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Filed pursuant to Rule 424(b)(3)
Registration Number 333-09495
ANNEX A
PROSPECTUS
GRACE HOLDING, INC.
(TO BE RENAMED W. R. GRACE & CO.)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Prospectus of Grace Holding, Inc. (the "Prospectus") is being furnished
in connection with the distribution ("Distribution") by W. R. Grace & Co., a New
York corporation ("Grace New York"), of one share of Common Stock, par value
$.01 per share (together with the associated rights, "New Grace Common Stock"),
of Grace Holding, Inc., a Delaware corporation wholly owned by Grace New York
(individually or together with its subsidiaries, "New Grace"), for each share of
Common Stock, par value $1.00 per share, of Grace New York (together with the
associated rights, "Grace New York Common Stock").
The Distribution, and certain related transactions, will be effected as
follows.
- Pursuant to the Agreement and Plan of Reorganization, as amended or
supplemented from time to time (the "Reorganization Agreement," and the
transactions contemplated thereby, the "Reorganization"), dated as of
February 4, 1996, by and between Grace New York and Fresenius AG, a German
corporation ("Fresenius AG"), W. R. Grace & Co.-Conn., a Connecticut
corporation which conducts the packaging and specialty chemicals
businesses of Grace New York ("Grace Chemicals"), will distribute the
capital stock of National Medical Care, Inc., a Delaware corporation and
the wholly owned principal health care subsidiary of Grace Chemicals
("NMC"), to Grace New York, resulting in Grace Chemicals, New Grace and
NMC becoming sister companies.
- Immediately thereafter, Grace New York will (1) contribute the capital
stock of Grace Chemicals to New Grace and (2) effect the Distribution (the
moment of the Distribution, the "Time of Distribution").
- Immediately following the Time of Distribution, Grace New York will be
recapitalized (the "Recapitalization") so that each holder of one share of
Grace New York Common Stock will thereafter also hold one share of a new
series of Grace New York preferred stock, par value $.10 per share (a "New
Preferred Share").
- Immediately following the Recapitalization, Grace New York (which will
then be comprised only of NMC's health care business) will merge (the
"Grace Merger") with a subsidiary of Fresenius Medical Care AG, a German
corporation ("Fresenius Medical Care"), and, based on information
available as of July 15, 1996, holders of Grace New York Common Stock
(other than any Grace New York Common Stock as to which appraisal rights
have been asserted and not withdrawn or otherwise lost, and certain other
shares) will receive approximately 1.013 American Depositary Shares
("ADSs"), each representing one-third of an Ordinary Share, nominal value
DM 5 per share, of Fresenius Medical Care ("FMC Ordinary Share"), in
exchange for each share of Grace New York Common Stock. Such ADSs,
together with the FMC Ordinary Shares allocated to NMC employees holding
options with respect to Grace New York Common Stock, will represent 44.8%
of the FMC Ordinary Shares outstanding on a fully diluted basis
immediately following the Reorganization. Shares of Grace New York
Preferred Stock, par value $100 per share ("Grace New York Preferred
Stock"), will not be exchanged for FMC Ordinary Shares in the Grace Merger
and will remain outstanding thereafter. In addition, immediately following
the Distribution, Fresenius USA, Inc., a Massachusetts corporation and
majority-owned subsidiary of Fresenius AG which acts as Fresenius AG's
distributor in North America ("Fresenius USA"), will merge with another
subsidiary of Fresenius Medical Care (the "Fresenius Merger").
- As promptly as practicable following the Grace Merger and the Fresenius
Merger, Fresenius USA will be contributed to FNMC.
For more information on the Reorganization, see the Joint Proxy
Statement-Prospectus of Grace New York and Fresenius USA dated August 2, 1996
(the "Joint Proxy Statement-Prospectus"). Immediately prior to the Time of
Distribution, the Certificate of Incorporation of Grace New York (the "Grace New
York Certificate") will be amended to change the name of Grace New York to
"Fresenius National Medical Care, Inc." ("FNMC"), and the Amended and Restated
Certificate of Incorporation of New Grace (the "New Grace Certificate") will be
amended to change the name of New Grace to "W. R. Grace & Co."
The Distribution will result in 100% of the outstanding shares of New Grace
Common Stock being distributed to the holders of Grace New York Common Stock. No
consideration will be required to be paid by holders of Grace New York Common
Stock for the shares of New Grace Common Stock. It is expected that certificates
representing shares of New Grace Common Stock will be mailed by ChaseMellon
Shareholder Services, L.L.C. (the "Distribution Agent") as promptly as
practicable following the Time of Distribution. See "THE DISTRIBUTION."
There is no current public trading market for New Grace Common Stock,
although it is expected that a "when-issued" trading market will develop at or
about the Time of Distribution. New Grace will apply to list the shares of New
Grace Common Stock on the New York Stock Exchange ("NYSE") under the symbol
"GRA."
(Continued on next page)
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A VOTE OF THE HOLDERS OF THE GRACE NEW YORK COMMON AND PREFERRED
STOCKS IS REQUIRED IN CONNECTION WITH THE REORGANIZATION, AS
DESCRIBED IN THE JOINT PROXY STATEMENT-PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES.
The date of this Prospectus is August 2, 1996.
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(Continued from front cover)
The following charts represent the corporate organization of the parties to the
Reorganization on both pre-transaction and post-transaction bases:
[Chart]
(End of front cover)
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TABLE OF CONTENTS
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SUMMARY............................................................................... 1
New Grace........................................................................... 1
The Distribution.................................................................... 2
Tax Consequences of the Distribution................................................ 2
Relationship with Grace New York after the Distribution............................. 2
Listing and Trading of New Grace Common Stock; No Current Public Market............. 3
SUMMARY SELECTED FINANCIAL INFORMATION OF GRACE CHEMICALS............................. 4
THE DISTRIBUTION...................................................................... 5
Manner of Effecting the Distribution................................................ 5
Conditions; Termination............................................................. 5
Fraudulent Transfer and Related Considerations...................................... 6
Certain Federal Income Tax Consequences of the Distribution......................... 6
Relationships After the Distribution................................................ 8
Listing and Trading of New Grace Common Stock; No Current Public Market............. 8
Dividend Policy and Share Repurchases............................................... 9
NMC Credit Agreement................................................................ 9
Other Arrangements.................................................................. 10
BUSINESS OF NEW GRACE................................................................. 12
BUSINESS OF GRACE CHEMICALS........................................................... 12
Overview and Strategy............................................................... 12
Chemical Industry Overview.......................................................... 13
Products and Markets................................................................ 14
Discontinued Operations............................................................. 18
Research Activities................................................................. 19
Patents and Other Intellectual Property Matters..................................... 19
Environmental, Health and Safety Matters............................................ 20
Legal Proceedings and Regulatory Matters............................................ 20
Properties.......................................................................... 28
PRO FORMA FINANCIAL INFORMATION....................................................... 29
Unaudited Pro Forma Condensed Consolidated Balance Sheet............................ 29
Unaudited Pro Forma Condensed Consolidated Statement of Operations.................. 30
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF
OPERATIONS.......................................................................... 31
CAPITALIZATION........................................................................ 33
GRACE CHEMICALS SELECTED FINANCIAL INFORMATION........................................ 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION........................................................................... 35
Review of Operations................................................................ 35
Specialty Chemicals................................................................. 35
Statement of Operations............................................................. 37
Restructuring Costs, Asset Impairments and Other Costs.............................. 38
Discontinued Operations............................................................. 39
Financial Condition................................................................. 39
Asbestos-Related Matters............................................................ 41
Environmental Matters............................................................... 41
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MANAGEMENT............................................................................ 43
Board of Directors.................................................................. 43
Committees of the Board of Directors................................................ 45
Compensation of Directors........................................................... 45
Executive Officers.................................................................. 46
Executive Compensation and Employee Benefits Prior to the Distribution.............. 46
Executive Compensation and Employee Benefits Following the Distribution............. 47
Employee Benefits and Compensation Agreement........................................ 47
Compensation Committee Interlocks and Insider Participation......................... 47
CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE............................... 48
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................................ 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................................... 49
BENEFICIAL OWNERSHIP OF MANAGEMENT.................................................... 49
DESCRIPTION OF NEW GRACE CAPITAL STOCK................................................ 50
CERTAIN ANTI-TAKEOVER EFFECTS......................................................... 51
Classified Board of Directors....................................................... 51
Number of Directors; Removal; Filling Vacancies..................................... 51
No Shareholder Action by Written Consent; Special Meetings.......................... 52
Advance Notice Provisions for Shareholder Nominations and Shareholder Proposals..... 52
New Grace Preferred Stock........................................................... 53
Rights to Purchase Securities and Other Property.................................... 54
Amendment of Certain Provisions of the New Grace Certificate of Incorporation and
New Grace By-laws................................................................ 54
Preferred Stock Purchase Rights..................................................... 55
Certain Anti-takeover Features...................................................... 57
Anti-takeover Statute............................................................... 57
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS............................... 59
Limitation of Liability of Directors................................................ 59
Indemnification of Directors and Officers........................................... 59
Certain Other Information........................................................... 60
COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS OF GRACE NEW YORK AND NEW GRACE.......... 61
Duties of Directors................................................................. 61
Size and Classification of the Board of Directors................................... 61
Removal of Directors; Filling Vacancies on the Board of Directors................... 62
Shareholder Nominations............................................................. 62
Action by Written Consent........................................................... 63
Special Meetings of Shareholders; Quorum............................................ 63
Shareholder Proposals............................................................... 64
Required Vote for Authorization of Certain Actions.................................. 64
Amendment of Corporate Charter and By-laws.......................................... 64
Appraisal Rights.................................................................... 65
Fair Price and Anti-Greenmail Provisions............................................ 65
Stock Rights Plan................................................................... 65
State Anti-takeover Statutes........................................................ 66
Limitation on Directors' Liability.................................................. 67
Indemnification of Officers and Directors........................................... 67
Cumulative Voting................................................................... 67
Conflict-of-Interest Transactions................................................... 68
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Dividends and Other Distributions................................................... 68
Issuance of Rights or Options to Purchase Shares to Directors, Officers and
Employees........................................................................ 68
Loans to Directors.................................................................. 69
Right to Inspect Corporate Books and Records; Right to Inspect Shareholder Lists.... 69
VALIDITY OF SECURITIES................................................................ 70
EXPERTS............................................................................... 70
ADDITIONAL INFORMATION................................................................ 70
INDEX OF DEFINED TERMS................................................................ 71
ANNEXES
A - Form of Amended and Restated Certificate of Incorporation of W. R. Grace &
Co.............................................................................. A-1
B - Form of Amended and Restated By-laws of W. R. Grace & Co........................ B-1
C - Summary of Grace Holding, Inc. 1996 Stock Incentive Plan........................ C-1
D - Summary of Grace Holding, Inc. 1996 Stock Retainer Plan for Nonemployee
Directors....................................................................... D-1
E - Grace New York 1996 Proxy Excerpt............................................... E-1
F - Consolidated Financial Statements of W. R. Grace & Co. for the year ended
December 31, 1995............................................................... F-1
G - Consolidated Financial Statements of W. R. Grace & Co. for the quarter ended
March 31, 1996.................................................................. G-1
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information set forth elsewhere in this Prospectus and the Joint Proxy
Statement-Prospectus. The location of the definitions of defined terms used
herein may be found in the "INDEX OF DEFINED TERMS" on page 71. This Prospectus
is being furnished solely to provide information to holders of Grace New York
Common Stock who will receive shares of New Grace Common Stock in the
Distribution. Changes may occur after the date hereof. However, the information
set forth herein will not be updated, except in the normal course of public
disclosures by Grace New York and, following the Distribution, New Grace.
NEW GRACE
New Grace will be the parent company of Grace Chemicals, which is primarily
engaged in the packaging and specialty chemicals businesses on a worldwide
basis. Grace Chemicals primarily operates through the following four units:
- Grace Packaging, which accounted for approximately 46.2% of Grace
Chemicals' 1995 sales and revenues from continuing operations, provides
flexible packaging systems (including material, equipment and services)
for meat, poultry, cheese and other perishable food products; shrink films
used in packaging consumer and industrial products; foam trays for
supermarkets and poultry and other food processors; and rigid plastic
containers for dairy and other food and nonfood products.
- Grace Davison, which accounted for approximately 18.8% of Grace
Chemicals' 1995 sales and revenues from continuing operations,
manufactures refinery catalysts, including fluid cracking catalysts that
"crack" crude oil into motor fuels and other petroleum-based products;
polyolefin catalysts, which are critical in the manufacture of
polyethylene resins for plastic film, high-performance pipe and household
containers; and silica and zeolite adsorbents, which are used in a wide
variety of products, such as plastics, toothpastes, paints and insulated
glass, as well as in the refining of edible oils.
- Grace Construction, which accounted for approximately 10.8% of Grace
Chemicals' 1995 sales and revenues from continuing operations,
manufactures concrete admixtures, cement additives, fireproofing and
waterproofing materials and masonry products to strengthen concrete,
control corrosion, prevent water damage and protect structural steel
against collapse due to fire.
- Grace Container, which accounted for approximately 9.7% of Grace
Chemicals' 1995 sales and revenues from continuing operations, produces
can and bottle sealants that protect food and beverages from bacteria and
other contaminants, extend shelf life and preserve flavor; coatings used
in the manufacture of cans and closures; and formulated engineered
polymers used in the electronics and other industries.
Grace Chemicals' strategy has been and, following the Distribution, will be
to (i) focus on core businesses to accelerate profitable growth; (ii) upgrade
financial performance, principally by selling or monetizing noncore businesses,
managing debt levels consistent with profitable growth opportunities, and
reducing overhead; and (iii) integrate corporate and operating unit functions
through global product line management. As part of this strategy, since
mid-1995, efforts have been made to enhance shareholder value by strengthening
the balance sheet and reducing costs. These objectives are being achieved
through (i) the pending dispositions of Grace Chemicals' health care business
and water treatment and process chemicals business and the planned disposition
of its cocoa business (intended to be completed in 1996); (ii) the anticipated
use of the proceeds from these and other transactions (including approximately
$2.2 billion from the Reorganization) to substantially reduce indebtedness, to
repurchase stock, and to invest in core businesses; (iii) a worldwide
restructuring program to streamline processes and thereby reduce expenses by
approximately $100 million annually (with further actions being taken to improve
margins); and (iv) the implementation of rigorous controls on working capital
and capital spending. These plans are designed to make Grace Chemicals a
high-performance, high-value company focused on the strengths of its packaging
and specialty chemicals businesses. In addition, in the early 1990s, the
management structure of Grace Chemicals was reorganized on the basis of global
product lines (as distinguished from regional product management). As a result
of this
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reorganization, Grace Chemicals believes that it is better able to serve its
multinational customers in all global regions, as well as to tailor its product
offerings to meet local preferences.
THE DISTRIBUTION
At the Time of Distribution, Grace New York (through the Distribution
Agent) will distribute, on a one-share-for-one-share basis, all of the issued
and outstanding shares of New Grace Common Stock to the holders of shares of
Grace New York Common Stock. No consideration will be required to be paid by the
holders of Grace New York Common Stock for the New Grace Common Stock. It is
expected that the mailing of certificates representing shares of New Grace
Common Stock pursuant to the Distribution will occur as promptly as practicable
following the time of Distribution. In connection with the Distribution, NMC
will borrow and/or will assume Debt (as defined in the Reorganization Agreement)
in an aggregate amount of $2.263 billion (as adjusted pursuant to the
Reorganization Agreement) and will distribute the net cash proceeds to Grace
Chemicals as a dividend (such assumption and dividend, the "Distribution
Payment"). As of the date hereof, it is estimated that the Distribution Payment
will be approximately $2.2478 billion. A portion of such net cash proceeds will
be applied to further reduce Grace Chemicals' debt; the remaining net cash
proceeds are expected to be used to purchase shares of New Grace Common Stock
and to invest in core businesses. Pursuant to the Distribution Agreement, dated
as of February 4, 1996, between Grace New York, Fresenius AG and Grace Chemicals
(the "Distribution Agreement"), at the Time of Distribution, New Grace's name
will be changed to "W. R. Grace & Co." See "THE DISTRIBUTION -- Manner of
Effecting the Distribution -- Intercompany Transactions."
The Distribution will be consummated contemporaneously with the Grace
Merger and only after the satisfaction or waiver of all conditions to the Grace
Merger. In addition, consummation of the Distribution is a condition to the
consummation of the Grace Merger. The Distribution Agreement may be terminated,
and the Distribution may be abandoned, only following termination of the
Reorganization Agreement, by and in the sole discretion of the Grace New York
Board of Directors (the "Grace New York Board"), without the approval of Grace
New York shareholders or any other party. In the event of such termination or
abandonment, Grace New York will have no liability to any person under the
Distribution Agreement or any obligation to effect the Distribution thereafter.
See "CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE."
TAX CONSEQUENCES OF THE DISTRIBUTION
The Distribution is expected to be tax-free to Grace New York and to the
holders of Grace New York Common Stock who receive shares of New Grace Common
Stock in the Distribution. See "THE DISTRIBUTION -- Certain Federal Income Tax
Consequences of the Distribution."
RELATIONSHIP WITH GRACE NEW YORK AFTER THE DISTRIBUTION
As a result of the Distribution, New Grace will cease to be a subsidiary of
Grace New York and will operate as a separate publicly held company. See
"CERTAIN RELATIONSHIPS AND TRANSACTIONS."
Under the credit agreement to be entered into by NMC shortly before the
Distribution (the "NMC Credit Agreement," and the credit facilities provided
thereunder, the "NMC Credit Facility"), Grace Chemicals has agreed to provide
guarantees up to a maximum of $950 million. The NMC Credit Agreement is expected
to provide that these guarantees will be released as to $800 million upon the
occurrence of certain events after 45 days, but within 60 days, following the
Effective Date, including (a) the receipt of an unconditional joint and several
guarantee from Fresenius Medical Care and certain of its subsidiaries for the
full amount of the NMC Credit Facility; or (b) the receipt of a letter of credit
or other acceptable financial accommodation for the account of Grace Chemicals
or Fresenius Medical Care in form and substance satisfactory to the lenders
under the NMC Credit Agreement (the "Lenders"); or (c) a prepayment in certain
specified amounts under the NMC Credit Facility. If such guarantees are not
released within 60 days following the Effective Date, demand for payment will be
made on Grace Chemicals under such guarantees as to $800 million. Grace
Chemicals has been advised that it is the intention of Fresenius Medical Care to
2
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provide the unconditional joint and several guarantees referred to in the
preceding sentence in a manner so as to cause the release of the Grace Chemicals
guarantees as to $800 million not before 46 days, but on or prior to 50 days,
following the Effective Date. However, no assurance can be given that such
guarantees will be provided or that either or both of Grace Chemicals'
guarantees will be released. In the event that Fresenius Medical Care does not
provide such guarantees or otherwise effect the release of the Grace Chemicals
guarantees as to $800 million, Grace Chemicals would be required to provide the
letters of credit or repay the amounts specified in the NMC Credit Agreement
and, thereafter, be subrogated to the rights of Lenders with respect to such
repaid amounts after the Lenders under the respective facilities have been
repaid in full; and Grace Chemicals has undertaken to the Lenders to maintain
unused available credit in an amount to be determined while the Grace Chemicals
guarantees are outstanding in order to facilitate such actions. In connection
with Grace Chemicals' agreement to extend guarantees under the NMC Credit
Agreement, Fresenius Medical Care and Grace Chemicals intend to enter into an
agreement to induce Fresenius Medical Care to cause such guarantees to be
released on the 50th day following the Effective Date. The balance of the Grace
Chemicals guarantees as to the remaining $150 million will be released upon NMC
(or Fresenius Medical Care, if Fresenius Medical Care guarantees the NMC Credit
Facility), on a consolidated basis, achieving a ratio of senior debt to EBITDA
(i.e., earnings before interest, taxes, depreciation and amortization) of equal
to or less than 3.5. See "THE DISTRIBUTION -- NMC Credit Agreement."
In addition, Grace Chemicals has entered into certain agreements and given
certain guarantees in connection with the OIG Investigation. See "THE
DISTRIBUTION -- Other Arrangements."
LISTING AND TRADING OF NEW GRACE COMMON STOCK; NO CURRENT PUBLIC MARKET
There is no current public trading market for the New Grace Common Stock.
New Grace will apply to list the New Grace Common Stock on the NYSE under the
symbol "GRA" (see "THE DISTRIBUTION -- Listing and Trading of New Grace Common
Stock; No Current Public Market"). However, there can be no assurance as to the
volume of trading and liquidity that will result or as to the prices at which
New Grace Common Stock will trade after the Distribution. Until the New Grace
Common Stock is fully distributed and an orderly market develops, the prices at
which trading in New Grace Common Stock occurs may fluctuate.
3
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SUMMARY SELECTED FINANCIAL INFORMATION OF GRACE CHEMICALS
The following summary selected consolidated financial information of Grace
Chemicals should be read in conjunction with the Consolidated Financial
Statements, the First Quarter Financial Statements and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" included
elsewhere in this Prospectus. The financial information for the years ended
December 31, 1991 through 1995 has been based on financial statements audited by
Price Waterhouse LLP, independent certified public accountants. The financial
information for the three-month interim periods ended March 31, 1995 and 1996
has been based on unaudited interim financial statements that 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 prior periods
have been restated to conform to the current period's basis of presentation. The
results of operations for the three-month interim period ended March 31, 1996
are not necessarily indicative of the results of operations for the fiscal year
ending December 31, 1996.
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THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Sales and revenues................................ $3,326.2 $3,061.8 $2,895.5 $3,218.2 $3,665.5 $853.4 $886.0
(Loss)/income from continuing operations.......... 157.4 1.4 19.1 (41.4) (196.6) 22.9 41.6
Income from continuing operations before special
items(1)........................................ 153.9 146.5 119.1 157.6 194.7 35.4 41.6
</TABLE>
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DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995 MARCH 31, 1996
------- ------- ------- ------- ------- ----------------
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BALANCE SHEET DATA:
Total assets...................................... $6,007.1 $5,598.6 $6,108.6 $6,230.6 $6,297.6 $6,485.5
Long-term debt.................................... 1,793.1 1,354.5 1,173.5 1,098.8 1,295.5 1,265.4
Total liabilities................................. 3,981.9 4,053.6 4,591.0 4,726.1 5,065.8 5,154.6
Total equity...................................... 2,025.2 1,545.0 1,517.6 1,504.5 1,231.8 1,330.9
</TABLE>
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(1) Income from continuing operations before special items reconciles to
(loss)/income from continuing operations as follows:
<TABLE>
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THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
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Income from continuing operations before special
items............................................... $ 153.9 $ 146.5 $ 119.1 $ 157.6 $ 194.7 $ 35.4 $ 41.6
Provision for corporate governance................... -- -- -- -- (18.6) (12.5) --
Gain on sale of remaining interest in The Restaurant
Enterprises Group, Inc............................. -- -- -- 27.0 -- -- --
Restructuring costs and asset impairments/other
activities......................................... -- -- -- -- (144.0) -- --
Provisions for environmental liabilities at former
manufacturing sites................................ -- -- -- (26.0) (50.0) -- --
Provision relating to a fumed silica plant........... -- (140.0) -- -- -- -- --
Postretirement benefits prior to plan amendments..... -- (5.1) -- -- -- -- --
Strategic restructuring gain......................... 3.5 -- -- -- -- -- --
Provisions relating to asbestos-related liabilities
and insurance coverage............................. -- -- (100.0) (200.0) (178.7) -- --
------- ------- ------- ------- ------- ------ ------
(Loss)/income from continuing operations............. $ 157.4 $ 1.4 $ 19.1 $ (41.4) $(196.6) $ 22.9 $ 41.6
======= ======= ======= ======= ======= ====== ======
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THE DISTRIBUTION
In connection with the Reorganization, holders of Grace New York Common
Stock will receive a dividend of one share of New Grace Common Stock for each
share of Grace New York Common Stock held of record at the Time of Distribution.
The terms and conditions of the Distribution are set forth in the Distribution
Agreement and the Reorganization Agreement. See "CERTAIN AGREEMENTS BETWEEN
GRACE NEW YORK AND NEW GRACE." Following the Distribution, Grace New York's
operations will consist of its dialysis services and related health care
businesses, and New Grace will be the parent company of Grace Chemicals'
existing packaging and specialty chemicals businesses.
Holders of record of Grace New York Common Stock with inquiries relating to
the Distribution should contact the Distribution Agent by telephone at (800)
648-8392 or should contact W. R. Grace & Co. in writing at One Town Center Road,
Boca Raton, Florida 33486-1010 or by telephone at (407) 362-2300.
