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 September 30, 1996
Commission File Number 1-12139
W. R. GRACE & CO.
Delaware 65-0654331
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Town Center Road
Boca Raton, Florida 33486-1010
(561) 362-2000
Indicate by check mark whether the registrant (including its predecessor) (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 [ ]
83,007,373 shares of Common Stock, $.01 par value, were outstanding at
November 1, 1996.
<PAGE>
W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
-----------------
Page No.
--------
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-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition I-13 to I-20
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-2
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. (a
Delaware corporation), and the term "Grace" refers to the Company and/or one
or more of its subsidiaries.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Nine Months Ended
Consolidated Statement of Operations (Unaudited) September 30, September 30,
- ------------------------------------------------ ------------------ -------------------
$ millions (except per share) 1996 1995 1996 1995
- ------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales and revenues................................ $ 821.3 $ 946.4 $2,656.2 $2,732.1
Other income...................................... 8.2 4.5 26.1 13.3
-------- -------- -------- --------
Total........................................... 829.5 950.9 2,682.3 2,745.4
-------- -------- -------- --------
Cost of goods sold and operating expenses......... 503.9 565.4 1,607.7 1,617.6
Selling, general and administrative expenses...... 150.5 225.3 556.2 693.5
Depreciation and amortization..................... 43.4 45.8 135.3 124.2
Interest expense and related financing costs...... 18.2 17.8 54.9 52.3
Research and development expenses................. 22.5 27.2 80.3 92.2
Restructuring costs............................... - 44.3 53.7 44.3
Gain on sales of businesses....................... - - (326.4) -
-------- -------- -------- --------
Total........................................... 738.5 925.8 2,161.7 2,624.1
-------- -------- -------- --------
Income from continuing operations before
income taxes............................. 91.0 25.1 520.6 121.3
Provision for income taxes........................ 35.5 5.3 190.4 33.6
-------- -------- -------- --------
Income from continuing operations................. 55.5 19.8 330.2 87.7
Income from discontinued operations............... 2,464.4 1.9 2,587.2 60.2
-------- -------- -------- --------
Net income........................................ $2,519.9 $ 21.7 $2,917.4 $ 147.9
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------
Earnings per share:
Continuing operations........................... $ .61 $ .20 $ 3.46 $ .92
Net income...................................... $ 27.66 $ .22 $ 30.64 $ 1.55
Fully diluted earnings per share:
Continuing operations........................... $ .59 $ .20 $ 3.37 $ .89
Net income...................................... $ 26.83 $ .22 $ 29.76 $ 1.51
Dividends declared per common share............... $ .125 $ .35 $ .375 $ 1.05
- ------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
I-1
<PAGE>
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Nine Months Ended
Consolidated Statement of Cash Flows (Unaudited) September 30,
- -------------------------------------------------------------------------------- ----------------------
$ millions 1996 1995
- -------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes......................... $ 520.6 $ 121.3
Reconciliation to cash provided by/(used for) operating activities:
Depreciation and amortization............................................. 135.3 124.2
Noncash charge relating to restructuring costs............................ 53.7 44.3
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.......................... (158.6) (55.4)
Decrease/(increase) in inventories...................................... 26.1 (81.5)
Proceeds from asbestos-related insurance settlements.................... 139.1 174.4
Payments made for asbestos-related litigation settlements,
judgments and defense costs......................................... (86.6) (96.7)
Decrease in accounts payable............................................ (36.4) (65.7)
Other................................................................... (116.3) (14.2)
-------- --------
Net pretax cash provided by operating activities of continuing operations..... 150.5 150.7
Net pretax cash provided by operating activities of discontinued operations... 72.8 43.1
-------- --------
Net pretax cash provided by operating activities.............................. 223.3 193.8
Income taxes paid............................................................. (113.8) (207.2)
-------- --------
Net cash provided by/(used for) operating activities.......................... 109.5 (13.4)
-------- --------
INVESTING ACTIVITIES (1)
Capital expenditures.......................................................... (335.3) (366.5)
Businesses acquired in purchase transactions, net of
cash acquired and debt assumed........................................... (33.8) (31.4)
Increase in net investing activities of discontinued operations............... (181.2) (149.1)
Net proceeds from divestments................................................. 2,802.9 49.4
Other......................................................................... 25.3 9.3
-------- --------
Net cash provided by/(used for) investing activities.......................... 2,277.9 (488.3)
-------- --------
FINANCING ACTIVITIES (1)
Dividends paid................................................................ (36.0) (100.3)
Repayments of borrowings having original maturities in excess of three months. (513.6) (41.6)
Increase in borrowings having original maturities in excess of three months... .1 52.1
Net (decrease)/increase in borrowings having original
maturities of less than three months..................................... (512.7) 475.3
Stock options exercised....................................................... 52.0 123.1
Purchase of treasury stock.................................................... (727.1) (12.0)
(Decrease)/increase in net financing activities of discontinued operations.... (198.8) 4.2
Other......................................................................... .2 -
-------- --------
Net cash (used for)/provided by financing activities........................ (1,935.9) 500.8
-------- --------
Effect of exchange rate changes on cash and cash equivalents.................... (0.5) 3.5
-------- --------
Increase in cash and cash equivalents........................................... $ 451.0 $ 2.6
======== ========
</TABLE>
(1) See Notes 1 and 5 in this Report for supplemental information relating to
noncash investing and financing activities.
