1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
Commission File Number 1-3720
W. R. GRACE & CO.
New York 13-3461988
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Town Center Road
Boca Raton, Florida 33486-1010
(407) 362-2000
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 and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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90,870,737 shares of Common Stock, $1.00 par value, were outstanding at August
1, 1996.
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W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
Page No.
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Part I. Financial Information
- -------
Item 1. Financial Statements
Consolidated Statement of Operations I-1
Consolidated Statement of Cash Flows I-2
Consolidated Balance Sheet I-3
Notes to Consolidated Financial Statements I-4 to I-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition I-11 to I-18
Part II. Other Information
- -------
Item 1. Legal Proceedings II-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other Information II-3
Item 6. Exhibits and Reports on Form 8-K II-3
As used in this Report, the term "Company" refers to W. R. Grace & Co., and the
term "Grace" refers to the Company and/or one or more of its subsidiaries.
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Consolidated Statement of Operations (Unaudited) June 30, June 30,
------------------------------------------------ ---------------------- -----------------------
$ millions (except per share) 1996 1995 1996 1995
--------------------------------- --------- -------- --------- --------
Sales and revenues . . . . . . . . . . . . . . . . . . . $ 948.9 $932.3 $1,834.9 $1,785.7
Other income . . . . . . . . . . . . . . . . . . . . . . 14.1 4.5 17.9 8.8
-------- ------ -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 963.0 936.8 1,852.8 1,794.5
-------- ------ -------- --------
Cost of goods sold and operating expenses . . . . . . . 572.0 550.7 1,103.8 1,051.6
Selling, general and administrative expenses . . . . . . 206.4 219.7 405.7 450.5
Depreciation and amortization . . . . . . . . . . . . . 46.4 40.2 91.9 78.4
Interest expense and related financing costs . . . . . . 18.3 18.7 36.7 34.5
Research and development expenses . . . . . . . . . . . 29.0 31.1 57.8 61.6
Corporate expenses previously allocated to the
health care segment . . . . . . . . . . . . . . - 11.6 - 21.7
Restructuring costs . . . . . . . . . . . . . . . . . . 53.7 - 53.7 -
Gain on sales of businesses . . . . . . . . . . . . . . (326.4) - (326.4) -
------- ------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 599.4 872.0 1,423.2 1,698.3
------- ------- -------- --------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 363.6 64.8 429.6 96.2
Provision for income taxes . . . . . . . . . . . . . . . 130.5 19.8 154.9 28.3
------- ------ -------- --------
Income from continuing operations . . . . . . . . . . . 233.1 45.0 274.7 67.9
Income from discontinued operations . . . . . . . . . . 100.8 33.7 122.8 58.3
------- ------ -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 333.9 $ 78.7 $ 397.5 $ 126.2
======= ======= ========= ========
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Earnings per share:
Continuing operations . . . . . . . . . . . . . . . . $ 2.41 $ .47 $ 2.82 $ .71
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33
Fully diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . $ 2.37 $ .46 $ 2.76 $ .70
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30
Dividends declared per common share . . . . . . . . . . $ .125 $ .35 $ .25 $ .70
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The Notes to Consolidated Financial Statements
are an integral part of this statement.
I-1
4
W. R. Grace & Co. and Subsidiaries Six Months Ended
Consolidated Statement of Cash Flows (Unaudited) June 30,
- ------------------------------------------------ -----------------
$ millions 1996 1995
- ------------------------------------------------ ------- -------
OPERATING ACTIVITIES
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . $429.6 $ 96.2
Reconciliation to cash provided by/(used for) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.9 78.4
Noncash charge relating to restructuring costs . . . . . . . . . . . . . . . . . . . 53.7 -
Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326.4) -
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net . . . . . . . . . . . . . . . . . (78.4) (60.0)
Decrease/(increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . 33.3 (82.3)
Proceeds from asbestos-related insurance settlements . . . . . . . . . . . . . . 99.7 156.4
Payments made for asbestos-related litigation settlements,
judgments and defense costs . . . . . . . . . . . . . . . . . . . . . . (73.1) (60.2)
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (20.3) (51.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98.1) (37.2)
------ ------
Net pretax cash provided by operating activities of continuing operations . . . . . . . . 111.9 39.9
Net pretax cash provided by operating activities of discontinued operations . . . . . . . 47.1 27.8
------ ------
Net pretax cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 159.0 67.7
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40.5) (91.0)
------ ------
Net cash provided by/(used for) operating activities . . . . . . . . . . . . . . . . . . . 118.5 (23.3)
------ ------
INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234.5) (232.6)
Businesses acquired in purchase transactions, net of
cash acquired and assumed debt . . . . . . . . . . . . . . . . . . . . . . . . . . . - (31.1)
Increase in net investments in discontinued operations . . . . . . . . . . . . . . . . . . (97.6) (46.3)
Net proceeds from divestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697.1 7.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7 2.5
------ ------
Net cash provided by/(used for) investing activities . . . . . . . . . . . . . . . . . . . 379.7 (300.4)
------ ------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24.5) (66.3)
Repayments of borrowings having original maturities in excess of three months . . . . . . (50.8) (51.2)
Increase in borrowings having original maturities in excess of three months . . . . . . . - 85.3
Net (decrease)/increase in borrowings having original
maturities of less than three months . . . . . . . . . . . . . . . . . . . . . . . . (6.7) 251.0
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.2 84.3
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (398.2) (12.1)
(Decrease)/increase in net financing activities of discontinued operations . . . . . . . . (37.1) 2.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .1
------ ------
Net cash (used for)/provided by financing activities . . . . . . . . . . . . . . . . . . . (464.1) 293.3
------ ------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (1.0) 3.5
------ ------
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 33.1 $(26.9)
====== ======
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
5
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
-------------------------------------- June 30, December 31,
$ millions (except par value) 1996 1995
-------------------------------------- --------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 73.7 $ 40.6
Notes and accounts receivable, net . . . . . . . . . . . . . . 712.5 596.8
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 402.4 491.9
Net assets of discontinued operations . . . . . . . . . . . . . 296.9 323.7
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 194.0 206.1
Other current assets . . . . . . . . . . . . . . . . . . . . . 25.4 22.2
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . 1,704.9 1,681.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,398.9
and $1,418.8, respectively . . . . . . . . . . . . . . . . 1,771.8 1,736.1
Goodwill, less accumulated amortization of $12.7
and $20.6, respectively . . . . . . . . . . . . . . . . . 39.6 111.8
Net assets of discontinued operations - health care . . . . . . . 1,571.6 1,435.3
Asbestos-related insurance receivable . . . . . . . . . . . . . . 241.2 321.2
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 380.1 386.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 596.6 625.3
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 603.9 $ 638.3
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 237.8 339.2
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 333.8 103.3
Other current liabilities . . . . . . . . . . . . . . . . . . . 828.6 836.4
Minority interest . . . . . . . . . . . . . . . . . . . . . . . 297.0 297.0
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . . 2,301.1 2,214.2
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,262.8 1,295.5
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 773.6 789.0
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 43.2 44.8
Noncurrent liability for asbestos-related litigation . . . . . . . 659.1 722.3
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 5,039.8 5,065.8
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value . . . . . . . . . . . . . . . 7.4 7.4
Common stock, $1 par value . . . . . . . . . . . . . . . . . . 98.7 97.4
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 513.4 459.8
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 709.0
Cumulative translation adjustments . . . . . . . . . . . . . . (40.4) (39.4)
Treasury stock - 5,189,124 common shares, at cost . . . . . . . (395.1) (2.4)
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . 1,266.0 1,231.8
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6
======== ========
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-3
6
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(A) BASIS OF PRESENTATION
The financial statements in this Report at June 30, 1996 and 1995 and
for the three- and six-month interim periods then ended are unaudited
and should be read in conjunction with the consolidated financial
statements in the Company's 1995 Annual Report on Form 10-K (1995
Annual Report). Such interim financial statements reflect all
adjustments that, in the opinion of management, are necessary for a
fair presentation of the results of the interim periods presented; all
such adjustments are of a normal recurring nature. Certain amounts in
the prior periods' consolidated financial statements have been
reclassified to conform to the current periods' basis of presentation.
