaries~~62,474 ~~net .......... - 52,554~~ (52147,~~554~~215) ~~- Property~~Selling, ~~plant~~general and ~~equipment,~~administrative ~~net~~ ....... - ~~497~~(28,~~768~~590) 67(16,~~673~~531) ~~565~~(45,~~441~~121) ~~Goodwill,~~Amortization ~~net~~of ~~............................~~intangible ~~89,931 235,775 - 325,706 Intangible~~ assets, ~~net~~ ........~~...........~~ - ~~9,442~~(144) - ~~9,442~~(144) ~~Long~~-~~term receivable from related party...~~ - - ~~30,298 30,298 Other assets .............................~~ - ~~42,676 340 43,016~~ ----~~-----~~ ---------- ---------- ---------- ----------- ~~Total~~Operating ~~Assets~~income .........................~~....~~ $- ~~400~~17,~~431~~693 $119,~~163,569~~355 $- ~~237~~37,~~965~~048 $Equity ~~(466,482)~~in $income ~~1,335,483~~of ~~=========~~subsidiaries ~~========== ========= ========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Short-term debt~~ .........~~..............~~ $17,990 - $ - $(17,990) ~~144 $~~ - $Intercompany ~~144~~royalty ~~Current~~income ~~maturities~~(expense), ofnet ~~long~~-~~term~~ ~~debt~~8,852 ..(8,852) - ~~2,728~~Intercompany 4dividend ~~2,732~~income ~~Accounts payable~~ .............~~.........~~ - 342,~~870~~477 ~~18,335~~- 53(2,~~205~~477) ~~Accrued~~- ~~liabilities~~Interest expense ......................... -812 66(14,~~229~~601) ~~23,673~~560 89(13,~~902~~229) ~~Income~~Other ~~taxes~~income ~~payable~~(expense), net ..............~~.....~~ ~~16,520~~(1) 3(1,~~472~~365) 142,~~209~~778 341,~~201~~412 --------- ---------- ---------- ---------- ----------- ~~Total~~Income ~~Current~~before ~~liabilities ........... 16,520 107,299 56,365 - 180,184 Long-term debt less current maturities ... - 623,002 6 623,008 Deferred~~ income taxes ................~~....~~ -18,801 9113,~~771~~056 813,~~944~~841 ~~100~~(20,~~715~~467) ~~Other~~25,231 ~~liabilities~~Income taxes ........................ ~~56,013 46,992 673 103,678 Total Shareholder's Equity~~ .....~~..........~~ ~~327,898~~(283) ~~294~~(5,~~505~~600) ~~171~~(3,~~977~~307) (~~466~~9,~~482~~190) ~~327,898~~ --------- ---------- ---------- ---------- ----------- ~~Total~~Net ~~Liabilities~~income ~~and Shareholder's Equity~~ ................................ $ ~~400~~18,~~431~~518 $1 7,~~163,569~~456 $ ~~237~~10,~~965~~534 $ (~~466~~20,~~482~~467) $ 116,~~335,483~~041 ========= ========== ========== ========== ===========

13 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) ISP CHEMCO INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JULY 4, 2004 (THOUSANDS)

Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ ~~ASSETS~~Net ~~Current~~sales ~~Assets: Cash and cash equivalents~~ ............. ~~$ 7 $ 20,869 $ 23,419 $ - $ 44,295 Accounts receivable, trade, net~~ ....... ~~- 5,042 89,648 94,690 Accounts receivable, other~~ ............ $ - ~~2,365~~$ 20248,~~252~~347 22$ 280,~~617~~218 ~~Receivables~~$ ~~from~~- ~~related~~$ ~~parties....... 183 13~~528,~~260~~565 ~~10,715~~Intercompany ~~24,158~~net ~~Inventories~~sales ...................~~........~~ - ~~108~~122,~~383~~646 748,~~512~~510 ~~182~~(131,~~895~~156) ~~Deferred~~- ~~income~~-------- ~~taxes..................~~---------- ---------- ~~19,313~~---------- ~~11,838~~---------- ~~31,151~~Total ~~Prepaid~~net ~~expenses~~sales ....................... - 3370,~~834~~993 4288,~~674~~728 8(131,~~508~~156) 528,565 --------- ---------- ---------- ---------- ----------- ~~Total~~Cost ~~current~~of ~~assets~~products sold ................ ~~190 173,066 235,058 - 408,314 Investment in subsidiaries~~ ....~~...........~~ ~~346,242 210,688~~ - (~~556~~272,~~930~~342) ~~- Intercompany loans ....................... 16,021~~ (8194,~~387~~436) (7131,~~634)~~156 ~~- Due from~~ (~~to) subsidiaries~~335, ~~net .......... - 55,219 (55,219~~622) ~~- Property~~Selling, ~~plant~~general and ~~equipment,~~administrative ~~net~~ ....... - ~~494~~(61,~~303~~758) 75(36,~~388~~568) ~~569~~(98,~~691~~326) ~~Goodwill,~~Amortization ~~net~~of ~~............................~~intangible ~~89,931 235,775 5,395 331,101 Intangible~~ assets~~, net~~ .........~~..........~~ - ~~9,010~~(439) - ~~9,010~~(439) ~~Long~~-~~term receivable from related party...~~ - - ~~31,661 31,661 Other assets .............................~~ - ~~47,509 526 48,035~~ ----~~-----~~ ---------- ---------- ---------- ----------- ~~Total~~Operating ~~Assets~~income .........................~~....~~ $- ~~452~~36,~~384~~454 $157,~~217,183~~724 $- ~~285~~94,~~175~~178 ~~$(556,930)~~Equity $in ~~1,397,812~~income ~~=========~~of ~~========== ========= ========= =========== LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Short-term debt~~ subsidiaries..........~~.............~~ $43,432 - $ - $(43,432) ~~68 $~~ - $Intercompany 68royalty ~~Current~~income ~~maturities of long-term debt~~ (expense)..... - 221,~~724~~404 ~~2 2~~(21,~~726~~404) ~~Accounts~~- ~~payable~~Intercompany dividend income .............~~.........~~ - 293,~~601~~175 ~~26,582~~- 56(3,~~183~~175) ~~Accrued~~- ~~liabilities~~Interest expense ......................... -1,421 55(29,~~723~~168) 201,~~725~~151 76(26,~~448~~596) ~~Income~~Other ~~taxes~~expense, ~~payable~~net ....................... ~~18,359~~(4) 3(2,~~265~~225) 15(2,~~647~~283) 37(4,~~271~~512) ---------- ---------- ---------- ---------- ----------- ~~Total~~Income ~~Current~~before ~~liabilities ........... 18,359 91,313 63,024 - 172,696 Long-term debt less current maturities ... - 621,624 31 621,655 Deferred~~ income taxes ...............~~.....~~ -44,849 ~~104~~29,~~944~~640 1035,~~093~~188 ~~115~~(46,~~037~~607) ~~Other~~63,070 ~~liabilities~~Income taxes ........................ ~~55,973 53,060 1,339 110,372 Total Shareholder's Equity~~ .....~~..........~~ ~~378,052~~(496) ~~346~~(15,~~242~~216) ~~210~~(6,~~688~~180) (~~556~~21,~~930~~892) ~~378,052~~ ---------- ---------- ---------- ---------- ----------- ~~Total~~Net ~~Liabilities~~income ~~and Shareholder's Equity~~ ................................ $ ~~452~~44,~~384~~353 $1 14,~~217,183~~424 $ ~~285~~29,~~175~~008 $ (~~556~~46,~~930~~607) $ 141,~~397,812~~178 ========== ========== ========== ========== ===========

ISP CHEMCO INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 29, 2003 (THOUSANDS)

Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ~~Cash and cash equivalents, beginning of period........... $ 5 $ 3,611 $ 7,214 $ 10,830~~ -------- ----~~------~~ ~~----------- --------- Cash provided by (used in) operating activities:~~ Net ~~income~~sales ~~(loss)~~................................~~......~~ ~~(48,966)~~$ ~~(88,058) 16,828 (120,196) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of change in accounting principle. 42,713 112,687~~ - ~~155,400~~$ ~~Gain on sale of assets.............................. - (2~~216,~~389)~~640 ~~(3,079)~~$ (5245,~~468)~~464 ~~Depreciation........................................~~$ - ~~34,841~~$ 7462,~~286~~104 ~~42,127~~Intercompany ~~Amortization~~net ofsales ~~intangible assets~~................... - ~~680 - 680 Deferred income taxes............................... (1~~115,~~460)~~356 ~~12,966 (5,392)~~ 6,~~114~~438 (~~Increase) decrease in working capital items........... 10~~121,~~871 (5,289~~794) ~~3,511 9,093 Proceeds (repayments) from sale of accounts receivable.~~ - - ~~3,932 3,932 (Increase) decrease in receivable from related parties. (9) (3,365) (1,737) (5,111) Change in amounts due to (from) subsidiaries...........~~ - ~~28,471 (28,471)~~ - ~~Change in investment in and advances to affiliates..... 89,489 (88,628) (861)~~ - ~~Change in cumulative translation adjustment............~~ - --- ~~9,374 9,374 Other, net............................................. 4,309 (113) (5,426) (1,230)~~ ---------- ---------- ----------- ---------- ~~Net~~Total ~~cash~~net ~~provided~~sales ~~by (used in) operating activities~~....................... 96- 331,~~947~~996 1251,~~803~~902 (4121,~~035~~794) 94462,~~715~~104 -------- ---------- ---------- ----------- ---------- ~~Cash~~Cost ~~provided~~of byproducts ~~(used~~sold ~~in) investing activities: Capital expenditures and acquisition~~.................... - (37238,~~348~~036) (5183,~~123~~566) 121,794 (42299,~~471~~808) ~~Net~~Selling, ~~proceeds~~general ~~from~~and ~~sale~~administrative ~~of assets~~...... - (57,494) (31,420) (88,914) Other operating charges................... - 7(1,~~533~~376) ~~19,738~~(75) 27(1,~~271~~451) ~~--------~~Amortization ~~----------~~of ~~-----------~~intangible ~~--------- Net cash provided by (used in) investing activities~~assets......... - (~~29,815~~288) ~~14,615~~- (~~15,200~~288) -------- ---------- ----------- --------- ~~Cash provided by (used in) financing activities: Increase in short~~-~~term~~ ~~debt............................~~ - --------- 15Operating 15income ~~Decrease in borrowings under revolving credit facility~~.........................~~.............~~ - ~~(85~~34,~~250)~~802 36,841 - ~~(85~~71,~~250)~~643 ~~Repayments~~Equity in income of ~~long-term~~subsidiaries ~~debt~~.........~~..................~~ ~~(182~~30,~~232)~~380 63- ~~(33)~~- (~~182~~30,~~202~~380) ~~Call~~- ~~premium~~Intercompany onroyalty ~~redemption~~income ~~of debt.....................~~ (~~2,734~~expense), -net - 18,052 (218,~~734~~052) ~~Change~~- inIntercompany ~~net~~dividend ~~intercompany~~income ~~loans~~.............~~..........~~ - 113,~~816~~210 - (113,~~816~~210) - ~~Decrease~~Interest inexpense ~~restricted cash~~.........................~~...~~ 811,~~130~~669 ~~101~~(29,~~000~~520) -1,201 ~~182~~(26,~~130~~650) ~~Debt~~Other ~~issuance~~income ~~costs~~(expense), net ..............~~......................~~ - (~~820~~3) - (~~820~~3,081) ~~Capital contribution from parent company............... 6~~3,~~891~~159 -75 -------- ~~6,891~~ ---------- ---------- ----------- ---------- ~~Net~~Income ~~cash~~before ~~provided~~income bytaxes ~~(used~~and cumulative effect of change in accounting principle 32,046 23,463 23,149 (33,590) ~~financing~~45,068 ~~activities~~Income taxes ............................. (~~96,945~~582) 26(10,~~809~~969) (114,~~834~~242) (8115,~~970~~793) -------- ---------- ---------- ---------- ---------- ~~Effect~~Income ofbefore ~~exchange~~cumulative ~~rate~~effect ~~changes~~of onchange ~~cash~~in accounting principle.................. -31,464 -12,494 ~~636~~18,907 ~~636~~(33,590) ~~--------~~29,275 ~~----------~~Cumulative ~~-----------~~effect ~~---------~~of ~~Net~~ change in ~~cash~~accounting ~~and~~principle, ~~cash~~net ~~equivalents~~of income tax benefit of $600 ................................... 2- (~~1,203~~583) (~~618~~438) (1,~~819~~021) -------- ---------- ---------- ---------- ---------- ~~Cash~~Net ~~and~~income ~~cash equivalents, end of period~~............................... $ 731,464 $ 211,~~408~~911 $ 618,~~596~~469 $ 9(33,~~011~~590) $ 28,254 ======== ========== ========== ========== ==========

14 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) ISP CHEMCO INC. CONDENSED CONSOLIDATING BALANCE SHEET JULY 4, 2004 (THOUSANDS)

Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ ASSETS Current Assets: Cash and cash equivalents, ~~beginning of period~~............. $ 64 $ 172,~~735~~066 $ 1523,~~550~~140 $ ~~33,291~~ -~~-------~~ ~~----------~~$ ~~-----------~~25,210 ~~---------~~Accounts ~~Cash~~receivable, ~~provided~~trade, bynet ~~(used~~....... ~~in)~~- ~~operating~~6,606 ~~activities:~~108,279 ~~Net~~114,885 ~~income~~Accounts receivable, other ............ - 3,219 29,858 33,077 Receivables from related parties....... 183 15,161 (317) 15,027 Inventories ........................... ~~(1,681)~~- 20102,~~121~~936 2081,~~900~~957 39184,~~340~~893 ~~Adjustments~~Deferred ~~to reconcile net~~ income totax ~~net cash provided by (used in) operating activities: Cumulative effect of change in accounting principle~~assets. ~~- 583 438 1,021 Depreciation~~............ - 21,420 3,896 25,316 Prepaid expenses ......................~~......~~ - 364,~~144~~706 82,~~659~~413 447,~~803~~119 ~~Amortization~~-------- of---------- ~~intangible~~--------- ---------- ----------- Total current assets ................~~...~~ -187 ~~432~~156,114 249,226 - ~~432~~405,527 ~~Deferred~~Investment ~~income~~in ~~taxes~~subsidiaries ...............~~................~~ ~~- 13~~293,~~773~~694 4248,~~685~~362 ~~18,458~~- (~~Increase~~542,056) ~~decrease~~- inIntercompany ~~working~~loans ~~capital items~~........... ~~1,839 (16,176) (17,907) (32,244) Proceeds (repayments) from sale of accounts receivable~~. ~~- - (2,560) (2,560) Increase in receivable from related parties~~............ ~~(215)~~16,021 (~~385) (12~~37,~~509~~826) ~~(13~~21,~~109)~~805 ~~Change~~- inDue ~~amounts~~from ~~due to~~ (~~from~~to) subsidiaries, net ........... - 34,081 (234,~~665~~081) ~~2,665~~ - ~~Change~~Property, inplant ~~investment in~~ and ~~advances~~equipment, tonet ~~affiliates~~....... (1- 493,~~353)~~762 ~~(10~~88,~~365)~~304 11582,~~718~~066 -Goodwill ~~Change in cumulative translation adjustment~~............ ~~- - 6,362 6,362 Other, net~~..................... 89,931 240,926 6,111 336,968 Intangible assets, net....................~~....~~ ~~(40)~~- ~~584 (5~~19,~~206)~~102 ~~(4,662)~~ -~~-------~~ ~~----------~~19,102 Long-~~----------~~term ~~---------~~receivable ~~Net~~from ~~cash~~related ~~provided~~party ~~by (used in) operating activities~~..~~....~~ ~~(1,450)~~- ~~42,046~~- 1733,~~245~~079 5733,~~841~~079 ~~--------~~Other ~~----------~~assets ~~----------- --------- Cash used in investing activities: Capital expenditures and acquisition~~............................. - ~~(32~~61,~~638)~~732 ~~(17,021)~~439 ~~(49~~62,~~659)~~171 -------- ---------- --------- ---------- ----------- ~~Net~~Total ~~cash~~Assets ~~used in investing activities~~............................. -$399,833 ~~(32~~$1,~~638)~~216,253 ~~(17~~$ 364,~~021)~~883 $ (49542,~~659~~056) ~~--------~~$ ~~----------~~1,438,913 ~~-----------~~======== ~~---------~~========== ~~Cash~~========= ~~provided~~========== by=========== ~~(used~~LIABILITIES ~~in)~~AND ~~financing~~SHAREHOLDER'S ~~activities:~~EQUITY ~~Decrease~~Current inLiabilities: ~~short~~Short-term debt .......................~~.....