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
<PAGE>
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
- ----------------------------------------------------------- September 30, December 31,
$ millions (except par value) 1996 1995
- ----------------------------------------------------------- ------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... $ 491.6 $ 40.6
Notes and accounts receivable, net...................... 765.9 596.8
Inventories............................................. 415.3 491.9
Net assets of discontinued operations................... 369.8 323.7
Deferred income taxes................................... 220.7 206.1
Other current assets.................................... 24.3 22.2
------------ ------------
Total Current Assets................................. 2,287.6 1,681.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,428.4
and $1,418.8, respectively......................... 1,833.6 1,736.1
Goodwill, less accumulated amortization of $10.5
and $20.6, respectively............................ 49.3 111.8
Net assets of discontinued operations - health care........ - 1,435.3
Asbestos-related insurance receivable...................... 228.2 321.2
Deferred income taxes...................................... 361.8 386.6
Other assets............................................... 586.3 625.3
------------ ------------
TOTAL................................................ $ 5,346.8 $ 6,297.6
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt......................................... $ 155.3 $ 638.3
Accounts payable........................................ 253.2 339.2
Income taxes............................................ 280.3 103.3
Other current liabilities............................... 842.2 836.4
Minority interest....................................... 297.0 297.0
------------ ------------
Total Current Liabilities............................ 1,828.0 2,214.2
Long-term debt............................................. 741.6 1,295.5
Other liabilities.......................................... 798.9 789.0
Deferred income taxes...................................... 62.3 44.8
Noncurrent liability for asbestos-related litigation....... 645.6 722.3
------------ ------------
Total Liabilities.................................... 4,076.4 5,065.8
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value........................ - 7.4
Common stock, par value of $.01 and $1, respectively.... .9 97.4
Paid in capital......................................... 549.0 459.8
Retained earnings....................................... 762.7 709.0
Cumulative translation adjustments...................... (42.2) (39.4)
Treasury stock - 53,000 common shares, at cost.......... - (2.4)
------------ ------------
Total Shareholders' Equity........................... 1,270.4 1,231.8
------------ ------------
TOTAL................................................ $ 5,346.8 $ 6,297.6
============ ============
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-3
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
1. CHANGE IN ORGANIZATION AND BASIS OF PRESENTATION
Change in Organization
On September 28, 1996, W. R. Grace & Co., a New York corporation
subsequently renamed Fresenius National Medical Care Holdings, Inc. (Grace
New York), distributed all of the shares of the Company's outstanding
common stock to the holders of common stock of Grace New York on a
one-for-one basis. As a result of the distribution, Grace New York's
principal remaining asset was 100% of the outstanding capital stock of
National Medical Care, Inc. (NMC). On September 29, 1996, a wholly owned
subsidiary of Fresenius Medical Care AG (FMC), a German corporation,
merged with and into Grace New York, resulting in the combination of NMC
with the worldwide dialysis business of Fresenius AG (Fresenius), a German
health care corporation and the principal shareholder of FMC.
Neither the shares of Grace New York preferred stock issued and
outstanding at the time of the distribution nor the treasury shares held
by Grace New York at the time of the distribution were transferred to the
Company. Accordingly, the distribution was accounted for as a retirement
within the shareholders' equity section of the consolidated balance sheet
at September 30, 1996. See Note 9 below for a reconciliation of the
changes in shareholders' equity for the nine-month period ended September
30, 1996.
For further information, see the Grace New York Joint Proxy
Statement-Prospectus dated August 2, 1996 (Joint Proxy
Statement-Prospectus), the Company's Prospectus dated August 2, 1996
(Prospectus) and Note 5 below.
Basis of Presentation
The interim consolidated financial statements in this Report are unaudited
and should be read in conjunction with the consolidated financial statements
for the year ended December 31, 1995 contained in the Prospectus. Such
interim consolidated 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 nine-month interim periods
ended September 30, 1996 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1996.
2. 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
I-4
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
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 44,400 asbestos-related lawsuits at
September 30, 1996 (35 involving claims for property damage and the
remainder involving approximately 115,100 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 nine
months of 1996, one new property damage lawsuit was filed; six property
damage lawsuits were settled for a total of $11.9 (including one case that
was on appeal); six property damage lawsuits were dismissed without the
payment of any damages or settlement amounts; and, in a case that had been
on appeal and is now final, Grace was held liable for $4.1.
During the first nine months of 1996, approximately 2,200 personal injury
claims against Grace were dismissed without payment and approximately
4,500 personal injury claims were settled for $18.6.
Based upon and subject to the factors discussed in Note 2 in the
Prospectus, 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 September 30, 1996 and December 31,
1995, as well as personal injury lawsuits and claims expected to be filed
through 1998, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liability for asbestos-related litigation (1).................... $ 100.0 $ 100.0
Noncurrent liability for asbestos-related litigation................. 645.6(3) 722.3
-------- --------
Total asbestos-related liability (2)..................................... $ 745.6 $ 822.3
======== ========
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Included in "Other current liabilities" in the consolidated balance
sheet.
(2) Excludes two property damage lawsuits as to which the liabilities are
not yet estimable because Grace has not yet been able to obtain
sufficient information through discovery proceedings.
(3) 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 nine months ended September 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
I-5
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
its remaining excess insurance carriers whose policies are believed by
Grace to be 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
related to the reimbursement for past and estimated future payments to
defend against and dispose of asbestos-related lawsuits and claims:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes receivable from insurance carriers - current, net of discounts of $4.0 (1995 - $4.3) (1)..... $ 42.8 $ 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.............................................................. 228.2 (3) 321.2
--------- ---------
Total amounts due from insurance carriers.......................................................... $ 304.4 $ 439.6
========= =========
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 $46.3 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 September 30, 1996, settlements with certain insurance carriers
provided for the future receipt by Grace of $85.3, which Grace has
recorded as notes receivable (both current and noncurrent) of $76.2, net
of discounts. In the first nine months of 1996, Grace received net
proceeds of $139.1 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, $91.4 was received
pursuant to settlements entered into in 1993 through 1996, which had
previously been classified as notes receivable. Pursuant to 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 $202.8 of
the asbestos-related receivable of $228.2 at September 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
September 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 in the Prospectus.
I-6
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
3. ACQUISITIONS AND DIVESTMENTS - CONTINUING OPERATIONS
Acquisitions
In July 1996, Grace completed the acquisition of Cypress Packaging, Inc.
(Cypress), a manufacturer of flexible packaging. Cypress, with 1995 sales
of more than $20, is a leading supplier of plastic packaging materials for
the retail pre-cut produce market segment.
In August 1996, Grace acquired Bayem S.A. de C.V., a wholly owned
subsidiary of Grupo Zapata in Mexico that produces can coatings and
closure sealants for the rigid container industry, with 1995 sales in
excess of $10.