The results of operations for the three- and six-month interim periods
ended June 30, 1996 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1996.
(B) ASBESTOS AND RELATED INSURANCE LITIGATION
As previously reported, Grace is a defendant in property damage and
personal injury lawsuits relating to previously sold asbestos-
containing products, and anticipates that it will be named as a
defendant in additional asbestos-related lawsuits in the future. Due
to the unique nature of each property damage claim, Grace cannot
predict whether and to what extent asbestos-related property damage
lawsuits and claims will be brought against it in the future or the
expenses involved in defending against and disposing of any such
future lawsuits and claims. By contrast, Grace believes that there
are common features with respect to personal injury claims; therefore,
in 1995, Grace determined that it had adequate experience to
reasonably estimate the number of personal injury claims to be filed
against it through 1998 and established an accrual for such claims.
Grace was a defendant in approximately 44,100 asbestos-related
lawsuits at June 30, 1996 (39 involving claims for property damage and
the remainder involving approximately 109,000 claims for personal
injury), as compared to approximately 40,800 lawsuits at December 31,
1995 (47 involving claims for property damage and the remainder
involving approximately 92,400 claims for personal injury). During
the first half of 1996, Grace settled four property damage lawsuits
for a total of $11.3 (including one case that was on appeal); one new
property damage lawsuit was filed; four property damage lawsuits were
dismissed without the payment of any damages or settlement amounts by
Grace; and, in a case that had been on appeal and is now final, Grace
was held liable for $4.1. During the first half of 1996,
approximately 1,400 personal injury claims against Grace were
dismissed without payment and $13.6 was recorded to reflect
settlements in approximately 3,500 personal injury claims.
Based upon and subject to the factors discussed in Note 2 to Grace's
consolidated financial statements for the year ended December 31,
1995, Grace estimates that its probable liability with respect to the
defense and disposition of asbestos property damage and personal
injury lawsuits and claims pending at June 30, 1996 and December 31,
1995 (except for four property damage lawsuits as to which the
liabilities are not yet estimable because Grace has
I-4
7
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
not yet been able to obtain sufficient information as to the relevant
properties through discovery proceedings), as well as personal injury
lawsuits and claims expected to be filed through 1998, is as follows:
June 30, December 31,
1996 1995
Current liability for asbestos-related litigation (1) . . . . . . . . . . . . . . . $100.0 $100.0
Noncurrent liability for asbestos-related litigation . . . . . . . . . . . . . . . . 659.1 (2) 722.3
------ ------
Total asbestos-related liability . . . . . . . . . . . . . . . . . . . . . . . . . . $759.1 $822.3
====== ======
(1) Included in "Other current liabilities" in the consolidated
balance sheet.
(2) The decrease from December 31, 1995 reflects payments made by
Grace for settlements and defense costs in connection with
asbestos-related lawsuits and claims during the six months ended
June 30, 1996.
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace has settled with and been
paid by its primary insurance carriers with respect to both property
damage and personal injury lawsuits and claims. With minor
exceptions, Grace has also settled with its excess insurance carriers
that wrote policies available for property damage claims; those
settlements involve amounts paid and to be paid to Grace. In
addition, Grace has settled with many excess insurance carriers that
wrote policies available for personal injury lawsuits and claims.
Grace is currently in litigation with its remaining excess insurance
carriers whose policies Grace believes are available for
asbestos-related personal injury lawsuits and claims. Recovery under
these policies is subject to lengthy litigation and legal
uncertainties. Insurance coverage for asbestos-related liabilities
has not been commercially available since 1985.
The following table shows Grace's total estimated insurance recoveries
in reimbursement for past and estimated future payments to defend
against and dispose of asbestos-related lawsuits and claims:
June 30, December 31,
1996 1995
Notes receivable from insurance carriers - current, net of discounts of $4.0 (1995 - $4.3) (1) $ 69.1 $ 62.0
Notes receivable from insurance carriers - noncurrent, net of discounts of $5.1 (1995 - $7.3) (2) 33.4 56.4
Asbestos-related insurance receivable . . . . . . . . . . . . . . . . . . . . 241.2(3) 321.2
------ ------
Total amounts due from insurance carriers . . . . . . . . . . . . . . . . . . . . . $343.7 $439.6
====== ======
(1) Included in "Notes and accounts receivable, net" in the
consolidated balance sheet.
(2) Included in "Other assets" in the consolidated balance sheet.
(3) The decrease from December 31, 1995 reflects the receipt of net
insurance proceeds of $33.3 and the reclassification of $46.7 from
"Asbestos-related insurance receivable" to "Notes receivable
from insurance carriers - current" and "- noncurrent" as the
result of a 1996 settlement with an insurance carrier.
At June 30, 1996, settlements with certain insurance carriers provided
for the future receipt by Grace of $111.6, which Grace has recorded as
notes receivable (both current and noncurrent) of $102.5, net of
discounts. In the first half of 1996, Grace received net proceeds of
$99.7 pursuant to settlements with insurance carriers in reimbursement
for monies previously expended by Grace in connection with
asbestos-related lawsuits and claims; of this amount, $65.1 was
received pursuant to settlements entered into in 1993 through 1996,
which had previously been classified as notes receivable. Pursuant to
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8
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
settlements with two groups of carriers in 1995, Grace will continue
to receive payments based on future cash outflows for asbestos-
related lawsuits and claims; such payments are estimated to represent
approximately $215.8 of the asbestos-related receivable of $241.2 at
June 30, 1996.