~~ $ - $ - ~~(76)~~$ ~~(76)~~68 ~~Repayments~~$ - $ 68 Current maturities of long-term debt .. - 2,974 143 3,117 Loans payable to related party......... - 4,000 30,000 34,000 Accounts payable ...................... - 2333,256 (137,~~554)~~611 (170,~~577)~~867 ~~(Increase)~~Accrued ~~decrease~~liabilities ~~in intercompany loans~~.............. ~~- (7,967) 7,967 - Dividends and distributions to parent company~~.....~~.....~~ - 335,~~270~~508 (325,~~270)~~864 -61,372 ~~Capital~~Income ~~contribution~~taxes ~~from parent company~~payable................... 116,~~451~~379 -3,522 -7,108 127,~~451~~009 -------- ---------- --------- ---------- ----------- ~~Net~~Total ~~cash~~Current ~~provided~~liabilities ~~by (used in) financing activities~~........... 116,~~451~~379 (679,~~274)~~260 4100,~~644~~794 ~~(179)~~ -~~-------~~ ~~----------~~196,433 Long-~~----------~~term debt less current maturities ... -~~--------~~ ~~Effect~~650,486 of450 ~~exchange~~650,936 ~~rate~~Deferred ~~changes~~income ontax ~~cash~~liabilities...........~~.......~~ - -121,374 313,~~001~~961 3135,~~001~~335 ~~--------~~Other ~~----------~~liabilities ~~-----------~~........................ ~~---------~~57,577 ~~Net~~71,439 ~~change~~1,316 in130,332 ~~cash~~Total ~~and~~Shareholder's ~~cash~~Equity ~~equivalents~~...............~~...~~ 1325,877 3293,~~134~~694 7248,~~869~~362 11(542,~~004~~056) 325,877 -------- ---------- --------- ---------- ----------- ~~Cash~~Total Liabilities and ~~cash~~Shareholder's ~~equivalents,~~Equity ~~end of period~~................................ $399,833 7$1,216,253 $ 20364,~~869~~883 $ 23(542,~~419~~056) $ 441,~~295~~438,913 ======== ========== ========= ========== ===========

15 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) ISP CHEMCO INC. CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2003 (THOUSANDS)

16 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) ISP CHEMCO INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SIX MONTHS ENDED JULY 4, 2004 (THOUSANDS)

17 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) ISP CHEMCO INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SIX MONTHS ENDED JUNE 29, 2003 (THOUSANDS)

18 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES For information regarding contingencies, reference is made to Note 22 to consolidated financial statements contained in the 2003 Form 10-K. Environmental Litigation The Company, together with other companies, is a party to a variety of proceedings and lawsuits involving environmental matters ("Environmental Claims") under the Comprehensive Environmental Response Compensation and Liability Act, Resource Conservation and Recovery Act and similar state laws, in which recovery is sought for the cost of cleanup of contaminated sites or remedial obligations are imposed. A number of these Environmental Claims are in the early stages or have been dormant for protracted periods. While the Company cannot predict whether adverse decisions or events can occur in the future, in the opinion of the Company's management, the resolution of the Environmental Claims should not be material to the business, liquidity, results of operations, cash flows or financial position of the Company. However, adverse decisions or events, particularly as to increases in remedial costs, discovery of new contamination, assertion of natural resource damages, plans for development of the Company's Linden, New Jersey property, and the liability and the financial responsibility of the Company's insurers and of the other parties involved at each site and their insurers, could cause the Company to increase its estimate of its liability or decrease its estimate of insurance recoveries in respect of those matters. It is not currently possible to estimate the amount or range of any additional liability. Tax Claim Against G-I Holdings Inc. The predecessor of ISP and certain of its domestic subsidiaries were parties to tax sharing agreements with members of a consolidated group for Federal income tax purposes that included G-I Holdings Inc. (the "G-I Holdings Group") in certain prior years. Until January 1, 1997, ISP and its domestic subsidiaries were included in the consolidated Federal income tax returns of the G-I Holdings Group and, accordingly, would be severally liable for any tax liability of the G-I Holdings Group in respect of those prior years. Those tax sharing agreements are no longer applicable with respect to the tax liabilities of ISP for periods subsequent to January 1, 1997, because neither the Company nor any of its domestic subsidiaries are members of the G-I Holdings Group for periods after January 1, 1997. In January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related bodily injury claims relating to the inhalation of asbestos fiber. On September 15, 1997, G-I Holdings received a notice from the Internal Revenue Service ("IRS") of a deficiency in the amount of $84.4 million (after taking into account the use of net operating losses and foreign tax credits otherwise available for use in later years) in connection with the formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants partnership"), a partnership in which G-I Holdings held an interest. On September 21, 2001, the IRS filed a proof of claim with respect to such deficiency in the G-I Holdings bankruptcy against G-I Holdings and ACI Inc., a subsidiary of G-I Holdings which also held an interest in the surfactants partnership and also has 19 ISP CHEMCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. CONTINGENCIES - (CONTINUED) filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. If the proof of claim is sustained, ISP and/or certain of its subsidiaries together with G-I Holdings and several current and former subsidiaries of G-I Holdings would be severally liable for taxes and interest in the amount of approximately $288 million, computed as of July 4, 2004. On May 7, 2002, G-I Holdings, together with ACI Inc., filed an objection to the proof of claim, which objection will be heard by the United States District Court for the District of New Jersey overseeing the G-I Holdings bankruptcy. G-I Holdings has advised the Company that it believes that it will prevail in this tax matter involving the surfactants partnership, although there can be no assurance in this regard. The Company believes that the ultimate disposition of this matter will not have a material adverse effect on its business, financial position or results of operations. For additional information relating to G-I Holdings, reference is made to Notes 8 and 22 to consolidated financial statements contained in the 2003 Form 10-K. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless otherwise indicated by the context, "we," "us" and "our" refer to ISP Chemco Inc. and its consolidated subsidiaries. CRITICAL ACCOUNTING POLICIES There have been no significant changes in our critical accounting policies during the first six months of 2004. For a discussion of our critical accounting policies, reference is made to the "- Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. RESULTS OF OPERATIONS - SECOND QUARTER 2004 COMPARED WITH SECOND QUARTER 2003 Overview We recorded net income of $19.3 million for the second quarter of 2004 compared with net income of $16.0 million in the second quarter of 2003. The improved results for the second quarter of 2004 were attributable to significantly higher operating income, partially offset by higher other expense, net. Net Sales. Net sales by business segment for the second quarter of 2004 and 2003 were: Second Quarter Ended ---------------------------- July 4, June 29, 2004 2003 --------- --------- (Millions) Specialty chemicals.................... $ 178.1 $ 159.0 Industrial chemicals................... 