MANNER OF EFFECTING THE DISTRIBUTION
At the Time of Distribution, Grace New York will effect the Distribution by
delivering certificates representing all of the issued and outstanding shares of
New Grace Common Stock to the Distribution Agent, which, in turn, will
distribute such shares on the basis of one share of New Grace Common Stock for
each share of Grace New York Common Stock held of record at the Time of
Distribution. No holder of Grace New York Common Stock will be required to pay
any cash or other consideration for the shares of New Grace Common Stock, or to
surrender or exchange shares of Grace New York Common Stock, in order to receive
shares of New Grace Common Stock. It is expected that certificates representing
shares of New Grace Common Stock will be mailed by the Distribution Agent to
holders of Grace New York Common Stock as promptly as practicable following the
Time of Distribution.
Shares Outstanding Following the Distribution. The actual number of shares
of New Grace Common Stock to be distributed in the Distribution will equal the
number of shares of Grace New York Common Stock outstanding at the Time of
Distribution, less the number of shares of Grace New York Common Stock as to
which appraisal rights have been perfected in accordance with New York law
("Dissenting Shares"). Based upon the shares of Grace New York Common Stock
outstanding on July 15, 1996, and assuming that there are no Dissenting Shares,
approximately 92 million shares of New Grace Common Stock will be distributed in
the Distribution. Following the Distribution, approximately 208 million shares
of New Grace Common Stock will remain authorized but unissued, of which
approximately 11.5 million will be reserved for issuance pursuant to director
and employee stock plans. In the Reorganization, employee stock options with
respect to Grace New York Common Stock held by individuals who will be employees
of New Grace following the Distribution will be converted into options with
respect to New Grace Common Stock, and employee stock options with respect to
Grace New York Common Stock held by individuals who will be employees of
Fresenius Medical Care or a subsidiary thereof following the Distribution will
be converted into either options with respect to securities of Fresenius Medical
Care or securities of Fresenius Medical Care; in both cases, options remaining
outstanding following the Reorganization will be adjusted to preserve their
value. See "MANAGEMENT -- Executive Compensation and Employee Benefits Following
the Distribution."
Intercompany Transactions. Prior to the Distribution, NMC will effect the
Distribution Payment by assuming Debt and transferring cash in an aggregate
amount currently estimated to be approximately $2.2478 billion. See "CERTAIN
AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE."
CONDITIONS; TERMINATION
The Distribution is conditioned upon, among other things, (i) the approval
of the Reorganization by Grace New York shareholders, (ii) the satisfaction or
waiver of all conditions to the Reorganization set forth in the Reorganization
Agreement, and (iii) the compliance of the transactions contemplated by the
Distribution Agreement with all applicable federal and state securities laws.
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The Distribution will be consummated contemporaneously with the Grace
Merger and only after the satisfaction or waiver of all conditions to the Grace
Merger. In addition, consummation of the Distribution is a condition to the
consummation of the Grace Merger. The Distribution Agreement may be terminated,
and the Distribution may be abandoned, only following termination of the
Reorganization Agreement, by and in the sole discretion of the Grace New York
Board, without the approval of Grace New York's shareholders or any other party.
See "THE REORGANIZATION -- Termination" in the Joint Proxy Statement-Prospectus.
In the event of such termination or abandonment, Grace New York will have no
liability to any person by virtue of the Distribution Agreement or any
obligation to effect the Distribution thereafter.
FRAUDULENT TRANSFER AND RELATED CONSIDERATIONS
It is a condition to the Reorganization that the Distribution and the
Distribution Payment shall have occurred. Under applicable law, the Distribution
and the Distribution Payment would constitute a "fraudulent transfer" if (i)
Grace New York or NMC is insolvent when the Distribution Payment is made or at
the Time of Distribution, (ii) the Distribution or the Distribution Payment
would render Grace New York or NMC insolvent, (iii) the Distribution or the
Distribution Payment would leave Grace New York or NMC engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital or (iv) Grace New York or NMC intended to incur or believed it would
incur debts beyond its ability to pay as such debts mature. Generally, an entity
is considered insolvent if it is unable to pay its debts as they come due or if
the fair value of its assets is less than the amount of its actual and expected
liabilities. In addition, the Distribution and the Distribution Payment may be
made only out of surplus (net assets minus capital) and not out of capital.
Grace believes that, based on the factors considered in connection with the
Reorganization, each of the Distribution and the Distribution Payment will not
be a fraudulent transfer and will be made out of surplus in accordance with
applicable law. There is no certainty, however, that a court would reach the
same conclusions in determining that Grace New York or NMC have satisfied the
applicable standards. In this regard, it should be noted that Grace New York or
NMC may have significant liabilities relating to regulatory matters. For more
information regarding such potential liabilities, see "BUSINESS OF FRESENIUS
MEDICAL CARE -- Regulatory and Legal Matters" in the Joint Proxy
Statement-Prospectus.
If, in a lawsuit filed by an unpaid creditor or a representative of unpaid
creditors, or a trustee in bankruptcy, a court were to find that, at the time
the Distribution or the Distribution Payment was consummated or after giving
effect thereto, either Grace New York or NMC, as the case may be, (i) was
insolvent, (ii) was rendered insolvent by reason of the Distribution or the
Distribution Payment, (iii) was engaged in a business or transaction for which
its remaining assets constituted unreasonably small capital or (iv) intended to
incur, or believed it would incur, debts beyond its ability to pay as such debts
matured, then such court might require New Grace or Grace Chemicals to fund
certain liabilities of FNMC, as Grace New York will be known following the
Reorganization, or NMC, as the case may be, for the benefit of FNMC's or NMC's
creditors. The same consequences would also apply were a court to find that the
Distribution and the Distribution Payment were not made out of surplus.
Pursuant to the OIG Agreements, the United States has agreed to release
NMC, Grace Chemicals and certain others in connection with certain possible
fraudulent transfer claims relating to the Reorganization. See "-- Other
Arrangements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
In the opinion of Wachtell, Lipton, Rosen & Katz, special counsel to Grace,
and Miller & Chevalier, tax counsel to Grace (collectively, "Counsel"), the
following discussion is an accurate description of the material federal income
tax consequences expected to result to New Grace and Grace New York shareholders
as a result of the Distribution. This discussion is based on the current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations, judicial authority and administrative rulings
and practice. There can be no assurance that the Internal Revenue Service (the
"IRS") will not take a contrary view. No ruling from the IRS has been or will be
sought with respect to any aspect of the transactions
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described herein. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to shareholders.
The following summary is for general information only. The tax treatment
applicable to a shareholder may vary depending upon the shareholder's particular
situation, and certain shareholders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, and persons who are not
citizens or residents of the U.S. or who are foreign corporations, foreign
partnerships or foreign estates or trusts as to the U.S.) may be subject to
special rules not discussed below. EACH SHAREHOLDER IS URGED TO CONSULT HIS OR
HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE
TRANSACTIONS DESCRIBED HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
The obligation of Grace New York to consummate the Distribution is
conditioned, among other things, upon the delivery of satisfactory tax opinions
from special counsel and tax counsel to Grace New York (the "Opinions"). Counsel
currently expect that the Opinions will state that the Distribution will qualify
as a tax-free distribution under Section 355 of the Code. In rendering the
Opinions, counsel will receive, rely on and assume the accuracy of certain
representations by Grace New York and Fresenius AG (the "Representations"), and
certain other information, data, documentation and materials deemed necessary,
including representations that, to the best knowledge of the management of Grace
New York and Fresenius AG: (i) except as set forth in the Reorganization
Agreement, there is no plan or intention by the shareholders of Grace New York
to sell, exchange, transfer by gift or otherwise dispose of any of their stock
in, or securities of, either Grace New York or New Grace subsequent to the
Distribution; (ii) there is no plan or intention to liquidate New Grace
subsequent to the Distribution, to sell or otherwise dispose of a substantial
amount of the assets of New Grace or its subsidiaries (except in the ordinary
course of business), to redeem shares of New Grace Common Stock except as
described in the Representations, to cause New Grace to merge with any other
corporation or to cease to conduct New Grace's business; and (iii) there is no
plan or intention to liquidate Grace New York subsequent to the Distribution, to
sell or otherwise dispose of a substantial amount of the assets of Grace New
York or its subsidiaries (except in the ordinary course of business), to redeem
shares of Grace New York Common Stock (except as described in the
Representations), to cause Grace New York to merge with any other corporation
(except as described in the Reorganization Agreement), or to cease to conduct
its business. The Representations address, among other things, the requirements
for tax-free treatment of the Distribution that (a) Grace New York shareholders
retain a continuity in both Grace New York and New Grace after the Distribution,
and (b) Grace New York's historic businesses continue after the Distribution.
Assuming that the Distribution is tax-free, (i) Grace New York shareholders
will not recognize income, gain or loss upon the receipt of shares of New Grace
Common Stock; (ii) each shareholder will allocate his or her aggregate tax basis
in his or her Grace New York Common Stock before the Distribution between his or
her Grace New York Common Stock and New Grace Common Stock in proportion to
their respective fair market values at the time of the Distribution; (iii) each
shareholder's holding period for New Grace Common Stock will include his or her
holding period for his or her Grace New York Common Stock, provided that the
Grace New York Common Stock is held as a capital asset at the time of the
Distribution; (iv) the earnings and profits of Grace New York will be allocated
between Grace New York and New Grace; and (v) no gain or loss will be recognized
by Grace New York or New Grace upon the Distribution. For a description of the
consequences to Grace New York and New Grace shareholders if the Distribution
were not to qualify as tax-free, see "RISK FACTORS -- Other Risks -- Certain
U.S. Tax Considerations Related to the Distribution" in the Joint Proxy
Statement-Prospectus.
A Preferred Share Purchase Right (a "New Grace Right") will attach to each
share of New Grace Common Stock distributed in the Distribution. While the
distribution of the New Grace Rights should not be taxable to shareholders, to
New Grace or to Grace New York, shareholders may, depending upon the
circumstances, recognize taxable income in the event that the New Grace Rights
become exercisable for New
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Grace Junior Preferred Stock (or other consideration) or for common stock of an
acquiring company. See "CERTAIN ANTI-TAKEOVER EFFECTS -- Preferred Stock
Purchase Rights."
On or prior to the Time of Distribution, Grace New York and New Grace will
enter into a Tax Sharing and Indemnification Agreement providing for various tax
matters. See "CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE."
THE FOREGOING DISCUSSION OF MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO THE TAX CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE APPLICABILITY
AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS, AND OF PROPOSED CHANGES IN
APPLICABLE TAX LAWS.
RELATIONSHIPS AFTER THE DISTRIBUTION
As a result of the Distribution, NMC will cease to be affiliated with Grace
Chemicals, and New Grace will operate as a separate publicly held company. From
and after the Distribution, shares of New Grace Common Stock and FMC Ordinary
Shares (or ADSs represented by American Depositary Receipts ("ADRs")) will trade
independently. See "CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS."
LISTING AND TRADING OF NEW GRACE COMMON STOCK; NO CURRENT PUBLIC MARKET
There is no current public trading market for New Grace Common Stock. New
Grace will apply to list the New Grace Common Stock on the NYSE under the symbol
"GRA." Based on information as of July 15, 1996, New Grace initially expects to
have approximately 92 million shares issued and outstanding, approximately 4.7
million shares subject to outstanding options and approximately 18,000 holders
of record.
A "when-issued" trading market in New Grace Common Stock is expected to
develop at or about the Time of Distribution. The existence of such a market
means that shares can be traded prior to the time certificates are actually
available or issued. The prices at which shares of New Grace Common Stock may
trade, either prior to the Distribution on a "when-issued" basis or subsequent
to the Distribution, cannot be predicted. Until an orderly market develops, the
prices at which trading in such stock will occur may fluctuate significantly.
The prices at which the shares of New Grace Common Stock will trade will be
determined by the marketplace, and may be influenced by many factors, including,
among others, the depth and liquidity of the market for such shares, investor
perceptions of New Grace and the industries in which it participates, New
Grace's dividend policy and general economic and market conditions. Such prices
may also be affected by certain anti-takeover provisions of the New Grace
Certificate, the Amended and Restated By-laws of New Grace (the "New Grace
By-laws") and the New Grace Rights, in each case as in effect following the
Distribution. See "CERTAIN ANTI-TAKEOVER EFFECTS."
The shares of New Grace Common Stock distributed to holders of Grace New
York Common Stock will be freely transferable, except for shares of New Grace
Common Stock received by persons who may be deemed "affiliates" of New Grace
under the Securities Act of 1933, as amended (the "Securities Act"). Persons who
may be deemed affiliates of New Grace after the Distribution generally include
individuals or entities that control, are controlled by or are under common
control with New Grace, and may include the directors and executive officers of
New Grace, as well as any principal shareholders of New Grace. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "BENEFICIAL OWNERSHIP OF
MANAGEMENT." Persons who are affiliates of New Grace will be permitted to sell
their shares of New Grace Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Rule 144 under the Securities Act. Based on the number of shares of New Grace
Common Stock expected to be held by directors and executive officers of New
Grace following the Distribution, approximately 224,000 shares of New Grace
Common Stock will be available for sale pursuant to such exemptions.
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DIVIDEND POLICY AND SHARE REPURCHASES
Grace New York's stated policy is to pay dividends in any year equal to 20%
to 30% of its earnings for the prior year. New Grace intends to continue this
policy. In addition, New Grace intends to repurchase New Grace Common Stock from
time to time as circumstances allow. However, the declaration and payment of
cash dividends and the repurchase of shares will be at the sole discretion of
the New Grace Board of Directors (the "New Grace Board") and will depend on New
Grace's ability to declare and pay dividends and to repurchase shares under its
credit and financing agreements, as well as on the future operating and
financial condition of New Grace, its capital requirements and future prospects,
general business conditions and other factors deemed relevant by the New Grace
Board. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- Financial Condition -- Liquidity and Capital Resources."
NMC CREDIT AGREEMENT
In connection with the NMC Credit Agreement, Grace Chemicals has agreed to
guarantee a two-year facility ("Facility 3") (which provides for a maximum of
$500 million of available credit) and a seven-year facility ("Facility 2") up to
a maximum of $450 million. The NMC Credit Agreement is expected to provide that
these guarantees will be released as to $800 million upon the occurrence of
certain events after 45 days, but within 60 days, following the Effective Date,
including (a) the receipt of an unconditional joint and several guarantee from
Fresenius Medical Care and certain of its subsidiaries for the full amount of
the NMC Credit Facility; or (b) the receipt of a letter of credit or other
acceptable financial accommodation for the account of Grace Chemicals or
Fresenius Medical Care in form and substance satisfactory to the Lenders; or (c)
a prepayment in certain specified amounts under the NMC Credit Facility. If such
guarantees are not released within 60 days following the Effective Date, demand
for payment will be made on Grace Chemicals under such guarantees as to $800
million. Grace Chemicals has been advised that it is the intention of Fresenius
Medical Care to provide the unconditional joint and several guarantees referred
to in the preceding sentence in a manner so as to cause the release of the Grace
Chemicals' guarantees as to $800 million not before 45 days, but on or prior to
50 days, following the Effective Date. However, no assurance can be given that
such guarantees will be provided or that either or both of Grace Chemicals'
guarantees will be released. In the event that Fresenius Medical Care does not
provide such guarantees or otherwise effect the release of the Grace Chemicals
guarantees as to $800 million, Grace Chemicals would be required to provide the
letters of credit or repay the amounts specified in the NMC Credit Agreement
and, thereafter, be subrogated to the rights of Lenders with respect to such
repaid amounts after the Lenders under the respective facilities have been
repaid in full; and Grace Chemicals has undertaken to the Lenders to maintain
unused available credit in an amount to be determined while the Grace Chemicals
guarantees are outstanding in order to facilitate such actions. The balance of
the Grace Chemicals guarantees under Facility 2 will be released upon NMC (or
Fresenius Medical Care, if Fresenius Medical Care guarantees the NMC Credit
Facility), on a consolidated basis, achieving a ratio of senior debt to EBITDA
of equal to or less than 3.5.
In connection with Grace Chemicals' agreement to extend guarantees under
the NMC Credit Agreement, to provide a significant inducement for the release of
such guarantees as to $800 million on or prior to the 50th day following the
Effective Date, Fresenius Medical Care and Grace Chemicals intend to enter into
an agreement providing that, if such Grace Chemicals guarantees, other than with
respect to $150 million guaranteed under Facility 2, have not been released
prior to close of business on the 50th day following the Effective Date, it
will, at such time, make a $300 million payment to W. R. Grace Foundation, Inc.
which contribution may not be used to satisfy any legal obligation of Grace
Chemicals). In addition, it is intended that Fresenius Medical Care will agree
that (i) it will contribute the capital stock of Fresenius USA to Grace promptly
following the Effective Date and (ii) during the 49-day period following the
Effective Date, (a) it will not engage, or permit NMC to engage, in any
settlement discussions regarding OIG matters without Grace Chemicals'
participation and consent and (b) it will cause the respective businesses of NMC
and Fresenius USA to be conducted in the ordinary course, without incurring
additional debt (other than indebtedness permitted under the NMC Credit
Agreement), relinquishing or modifying contracts with affiliates of Fresenius AG
and without making cash distributions other than to a subsidiary of Grace.
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In connection with the above, it is intended that Fresenius Medical Care
will agree that, during the 45-day period following the Effective Date, it will
not (except as required by the Reorganization Agreement or the agreement
described in the preceding paragraph): (i) make, or cause to be made, a capital
contribution to Grace (or its subsidiaries) or take, or cause to be taken, any
action which would cause a capital contribution to any such entity to be
required under the NMC Credit Agreement; (ii) provide, or cause to be provided,
any guarantee of any debt of Grace (or its subsidiaries), or procure or provide,
or cause to be procured or provided, any letter of credit or other credit
support of any such debt; (iii) take, or cause to be taken, any other action
that has the effect, directly or indirectly, of rendering any assets of
Fresenius Medical Care (other than Grace (or its subsidiaries)) to support the
debt of NMC.
Under this agreement, it is intended that Fresenius Medical Care will
consent to jurisdiction and enforceability in the states of New York and Florida
by Grace Chemicals and W. R. Grace Foundation, Inc., will agree that all costs
of enforcement of the agreement will be borne by Fresenius Medical Care, will
agree that W. R. Grace Foundation, Inc. will be a third-party beneficiary of the
agreement and will agree that any provision of the agreement that is invalid or
unenforceable shall only be so to the extent of such invalidity or
unenforceability without in any way affecting any remaining provisions.
OTHER ARRANGEMENTS
As a result of discussions with representatives of the United States in
connection with the OIG Investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any Obligations of NMC to
the United States relating to or arising out of the OIG Investigation and a qui
tam action pending in federal court in Florida (the "Florida Action") (the
"Government Claims"). For the purposes of the OIG Agreements, an Obligation is
(a) a liability or obligation of NMC to the United States in respect of a
Government Claim pursuant to a court order (i) which is final and nonappealable
or (ii) the enforcement of which has not been stayed pending appeal or (b) a
liability or obligation agreed to be an obligation in a settlement agreement
executed by Fresenius Medical Care, Grace New York or NMC, on the one hand, and
the United States, on the other hand. As stated elsewhere herein, the outcome of
the OIG Investigation cannot be predicted. The entering into of the OIG
Agreements is not an admission of liability by any party with respect to the OIG
Investigation, nor does it indicate the liability, if any, which may result
therefrom.
Under the OIG Agreements, effective upon consummation of the
Reorganization, the United States will be provided by Fresenius Medical Care and
Grace New York with a joint and several guarantee of payment when due of all
Obligations (the "Primary Guarantee"). As credit support for this guarantee, NMC
will deliver, on or prior to the Effective Date, an irrevocable standby letter
of credit in the amount of $150 million. The United States will return such
letter of credit (or any renewal or replacement) for cancellation when all
Obligations have been paid in full or it is determined that NMC has no liability
in respect of the Government Claims. In addition, under the OIG Agreements,
effective upon consummation of the Reorganization, the United States will be
provided with a guarantee by Grace Chemicals of the obligations of Fresenius
Medical Care under the Primary Guarantee in respect of Government Claims for
acts and transactions that took place at any time up to the consummation of the
Reorganization (the "Secondary Guarantee"). Under the Secondary Guarantee,
payment will be required only if, and to the extent that, Obligations have
become due and payable and remain uncollected for 120 days. Grace Chemicals is a
third-party beneficiary of the Primary Guarantee and may institute suit to
enforce its terms.
Under the OIG Agreements, the United States has agreed, solely in its
capacity as holder of the Government Claims: (a) to not take any action
whatsoever to impede, prohibit, enjoin, delay or otherwise interfere with
consummation of the Reorganization on grounds that the Reorganization
constitutes a fraudulent conveyance or other similarly avoidable transfer as to
the United States; (b) to represent to the court in the Florida Action or any
other court presented with an attempt by a relator in any qui tam action
relating in substantial part to matters that are the subject of the Florida
Action or the OIG Investigation to impede, prohibit, enjoin, delay or otherwise
interfere with consummation of the Reorganization that the OIG Agreements
satisfy the concerns of the United States with respect to the Reorganization
and; (c) effective upon consummation of the Reorganization, to release and
discharge Grace Chemicals, Grace New York, NMC, Fresenius Medical Care, and
certain other parties (collectively, the "Releasees") from claims to the effect
that the Reorganization (or any transaction comprising a part thereof)
constitutes a fraudulent conveyance or other similarly avoidable transfer as to
the United States.
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Fresenius Medical Care and the United States state in the OIG Agreements
that they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any obligations arising under such resolution, taking into account the
ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements
state that the foregoing statements shall not be construed to obligate any
person to enter into any settlement of the Government Claims or to agree to a
structured settlement. Moreover, the OIG Agreements state that the statements
described in the first sentence of this paragraph are precatory and statements
of intent only and that (a) compliance by the United States with such provisions
is not a condition or defense to the obligations of Fresenius Medical Care,
Grace New York or Grace Chemicals under the OIG Agreements and (b) breach of
such provisions by the United States cannot and will not be raised by Fresenius
Medical Care, Grace New York or Grace Chemicals to excuse performance of their
respective its obligations under the OIG Agreements.
If the Reorganization is not consummated on or before October 1, 1996, the
OIG Agreements will terminate and be of no further force and effect unless all
parties thereto agree otherwise in writing. If the Reorganization Agreement is
amended, modified or supplemented after the date of the Joint Proxy
Statement-Prospectus, Fresenius Medical Care will provide the United States with
written notice describing the nature of such amendment, modification or
supplement. If the United States determines that such amendment, modification or
supplement is adverse to its interests, the United States will have the right to
terminate the OIG Agreements by delivering written notice of such termination
within 10 business days of its actual receipt of notice of such amendment,
modification or supplement.
The foregoing describes the material terms of the OIG Agreements, copies of
which have been filed as exhibits to the Registration Statement. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such exhibits.
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BUSINESS OF NEW GRACE
New Grace was incorporated in January 1996 as a wholly owned subsidiary of
Grace New York and currently has no assets. Prior to the Distribution, Grace New
York will contribute to New Grace all of the capital stock of Grace Chemicals
and will thereafter effect the Distribution. Immediately following the
Distribution, the name of New Grace will be changed to "W. R. Grace & Co." New
Grace's principal executive offices are located at One Town Center Road, Boca
Raton, Florida 33486-1010, and its main telephone number is (407) 362-2000.
BUSINESS OF GRACE CHEMICALS
OVERVIEW AND STRATEGY
Grace Chemicals is one of the world's leading packaging and specialty
chemicals companies. Grace Chemicals began operating its core businesses in
1954, when it acquired both the Dewey and Almy Chemical Company and the Davison
Chemical Company. Grace Chemicals also has certain noncore businesses that have
been classified as discontinued operations, the most significant of which are
its cocoa business and its Amicon bioseparations business.
Grace Chemicals' core businesses are packaging, catalysts and other
silica-based products, construction products, and container and specialty
polymer products. Grace Chemicals believes that each of its core businesses is a
market leader, offers high value-added products, employs leading technology and
has a global presence. Grace Chemicals' products and systems serve highly
specialized markets, and, accordingly, competition tends to be based primarily
on technological capability, customer service, product quality, and, to a lesser
extent, price. These products and systems also represent an important or
critical component (but a relatively small portion of the cost) of the end
products in which they are used. In its core businesses, Grace Chemicals
believes that it provides highly differentiated, superior products and services
through investments in research and development, facilities that enable Grace
Chemicals to take advantage of expanding global market opportunities, and
technology platforms capable of providing multiple products to satisfy
customers' specific needs. Moreover, Grace Chemicals has focused its research
and development spending on core businesses, fostered the exchange of technology
among its product lines and increased the level of process development directed
at streamlining operations.
