SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to_______
Commission file number 1-12139
SEALED AIR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0654331
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification
Number)
Park 80 East 07663-5291
Saddle Brook, New Jersey (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code (201) 791-7600
W. R. Grace & Co.
One Town Center Road, Boca Raton, Florida 33486-1010
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
There were 83,272,061 shares of the registrant's common stock, par value
$0.10 per share, and 36,021,851 shares of the registrant's convertible
preferred stock, par value $.10 per share, outstanding as of April 30,
1998.
PART I
FINANCIAL INFORMATION
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three Months Ended March 31, 1998 and 1997
(In thousands of dollars except per share data)
(Unaudited)
1998 1997
Net sales $431,035 $422,693
Cost of sales 290,913 274,629
Gross profit 140,122 148,064
Marketing, administrative and
development expenses 94,543 84,759
Operating profit 45,579 63,305
Other income (expense), net (493) 69
Earnings before income taxes 45,086 63,374
Income taxes 18,034 26,114
Net earnings $ 27,052 $ 37,260
Earnings per common share:
Basic $ 0.22 $ 0.47
Diluted $ 0.22 $ 0.47
Weighted average number of
common shares outstanding (000):
Basic 40,648 40,756
Diluted 40,859 40,967
See accompanying notes to consolidated financial statements.
2
SEALED AIR CORPORATION
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(In thousands of dollars except share data)
(Unaudited)
March 31, December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 59,512 $ -
Notes and accounts receivable, less allowance
for doubtful accounts of $11,492 in 1998 and
$7,256 in 1997 416,865 272,194
Inventories 312,609 225,976
Other current assets 57,400 29,188
Total current assets 846,386 527,358
Property and equipment:
Land and buildings 394,257 320,099
Machinery and equipment 1,288,814 1,125,567
Other property and equipment 116,582 119,533
Construction in progress 150,604 187,797
1,950,257 1,752,996
Less accumulated depreciation and amortization 735,363 712,844
Property and equipment, net 1,214,894 1,040,152
Goodwill, less accumulated amortization of
$481 in 1998 and $379 in 1997 1,906,278 13,433
Other assets 179,329 65,888
$4,146,887 $1,646,831
3
SEALED AIR CORPORATION
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 (Continued)
(In thousands of dollars except share data)
(Unaudited)
March 31, December 31,
1998 1997
LIABILITIES, CONVERTIBLE PREFERRED STOCK & EQUITY
Current Liabilities:
Notes payable and current
installments of long-term debt $284,270 $ -
Accounts payable 152,687 114,907
Other accrued liabilities 159,434 68,710
Income taxes payable 22,210 -
Total current liabilities 618,601 183,617
Long-term debt, less current
installments 1,043,141 -
Deferred income taxes 118,056 13,939
Other non-current liabilities 87,339 96,647
Total liabilities 1,867,137 294,203
Convertible preferred stock $50 per share
redemption value. Authorized 50,000,000
shares, issued 36,021,851 shares in 1998 1,801,093 -
Equity:
Net assets - 1,482,682
Accumulated translation adjustment - (130,054)
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 83,272,061 shares
in 1998 8,327 -
Additional paid-in capital 593,568 -
Retained earnings 27,052 -
Accumulated translation adjustment (140,171) -
488,776 -
Less deferred compensation 10,119 -
Total equity 478,657 1,352,628
$4,146,887 $1,646,831
See accompanying notes to consolidated financial statements.
4
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements (abbreviated) of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
(In thousands of dollars)
(Unaudited)
1998 1997
Cash Flows From Operating Activities:
Net earnings $ 27,052 $ 37,260
Adjustments to reconcile net earnings to
net cash provided by operating activities, net of
effect of businesses acquired:
Depreciation and amortization 29,296 24,977
Deferred taxes 19,022 3,142
Net loss on disposals of fixed assets 4,305 67
Cash provided (used) by changes in:
Receivables (5,210) 6,979
Inventories (8,080) (3,777)
Other current assets 4,427 3,670
Other assets (5,142) (2,605)
Accounts payable (12,722) (20,472)
Other accrued liabilities 5,271 (11,176)
Other non-current liabilities 5,656 (3,632)
Net cash provided by operating activities 63,875 34,433
Cash Flows From Investing Activities:
Capital expenditures for property and equipment (16,963) (44,067)
Proceeds from sales of property and equipment 2,701 1,608
Net cash used in investing activities (14,262) (42,459)
Cash Flows From Financing Activities:
Net advances (to) from W. R. Grace & Co. - Conn. (43,779) 8,026
Proceeds from long-term debt 1,258,807 -
Payment of contribution to New Grace (1,256,614) -
Net proceeds on notes payable 986 -
Net cash (used in) provided by
financing activities (40,600) 8,026
Effect of exchange rate changes on cash
and cash equivalents (760) -
Cash and Cash Equivalents:
Increase during the period 8,253 -
Balance, beginning of period - -
Net cash from acquired business 51,259 -
Balance, end of period $ 59,512 $ -
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements (abbreviated) of Cash Flows
For the Three Months Ended March 31, 1998 and 1997 (Continued)
(In thousands of dollars)
(Unaudited)
1998 1997
Supplemental Non-Cash Items:
Issuance of 36,021,851 shares of convertible
preferred stock and 40,647,815 shares of
common stock in connection with the
Recapitalization $1,805,158 -
Net assets acquired in exchange for the
issuance of 42,624,246 shares of common stock
in connection with the Merger net of cash
balance of $51,259 acquired $2,089,494 -
See accompanying notes to consolidated financial statements.