49.1 44.4 Mineral products....................... 34.5 26.1 --------- --------- Net sales............................ $ 261.7 $ 229.5 ========= ========= Net sales for the second quarter of 2004 were $261.7 million compared with $229.5 million in the second quarter of 2003. The $32.2 million (14%) increase in sales resulted primarily from higher unit volumes in all business segments (totaling $28.8 million). The favorable impact of the weaker U.S. dollar ($6.7 million), primarily in Europe, also benefited sales. Gross Margin. Our gross margin in the second quarter of 2004 was 36.3% compared with 35.9% in the second quarter of 2003. The gross margin for the specialty chemicals segment increased to 45.5% in the second quarter of 2004 from 43.8% in the same period of 2003 as a result of the favorable impact of higher volumes and the weaker U.S. dollar, as well as manufacturing efficiencies. The overall improved margin was adversely impacted by a lower margin for the mineral products segment, which decreased to 26.7% from 28.4% in the second quarter of 2003 as a result of higher manufacturing costs. Also, the gross margin for the industrial chemicals segment decreased to 9.6% from 21 11.9% in the second quarter of 2003 primarily due to the adverse impact of the stronger Euro on European-based manufacturing costs. Selling, General and Administrative. Selling, general and administrative expenses increased 9% in the second quarter of 2004 to $49.2 million from $45.1 million in the second quarter of 2003, however, as a percent of sales, decreased to 18.8% from 19.7% in the second quarter of 2003. The increase in selling, general and administrative expenses in the second quarter of 2004 related primarily to higher selling and distribution costs as a result of the higher sales levels. Operating Income. Operating income (loss) by business segment for the second quarter of 2004 and 2003 was: Second Quarter Ended ---------------------------- July 4, June 29, 2004 2003 --------- --------- (Millions) Specialty chemicals.................... $ 41.6 $ 33.7 Industrial chemicals................... (1.8) (1.4) Mineral products....................... 5.6 4.7 --------- --------- Total segment operating income....... 45.4 37.0 Unallocated corporate office items..... (0.1) - --------- --------- Operating income..................... $ 45.3 $ 37.0 ========= ========= Operating income for the second quarter of 2004 was $45.3 million, a 22% increase compared with $37.0 million in the second quarter of 2003. Operating income for the specialty chemicals segment was $41.6 million for the second quarter of 2004, a 23% improvement compared with $33.7 million in the second quarter of 2003. The improved results were primarily attributable to the personal care and performance chemicals product lines, mainly due to the favorable effect of higher unit volumes. Operating income for the specialty chemicals segment in the second quarter of 2004 was also favorably impacted by the weaker U.S. dollar and, to a lesser extent, by the contribution to income from the three specialty chemical niche acquisitions made during the first quarter of 2004 (see "-Liquidity and Financial Condition" below). The industrial chemicals segment recorded an operating loss of $1.8 million in the second quarter of 2004 compared with an operating loss of $1.4 million in the second quarter of 2003. The results were attributable to the adverse impact of the stronger Euro on European-based manufacturing costs, mostly offset by an improved product mix and manufacturing efficiencies. Operating income for the mineral products segment was $5.6 million in the second quarter of 2004 compared with $4.7 million in the second quarter of 2003. The 19% improvement in operating income from the second quarter of 2003 was primarily due to higher unit volumes, partially offset by increased freight expense and higher manufacturing costs. Interest Expense. Interest expense for the second quarter of 2004 was $13.0 million compared with $13.2 million in the same period in 2003. The lower interest expense was attributable to lower average interest rates ($0.5 million impact), partially offset by higher average borrowings ($0.3 million impact), both as a result of the refinancing of our senior secured credit facility in April 2004 (see "-Liquidity and Financial Condition" below). Other Income (Expense), net. Other income (expense), net, comprises foreign exchange gains/losses resulting from the revaluation of foreign 22 currency-denominated accounts receivable and payable as a result of changes in exchange rates, and other nonoperating items of expense. Other expense, net, was $2.8 million in the second quarter of 2004 compared with other income, net, of $1.4 million in the second quarter of 2003. The higher expense in the second quarter of 2004 was due to unfavorable foreign exchange. Income Taxes. In the second quarter of 2004, we recorded a provision for income taxes of $10.2 million. Our effective tax rate for the second quarter of 2004 was 34.6% compared with an effective tax rate of 36.4% in the second quarter of 2003. Business Segment Review A discussion of operating results for each of our business segments follows. We operate our business through three reportable business segments: specialty chemicals; industrial chemicals; and mineral products. Specialty Chemicals Sales in the second quarter of 2004 were $178.1 million compared with $159.0 million in the same period in 2003. The 12% increase in sales was attributable to higher unit volumes ($17.6 million). The favorable impact of the weaker U.S. dollar ($5.2 million), primarily in Europe, also benefited sales. The personal care product line experienced strong volume growth in its skin care and oral care markets in Europe and North America. Sales for the performance chemicals, food and personal care product lines includes the contribution to sales from the three acquisitions made during the first quarter of 2004. Operating income for the specialty chemicals segment improved 23% to $41.6 million for the second quarter of 2004 compared with $33.7 million in the second quarter of 2003. The improved results were primarily attributable to the personal care and performance chemicals product lines (up a combined $6.2 million) and were due to the favorable effect of higher unit volumes and a favorable product mix (totaling $5.6 million). Operating income for the specialty chemicals segment in the second quarter of 2004 was also favorably impacted by the weaker U.S. dollar ($2.7 million) and, to a lesser extent, from the contribution to income from the three acquisitions made during the first quarter of 2004. Industrial Chemicals Sales in the second quarter of 2004 were $49.1 million compared with $44.4 million in the second quarter of 2003. The 11% increase in sales resulted from higher unit volumes ($3.8 million) and by the favorable effect of the weaker U.S. dollar ($1.5 million), partially offset by slightly unfavorable pricing. The industrial chemicals segment recorded an operating loss of $1.8 million in the second quarter of 2004 compared with an operating loss of $1.4 million in the second quarter of 2003. The lower results were due to the adverse impact of the stronger Euro on European-based manufacturing costs ($1.9 million), partially offset by an improved product mix and manufacturing efficiencies. 