Grace Chemicals' strategy has been and, following the Distribution, will be
to (i) focus on core businesses to accelerate profitable growth; (ii) upgrade
financial performance, principally by selling or monetizing noncore businesses,
managing debt levels consistent with profitable growth opportunities, and
reducing overhead; and (iii) integrate corporate and operating unit functions
through global product line management. As part of this strategy, since
mid-1995, efforts have been made to enhance shareholder value by strengthening
the balance sheet and reducing costs. These objectives are being achieved
through (i) the sale of Grace Chemicals' water treatment and process chemicals
business, the pending disposition of Grace Chemicals' health care business and
the planned disposition of its cocoa business (intended to be completed in
1996); (ii) the anticipated use of the proceeds from these and other
transactions (including the Distribution Payment), to substantially reduce
indebtedness, to repurchase stock, and to invest in core businesses; (iii) a
worldwide restructuring program to streamline processes and thereby reduce
expenses by approximately $100 million annually (with further actions being
taken to improve margins); and (iv) the implementation of rigorous controls on
working capital and capital spending. These plans are designed to make Grace
Chemicals a high-performance, high-value company focused on the strengths of its
packaging and specialty chemicals businesses. In addition, in the early 1990s,
the management structure of Grace Chemicals was reorganized on the basis of
global product lines (as distinguished from regional product management). As a
result of this reorganization, Grace Chemicals believes that it is better able
to serve its multinational customers in all global regions, as well as to tailor
its product offerings to meet local preferences.
To focus on core business growth, Grace Chemicals has made strategic
acquisitions, totaling $120 million in the 1991 to 1995 period, directly related
to its core businesses, including acquisitions intended to further expand its
core businesses internationally. In 1992, Grace Chemicals acquired the North
American food
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service packaging business of DuPont Canada, Inc. In 1993, Grace Chemicals
acquired the Katalistiks fluid cracking catalyst additive business previously
owned by a joint venture between Union Carbide Corporation and AlliedSignal Inc.
In 1993, Grace Chemicals also formed a 51%-owned joint venture with a large
chemical and industrial concern headquartered in Volgograd, Russia, to produce
flexible packaging for sale throughout the Commonwealth of Independent States;
the joint venture began production in the third quarter of 1994. In 1994, Grace
Chemicals acquired the Schur Multiflex group of European flexible packaging
businesses; construction chemicals businesses; and a small pollution control
equipment producer. In 1995, Grace Chemicals formed a 51%-owned joint venture in
Malaysia to produce rigid plastic packaging products for sale throughout
Southeast Asia; a 68%-owned joint venture with a Chinese packaging company to
manufacture shrink films for sausage casings and to market Grace Chemicals'
packaging products and systems in China; a 51%-owned joint venture with a
Russian company to produce container and closure sealants for sale throughout
the Commonwealth of Independent States; and a 50%-owned joint venture with
Engelhard Corporation to manufacture and market metal-based catalytic converters
to the automotive industry. In early 1996, Grace Chemicals agreed to form a
joint venture to produce and market coatings, closures and can sealing compounds
in India, and, in June 1996, Grace Chemicals agreed in principle to acquire
Cypress Packaging, Inc., a U.S. manufacturer of flexible plastic packaging
materials for the retail pre-cut produce market segment. In furtherance of its
strategy to focus on core businesses, Grace Chemicals announced in March 1996
that it had entered into a definitive agreement to sell its water treatment and
process chemicals business to Betz Laboratories, Inc. for $632 million. This
transaction was completed in June 1996.
From 1991 through 1995, Grace Chemicals' capital expenditures for its core
packaging and specialty chemicals business totaled $1,470.8 million (including
$487.4 million in 1995). These expenditures were directed towards the expansion
of existing facilities as well as the construction of new facilities. Grace
anticipates that its capital expenditures for 1996 will approximate those for
1995, including expenditures related to a $350 million multi-year global
expansion program in its packaging business.
In the future, Grace Chemicals intends to emphasize internal growth. In
addition, it may also effect acquisitions, joint ventures and strategic
alliances that afford synergies or other benefits necessary to fulfill strategic
objectives of a core business (such as a key technology or opportunities for
geographic expansion) or that provide a combination of a close fit with a core
business with the potential for exceptional returns.
At year-end 1995, Grace Chemicals had approximately 21,200 full-time
employees worldwide in its continuing operations and approximately 2,200
full-time employees worldwide in discontinued operations.
CHEMICAL INDUSTRY OVERVIEW
The chemicals industry is generally grouped into three major categories:
commodity chemicals, fine chemicals and specialty chemicals. Commodity
chemicals, such as methanol, ethylene and ammonia, are produced in large volumes
using established manufacturing processes and are sold to a wide range of
customers. Virtually all commodity chemicals have multiple producers, are
relatively fungible and do not command high premiums. At the other extreme, fine
chemicals are the highest value-added chemicals used as intermediates in the
production of pharmaceuticals, foodstuffs and other products, are usually
produced in low volumes using high manufacturing standards and are typically
sold for high premiums. Specialty chemicals, such as those produced by Grace
Chemicals, are high value-added products used as intermediates in a wide variety
of products, are produced in small volumes, and must satisfy well-defined
performance requirements and specifications. Specialty chemicals are often
critical components of the end products in which they are used; consequently,
they are tailored to customer needs, which generally results in a close
relationship between the specialty chemicals producer and the customer. Rapid
response to customers and reliability of product and supply are important
competitive factors in specialty chemicals businesses.
Management of Grace Chemicals believes that, in the specialty chemicals
business, technological leadership (resulting from continuous innovation through
research and development), combined with product differentiation and superior
customer service, leads to high operating margins. Grace Chemicals believes that
its core businesses are characterized by market features that reward the higher
research and development and customer service costs associated with its
strategy.
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PRODUCTS AND MARKETS
Packaging. Grace Chemicals' packaging business ("Grace Packaging")
provides high-performance total packaging systems on a worldwide basis,
competing principally by providing superior-quality products and services for
specialized customer needs. The principal products and services provided by
Grace Packaging are (i) flexible plastic packaging systems (including material,
equipment and services) for a broad range of perishable foods such as fresh,
smoked and processed meat products, cheese, poultry, prepared foods (including
soups and sauces for restaurants and institutions), baked goods and produce;
(ii) shrink films used in packaging a variety of nonfood consumer and industrial
products; (iii) foam trays for supermarkets and poultry and other food
processors; and (iv) rigid plastic containers for dairy and other food and
nonfood products. Grace Packaging competes through three product groups:
flexible packaging (marketed extensively under the Cryovac(R) registered
trademark), Formpac(TM) foam trays and Omicron(TM) rigid plastic containers.
Grace Packaging believes that its expertise in food technology and its
long-standing relationships with food producers, principally meat packers, have
been and will continue to be key factors in its success.
The Cryovac packaging products group developed and introduced flexible
plastic vacuum shrink packaging to the food processing industry in the late
1940s, contributing to expanded food distribution and marketing by providing
superior protection against decay-inducing bacteria and moisture loss. The
market for Cryovac products has since expanded into the retail food market, and
Cryovac packaging technology has also been introduced in nonfood applications
for consumer merchandising of housewares, toys and compact discs, as well as for
electronic and medical products.
Cryovac flexible packaging products include shrink bags, shrink films,
laminated films, and films for medical bags and equipment. Shrink bags are
multi-layered plastic bags that mold themselves to the exact shape of the
product, forming a clear "second skin." Using sophisticated coextrusion
technology, Cryovac shrink bags maximize barrier properties, optics, abuse
resistance, shrinkability and seal strength. Cryovac shrink films are
multi-layered shrinkable plastic films used to package a variety of food and
nonfood consumer goods to protect against damage, preserve freshness and enhance
marketability. Cryovac laminates are multi-layered, nonshrinkable and normally
high-barrier flexible materials used for packaging perishable foods, shelf-
stable products (nonrefrigerated foods, such as syrups, toppings and tomato
paste) and various nonfood products. The Cryovac line also includes sterilized
medical bags and films for use in medical products.
Grace Packaging differentiates its flexible packaging products from
competitive products by offering a combination of the following core
competencies: (i) proprietary film processing technology; (ii) resin technology,
permitting the production of materials suited to specific customer needs; (iii)
packaging and food science expertise, providing better understanding of the
interaction between packaging materials and packaged products; (iv) complete
systems support capability, providing a single source for customer needs; (v)
talented employee base that strives to anticipate, meet and exceed customer
expectations; and (vi) effective sales and distribution networks. In addition,
Grace Packaging's systems can be adapted to support customers' marketing goals.
Technological leadership is a key competitive factor in the packaging
business. Today, Grace Packaging is recognized as a worldwide leader in flexible
packaging technology. Management expects that its technological leadership will
continue to spur Grace Packaging's growth in several markets: in the rapidly
expanding packaged fresh-cut produce market, Grace Packaging produces films that
permit oxygen to pass through at various rates, thereby matching the varying
respiration rates of different vegetables and permitting longer shelf life; in
the fresh meat market, Grace Packaging's case-ready program reduces
supermarkets' in-store production costs by allowing meat processors to centrally
package meat products suitable for display; in the bone-in pork market, Grace
Packaging's Total Bone Guard (TBG(TM)) packaging products have revolutionized
the distribution of large subprimal cuts of pork by adding a film patch to
certain sections of a high-abuse barrier bag to prevent bone punctures; and, in
the processed meats and poultry markets, Cryovac cook-in bags and laminates
withstand high cooking temperatures, reducing the potential for contamination
and retaining product shape, clarity and weight. Because technological
innovations by competitors could adversely affect its business, Grace Packaging
intends to continue to focus research and development expenditures on
maintaining technological leadership in flexible packaging.
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<PAGE> 20
Grace Packaging's Formpac business group manufactures and sells polystyrene
foam prepackaging trays used by supermarkets and grocery stores to protect and
display fresh meat, poultry and produce, and by poultry and other meat
processors, as well as foam food service items such as hinged-lid containers
used in institutional environments, by carry-out restaurants and by supermarkets
for sale to retail customers. Formpac manufactures foam trays in a two-stage
process consisting of the extrusion and thermoforming of polystyrene foam
sheets. Although the majority of Formpac's customers are located in the eastern
two-thirds of the U.S., Formpac's proprietary technology has also been
successfully used in certain packaging applications outside of the U.S.
Competition is based on service, price and product quality.
Grace Packaging's Omicron business group produces rigid plastic packaging
products (primarily plastic tubs for dairy products such as margarine and
yogurt) in Australia. Omicron products use proprietary thermoforming technology,
involving the controlled thinning and shaping of hot plastic sheets to increase
strength and rigidity while minimizing weight. Grace Packaging is expanding the
Omicron business into Southeast Asia through a 51%-owned joint venture formed in
1995 to produce rigid plastic packaging products in Malaysia.
Resins are the principal raw materials used by Grace Packaging. Although
prices for ethylene-based resins can be volatile, there is currently an adequate
worldwide supply of resins at generally stable prices. Further, Grace Packaging
has typically been able to increase the sales prices of its products in response
to increases in the prices of resins and other raw materials. However, to the
extent that resin prices increase and Grace Packaging cannot pass on the
increases to its customers, such price increases may have an adverse impact on
Grace Chemicals' profitability. In most cases, multiple sources of resins and
other raw materials exist, with at least one source located in most global
regions.
Grace Packaging's sales and revenues were $1.7 billion in 1995, $1.4
billion in 1994 and $1.3 billion in 1993. Approximately 51% of Grace Packaging's
1995 sales and revenues were generated in North America, 30% in Europe, 11% in
Asia Pacific and the remainder in Latin America. Grace Packaging estimates that
approximately 80% of its 1995 sales were to the food industry. Although sales
and revenues tend to be slightly higher in the fourth quarter, seasonality is
generally not significant to Grace Packaging.
At year-end 1995, Grace Packaging employed approximately 9,900 people in 28
production facilities (nine in North America, eight in Europe, six in Asia
Pacific and five in Latin America) and 79 sales offices, serving approximately
24,000 customers. Grace Packaging's principal U.S. manufacturing facilities are
located at Simpsonville, South Carolina, Iowa Park, Texas, Seneca, South
Carolina and Cedar Rapids, Iowa; its principal European manufacturing facilities
are located at Epernon, France, St. Neots, United Kingdom, Passirana, Italy, and
Hamburg and Flensburg, Germany, and it has major manufacturing facilities
located in Australia, Japan, Brazil and Argentina. Grace Packaging has also
recently constructed a manufacturing facility in Kuantan, Malaysia that will be
its principal manufacturing facility in Asia. Grace Packaging distributes its
products globally through direct sales organizations and distributors, using a
network of distribution facilities located near its manufacturing facilities.
In Grace Packaging's business, the failure to have capacity sufficient to
meet customer needs, or to manufacture in geographic markets in which customers
expand, could result in a loss of customer relationships and/or business. As a
result of product introductions, marketing programs and improvements in global
economic conditions, worldwide demand for Grace Packaging products grew at a
rapid pace in 1994 and 1995, placing pressure on existing capacity. To address
this matter, Grace Packaging has added capacity in all regions (including the
plant in Kuantan, Malaysia, referred to above).
Catalysts and Other Silica-Based Products. Grace Chemicals' Davison
division ("Grace Davison"), founded in 1832, is composed of three principal
product groups: refinery catalysts, polyolefin catalysts, and silica and zeolite
adsorbents. These products apply silica, alumina and zeolite technology, and are
designed and manufactured to meet the varying specifications of such diverse
customers as major oil refiners, plastics and chemical manufacturers and
consumer products companies. Grace Davison's technological expertise provides a
competitive edge, allowing Grace Davison to quickly design products that meet
customer specifications, as well as to develop new products that expand its
existing technology; for example, Grace
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<PAGE> 21
Davison estimates that a substantial portion of its 1995 fluid cracking catalyst
sales was attributable to products introduced in the last five years.
Refinery catalysts include (a) fluid cracking catalysts used by petroleum
refiners to convert crude oil into more valuable transportation fuels, such as
gasoline and jet and diesel fuel, as well as other petroleum-based products, and
(b) hydroprocessing catalysts that remove certain impurities (such as nitrogen,
sulfur and heavy metals) from crude oil prior to the use of fluid cracking
catalysts. Oil refining is a highly specialized discipline, demanding that
products be tailored to meet local variations in crude oil and the refinery's
changing operational needs. Grace Davison works regularly with most of the
approximately 360 refineries in the world, helping to find the most appropriate
catalyst formulations for the refiners' changing needs. Grace Davison's business
has benefited in recent years, in part, from the use of heavier crude oils, and
could be adversely affected by an increase in the availability of lighter crude
oil, which generally requires less fluid cracking catalysts to refine.
Competition in the refinery catalyst business is based on technology,
product performance, customer service and price. Grace Davison believes it is
one of the world leaders in refinery catalysts and the largest supplier of fluid
cracking catalysts in North America and Europe.
Grace Davison's polyolefin catalysts and catalyst supports are essential
components used in manufacturing nearly half of all high density and linear low
density polyethylene resins, which are used in products such as plastic film,
high-performance pipe and household containers. The polyolefin catalyst business
is technology-intensive and focused on providing products specifically
formulated to meet end-user applications. Manufacturers generally compete on a
worldwide basis, and competition has recently intensified due to evolving
technologies, particularly the use of metallocenes. Grace Chemicals believes
that metallocenes represent a revolutionary development in the making of
plastics, allowing plastics manufacturers to design polymers with exact
performance characteristics. Grace Davison is continuing its work on the
development and commercialization of metallocene catalysts.
Silica and zeolite adsorbents are used in a wide variety of industrial and
consumer applications. For example, silicas are used in coatings as flatting
agents (i.e., to reduce gloss), in plastics to improve handling, in toothpastes
as thickeners and cleaners, in foods to carry flavors and prevent caking, and in
the purification of edible oils. Zeolite adsorbents are used between the two
panes of insulated glass to adsorb moisture and in process applications to
separate certain chemicals from mixtures. Competition is based on product
performance, customer service and price. Grace Davison is planning to expand its
silica business in the Asia Pacific region with a new plant in Kuantan,
Malaysia, to open in 1996.
Grace Davison's sales and revenues were $687 million in 1995, $610 million
in 1994 and $572 million in 1993; approximately 52% of Grace Davison's 1995
sales and revenues were generated in North America, 37% in Europe, 10% in Asia
Pacific and 1% in Latin America. At year-end 1995, Grace Davison employed
approximately 2,700 people worldwide in nine facilities (six in the U.S. and one
each in Canada, Germany and Brazil). Grace Davison's principal U.S.
manufacturing facilities are located in Baltimore, Maryland and Lake Charles,
Louisiana; its principal European manufacturing facility is located in Worms,
Germany. Grace Davison has a direct selling force and distributes its products
directly to customers.
Most raw materials used in the manufacture of Grace Davison products are
available from multiple sources, and, in some instances, are produced or
supplied by Grace Davison. Because of the diverse applications of products using
Grace Davison technology and the geographic areas in which such products are
used, seasonality does not have a significant effect on Grace Davison's
businesses.
Construction Products. Grace Chemicals' construction products division
("Grace Construction") is a leading supplier of specialty materials to the
construction industry. Grace Construction's products fall mainly into three
groups: concrete and cement additives (principally additives that add strength,
control corrosion, reduce the amount of water required or modify the setting
time), products that prevent water damage to structures (such as water and ice
proofing products for residential use and waterproofing systems for commercial
structures), and substances that protect structural steel against collapse due
to fire. In North America, Grace Construction also manufactures and distributes
masonry block additives and products and
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<PAGE> 22
vermiculite products used in construction and other industrial applications.
Grace Construction's products are sold to a broad customer base, including
cement manufacturers, ready-mix and pre-stressed concrete producers, specialty
subcontractors and applicators, masonry block manufacturers, building materials
distributors, and other industrial manufacturers. Grace Construction's products
are marketed to construction specifiers, such as architects and structural
engineers, for whom product performance and adaptability are important, as well
as to contractors, to whom cost and ease of application are frequently more
important.
Grace Construction competes globally with several large construction
materials suppliers and regionally and locally with numerous smaller
competitors. Grace Construction's customers are frequently local contractors and
cement manufacturers; consequently, local suppliers are often able to compete
effectively. As a result, Grace Construction sells products to certain customers
under global or U.S. contracts, others under regional contracts and others on a
job-by-job basis. In recent years, the cement manufacturing business and the
contracting business have experienced substantial consolidation, particularly in
foreign markets. Competition is based largely on price, technical support and
service, adaptability of the product, and product performance.
Grace Construction's 1995 sales and revenues totaled $397 million (66% in
North America, 17% in each of Europe and Asia Pacific and less than 1% in Latin
America), versus $387 million and $333 million in 1994 and 1993, respectively.
At year-end 1995, Grace Construction employed approximately 1,900 people at 57
production facilities (27 in North America, 11 in Southeast Asia, seven in
Australia/New Zealand, seven in Europe, four in Latin America and one in Japan)
and 70 sales offices worldwide. Grace Construction's capital expenditures tend
to be relatively lower, and sales and marketing expenditures tend to be
relatively higher, than those of Grace Chemicals' other core businesses.
The construction business is cyclical in response to economic conditions
and construction demand. The construction market has experienced slow but steady
growth through 1995 from a cyclical low in 1991. During this time, management of
Grace Construction has focused its efforts on streamlining its range of products
and reducing costs. For example, during this period, Grace Construction
implemented a lower cost structure by consolidating manufacturing operations in
North America and through an extensive restructuring plan in Europe. The
construction business is also seasonal due to weather conditions. Grace
Construction seeks to increase profitability and minimize the impact of cyclical
and seasonal downturns in regional economies by introducing technically
advanced, value-added products, expanding geographically, and developing
business opportunities in renovation construction markets. However, there can be
no assurance that Grace Construction's attempts to minimize the impact of the
cyclicality and seasonality of the construction business will succeed, and such
cyclicality and seasonality could adversely affect the business of Grace
Construction.
The raw materials used for manufacturing Grace Construction products are
primarily commodities obtained from multiple sources, including commodity
chemical producers, petroleum companies and paper manufacturers. In most
instances, there are at least two alternative suppliers for each of the
principal raw materials used by Grace Construction. However, the worldwide
supply of calcium lignin, a wood pulping by-product used as a raw material in
the production of concrete admixtures, has been decreasing as paper mills
convert to new manufacturing processes. Grace Construction has secured
short-term supplies of calcium lignin and is exploring new technologies to
replace it in the future. However, there is no assurance that Grace Construction
will be able to find an adequate replacement for calcium lignin, and, in the
event of such an occurrence, the business of Grace Construction may be adversely
affected.
Container and Specialty Polymer Products. Grace Chemicals' container
division ("Grace Container") consists primarily of four product lines: container
sealants, closure sealants, coatings for metal packaging and specialty polymers.
Container sealants are applied to food and beverage cans, as well as to other
rigid containers (such as industrial product containers and aerosol cans), to
ensure a hermetic seal between the lid and the can body. Closure sealants are
used to seal pry-off and twist-off metal crowns, as well as roll-on pilfer proof
and plastic closures, for the glass/plastic container markets (primarily in
beverage and food applications). Coatings are used in the manufacture of cans
and closures to protect the metal against corrosion, to protect the contents
against the influences of metal, to ensure proper adhesion of sealing compounds
to metal surfaces, and to provide base coats for inks and for decorative
purposes. These products are principally sold to
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third parties who perform canning and bottling for food and beverage companies.
Formulated engineered polymers are used in printed circuit board and component
assembly in the electronics, electrical, automotive and defense industries,
including surface mount and conductive adhesives, capacitor coatings,
light-emitting diode encapsulants and conformal coatings. Grace Container is
expanding its product offering and is seeking to improve sales growth through
new technologies such as its oxygen-scavenging compound, which combines with
closure sealants to extend shelf life by eliminating oxygen, and oxygen's effect
on taste, from sealed beer and other beverage bottles.
Grace Container's sales and revenues were $357 million, $325 million and
$306 million in 1995, 1994 and 1993, respectively. Future sales growth will
likely be impacted by the trend toward cans and cannery systems requiring fewer
seams. Grace Container's products are marketed internationally, with 34% of 1995
sales and revenues in Europe, 28% in each of North America and Asia Pacific and
10% in Latin America. At year-end 1995, Grace Container employed approximately
1,600 people at 30 production facilities (nine in Asia Pacific and seven in each
of North America, Europe and Latin America) and 57 sales offices worldwide.
Competition is based on providing high-quality customer service at all customer
sites, as well as on price and product quality and reliability. In addition,
because of the relative concentration of the canning and bottling market,
maintaining relationships with the leading canners and bottlers and assisting
them as they install new plants and reengineer processes are key elements for
success. Although the raw materials used in Grace Container's operations,
including resins, rubber and latices, are generally available from multiple
sources, the prices of these raw materials experienced rapid escalation during
most of 1995, negatively impacting Grace Container's gross margins; improvements
are expected in 1996 as raw materials prices started to ease during the latter
part of 1995. However, no assurance can be given that these prices will continue
to decline or as to the extent of any decline. Although demand for container
packaging and sealant products tends to increase slightly during the second and
third quarters, the impact of such seasonality is not significant to Grace
Container.
Thermal and Emission Control Systems. Grace Chemicals' thermal and
emission control systems business ("Grace TEC Systems") is a developmental
business that consists of four principal product groups: web processing
products, industrial emission control products, mobile emission control products
and specialty catalysts. These products are designed to customer specifications
and are sold to a variety of industrial customers.
Web processing products, consisting primarily of air flotation dryers and
auxiliary equipment, are sold principally to the graphic arts, coating and
converting markets. The industrial emission control products group manufactures
volatile organic compound control equipment, including thermal, catalytic and
regenerative oxidation systems. Demand for this equipment is driven principally
by government regulations. The mobile emission control products group sells
washcoat materials and specialty substrates. Washcoat materials are used by
catalyst manufacturers to enhance the performance of catalytic converters sold
to automotive original equipment manufacturers. Specialty catalysts are used to
control volatile organic compounds, nitrogen oxides and carbon monoxide from a
variety of sources.
Competition for Grace TEC Systems' products is based primarily on system
design, materials, technology, customer service, product performance and price.
DISCONTINUED OPERATIONS
In 1993, the then remaining noncore businesses of Grace New York were
classified as discontinued operations. The sale and monetization of a
substantial portion of these noncore businesses have been completed; Grace Cocoa
and Amicon are the principal discontinued operations that have not yet been
divested. Grace Chemicals is actively pursuing the disposition of these
businesses and its other remaining discontinued operations and intends to
complete such dispositions in 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION."
Grace Cocoa. The chocolate and cocoa business of Grace Chemicals ("Grace
Cocoa") produces high-quality intermediate cocoa and chocolate products for sale
as ingredients to the bakery, confectionery, dairy and beverage industries.