5
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1998 and 1997
(In thousands of dollars)
(Unaudited)
Three Months Ended
March 31,
1998 1997
Net earnings $27,052 $37,260
Other comprehensive income:
Foreign currency translation adjustments (10,117) (21,037)
Comprehensive income $16,935 $16,223
See accompanying notes to consolidated financial statements.
6
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Amounts in thousands, except share data)
(Unaudited)
(1) Reorganization and Merger
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.)
and Sealed Air Corporation ("old Sealed Air"), completed a series of
transactions as a result of which:
(a) The specialty chemicals business of the Company was
separated from its packaging business, the packaging
business was contributed to one wholly owned subsidiary
("Cryovac"), and the specialty chemicals business was
contributed to another wholly owned subsidiary ("New
Grace"); the Company and Cryovac borrowed approximately
$1,258,807 under two new credit agreements (the "Credit
Agreements"), discussed below and transferred substantially
all of those funds to New Grace; and the Company distributed
all of the outstanding shares of common stock of New Grace
to its stockholders. These transactions are referred to
below as the "Reorganization."
(b) The Company recapitalized its outstanding shares of
common stock, par value $0.01 per share ("Old Grace Common
Stock"), into a new common stock and Series A convertible
preferred stock (the "Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air
(the "Merger"), with old Sealed Air being the surviving
corporation. As a result of the Merger, old Sealed Air became
a subsidiary of the Company, and the Company was renamed
Sealed Air Corporation.
(2) Basis of Presentation
The Merger has been accounted for as a purchase of old Sealed Air by
the Company as of March 31, 1998. As a result, the consolidated
statements of earnings and cash flows reflect the operating results of
Cryovac for the first quarter of 1997 and 1998. The consolidated
balance sheet at December 31, 1997 reflects the financial position of
Cryovac only while the consolidated balance sheet at March 31, 1998
reflects the consolidated financial position of Cryovac and old Sealed
Air, as adjusted for the Reorganization, Recapitalization and Merger.
In connection with the Merger, the Company issued 42,624,246 shares of
common stock at a value of $49.52 per share and incurred costs related
to the Merger of approximately $30,000 for a purchase price of
approximately $2,141,000 in exchange for the net assets of old
Sealed Air. The fair value of such net assets acquired by the
Company include approximately $181,000 of property and equipment,
approximately $95,800 of working capital (including a cash balance of
approximately $51,300), and other long-term assets and liabilities
resulting in approximately $1,900,000 of goodwill, which is being
amortized over 40 years. See Note 8 for unaudited pro forma financial
information for the quarter ended March 31, 1998.
All significant intercompany transactions and balances have been
eliminated in consolidation. In management's opinion, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the consolidated financial position and results of
operations for the quarter ended March 31, 1998 have been made.
7
(3) Equity
Prior to the Merger, Cryovac's operations were conducted by divisions
or subsidiaries of the Company, and Cryovac did not have a separate
identifiable capital structure. Therefore, the balance sheet as of
December 31, 1997 reflects the net assets of Cryovac at such date
rather than shareholders' equity. In connection with the
Recapitalization, the Company recapitalized the outstanding shares of
Old Grace Common Stock into 40,647,815 shares of the Company's common
stock and 36,021,851 shares of Series A convertible preferred stock
(convertible into approximately 31,900,000 shares of the Company's
common stock), each with a par value of $0.10 per share. In
connection with the Merger, the Company issued 42,624,246 shares of
the Company's common stock to the shareholders of old Sealed Air.