23 Mineral Products Sales for the mineral products segment for the second quarter of 2004 were $34.5 million compared with $26.1 million for the second quarter of 2003. The 32% increase was due to higher unit volumes ($7.5 million) as a result of industry-wide growth and included 24% higher sales to Building Materials Corporation of America, an affiliate which we refer to as "BMCA." Operating income for the mineral products segment was $5.6 million in the second quarter of 2004 compared with $4.7 million for the second quarter of 2003. The 19% improvement from the second quarter of 2003 was primarily due to the higher unit volumes, partially offset by increased freight expense and higher manufacturing costs. RESULTS OF OPERATIONS - FIRST SIX MONTHS 2004 COMPARED WITH FIRST SIX MONTHS 2003 Overview We recorded net income of $41.2 million for the first six months of 2004 compared with net income of $28.3 million in the first six months of 2003. The improved results for the first six months of 2004 were attributable to significantly higher operating income, partially offset by higher other expense, net. First six months 2003 results included a $1.0 million after-tax charge for the cumulative effect of a change in accounting principle from the adoption of Statement of Financial Accounting Standards, which we refer to as "SFAS," No. 143, "Accounting for Asset Retirement Obligations." Net Sales. Net sales by business segment for the first six months of 2004 and 2003 were: Six Months Ended ---------------------------- July 4, June 29, 2004 2003 --------- --------- (Millions) Specialty chemicals.................... $ 364.3 $ 316.9 Industrial chemicals................... 97.8 93.5 Mineral products....................... 66.5 51.7 --------- --------- Net sales............................ $ 528.6 $ 462.1 ========= ========= Net sales for the first six months of 2004 were $528.6 million compared with $462.1 million in the first six months of 2003. The $66.5 million (14%) increase in sales resulted primarily from higher unit volumes in all business segments (totaling $51.9 million). The favorable impact of the weaker U.S. dollar ($20.6 million), primarily in Europe, also benefited sales. Gross Margin. Our gross margin in the first six months of 2004 was 36.5% compared with 35.1% in the first six months of 2003. The gross margin for the specialty chemicals segment increased to 45.4% in the first six months of 2004 from 43.9% in the same period of 2003 as a result of the favorable impact of higher volumes and the weaker U.S. dollar, partially offset by higher manufacturing costs ($3.0 million). Also, the gross margin for the industrial chemicals segment increased to 11.7% in the first six months of 2004 from 9.5% in the same period of 2003 due to an improved product mix and manufacturing efficiencies, partially offset by the adverse impact of the stronger Euro on European-based manufacturing costs. The overall improved margin was adversely 24 impacted by a lower margin for the mineral products segment, which decreased to 24.1% from 27.8% in the first six months of 2003 as a result of higher manufacturing costs and lower average selling prices in connection with a long-term customer supply contract entered into in the second quarter of 2003. Selling, General and Administrative. Selling, general and administrative expenses increased 11% in the first six months of 2004 to $98.3 million from $88.9 million in the first six months of 2003, however, as a percent of sales, decreased to 18.6% from 19.2% in the first six months of 2003. The increase in selling, general and administrative expenses in the first six months of 2004 related primarily to higher selling and distribution costs as a result of the higher sales levels. Other operating charges. Other operating charges of $1.5 million in the first six months of 2003 represented a charge for compensation expense for stock option payments related to ISP's going private transaction in February 2003. Operating Income. Operating income (loss) by business segment for the first six months of 2004 and 2003 was: Six Months Ended ---------------------------- July 4, June 29, 2004 2003 --------- --------- (Millions) Specialty chemicals.................... $ 87.8 $ 66.9 Industrial chemicals................... (1.6) (4.1) Mineral products....................... 8.1 8.7 --------- --------- Total segment operating income....... 94.3 71.5 Unallocated corporate office items..... (0.1) 0.1 --------- --------- Operating income..................... $ 94.2 $ 71.6 ========= ========= Operating income for the first six months of 2004 was $94.2 million compared with $71.6 million in the first six months of 2003. Excluding the other operating charges discussed above, operating income increased 29% to $94.2 million from $73.1 million in the first six months of 2003 (see "Non-GAAP Financial Measures" below). Operating income for the specialty chemicals segment was $87.8 million for the first six months of 2004 compared with $66.9 million in the first six months of 2003. On a comparable basis, excluding the aforementioned charges pertaining to specialty chemicals, operating income for the segment improved 29% to $87.8 million compared with $68.0 million in the first six months of 2003. The improved results were primarily attributable to the personal care and performance chemicals product lines and were mainly due to the favorable effect of higher unit volumes partially offset by higher manufacturing costs. Operating income for the specialty chemicals segment in the first six months of 2004 was also favorably impacted by the weaker U.S. dollar ($11.8 million) and, to a lesser extent, by the contribution to income from the three specialty chemical niche acquisitions made during the first quarter of 2004 (see "-Liquidity and Financial Condition" below). The industrial chemicals segment recorded an operating loss of $1.6 million in the first six months of 2004. Excluding the aforementioned other operating charges in the first six months of 2003 pertaining to industrial chemicals, the operating loss in the first six months of 2003 was $3.9 million. The reduced losses were attributable to an improved product mix and 25 manufacturing efficiencies, partially offset by the adverse impact of the stronger Euro on