Cocoa liquor, cocoa butter and cocoa powder are sold internationally; coatings
and intermediate chocolate products are sold to the European market; and
intermediate chocolate products,
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mainly coatings and cookie drops, are sold to the North American market. Grace
Cocoa competes primarily on the basis of service, product quality and
reliability. Sales of cocoa and chocolate products were $798 million in 1995,
$718 million in 1994 and $636 million in 1993. At year-end 1995, Grace Cocoa
employed approximately 1,700 people at nine production facilities (four in each
of Europe and North America and one in Asia Pacific) and five other offices
worldwide. Grace Chemicals is focusing on improving Grace Cocoa's operating cash
flow through the adoption of new strategies and a new global organizational
structure, while simultaneously positioning the business for sale.
Amicon. The Amicon bioseparations division ("Amicon") produces and markets
membrane ultrafiltration devices and systems and low and high pressure liquid
chromatography media, columns and systems. Amicon's ultrafiltration devices are
used primarily for concentrating proteins and nucleic acids (such as DNA) for
both research and drug production purposes. Amicon's chromatography products are
mainly used for purifying and isolating specific molecules in the production of
synthetic drugs. Amicon's customers consist primarily of pharmaceutical,
biotechnology and specialty chemicals companies, government-sponsored research
facilities, academic institutions and hospitals.
Amicon operates manufacturing facilities in the U.S., England, France and
Ireland. Amicon maintains direct sales and technical services offices in the
U.S. and 11 other countries and has distribution arrangements in 25 other
countries.
RESEARCH ACTIVITIES
Grace Chemicals engages in research and development programs directed
toward the development of new products and processes, and the improvement of,
and development of new uses for, existing products and processes. Research is
carried out by product line laboratories in North America, Europe, Asia and
Latin America and by the Corporate Research Division in Columbia, Maryland
(collectively, the "Research Division"). The Research Division's activities
focus on Grace Chemicals' core product lines and include research in specialty
polymers, catalysis, construction materials, photopolymers, specialty packaging
and process engineering, principally involving the development of technologies
to manufacture chemical specialties. Grace Chemicals' research and development
strategy will be to use its centralized Washington Research Center ("WRC") to
develop technology platforms on which new products will be based, while focusing
development efforts in each business unit, in conjunction with WRC, on the
improvement of existing products and/or the adaptation of existing products to
customer needs.
Research and development expenses relating to continuing operations
amounted to $121 million in 1995, $107 million in 1994 and $112 million in 1993
(including expenses incurred in funding external research projects). The amount
of research and development expenses relating to government- and
customer-sponsored projects (as opposed to projects sponsored by Grace
Chemicals) is not material.
PATENTS AND OTHER INTELLECTUAL PROPERTY MATTERS
Grace Chemicals relies on numerous patents and patent applications, as well
as on know-how and other proprietary information. As competition in the markets
in which Grace Chemicals does business is often based on technological
superiority and innovation, with new products being introduced frequently, the
ability to achieve technological innovations and obtain patent or other
intellectual property protection is crucial. There can be no assurance that
Grace Chemicals' patents, patent applications or other intellectual property
will provide sufficient proprietary protection. There can also be no assurance
that the patents of other companies will not have an adverse effect on Grace
Chemicals. Other companies may independently develop similar systems or
processes that circumvent patents issued to Grace Chemicals. In addition, Grace
Chemicals' competitors may develop technologies, systems or processes that are
more effective than those developed by Grace Chemicals, or that render Grace
Chemicals' technology, systems or processes less competitive or obsolete. Any
such events could have an adverse effect on Grace Chemicals.
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ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
In constructing and operating its facilities, Grace Chemicals incurs
capital and operating expenditures relating to the protection of the
environment, as well as costs to remediate properties. The following table sets
forth Grace Chemicals' expenditures in the past three years, and its estimated
expenditures in 1996 and 1997, for (i) the operation and maintenance of
environmental facilities and the disposal of hazardous and nonhazardous wastes
with respect to continuing operations; (ii) capital improvements to
environmental control facilities relating to continuing operations; and (iii)
the remediation of sites:
<TABLE>
<CAPTION>
(I)
-------------- (II)
OPERATION OF ------------ (III)
FACILITIES AND CAPITAL -----------
WASTE DISPOSAL IMPROVEMENTS REMEDIATION
-------------- ------------ -----------
(IN MILLIONS)
<S> <C> <C> <C>
1993........................................... $ 41 $ 19 $44
1994........................................... 36 22 31
1995........................................... 44 15 31
1996 (estimated)............................... 45 20 30
1997 (estimated)............................... 47 17 20
</TABLE>
Such expenditures have not had, and are not expected to have, a material
effect on Grace Chemicals' other capital expenditures, its earnings or its
competitive position. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION."
With the goal of continuously improving Grace Chemicals' environment,
health and safety ("EHS") performance, Grace New York established its Commitment
to Care(TM) initiative (based on the Responsible Care(R) program of the Chemical
Manufacturers Association) in 1994 as the program under which all Grace
Chemicals' EHS activities are to be implemented. To the extent applicable,
Commitment to Care extends the basic elements of Responsible Care to all Grace
Chemicals locations worldwide, embracing specific objectives in the key areas of
product stewardship, employee health and safety, community awareness and
emergency response, distribution, process safety, and pollution prevention.
See "-- Legal Proceedings and Regulatory Matters" for information
concerning environmental proceedings to which Grace Chemicals is a party and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" for additional information concerning environmental matters.
LEGAL PROCEEDINGS AND REGULATORY MATTERS
Asbestos Litigation. Grace Chemicals 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 Chemicals cannot predict whether and to what extent
asbestos-related property damage lawsuits and claims will be brought against it
in the future or the expenses involved in defending against and disposing of any
such future lawsuits and claims. By contrast, Grace Chemicals believes that
there are common features with respect to personal injury claims; in the fourth
quarter of 1995, Grace Chemicals 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 Chemicals'
aggregate accrual for asbestos liabilities as of March 31, 1996 was $792.4
million; this amount reflects all asbestos-related property damage and personal
injury lawsuits and claims pending at that date (except for four property damage
lawsuits as to which the liabilities are not yet estimable because Grace
Chemicals has not yet been able to obtain sufficient information as to the
relevant properties through discovery proceedings), as well as personal injury
lawsuits and claims expected to be filed through 1998.
Grace Chemicals previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace Chemicals 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 Chemicals has
also
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<PAGE> 26
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 Chemicals. In addition, Grace Chemicals has settled with many excess
insurance carriers that wrote policies available for personal injury lawsuits
and claims. Grace Chemicals is currently in litigation with its remaining excess
insurance carriers whose policies Grace Chemicals believes are available for
asbestos-related personal injury lawsuits and claims. Recovery under these
policies is subject to lengthy litigation and legal uncertainties. Insurance
coverage for asbestos-related liabilities has not been commercially available
since 1985.
As of March 31, 1996, Grace Chemicals had recorded a receivable of $281.5
million, which is the amount estimated to be the probable recovery from its
insurance carriers with respect to pending and projected asbestos claims. In
Grace Chemicals' opinion, it is probable that recoveries from its insurance
carriers, along with other funds, will be available to satisfy the pending
property damage and personal injury claims, and personal injury claims expected
to be filed through year-end 1998. Consequently, Grace Chemicals 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.
In addition to the discussion below, see Note 2 to the historical consolidated
financial statements of Grace New York and the notes thereto for the year ended
December 31, 1995, attached hereto as Annex F (the "Consolidated Financial
Statements"), and Note (b) to the unaudited historical consolidated financial
statements of Grace New York and the notes thereto for the three-month period
ended March 31, 1996, attached hereto as Annex G (the "First Quarter Financial
Statements"), for a more comprehensive discussion of these matters, including
tabular presentations of accrued liabilities and asbestos-related receivables.
Grace Chemicals was a defendant in approximately 40,800 asbestos-related
lawsuits at year-end 1995 (47 involving claims for property damage and the
remainder involving approximately 92,400 claims for personal injury), as
compared to approximately 38,700 lawsuits at year-end 1994 (65 involving claims
for property damage and the remainder involving approximately 67,900 claims for
personal injury). In most of these lawsuits, Grace Chemicals is one of many
defendants.
The plaintiffs in property damage lawsuits generally seek, among other
things, to have the defendants absorb the cost of removing, containing or
repairing the asbestos-containing materials in the affected buildings. Through
1995, 129 asbestos property damage cases were dismissed with respect to Grace
Chemicals without payment of any damages or settlement amounts; judgments were
entered in favor of Grace Chemicals in 10 cases (excluding cases settled
following appeals of judgments in favor of Grace Chemicals and a case in which
the plaintiff was granted a new trial on appeal); Grace Chemicals was held
liable for a total of $74.7 million in seven cases (two of which are on appeal);
and 177 property damage suits and claims were settled for a total of $421.8
million.
Included in the asbestos property damage lawsuits pending against Grace
Chemicals and others at year-end 1995 were the following class actions: (i) a
Pennsylvania state court action (Prince George Center, Inc. v. U.S. Gypsum
Company, et al., Court of Common Pleas of Philadelphia County), certified in
1992, covering all commercial buildings in the U.S. leased, in whole or in part,
to the U.S. government on or after May 30, 1986; (ii) an action, conditionally
certified by the U.S. Court of Appeals for the Fourth Circuit in 1993 and
pending in the U.S. District Court for the District of South Carolina, covering
all public and private colleges and universities in the U.S. whose buildings
contain asbestos materials (Central Wesleyan College, et al. v. W. R. Grace, et
al.); and (iii) a purported class action (Anderson Memorial Hospital, et al. v.
W. R. Grace & Co., et al.), filed in 1992, in the Court of Common Pleas for
Hampton County, South Carolina, on behalf of all entities that own, in whole or
in part, any building containing asbestos materials manufactured by Grace
Chemicals or one of the other named defendants, other than buildings subject to
the class action lawsuits described above and any building owned by the federal
or any state government. In December 1995, Grace Chemicals entered into an
agreement to settle the claims under Prince George Center, Inc. v. U.S. Gypsum
Company, et al. The terms of the settlement agreement (which is subject to
judicial review and approval after class members have an opportunity to be
heard) are not expected to have a significant effect on Grace Chemicals'
consolidated results of operations or financial position. In July 1994, the
claims of most class members in Anderson Memorial Hospital, et al., v. W. R.
Grace & Co., et al. were dismissed due to a ruling that a South Carolina statute
prohibits nonresidents from pursuing claims in the South Carolina state courts
21
<PAGE> 27
with respect to buildings located outside the state. The plaintiffs have
requested that the court reconsider its decision. In August 1994, Grace
Chemicals entered into an agreement to settle In re: Asbestos School Litigation,
a nationwide class action brought in 1983 in the U.S. District Court for the
Eastern District of Pennsylvania on behalf of all public and private elementary
and secondary schools in the U.S. that contain friable asbestos materials (other
than schools that "opted out" of the class). The terms of the settlement
agreement (which were approved by the U.S. District Court for the Eastern
District of Pennsylvania in September 1995) are not expected to have a
significant effect on Grace Chemicals' consolidated results of operations or
financial position.
The remaining asbestos lawsuits pending at year-end 1995 involved claims
for personal injury. Through year-end 1995, approximately 10,100 personal injury
lawsuits involving 24,500 claims were dismissed with respect to Grace Chemicals
without payment of any damages or settlement amounts (primarily on the basis
that Grace Chemicals products were not involved), and approximately 23,700 such
suits involving 29,600 claims were disposed of for a total of $109 million (see
"-- Insurance Litigation" below). However, as a result of various trends
(including the insolvency of other former asbestos producers and cross-claims by
co-defendants in asbestos personal injury lawsuits), the costs incurred in
disposing of such lawsuits in the past may not be indicative of the costs of
disposing of such lawsuits in the future.
In 1991, the Judicial Panel on Multi-District Litigation consolidated in
the U.S. District Court for the Eastern District of Pennsylvania, for pre-trial
purposes, all asbestos personal injury cases pending in the U.S. federal courts,
including approximately 7,000 cases then pending against Grace Chemicals; 3,600
new cases involving 7,200 claims against Grace Chemicals have subsequently been
added to the consolidated cases. To date, no action has been taken by the court
handling the consolidated cases that would indicate whether the consolidation
will affect Grace's cost of disposing of these cases or its defense costs.
Grace Chemicals' 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. A May 1994 decision of the U.S. Court of Appeals for the
Second Circuit limited the amount of insurance coverage available with respect
to property damage lawsuits and claims. Because Grace Chemicals' insurance
covers both property damage and personal injury lawsuits and claims, the May
1994 decision has had the concomitant effect of reducing the insurance coverage
available with respect to Grace Chemicals' asbestos personal injury lawsuits and
claims. However, in Grace Chemicals' opinion (which is not based on a formal
opinion of counsel), it is probable that recoveries from its insurance carriers,
along with other funds, will be available to satisfy the property damage and
personal injury lawsuits and claims pending at year-end 1995, as well as
personal injury lawsuits and claims expected to be filed in the future.
Consequently, Grace Chemicals 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. See "-- Insurance
Litigation" below and Note 2 to the Consolidated Financial Statements attached
hereto for additional information.
Environmental Proceedings. Manufacturers of specialty chemical products,
including Grace Chemicals, are subject to stringent regulations under numerous
federal, state and local environmental, health and safety laws and regulations
relating to the generation, storage, handling, discharge and disposition of
hazardous wastes and other materials. Grace Chemicals has expended substantial
funds in order to comply with such laws and regulations and expects to continue
to do so in the future. See "-- Environmental, Health and Safety Matters." There
can be no assurance that additional material environmental costs will not arise
as a result of future legislation or other developments. Grace Chemicals
believes that neither its operations, its financial condition nor its
competitive position will be materially adversely affected by compliance with
environmental requirements or by the impact of environmental considerations on
the marketability of its products. However, there can be no assurance that Grace
Chemicals will not incur material liability in connection with future actions of
governmental agencies and/or private parties relating to past or future
practices of Grace Chemicals with respect to the generation, storage, handling,
discharge or disposition of hazardous wastes and other materials.
22
<PAGE> 28
The following is a description of the material environmental proceedings in
which Grace Chemicals is involved:
Grace Chemicals (together with certain other companies) has been designated
a "potentially responsible party" ("PRP") by the U.S. Environmental Protection
Agency ("EPA") with respect to absorbing the costs of investigating and
remediating pollution at various sites. At year-end 1995, proceedings were
pending with respect to approximately 30 sites as to which Grace has been
designated a PRP. Federal law provides that all PRPs may be held jointly and
severally liable for the costs of investigating and remediating a site. Grace
Chemicals is also conducting investigatory and remediation activities at sites
under the jurisdiction of state and/or local authorities.
In addition, in 1989, Hatco Corporation ("Hatco"), which purchased the
assets of a Grace Chemicals business in 1978, instituted a lawsuit against Grace
Chemicals in the U.S. District Court for the District of New Jersey (Hatco
Corporation v. W. R. Grace & Co.-Conn.) seeking recovery of cleanup costs for
waste allegedly generated at a New Jersey facility during the period of Grace
Chemicals' ownership. Grace Chemicals subsequently filed a lawsuit against its
insurance carriers seeking indemnity against any damages assessed against Grace
Chemicals in the underlying lawsuit, as well as defense costs. In decisions
rendered during 1993, the U.S. District Court for the District of New Jersey
ruled that Grace Chemicals is responsible for a substantial portion of Hatco's
costs. In July 1995, the U.S. Court of Appeals for the Third Circuit reversed
the decisions of the U.S. District Court for the District of New Jersey and
remanded the lawsuit to the U.S. District Court for the District of New Jersey
for further proceedings. Specifically, the Court of Appeals (i) reversed the
U.S. District Court for the District of New Jersey ruling that Grace Chemicals
is responsible for a substantial portion of Hatco's costs and (ii) ruled that in
the remand proceeding the burden of proof would be on Hatco to establish that it
had not released Grace Chemicals from the asserted liabilities. In an earlier
decision, the U.S. District Court for the District of New Jersey had resolved,
in a manner favorable to Grace Chemicals, certain legal issues regarding Grace
Chemicals' right to insurance coverage; however, the ultimate liability of Grace
Chemicals' insurance carriers will be determined at trial, should a trial be
necessary after the remand proceedings described above. Remediation costs, and
Grace Chemicals' share, if any, of such costs, will be determined once ongoing
site investigations are completed, a remediation plan is approved by the State
of New Jersey (which is expected by year-end 1997) and the litigation is fully
resolved. Grace Chemicals estimates that any amounts that it may be required to
pay in connection with this litigation (which amounts are expected to be
partially offset by recoveries from insurance carriers) will not exceed its
established reserves. See "-- Insurance Litigation" below.
In November 1995, Grace Chemicals received a letter from the U.S.
Department of Energy ("DOE") inquiring as to Grace Chemicals' willingness to
contribute to the continued cleanup of a former Grace Chemicals property located
in Wayne, New Jersey. The letter asserted that Grace Chemicals has a legal duty
to pay for the site's cleanup and that the total cost of cleanup may exceed $100
million. The operations conducted by Grace Chemicals at the Wayne site (from
1955 to 1970) included work done on radioactive materials under contract with
the U.S. government for the "Manhattan Project" and with the U.S. Atomic Energy
Commission. In 1975, the U.S. Nuclear Regulatory Commission inspected the site,
concluded that it was decontaminated in accordance with applicable regulations
and released it for unrestricted use. In 1984, pursuant to a request from the
DOE, Grace Chemicals transferred the Wayne property to the DOE and made a cash
payment as a contribution towards the DOE's cleanup efforts at the site, which
was acknowledged by the DOE as fulfilling any obligation Grace Chemicals had to
contribute to DOE's cleanup effort. As a result of these transactions, Grace
Chemicals believes it has no further obligation to contribute to the DOE's
cleanup activities.
In March 1993, an action was filed in the U.S. District Court for the
Southern District of Texas against Grace Drilling Company, a subsidiary of Grace
Chemicals, the business and assets of which have since been sold, and several
other defendants, for alleged violations of the Clean Water Act and the Rivers
and Harbors Act (U.S. v. Fina Oil and Chemical Co., et al.). The government
alleges that seagrasses and seabeds around a drilling rig operated by Fina Oil
and Chemical Co. were damaged in connection with the placing, servicing and
removal of the rig. The government is seeking injunctive relief requiring the
defendants to restore the damaged areas and to compensate for temporary loss of
the seagrass habitat, as well as civil penalties of up to $25,000
23
<PAGE> 29
per day of violation and attorneys' fees. The parties to such action are
currently participating in a court-ordered mediation process.
Grace Chemicals is also a party to other proceedings involving federal,
state and/or local government agencies and private parties regarding Grace
Chemicals' compliance with environmental laws and regulations. These proceedings
are not expected to result in significant sanctions or in any material
liability. As a voluntary participant in the EPA Toxic Substances Control Act
("TSCA") Compliance Audit Program, Grace Chemicals agreed to undertake a
corporate-wide audit of compliance with Section 8 of TSCA, and agreed to pay a
stipulated civil penalty for each study or report that the EPA alleges should
have been, but was not, submitted to the EPA as required under Section 8 of
TSCA. Grace Chemicals has been advised that it will be required to pay the EPA a
penalty of $255,000 for information discovered in the course of the audit. In
addition, Grace Chemicals has voluntarily reported to the EPA violations of
certain notification and related requirements under TSCA, and penalties may be
assessed against Grace Chemicals in connection therewith; however, the amount of
such penalties cannot be determined at this time.
Grace Chemicals believes that the liabilities for environmental remediation
costs that have been recorded in Grace New York's historical financial
statements are adequate. In addition, Grace Chemicals is presently involved in
litigation with its insurance carriers seeking to hold them responsible for
certain amounts for which Grace Chemicals may be held liable with respect to
such costs. The outcome of such litigation, as well as the amounts of any
recoveries that Grace Chemicals may receive in connection therewith, is
presently uncertain. However, Grace Chemicals believes that the resolution of
pending environmental proceedings will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of New
Grace. For further information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION."
Insurance Litigation. Grace Chemicals is involved in litigation with
certain of its insurance carriers with respect to asbestos-related insurance
claims and environmental liabilities. It has settled all of its asbestos-related
insurance coverage actions, with the exception of Maryland Casualty Co. v. W. R.
Grace & Co., pending in the U.S. District Court for the Southern District of New
York. Grace Chemicals' two environmental insurance coverage actions consist of
an action pending in the U.S. District Court for the Southern District of New
York, also styled Maryland Casualty Co. v. W. R. Grace & Co., and an action
pending in the U.S. District Court for the District of New Jersey, Hatco Corp.
v. W. R. Grace & Co.-Conn. The relief sought by Grace Chemicals in these three
actions would provide insurance that would partially offset Grace Chemicals'
estimated exposure with respect to amounts already expended, and that may be
expended in the future, by Grace Chemicals to defend claims, satisfy judgments
and fund settlements. See Note 2 to the Consolidated Financial Statements and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" for additional information.
Prior to 1993, Grace Chemicals received payments totaling $97.7 million
from insurance carriers, the majority of which represented the aggregate
remaining obligations owed to Grace Chemicals by those carriers for
primary-level insurance coverage written for the period June 30, 1962 through
June 30, 1987. In 1993 and 1994, Grace Chemicals settled with insurance carriers
for a total of $300.2 million (portions of which were paid or will be paid in
subsequent years), in reimbursement for amounts expended by Grace Chemicals in
connection with asbestos-related litigation. In 1995, Grace Chemicals settled
with a primary-level insurer for $100 million, and with other insurers for a
total of $200.3 million, including future payments of approximately $70 million.
In 1996, Grace Chemicals has settled with additional excess-level insurers for a
total of $59.9 million (including $19.2 million to be received over the next
five years) with respect to both products liability and other coverage. As a
result of these settlements, Grace Chemicals' asbestos-related insurance claims
have been dismissed as to the primary-level product liability insurance coverage
previously sold by the relevant insurers to Grace Chemicals, as well as to many
of Grace Chemical's excess-level liability insurers. However, ligation continues
in New York federal court as to certain excess-level carriers which have not
settled.
In April 1996, as a result of rulings in the New York federal court action
favorable to Grace Chemicals with respect to its asbestos-related property
damage liabilities, the insurers agreed to the entry of summary
24
<PAGE> 30
judgment in favor of Grace Chemicals. These insurers have stated that they
intend to appeal the trial court's rulings. The New York court has not yet
addressed Grace Chemicals' claims for insurance coverage for its
asbestos-related bodily injury liabilities.
The Hatco environmental coverage action, involving a single environmental
site, is set for trial in September 1996, with its discovery phase substantially
complete. The comprehensive environmental coverage action in New York federal
court, potentially involving several hundred sites, is just entering its
discovery phase, focusing on eight representative or "test" environmental sites.
No trial date has been set, but the test sites will probably be tried next year.
Fumed Silica Plant Litigation. In 1993, Grace Chemicals initiated legal
action in the Belgian courts against the Flemish government to recover losses
resulting from the closing of Grace Chemicals' fumed silica plant in Puurs,
Belgium. Grace Chemicals is seeking damages in excess of four billion Belgian
francs (approximately $135.5 million at the December 29, 1995 exchange rate),
plus interest and lost profits. This claim was dismissed at the trial court
level and is now being appealed by Grace Chemicals. The trial court also
determined that Grace Chemicals should repay approximately 239 million Belgian
francs (approximately $8.1 million at the December 29, 1995 exchange rate), plus
interest to the Flemish government for previously received investment grants;
this decision is also being appealed by Grace Chemicals. Also pending is an
arbitration involving the engineering company that was responsible for the
design and construction of the fumed silica plant. The outcome of this
proceeding may affect the action filed against the Flemish government.
Shareholder Litigation. Commencing in March 1995, five lawsuits were
brought against Grace New York and members of the Grace New York Board (as well
as against J. P. Bolduc, who resigned as President and Chief Executive Officer
and a director of Grace New York in March 1995) in New York State Supreme Court,
New York County. These lawsuits were consolidated in the case entitled Weiser,
et al. v. Grace, et al. The consolidated amended complaint in this lawsuit,
which purports to be a derivative action (i.e., an action brought on behalf of
Grace New York), alleges, among other things, that the individual defendants
breached their fiduciary duties to Grace New York (i) by providing J. Peter
Grace, Jr. (the Chairman and a director of Grace New York until his death in
April 1995) with certain compensation arrangements upon his voluntary retirement
as Grace New York's Chief Executive Officer in 1992 and (ii) by approving Mr.
Bolduc's severance arrangements, and that Messrs. Grace and Bolduc breached
their fiduciary duties by accepting such benefits and payments. The lawsuit
seeks unspecified damages, the cancellation of all allegedly improper
agreements, the cancellation of the non-employee director retirement plan, the
return of all remuneration paid to the present and former directors who are
defendants while they were in breach of their fiduciary duties to Grace New
York, an award of attorneys' and experts' fees and costs, and such other relief
as the Court may deem appropriate.
In March 1996, two purported shareholder derivative class actions were
filed in New York State Supreme Court, New York County, against Grace New York
and Albert J. Costello, Grace New York's Chairman, President and Chief Executive
Officer, alleging that the defendants breached their fiduciary duties to Grace
New York's shareholders by failing to investigate and consider fully a proposal
by Hercules, Incorporated to acquire or merge with Grace New York (Izes, etc. v.