The convertible preferred stock votes with the common stock
on an as-converted basis, pays a cash dividend, as declared by the
Board, at an annual rate of $2.00 per share, payable quarterly in
arrears, will be redeemable at the option of the Company beginning
on March 31, 2001, subject to certain conditions, and will be subject
to mandatory redemption on March 31, 2018 at $50.00 per share, plus
accrued and unpaid dividends. Because it is subject to mandatory
redemption, the convertible preferred stock is classified outside
of the shareholders' equity section of the balance sheet at the
mandatory redemption value of $50 per share.
(4) Earnings Per Share
For the first quarters of 1998 and 1997, Cryovac's operations were
conducted by divisions or subsidiaries of the Company and therefore did
not have a separate identifiable capital structure upon which a
calculation of earnings per common share could be based. In February
1998, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 98, "Computation of Earnings per Share"
("SAB 98"). SAB 98 revises prior SEC guidance concerning presentations
of earnings per common share information for companies when the
historical financial statements are not indicative of the ongoing
entity. SAB No. 98 requires all companies to present earnings per
common share for all periods for which statement of earnings
information is presented in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share."
Basic and diluted earnings per common share for the first quarters of
1998 and 1997 have been calculated giving retroactive recognition to
the Recapitalization. For purposes of calculating basic and diluted
earnings per common share, net earnings have been reduced by the
dividend that would have been payable on the Company's convertible
preferred stock (if such shares had been outstanding during the quarter)
to arrive at earnings available to common stockholders. The weighted
average number of outstanding common shares used for calculating basic
earnings per common share is calculated on an equivalent share basis
using the weighted average number of shares outstanding of the
Company's common stock for the periods presented, adjusted to
reflect the terms of the Recapitalization. The weighted average
number of common shares used for calculating diluted earnings per
common share also includes the assumed exercise of the outstanding
dilutive stock options. The convertible preferred stock is not
considered in the calculation of diluted earnings per common share
because the treatment of the convertible preferred stock as the common
stock into which it is convertible would be antidilutive (i.e., would
increase earnings per common share). If the shares of the Company's
convertible preferred stock were assumed to be converted into common
stock (which would result in the issuance of approximately
31,900,000 shares of common stock), diluted earnings per
common share would be $0.37 and $0.51 for the quarters ended
March 31, 1998 and 1997, respectively.
The following represents the reconciliation of the numerators and
denominators of the basic and diluted earnings per common share
computations for the three months ended March 31, 1998 and 1997.
Such earnings per common share amounts are not necessarily
indicative of the results that would have occurred had Cryovac been a
stand-alone operation for the quarters ended March 31, 1998 and 1997.
8
For the three months ended March 31
1998 1997
Average Average
Income Shares Per Share Income Shares Per Share
(Numerator) Outstanding Amount (Numerator) Outstanding Amount
(Denominator) (Denominator)
Basic EPS
Net earnings $27,052 $37,260
Less:Preferred dividends 18,011 18,059
Earnings available to
common shareholders $ 9,041 40,647,815 $0.22 $19,201 40,756,065 $0.47
Effect of dilutive securities
Options - 211,000 - - 211,000 -
Diluted EPS
Net earnings plus
assumed conversions $9,041 40,858,815 $0.22 $19,201 40,967,065 $0.47
(5) Inventory
At March 31, 1998, the components of inventories by major classification
(raw materials, work in process and finished goods) are as follows:
March 31, December 31,
1998 1997
Raw materials $ 64,603 $ 44,043
Work in process 56,574 54,532
Finished goods 206,439 142,282
Subtotal 327,616 240,857
Less LIFO reserve 15,007 14,881
Total inventory $312,609 $225,976
(6) Income Taxes
The Company's effective income tax rates were 40.0% and 41.2% for the
first quarters of 1998 and 1997, respectively. Such rates were higher
than the statutory U.S. federal income tax rate primarily due to state
income taxes. The effective tax rate for the remaining nine months of
1998 is expected to be higher than the first quarter of 1998 primarily
due to the non-deductibility of the goodwill resulting from the Merger
and the non-recurring cumulative effect of providing for the assumed
repatriation of Cryovac's prior years' foreign earnings.
Since all tax liabilities related to earnings of Cryovac prior to
the Merger were or will be paid by W.R. Grace & Co. - Conn.,
there are no current taxes payable reflected in the consolidated
balance sheets at March 31, 1998 and at December 31, 1997 related
to Cryovac. The balance reflected on the consolidated balance sheet
for March 31, 1998 relates only to old Sealed Air.
9
(7) Long-Term Debt
At March 31, 1998, long-term debt consisted primarily of borrowings of
$1,258,807 made on March 30, 1998 and March 31, 1998 under the Credit
Agreements described below in connection with the Reorganization.