European-based manufacturing costs. Operating income for the mineral products segment was $8.1 million in the first six months of 2004. On a comparable basis, excluding other operating charges in the first six months of 2003 pertaining to mineral products, operating income was $8.9 million for the first six months of 2003. The decline in operating income from the first six months of 2003 was primarily due to increased freight expense, higher manufacturing costs and lower average selling prices, partially offset by the favorable impact of higher unit volumes. Interest Expense. Interest expense for the first six months of 2004 was $26.6 million compared with $26.7 million in the same period in 2003. The slightly lower interest expense was attributable to lower average interest rates ($0.9 million impact), offset by higher average borrowings ($0.8 million impact), primarily as a result of the refinancing of our senior secured credit facility in April 2004 (see "-Liquidity and Financial Condition" below). Other Income (Expense), net. Other income (expense), net, comprises foreign exchange gains/losses resulting from the revaluation of foreign currency-denominated accounts receivable and payable as a result of changes in exchange rates, and other nonoperating items of expense. Other expense, net, was $4.5 million in the first six months of 2004 compared with other income, net, of $0.1 million in the first six months of 2003. The higher expense in the first six months of 2004 was due to unfavorable foreign exchange. Income Taxes. In the first six months of 2004, we recorded a provision for income taxes of $21.9 million. Our effective tax rate for the first six months of 2004 was 34.7%, consistent with an effective tax rate of 35.0% for the first six months of 2003. Business Segment Review A discussion of operating results for each of our business segments follows. We operate our business through three reportable business segments: specialty chemicals; industrial chemicals; and mineral products. The operating income for the first six months of 2003 for each business segment discussed below is adjusted for the non-GAAP financial measures in the table below. Non-GAAP Financial Measures The business segment review below and the discussion of operating income above contain information regarding non-GAAP financial measures contained within the meaning of Item 10 of Regulation S-K promulgated by the Securities and Exchange Commission. As used herein, "GAAP" refers to U.S. generally accepted accounting principles. We use non-GAAP financial measures to eliminate the effect of certain other operating gains and charges on reported operating income. Management believes that these financial measures are useful to bondholders and financial institutions because such measures exclude transactions that are unusual due to their nature or infrequency and therefore allow bondholders and financial institutions to more readily compare our company's performance from period to period. Management uses this information in monitoring and evaluating our company's performance and the performance of individual business segments. The non-GAAP financial measures included herein have been reconciled to the most directly comparable GAAP financial measure as is required under Item 10 of Regulation S-K regarding the use of such 26 financial measures. These non-GAAP financial 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 U.S. generally accepted accounting principles. First Six Months -------------------- 2004 2003 -------- -------- (Millions) Reconciliation of non-GAAP financial measures: Operating income per GAAP............................... $ 94.2 $ 71.6 Non-GAAP adjustments: Add: Other operating charges(1).................... - 1.5 --------- -------- Operating income as adjusted............................ $ 94.2 $ 73.1 ========= ======== Supplemental Business Segment Information: Operating income: Operating income per GAAP - Specialty Chemicals.... $ 87.8 $ 66.9 Non-GAAP adjustments (1)........................... - 1.1 --------- -------- Operating income - Specialty Chemicals as adjusted. $ 87.8 $ 68.0 ========= ======== Operating loss per GAAP - Industrial Chemicals..... $ (1.6) $ (4.1) Non-GAAP adjustments (1)........................... - 0.2 --------- -------- Operating loss - Industrial Chemicals as adjusted.. $ (1.6) $ (3.9) ========= ======== Operating income per GAAP - Mineral Products....... $ 8.1 $ 8.7 Non-GAAP adjustments (1)........................... - 0.2 --------- -------- Operating income - Mineral Products as adjusted.... $ 8.1 $ 8.9 ========= ======== Total segment operating income as adjusted......... $ 94.3 $ 73.0 Unallocated corporate office per GAAP.............. (0.1) 0.1 --------- -------- Operating income as adjusted....................... $ 94.2 $ 73.1 ========= ======== (1) Non-GAAP adjustments for the first six months of 2003 represent an other operating charge of $1.5 million for stock option payments related to ISP's going private transaction. Specialty Chemicals Sales in the first six months of 2004 were $364.3 million compared with $316.9 million for the same period in 2003. The 15% increase in sales was attributable to higher unit volumes ($36.9 million). The favorable impact of the weaker U.S. dollar ($15.7 million), primarily in Europe, also benefited sales. The personal care product line experienced strong volume growth in each of its hair care, skin care and oral care markets in Europe and North America. Sales for the performance chemicals, food and personal care product lines includes the contribution to sales from the three acquisitions made during the first quarter of 2004 and also from Germinal S.A., which was acquired in the second quarter of 2003. Operating income for the specialty chemicals segment was $87.8 million for the first six months of 2004 compared with $66.9 million in the first six months of 2003. On a comparable basis, excluding the aforementioned other operating charges pertaining to specialty chemicals, operating income for the segment improved 29% to $87.8 million compared with $68.0 million in the first 27 six months of 2003. The improved results were primarily attributable to the personal care and performance chemicals and were due to the favorable effect of higher unit volumes ($20.7 million), partially offset by higher manufacturing costs ($3.0 million) and increased operating expenses ($4.3 million) due to higher selling and distribution costs resulting from the higher sales levels. Operating income for the specialty chemicals segment in the first six months of 2004 was also favorably impacted by the weaker U.S. dollar ($11.8 million) and, to a lesser extent, from the contribution to income from the three acquisitions made during the first quarter of 2004 and from Germinal S.A., which was acquired in the second quarter of 2003. Industrial Chemicals Sales in the first six months of 2004 were $97.8 million compared with $93.5 million in the first six months of 2003. The increase in sales was attributable to the favorable effect of the weaker U.S. dollar ($4.9 million), partially offset by