Divestments
In June 1996, Grace sold its water treatment and process chemicals
business to Betz Laboratories, Inc. 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 (through the date of sale) and nine months
ended September 30, 1995 were $201.2 and $300.0, respectively; its
financial position and results of operations were not significant to
Grace.
The divestments of this business and Grace's biopesticides business
resulted in a pretax gain of $326.4, and an after-tax gain of $210.1
($2.20 per common share of the Company), in continuing operations.
4. RESTRUCTURING COSTS
As discussed in Note 5 in the Prospectus, during the third quarter of 1995
Grace began implementing a worldwide program focused on streamlining
processes and reducing general and administrative expenses, factory
administration costs and noncore corporate research and development
expenses. In the third and fourth quarters of 1995, Grace recorded pretax
charges totaling $44.3 and $91.7 ($27.1 and $61.9 after-tax),
respectively, associated with the implementation of the restructuring
program.
As previously reported, Grace has implemented, and expects to continue to
implement, additional cost reduction and efficiency improvements beyond
those initiated in 1995, as it further evaluates and reengineers its
operations. In furtherance of those actions, in the second quarter of 1996
Grace recorded a pretax charge of $53.7 ($32.4 after-tax), principally
related to employee termination benefits and lease termination costs in
connection with the restructuring of Grace's European packaging operations.
I-7
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
5. DISCONTINUED OPERATIONS
Health Care
As discussed in Note 1 above, on September 28, 1996 Grace New York
completed the spin-off of the Company and the combination of NMC with the
worldwide dialysis business of Fresenius. Prior to the completion of these
transactions, Grace received a tax-free distribution of approximately $2,300
(including assumed debt) from NMC. As part of the transactions, for each
Grace New York common share outstanding at the close of trading on
September 27, 1996, Grace New York shareholders received one share of a new
class of Grace New York preferred stock and 1.04909 American Depositary
Shares (ADS), each representing one-third of an ordinary share of FMC (which
collectively represent approximately 44.8% of FMC's common equity).
The distribution of approximately $2,300, along with the 44.8% common
equity interest in FMC valued at approximately $2,200 (based upon the number
of ADSs and their initial price per share on September 30, 1996), resulted
in a transaction valued at approximately $4,500. The total proceeds of
approximately $4,500, less Grace New York's investment in NMC and related
transaction costs, resulted in a pre- and after-tax gain of approximately
$2,500 ($26.09 per common share of the Company) in discontinued operations.
The 44.8% common equity interest in FMC is also reflected as a dividend of
approximately $2,200 within the shareholders' equity section of the
consolidated balance sheet at September 30, 1996. See Note 9 below for a
reconciliation of the changes in shareholders' equity for the nine-month
period ended September 30, 1996.
In connection with the transaction, NMC borrowed $2,500 under a
credit agreement. Grace has guaranteed $950 of those borrowings and
expects its guarantee to be released (1) as to $800, upon the occurrence
of certain events and subject to certain conditions, not later than
November 26, 1996 and (2) as to the remaining $150, upon the achievement
of certain financial ratios by NMC and certain affiliates. However, Grace
can give no assurance whether or to what extent the guarantees will be
released or when such release will occur. See "Financing" in the Joint
Proxy Statement-Prospectus for additional information.
Under the terms of the transaction, NMC will remain responsible for all
liabilities, if any, resulting from the previously reported investigation
by the Office of the Inspector General (OIG) of the U.S. Department of
Health and Human Services. In July 1996, an agreement was entered into
with the U.S. government under which, subject to certain conditions and
limitations, (i) FMC and Grace New York guaranteed 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 guaranteed the
obligations of FMC under the foregoing guarantee with respect to acts and
transactions that took place prior to the consummation of the transaction
(but only if such obligations become due and payable and remain
uncollected for 120 days); and (iii) NMC delivered a standby letter of
credit in the principal amount of $150 in favor of the U.S. government to
support its payment of such obligations.
I-8
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
See Note 7 in the Prospectus, and "Business of Fresenius Medical Care --
Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- OIG
Investigation" and "-- OIG Agreements" in the Joint Proxy
Statement-Prospectus, for additional information.
Discontinued Operations - Consolidated Statement of Operations
The sales and revenues and results of the discontinued health care
operations and the gains on the separation of NMC and the sale of the
transgenic plant business of Grace's Agracetus subsidiary (discussed
below) were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales and revenues - health care $ 545.5 $ 520.9 $1,650.7 $1,536.2
======== ======== ======== ========
Income/(loss) from health care operations
before income taxes $ (17.3) $ 23.6 $ 59.8 $ 127.7
Provision for income taxes 2.0 21.7 35.7 67.5
-------- -------- -------- --------
Income/(loss) from health care operations $ (19.3) $ 1.9 $ 24.1 $ 60.2
-------- -------- -------- --------
Gain on separation/sale of businesses $2,473.7 $ - $2,602.7 $ -
Provision for/(benefit from) income
taxes on separation/sale of businesses (10.0) - 39.6 -
-------- -------- -------- --------
Net gain on separation/sale of businesses $2,483.7 $ - $2,563.1 $ -
-------- -------- -------- --------
Income from discontinued operations $2,464.4 $ 1.9 $2,587.2 $ 60.2
======== ======== ======== ========
</TABLE>
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 ($25.1 and $23.0 for the third
quarters of 1996 and 1995, respectively, and $76.3 and $64.7 for the nine
months ended September 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 three and nine months ended September 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 ($0.83
per common share of the Company) in discontinued operations.
I-9
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
Discontinued Operations - Consolidated Balance Sheet
The net assets, excluding intercompany assets, of Grace's discontinued
operations included in the consolidated balance sheet at September 30,
1996, were as follows:
<TABLE>
<CAPTION>
Cocoa Other Total
------- ------- -------
<S> <C> <C> <C>
Current assets $296.2 $ 32.3 $328.5
Properties and equipment, net 178.8 24.7 203.5
Investments in and advances to affiliated companies - 40.6 40.6
Other assets 61.2 24.6 85.8
------- ------- -------
Total assets $536.2 $ 122.2 $658.4
------- ------- -------
Current liabilities $179.1 $ 23.5 $202.6
Other liabilities 79.1 6.9 86.0
------- ------- -------
Total liabilities $258.2 $ 30.4 $288.6
------- ------- -------
Net assets $278.0 $ 91.8 $369.8
======= ======= =======
</TABLE>
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.
6. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
As described in Notes 16 and 17 in the Prospectus, Grace maintains defined
benefit pension plans covering employees of certain units who meet age and
service requirements, and provides certain postretirement health care and
life insurance benefits for retired employees of specified U.S. units.
Effective in the third quarter of 1996, Grace, in conjunction with a plan
curtailment, reassessed the discount rate used to value future pension
obligations for its principal U.S. plan and changed the rate from 7.25% to
8.00%. This change is not expected to have a material impact on results of
operations.
I-10
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
7. STOCK INCENTIVE PLANS
As described in Note 15 in the Prospectus, stock options are granted under
the Company's stock incentive plans. In connection with the transactions
described in Notes 1 and 5 above, the number of shares covered by
outstanding options and the exercise prices of such options were adjusted
to preserve their economic value. The following table sets forth
information relative to such options, as adjusted:
<TABLE>
<CAPTION>
Average
Number Exercise
of Shares Price
----------- --------
<S> <C> <C>
Balance at December 31, 1995, as adjusted................ 8,833,450 $26.06
Options granted.......................................... 984,818 51.43
-----------
9,818,268
Options exercised........................................ (2,710,055) 24.90
Options terminated or canceled........................... (367,763) 28.08
-----------
Balance at September 30, 1996............................ 6,740,450 30.12
===========
</TABLE>
At September 30, 1996, options covering 4,726,562 shares were
exercisable and 7,000,000 shares were available for additional grants.
Currently outstanding options expire on various dates between October
1996 and May 2006.
8. INVENTORIES
Components of Grace's inventories were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw and packaging materials $111.6 $137.1
In process 75.0 78.0
Finished products 277.1 325.2
------- -------
$463.7 $540.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (48.4) (48.4)
------- -------
Total Inventories $415.3 $491.9
======= =======
</TABLE>
9. SHAREHOLDERS' EQUITY
Earnings per share are calculated on the basis of the following weighted
average number of common shares outstanding:
1996 1995
---------- ----------
Three Months Ended September 30: ............. 91,092,000 96,708,000
Nine Months Ended September 30: .............. 95,188,000 95,330,000
I-11
<PAGE>
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
The Company is authorized to issue 300,000,000 shares of common stock. Of
the common stock unissued at September 30, 1996, approximately 13,815,000
shares were reserved for issuance pursuant to stock options and other
stock incentives.
The Certificate of Incorporation also authorizes 53,000,000 shares of
preferred stock, $.01 par value, none of which has been issued. 3,000,000
of such shares have been designated Junior Participating Preferred Stock
and are reserved for issuance in connection with the Company's Preferred
Stock Purchase Rights (Rights). A Right trades together with each
outstanding share of common stock and entitles the holder to purchase
one-hundredth of a share of Junior Participating Preferred Stock under
certain circumstances and subject to certain conditions. The Rights are
not and will not become exercisable unless and until certain events occur,
and at no time will the Rights have any voting power.
The changes in shareholders' equity for the nine-month period ended
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Cumulative
Preferred Common Paid in Retained Translation Treasury
Stocks Stock Capital Earnings Adjustments Stock Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996................. $ 7.4 $ 97.4 $ 459.8 $ 709.0 $ (39.4) $ (2.4) $ 1,231.8
Net income................................. -- -- -- 2,917.4 -- -- 2,917.4
Cash dividends paid........................ -- -- -- (36.0) -- -- (36.0)
Dividend of common equity interest in FMC.. -- -- -- (2,172.3) -- -- (2,172.3)
Stock options and awards................... -- 1.4 50.6 -- -- -- 52.0
Purchase of common stock................... -- -- -- -- -- (727.1) (727.1)
Shares issued under stock option plans..... -- -- 1.6 -- -- 5.8 7.4
Retirement of treasury stock............... -- (9.8) (51.1) (662.8) -- 723.7 --
Change in par value of common stock........ -- (88.1) 88.1 -- -- -- --
Retirement of preferred stocks............. (7.4) -- -- 7.4 -- -- --
Translation adjustments.................... -- -- -- -- (2.8) -- (2.8)
------ ------ ------- -------- -------- ------- ---------
Balance at September 30, 1996.............. $ -- $ .9 $ 549.0 $ 762.7 $ (42.2) $ -- $ 1,270.4
====== ====== ======= ======== ======== ======= =========
</TABLE>
I-12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
REVIEW OF OPERATIONS
Overview - Income from Continuing Operations
The first nine months of 1996 included an after-tax gain totaling $210.1
million ($326.4 million pretax) on the sale of businesses, primarily
Grace's water treatment and process chemicals business and its
biopesticides business, partially offset by an after-tax charge of $32.4
million ($53.7 million pretax) for restructuring costs. The third quarter
and first nine months of 1995 included an after-tax charge of $6.1 million
and $18.6 million ($10.0 million and $30.0 million pretax), respectively,
relating to corporate governance matters, as well as an after-tax charge
of $27.1 million ($44.3 million pretax) for restructuring costs. Excluding
the above items, income from continuing operations for the third quarter
of 1996 would have increased 5% as compared to the third quarter of 1995,
and income from continuing operations for the 1996 first nine months would
have increased by 14% over the first nine months of 1995.