It also includes certain other loans of the Company's subsidiaries
that were outstanding at March 31, 1998. The balance sheet at
December 31, 1997 does not reflect any long-term debt or notes payable
because prior to the Merger, the Company borrowed for its subsidiaries
and divisions and generally did not allocate such debt to those
subsidiaries or divisions.
In connection with the Reorganization, the Company entered into the
Credit Agreements, which include a $1.0 billion 5-year revolving credit
facility that expires on March 30, 2003 and a $600 million 364-day
revolving credit facility that expires on March 29, 1999. The Credit
Agreements provide that the Company and certain of its subsidiaries,
including Cryovac and old Sealed Air, may borrow for various purposes,
including the refinancing of existing debt, the provision of working
capital and other general corporate needs.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The Credit Agreements provide for changes in borrowing
margins based on financial criteria and impose certain limitations on
the operations of the Company and certain of its subsidiaries. These
limitations include financial covenants relating to interest coverage
and debt leverage as well as certain restrictions on the incurrence of
additional indebtedness, the creation of liens, mergers and
acquisitions, and certain dispositions of property or assets.
The Company was in compliance with these requirements as of
March 31, 1998.
(8) Pro Forma Information
The following table presents selected unaudited pro forma financial
information for the quarter ended March 31, 1998 that was prepared as if
the Reorganization, the Recapitalization and the Merger had occurred on
January 1, 1998. Such information is presented to illustrate how the
Company might have looked if Cryovac had been an independent company and
if the operations of old Sealed Air and Cryovac had been combined for
the first quarter of 1998. This information is not intended to
represent what the Company's actual results of operations would have
been for the quarter ended March 31, 1998.
Historical
Old Pro Forma
Cryovac Sealed Air Consolidated(b)
Net sales $431,035 $213,053 $643,787
Operating profit 45,579 37,987 (a) 83,454
Net earnings 27,052 22,201 (a) 32,805
Basic and diluted earnings
per share (c) - - $.18
(a) Does not reflect transaction expenses of $24,689 incurred by old
Sealed Air during the first quarter of 1998 in connection with the
Merger.
(b) Reflects pro forma adjustments made in combining old Sealed Air
and Cryovac as a result of the Reorganization, the Recapitalization and
the Merger, including, among others, additional goodwill amortization of
$10,344 per quarter, additional interest expense of $20,405 per quarter,
and the elimination of historical allocated corporate
10
expenses of the Company of $18,044 partially offset by additional
costs the Company expects to incur to provide corporate services and
certain employee benefit costs.
(c) In calculating pro forma basic and diluted earnings per common
share, $18,011 per quarter of dividends payable on the Company's Series
A convertible preferred stock was deducted to arrive at earnings
available to common shareholders. The weighted average number of
outstanding common shares used to calculate pro forma basic and diluted
earnings per common share was 83,272,000 and 83,483,000 respectively,
(the latter of which includes the assumed exercise of common stock
options held by Cryovac employees that were outstanding prior to the
Merger), respectively. The assumed conversion of the convertible
preferred stock is not considered in the calculation of diluted
earnings per common share as the effect is antidilutive (i.e., would
increase earnings per common share). If the shares of the convertible
preferred stock were treated as if it was converted into common stock,
(which would result in the issuance of approximately 31,900,000 shares
of common stock), pro forma diluted earnings per share would have been
$0.28 per share for the quarter ended March 31, 1998.
11
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Since the Merger was consummated on March 31, 1998, the following
discussion relates to the results of operations of the Cryovac packaging
business of the Company ("Cryovac") during the periods ended March 31,
1998 and 1997, except as noted below. During those periods,
Cryovac was operated by divisions or subsidiaries of the Company.
Except as noted below, the following discussion of the financial
condition of the Company relates to the Company after giving effect to
the merger of the Company and old Sealed Air (the "Merger"), and the
transactions related to it, that occurred effective March 31, 1998.
Results of Operations
The Company's net sales increased 2% to $431,035,000 compared with
$422,693,000 in the first quarter of 1997 primarily due to increased
unit volume partially offset by the negative effect of foreign currency
translation. Excluding this negative effect, the increase in net sales
would have been 7% compared with the first quarter of 1997.
Net sales from domestic operations increased 9% compared with the first
quarter of 1997 primarily due to increased unit volume. Net sales from
foreign operations decreased 4% compared with the first quarter of 1997
primarily due to the negative effect of foreign currency translation
which more than offset an increase in unit volume. Excluding this
negative effect, foreign net sales would have increased 5% compared
with the first quarter of 1997.