Grace's ultimate exposure with respect to its asbestos-related
lawsuits and claims will depend on the extent to which its insurance
will cover damages for which it may be held liable, amounts paid in
settlement and litigation costs. However, in Grace's opinion (which
is not based on a formal opinion of counsel), it is probable that
recoveries from its insurance carriers (including amounts reflected in
the receivable discussed above), along with other funds, will be
available to satisfy the personal injury and property damage lawsuits
and claims pending at June 30, 1996, as well as personal injury
lawsuits and claims expected to be filed in the future. Consequently,
Grace believes that the resolution of its asbestos-related litigation
will not have a material adverse effect on its consolidated results of
operations or financial position.
For additional information, see Note 2 to the consolidated financial
statements in the 1995 Annual Report.
(C) ACQUISITIONS AND DIVESTMENTS - CONTINUING OPERATIONS
Acquisitions
In July 1996, Grace announced that it had completed the acquisition of
Cypress Packaging, Inc. (Cypress), a manufacturer of flexible
packaging. Cypress, with 1995 sales of more than $20.0, is a
leading supplier of plastic packaging materials for the retail pre-cut
produce market segment.
Divestments
In June 1996, Grace sold its water treatment and process chemicals
business to Betz Laboratories, Inc. (Betz). The purchase price in the
transaction was $632.0, subject to certain adjustments, plus the
assumption of certain liabilities. As initially adjusted, the
purchase price of $636.4 (which is subject to further adjustment) was
paid at closing as follows: $534.8 in cash, a $100.0 promissory note
(secured by a letter of credit) due in January 1997, and a $1.6
promissory note paid in July 1996. The sales and revenues of Grace's
water treatment and process chemicals business for the six months
ended June 30, 1996 and 1995 were $201.2 and $193.9, respectively; its
financial position and results of operations were not significant to
Grace.
As reflected in the consolidated statement of operations (in the line
captioned "Gain on sales of businesses"), the sales of this business
and the biopesticides business resulted in a pretax gain of $326.4,
and an after-tax gain of $210.1 ($2.18 per common share), in
continuing operations.
I-6
9
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(D) DISCONTINUED OPERATIONS
Health Care
As previously reported, in February 1996 Grace and Fresenius AG
(Fresenius) entered into a definitive agreement to combine National
Medical Care, Inc. (NMC), Grace's principal health care subsidiary,
with Fresenius' worldwide dialysis business (FWD) to create Fresenius
Medical Care AG (FMC). The combination would follow the borrowing
and/or assumption of debt aggregating approximately $2,300 by NMC, a
tax-free distribution of the net cash proceeds by NMC to W. R. Grace &
Co.-Conn., a Connecticut subsidiary of the Company that conducts
Grace's packaging and specialty chemicals businesses (Grace Chemicals)
and a tax-free distribution by the Company, with respect to each share
of its Common Stock, of one share of a newly formed Delaware
corporation (New Grace) holding all of the stock of Grace Chemicals,
as well as Grace's other businesses other than NMC. As a result of
these transactions,the holders of the Company's Common Stock would own
100% of New Grace and would be allocated an aggregate of approximately
44.8% of FMC's ordinary shares on a fully diluted basis. The holders
of the Company's Common Stock would also own preferred stock, the
dividend on which would be linked to the performance of FMC.
The Company's shareholders are to vote on the combination and related
matters at a special meeting to be held on September 16, 1996, and
it is expected that the various transactions will be completed
following the date of the special meeting and prior to
October 1, 1996; however, there can be no assurance as to whether
or when such transactions will be completed.
Grace, on behalf of NMC, has obtained a commitment letter from various
financial institutions under which approximately $2,500 of financing is
expected to be made available to NMC and certain specified subsidiaries
and affiliates in connection with the above transactions. The credit
agreement is expected to provide that certain obligations thereunder
will be guaranteed by Grace Chemicals for specified periods of time and
subject to certain conditions. See "FINANCING" in the Company's Joint
Proxy Statement-Prospectus dated August 2, 1996 for additional
information.
In October 1995, NMC received five investigative subpoenas from the
Office of the Inspector General (OIG) of the U.S. Department of Health
and Human Services. In the event that a U.S. government agency
believes that any wrongdoing has occurred, civil and/or criminal
proceedings could be instituted, and if any such proceedings were to
be instituted and the outcome were unfavorable, NMC could be subject
to fines, penalties and damages or could become excluded from
government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of NMC and Grace. However, at the present time, the
results of the investigation and its impact cannot be predicted, as
management does not believe that the liability, if any, with respect
to the OIG investigation is estimable.
Under the terms of the combination of FWD and NMC described above, NMC
will remain responsible for all liabilities, if any, resulting from
the OIG investigation. In July 1996, an agreement was reached with
the U.S. government under which, subject to certain conditions
I-7
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W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
and limitations, upon such combination, (i) FMC and the Company (which
will become a subsidiary of FMC) are to guarantee the payment of the
obligations, if any, of NMC to the U.S. government in respect of the
OIG investigation and another proceeding; (ii) Grace Chemicals is to
guarantee the obligations of FMC under the foregoing guarantee with
respect to acts and transactions that took place prior to the
consummation of the combination (but only if such obligations become
due and payable and remain uncollected for 120 days); and (iii) NMC is
to deliver a standby letter of credit in the principal amount of
$150.0 in favor of the U.S. government to support its payment of such
obligations. As a result of this agreement, the U.S. government has
agreed (i) to not take any action to delay or interfere with the
combination and (ii) to release Grace, NMC and certain other parties
from certain fraudulent conveyance and related claims arising from or
related to the combination (or any transaction comprising a part
thereof).
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation" and
" -- OIG Agreements" in the Company's Joint Proxy Statement-Prospectus
dated August 2, 1996 for additional information.
Discontinued Operations - Consolidated Statement of Operations
The sales and revenues and results of the discontinued health care
operations and the gain on the sale of the transgenic plant business
of Grace's Agracetus subsidiary (discussed below) were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------
1996 1995 1996 1995
------ ------ ----- -----
Sales and revenues - health care $565.5 $523.5 $1,105.2 $1,015.3
====== ====== ======== ========
Income from health care operations
before income taxes $ 38.9 $ 60.1 $ 77.1 $ 104.1
Provision for income taxes 17.5 26.4 33.7 45.8
------ ------ -------- --------
Income from health care operations $ 21.4 $ 33.7 $ 43.4 $ 58.3
------ ------ -------- --------
Gain on sale of business $129.0 $ - $ 129.0 $ -
Provision for income taxes on
sale of business 49.6 - 49.6 -
------ ------ -------- --------
Net gain on sale of business $ 79.4 $ - $ 79.4 $ -
------ ------ -------- --------
Income from discontinued operations $100.8 $ 33.7 $ 122.8 $ 58.3
====== ====== ======== ========
The operating results of Grace's cocoa business and other discontinued
operations have been charged against previously established reserves
and are, therefore, not reflected in the above results.