Operating Results - Continuing Operations
Grace's continuing operations consist principally of the development,
manufacture and sale of packaging and specialty chemical products and
systems. The following table compares the operating results for Grace's
continuing operations for the 1996 third quarter and first nine months to
those for the comparable periods of 1995 (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales and revenues, before divested
businesses/other $ 821.3 $ 810.0 $2,401.3 $2,344.4
Sales and revenues of divested
businesses/other (i) - 136.4 254.9 387.7
-------- -------- -------- --------
Sales and revenues $ 821.3 $ 946.4 $2,656.2 $2,732.1
======== ======== ======== ========
Operating income before taxes (ii) $ 108.2 $ 96.7 $ 294.2 $ 250.4
Gain on sales of businesses - - 326.4 -
Restructuring costs - (44.3) (53.7) (44.3)
Provision for corporate governance - (10.0) - (30.0)
Interest expense/financing costs (iii) (18.2) (17.8) (54.9) (52.3)
Other income/(expenses), net (iii) 1.0 .5 8.6 (2.5)
-------- -------- -------- --------
Income from continuing operations
before income taxes $ 91.0 $ 25.1 $ 520.6 $ 121.3
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------
</TABLE>
(i) Primarily comprised of the water treatment business, divested in the
second quarter of 1996.
(ii) Reflects the allocation of general corporate overhead, general
corporate research expenses and certain other income and expense
items that can be identified with continuing operations.
(iii) Corporate interest and financing costs and nonallocable expenses are
not reflected in the results of continuing operations. Corporate
interest and financing costs are not allocated to continuing
operations because significant financing decisions are centralized
at the corporate level.
I-13
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
The 2% increase in sales and revenues before divested businesses/other for
the third quarter of 1996 reflected a favorable volume variance estimated
at 4% (with increased volumes in all product lines), offset by unfavorable
price/product mix and currency translation variances estimated at 2%. The
2% increase in sales and revenues before divested businesses/other for the
first nine months of 1996 reflected a favorable volume variance estimated
at 4%, offset by unfavorable price/product mix and currency translation
variances estimated at 1% each. The following is a discussion of the sales
and revenues of Grace's product lines for the 1996 and 1995 third
quarters.
o PACKAGING - Volume increases were offset by unfavorable price/product
mix variances, resulting in essentially flat sales for the 1996 quarter
versus 1995. Sales of bags declined, particularly (1) in North America,
due to lower sales in the processed (smoked and cured) meat segment as
a result of continued higher pork prices, and (2) in Asia Pacific,
caused by the lower consumption of beef due to consumer fears
associated with the outbreak of E. coli bacteria and bovine spongiform
encephalopathy - commonly referred to as "mad cow disease", partially
offset by (3) sales increases in Latin America due to an improving
economy in Argentina and increased cattle slaughter rates in Uruguay.
Sales of bags in Europe for the 1996 third quarter were comparable to
the 1995 quarter despite the impact of mad cow disease.
Sales of films were down, primarily in North America and Asia Pacific,
due to continued pricing pressures. European sales increased due to
improved demand from the bakery segment due to stronger sales in the
organized retail level in the U.K., along with growth in Italy and
Holland due to market share gains. European display sales increased as
a result of sales of new products. Laminate sales were flat, as improved
sales in the processed and prepared foods segment from new product
applications in Asia Pacific were offset by a decline in the rollstock
segment in North America as a result of higher pork prices.
o CONTAINER - Volume increases from improved market penetration of can
coating products in Latin America were offset by sales declines of
closure compounds. Lower consumer demand for beverage products in Europe
and market share loss in Asia Pacific led to decreased sales of closure
compounds for the 1996 quarter versus the 1995 quarter. European can
sealing sales were up slightly due to market share gains.
o CATALYSTS AND OTHER SILICA-BASED PRODUCTS - Sales declined slightly, as
higher sales of polyolefin catalysts and silica/adsorbents were offset
by a sales decline in refinery catalysts. The decline in refinery
catalysts in North America and Europe, caused by pricing pressures,
were partially offset by continued growth in Asia Pacific. Polyolefin
catalyst sales continue to be positively impacted by the strong resin
market, while silica/adsorbent sales benefited from new product
applications in Europe and Asia Pacific.
o CONSTRUCTION PRODUCTS - Sales increased in all regions and within all
products, especially in North America, as volumes in concrete and
waterproofing products improved from growth in housing starts and
projects. Also significantly contributing to the increase was the
positive impact from market share gains in Asia Pacific concrete
products.
I-14
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Operating income before taxes increased by 12% in the third quarter of
1996 as compared to the 1995 third quarter, as cost management programs
continued to favorably impact results across all regions and product
lines. In addition, regional results included the following operational
highlights:
o NORTH AMERICA - Sales volume increases in construction products
were partially offset by lower gross profit in packaging due to the
volume declines in bags and films, discussed above.
o EUROPE - Results were favorably impacted by the volume increases in
construction products and silica/adsorbents, discussed above.
o ASIA PACIFIC - Volume increases from catalysts and other silica-based
products were partially offset by declines in gross profit in packaging
due to the volume declines in bags and films, discussed above.
o LATIN AMERICA - Results versus the 1995 third quarter were favorably
impacted by the volume increases in bags, discussed above.
For the first nine months of 1996, operating income increased 17% over
1995, primarily due to growth in construction products and catalysts and
other silica-based products, as discussed above. This growth was partially
offset by the flat sales and unfavorable product mix from packaging due to
a volume decline in the European and Asia Pacific bag market as a result
of lower beef consumption levels, as previously discussed.
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 first nine months 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
Interest expense and related financing costs of $18.2 million and $54.9
million (excluding amounts allocated to discontinued operations) in the
third quarter and first nine months of 1996, respectively, increased 2%
and 5%, respectively, versus the comparable 1995 periods. Including
amounts allocated to discontinued operations, interest expense and related
financing costs increased 6% and 12% in the third quarter and first nine
months of 1996, respectively, over the comparable 1995 periods, to $43.3
million and $131.2 million, respectively. The overall increase in interest
expense and related financing costs is primarily due to higher average
debt levels, partially offset by lower average effective interest rates.
See "Financial Condition: Liquidity and Capital Resources" below for
information on borrowings.
I-15
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Research and Development Expenses
Research and development spending decreased 17% and 13% in the third
quarter and first nine months of 1996, respectively, versus the 1995
periods, reflecting cost management programs. Research and development
spending for 1996 has been directed to Grace's continuing packaging and
specialty chemicals businesses.
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
product lines.
Restructuring Costs
See Note 4 in this Report for information relating to restructuring costs.