Cost of sales increased 6% compared with 1997 primarily due to higher
depreciation and other expenses related to capital expenditures made in
prior years, certain manufacturing and product integration costs, and
changes in product mix.
Gross profit declined 5% compared with 1997 primarily reflecting
the increase in cost of sales discussed above. As a percent of sales,
gross profit declined to 32.5% from 35.0% in the first quarter of 1997.
Marketing, administrative and development expenses increased 12%
compared with the first quarter of 1997 primarily reflecting the
Company's higher level of net sales and corporate expenses allocated to
Cryovac by the Company prior to the Merger. These allocated expenses
amounted to $18,044,000 compared with $9,816,000 in 1997. Approximately
$8,400,000 of such expenses in the 1998 period were attributable to
12
certain pension expenses that were incurred in connection with the
Merger with respect to Cryovac employees. Such allocated expenses
ceased as a result of the Merger. However, the Company expects to incur
marketing, administrative and development expenses that will partially
offset the savings derived from the elimination of these allocated
expenses.
Operating profit declined 28% and net earnings declined 27% compared with
the first quarter of 1997 primarily due to the factors mentioned above.
The Company expects earnings to be adversely affected this
year by restructuring and integration activities relating to the Merger.
The Company will assess the combined operating structure, business
processes and circumstances that bear upon the operations, facilities
and other assets of the business as part of developing a combined
strategic and operating plan. The objective of such plan will be
to enhance productivity and efficiency of the combined operations by
reducing duplicate functions, facilities and overhead costs.
The Company's effective income tax rate was 40.0% in the first quarter
of 1998 and 41.2% in the first quarter of 1997.
Since Cryovac's operations were conducted during the first quarters
of 1997 and 1998 by divisions or subsidiaries of the Company, Cryovac
did not have a separate identifiable capital structure that could be
used to calculate earnings per share. However, in accordance with
Staff Accounting Bulletin No. 98 ("SAB 98"), basic and diluted
earnings per share has been calculated by retroactively giving
effect to the Recapitalization. Such earnings per share amounts
are not necessarily indicative of the results that would have
occurred had Cryovac been a stand-alone entity for the quarters
ended March 31, 1998 and 1997.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flows from
operations and amounts available under the Company's existing lines
of credit, including the Credit Agreements discussed below. Prior
to the consummation of the Merger, Cryovac participated in the
Company's centralized cash management system, whereby cash received
from operations was transferred to, and disbursements were funded from,
centralized corporate accounts. As a result, any cash needs of Cryovac
in excess of cash flows from operations were transferred to these
corporate accounts and used for other corporate purposes. In the
first quarter of 1997, $8,026,000 of net cash was advanced by the
Company to Cryovac pursuant to these procedures. In connection
with the Reorganization, most of the Company's net cash at
March 31, 1998 (other than cash recorded on the balance sheet of
old Sealed Air immediately before the merger) was transferred to
New Grace.
Net cash provided by operating activities amounted to $63,875,000
and $34,433,000 in the first quarters of 1998 and 1997, respectively.
The increase in operating cash flows in 1998 was primarily due to
changes in operating assets and liabilities from improved working
capital management compared with the first quarter of 1997 which more
than offset a decrease in net earnings.
Net cash used for investing activities amounted to approximately
$14,262,000 and $42,459,000 in the first quarters of 1998 and 1997,
respectively. Capital expenditures in the quarter were $16,963,000 in
1998 and $44,067,000 in 1997 reflecting a decrease in 1998 as Cryovac
completed several major manufacturing expansion programs in 1997.
As the assets of old Sealed Air were acquired through the issuance
of the Company's common stock, the consolidated statement of cash
flows for the first quarter of 1998 does not reflect the changes in
the related balance sheet items caused by the addition of old Sealed
Air's assets and liabilities, except for the cash balance of $51,259,000
acquired. The non-cash acquisition of such net assets is reflected as
supplementary information to the consolidated statement of cash flows,
net of cash.
Net cash used by financing activities amounted to approximately
$40,600,000 in the first quarter of 1998 primarily reflecting net
advances made to the Company in the first quarter of 1998 in
connection with the Reorganization and Merger. Cash flows from
financing activities in 1998 also reflected the proceeds from
long-term debt borrowed under the Credit Agreements offset by the
payment of the contribution of funds to New Grace in connection
with the Reorganization. In the first quarter of 1997, $8,026,000
of net cash provided was advanced by the Company pursuant to
the cash management procedures discussed above.