The net operating income of the health care business reflects an
allocation of Grace's interest expense ($24.4 and $21.6 for the
second quarters of 1996 and 1995, respectively,
I-8
11
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
and $51.2 and $41.7 for the six months ended June 30, 1996 and 1995,
respectively) based on a ratio of the net assets of the health care
business as compared to Grace's total capital. Taxes have been
allocated to the health care business as if it were a stand-alone
taxpayer; however, these allocations are not necessarily indicative of
the taxes attributable to the health care business in the future. For
the quarter and six months ended June 30, 1995, net operating income
of the health care business also reflects an allocation of Grace's
health care-related research expenses (Grace management initiated the
phase-out of certain of its health care research programs in the third
quarter of 1995).
In May 1996, Grace completed the sale of the transgenic plant business
of its Agracetus subsidiary to the Monsanto Company for $150.0 in
cash, resulting in a pretax gain of $129.0, and an after-tax gain of
$79.4 ($0.82 per common share), in discontinued operations.
Discontinued Operations - Consolidated Balance Sheet
The net assets, excluding intercompany assets, of Grace's discontinued
operations included in the consolidated balance sheet at June 30,
1996, are as follows:
Sub- Health
Cocoa Other Total Care Total
----- ----- ------ --------- --------
Current assets $335.2 $ 4.7 $339.9 $ 726.2 $1,066.1
Properties and equipment, net 180.9 15.9 196.8 417.7 614.5
Investments in and advances to
affiliated companies - 28.4 28.4 - 28.4
Other assets 57.4 - 57.4 981.5 1,038.9
------ ----- ------ -------- --------
Total assets $573.5 $49.0 $622.5 $2,125.4 $2,747.9
------ ----- ------ -------- --------
Current liabilities $237.2 $ 5.0 $242.2 $ 476.0 $ 718.2
Other liabilities 79.2 4.2 83.4 77.8 161.2
------ ----- ------ -------- --------
Total liabilities $316.4 $ 9.2 $325.6 $ 553.8 $ 879.4
------ ----- ------ -------- --------
Net assets $257.1 $39.8 $296.9(1) $1,571.6(2) $1,868.5
====== ===== ====== ======== ========
(1) Classified as a current asset in the consolidated balance sheet.
(2) Classified as a noncurrent asset in the consolidated balance
sheet.
Minority interest consists of a limited partnership interest in Grace
Cocoa Associates, L.P. (LP). LP's assets consist of Grace Cocoa's
worldwide cocoa and chocolate business, long-term notes and demand
loans due from various Grace entities and guaranteed by the Company
and its principal operating subsidiary, and cash. LP is a separate
and distinct legal entity from each of the Grace entities and has
separate assets, liabilities, business functions and operations. For
financial reporting purposes, the assets, liabilities, results of
operations and cash flows of LP are included in Grace's consolidated
financial statements as components of discontinued operations and the
outside investors' interest in LP is reflected as a minority interest.
The intercompany notes held by LP are eliminated in preparing the
consolidated financial statements and, therefore, have not been
classified as pertaining to discontinued operations.
I-9
12
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(E) RESTRUCTURING COSTS
As discussed in Note 5 to the consolidated financial statements in the
1995 Annual Report, Grace began implementing in 1995 a worldwide
program focused on streamlining processes and reducing general and
administrative expenses, factory administration costs and noncore
corporate research and development expenses. As previously reported,
Grace expects to implement additional cost reduction and efficiency
improvements beyond those initiated in 1995, as its businesses further
evaluate and reengineer their operations. In furtherance of that
plan, in the second quarter of 1996, Grace recorded a pretax charge of
$53.7 million ($32.4 million after-tax), principally related to
restructuring the Company's European packaging operations. The
charge primarily relates to employee termination benefits and lease
termination costs.
(F ) OTHER
Components of Grace's inventories were as follows:
June 30, December 31,
1996 1995
-------- ------------
Raw and packaging materials $120.0 $137.1
In process 79.5 78.0
Finished products 252.9 325.2
------ ------
$452.4 $540.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (50.0) (48.4)
------ ------
Total Inventories $402.4 $491.9
====== ======
Earnings per share are calculated on the basis of the following
weighted average number of common shares outstanding:
1996 1995
---------- ----------
Three Months Ended June 30: . . . . . . . . . . . . 96,634,000 95,116,000
Six Months Ended June 30: . . . . . . . . . . . . . 97,259,000 94,629,000
I-10
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
REVIEW OF OPERATIONS
Overview
The second quarter of 1996 included an after-tax gain on the sales of
businesses, primarily the water treatment and process chemicals
business and the transgenic plant business, totaling $289.5 million
($455.4 million pretax), offset by an after-tax charge for
restructuring costs of $32.4 million ($53.7 million pretax). The
first quarter of 1995 included an after-tax charge of $12.5 million
($20.0 million pretax) relating to corporate governance matters.
Excluding the above items, net income for the second quarter of 1996
would have decreased 2% as compared to the second quarter of 1995, and
net income for the 1996 first half would have increased by 1% over the
1995 first half.
Operating Results
The following table compares results for the specialty chemicals
segment for the 1996 second quarter and first half to those for the
comparable periods of 1995:
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Specialty Chemicals Operating Results June 30, June 30,
------------------------------------- ----------------------- -----------------------
$ millions 1996 1995 1996 1995
------------------------------------- ------ ------ -------- --------
Sales and revenues $948.9 $932.3 $1,834.9 $1,785.7
====== ====== ======== ========
Operating income before taxes (i) $102.1 $ 85.3 $ 186.0 $ 153.7
Gain on sales of businesses 326.4 - 326.4 -
Restructuring costs (53.7) - (53.7) -
Provision for corporate governance - - - (20.0)
Interest expense/financing costs (ii) (18.3) (18.7) (36.7) (34.5)
Other income/(expenses), net (ii) 7.1 (1.8) 7.6 (3.0)
------ ------ -------- --------
Income from continuing operations
before income taxes $363.6 $ 64.8 $ 429.6 $ 96.2
====== ====== ======== ========
(i) Reflects the allocation of general corporate overhead, general
corporate research expenses and certain other income and expense
items that can be identified with the specialty chemicals
operations.
(ii) Corporate interest and financing costs and nonallocable expenses
are not reflected in the results of the specialty chemicals
segment. Corporate interest and financing costs are not allocated
to the specialty chemicals operating results because all
significant financing decisions are centralized at the corporate
level.
Sales and revenues increased 2% and 3% in the second quarter and first
half of 1996, respectively, as compared to the 1995 periods. The
increase for the 1996 second quarter reflected a favorable volume
variance estimated at 4%, and unfavorable price/product mix and
currency translation variances estimated at 1% each, compared to 1995.
The increase for the first half of 1996 reflected a favorable volume
variance estimated at 3%, with price/product mix and currency
translation variances being flat.
I-11
14
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Comparison of Second Quarter 1996 to Second Quarter 1995
Construction products, catalysts and other silica-based products,
packaging and water treatment product lines experienced improved
volumes, offset by a volume decline in container products.