Income Taxes
The effective tax rates were 39.0% and 36.6%, respectively, for the third
quarter and first nine months of 1996, compared with 21.1% and 27.7%,
respectively, for the comparable periods in 1995. Excluding the items
discussed in "Overview - Income from Continuing Operations" above, Grace's
effective tax rates would have been 33.2% for the third quarter of 1995
and 38.5% and 31.8% for the first nine months of 1996 and 1995,
respectively.
The effective tax rates in the third quarter and first nine months of 1995
reflected a lower overall foreign tax rate than is currently experienced,
as the result of a reassessment of the valuation allowance for certain
deferred tax assets.
Income from Discontinued Operations
As discussed in Notes 1 and 5 in this Report, on September 28, 1996, Grace
New York completed the spin-off of the Company and the combination of
NMC with the worldwide dialysis business of Fresenius. The following table
compares the results for health care operations for the 1996 third quarter
and first nine months to results for the comparable periods of 1995
(dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales and revenues $ 545.5 $ 520.9 $1,650.7 $1,536.2
======== ======== ======== ========
Operating income before taxes (i) $ 7.8 $ 46.6 $ 136.1 $ 192.4
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------
</TABLE>
(i) The above operating results do not include interest expense allocated
to the discontinued health care business of $25.1 and $23.0 for the
third quarters of 1996 and 1995, respectively, and $76.3 and $64.7
for the first nine months of 1996 and 1995, respectively.
I-16
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Health care sales and revenues for the third quarter and first nine months
of 1996 increased by 5% and 7%, respectively, over the comparable periods
of 1995. These improvements were due to increases in revenues from kidney
dialysis services and medical products operations in both periods, largely
due to the effect of acquisitions subsequent to the first nine months of
1995. Partially offsetting the first nine months of 1996 increase was the
decision, effective July 1, 1995, to discontinue recognizing incremental
revenue relating to certain dual eligible end stage renal disease patients
due to the previously reported impact of the Omnibus Budget Reconciliation
Act of 1993 (OBRA 93) on the payment of benefits under Medicare and
employer health plans for certain dual eligible end stage renal disease
patients. The number of centers providing dialysis and related services
increased 11%, from 657 at September 30, 1995 to 732 at September 28, 1996
(607 in North America, 65 in Europe, 41 in Latin America and 19 in Asia
Pacific). The improvements in dialysis services and medical products
operations were partially offset by decreases in both the third quarter
and first nine months of 1996 in home health care revenues resulting from
a decrease in infusion therapy revenues, principally intradialytic
parenteral nutrition (IDPN) therapy, due to continued managed care pricing
pressure.
Operating income before taxes in the third quarter and first nine months
of 1996 decreased by 83% and 29%, respectively, over the 1995 periods. In
the third quarters of 1996 and 1995, operating income was affected by
various nonrecurring charges, primarily relating to asset impairments. As
previously discussed, operations were negatively affected by 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 associated with IDPN
therapy, discussed above. Offsetting these items was the increase in
earnings from medical products operations due to the increased revenues
discussed above, as well as increased treatment volume in kidney dialysis
services which was positively impacted by the effects of acquisitions and
the increased number of centers providing dialysis and related services.
As previously reported, certain matters could materially adversely affect
NMC's business, financial position and results of operations. For a
discussion of these items, see Note 7 in the Prospectus and "Business of
Fresenius Medical Care -- Regulatory and Legal Matters" in the Joint Proxy
Statement-Prospectus.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, the net pretax cash provided by
Grace's continuing operating activities was essentially flat at $150.5
million, versus $150.7 million in the first nine months of 1995. A
reduction in cash inflows from settlements with certain insurance carriers
(in connection with asbestos-related litigation) net of amounts paid for
the defense and disposition of asbestos-related litigation of $52.5
million in the first nine months of 1996 as compared to $77.7 million in
the first nine months of 1995 was largely offset by improved operating
results. 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 increased by $122.9 million in
the first nine months of 1996 versus the first nine months of 1995.
I-17
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Investing activities provided $2,277.9 million of cash in the first nine
months of 1996, largely reflecting the net cash proceeds of $2,802.9
million from the divestments of businesses (excluding a $100.0 million
promissory note received on the sale of the water treatment and process
chemicals business and the 44.8% common equity interest in FMC valued at
approximately $2.2 billion). Capital expenditures of $335.3 million have
been made for the first nine months of 1996, primarily related to the
packaging and catalyst and other silica-based businesses. Also, investing
activities of discontinued operations for the first nine months of 1996
used $181.2 million (compared to $149.1 million used in the first nine
months of 1995), primarily reflecting the classification of the health
care business as a discontinued operation in the 1995 second quarter.
Management anticipates that total capital expenditures for 1996 will not
exceed the 1995 expenditure level.
Net cash used for financing activities in the first nine months of 1996
was $1,935.9 million, primarily reflecting reductions in debt, the
repurchase of stock (discussed below), and the payment of dividends,
partially offset by proceeds from the exercise of employee stock options.
Total debt was $896.9 million at September 30, 1996, reflecting a decrease
of $1,036.9 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 41.4% at September 30, 1996. As of September 30, 1996, Grace
canceled agreements to sell up to $300 million of interests in designated
pools of trade receivables, $180 million of which pertained to NMC. At
December 31, 1995, $295.8 million had been received pursuant to such
sales, $179.8 million of which pertained to NMC.
Grace is targeting a ratio of net debt to earnings before interest, taxes,
deprecation and amortization of between 1.6 and 2.0 following the
completion of pending divestments. Accordingly, the cash received from
divestments is being used to reduce debt and repurchase shares.
Grace New York initiated its previously announced share repurchase program
in April 1996. As of September 27, 1996, Grace New York had acquired
9,864,800 shares under this program at a cost of approximately $727.1
million or an average price of approximately $73.70 per share. This
average price per share does not reflect the NMC transactions described
in Notes 1 and 5 in this Report. Under the Company's program to repurchase
up to 20% of the shares outstanding following the NMC transaction, as of
November 14, 1996 the Company had repurchased 8,020,800 shares at a cost of
approximately $423.0 million (or an average price of approximately $52.74
per share).