At March 31, 1998, the Company had working capital of $227,785,000,
or 5% of total assets, compared to working capital of $343,741,000,
or 21% of total assets, at December 31, 1997. The decrease in working
capital primarily reflects the increase in notes payable and current
installments of long-term debt of $284,270,000 arising primarily from
the borrowings made under the Credit Agreements discussed below
partially offset by the effect of the combination of the balance sheets
of Cryovac and old Sealed Air at March 31, 1998.
The Company's ratio of current assets to current liabilities (current
ratio) was 1.4 at March 31, 1998 and 2.9 at December 31, 1997. The
Company's ratio of current assets less inventory to current liabilities
(quick ratio) was 0.9 at March 31, 1998 and 1.6 at December 31, 1997.
The decreases in these ratios in 1998 resulted primarily from the
decreases in working capital discussed above.
14
Prior to the Merger, Cryovac had no capital structure since it was
operated by divisions or subsidiaries of the Company. In addition,
there was no allocation of the Company's borrowings and related interest
expense, except for interest capitalized as a component of Cryovac's
properties and equipment. Therefore, the financial position of the
Company at December 31, 1997 was not indicative of the financial
position that would have existed if Cryovac had been an independent
stand-alone entity at that time. At March 31, 1998, the consolidated
balance sheet reflects the combined financial position of Cryovac and
old Sealed Air, as adjusted for the Reorganization, Recapitalization
and Merger.
In connection with the Reorganization, the Company entered into two
Credit Agreements (the "Credit Agreements"), the first of which is a
$1.0 billion 5-year revolving credit facility that expires on
March 30, 2003 and the second of which is a $600 million 364-day
revolving credit facility that expires on March 29, 1999. The Credit
Agreements provide that the Company and certain of its subsidiaries,
including Cryovac and old Sealed Air, may borrow for various purposes,
including the refinancing of existing debt, the provision of working
capital and for other general corporate needs. Initial borrowings of
$1,258,807,000 were made in connection with the Reorganization.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The Credit Agreements provide for changes in borrowing
margins based on financial criteria and impose certain limitations on the
operations of the Company and certain of its subsidiaries. These
limitations include financial covenants relating to interest coverage and
debt leverage as well as certain restrictions on the incurrence of
additional indebtedness, the creation of liens, mergers and acquisitions,
and certain dispositions of property or assets. The Company was in
compliance with these requirements as of March 31, 1998.
At March 31, 1998, the Company had available lines of credit, including
those available under the Credit Agreements, of approximately
$1,664,295,000 of which approximately $373,851,000 were unused. Such
lines of credit permit the Company and certain of its subsidiaries to
make borrowings for working capital and other corporate purposes.
15
Since Cryovac did not have a separate identifiable capital structure
before the Merger, the balance sheet as of December 31, 1997 reflects
the net assets of Cryovac at such date rather than shareholders' equity.
In connection with the Recapitalization, the Company recapitalized the
outstanding shares of Old Grace Common Stock into outstanding shares of
a new common stock and Series A convertible preferred stock.
In connection with the Merger, the Company issued 42,624,246 shares
of the Company's common stock to the shareholders' of old Sealed Air.
The convertible preferred stock votes with the common stock
on an as-converted basis, pays a cash dividend, as declared by the
Board, at an annual rate of $2.00 per share, payable quarterly in
arrears, will be redeemable at the option of the Company beginning
on March 31, 2001, subject to certain conditions, and will be subject
to mandatory redemption on March 31, 2018 at $50.00 per share, plus
accrued and unpaid dividends. Because it is subject to mandatory
redemption, the convertible preferred stock is classified outside
of the shareholders' equity section of the balance sheet at the
mandatory redemption value of $50 per share.
The Company's shareholders' equity was $478,657,000 at March 31, 1998.
The decrease in total equity (shareholders' equity of $478,657,000 at
March 31, 1998 and net assets of $1,352,628,000 at December 31, 1997) was
primarily due to the cash transferred to New Grace in connection with
the Reorganization partially offset by the stock issued in connection
with the merger with old Sealed Air.
Other Matters
Environmental Matters
The Company is subject to loss contingencies resulting from environmental
laws and regulations, and it accrues for anticipated costs associated
with investigatory and remediation efforts when an assessment has
indicated that a loss is probable and can be reasonably estimated. These
accruals do not take into account any discounting for the time value of
money and are not reduced by potential insurance recoveries, if any.
Environmental liabilities are reassessed whenever circumstances become
better defined and/or remediation efforts and their costs can be better
estimated. These liabilities are evaluated periodically based on
available information, including the progress of remedial investigation
at each site, the current status of discussions with regulatory
authorities regarding the methods and extent of remediation and the
apportionment of costs among potentially responsible parties. As some of
these issues are decided (the outcomes of which are subject to
uncertainties) and/or new sites are assessed and costs can be reasonably
estimated, the Company adjusts the recorded accruals, as necessary.