# PACKAGING - Volume increases were offset by unfavorable
price/product mix variances, resulting in sales being flat for the
1996 quarter versus the 1995 quarter. Sales of bags declined,
particularly in Europe and Asia Pacific, due to the considerable
decrease in beef consumption caused by the outbreak of bovine
spongiform encephalopathy (commonly referred to a "mad cow
disease"). Sales of films were down, primarily in North America,
due to pricing pressures. Laminate sales increased, primarily as
a result of market share gains in Asia Pacific.
# CATALYSTS AND OTHER SILICA-BASED PRODUCTS - Sales were higher in
all regions. Market share gains in Asia Pacific and Europe
increased sales for refinery catalysts, and North America
polyolefin catalyst sales increased primarily due to an improved
resin market.
# CONSTRUCTION PRODUCTS - Volumes increased in all regions and in
all products, especially concrete and waterproofing products in
North America and Asia Pacific. These increases were due to
housing starts and projects that had been delayed by severe
weather in the first quarter of 1996 in North America and market
share gains in Asia Pacific. Volume increases were partially
offset by the effect of the 1995 divestment of the composite
material business.
# CONTAINER - The negative effects of currency exchange, coupled
with volume declines, led to decreased sales of can sealing
products in Asia Pacific and closure compounds in Europe,
partially offset by volume increases of can coating products in
Latin America as a result of continued market penetration.
# WATER TREATMENT - Volume increases, caused by market share gains,
resulted in higher paper industry process chemicals sales in
Europe. Water treatment chemicals sales in Latin America
increased, as management implemented various programs to improve
price/product mix. As discussed in note (c) to the consolidated
financial statements in this Report, Grace sold its water
treatment and process chemicals business in June 1996.
Operating income before taxes increased by 20% in the second quarter
of 1996 as compared to the 1995 second quarter, as cost management
programs continued to favorably impact results across all regions and
product lines. In addition to the favorable effects of the cost
management programs, operating income before taxes was affected by the
factors discussed below.
# NORTH AMERICA - Improved results in the second quarter of 1996
reflected improved operating margins resulting from the sales
volume increases in construction products, offset by continued
weakness in fluid cracking catalysts and resultant pricing
pressures.
I-12
15
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
# EUROPE - Results improved versus the 1995 second quarter,
primarily due to the volume increases in refinery catalysts,
construction products and paper industry process chemicals.
These favorable results were offset by lower results in packaging
due to the volume decline in bags, discussed above.
# ASIA PACIFIC - 1996 second quarter results declined versus the
1995 period, as the volume increases in construction products
were offset by unfavorable results in can sealing products due to
certain depressed economies and the shortage of products to be
canned as a result of last year's floods in Southeast Asia, and
in packaging due to the volume decline in bags, discussed above.
# LATIN AMERICA - Results improved versus the 1995 second quarter,
primarily due to the increased water treatment chemical sales and
market share gains in coating products.
For the first half of 1996, operating income increased 21% over the
comparable period of 1995, primarily due to improved operating margins
and the growth in catalysts and other silica-based products,
construction products and water treatment, as discussed above.
Statement of Operations
Other Income
Other income includes interest income, dividends, royalties from
licensing agreements and equity in earnings of affiliated companies.
Included in other income in the second quarter and first half of
1996 was interest income of $7.5 million relating to the settlement
of prior years' Federal income tax returns.
Interest Expense and Related Financing Costs
Excluding amounts allocated to discontinued operations (as discussed
in Note (d) to the consolidated financial statements in this Report),
interest expense and related financing costs of $18.3 million and
$36.7 million in the second quarter and first half of 1996,
respectively, decreased 2% and increased 6%, respectively, versus the
comparable 1995 periods. Including amounts allocated to discontinued
operations, interest expense and related financing costs increased 6%
and 15% in the second quarter and first half of 1996, respectively,
over the comparable 1995 periods, to $42.7 million and $87.9 million,
respectively. The overall increase in interest expense and related
financing costs is primarily due to higher average debt levels.
See "Financial Condition: Liquidity and Capital Resources" below for
information on borrowings
Research and Development Expenses
Research and development spending decreased 7% and 6% in the second
quarter and first half of 1996, respectively, versus the 1995 periods,
reflecting cost management programs. Research and development
spending for 1996 has been directed to Grace's core packaging and
specialty chemicals businesses.
I-13
16
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Research and development spending is expensed as incurred. Research
is carried out by product line laboratories in North America, Europe,
Latin America and Asia Pacific and at a corporate research facility in
the U.S. Corporate research spending is generally charged to the
product lines, based upon the costs incurred on projects directly
sponsored by the respective product lines.
Restructuring Costs
See note (e) to the consolidated financial statements in this Report
for information relating to restructuring costs.
Income Taxes
The effective tax rates were 35.9% and 36.1%, respectively, for the
second quarter and first half of 1996, compared with 30.6% and 29.4%,
respectively, for the second quarter and first half of 1995.
Excluding the items discussed under "Overview" above, Grace's
effective tax rates would have been 39.1% for the second quarter of
1996 and 38.2% and 30.8% for the first half of 1996 and 1995,
respectively.
The low effective tax rates in the second quarter and first half of
1995 were primarily due to a lower overall foreign tax rate, as the
result of a reassessment of the valuation allowance for certain
deferred tax assets.
Income from Discontinued Operations
The following table compares the results for the health care business
for the 1996 second quarter and first half to results for the
comparable periods of 1995:
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Health Care Operating Results June 30, June 30,
---------------------------------- ---------------------- ------------------------
$ millions 1996 1995 1996 1995
---------------------------------- ------ ------ -------- ---------
Sales and revenues $565.5 $523.5 $1,105.2 $1,015.3
====== ====== ======== ========
Operating income before taxes (i) $ 63.3 $ 81.7 $ 128.3 $ 145.8
====== ====== ======== ========
(i) The above operating results do not include interest expense
allocated to the discontinued health care business of $24.4 and
$21.6 for the second quarters of 1996 and 1995, respectively, and
$51.2 and $41.7 for the first six months of 1996 and 1995,
respectively.
Sales and revenues for the second quarter and first half of 1996
increased by 8% and 9%, respectively, over the comparable periods of
1995. These improvements were due to 11% increases in kidney dialysis
services revenues in both the second quarter and first half of 1996,
and increases of 8% and 12% in the second quarter and first half of
1996, respectively, in medical products operations. The increases
were largely due to the effect of acquisitions subsequent to the first
half of 1995, partially offset by the decision, effective July 1,
1995, to discontinue recognizing incremental revenue relating to
certain dual eligible end
I-14
17
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
stage renal disease patients; see the discussion below relating to the
Omnibus Budget Reconciliation Act of 1993 (OBRA 93). The number of
centers providing dialysis and related services increased 13%, from
623 at June 30, 1995 to 706 at June 30, 1996 (587 in North America, 66
in Europe, 37 in Latin America and 16 in Asia Pacific). The
improvements in dialysis services and medical products operations were
partially offset by a 5% decrease in both the second quarter and first
half of 1996 in home health care revenues resulting from a decrease in
infusion therapy revenues due to continued managed care pricing
pressure.