W. R. Grace & Company, et al. and Polikoff, etc. v. W. R. Grace & Company, et
al.). The lawsuits seek injunctive relief ordering defendants to carry out their
fiduciary duties by considering and evaluating such proposal, unspecified
monetary damages, costs and counsel fees and such other relief as the Court
deems proper.
Securities and Exchange Commission Investigations. Grace New York has been
notified that the Securities and Exchange Commission (the "Commission") has
issued a formal order of investigation with respect to Grace New York's prior
disclosures regarding benefits and retirement arrangements provided to J. Peter
Grace, Jr. (the Chairman and a director of Grace New York until his death in
April 1995) and certain matters relating to J. Peter Grace III, a son of J.
Peter Grace, Jr. Grace New York is cooperating with the investigation.
In April 1996, Grace New York received a formal order of investigation
issued by the Commission directing an investigation into, among other things,
whether Grace New York violated the federal securities
25
<PAGE> 31
laws by filing periodic reports with the Commission that contained false and
misleading financial information. Pursuant to this formal order of
investigation, Grace New York has received a subpoena from the Southeast
Regional Office of the Commission requiring the Company to produce documents
relating to reserves (net of applicable taxes) established by Grace New York and
NMC during the period from January 1, 1990 to the date of the subpoena (the
"Covered Period"). New Grace believes that all financial statements filed by
Grace New York with the Commission during the Covered Period, the financial
statements of NMC included in the NMC Form 10 filed with the Commission on
September 25, 1995, and the Consolidated Financial Statements (all of which
financial statements, other than unaudited quarterly financial statements, were
covered by unqualified opinions issued by Price Waterhouse LLP, independent
certified public accountants), have been fairly stated, in all material
respects, in conformity with generally accepted accounting principles. Grace New
York is cooperating with the investigation. The outcome of this investigation
and its impact, if any, on Grace New York, New Grace or NMC cannot be predicted
at this time.
Shareholder Actions Relating to NMC. In 1995, nine purported class action
lawsuits were brought against Grace New York and certain of its officers and
directors in various federal courts. These lawsuits have been consolidated in
the case entitled Murphy, et al. v. W. R. Grace & Co., et al., which is pending
in the U.S. District Court for the Southern District of New York. The first
amended class action complaint in this lawsuit, which purports to be a class
action on behalf of all persons and entities who purchased Grace New York's
publicly traded securities during the period from March 13, 1995 through October
17, 1995, generally alleges that the defendants concealed information, and
issued misleading public statements and reports, concerning NMC's financial
position and business prospects, a proposed spin-off of NMC and the matters that
are the subject of the investigations of NMC by the Office of the Inspector
General of the U.S. Department of Health and Human Services (the "OIG"), in
violation of federal securities laws. The lawsuit seeks unspecified damages,
attorneys' and experts' fees and costs and such other relief as the Court deems
proper.
In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division, against
Grace New York, certain of its directors and its former President and Chief
Executive Officer, alleging that such individuals breached their fiduciary
duties by failing to properly supervise the activities of NMC in the conduct of
its business (Bennett v. Bolduc, et al.). In December 1995, the plaintiff in
this action filed a new action, based on similar allegations, in the U.S.
District Court for the Southern District of New York (Bennett v. Bolduc, et
al.). The Florida action has been dismissed in favor of the action filed in the
U.S. District Court for the Southern District of New York. A second action
making similar allegations was filed in October 1995 in New York State Supreme
Court, New York County (Bauer v. Bolduc, et al.). Grace New York has been
advised that this action will be dismissed or stayed in favor of the Bennett
action, which has been consolidated, for discovery purposes only, with the
Murphy action described above. The complaint in the Bennett action seeks
unspecified damages, attorneys' and experts' fees and costs and such other
relief as the Court deems proper.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against Grace New York and certain of its
current and former directors, alleging that the defendants breached their
fiduciary duties, principally by failing to provide internal financial data
concerning NMC to Vivra Incorporated and by failing to negotiate with Baxter
International, Inc. in connection with a business combination involving NMC
(Rosman v. W. R. Grace, et al. 96-102347). The lawsuit seeks injunctive relief
ordering the defendants to carry out their fiduciary duties and preventing or
rescinding the Reorganization or any related transactions with Fresenius AG,
unspecified monetary damages, an award of plaintiff's attorneys' and experts'
fees and costs and such other relief as the court may deem just and proper. The
plaintiff has not taken any steps to prosecute this lawsuit since it was filed,
and the defendants believe this lawsuit is without merit.
OIG Investigation. As discussed in the Joint Proxy Statement-Prospectus
mailed herewith, NMC is the subject of an investigation (the "OIG
Investigation") by the OIG, among others. One of the subpoenas received in
connection with the OIG Investigation requests documents from NMC relating to
the relationship of NMC with Grace New York and Grace Chemicals and Grace
Chemicals' and Grace New York's knowledge of NMC's activities. Such request may
indicate that investigators are looking into Grace Chemicals' potential
liability in respect of NMC's activities. Under the Distribution Agreement,
Grace New
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<PAGE> 32
York will indemnify Grace Chemicals with respect to all liabilities arising from
or relating to the OIG Investigation and may not settle or compromise the OIG
Investigation unless, as part of such settlement or compromise, Grace Chemicals
is granted an unconditional release in respect thereof. However, no assurance
can be given that Grace Chemicals will not have liability in this regard. See
"THE DISTRIBUTION -- Fraudulent Transfer and Related Considerations." In
addition, under the OIG Agreement, Grace Chemicals has given certain guarantees
in connection with the OIG Investigation. See "THE DISTRIBUTION -- Other
Arrangements."
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<PAGE> 33
PROPERTIES
Grace Chemicals operates manufacturing and other types of plants and
facilities (including office and other service facilities) throughout the world,
some of which are shared by two or more of Grace Chemicals' product lines. Grace
Chemicals considers its major operating properties to be in good operating
condition and suitable for their current use. Although Grace Chemicals believes
that, after taking planned expansion into account, the productive capacity of
its plants and other facilities is generally adequate for current operations and
foreseeable growth, it conducts ongoing, long-range forecasting of its capital
requirements to assure that additional capacity will be available when and as
needed. Accordingly, Grace Chemicals does not anticipate that its operations or
income will be materially affected by the absence of available capacity. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" for information regarding Grace Chemicals' capital expenditures.
The following table describes Grace Chemicals' principal properties, all of
which are owned.
<TABLE>
<CAPTION>
FLOOR AREA PRIMARY
(APPROXIMATE PRODUCT
LOCATION SQUARE FEET) LINES
- --------------------------------------------- ------------------------ ----------------
<S> <C> <C>
In der Hollerhecke 2,334,100 Grace Davison
67547 Worms, Germany
803 N. Maple St. 1,139,600 Grace Packaging
Simpsonville, SC
Rue St. Denis, 703,900 Grace Packaging,
Epernon, France Grace Container
and Grace
Construction
5500 Chemical Road 650,000 Grace Davison
Baltimore, MD
1301 W. Magnolia 579,400 Grace Packaging
Iowa Park, TX
1126 Sydney Rd. 409,800 Grace Packaging
Fawkner, Victoria,
Australia
20017 Passirana - 393,400 Grace Packaging
Via Trento 7 and Grace
I-20017 Rho Construction
Milano, Italy
150 Grace Way 334,600 Grace Packaging
Seneca, SC
1125 Wilson Ave., S.W. 236,800 Grace Packaging
Cedar Rapids, IA
P.O. Box 3247, Hwy. #27 115,700 Grace Davison
Lake Charles, LA
</TABLE>
In addition, Grace Cocoa owns a 315,300 square-foot facility in Milwaukee,
Wisconsin. Additional information regarding Grace Chemicals' properties is set
forth in Notes 1, 9 and 12 to the Consolidated Financial Statements.
28
<PAGE> 34
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The unaudited pro forma condensed consolidated balance sheet of New Grace
has been derived from the historical consolidated balance sheet of Grace New
York, adjusted for the disposition of NMC and for certain costs and expenses to
be incurred in connection with the Reorganization. The pro forma condensed
consolidated balance sheet has been prepared on the assumption that the
Reorganization occurred on March 31, 1996.
The pro forma condensed consolidated balance sheet should be read in
conjunction with the Consolidated Financial Statements and the First Quarter
Financial Statements. The pro forma condensed consolidated balance sheet is not
necessarily indicative of the financial position of New Grace that would
actually have resulted had the Reorganization occurred on March 31, 1996.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
GRACE NEW YORK ----------------------- NEW GRACE
HISTORICAL DEBIT CREDIT PRO FORMA
-------------- -------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................... $ 56.5 $2,247.8(a) $1,187.8(b)
60.0(a) $1,056.5
Notes and accounts receivable, net............. 666.8 666.8
Other current assets........................... 1,024.6 1,024.6
-------- --------
Total Current Assets...................... 1,747.9 2,747.9
Properties and equipment, net.................. 1,810.0 1,810.0
Net assets of discontinued operations -- health
care......................................... 1,540.5 366.3(b) 1,842.6(c) 64.2
Other assets................................... 1,387.1 1,387.1
-------- --------
Total Assets.............................. $6,485.5 $6,009.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt................................ $ 895.2 821.5(b) $ 73.7
Other current liabilities...................... 1,494.0 1,494.0
-------- --------
Total Current Liabilities................. 2,389.2 1,567.7
Long-term debt................................. 1,265.4 1,265.4
Other liabilities.............................. 807.6 807.6
Noncurrent liability for asbestos-related
litigation................................... 692.4 692.4
-------- --------
Total Liabilities......................... 5,154.6 4,333.1
-------- --------
Commitments and Contingencies
Shareholders' Equity
Preferred stocks............................... 7.4 7.4(e) --
Common stock................................... 98.5 97.5(d) 1.0
Paid in capital................................ 503.1 95.1(d) 598.2
Retained earnings.............................. 760.2 60.0(a) 2,247.8(a)
1,842.6(c) 7.4(e) 1,112.8
Cumulative translation adjustments............. (35.9) (35.9)
Treasury stock, at cost........................ (2.4) 2.4(d) --
-------- --------
Total Shareholders' Equity................ 1,330.9 1,676.1
-------- --------
Total Liabilities and Shareholders'
Equity.................................. $6,485.5 $6,009.2
======== ========
</TABLE>
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION PRESENTED.
29
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma condensed consolidated statement of operations of
New Grace has been derived from the historical consolidated statement of
operations of Grace New York, adjusted to reflect the reduction in interest
expense expected to result from the Reorganization. The pro forma condensed
consolidated statement of operations has been prepared on the assumption that
the Reorganization occurred on January 1, 1995.
The pro forma condensed consolidated statement of operations should be read
in conjunction with the Consolidated Financial Statements and the First Quarter
Financial Statements. The pro forma condensed consolidated statement of
operations is not necessarily indicative of the results of operations of New
Grace that would actually have resulted had the Reorganization occurred on
January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------
PRO FORMA
GRACE ADJUSTMENTS NEW
NEW YORK ---------------- GRACE
HISTORICAL DEBIT CREDIT PRO FORMA
--------- ----- ------ -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales and revenues..................................................... $3,665.5 $ 3,665.5
Other income........................................................... 41.9 41.9
------- -------
Total......................................................... 3,707.4 3,707.4
------- -------
Cost of goods sold and operating expenses.............................. 2,243.7 2,243.7
Selling, general and administrative expenses........................... 905.6 905.6
Depreciation and amortization.......................................... 186.3 186.3
Interest expense and related financing costs........................... 71.3 $0.7(f) 70.6
Research and development expenses...................................... 120.6 120.6
Corporate expenses previously allocated to health care operations...... 37.8 37.8
Restructuring costs and asset impairments.............................. 179.5 179.5
Provision relating to asbestos-related liabilities and insurance
coverage............................................................. 275.0 275.0
------- -------
Total......................................................... 4,019.8 4,019.1
------- -------
Loss from continuing operations before income taxes.................... (312.4) (311.7)
Benefit from income taxes.............................................. (115.8) 0.3(f) (115.5)
------- -------
Loss from continuing operations........................................ $ (196.6) $ (196.2)
======= =======
Loss per share:
Continuing operations................................................ $ (2.05) $ (2.05)
Fully diluted loss per share:
Continuing operations................................................ $ -- (1) $ --(1)
Weighted average shares of Common Stock outstanding (in thousands)..... 95,822 95,822
</TABLE>
- ---------------
(1) Not presented as the effect is anti-dilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------
PRO FORMA
GRACE ADJUSTMENTS NEW
NEW YORK ---------------- GRACE
HISTORICAL DEBIT CREDIT PRO FORMA
--------- ----- ------ ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Sales and revenues..................................................... $ 886.0 $ 886.0
Other income........................................................... 3.8 3.8
------- --------
Total......................................................... 889.8 889.8
------- --------
Cost of goods sold and operating expenses.............................. 531.8 531.8
Selling, general and administrative expenses........................... 199.3 199.3
Depreciation and amortization.......................................... 45.5 45.5
Interest expense and related financing costs........................... 18.4 $5.6(f) 24.0
Research and development expenses...................................... 28.8 28.8
------- --------
Total......................................................... 823.8 829.4
------- --------
Income from continuing operations before income taxes.................. 66.0 60.4
Provision for income taxes............................................. 24.4 $2.2(f) 22.2
------- --------
Income from continuing operations...................................... $ 41.6 $ 38.2
======= ========
Earnings per share:
Continuing operations................................................ $ .42 $ .39
Fully diluted earnings per share:
Continuing operations................................................ $ .41 $ .38
Weighted average shares of Common Stock outstanding (in thousands)..... 97,888 97,888
</TABLE>
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION
PRESENTED.
30
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(a) The Reorganization Agreement provides that, prior to the Reorganization, NMC
will borrow and/or will assume debt of Grace Chemicals in an aggregate
amount of approximately $2,263 (as adjusted pursuant to the Reorganization
Agreement), and will distribute the net cash proceeds to Grace Chemicals; it
is currently estimated that such aggregate amount will be approximately
$2,247.8. A portion of such net cash proceeds will be applied to further
reduce Grace Chemicals' debt, resulting in an aggregate reduction of
$1,187.8 in Grace Chemicals' debt (see note (b) below). In addition, Grace
will incur expenses totaling approximately $60.0 (net of applicable tax
benefit) in connection with the Reorganization. The remaining net cash
proceeds received from NMC (estimated at $1,000.0) are expected to be used
to purchase shares of New Grace Common Stock, which would result in a
decrease in current assets and a commensurate decrease in shareholders'
equity.
(b) As discussed in note (a) above, the assumption of Grace Chemicals' debt by
NMC and the application of a portion of the net cash proceeds distributed to
Grace Chemicals by NMC to the reduction of Grace Chemicals' debt is expected
to result in an aggregate reduction of $1,187.8 in Grace Chemicals' debt,
consisting of (i) $179.8 of borrowings under NMC receivables financing
arrangements; (ii) $186.5 of other NMC debt; and (iii) $821.5 of short-term
debt (consisting of $527.3 of commercial paper and bank borrowings and
$294.2 of other short-term borrowings).
(c) Reflects the disposition of NMC's net assets of $1,842.6. Subsequent to the
disposition of NMC, New Grace will retain as discontinued operations certain
health care assets, primarily a bioseparation sciences business, a health
care services company and other assets (including NMC's cash and marketable
securities). The resulting gain of $405.2 (reflecting net cash proceeds of
$2,247.8, as described in note (a) above, less the disposition of NMC's net
assets of $1,842.6) is not reflected in the pro forma condensed consolidated
statement of operations.
(d) As part of the Reorganization, Grace New York will distribute, on a
one-share-for-one-share basis, all of the issued and outstanding New Grace
Common Stock (which has a par value of $.01 per share) to the holders of
shares of Grace New York Common Stock (which has a par value of $1.00 per
share) at the Time of Distribution. The treasury stock held by Grace New
York at the Time of Distribution will not be transferred to New Grace and is
therefore eliminated in the pro forma adjustments. As a result of the
retirement of the treasury stock and the difference in the par values, (i)
the $2.4 of treasury stock will be eliminated, (ii) Common stock will
decrease by $97.5 and (iii) paid in capital will increase by $95.1.
(e) The currently issued and outstanding shares of Grace New York Preferred
Stock will remain issued and outstanding following the Reorganization and
the Distribution, and no New Grace preferred stock will be issued. The
resulting reduction in outstanding Preferred stock is presented as an
increase in retained earnings within the shareholders' equity section of the
pro forma balance sheet.
(f) Grace Chemicals has allocated interest expense to discontinued operations
(including NMC), based on the ratio of the net assets of the businesses
classified as discontinued operations as compared to Grace Chemicals' total
capital. Excluding amounts allocated to discontinued operations, interest
expense and related financing costs were $71.3 for the year ended December
31, 1995 and $18.4 for the three months ended March 31, 1996. For the year
ended December 31, 1995, the assumed reduction in debt as of January 1, 1995
would have the pro forma effect of reducing total interest expense and
related financing costs by $94.2 (of which $0.7 was attributable to
continuing operations and $93.5 was attributable to discontinued
operations). For the three months ended March 31, 1996, the assumed
reduction in debt as of January 1, 1995 would have the pro forma effect of
reducing total interest expense and related financing costs by $21.2
(increasing interest expense and related financing costs attributable to
continuing operations by $5.6 and reducing interest expense and related
financing costs attributable to discontinued operations by $26.8).
31
<PAGE> 37
The above adjustments to interest expense and related financing costs would
have the pro forma effect of increasing tax expense by $0.3 for the year
ended December 31, 1995 and reducing tax expense by $2.2 for the
three-month period ended March 31, 1996. The tax effects were calculated
using an effective tax rate of approximately 40%, which represents the U.S.
federal corporate tax rate of 35%, plus state and local income taxes, net
of U.S. federal income tax benefit.
------------------------
For accounting purposes, Grace Chemicals will receive the Distribution
Payment and will be deemed to receive a 44.8% common equity interest in FMC and
to immediately distribute such interest to the holders of Grace New York Common
Stock; however, the receipt and distribution of the interest in FMC Ordinary
Shares are not reflected in the pro forma condensed consolidated balance sheet
and statement of operations.
In March 1996, Grace Chemicals entered into a definitive agreement to sell
its Grace Dearborn water treatment and process chemicals business to Betz
Laboratories, Inc. for $632 million. The transaction was completed in June 1996.
Grace Dearborn's sales and revenues were $398.5 million for the year ended
December 31, 1995; its financial position and results of operations were not
significant to Grace Chemicals. Also, in May 1996 Grace Chemicals completed the
sale of the transgenic plant business of its Agracetus, Inc. subsidiary (which
had previously been classified as a discontinued operation) to the Monsanto
Company for $150 million; the revenues and net assets of Agracetus, Inc. were
immaterial to Grace Chemicals. The after-tax cash proceeds generated by these
transactions have been applied to the further reduction of borrowings and the
repurchase of stock. These transactions are not reflected in the pro forma
financial information included herein.
In May 1996, Grace Chemicals entered into a new credit agreement providing
for total borrowings of $1.85 billion, and three previous agreements providing
for total borrowings of $850 million were terminated. The new credit agreement
is intended to provide liquidity to finance the repurchase of stock and
potential acquisitions. The borrowings under the new credit agreement have been
guaranteed by New Grace and Grace New York. Upon the completion of the
transactions described above (including the Reorganization), the total
borrowings available under the new credit agreement will be reduced to $650
million and the guarantee by Grace New York will be terminated.
32
<PAGE> 38
CAPITALIZATION
The following table sets forth the capitalization of Grace New York and the
pro forma capitalization of New Grace at March 31, 1996, giving effect to the
Reorganization and related transactions described in the notes to the unaudited
pro forma condensed consolidated balance sheet and statement of operations. This
table should be read in conjunction with such notes, the Consolidated Financial
Statements and the First Quarter Financial Statements.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------
GRACE NEW YORK NEW GRACE
HISTORICAL PRO FORMA
-------------- ---------
(DOLLARS IN MILLIONS, EXCEPT PAR
VALUE)
<S> <C> <C>
Debt, including short-term debt(a)............................ $2,160.6 $1,339.1
-------- --------
Shareholders' equity:
Grace New York Common Stock:
Common stock, $1.00 par value; 300,000,000 shares
authorized; 98,487,000 outstanding..................... $ 98.5 --
Grace Delaware Common Stock
Common stock, $.01 par value; 300,000,000 shares
authorized; 98,487,000 outstanding..................... -- $ 1.0
Grace New York Preferred Stock:
6% Preferred Stock, Cumulative, $100 par value; 40,000
shares authorized; 36,460 outstanding.................. 3.6 --
Class A Preferred Stock, 8% Cumulative, $100 par value;
50,000 shares authorized; 16,256 outstanding........... 1.6 --
Class B Preferred Stock, 8% Noncumulative, $100 par
value; 40,000 shares authorized; 21,577 outstanding.... 2.2 --
Paid in capital............................................. 503.1 598.2
Retained earnings........................................... 760.2 1,112.8
Cumulative translation adjustments.......................... (35.9) (35.9)
Treasury stock, at cost..................................... (2.4) --
-------- --------
Total shareholders' equity............................... 1,330.9 1,676.1
-------- --------
Total capitalization..................................... $3,491.5 $3,015.2
======== ========
</TABLE>
- ---------------
(a) In addition to the retirement of debt reflected above, it is also expected
that $179.8 of borrowings under NMC receivables financing arrangements and
$186.5 of other NMC debt will be retired. These amounts are classified
within Net assets of discontinued operations -- health care in the Grace New
York historical balance sheet at March 31, 1996.
33
<PAGE> 39
GRACE CHEMICALS SELECTED FINANCIAL INFORMATION
The following selected consolidated financial information for Grace
Chemicals should be read in conjunction with the Consolidated Financial
Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION" included elsewhere in this Prospectus. This financial
information for the years ended December 31, 1991 through 1995 has been based on
financial statements audited by Price Waterhouse LLP, independent certified
public accountants. The financial information for the three-month interim
periods ended March 31, 1995 and 1996 has been based on unaudited interim
financial statements that 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 prior periods have been restated to conform to the current
period's basis of presentation. The results of operations for the three-month
interim period ended March 31, 1996 are not necessarily indicative of the
results of operations for the fiscal year ending December 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and revenues................................... $3,326.2 $3,061.8 $2,895.5 $3,218.2 $3,665.5 $853.4 $886.0
(Loss)/income from continuing operations............. 157.4 1.4 19.1 (41.4) (196.6) 22.9 41.6
Income from continuing operations before special
items(1)........................................... 153.9 146.5 119.1 157.6 194.7 35.4 41.6
(Loss)/earnings from continuing operations per share
of Grace New York Common Stock..................... 1.80 .01 .20 (.45) (2.05) .24 .42
Earnings from continuing operations per share of
Grace New York Common Stock before special
items(1)........................................... 1.76 1.63 1.30 1.68 2.03 .38 .42
Cash dividends declared per share of Grace New York
Common Stock....................................... 1.40 1.40 1.40 1.40 1.175 .35 .125
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................................... $6,007.1 $5,598.6 $6,108.6 $6,230.6 $6,297.6 $6,485.5
Long-term debt....................................... 1,793.1 1,354.5 1,173.5 1,098.8 1,295.5 1,265.4
Total liabilities.................................... 3,981.9 4,053.6 4,591.0 4,726.1 5,065.8 5,154.6
Total equity......................................... 2,025.2 1,545.0 1,517.6 1,504.5 1,231.8 1,330.9
</TABLE>
- ---------------
(1) Income from continuing operations before special items reconciles to
(loss)/income from continuing operations as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations before special
items.............................................. $153.9 $ 146.5 $ 119.1 $ 157.6 $ 194.7 $ 35.4 $41.6
Provision for corporate governance................... -- -- -- -- (18.6) (12.5) --
Gain on sale of remaining interest in The Restaurant
Enterprises Group, Inc............................. -- -- -- 27.0 -- -- --
Restructuring costs and asset impairments/other
activities......................................... -- -- -- -- (144.0) -- --
Provisions for environmental liabilities at former
manufacturing sites................................ -- -- -- (26.0) (50.0) -- --
Provision relating to a fumed silica plant........... -- (140.0) -- -- --
Postretirement benefits prior to plan amendments..... -- (5.1) -- -- -- -- --
Strategic restructuring gain......................... 3.5 -- -- -- -- -- --
Provisions relating to asbestos-related liabilities
and insurance coverage............................. -- -- (100.0) (200.0) (178.7) -- --
------ ------- ------- ------- ------- ------ -----
(Loss)/income from continuing operations............. $157.4 $ 1.4 $ 19.1 $ (41.4) $(196.6) $ 22.9 $41.6
====== ======= ======= ======= ======= ====== =====
</TABLE>
34
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of the results of operations and financial
condition of Grace Chemicals. The discussion should be read in conjunction with
the Consolidated Financial Statements.