However, the Company believes that it has adequately reserved for all
probable and estimable environmental exposures.
16
Year 2000 Computer System Compliance
The Company has conducted a comprehensive review of its computer systems
to identify systems that could be affected by the "Year 2000" issue and
is implementing a plan to resolve the issue. The Company currently
believes that, with modifications to existing software and by converting
to new software, the Year 2000 issue will not pose significant
operational problems. However, if such modifications and conversions
are not completed in a timely manner, the Year 2000 issue may have a
material impact on the operations of the Company. It is anticipated
that costs associated with modifying the existing systems will not be
material to the Company's consolidated financial position.
Recently Issued Statements of Financial Accounting Standards
In February 1998, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which
became effective for the Company for the annual period beginning
January 1, 1998. SFAS No. 132 requires additional information about
the changes in the benefit obligation and fair value of plan assets
during the period, while standardizing the disclosure requirements
for pensions and other postretirement benefits. The Company will
include such disclosures in its Form 10-K filing for the year ended
December 31, 1998.
In June 1997, the Financial Accounting Standards Board released Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No.
131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). Both statements became effective for the
Company beginning January 1, 1998. These statements require disclosure
of certain components of changes in equity and certain information about
operating segments and geographic areas of operation. The Company
adopted SFAS 130 in the first quarter of 1998 ("see Consolidated
Statements of Comprehensive Income"). The Company has also adopted SFAS
131 which does not require interim period reporting in the year of
adoption. The Company is completing its evaluation of the disclosure
requirements of SFAS 131 and will begin such disclosures in its Form 10-K
filing for the year ended December 31, 1998. These statements do not
have any effect on the results of operations or financial position of the
Company.
Forward-Looking Statements
Certain statements made by the Company in this report and in future oral
and written statements by management of the Company may be forward-
looking in nature, or "forward-looking statements." These forward-
looking statements are based upon management's current expectations
concerning future events and discuss, among other things, anticipated
future performance and future business plans. Forward-looking statements
are identified by such words and phrases as "expects," "believes," "will
continue," "plans to," "could be," and similar expressions. Forward-
looking statements are necessarily subject to uncertainties, many of
which are outside the control of the Company, that could cause actual
results to differ materially from such statements.
While the Company is not aware that any of the factors listed below will
adversely affect the future performance of the Company, the Company
recognizes that it is subject to a number of uncertainties, such as
general economic, business and market conditions, conditions in the
industries and markets that use the Company's packaging materials and
other products, the development and success of new products, the
Company's success in entering new markets, competitive factors,
difficulties in integrating the Cryovac and old Sealed Air businesses,
raw material availability and pricing, changes in the Company's
relationship
17
with customers and suppliers, future litigation and claims (including
environmental matters) against the Company, changes in domestic or
foreign laws or regulations, or difficulties related to the Year 2000
issue.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company's Annual Report on Form 10-K for the year ended December 31
1997 reported in Item 3 a number of pending legal proceedings.
In connection with the transactions between the Company and Sealed Air
Corporation described in note 1 of the Notes to Consolidated Financial
Statements in Part I of this Quarterly Report on Form 10-Q, which
description is incorporated herein by reference, liability for all
such legal proceedings except certain environmental proceedings
were assumed by New Grace on March 31, 1998 in the Reorganization
and Merger. The Company retained certain environmental liabilities
at certain sites. While it is often difficult to estimate potential
environmental liabilities and the future impact of environmental
matters, based upon the information currently available to the
Company and its exposure in dealing with such matters, the Company
believes that its potential liability with respect to such sites
is not material to the Company's consolidated financial position.
Item 2. Changes in Securities and Use of Proceeds.
On March 31, 1998, the company completed a series of transactions under
an Agreement and Plan of Merger dated as of August 14, 1997 (the "Merger
Agreement") among the Company, old Sealed Air and a subsidiary of the
Company. These transactions are described in detail in Items 2 and 5 of
the Company's Current Report on Form 8-K, Date of Report March 31, 1998,
which Items are filed as exhibits hereto and incorporated herein by
reference. In connection with such transactions, the Company
recapitalized its outstanding common stock into a new common stock and
Series A convertible preferred stock. The rights of the holders of the
Company's new common stock and Series A convertible preferred stock are
set forth in the Company's Amended and Restated Certificate of
Incorporation and its by-laws, which are filed as exhibits hereto and
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 20, 1998, the Company held a special meeting of stockholders in
order to approve and adopt the Merger Agreement and to approve an
amendment to the Company's certificate of incorporation to repeal certain
provisions requiring 80% stockholder approval for such repeal. The
stockholders approved the Merger Agreement but failed to approve the
repeal of the provisions for which 80% approval was required.