At September 30, 1996, the Company held cash and cash equivalents of
$491.6 million in anticipation of continuing share repurchase activity.
This balance has been substantially eliminated as a result of the share
repurchases described above.
In May 1996, Grace 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. On November 27, 1996, the
total borrowings available under the new credit
I-18
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
agreement will be reduced to $650 million. In addition, Grace continues to
have $350 million available under a separate long-term facility expiring
on September 1, 1999.
See Note 5 in this Report for information concerning an agreement reached
with the U.S. government regarding the OIG investigation.
In July 1996, Grace completed the acquisition of Cypress Packaging, Inc.
(Cypress), a manufacturer of flexible packaging. Cypress, with 1995 sales
of more than $20 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
million plant in Seneca, South Carolina to serve the fresh-cut produce
market.
In October 1996, Grace announced that it expects to divest four noncore
businesses within the next three to six months. The businesses to be sold
are Grace TEC Systems and Grace Specialty Polymers, as well as Grace Cocoa
and Amicon (a bioseparation sciences business), previously classified as
discontinued operations. Grace expects to receive approximately $300
million in pre-tax proceeds from the divestitures, net of satisfaction of
minority interest and other obligations associated with Grace Cocoa.
Asbestos-Related Matters
As reported in Note 2 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. As also 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. In the first nine
months of 1996, Grace received $52.5 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 September 30, 1996 includes a $228.2
million receivable due from insurance carriers, a portion of which is
subject to litigation. Grace has also recorded notes receivable of $85.3
million ($76.2 million, net of discounts) for amounts to be received in
1996 to 2001 pursuant to settlement agreements with certain insurance
carriers.
Environmental Matters
During the third quarter of 1996, Grace settled a lawsuit with Hatco
Corporation (see Item 1 of Part I in this Report); this settlement is not
expected to significantly affect Grace's liquidity. There were no other
significant developments relating to environmental liabilities in the
first nine months of 1996.
For additional information relating to environmental liabilities, see Note
12 in the Prospectus.
I-19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(a) Note (b) to the Consolidated Financial Statements in Part I of this
Report is incorporated herein by reference.
(b) In September 1996, Grace settled the lawsuit instituted by Hatco
Corporation ("Hatco"), which is described in the Prospectus under the heading
"Business of Grace Chemicals -- Legal Proceedings and Regulatory Matters --
Environmental Proceedings." In addition, subject to the execution of
definitive agreements, Grace and its insurance carriers have agreed on the
terms of a settlement of the related lawsuit in which Grace sought indemnity
from such carriers against any damages and defense costs incurred by Grace as
a result of the Hatco lawsuit. Under the settlements, Grace will be required
to pay a percentage of future remediation costs (which percentage will vary
based upon the total amount of such costs), and the insurance carriers will
pay Grace a specified amount. Grace believes that the amounts it will be
required to pay in connection with the settlement of the Hatco lawsuit (net of
recoveries expected from insurance carriers) will not exceed Grace's
established reserves.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 16, 1996, the Company's predecessor, W. R. Grace & Co., a
New York corporation subsequently renamed Fresenius National Medical Care
Holdings, Inc. ("Grace New York"), held a special meeting of shareholders
("Special Meeting"). At the Special Meeting, Grace New York's shareholders (a)
adopted and
II-1
<PAGE>
approved the Agreement and Plan of Reorganization, dated as of February 4,
1996, between Grace New York and Fresenius AG, related agreements, and the
transactions contemplated thereby and (b) adopted and approved an amendment to
Grace New York's Certificate of Incorporation.
The following sets forth the results of voting at the Special Meeting:
VOTES
----------------------------------------------------
MATTER FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ------ --- ------- ----------- ----------------
Agreement and
Plan of
Reorganization 76,330,692 681,952 443,917 283,510
Amendment to
Certificate of
Incorporation 72,900,256 4,356,893 477,817 5,104
Item 5. Other Information.
On October 22, 1996, Grace announced that it expects to divest four
noncore businesses within the next three to six months. The businesses to be
sold are Grace TEC Systems and Grace Specialty Polymers, as well as Grace
Cocoa and Amicon, previously classified as discontinued operations.
In August 1996, Grace acquired Bayem S.A. de C.V., a wholly owned
subsidiary of Grupo Zapata in Mexico that produces can coatings and closure
sealants for the rigid container industry, with 1995 sales in excess of
$10 million.
II-2
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this Report:
-- 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
(b) Reports on Form 8-K. On July 11, 1996, Grace New York filed a Report
on Form 8-K relating to the sale of the business and assets of Grace's
Dearborn water treatment and process chemicals business to Betz Laboratories,
Inc. Grace New York filed a Report on Form 8-K on August 9, 1996, relating to
the announcement of 1996 second quarter results. The Company filed a Report on
Form 8-K on October 10, 1996, relating to Grace New York's distribution of all
of the shares of the Company's outstanding common stock to the holders of
Grace New York's common stock on a one-for-one basis. The Company also filed a
Report on Form 8-K on November 8, 1996, relating to the announcement of 1996
third quarter results.