REVIEW OF OPERATIONS
First Quarter 1996 Compared to First Quarter 1995. Sales and revenues
increased 4% in the first quarter of 1996 over the first quarter of 1995. Net
income for the first quarter of 1996 was $63.6 million, a 34% increase as
compared to the 1995 first quarter. The first quarter of 1995 includes an
after-tax charge of $12.5 million ($20.0 million pretax) for costs associated
with the termination of the employment agreement of Grace New York's former
president and chief executive officer, pension costs resulting from the
retirement of certain directors, legal and other expenses related to the
foregoing and other corporate governance activities. Excluding the above charge,
net income for the first quarter of 1996 would have increased 6% as compared to
the 1995 first quarter.
1995 Compared to 1994. Sales and revenues of Grace Chemicals increased 14%
in 1995 over 1994, as compared to an increase of 11% in 1994 over 1993.
(Loss)/income from continuing operations was $(196.6) million, $(41.4)
million and $19.1 million in 1995, 1994 and 1993, respectively. These results
reflected (i) 1995, 1994 and 1993 pretax provisions of $275.0 million, $316.0
million and $159.0 million ($178.7 million, $200.0 million and $100.0 million
after-tax), respectively, relating to asbestos-related liabilities and insurance
coverage (see "-- Asbestos-Related Matters" below and Note 2 to the Consolidated
Financial Statements for further information); (ii) 1995 and 1994 pretax
provisions of $77.0 million and $40.0 million ($50.0 million and $26.0 million
after-tax), respectively, relating to environmental liabilities (see
"-- Environmental Matters" below for further information); (iii) a 1995 pretax
charge of $220.0 million ($144.0 million after-tax) relating to restructuring
costs, asset impairments and other costs (see "-- Restructuring Costs, Asset
Impairments and Other Costs" below for further information); (iv) a 1995 pretax
charge of $30.0 million ($18.6 million after-tax) relating to corporate
governance matters; and (v) a 1994 gain of $27.0 million (pre- and after-tax) on
the sale of Grace Chemicals' remaining interest in The Restaurant Enterprises
Group, Inc. Excluding these provisions and charges from all years, income from
continuing operations in 1995 increased 24%, to $194.7 million, as compared to
1994, and in 1994 increased 32%, to $157.6 million, over 1993.
Income from continuing operations reflects corporate expenses of $37.8
million, $37.1 million and $37.4 million in 1995, 1994 and 1993, respectively,
previously allocated to the discontinued health care operations. These expenses
will not be assumed by NMC following the Reorganization and it is expected that
these costs will be eliminated. See below for additional information regarding
the Reorganization and Grace Chemicals' cost management efforts.
For all periods presented, the Consolidated Statement of Operations has
been restated to reflect the classification of certain businesses as
discontinued operations, as discussed in Note 7 to the Consolidated Financial
Statements.
SPECIALTY CHEMICALS
Operating Results -- First Quarter 1996 Compared to First Quarter 1995. As
noted above, sales and revenues increased 4% in the first quarter of 1996 as
compared to the 1995 first quarter, reflecting favorable volume, price/product
mix and currency translation variances estimated at 2%, 1% and 1%, respectively.
Catalysts and other silica-based products, packaging and water treatment product
lines experienced improved volumes, offset by volume declines in the
construction and container product lines. Volume increases in catalysts and
other silica-based products reflected higher sales in all regions, especially
refinery catalysts in Asia Pacific (due to market share gains), polyolefin
catalysts in North America, and silica/adsorbent products in Europe, Asia
Pacific and Latin America, as a result of new product introductions. Packaging
volume increases reflected higher sales of bags in North America and Europe, and
laminates in all regions, particularly
35
<PAGE> 41
Europe; 1996 first quarter sales of films were flat versus the first quarter of
1995. Volume increases in water treatment reflected higher paper industry
process chemicals sales in Europe caused by market share gains, as well as
higher water treatment chemicals sales in Latin America. Construction products
experienced volume decreases, primarily due to the 1995 divestment of the
composite material business and decreases in sales of fire protection products
in North America (due to a declining market) and waterproofing products in North
America (compared to a strong 1995 first quarter that benefited from a mild
winter) and Europe (due to weak economic conditions in the United Kingdom).
These decreases were offset by higher sales of concrete products in Asia Pacific
(caused by a strong construction market). Container volume decreases were due to
decreased sales of can sealing products in Asia Pacific and closure compounds in
Europe, partially offset by improved sales of can coating products in Latin
America (as a result of continuing market share penetration).
Operating income before taxes increased by 23% in the first quarter of 1996
as compared to the 1995 first quarter, as cost management programs initiated in
1995 are beginning to favorably impact operating income within all regions and
product lines. North American results in the first quarter of 1996 increased,
primarily reflecting improved operating margins and the volume increases in
packaging, offset by the volume decreases in construction products noted above.
European results improved versus the 1995 first quarter, primarily due to higher
sales of silica/adsorbents products (attributable to strong sales of catalyst
carriers which are used by customers to convert ethylene to ethanol) and in
paper industry process chemicals, as noted above. These favorable results were
offset by lower results in packaging, as lower margins and higher operating
expenses offset the volume increases discussed above. In Asia Pacific, 1996
first quarter results were flat versus the first quarter of 1995, as the volume
increases in refinery catalysts noted above were offset by unfavorable results
in can sealing products (due to a shortage of products to be canned as a result
of last year's floods in Southeast Asia). Latin American results in the first
quarter of 1996 improved versus the first quarter of 1995, primarily due to the
improved water treatment chemical sales noted above, improved volumes in
packaging and market share gains within container's coating products. The above
results reflect the allocation of general corporate overhead, general corporate
research expenses and certain other income and expense items that can be
identified with the specialty chemicals operations; corporate interest and
financing costs and nonallocable expenses are not reflected in the specialty
chemicals results.
Operating Results -- 1995 Compared to 1994. As noted above, sales and
revenues increased 14% in 1995 as compared to 1994, reflecting favorable volume,
price/product mix and currency translation variances estimated at 7%, 4% and 3%,
respectively. All product lines experienced improved volumes in 1995. Packaging
volume increases reflected higher sales of bags and films in all regions, and
higher sales of laminates in all regions other than Latin America. Volume
increases in catalysts and other silica-based products reflected higher sales in
all regions, especially refinery catalysts in Asia Pacific and Europe, and
silica/adsorbent products in Asia Pacific and Europe. Container volume increases
were due to increased sales of specialty polymers and can sealing products in
Asia Pacific, and coating products in Latin America. Volume increases in water
treatment reflected higher paper industry process chemicals sales in Europe and
North America caused by market share gains, as well as higher water treatment
chemicals sales in Latin America. Construction products experienced volume
increases, primarily in Asia Pacific, due to increased construction activity,
partially offset by volume decreases in both fire protection products in North
America (due to a small market share loss) and waterproofing products in Europe
and North America.
Operating income before taxes (which excludes for all years the items
discussed in the second paragraph of "-- Review of Operations") increased by 15%
in 1995 as compared to 1994. North American results in 1995 improved, reflecting
strong growth in packaging due to the volume increases noted above (especially
in bags). However, this was partially offset by reduced profitability in
refinery catalysts as North American refiners continued to experience low
margins. The narrow spread between light and heavy crude oil prices led
customers to crack higher quality light crude rather than heavy crude oil (which
requires more catalysts). In addition, water treatment chemicals in North
America experienced lower profitability due to ongoing market consolidations.
European results in 1995 improved significantly versus 1994, primarily in
packaging, reflecting volume increases caused by an economic recovery that
revitalized key markets, partially offset by unfavorable results in construction
waterproofing products due to higher material costs and a slowdown in the
nonresidential construction market. European results also benefited from the
absence of costs
36
<PAGE> 42
incurred in 1994 to streamline European packaging, water treatment and container
operations. In Asia Pacific, favorable results were achieved versus 1994,
primarily in refinery catalysts and silica/adsorbent and construction products
(due to the volume increases noted above), partially offset by higher operating
costs incurred to increase market share in the region. Latin American 1995
results declined slightly versus 1994, primarily due to the effect of inflation
indexation on wage and employee benefit costs in the Brazilian water treatment
operations, partially offset by increased profitability in packaging due to
improved volumes and in container products due to market share gains in coating
products. The above results reflect the allocation of corporate overhead and
corporate research expenses; corporate interest and financing costs and
nonallocable expenses are not reflected in the results of specialty chemicals.
Operating Results -- 1994 Compared to 1993. Sales and revenues increased
by 11%, and operating income before taxes increased by 19%, in 1994 as compared
to 1993. The increase in sales and revenues reflected favorable volume,
price/product mix and currency translation variances estimated at 9%, 1% and 1%,
respectively. Volume increases were experienced by all core product lines. North
American results in 1994 were positively affected by strong growth in
construction and packaging, mainly due to the volume increases, partially offset
by reduced profitability in refinery catalysts due to volume decreases as a
result of customers' use of higher quality crude oil and an increase in customer
maintenance shutdowns. European results in 1994 improved significantly versus
1993, primarily due to improvements in refinery and polyolefin catalysts and
construction products (due to the volume increases), partially offset by costs
associated with streamlining European operations. In Asia Pacific, favorable
results were achieved versus 1993, primarily due to volume increases in refinery
and polyolefin catalysts and container products. Latin American 1994 results
improved versus 1993, primarily due to increased profitability in packaging (due
to increased volumes in bags, films and laminates). Latin American results also
benefited from improved economic conditions in Brazil; however, this was
partially offset by the devaluation of the Mexican peso in late 1994.
STATEMENT OF OPERATIONS
First Quarter 1996 Compared to First Quarter 1995
Other Income. Other income includes interest income, dividends, royalties
from licensing agreements and equity in earnings of affiliated companies.
Interest Expense and Related Financing Costs. Excluding amounts allocated
to discontinued operations (as discussed in Note (c) to the First Quarter
Financial Statements), interest expense and related financing costs of $18.4
million in the first quarter of 1996 increased 16% versus the comparable period
of 1995. Including amounts allocated to discontinued operations, interest
expense and related financing costs increased 26% in the first quarter of 1996
over the comparable period of 1995, to $45.2 million, primarily due to higher
debt levels. See "-- Financial Condition -- Liquidity and Capital
Resources -- First Quarter 1996" for information on borrowings.
Research and Development Expenses. Research and development spending
decreased 6% in the first quarter of 1996 versus the 1995 first quarter,
reflecting the cost management programs discussed above. Research and
development spending continues to be directed toward Grace Chemicals' core
specialty chemicals businesses.
Income Taxes. The effective tax rate was 37.0% in the first quarter of
1996 versus 31.1% in the 1995 first quarter, excluding the 1995 first quarter
charge of $20.0 million pretax ($12.5 million after-tax) for corporate
governance, as discussed above. The higher effective tax rate in the first
quarter of 1996 was primarily due to a reduction in the overall foreign tax rate
in the first quarter of 1995, as the result of a reassessment of the valuation
allowance for certain deferred tax assets.
1995 Compared to 1994
Other Income. See Note 4 to the Consolidated Financial Statements for
information relating to other income.
Interest Expense and Related Financing Costs. Excluding amounts allocated
to discontinued operations (as discussed in Note 7 to the Consolidated Financial
Statements), interest expense and related financing costs of $71.3 million in
1995 increased 44% versus 1994. Including amounts allocated to discontinued
37
<PAGE> 43
operations, interest expense and related financing costs increased 50% in 1995
over 1994, to $164.8 million, primarily due to higher average effective
short-term interest rates and higher debt levels.
Grace Chemicals' debt and interest rate management objectives are to reduce
its cost of funding over the long term, considering economic conditions and
their potential impact on Grace Chemicals, and to improve liquidity by
developing and maintaining access to a variety of long-term and short-term
capital markets. To manage its exposure to changes in interest rates, Grace
Chemicals enters into interest rate agreements; during 1995, most of these
agreements effectively converted fixed-rate debt into variable-rate debt. These
agreements have readily identifiable impacts on interest cost and are
characterized by broad market liquidity. See Note 11 to the Consolidated
Financial Statements for further information on interest rate agreements.
See "-- Financial Condition -- Liquidity and Capital Resources" below and
Note 10 to the Consolidated Financial Statements for information on borrowings.
Research and Development Expenses. Research and development spending
increased 13% in 1995 versus 1994. Research and development spending continues
to be directed toward Grace Chemicals' core specialty chemicals businesses. As
discussed below, during 1995 Grace Chemicals undertook a worldwide restructuring
program, including a study of company-wide research and development expenses.
Certain actions have already been taken based on this study, including the
shutdown of Grace Chemicals' Japan research center and the phase-out of certain
research programs related to noncore operations.
RESTRUCTURING COSTS, ASSET IMPAIRMENTS AND OTHER COSTS
Restructuring Costs. As discussed in Note 5 to the Consolidated Financial
Statements, during the third quarter of 1995, Grace Chemicals began implementing
a worldwide restructuring program aimed at streamlining processes and reducing
general and administrative expenses, factory administration costs and noncore
corporate research and development expenses. The program is expected to be
substantially completed by the end of 1996. In the third and fourth quarters of
1995, Grace Chemicals recorded pretax charges totalling $44.3 million and $91.7
million ($27.2 million and $61.9 million after-tax), respectively, comprised of
$77.4 million for employee termination benefits; $13.4 million for plant closure
and related costs, including lease termination costs; $15.5 million for prior
business exits and related costs; $20.8 million for asset writedowns; and $8.9
million for other costs. The $77.4 million for employee termination benefits
primarily represents severance pay and other benefits associated with the
elimination of approximately 1,000 positions worldwide; more than 50% of the
total cost reductions will come from corporate staff functions worldwide.
Grace Chemicals expects to implement additional cost reductions and
efficiency improvements beyond those discussed above, as its businesses further
evaluate and reengineer their operations. These reductions and efficiencies are
expected in areas such as purchasing, logistics, working capital management and
manufacturing.
Asset Impairments. During 1995, Grace Chemicals determined that, due to
various events and changes in circumstances (including the worldwide
restructuring program described above), certain long-lived assets and related
goodwill were impaired. As a result, in the fourth quarter of 1995, Grace
Chemicals recorded a $43.5 million pretax charge ($29.0 million after-tax), the
majority of which related to assets that will continue to be held and used in
Grace Chemicals' continuing operations; the charge included no significant
individual components. Grace Chemicals determined the amount of the charge based
on various valuation techniques, including discounted cash flow, replacement
cost and net realizable value for assets to be disposed of.
Other Costs. Also, in the fourth quarter of 1995, Grace Chemicals recorded
pretax charges totalling $40.5 million ($25.9 million after-tax) relating to the
writedown of corporate assets ($27.0 million) and working capital assets ($13.5
million). These amounts are included in "Cost of goods sold and operating
expenses" in the Consolidated Statement of Operations included in the
Consolidated Financial Statements.
Income Taxes. Grace Chemicals' effective tax rates were (37.1)%, (53.0)%
and 34.6% in 1995, 1994 and 1993, respectively. Excluding the items discussed in
the second paragraph of "-- Review of Operations," Grace Chemicals' effective
tax rates were 32.8%, 34.6% and 36.7% in 1995, 1994 and 1993, respectively. The
lower effective tax rate in 1995, as compared to 1994, was largely due to the
reversal of the valuation allowance on foreign net operating losses and lower
state income taxes, partially offset by higher taxes on foreign
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operations. The lower effective tax rate in 1994 as compared to 1993, was
largely due to lower taxes on foreign operations.
Grace Chemicals has recognized a valuation allowance relating to
uncertainty as to the realization of certain deferred tax assets, including U.S.
tax credit carryforwards, state and local net operating loss carryforwards and
net deferred tax assets. As a result of the favorable resolution of an audit,
the valuation allowance on net operating loss carryforwards in foreign
jurisdictions was reversed in 1995. Based upon anticipated future results, Grace
Chemicals has concluded, after consideration of the valuation allowance, that it
is more likely than not that the remaining balance of the net deferred tax
assets will be realized.
See Note 6 to the Consolidated Financial Statements for further information
on income taxes.
DISCONTINUED OPERATIONS
In the second quarter of 1993, Grace Chemicals classified as discontinued
operations its battery separators business; certain engineered materials
businesses, principally its printing products, material technology and
electromagnetic radiation control businesses (collectively, "EMS"); and other
noncore businesses. At that time, a provision of $105.0 million (net of an
applicable tax benefit of $22.3 million) was recorded to reflect the losses
expected on the divestment of these businesses.
During the fourth quarter of 1995, Grace Chemicals revised the divestment
plan for Grace Cocoa. As a result of this revised divestment plan, recent trends
and a reassessment of forecasts for all remaining discontinued operations, Grace
Chemicals recorded an additional provision of $151.3 million (net of an
applicable tax benefit of $48.7 million) related to its remaining discontinued
operations, principally Grace Cocoa.
See Note 7 to the Consolidated Financial Statements for additional
information relating to the above matters.
FINANCIAL CONDITION
Liquidity and Capital Resources
First Quarter 1996. During the first quarter of 1996, the net pretax cash
used for Grace Chemicals' continuing operating activities was $47.7 million,
versus $68.5 million in the first quarter of 1995. The reduction was primarily
due to improved operating results, offset by net cash outflows of $7.5 million
in the first quarter of 1996, reflecting amounts paid for the defense and
disposition of asbestos-related litigation (net of amounts received from
settlements with certain insurance carriers for asbestos-related litigation, as
discussed below), as compared to a net cash inflow of $69.1 million in the first
quarter of 1995. After giving effect to the net pretax cash (used for)/provided
by operating activities of discontinued operations (including an increase in the
use of operating working capital by NMC in the first quarter of 1996) and
payments of income taxes, the net cash used for operating activities was $91.3
million in the first quarter of 1996 versus $62.5 million in the first quarter
of 1995.
Investing activities used $139.8 million of cash in the first quarter of
1996, largely reflecting capital expenditures of $112.5 million (more than 70%
of which relates to Grace Chemicals' packaging and catalyst and other
silica-based businesses). Also, investing activities of discontinued operations
for the first quarter of 1996 used $33.8 million (compared to $3.3 million used
in the 1995 first quarter), primarily reflecting the classification of the
health care business as a discontinued operation in the 1995 second quarter.
Management anticipates that the level of capital expenditures in 1996 will
approximate that of 1995.
Net cash provided by financing activities in the first quarter of 1996 was
$246.8 million, primarily reflecting an increase in total debt from December 31,
1995 and proceeds from the exercise of employee stock options, offset by the
payment of $12.4 million of dividends. Total debt was $2,160.6 million at March
31, 1996, an increase of $226.8 million from December 31, 1995. Grace Chemicals'
total debt as a percentage of total capital (debt ratio) increased from 61.1% at
December 31, 1995 to 61.9% at March 31, 1996, primarily
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<PAGE> 45
due to the increase in total debt. At March 31, 1996 and December 31, 1995, the
net assets of the discontinued health care business included $210.6 million and
$226.7 million of debt, respectively.
Grace Chemicals expects to receive a substantial amount of cash in 1996
from the Distribution Payment, the previously announced pending sale of the
Grace Dearborn water treatment and process chemicals business, the sale of Grace
Chemicals' transgenic plant business (see discussion below), and, to a lesser
extent, funds generated by operations. Grace Chemicals expects to apply the cash
proceeds generated by these transactions to the reduction of borrowings, the
repurchase of stock and investments in core businesses. A previously announced
share repurchase program was initiated in April 1996.
In May 1996, Grace sold the transgenic plant business of its Agracetus,
Inc. subsidiary to the Monsanto Company for $150.0 million in cash.
1995. During 1995, the net pretax cash provided by Grace Chemicals'
continuing operating activities was $229.7 million, versus $210.9 million in
1994. The increase was primarily due to net cash inflows of $97.0 million in
1995 from settlements with certain insurance carriers for asbestos-related
litigation, net of amounts paid for the defense and disposition of
asbestos-related litigation (see discussion below), as compared to the net
outflow of $60.0 million for asbestos-related litigation in 1994. However, the
1995 increase was offset by an increase in the use of operating working capital.
After giving effect to the net pretax cash provided by operating activities of
discontinued operations (including an increase in the use of operating working
capital by NMC in 1995) and increased payments of income taxes (attributable to
taxable income resulting from settlements of asbestos-related litigation, as
well as from audit adjustments to prior years' federal income tax returns), the
net cash provided by operating activities was $107.0 million in 1995 versus
$453.5 million in 1994.
Investing activities used $801.6 million of cash in 1995, largely
reflecting capital expenditures of $537.6 million (more than 75% of which
relates to Grace Chemicals' packaging and catalyst and other silica-based
businesses) and the acquisition of dialysis centers and medical products
facilities for a total of $37.4 million in the first quarter of 1995. Also,
investing activities of discontinued operations for 1995 used $295.2 million,
primarily reflecting the classification of the health care segment as a
discontinued operation in the second quarter. Management anticipates that the
level of capital expenditures in 1996 will approximate that of 1995. In 1995,
Grace Chemicals launched a $350.0 million global capital expansion program in
its packaging product line, including $50.0 million to build a plant in Seneca,
South Carolina to serve the fresh-cut produce market. In 1996, Grace Chemicals
is also scheduled to open new silica and packaging plants in Kuantan, Malaysia.
Net cash provided by financing activities in 1995 was $655.7 million,
primarily reflecting an increase in total debt from December 31, 1994 and the
exercise of employee stock options, offset by the payment of $112.6 million of
dividends. Total debt was $1,933.8 million at December 31, 1995, an increase of
$404.1 million from December 31, 1994. Grace Chemicals' total debt as a
percentage of total capital (debt ratio) increased from 50.4% at December 31,
1994 to 61.1% at December 31, 1995, primarily due to the reduction in
shareholders' equity (due to the charges discussed in "-- Review of
Operations -- 1995 Compared to 1994" and "Discontinued Operations") and the
increase in total debt. At December 31, 1995, the net assets of the discontinued
health care segment included $226.7 million of debt.
In October 1995, in anticipation of the then pending spin-off of NMC, the
Grace New York Board declared a quarterly cash dividend of 12.5 cents per share
on Grace New York Common Stock, a reduction from the previous quarterly cash
dividend of 35 cents per share. At that time, the Grace New York Board also
approved a policy of paying dividends at a rate of 20% to 30% of the prior
year's net earnings and authorized the repurchase of up to 10 million shares of
Grace New York Common Stock. In February 1996, after approving the
Reorganization Agreement, the Grace New York Board increased the number of
shares that may be repurchased to 20% of the outstanding Grace New York Common
Stock (see "-- Discontinued Operations" and Note 7 to the Consolidated Financial
Statements).
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ASBESTOS-RELATED MATTERS
First Quarter 1996. In the first quarter of 1996, Grace Chemicals paid
$7.5 million for the defense and disposition of asbestos-related property damage
and personal injury litigation, net of amounts received under settlements with
certain insurance carriers. The balance sheet at March 31, 1996 includes a
receivable due from insurance carriers, a portion of which is subject to
litigation, of $281.5 million. Grace Chemicals has also recorded notes
receivable of $147.3 million ($136.8 million net of discounts) for amounts to be
received in 1996 to 2001 pursuant to settlement agreements with certain
insurance carriers.
Although the amounts to be paid in 1996 in respect of asbestos-related
lawsuits and claims cannot be precisely estimated, Grace Chemicals expects that
it will be required to expend approximately $40.0 million (pretax) in 1996 to
defend against and dispose of such lawsuits and claims (after giving effect to
payments to be received from certain insurance carriers, as discussed above and
in Note (b) to the First Quarter Financial Statements and in Note 2 to the
Consolidated Financial Statements). As indicated therein, the amounts reflected
in the First Quarter 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 Chemicals'
continuing litigations with certain of its insurance carriers can be predicted
with certainty.
1995. In 1995, Grace Chemicals received $97.0 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.
During the fourth quarter of 1995, Grace Chemicals recorded a noncash pretax
charge of $275.0 million ($178.7 million after-tax), primarily to reflect the
estimated costs of defending against and disposing of personal injury lawsuits
and claims expected to be filed through 1998. The balance sheet at December 31,
1995 includes a receivable due from insurance carriers, a portion of which is
subject to litigation, of $321.2 million. Grace Chemicals has also recorded
notes receivable of $130.0 million ($118.4 million after discounts) for amounts
to be received in 1996 to 1999 pursuant to settlement agreements previously
entered into with certain insurance carriers.
ENVIRONMENTAL MATTERS
First Quarter 1996. There were no significant developments relating to
environmental liabilities in the first quarter of 1996.