A total of 57,428,974 shares of the common stock of the Company were
voted in person or by proxy at the March 20 meeting, representing
approximately 76.8% of the shares entitled to vote at such meeting. The
votes cast on the matters before the meeting were as follows:
Number of Votes
Approval of Merger Agreement For 56,826,611
Against 363,379
Abstentions 238,984
Approval of repeal of certain For 56,562,225
provisions of the certificate Against 617,026
of incorporation Abstentions 249,722
Item 5. Other Information
On March 23, 1998, old Sealed Air held a special meeting of stockholders
at which the stockholders approved the Merger Agreement. A total of
29,232,324 shares of common stock of old Sealed Air were voted in person
or by proxy at the March 23 special meeting, representing 68.6% of the
shares entitled to vote at such meeting. The votes cast on the Merger
Agreement were at follows:
Number of Votes
Approval of Merger Agreement For 29,131,317
Against 67,262
Abstentions 33,745
19
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
2 Distribution Agreement dated as of March 30, 1998 among
the Company, W. R. Grace-Conn. ("Grace-Conn.") and
W.R.Grace & Co. ("New Grace") [incorporated by
reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K, Date of Report March 31, 1998, File No. 1-
12139].
3.1 Amended and Restated Certificate of Incorporation of the
Company as currently in effect.
3.2 Amended and Restated By-Laws of the Company
[incorporated by reference to Exhibit 3.2 to the
Company's Current Report of Form 8-K, Date of Report
March 31, 1998, File No. 1-12139].
10.1 Employee Benefits Allocation Agreement dated as of March
30, 1998 among the Company, Grace-Conn. And New Grace
[incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, Date of Report
March 31, 1998, File No. 1-12139].
10.2 Tax Sharing Agreement dated as of March 30, 1998 among
the Company, Grace-Conn. And New Grace [incorporated by
reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K, Date of Report March 31, 1998, File
No. 1-12139].
10.3 Global Revolving Credit Agreement (5-year) dated as of
March 30, 1998 among the Company, certain of its
subsidiaries including Cryovac, Inc., ABN AMRO Bank
N.V., Bankers Trust Company, Bank of America National
Trust and Savings Association, NationsBank, N.A. and
other banks party thereto [incorporated by reference
to Exhibit 10.3 to the Company's Current Report of Form
8-K, Date of Report March 31, 1998, File No. 1-12139].
10.4 Global Revolving Credit Agreement (364-day) dated as of
March 30,1998 among the Company, certain of its
subsidiaries includingCryovac, Inc., ABN AMRO Bank N.V.,
Bankers Trust Company, Bank of America National Trust
and Savings Association, NationsBank, N.A. and other
banks party thereto [incorporated by reference to Exhibit
10.4 to the Company's Current Report on Form 8-K, Date of
Report March 31, 1998, File No. 1-12139].
27 Financial Data Schedule
99 Items 2 and 5 of the Company's Current Report on Form
8-K filed on April 15, 1998, File No. 1-12139.
(b) Reports on Form 8-K:
The Company filed the following Reports on Form 8-K since the
beginning of 1998:
Date of Filing Disclosures
February 9, 1998 Announcement of 1997 fourth quarter and full
year results.
April 6, 1998 as
amended April 29, Changes in the Company's Certifying Accountants
1998 from Price Waterhouse LLP to KPMG Peat Marwick
LLP.
20
April 15, 1998 Closing of the transactions under the Merger
Agreement. The Report also disclosed changes in
the Board of Directors and officers of the
Company, the approval of an Amended and Restated
Certificate of Incorporation for the Company and
the adoption of new by-laws for the Company.
The Report included the following financial
statements:
1. Consolidated Financial Statements for the
years ended December 31, 1997, 1996 and 1995
for Sealed Air Corporation (US).
2. Grace Packaging Special-Purpose Combined
Financial Statements as of December 31, 1997,
1996 and 1995 and for each of the three years
ended December 31, 1997.
3. Unaudited pro forma condensed consolidated
financial information for the year ended
December 31, 1997 giving effect to the
transactions under the Merger Agreement.
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SEALED AIR CORPORATION
Date: May 15, 1998 By s/Jeffrey S. Warren
Jeffrey S. Warren
Controller
(Authorized Executive
Officer and Chief
Accounting Officer)
22