II-3
<PAGE>
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: November 14, 1996 By /s/ Kathleen A. Browne
---------------------------
Kathleen A. Browne
Vice President and Controller
(Principal Accounting Officer)
II-4
<PAGE>
W. R. GRACE & CO.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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
EXHIBIT 11
W. R. GRACE & CO. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS
(Unaudited)
The weighted average number of shares of Common Stock outstanding were as
follows (in thousands):
<TABLE>
<CAPTION>
3 Mos. Ended 9 Mos. Ended
9/30/96 - 9/30/95 9/30/96 - 9/30/95
--------------------- ---------------------
<S> <C> <C> <C> <C>
Weighted average number of shares of Common
Stock outstanding.................................. 91,092 96,708 95,188 95,330
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method)...................................... 2,826 2,392 2,826 2,392
-------- -------- -------- --------
Weighted average number of shares of Common
Stock outstanding assuming full dilution........... 93,918 99,100 98,014 97,722
======== ======== ======== ========
</TABLE>
Income used in the computation of earnings per share were as follows (in
millions except per share):
<TABLE>
<CAPTION>
3 Mos. Ended 9 Mos. Ended
9/30/96 - 9/30/95 9/30/96 - 9/30/95
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net income................................... $2,519.9 $ 21.7 $2,917.4 $ 147.9
Dividends paid on preferred stocks........... (.1) (.1) (.4) (.4)
-------- -------- -------- --------
Income used in per share computation of
earnings and in per share computation of
earnings assuming full dilution........... $2,519.8 $ 21.6 $2,917.0 $ 147.5
======== ======== ======== ========
Earnings per share........................... $ 27.66 $ .22 $ 30.64 $ 1.55
Earnings per share assuming full dilution.... $ 26.83 $ .22 $ 29.76 $ 1.51
</TABLE>
EXHIBIT 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in millions except ratios)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------------------------- --------------------
1995 (b) 1994 (c) 1993 (d) 1992 (e) 1991 1996 (f) 1995 (g)
--------- --------- --------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net (loss)/income from continuing operations $ (196.6) $ (41.4) $ 19.1 $ 1.4 $157.4 $ 330.2 $ 87.7
Add/(deduct):
(Benefit from)/provision for income taxes (115.8) (46.6) 10.1 79.9 99.1 190.4 33.6
Income taxes of 50%-owned companies.... - - .1 2.1 1.5 - -
Equity in unremitted losses/(earnings)
of less than 50%-owned companies..... .8 (.6) (.5) (2.0) (.9) .1 (.7)
Interest expense and related financing costs,
including amortization of capitalized interest 179.8 138.5 122.7 162.7 209.6 139.1 127.8
Estimated amount of rental expense
deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 8.5 7.7
--------- --------- --------- --------- ------ --------- ---------
(Loss)/Income as adjusted................. $ (123.3) $ 60.0 $ 162.8 $ 258.1 $479.4 $ 668.3 $ 256.1
========= ========= ========= ========= ====== ========= =========
Combined fixed charges and preferred stock dividends:
Interest expense and related financing costs,
including capitalized interest....... $ 195.5 $ 143.2 $ 122.8 $ 176.3 $224.5 $ 154.2 $ 138.9
Estimated amount of rental expense
deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 8.5 7.7
--------- --------- --------- --------- ------ --------- ---------
Fixed charges............................. 204.0 153.3 134.1 190.3 237.2 162.7 146.6
Preferred stock dividend requirements (a). .5 .5 .8 .8 .9 .6 .6
--------- --------- --------- --------- ------ --------- ---------
Combined fixed charges and preferred
stock dividends........................ $ 204.5 $ 153.8 $ 134.9 $ 191.1 $238.1 $ 163.3 $ 147.2
========= ========= ========= ========= ====== ========= =========
Ratio of earnings to fixed charges... (h) (h) 1.21 1.36 2.02 4.11 1.75
========= ========= ========= ========= ====== ========= =========
Ratio of earnings to combined fixed charges
and preferred stock dividends.......... (h) (h) 1.21 1.35 2.01 4.09 1.74
========= ========= ========= ========= ====== ========= =========
</TABLE>
(a) For each period with an income tax provision, the preferred stock
dividend requirements are increased to include the pretax earnings
required to cover such requirements based on Grace's effective tax
rate for that period.
(b) Includes pretax provisions of $275.0 for asbestos-related liabilities
and insurance coverage; $220.0 relating to restructuring costs, asset
impairments and other activities; $77.0 for environmental liabilities
at former manufacturing sites; and $30.0 for corporate governance
activities.
(c) Includes a pretax provision of $316.0 relating to asbestos-related
liabilities and insurance coverage.
(d) Includes a pretax provision of $159.0 relating to asbestos-related
liabilities and insurance coverage.
(e) Includes a pretax provision of $140.0 relating to a fumed silica plant
in Belgium.
(f) Includes a pretax gain of $326.4 on the sales of businesses,
principally the water treatment and process chemicals business, offset
by a pretax provision of $53.7 relating to restructuring costs.
(g) Includes pretax provisions of $44.3 relating to restructuring costs
and $30.0 for corporate governance activities.
(h) As a result of the losses incurred for the years ended December 31,
1995 and 1994, Grace was unable to fully cover the indicated fixed
charges.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 491,600
<SECURITIES> 0
<RECEIVABLES> 765,900 <F1>
<ALLOWANCES> 0
<INVENTORY> 415,300
<CURRENT-ASSETS> 2,287,600 <F2>
<PP&E> 3,262,000
<DEPRECIATION> 1,428,400
<TOTAL-ASSETS> 5,346,800
<CURRENT-LIABILITIES> 1,828,000
<BONDS> 741,600
0
0
<COMMON> 900
<OTHER-SE> 1,269,500
<TOTAL-LIABILITY-AND-EQUITY> 5,346,800
<SALES> 2,656,200 <F3>
<TOTAL-REVENUES> 2,682,300
<CGS> 1,607,700
<TOTAL-COSTS> 1,607,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,900
<INCOME-PRETAX> 520,600 <F4>
<INCOME-TAX> 190,400
<INCOME-CONTINUING> 330,200 <F4>
<DISCONTINUED> 2,587,200 <F5>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,917,400
<EPS-PRIMARY> 30.64
<EPS-DILUTED> 29.76
<FN>
<F1> Amount shown is net of allowances.
<F2> Included within current assets are net assets of
discontinued operations of $369,800.
<F3> Excludes sales reported by the discontinued health
care segment of $1,650,700 for the first nine months
of 1996.
<F4> Includes (i) a gain of $326,400 ($210,100 after-tax)
on the sales of businesses, principally the water
treatment and process chemicals business, and (ii) a
charge of $53,700 ($32,400 after-tax) relating to
restructuring costs.
<F5> Includes (i) after-tax income of $24,100 from health care
operations, (ii) an after-tax gain of $2,483,700 on the
separation of National Medical Care, Inc. and (iii) an
after-tax gain of $79,400 on the sale of the transgenic
plant business of Grace's Agracetus subsidiary.
</TABLE>