1995. Grace Chemicals incurs costs to comply with environmental laws and
regulations and to fulfill its commitment to industry initiatives and Grace
Chemicals standards. Worldwide expenses of continuing operations related to the
operation and maintenance of environmental facilities and the disposal of
hazardous and nonhazardous wastes totalled $43.5 million, $35.7 million and
$40.7 million in 1995, 1994 and 1993, respectively. Such costs are estimated to
be approximately $45.0 million and $47.0 million in 1996 and 1997, respectively.
In addition, worldwide capital expenditures for continuing operations relating
to environmental protection totalled $14.9 million in 1995, compared to $21.5
million and $19.3 million in 1994 and 1993, respectively. Capital expenditures
to comply with environmental initiatives in future years are estimated to be
$20.0 million and $17.0 million in 1996 and 1997, respectively. Grace Chemicals
has also incurred costs to remediate environmentally impaired sites. These costs
were $31.3 million, $30.8 million and $44.4 million in 1995, 1994 and 1993,
respectively. These amounts have been charged against previously established
reserves. Future cash outlays for remediation costs are expected to total $30.0
million in 1996 and $20.0 million in 1997. Expenditures have been funded from
internal sources of cash and are not expected to have a significant effect on
liquidity.
Grace Chemicals accrues for anticipated costs associated with investigatory
and remediation efforts relating to the environment in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies," which
requires estimating the probability and amount of future costs. At December 31,
1995, Grace Chemicals' liability for environmental investigatory and remediation
costs related to continuing and discontinued operations totalled approximately
$280.3 million, which amount does not take into account any discounting for
future expenditures or possible future insurance recoveries. The measurement of
the liability is evaluated quarterly based on currently available information.
In 1995 and 1994, periodic
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provisions were recorded for environmental and plant closure expenses, which
include the costs of future environmental investigatory and remediation
activities. Additionally, in the fourth quarter of 1995 and first quarter of
1994, Grace Chemicals recorded pretax provisions of $77.0 million and $40.0
million ($50.0 million and $26.0 million after-tax), respectively, principally
to provide for future costs related to remediation activities required at former
manufacturing sites. The 1995 provision of $77.0 million related principally to
increased cost estimates associated with five former manufacturing facilities.
This provision was based on increased remediation activities which were
determined to be necessary at these locations during the investigation process
and, in one case, during the actual remediation process.
For additional information relating to environmental liabilities, see Note
12 to the Consolidated Financial Statements.
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MANAGEMENT
BOARD OF DIRECTORS
The New Grace Board is currently composed of certain executive officers of
Grace New York. Set forth below is information with respect to the individuals
who are expected to serve as the directors of New Grace following the
Distribution, all of whom are currently directors of Grace New York and will
resign from the Grace New York Board contemporaneously with the Reorganization.
Under the classified board provisions of the New Grace Certificate and the New
Grace By-laws, these individuals will not be required to stand for re-election
to the New Grace Board until the year in which their respective terms expire.
Each director's term will expire at the same time that such director's term as a
member of the Grace New York Board was scheduled to expire. See "CERTAIN
ANTI-TAKEOVER EFFECTS -- Classified Board of Directors."
CLASS I DIRECTORS -- TERMS EXPIRING IN 1999
ALBERT J. COSTELLO
Age: 60
Mr. Costello is Grace New York's Chairman, President and Chief Executive
Officer, positions he has held since May 1995. Before joining Grace New York,
Mr. Costello served as Chairman of the Board and Chief Executive Officer of
American Cyanamid Company from April 1993 to December 1994. Mr. Costello
received a B.S. in chemistry from Fordham University and an M.S. in chemistry
from New York University. He joined American Cyanamid Company in 1957 as a
chemist and held various research, marketing and management positions in the
U.S., Mexico and Spain. In 1982, he was named Group Vice President in charge of
American Cyanamid Company's global agricultural business; in 1983 he became an
Executive Vice President with responsibility for global agricultural and
chemical products businesses; and from 1991 through March 1993 he was American
Cyanamid Company's President. Mr. Costello is a director of FMC Corporation and
the Chemical Manufacturers Association; a trustee of Fordham University and the
American Enterprise Institute for Public Policy Research; a member of the
Business Roundtable; and a member of the executive committee of the
British-North American Committee of the National Planning Association. He has
previously served as a director of the Pharmaceutical Manufacturers Association;
as Chairman of the National Agricultural Chemicals Association; and as a member
of the Executive Committee of the Societe de Chimie Industrielle.
MARYE ANNE FOX
Age: 48
Dr. Fox is Vice President for research, and the Waggoner Regents Chair in
chemistry, of the University of Texas, positions she has held since 1994 and
1992, respectively; she has been on the faculty of the University of Texas since
1976. Dr. Fox received a B.S. in chemistry from Notre Dame College, an M.S. in
organic chemistry from Cleveland State University and a Ph.D. in organic
chemistry from Dartmouth College; she also holds an honorary doctoral degree
from Notre Dame College. Dr. Fox is Vice Chair of the National Science Board and
has received numerous honors and awards from a wide variety of educational and
professional organizations. She has also served on several editorial boards and
has authored approximately 300 publications, including three books and more than
20 book chapters.
THOMAS A. VANDERSLICE
Age: 64
Mr. Vanderslice began his career with General Electric Company, where he
spent 23 years in various technical, management and executive positions,
including Executive Vice President and Sector Executive of General Electric
Company's power systems business. He subsequently served as President and Chief
Operating Officer of GTE Corporation, as Chairman and Chief Executive Officer of
Apollo Computer, Inc., and, from 1989 to June 1995, as Chairman and Chief
Executive Officer of M/A-COM, Inc., a designer and
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manufacturer of radio frequency and microwave components, devices and subsystems
for commercial and defense applications. Mr. Vanderslice received a B.S. in
chemistry and philosophy from Boston College and a Ph.D. in chemistry and
physics from Catholic University; he holds several patents and has written
numerous technical articles. He is a director of Texaco Inc., a trustee of
Boston College and Chairman of the Massachusetts High Technology Council. He is
also a member of the National Academy of Engineering, the American Chemical
Society and the American Institute of Physics.
CLASS II DIRECTORS -- TERMS EXPIRING IN 1997
VIRGINIA A. KAMSKY
Age: 43
Ms. Kamsky is the founder, President and Co-Chief Executive Officer of
Kamsky Associates Inc., an advisory, consultancy and investment firm
specializing in The People's Republic of China. She graduated from Princeton
University with an honors degree in East Asian studies (with concentration in
Chinese and Japanese language studies) and served as a lending officer with The
Chase Manhattan Bank in Tokyo, Beijing and New York City before forming Kamsky
Associates, Inc. in 1980. Ms. Kamsky is a member of the Council on Foreign
Relations, a founding director of the Council's Hong Kong Committee, and a
trustee of Princeton-in-Asia and the Johns Hopkins-Nanjing Council. She
previously served on Princeton University's Board of Trustees, including its
Executive and Investment Committees.
JOHN E. PHIPPS
Age: 63
Mr. Phipps is a private investor. He is Chairman and a director of John H.
Phipps, Inc. and a director of The Bessemer Group, Bessemer Securities
Corporation, Bessemer Trust Company, Bessemer Trust Company of Florida, Bessemer
Trust Company, N.A., Essex Holdings and Ingersoll-Rand Company.
CLASS III DIRECTORS -- TERMS EXPIRING IN 1998
HAROLD A. ECKMANN
Age: 75
Mr. Eckmann retired in 1985 as Chairman and Chief Executive Officer of
Atlantic Mutual Insurance Company and Centennial Insurance Company -- The
Atlantic Companies. He was educated at the U.S. Merchant Marine Academy and the
University of California. Mr. Eckmann joined The Atlantic Companies in 1949, and
became President in 1970 and Chairman and Chief Executive Officer in 1976.
JAMES W. FRICK
Age: 71
Dr. Frick is president of James W. Frick Associates, a consulting firm to
private colleges and universities. He is also Vice President Emeritus of the
University of Notre Dame, having served the University in various capacities
from 1951 to 1987, including as a member of the Board of Trustees. Dr. Frick
holds three degrees from the University of Notre Dame. He is President Emeritus
of the Community Foundation of St. Joseph County, Indiana, a former director of
Society Bank of South Bend and Society National Bank, Indiana, and a former
member of the Board of Trustees of Converse College. He also served a term as a
member of the Board of Directors of the Department of Financial Institutions of
the State of Indiana.
THOMAS A. HOLMES
Age: 72
Mr. Holmes served as acting President and Chief Executive Officer of Grace
New York from March to May 1995. He was Chairman, President and Chief Executive
Officer of Ingersoll-Rand Company until his retirement in 1988, having spent his
entire business career with Ingersoll-Rand Company. He is a graduate of the
University of Missouri -- Rolla. Mr. Holmes is a director of Newmont Gold Co.
and Newmont Mining Corp.
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COMMITTEES OF THE BOARD OF DIRECTORS
There are currently no committees of the New Grace Board. However, after
the Distribution, it is expected that the following committees of the New Grace
Board will be established:
Audit Committee. The Audit Committee of the New Grace Board will be
responsible for reviewing the financial information New Grace provides to
shareholders and others, New Grace's systems of internal controls, and its
auditing, accounting and financial reporting process generally. The Audit
Committee's specific responsibilities will include recommending to the New Grace
Board the selection of independent certified public accountants to audit the
annual financial statements of New Grace and its consolidated subsidiaries;
reviewing the annual financial statements; and meeting with New Grace's senior
financial officers, internal auditors and independent certified public
accountants to review the scope and results of the audit and other matters
regarding New Grace's accounting, financial reporting and internal control
systems. The members of the Audit Committee are expected to be Mr. Eckmann
(Chairman), Drs. Fox and Frick and Mr. Vanderslice.
Compensation, Employee Benefits and Stock Incentive Committee. The
Compensation, Employee Benefits and Stock Incentive Committee of the New Grace
Board (the "Compensation Committee") will make recommendations to the New Grace
Board with respect to the salary and annual and long-term incentive compensation
of certain officers and other high-level employees, as well as with respect to
New Grace's benefit plans, programs and arrangements generally. The Compensation
Committee will also administer New Grace's stock incentive plans and determine
the recipients and terms of stock incentives granted under those plans. The
members of the Compensation Committee are expected to be Messrs. Eckmann, Holmes
(Chairman), Phipps and Vanderslice.
Nominating Committee. The Nominating Committee of the New Grace Board will
recommend to the Grace Delaware Board candidates for nomination as directors of
New Grace. The members of the Nominating Committee are expected to be Drs. Fox
and Frick and Messrs. Phipps (Chairman) and Holmes.
Committee on Corporate Responsibility. The Committee on Corporate
Responsibility of the New Grace Board will advise management on New Grace's role
in the public sector and its responsibility with respect to matters of public
policy. The members of the Committee on Corporate Responsibility are expected to
be Mr. Eckmann, Dr. Frick (Chairman) and Ms. Kamsky.
COMPENSATION OF DIRECTORS
Under the New Grace compensation program for nonemployee directors, each
nonemployee director will receive an annual retainer of $24,000, payable in
shares of New Grace Common Stock; the Chairmen of the Audit and Compensation
Committees will receive annual cash retainers of $12,000, and the Chairmen of
the Nominating Committee and the Committee on Corporate Responsibility will
receive annual cash retainers of $2,000; and each nonemployee director will
receive $2,000 in cash for each New Grace Board meeting and $1,000 for each
committee meeting attended (except that committee chairmen will receive $1,200
per committee meeting).
Nonemployee directors will be reimbursed for expenses they incur in
attending New Grace Board and committee meetings, and New Grace is expected to
maintain business travel accident insurance coverage for the nonemployee
directors. In addition, nonemployee directors will receive a fee of $1,000 per
day for work performed at New Grace's request.
A director will be able to defer payment of all or part of the fees
received for attending New Grace Board and committee meetings and/or the cash
retainers referred to above. The amounts deferred (plus an interest equivalent)
will be payable to the director or his or her heirs or beneficiaries in a lump
sum or in quarterly installments over two to 20 years following a date specified
by the director. The interest equivalent on amounts deferred will be computed at
the higher of the prime rate plus two percentage points or 120% of the prime
rate, in either case compounded semiannually. This program will provide for the
payment of additional survivors' benefits in certain circumstances.
New Grace also expects to have a retirement plan under which an individual
who has been a nonemployee director for more than four years will receive annual
payments of $24,000 for a period equal to
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the length of service as a nonemployee director (but not more than 15 years)
after the director ceases to be eligible to receive directors' fees. In the
event of a director's death, payments will be made to his or her surviving
spouse.
EXECUTIVE OFFICERS
Set forth below is information with respect to the individuals expected to
serve as executive officers of New Grace following the Distribution. All of the
individuals have been actively engaged in Grace New York's business for the past
five years, other than Mr. Costello; Mr. Ellberger, who was a Corporate Vice
President and Director of Corporate Development and Planning of American
Cyanamid Company from October 1991 until 1995 and, prior to that, Vice
President, Industrial and Performance Products Division; and Mr. Houchin, who
was Chief Executive Officer of Gulfstream Land & Development prior to joining
Grace New York in October 1991.
<TABLE>
<CAPTION>
NAME AND AGE OFFICE
- ----------------------------------- ------------------------------------------------
<S> <C>
Robert H. Beber (60)............... Executive Vice President and General Counsel
Robert J. Bettacchi (53)........... Vice President
Albert J. Costello (60)............ Chairman, President and Chief Executive Officer
Larry Ellberger (48)............... Senior Vice President
Peter D. Houchin (48).............. Senior Vice President and Chief Financial
Officer
James R. Hyde (57)................. Senior Vice President
J. Gary Kaenzig, Jr. (51).......... Senior Vice President
Donald H. Kohnken (62)............. Executive Vice President
Fred Lempereur (58)................ Senior Vice President
</TABLE>
EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS PRIOR TO THE DISTRIBUTION
The individuals who will serve as executive officers of New Grace after the
Distribution have served as and been compensated as executive officers of Grace
New York. For information with respect to the compensation of executive officers
of Grace New York prior to the Distribution, reference is made to the excerpt
from the Proxy Statement, dated April 10, 1996, for the 1996 Grace New York
Annual Meeting of Shareholders attached hereto as Annex E (the "Grace New York
1996 Proxy Excerpt"); such information is incorporated herein by reference.
In June 1996, Dr. Constantine L. Hampers resigned all offices and
directorships he held with Grace New York and its subsidiaries, including Grace
Chemicals and NMC. Under the terms of an agreement providing for his
resignation, Dr. Hampers will continue to receive salary (at the annual rate of
$875,270), as well as specified benefits, until December 31, 1996, at which time
he will become eligible to commence receiving the pension benefit provided under
his previous employment agreement with Grace Chemicals. He will also be entitled
to participate in Grace New York's Annual Incentive Compensation Program for
1996 and to receive any awards earned under Grace New York's Long-Term Incentive
Program (the "LTIP") for the 1994-1996 and 1995-1997 performance periods (with
the award for the 1995-1997 performance period to be paid on a pro rata basis).
In addition, as contemplated by his previous employment agreement, Dr. Hampers
was granted the right to purchase a corporate aircraft from Grace for its fair
market value (subject to certain adjustments), as well as an automobile
previously provided for his use. Dr. Hampers has subsequently agreed to purchase
the aircraft from Grace for approximately $19,000,000.
Grace Chemicals has been advised that Dr. Hampers has reached an agreement
to serve, following the Reorganization, as a consultant to Fresnius Medical
Care, reporting to Dr. Gerd Krick, who is the chief executive officer of
Fresenius AG and who will serve as the chief executive officer of Fresenius
Medical Care following the Reorganization. Under the terms of the agreement, Dr.
Hampers will receive a $6 million fee
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from Fresenius Medical Care conditional upon the successful completion of the
Reorganization, as well as a consulting fee of $500,000 per year for two years.
The foregoing description does not purport to be complete and is qualified
in its entirety by reference to the text of (i) Dr. Hampers' employment
agreement with Grace Chemicals, dated as of April 1, 1991, which was filed with
the Commission as an exhibit to the Annual Report on Form 10-K of Grace New York
for the year ended December 31, 1991, (ii) a letter agreement, dated March 29,
1996, amending such employment agreement, which was filed as an exhibit to the
Quarterly Report on Form 10-Q of Grace New York for the quarter ended March 31,
1996, and (iii) the letter agreement, dated June 14, 1996, providing for Dr.
Hampers' resignation, which has been filed as an exhibit to the Registration
Statement (see "ADDITIONAL INFORMATION" below).
EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS FOLLOWING THE DISTRIBUTION
Upon completion of the Distribution, New Grace will assume substantially
all of the obligations of Grace New York under its executive and other
compensation plans, programs and arrangements. Consequently, the compensation
and benefits to be provided to employees of New Grace and its subsidiaries will
be substantially identical to those they currently receive as employees of Grace
New York and its subsidiaries. In addition, Grace New York, as sole stockholder
of New Grace, is expected to approve New Grace's 1996 Stock Incentive Plan and
1996 Stock Retainer Plan for Nonemployee Directors, which are described and set
forth in Annexes C and D, respectively, to this Prospectus.
The Reorganization (including the Distribution) will not be deemed a
"change in control" of Grace New York for purposes of any employment or other
agreement between Grace New York and its executive officers. Grace New York's
nine executive officers would be entitled to receive payments aggregating
approximately $24 million under employment and/or executive severance agreements
in the event of a "change in control" for purposes of such agreements.
EMPLOYEE BENEFITS AND COMPENSATION AGREEMENT
It is currently expected that Grace New York and New Grace will enter into
an Employee Benefits and Compensation Agreement providing for, among other
things, (i) the retention or assumption, as the case may be, by New Grace of all
liabilities for compensation and employee benefits provided to individuals who
were or are employees of Grace Chemicals or beneficiaries or dependents of such
individuals ("New Grace Employees"), whether such liabilities arise before, at
or after the Time of Distribution; and (ii) the retention or assumption, as the
case may be, by New Grace of all liabilities associated with employee benefit
plans maintained by New Grace and the portion of such plans maintained by Grace
New York that cover New Grace Employees, whether such liabilities arise before,
at or after the Time of Distribution.
In addition, the Employee Benefits and Compensation Agreement is expected
to provide that the value of the contingent awards held by New Grace Employees
under the LTIP for the 1994-1996 and 1995-1997 performance periods will be
determined in accordance with the terms of the LTIP, adjusted to reflect the
Distribution, so that the financial performance component of the awards granted
to New Grace Employees will reflect the performance of New Grace, and that of
the awards granted to NMC employees will reflect NMC's performance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the New Grace Compensation Committee are expected to be
Messrs. Eckmann, Holmes (Chairman), Phipps and Vanderslice. As noted above, Mr.
Holmes served as acting President and Chief Executive Officer of Grace New York
from March 2 to May 1, 1995.
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<PAGE> 53
CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK
AND NEW GRACE
New Grace and Grace New York have entered into certain agreements providing
for the orderly separation of New Grace from Grace New York, the making of the
Distribution, and certain other matters. For a description of these agreements,
see "THE REORGANIZATION" in the Joint Proxy Statement-Prospectus. The
availability of the indemnities to be provided to Grace Chemicals under such
agreements will be dependent upon the financial strength and creditworthiness of
Fresenius AG, Fresenius Medical Care, FNMC and NMC. No assurance can be given
that such entities will be able to honor such indemnities should they be
obligated to do so at some future point. See also "THE DISTRIBUTION -- NMC
Credit Agreement" and "-- Other Arrangements" for a discussion of certain
arrangements between Grace Chemicals and NMC in respect of the NMC Credit
Agreement and the OIG Investigation.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The individuals who will serve as directors and executive officers of New
Grace after the Distribution currently serve as directors and executive officers
of Grace New York. For information with respect to certain relationships and
transactions prior to the Distribution, reference is made to the Grace New York
1996 Proxy Excerpt.
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<PAGE> 54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Grace New York currently owns all of the outstanding shares of New Grace
Common Stock. The following table sets forth certain information with respect to
all shareholders anticipated to be the beneficial owners (as defined below) of
more than 5% of the New Grace Common Stock outstanding immediately following the
Distribution, based solely upon a review of statements filed with the Commission
pursuant to Sections 13(d), 13(g) and 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), with respect to Grace New York Common
Stock prior to July 15, 1996.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP(A) CLASS(B)
- ------------------------------------------------------------- ---------------- ----------
<S> <C> <C>
College Retirement Equities Fund(c).......................... 7,238,300 shares 7.9%
730 Third Avenue
New York, N.Y. 10017-3206
Lincoln Capital Management Company(d)........................ 5,751,400 shares 6.3%
200 South Wacker Drive
Suite 2100
Chicago, Illinois 60606
</TABLE>
- ---------------
(a) Under the rules of the Commission, a person is deemed to be the "beneficial
owner" of a security if such person has or shares the power to vote or
direct the voting of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities if that person has the right to acquire beneficial
ownership within 60 days. Accordingly, more than one person may be deemed to
be a beneficial owner of the same security. Unless otherwise indicated by
footnote, the named person is expected to have sole voting and dispositive
power with respect to the shares to be held.
(b) Based on 92,001,176 shares of Grace New York Common Stock outstanding as of
July 15, 1996.
(c) The ownership information set forth herein is based in its entirety on
material contained in a Schedule 13G, dated February 1, 1996, filed with the
Commission by College Retirement Equities Fund, which certified therein that
the securities were not acquired for the purpose of changing or influencing
the control of Grace New York. With respect to the shares held, such
shareholder stated in such Schedule 13G that it has sole voting power and
sole dispositive power as to 7,238,300 shares.
(d) The ownership information set forth herein is based in its entirety on
material contained in a Schedule 13G, dated June 21, 1996, filed with the
Commission by Lincoln Capital Management Company, which certified therein
that the securities were not acquired for the purpose of changing or
influencing the control of Grace New York. With respect to the shares held,
such shareholder stated in such Schedule 13G that it has sole voting power
as to 2,651,800 shares and sole dispositive power as to 5,751,400 shares.
BENEFICIAL OWNERSHIP OF MANAGEMENT
Grace New York currently owns all of the outstanding shares of New Grace
Common Stock. For information with respect to the number of shares of New Grace
Common Stock expected to be beneficially owned immediately following the
Distribution by (i) the individuals expected to be New Grace directors and (ii)
the executive officers of Grace New York named in the Summary Compensation Table
in the Grace New York 1996 Proxy Excerpt who are expected to be executive
officers of New Grace, see the table set forth under "SECURITY OWNERSHIP OF
MANAGEMENT AND OTHERS" in the Grace New York 1996 Proxy Excerpt.
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<PAGE> 55
DESCRIPTION OF NEW GRACE CAPITAL STOCK
The following description of New Grace capital stock is a summary of the
material terms thereof and is qualified in its entirety by reference to the
provisions of the New Grace Certificate and the New Grace By-laws, copies of
which are attached to this Prospectus as Annex A and Annex B, respectively.
Under the New Grace Certificate, the total number of shares of all classes
of stock that New Grace has authority to issue is 353 million, consisting of 53
million shares of New Grace Preferred Stock, par value $.01 per share (the "New
Grace Preferred Stock"), and 300 million shares of New Grace Common Stock. No
shares of New Grace Preferred Stock are being issued in connection with the
Distribution. An aggregate of approximately 92 million shares of New Grace
Common Stock is expected to be distributed in the Distribution, based on the
number of shares of Grace New York Common Stock outstanding on July 15, 1996.
The New Grace Board is authorized to provide for the issuance of shares of
New Grace Preferred Stock in one or more series, to establish the number of
shares in each series, and to fix the designation, powers, preferences and
rights of each such series and the qualifications, limitations or restrictions
thereof. The New Grace Certificate has authorized, and the New Grace Board has
reserved for issuance, 3 million shares of Junior Participating Preferred Stock,
par value $.01 per share, of New Grace ("New Grace Junior Preferred Stock") in
connection with the New Grace Rights. See "CERTAIN ANTI-TAKEOVER EFFECTS --
Preferred Stock Purchase Rights."
The holders of New Grace Common Stock are entitled to one vote per share on
all matters voted on by shareholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by the
New Grace Board with respect to any series of New Grace Preferred Stock, the
holders of the New Grace Common Stock exclusively possess all voting power. The
New Grace Certificate does not provide for cumulative voting in the election of
directors. Subject to any preferential rights of any outstanding series of New
Grace Preferred Stock, the holders of New Grace Common Stock are entitled to
such dividends as may be declared from time to time by the New Grace Board from
funds available therefor, and, upon liquidation, are entitled to receive pro
rata all assets of New Grace available for distribution to such holders. All
shares of New Grace Common Stock received in the Distribution will be fully paid
and nonassessable and the holders thereof will not have preemptive rights. See
"CERTAIN ANTI-TAKEOVER EFFECTS."
The transfer agent and registrar for the New Grace Common Stock will be
Chemical Mellon Shareholder Services.