slightly unfavorable pricing. The industrial chemicals segment recorded an operating loss of $1.6 million in the first six months of 2004. Excluding the aforementioned other operating charges in the first six months of 2003 pertaining to industrial chemicals, the operating loss in the first six months of 2003 was $3.9 million. The reduced losses were attributable to an improved product mix and manufacturing efficiencies (totaling $5.9 million), partially offset by the adverse impact of the stronger Euro on European-based manufacturing costs ($3.1 million). Mineral Products Sales for the Mineral Products segment for the first six months of 2004 were $66.5 million compared with $51.7 million for the first six months of 2003. The 29% increase was due to higher unit volumes ($14.9 million) as a result of industry-wide growth and included 24% higher sales to BMCA. Operating income for the mineral products segment was $8.1 million in the first six months of 2004. On a comparable basis, excluding other operating charges in the first six months of 2003 pertaining to mineral products, operating income was $8.9 million for the first six months of 2003. The decline from the first six months of 2003 was due to increased freight expense, higher manufacturing costs and lower average selling prices in connection with a long-term customer supply contract entered into in the second quarter of 2003, partially offset by the favorable impact of higher unit volumes. LIQUIDITY AND FINANCIAL CONDITION Cash Flows and Cash Position During the first six months of 2004, our net cash outflow before financing activities was $18.3 million, including the reinvestment of $58.2 million for capital programs and acquisitions, partially offset by $39.9 million of cash generated from operations. Operating Activities. Net cash generated from operating activities totaled $39.9 million for the first six months of 2004, compared with $38.8 million in the first six months of 2003. Cash from operations for the first 28 six months of 2004 included a cash investment of $50.3 million in additional working capital, including a $40.0 million increase in receivables as a result of higher sales and a $14.9 million net decrease in payables and accrued liabilities, partially offset by a $5.8 million decrease in inventories. Accrued liabilities decreased a total of $27.7 million during the six-month period as a result of payments of accrued interest. Operating activities also included a $3.6 million cash outflow from related party transactions, principally due to increased receivables from BMCA as a result of higher sales of mineral products to BMCA. Investing Activities. Net cash used in investing activities in the first six months of 2004 totaled $58.2 million, including $28.6 million for acquisitions. Capital expenditures in the first six months of 2004 were $29.6 million compared with $25.8 million in the first six months of 2003. During the first six months of 2004, we completed three acquisitions in Europe to further enhance our global specialty chemicals business. The purchase price of these acquisitions totaled $27.3 million in cash, net of $0.8 million cash acquired. In February 2004, we acquired the assets and business of UK-based Red Carnation Gums Limited, a manufacturer of emulsifiers, stabilizers and gelling systems for food and oral care markets. In March 2004, we acquired the assets and business of Germany-based Biochema Schwaben, a formulator of preservatives and biocides with applications in industrial and personal care markets, primarily in printing, paints and coatings, polymer emulsions, skin care and hair care markets. Also in March 2004, we acquired the assets and business of UK-based Hallcrest Limited and its U.S. affiliate, a manufacturer and marketer of custom microencapsulation and liquid crystal technologies for the personal care, home care, oral care and food industries. Financing Activities. Net cash used in financing activities in the first six months of 2004 totaled $12.5 million. In April 2004, we dividended a total of $106.2 million to our parent company, International Specialty Holdings Inc., including cash dividends of $67.2 million. In connection with these dividends, our total long-term loan receivable of $39.0 million from a related party was eliminated. Financing activities also included a cash inflow of $31.2 million from a refinancing of our senior secured credit facilities (see below) and $34.0 million in short-term borrowings from a related party, partially offset by an increase of $7.8 million in a loan to a related party. In April 2004, we borrowed a total of $34.0 million from a subsidiary of our parent company pursuant to two note agreements. One loan, for $30.0 million, has a maturity date of October 30, 2004, and the second loan, for $4.0 million has a maturity date of April 30, 2005. Interest is payable on each loan at the rate of 1.65% per annum. On April 2, 2004, we and three of our wholly owned subsidiaries amended and restated our June 2001 $450.0 million senior secured credit facilities, which we refer to as the "Senior Credit Facilities" in order to extend the term, increase future flexibility and reduce the effective interest rate on borrowings. The Senior Credit Facilities provide a $250.0 million term loan with a maturity in March 2011, which replaces the $225.0 million term loan that was due to mature in June 2008. In connection therewith, we borrowed an additional $31.2 million to bring the outstanding balance of the term loan to $250.0 million. The Senior Credit Facilities reduced the margin-based interest rate for term loan borrowings and amended financial covenant ratios, including the elimination of the minimum adjusted net worth covenant. 29 On April 15, 2004, the $225.0 million revolving credit facility under the Senior Credit Facilities, which was to terminate in June 2006, was reduced to $200.0 million, including a borrowing capacity not in excess of $50.0 million for letters of credit, and the maturity was extended to April 15, 2009. In addition, the margin-based interest rate for revolving credit borrowings was reduced. As a result of the foregoing factors, cash and cash equivalents decreased by $31.2 million during the first six months of 2004 to $25.2 million. Current Maturities of Long-Term Debt As of July 4, 2004, our current maturities of long-term debt, scheduled to be repaid during the twelve month period ended June 2005, totaled $3.1 million, including $2.3 million related to the term loan under the Senior Credit Facilities. In addition, as discussed above, we have short-term loans payable to a related party totaling $34.0 million. Operating Lease Obligation We entered into an operating lease in 1998 for an equipment sale-leaseback transaction related to equipment at our Freetown, Massachusetts facility. The lease had an initial term of four years and, at our option, up to three one-year renewal periods. The first two annual renewal options were exercised during 2002 and 2003, and the third and final renewal option was exercised during the first quarter of 2004. The lease provides for