Operating income before taxes in the second quarter and first half of
1996 decreased by 23% and 12%, respectively, over the 1995 periods.
The decreases were principally attributable to the effects of OBRA 93
(which reduced revenues without a commensurate decrease in costs) on
kidney dialysis services results and a reduction in home health care
operating income due to the decreased revenues discussed above and
increased bad debt expense. Also negatively impacting operating
income were costs incurred in connection with the OIG investigation,
as discussed below and in note (d) to the consolidated financial
statements in this Report. These decreases were offset by the
increases in medical products operations due to the increased revenues
discussed above.
See below and note (d) to the consolidated financial statements in
this Report for a discussion concerning certain items relating to
NMC's operations and the possible material adverse effects of these
items.
Intradialytic Parenteral Nutrition (IDPN) Therapy
Among its other services, NMC administers IDPN therapy to chronic
dialysis patients who suffer from severe gastrointestinal
malfunctions. Since late 1993, Medicare claims processors have
sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN
claims currently being paid by Medicare represents an unauthorized
policy coverage change. Accordingly, NMC, along with certain other
IDPN providers, is pursuing various administrative and legal avenues,
including administrative appeals and a declaratory judgment action, to
address this problem.
Although NMC contends that its IDPN claims are consistent with
published Medicare coverage guidelines and ultimately will be approved
for payment, there can be no assurance that the claims will be
approved for payment. Such claims represent substantial accounts
receivable of NMC, amounting to approximately $130.0 million and $93.0
million as of June 30, 1996 and December 31, 1995, respectively, and
which have been increasing at the rate of approximately $6.0 million
per month; however, see below for information regarding a new IDPN
reimbursement policy. If NMC is unable to collect its IDPN accounts
receivable or if IDPN and/or Medicare Parenteral and Enteral Nutrition
(PEN) program coverage is reduced or eliminated, NMC's business,
financial position and results of operations could be materially
adversely affected.
In April 1996, the Medicare claims processors published new medical
review policies which restrict substantially the number of patients
for whom IDPN would be reimbursed by Medicare. The new policies are
final and effective for claims submitted on and after
I-15
18
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
July 1, 1996. NMC and other PEN providers continue to review whether
and to what extent possible modifications to the new policies might be
obtained in legislative, judicial or administrative forums.
While the new policy permits continued coverage of IDPN and other PEN
therapies, and while the potential impact of the new policy is subject
to further analysis, NMC believes that the new policy will make it
substantially more difficult to qualify patients for future coverage
by, among other things, requiring certain patients to undergo onerous
and/or invasive tests in order to qualify for coverage. The new
policy also eliminates all reimbursement for infusion pumps. NMC,
together with other interested parties, may seek to effect certain
changes in the new policy (other than with respect to elimination of
pumps revenues), and NMC has developed changes to its patient
qualification procedures in order to comply with the policy. However,
if NMC is unable to achieve meaningful change in the new policy, if
physicians and patients fail to accept the new qualification
procedures and/or if patients fail to qualify under such procedures,
the policy could significantly reduce the number of patients eligible
for Medicare coverage of IDPN and other PEN therapies, which would
have a material adverse effect on NMC's financial position and results
of operations.
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- IDPN" and "--
Reimbursement -- U.S. -- IDPN" in the Company's Joint Proxy
Statement-Prospectus dated August 2, 1996 for additional information.
OBRA 93
NMC's business, financial position and results of operations could
also be materially adversely affected by an adverse outcome in the
pending litigation concerning the implementation of certain provisions
of OBRA 93 relating to the coordination of benefits between Medicare
and employer health plans in the case of certain dialysis patients.
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- OBRA 93" in the
Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for
additional information.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996, the net pretax cash provided by Grace's
continuing operating activities was $111.9 million, versus $39.9
million in the first half of 1995. The increase was primarily due to
improved operating results, partially offset by reduced net cash
inflows resulting from settlements with certain insurance carriers for
asbestos-related litigation, net of amounts paid for the defense and
disposition of asbestos-related litigation (as discussed below), of
$26.6 million in the first half of 1996 as compared to $96.2 million
in the first half of 1995. After giving effect to the net pretax cash
provided by operating activities of discontinued operations and
payments of income taxes, the net cash provided by operating
activities was $118.5 million in the first half of 1996 versus $23.3
million used in the first half of 1995.
I-16
19
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Investing activities provided $379.7 million of cash in the first half
of 1996, largely reflecting the net cash proceeds of $697.1 million
from the divestments of businesses (excluding $101.6 million of
promissory notes received on the sale of the water treatment and
process chemicals business). This positive cash flow was partially
offset by capital expenditures of $234.5 million (more than 70% of
which relates to Grace's packaging and catalyst and other silica-based
businesses). Also, investing activities of discontinued operations
for the first half of 1996 used $97.6 million (compared to $46.3
million used in the first half of 1995), primarily reflecting the
classification of the health care business as a discontinued operation
in the 1995 second quarter. Management anticipates that capital
expenditures for 1996 will not exceed the capital expenditures for
1995.
Net cash used for financing activities in the first half of 1996 was
$464.1 million, primarily reflecting the purchase of stock (as
discussed below), reductions in debt and the payment of dividends,
partially offset by proceeds from the exercise of employee stock
options. Total debt was $1,866.7 million at June 30, 1996, reflecting
a decrease of $67.1 million from December 31, 1995. Grace's total
debt as a percentage of total capital (debt ratio) decreased from
61.1% at December 31, 1995 to 59.6% at June 30, 1996, primarily due to
the decrease in debt. At June 30, 1996 and December 31, 1995, the net
assets of the discontinued health care business included $188.1
million and $226.7 million of debt, respectively.
During the first six months of 1996, Grace received $697.1 million of
cash proceeds from divestments, principally from the sales of the
water treatment and process chemicals business and the transgenic
plant business, and it expects to receive approximately $2.3 billion
(in the form of cash and/or the assumption of debt) from the expected
distribution from NMC (as discussed in note (d) to the consolidated
financial statements in this Report). Grace has applied the cash
proceeds received to date, and expects to apply the cash proceeds
generated from the NMC distribution and, to a lesser extent, funds
generated by operations, to the reduction of borrowings, the
repurchase of stock and investments in core businesses.
See note (d) to the consolidated financial statements in this Report
for information concerning an agreement reached with the U.S.
government regarding the OIG investigation, and the commitment letter
for approximately $2.5 billion of financing obtained by Grace on
behalf of NMC.
In May 1996, Grace Chemicals entered into a new credit agreement
providing for total borrowings of $1.85 billion and terminated three
previous agreements providing for total borrowings of $850 million.
The new credit agreement is intended to provide liquidity to finance
the repurchase of stock and potential acquisitions pending the receipt
of the distribution from NMC. Borrowings under the new credit
agreement are to be guaranteed by New Grace and the Company. Upon the
completion of the disposition of NMC, the total borrowings available
under the new credit agreement will be reduced to $650 million and the
guarantee by the Company will terminate.
The Company initiated its previously announced share repurchase
program in April 1996. As of June 30, 1996, Grace had acquired
5,229,600 shares under this program at a cost of
I-17
20
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
approximately $398.2 million (or an average price of approximately
$76.14 per share). In late July 1996, the Company temporarily
suspended the repurchase program. Through late July 1996, Grace had
purchased a total of 7,920,200 shares at a cost of approximately
$583.3 million (or an average price of approximately $73.65 per
share).
In July 1996, Grace announced that it had completed the acquisition of
Cypress Packaging, Inc. (Cypress), a manufacturer of flexible
packaging. Cypress, with 1995 sales of more than $20.0 million, is a
leading supplier of plastic packaging materials for the retail pre-cut
produce market segment. The acquisition of Cypress is in lieu of the
previously announced plan to construct a $50.0 million plant in
Seneca, South Carolina to serve the fresh-cut produce market.
Asbestos-Related Matters
As reported in note (b) to the consolidated financial statements in
this Report, Grace is a defendant in property damage and personal
injury lawsuits relating to previously sold asbestos-containing
products and is involved in related litigation with certain of its
insurance carriers. In the first half of 1996, Grace received $26.6
million under settlements with certain insurance carriers, net of
amounts paid for the defense and disposition of asbestos-related
property damage and personal injury litigation. The balance sheet at
June 30, 1996 includes a receivable due from insurance carriers, a
portion of which is subject to litigation, of $241.2 million. Grace
has also recorded notes receivable of $111.6 million ($102.5 million,
net of discounts) for amounts to be received in 1996 to 2001 pursuant
to settlement agreements with certain insurance carriers.
Although the amounts to be paid in 1996 in respect of asbestos-related
lawsuits and claims cannot be precisely estimated, Grace expects that
it will be required to expend approximately $40.0 million (pretax) in
1996 to defend against and dispose of such lawsuits and claims (after
giving effect to payments to be received from certain insurance
carriers, as discussed above and in note (b) to the consolidated
financial statements in this Report). As indicated therein, the
amounts reflected in the consolidated financial statements with
respect to the probable cost of defending against and disposing of
asbestos-related lawsuits and claims and probable recoveries from
insurance carriers represent estimates; neither the outcomes of such
lawsuits and claims nor the outcomes of Grace's continuing litigations
with certain of its insurance carriers can be predicted with
certainty.
Environmental Matters
There were no significant developments relating to environmental
liabilities in the first half of 1996.
For additional information relating to environmental liabilities, see
Note 12 to the consolidated financial statements in the 1995 Annual
Report.
I-18
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(a) The section captioned "BUSINESS OF GRACE CHEMICALS--Legal Proceedings
and Regulatory Matters" on pages 20-27 of the Prospectus dated August 2, 1996
included in a Registration Statement on Form S-1 (Registration No. 333-09495)
filed by Grace Holding, Inc., a subsidiary of the Company, and the section
captioned "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal
Matters--Legal and Regulatory Proceedings" (insofar as such section contains
information relating to Grace and/or NMC) on pages 130-142 of the Joint Proxy
Statement-Prospectus dated August 2, 1996 included in a Registration Statement
on Form S-4 (Registration No. 333-09497) filed by the Company, are incorporated
herein by reference.
(b) Note (b) to the Consolidated Financial Statements in Part I of this
Report is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company's 1996 Annual Meeting of Shareholders ("Annual Meeting") was held
on May 10, 1996. At the Annual Meeting, the Company's shareholders (a) elected
three Class I Directors for a term expiring in 1999 and one Class II Director
for a term expiring in 1997; (b) ratified the selection of Price Waterhouse LLP
as independent certified public accountants of the Company and its consolidated
subsidiaries for 1996; (c) approved the Company's Long-Term Incentive Program;
(d) approved the
II-1
22
Company's Annual Incentive Compensation Program; and (e) defeated a shareholder
proposal regarding nonemployee directors' retirement benefits.
The following sets forth the results of voting at the Annual Meeting:
VOTES
---------------------------------------------------------
MATTER FOR AGAINST* ABSTENTIONS BROKER NON-VOTES
- ------ --- ------- ----------- ----------------
Election of Directors*
- ---------------------
Class I
A. J. Costello 77,650,539 7,517,194 -0- -0-
M. A. Fox 77,788,812 7,378,921 -0- -0-
T. A. Vanderslice 77,794,637 7,373,096 -0- -0-
Class II
C. L. Hampers 77,494,633 7,673,100 -0- -0-
Selection of
Independent
Accountants 77,618,746 7,223,154 325,833 -0-
Approval of
Long-Term
Incentive Program 69,625,813 14,758,408 783,509 -0-
Approval of
Annual Incentive
Compensation
Program 77,305,760 7,081,791 778,580 -0-
Shareholder
Proposal 24,044,222 52,093,064 1,004,906 -0-
- ---------------------------
* With respect to the election of directors, the form of proxy permitted
shareholders to check boxes indicating votes either "for" or "withheld";
votes relating to directors designated above as "against" are votes cast as
"withheld".
II-2
23
Item 5. Other Information.
In July 1996, Grace completed the acquisition of Cypress Packaging,
Inc. ("Cypress"), a manufacturer of flexible packaging located in Rochester,
N.Y. Cypress, with 1995 sales of more than $20 million, is a leading supplier
of plastic packaging materials for the retail pre-cut market segment.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this Report:
-- 364-Day Credit Agreement, dated as of May 17, 1996, among
W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding,
Inc., the several banks parties thereto, NationsBank, N.A.
(South), as documentation agent, and Chemical Bank, as
administrative agent, for such banks (filed as Exhibit 4.4
to the Registration Statement on Form S-1 (Registration No.
333-09495) of Grace Holding, Inc. filed on August 2, 1996
("S-1 Registration Statement") and incorporated herein by
reference)
-- Amended and Restated Credit Agreement, dated as of May 17,
1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co.,
Grace Holding, Inc., the several banks parties thereto and
Chemical Bank, as agent for such banks (filed as Exhibit
4.5 to the S-1 Registration Statement and incorporated
herein by reference)
-- Commitment letter for the Credit Agreement to be entered
into by National Medical Care, Inc., the principal health
care subsidiary of
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24
W. R. Grace & Co., and certain lenders (filed as
Exhibit 4.7 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Long-Term Incentive Program Award (filed as
Exhibit 10.13 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Stock Option Agreement (filed as Exhibit
10.14 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Executive Severance Agreement between W. R.
Grace & Co. and new officers (filed as Exhibit 10.23
to the S-1 Registration Statement and incorporated
herein by reference)
-- Form of Executive Severance Agreement between W. R.
Grace & Co. and others (filed as Exhibit 10.22 to the
S-1 Registration Statement and incorporated herein by
reference)
-- Letter Agreement dated June 14, 1996 between W. R.