a substantial guaranteed payment by us, adjusted at the end of each renewal period, and includes purchase and return options at fair market values determined at the inception of the lease. We have the right to exercise a purchase option with respect to the leased equipment, or the equipment can be returned to the lessor and sold to a third party. It is our current intention to exercise the purchase option and to maintain the Freetown plant and business, and we will be evaluating financing alternatives in that regard. If we exercise the purchase option in 2005, we will be obligated to pay a fixed purchase price of $33.6 million. As part of our acquisition of the Freetown facility 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, and the new owner did not assume our long-term supply contract with Polaroid. These events negatively impacted the sale of our fine chemicals products and reduced the utilization of our Freetown plant. We have since increased the utilization of the Freetown facility, primarily from additional production of personal care products. We also continue to shift specialty chemicals production to our Columbus, Ohio fine chemicals facility, which currently has excess capacity. Contractual Obligations A contract with a multinational supplier to supply a substantial amount of our acetylene needs to our Texas City, Texas facility expired in March 2004. As a result, we reduced our acetylene requirements at the Texas City plant by 50% through shifting production of acetylene-consuming products to our Calvert City, Kentucky plant. We also entered into a long-term supply contract for the remaining Texas City plant requirements with a local producer. Under this contract, we are obligated to purchase specified 30 quantities of acetylene through the end of 2013. Pricing under this contract is on a fixed basis with escalators related to changes in the Producer Price Index. We also have an acetylene supply contract for our requirements of acetylene delivery via pipeline to our Calvert City facility. The current term of this contract expires December 31, 2009 and allows us, at our sole option, to extend the agreement for two additional terms of five years each. We are required by the contract to pay a monthly non-cancelable facility fee. Pricing under the contract is on a fixed basis with escalators related to changes in the Producer Price Index. The annual unconditional purchase obligation related to the long-term acetylene supply contract at the Texas City plant, together with the non-cancelable facility fee associated with the Calvert City plant acetylene contract is $5.1 million. Contingencies See Note 14 to consolidated financial statements for information regarding contingencies. New Accounting Standards In December 2003, the Financial Accounting Standards Board issued a revised FASB Interpretation No. 46R, which we refer to as "FIN 46R," "Consolidation of Variable Interest Entities," replacing FIN 46 which had originally been issued in January 2003. FIN 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. We will be required to apply FIN 46R to variable interests in variable interest entities created after December 31, 2003. The effective dates of FIN 46R for public enterprises vary based on the type of variable interest entity and whether FIN 46 was applied to a variable interest entity prior to the effective date of FIN 46R. For any variable interest entities that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interest of the variable interest entities initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the variable interest entities. Our company does not currently have an interest in a variable interest entity. Therefore, FIN 46R will not have an immediate impact on our consolidated financial statements. In May 2004, the FASB issued FASB Staff Position, which we refer to as "FSP," No. FAS 106-2 to provide guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which we refer to as the "Act" for employers that sponsor postretirement health care plans which provide prescription drug benefits. In addition, the FSP requires those employers to provide certain disclosures in their financial statements regarding the effect of the Act and the related subsidy on postretirement health obligations and net periodic postretirement benefit cost. FSP FAS No. 106-2 applies only to sponsors of single-employer defined benefit postretirement health care plans for which (1) the employer has concluded that prescription drug 31 benefits available under the plan to some or all participants, for some or all future years, are "actuarially equivalent" to Medicare Part D and thus qualify for the subsidy under the Act, and (2) the expected subsidy will offset or reduce the employer's share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based. We will adopt the provisions of FSP FAS No. 106-2 effective for the quarterly period beginning July 5, 2004. The impact on our financial statements will be insignificant. * * * Forward-looking Statements This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are only predictions and generally can be identified by use of statements that include phrases such as "believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or phrases of similar import. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. Our operations are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. No assurances can be given that projected results or events will be achieved. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, for a discussion of "Market-Sensitive Instruments and Risk Management." At December 31, 2003 and July 4, 2004, there were no equity-related financial instruments employed by us to reduce market risk. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer (principal executive officer) and Vice President and Controller (principal financial officer), conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Vice President and Controller have each concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports filed, furnished or submitted under the Exchange Act. Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 33 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number -------------- 31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Principal Executive Officer. 31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Principal Financial Officer. 32.1 Certification pursuant to 18 U.S.C. Section 1350. (b) Reports on Form 8-K filed during the current quarter: The Company filed a report on Form 8-K, dated April 20, 2004, reporting an event under Item 5 thereof. 34 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ISP CHEMCO INC. ISP CHEMICALS INC. ISP MINERALS INC. ISP TECHNOLOGIES INC. DATE: August 18, 2004 BY: /s/ Sunil Kumar --------------- --------------- Sunil Kumar President and Chief Executive Officer (Duly Authorized Officer) DATE: August 18, 2004 BY: /s/Kenneth M. McHugh --------------- -------------------- Kenneth M. McHugh Vice President and Controller (Principal Financial and Chief Accounting Officer) 35

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