Grace & Co. and Constantine L. Hampers (filed as
Exhibit 10.35 to the S-1 Registration Statement and
incorporated herein by reference)
-- Option Agreement between W. R. Grace & Co. and Albert
J. Costello, dated May 1, 1995 (filed as Exhibit
10.36 to the S-1 Registration Statement and
incorporated herein by reference)
-- Option Agreement between W. R. Grace & Co. and Albert
J. Costello, dated March 6, 1996 (filed as Exhibit
10.37 to the S-1 Registration Statement and
incorporated herein by reference)
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25
-- Form of Indemnification Agreement between W. R. Grace
& Co. and certain directors (filed as Exhibit 10.39
to the S-1 Registration Statement and incorporated
herein by reference)
-- Guarantee Agreement among Fresenius Medical Care AG,
the United States of America, W. R. Grace & Co., and
National Medical Care, Inc. dated July 31, 1996
(filed as Exhibit 10.41 to the S-1 Registration
Statement and incorporated herein by reference)
-- Guarantee Agreement between W. R. Grace & Co.-Conn.
and the United States of America dated July 31, 1996
(filed as Exhibit 10.42 to the S-1 Registration
Statement and incorporated herein by reference)
-- Letter Agreement among W. R. Grace & Co., W. R. Grace
& Co.-Conn. and Fresenius Medical Care AG dated July
31, 1996 (filed as Exhibit 10.43 to the S-1
Registration Statement and incorporated herein by
reference)
-- weighted average number of shares and earnings used
in per share computations
-- computation of ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends
-- financial data schedule
-- Pro forma financial information for Grace Holding,
Inc. for the six-month period ended June 30, 1996
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26
-- Special-purpose, consolidated interim financial
statements of the Company for the three-month and
six-month periods ended June 30, 1996
-- "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and
Regulatory Matters" section of the Prospectus dated
August 2, 1996 included in the S-1 Registration
Statement
-- "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and
Legal Matters--Legal and Regulatory Proceedings"
section of the Joint Proxy Statement-Prospectus dated
August 2, 1996 included in a Registration Statement
on Form S-4 (Registration No. 333-09497) filed by W.
R. Grace & Co. (insofar as such section contains
information relating to Grace and/or NMC)
(b) Reports on Form 8-K. The Company filed a Report on Form 8-K
on April 15, 1996, relating to an agreement to sell the transgenic plant
business of its Agracetus subsidiary to the Monsanto Company for $150 million.
The Company filed a Report on Form 8-K on May 6, 1996, relating to the
announcement of 1996 first quarter results. The Company filed a Report on Form
8-K on July 11, 1996, relating to the sale of the business and assets of its
Dearborn water treatment and process chemicals business to Betz Laboratories,
Inc. The Company also filed a Report on Form 8-K on August 9, 1996, relating
to the announcement of 1996 second quarter results.
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27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. GRACE & CO.
-------------------------------
(Registrant)
Date: August 14, 1996 By /s/ Kathleen A. Browne
---------------------------
Kathleen A. Browne
Vice President and Controller
(Principal Accounting Officer)
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28
W. R. GRACE & CO.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
4.1 364-Day Credit Agreement, dated as of May 17, 1996, among W. R.
Grace & Co.-Conn., W. R. Grace & Co., Grace Holding, Inc., the
several banks parties thereto, NationsBank, N.A. (South), as
documentation agent, and Chemical Bank, as administrative
agent, for such banks (filed as Exhibit 4.4 to the Registration
Statement on Form S-1 (Registration No. 333-09495) of Grace
Holding, Inc. filed on August 2, 1996 ("S-1 Registration
Statement") and incorporated herein by reference)
4.2 Amended and Restated Credit Agreement, dated as of May 17,
1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace
Holding, Inc., the several banks parties thereto and Chemical
Bank, as agent for such banks (filed as Exhibit 4.5 to the S-1
Registration Statement and incorporated herein by reference)
4.3 Commitment letter for the Credit Agreement to be entered into
by National Medical Care, Inc., the principal health care
subsidiary of W. R. Grace & Co., and certain lenders (filed as
Exhibit 4.7 to the S-1 Registration Statement and incorporated
herein by reference)
10.1 Form of Long-Term Incentive Program Award (filed as Exhibit
10.13 to the S-1 Registration Statement and incorporated
herein by reference)
10.2 Form of Stock Option Agreement (filed as Exhibit 10.14 to the
S-1 Registration Statement and incorporated herein by
reference)
10.3 Form of Executive Severance Agreement between W. R. Grace &
Co. and new officers (filed as Exhibit 10.23 to the S-1
Registration Statement and incorporated herein by reference)
10.4 Form of Executive Severance Agreement between W. R. Grace &
Co. and others (filed as Exhibit 10.22 to the S-1 Registration
Statement and incorporated herein by reference)
29
10.5 Letter Agreement dated June 14, 1996 between W. R. Grace & Co.
and Constantine L. Hampers (filed as Exhibit 10.35 to the S-1
Registration Statement and incorporated herein by reference)
10.6 Option Agreement between W. R. Grace & Co. and Albert J.
Costello, dated May 1, 1995 (filed as Exhibit 10.36 to the S-1
Registration Statement and incorporated herein by reference)
10.7 Option Agreement between W. R. Grace & Co. and Albert J.
Costello, dated March 6, 1996 (filed as Exhibit 10.37 to the
S-1 Registration Statement and incorporated herein by
reference)
10.8 Form of Indemnification Agreement between W. R. Grace & Co.
and certain directors (filed as Exhibit 10.39 to the S-1
Registration Statement and incorporated herein by reference)
10.9 Guarantee Agreement among Fresenius Medical Care AG, the
United States of America, W. R. Grace & Co., and National
Medical Care, Inc. dated July 31, 1996 (filed as Exhibit 10.41
to the S-1 Registration Statement and incorporated herein by
reference)
10.10 Guarantee Agreement between W. R. Grace & Co.-Conn. and the
United States of America dated July 31, 1996 (filed as Exhibit
10.42 to the S-1 Registration Statement and incorporated
herein by reference)
10.11 Letter Agreement among W. R. Grace & Co., W. R. Grace &
Co.-Conn. and Fresenius Medical Care AG dated July 31, 1996
(filed as Exhibit 10.43 to the S-1 Registration Statement and
incorporated herein by reference)
11 Weighted average number of shares and earnings used in per
share computations
12 Computation of ratio of earnings to fixed charges and combined
fixed charges and preferred stock dividends
27 Financial Data Schedule
99.1 Pro forma financial information for Grace Holding, Inc.
for the six-month period ended June 30, 1996
99.2 Special-purpose, consolidated interim financial statements of
the Company for the three-month and six-month periods ended
June 30, 1996
30
99.3 "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and
Regulatory Matters" section of the Prospectus dated August 2,
1996 included in the S-1 Registration Statement
99.4 "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal
Matters--Legal and Regulatory Proceedings" section of the
Joint Proxy Statement-Prospectus dated August 2, 1996 included
in a Registration Statement on Form S-4 (Registration No.
333-09497) filed by W. R. Grace & Co. (insofar as such section
contains information relating to Grace and/or NMC)