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<PAGE> 56
CERTAIN ANTI-TAKEOVER EFFECTS
The New Grace Certificate and the New Grace By-laws contain certain
provisions that could delay or make more difficult the acquisition of New Grace
by means of a tender offer, a proxy contest or otherwise. Such provisions have
been implemented to enable New Grace, particularly (but not exclusively) in the
years immediately following the Distribution, to develop its business in a
manner which will foster its long-term growth without disruption caused by the
threat of a takeover not deemed by the New Grace Board to be in the best
interests of New Grace and its shareholders. The description of certain aspects
of the New Grace Certificate and the New Grace By-laws set forth below does not
purport to be complete and is qualified in its entirety by reference to the New
Grace Certificate and the New Grace By-laws, which are attached to this
Prospectus as Annex A and Annex B, respectively.
CLASSIFIED BOARD OF DIRECTORS
The New Grace Certificate and the New Grace By-laws provide that the New
Grace Board will be divided into three classes of directors, with the classes to
be as equal in number as possible. The New Grace Board is expected to consist of
the individuals referred to in "MANAGEMENT -- Board of Directors." The New Grace
Certificate and the New Grace By-laws provide that, of the initial directors of
New Grace, approximately one-third will continue to serve until the 1997 Annual
Meeting of Shareholders, approximately one-third will continue to serve until
the 1998 Annual Meeting of Shareholders and approximately one-third will
continue to serve until the 1999 Annual Meeting of Shareholders. Of the initial
directors, Virginia A. Kamsky and John E. Phipps will serve until the 1997
Annual Meeting of Shareholders, Harold A. Eckmann, James W. Frick and Thomas A.
Holmes will serve until the 1998 Annual Meeting of Shareholders, and Albert J.
Costello, Marye Anne Fox and Thomas A. Vanderslice will serve until the 1999
Annual Meeting of Shareholders. Starting with the 1997 Annual Meeting of
Shareholders, one class of directors will be elected each year for a three-year
term.
The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the New Grace Board. At
least two annual meetings of shareholders, instead of one, will generally be
required to effect a change in a majority of the New Grace Board. Such a delay
may help ensure that New Grace's directors, if confronted by a holder attempting
to force a proxy contest, a tender or exchange offer, or an extraordinary
corporate transaction, would have sufficient time to review the proposal as well
as any available alternatives to the proposal and to act in what they believe to
be the best interest of the shareholders. However, the classification provisions
will apply to every election of directors and will increase the likelihood that
incumbent directors will retain their positions, regardless of whether a change
in the composition of the New Grace Board would be beneficial to New Grace and
its shareholders and whether or not a majority of New Grace's shareholders
believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of New Grace, even though such an attempt might be
beneficial to New Grace and its shareholders. In addition, because the
classification provisions may discourage accumulations of large blocks of New
Grace Common Stock by purchasers whose objective is to take control of New Grace
and remove a majority of the New Grace Board, the classification of the New
Grace Board could tend to reduce the likelihood of fluctuations in the market
price of the New Grace Common Stock that might result from accumulations of
large blocks. Accordingly, shareholders could be deprived of certain
opportunities to sell their shares of New Grace Common Stock at a higher market
price than might otherwise be the case.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The New Grace Certificate provides that, subject to the rights of any
holders of any series of New Grace Preferred Stock to elect additional directors
under specified circumstances, the number of directors will be fixed in the
manner provided in the New Grace By-laws. The New Grace By-laws provide that,
subject to any rights of holders of New Grace Preferred Stock to elect directors
under specified circumstances, the number of directors will be fixed from time
to time exclusively pursuant to a resolution adopted by directors constituting a
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<PAGE> 57
majority of the total number of directors that New Grace would have if there
were no vacancies on the New Grace Board (the "Whole Board"). In addition, the
New Grace By-laws provide that, subject to applicable law and any rights of
holders of New Grace Preferred Stock, and unless the New Grace Board otherwise
determines, any vacancies will be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum. Accordingly,
absent an amendment to the New Grace By-laws, the New Grace Board could prevent
any shareholder from enlarging the New Grace Board and filling the new
directorships with such shareholder's own nominees.
Under the Delaware General Corporation Law ("DGCL"), unless otherwise
provided in a corporation's certificate of incorporation, directors serving on a
classified board may only be removed by the shareholders for cause. The New
Grace Certificate does not otherwise provide.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The New Grace Certificate and the New Grace By-laws provide that, subject
to the rights of any holders of New Grace Preferred Stock to elect additional
directors under specified circumstances, shareholder action can be taken only at
an annual or special meeting of shareholders and may not be taken by written
consent in lieu of a meeting. The New Grace By-laws provide that, subject to the
rights of holders of any series of New Grace Preferred Stock to elect additional
directors under specified circumstances, special meetings of shareholders can be
called only by the Chairman or the President or by the New Grace Board pursuant
to a resolution adopted by a majority of the Whole Board. Shareholders are not
permitted to call, or to require that the Chairman, the President or the New
Grace Board call, a special meeting of shareholders. Moreover, the business
permitted to be conducted at any special meeting of shareholders is limited to
the business brought before the meeting pursuant to the notice of meeting given
by New Grace.
The provisions of the New Grace Certificate and the New Grace By-laws
prohibiting shareholder action by written consent may have the effect of
delaying consideration of a shareholder proposal until the next annual meeting.
These provisions would also prevent the holders of a majority of the voting
power of the voting stock from unilaterally using the written consent procedure
to take shareholder action. Moreover, a shareholder could not force shareholder
consideration of a proposal over the opposition of the Chairman and the New
Grace Board by calling a special meeting of shareholders prior to the time the
Chairman or a majority of the Whole Board believes such consideration to be
appropriate.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The New Grace By-laws establish an advance notice procedure for
shareholders to nominate candidates for election as directors or to bring other
business before meetings of shareholders of New Grace (the "Shareholder Notice
Procedure").
Only those shareholder nominees who are nominated in accordance with the
Shareholder Notice Procedure will be eligible for election as directors of New
Grace. Under the Shareholder Notice Procedure, notice of shareholder nominations
to be made at an annual meeting (or of any other business to be brought before
such meeting) must be received by New Grace not less than 60 days nor more than
90 days prior to the first anniversary of the previous year's annual meeting
(or, if the date of the annual meeting is more than 30 days before or more than
60 days after such anniversary date, not earlier than the 90th day prior to such
meeting and not later than the later of (i) the 60th day prior to such meeting
or (ii) the 10th day after public announcement of the date of such meeting is
first made). Notwithstanding the foregoing, in the event that the number of
directors to be elected is increased and there is no public announcement naming
all of the nominees for director or specifying the size of the increased New
Grace Board made by New Grace at least 70 days prior to the first anniversary of
the preceding year's annual meeting, a shareholder's notice will be timely, but
only with respect to nominees for any new positions created by such increase, if
it is received by New Grace not later than the 10th day after such public
announcement is first made by New Grace.
The New Grace By-laws provide that only such business may be conducted at a
special meeting as is specified in the notice of meeting. Nominations for
election to the New Grace Board may be made at a special meeting at which
directors are to be elected only by or at the New Grace Board's direction or by
a shareholder
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who has given timely notice of nomination. Under the Shareholder Notice
Procedure, such notice must be received by New Grace not earlier than the 90th
day before such meeting and not later than the later of (i) the 60th day prior
to such meeting or (ii) the 10th day after public announcement of the date of
such meeting is first made. Shareholders will not be able to bring other
business before special meetings of shareholders.
The Shareholder Notice Procedure provides that at an annual meeting only
such business may be conducted as has been brought before the meeting by, or at
the direction of, the Chairman, the President or the New Grace Board or by a
shareholder who has given timely written notice (as set forth above) to the
Secretary of New Grace of such shareholder's intention to bring such business
before such meeting.
Under the Shareholder Notice Procedure, a shareholder's notice to New Grace
proposing to nominate an individual for election as a director must contain
certain information, including, without limitation, the identity and address of
the nominating shareholder, the class and number of shares of stock of New Grace
owned by such shareholder, and all information regarding the proposed nominee
that would be required to be included in a proxy statement soliciting proxies
for the proposed nominee. Under the Shareholder Notice Procedure, a
shareholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business and
about the proposing shareholder, including, without limitation, a brief
description of the business the shareholder proposes to bring before the
meeting, the reasons for conducting such business at such meeting, the name and
address of such shareholder, the class and number of shares of stock of New
Grace beneficially owned by such shareholder, and any material interest of such
shareholder in the business so proposed. If the Chairman or other officer
presiding at a meeting determines that an individual was not nominated, or other
business was not brought before the meeting, in accordance with the Shareholder
Notice Procedure, such individual will not be eligible for election as a
director, or such business will not be conducted at such meeting, as the case
may be.
By requiring advance notice of nominations by shareholders, the Shareholder
Notice Procedure will afford the New Grace Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the New Grace Board, to inform shareholders about such
qualifications. By requiring advance notice of other proposed business, the
Shareholder Notice Procedure will provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the New Grace Board, will provide the New Grace Board with an
opportunity to inform shareholders, prior to such meetings, of any business
proposed to be conducted at such meetings, together with the New Grace Board's
position regarding action to be taken with respect to such business, so that
shareholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the New Grace By-laws do not give the New Grace Board any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
New Grace and its shareholders.
NEW GRACE PREFERRED STOCK
The New Grace Certificate authorizes the New Grace Board to establish one
or more series of New Grace Preferred Stock, and to determine, with respect to
any series of New Grace Preferred Stock, the terms and rights of such series,
including (i) the designation of the series; (ii) the number of shares of the
series, which number the New Grace Board may thereafter (except where otherwise
provided in the New Grace Preferred Stock designation) increase or decrease (but
not below the number of shares thereof then outstanding); (iii) whether
dividends, if any, will be cumulative or noncumulative and the dividend rate of
the series; (iv) the dates on which dividends, if any, will be payable; (v) the
redemption rights and price or prices, if any, for shares of the series; (vi)
the terms and amounts of any sinking fund provided for the purchase or
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redemption of shares of the series; (vii) the amounts payable on shares of the
series in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of New Grace; (viii) whether the shares of the series
will be convertible into shares of any other class or series, or any other
security, of New Grace or any other corporation, and, if so, the specification
of such other class or series or such other security, the conversion price or
prices or rate or rates, any adjustments thereof, the date or dates as of which
such shares shall be convertible and all other terms and conditions upon which
such conversion may be made; (ix) restrictions on the issuance of shares of the
same series or of any other class or series; and (x) the voting rights, if any,
of the holders of such series.
The authorized shares of New Grace Preferred Stock, as well as shares of
New Grace Common Stock, will be available for issuance without further action by
New Grace's shareholders, unless such action is required by applicable law or
the rules of any stock exchange or automated quotation system on which New
Grace's securities may be listed or traded. If the approval of New Grace's
shareholders is not so required, the New Grace Board does not intend to seek
shareholder approval.
Although the New Grace Board has no intention at the present time of doing
so, it could issue a series of New Grace Preferred Stock that could, depending
on the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The New Grace Board will make any determination to issue
such shares based on its judgment as to the best interests of New Grace and its
shareholders. The New Grace Board, in so acting, could issue New Grace Preferred
Stock having terms that could discourage an acquisition attempt or other
transaction that some, or a majority, of New Grace's shareholders might believe
to be in their best interests or in which shareholders might receive a premium
for their stock over the then-current market price of such stock.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The New Grace Certificate authorizes the New Grace Board to create and
issue rights entitling the holders thereof to purchase from New Grace shares of
capital stock or other securities or property. The times at which and terms upon
which such rights are to be issued would be determined by the New Grace Board
and set forth in the contracts or instruments that evidence such rights. The
authority of the New Grace Board with respect to such rights includes, but is
not limited to, determining (i) the purchase price of the capital stock or other
securities or property to be purchased upon exercise of such rights; (ii)
provisions relating to the times at which and the circumstances under which such
rights may be exercised or sold or otherwise transferred, either together with
or separately from any other stock or other securities of New Grace; (iii)
provisions which adjust the number or exercise price of such rights or the
amount or nature of the stock, other securities or other property receivable
upon exercise of such rights in the event of a combination, split or
recapitalization of any stock of New Grace, a change in ownership of New Grace's
stock or other securities or a reorganization, merger, consolidation, sale of
assets or other occurrence relating to New Grace or any stock of New Grace, and
provisions restricting the ability of New Grace to enter into any such
transaction absent an assumption by the other party or parties thereto of the
obligations of New Grace under such rights; (iv) provisions which deny the
holder of a specified percentage of the outstanding securities of New Grace the
right to exercise such rights and/or cause such rights held by such holder to
become void; (v) provisions which permit New Grace to redeem or exchange such
rights; and (vi) the appointment of the rights agent with respect to such
rights. This provision is intended to confirm the New Grace Board's authority to
issue share purchase rights or other rights to purchase stock or securities of
New Grace or any other corporation. See "-- Preferred Stock Purchase Rights."
AMENDMENT OF CERTAIN PROVISIONS OF THE NEW GRACE CERTIFICATE OF INCORPORATION
AND NEW GRACE BY-LAWS
Under the DGCL, shareholders have the right to adopt, amend or repeal the
certificate of incorporation and by-laws of a corporation. In addition, if the
certificate of incorporation so provides, the by-laws may be amended by the
board of directors. The New Grace Certificate provides that the affirmative vote
of the holders of at least 80% of the voting power of the outstanding shares of
capital stock of New Grace eligible to vote generally in the election of
directors ("Voting Stock"), voting together as a single class, is required to
amend provisions of the New Grace Certificate relating to the prohibition of
shareholder action without a
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meeting; the number, election and term of New Grace's directors; the removal of
directors; and the amendment of the New Grace By-laws. The New Grace Certificate
further provides that the New Grace By-laws may be amended by the New Grace
Board or by the affirmative vote of the holders of at least 80% of the
outstanding shares of Voting Stock, voting together as a single class. These
voting requirements will have the effect of making it more difficult for
shareholders to amend the provisions of the New Grace Certificate stated above
or the New Grace By-laws, even if a majority of New Grace's shareholders believe
that such amendment would be in their best interests.
PREFERRED STOCK PURCHASE RIGHTS
The New Grace Board has determined that a dividend of one New Right will be
paid in respect of each share of New Grace Common Stock to the holder of record
thereof as of the Time of Distribution. Pursuant to the rights agreement
relating thereto (the "Rights Agreement"), each New Grace Right entitles the
registered holder to purchase from New Grace one hundredth of one share of New
Grace Junior Preferred Stock at a price of $200 per share (the "Purchase
Price"), subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the then
outstanding shares of New Grace Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the New Grace Board prior to such
time as any person or group becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding shares of New
Grace Common Stock (the earlier of such dates being called the "Rights
Distribution Date"), the New Grace Rights will be evidenced by the certificates
representing shares of New Grace Common Stock. The Rights Agreement provides
that, until the Rights Distribution Date (or the earlier redemption or
expiration of the New Grace Rights), (i) the New Grace Rights will be
transferred with and only with the shares of New Grace Common Stock, (ii)
certificates representing shares of New Grace Common Stock will contain a
notation incorporating the terms of the New Grace Rights by reference, and (iii)
the surrender for transfer of any certificates representing shares of New Grace
Common Stock will also constitute the transfer of the New Grace Rights
associated with the shares of New Grace Common Stock represented by such
certificate. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the New Grace Rights ("Rights Certificates")
will be mailed to holders of record of the shares of New Grace Common Stock as
of the close of business on the Rights Distribution Date and such separate
Rights Certificates alone will evidence the New Grace Rights.
The Purchase Price payable, and the number of shares of New Grace Junior
Preferred Stock or other securities or property issuable, upon exercise of the
New Grace Rights are subject to adjustment from time to time to prevent dilution
(i) in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of New Grace Junior Preferred Stock, (ii) upon
the grant to holders of the shares of New Grace Junior Preferred Stock of
certain rights or warrants to subscribe for or purchase shares of New Grace
Junior Preferred Stock at a price, or securities convertible into shares of New
Grace Junior Preferred Stock with a conversion price, less than the then current
market price of the shares of New Grace Junior Preferred Stock, or (iii) upon
the distribution to holders of the shares of New Grace Junior Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in shares of New
Grace Junior Preferred Stock) or of subscription rights or warrants (other than
those referred to above). The number of outstanding New Grace Rights and the
number of hundredths of a share of New Grace Junior Preferred Stock issuable
upon exercise of each New Grace Right are also subject to adjustment in the
event of a split of the New Grace Common Stock or a dividend on the New Grace
Common Stock payable in New Grace Common Stock, or subdivisions, consolidations
or combinations of the New Grace Common Stock occurring, in any such case, prior
to the Rights Distribution Date.
Shares of New Grace Junior Preferred Stock that may be purchased upon
exercise of the New Grace Rights will not be redeemable. Each share of New Grace
Junior Preferred Stock will be entitled to a minimum preferential quarterly
dividend payment of one dollar per share but will be entitled to an aggregate
dividend equal to 100 times the dividend declared per share of New Grace Common
Stock whenever such
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dividend is declared. In the event of liquidation, the holders of the New Grace
Junior Preferred Stock will be entitled to a minimum preferential liquidation
payment of $100 per share but will be entitled to an aggregate payment equal to
100 times the payment made per share of New Grace Common Stock. Each share of
New Grace Junior Preferred Stock will have 100 votes, voting together with the
New Grace Common Stock. Finally, in the event of any merger, consolidation or
other transaction in which New Grace Common Stock is exchanged, each share of
New Grace Junior Preferred Stock will be entitled to receive an amount equal to
100 times the amount received per share of New Grace Common Stock. These rights
are protected by customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights of New
Grace Junior Preferred Stock, the value of the one hundredth interest in a share
of New Grace Junior Preferred Stock that may be purchased upon exercise of each
New Grace Right should approximate the value of one share of New Grace Common
Stock.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a New Grace Right, other than New Grace Rights beneficially owned by the
Acquiring Person (which will become void after such person becomes an Acquiring
Person), will, after such person becomes an Acquiring Person, have the right to
receive upon exercise, in lieu of shares of New Grace Junior Preferred Stock,
that number of shares of New Grace Common Stock having a market value of two
times the exercise price of the New Grace Right (such right being referred to as
a "Flip-in Right"). In the event that, at any time on or after the date that any
person has become an Acquiring Person, New Grace is acquired in a merger or
other business combination transaction or 50% or more of its consolidated assets
or earning power is sold, proper provision will be made so that each holder of a
New Grace Right will thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the New Grace Right, that number
of shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of the New
Grace Right.
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person, and prior to the acquisition by such person or
group of 50% or more of the outstanding shares of New Grace Common Stock, the
New Grace Board may exchange the New Grace Rights for New Grace Common Stock or
New Grace Junior Preferred Stock (other than New Grace Rights owned by such
person or group, which will have become void after such person became an
Acquiring Person), in whole or in part, at an exchange ratio of one share of New
Grace Common Stock, or one hundredth of a share of New Grace Junior Preferred
Stock (or of a share of another series of New Grace Preferred Stock having
equivalent rights, preferences and privileges), per New Grace Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1%. No
fractional shares of New Grace Junior Preferred Stock will be issued (other than
fractions which are integral multiples of one hundredth of a share of New Grace
Junior Preferred Stock, which may, at the election of New Grace, be evidenced by
depositary receipts) and, in lieu thereof, an adjustment in cash will be made
based on the market price of the shares of New Grace Junior Preferred Stock on
the last trading day prior to the date of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
shares of New Grace Common Stock, the New Grace Board may redeem the New Grace
Rights in whole, but not in part, at a price of $.01 per New Grace Right (the
"Redemption Price"). The redemption of the New Grace Rights may be made
effective at such time, on such basis and with such conditions as the New Grace
Board may determine, in its sole discretion. Immediately upon any redemption of
the New Grace Rights, the right to exercise the New Grace Rights will terminate
and the only right of the holders of New Grace Rights will be to receive the
Redemption Price.
The terms of the New Grace Rights may be amended by the New Grace Board
without the consent of the holders of the New Grace Rights, including an
amendment to lower (i) the threshold at which a person becomes an Acquiring
Person and (ii) the percentage of New Grace Common Stock proposed to be acquired
in a tender or exchange offer that would cause the Rights Distribution Date to
occur, to not less than the greater of (a) the sum of .001% and the largest
percentage of the outstanding New Grace Common Stock then known to New Grace to
be beneficially owned by any person or group of affiliated or associated persons
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and (b) 10%, except that, from and after such time as any person or group of
affiliated or associated persons becomes an Acquiring Person, no such amendment
may adversely affect the interests of the holders of the New Grace Rights.
The New Grace Rights will not be exercisable until the Rights Distribution
Date. The New Grace Rights will expire on the close of business on the 10th
anniversary of the Time of Distribution (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the New Grace Rights are earlier
redeemed or exchanged by New Grace.
Until a New Grace Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of New Grace, including, without limitation, the
right to vote or to receive dividends.
The New Grace Rights will have certain anti-takeover effects. The New Grace
Rights will cause substantial dilution to a person or group that attempts to
acquire New Grace on terms not approved by the New Grace Board, except pursuant
to an offer conditioned on a substantial number of New Grace Rights being
acquired. The New Grace Rights should not interfere with any merger or business
combination approved by the New Grace Board, since the New Grace Rights may be
redeemed by New Grace at the Redemption Price prior to the time that a person or
group has become an Acquiring Person.
The foregoing summary of certain terms of the New Grace Rights does not
purport to be complete and is qualified in its entirety by reference to the form
of the Rights Agreement, which has been filed as an exhibit to the registration
statement described in "ADDITIONAL INFORMATION."
CERTAIN ANTI-TAKEOVER FEATURES
The New Grace Certificate, the New Grace By-laws and the New Grace Rights
contain several provisions that may make the acquisition of control of New Grace
difficult or expensive, increase the likelihood that incumbent management will
retain its positions, and deprive shareholders of opportunities to receive
premiums over the market value for their shares. In addition, in certain of the
agreements entered into in connection with the Reorganization, each of Grace New
York, New Grace, Fresenius AG and Fresenius Medical Care has undertaken to
indemnify one another against certain tax liabilities that could arise were the
Distribution to be taxable, which indemnity could diminish the willingness of a
third party to acquire New Grace in a taxable transaction for some period
following the Distribution. See "CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND
NEW GRACE."
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested shareholder" for a three-year period following the date on
which such shareholder becomes an interested shareholder unless (i) prior to
such date, the board of directors of the corporation approves either the
business combination or the transaction which resulted in the shareholder
becoming an interested shareholder, (ii) upon consummation of the transaction
which results in the shareholder becoming an interested shareholder, the
interested shareholder owns at least 85% of the voting stock (as defined in
Section 203 of the DGCL) of the corporation outstanding at the time the
transaction commenced (excluding certain shares), or (iii) on or subsequent to
such date, the business combination is approved by the board of directors of the
corporation and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock not owned by the interested shareholder. Except as specified in
Section 203 of the DGCL, an "interested shareholder" is defined to include (a)
any person that is the owner of 15% or more of the outstanding voting stock of
the corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at any
time within three years immediately prior to the relevant date and (b) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL makes it more
difficult for an interested shareholder to effect various business combinations
with a corporation for a three-year period, although the shareholders may elect
to exclude a corporation from the restrictions imposed thereunder; the New Grace
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Certificate does not exclude New Grace from such restrictions. It is anticipated
that the provisions of Section 203 of the DGCL may encourage companies
interested in acquiring New Grace to negotiate in advance with the New Grace
Board, since the shareholder approval requirement would be avoided if a majority
of the directors then in office approve either the business combination or the
transaction that results in the shareholder becoming an interested shareholder.
Section 203 of the DGCL should encourage persons interested in acquiring New
Grace to negotiate in advance with the New Grace Board, since the higher
shareholder voting requirements would not be invoked if such person, prior to
acquiring 15% of New Grace's Voting Stock, obtains the approval of the New Grace
Board for such acquisition or for the proposed business combination transaction
(unless such person acquires 85% or more of New Grace's voting stock in such
transaction, excluding certain shares as described above). In the event of a
proposed acquisition of New Grace, it is believed that the interests of New
Grace shareholders will best be served by a transaction that results from
negotiations based upon careful consideration of the proposed terms, such as the
price to be paid to minority shareholders, the form of consideration paid and
tax effects of the transaction.
Section 203 of the DGCL will not prevent a hostile takeover of New Grace.
It may, however, make more difficult or discourage a takeover of New Grace or
the acquisition of control of New Grace by a significant shareholder and thus
the removal of incumbent management. Any such effect will be enhanced by the
issuance of the New Grace Rights. Some shareholders may find this
disadvantageous in that they may not be afforded the opportunity to participate
in takeovers that are not approved as required by Section 203 of the DGCL but in
which shareholders might receive, for at least some of their shares, a
substantial premium above the market price at the time of a tender offer or
other acquisition transaction.
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LIABILITY AND INDEMNIFICATION
OF DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY OF DIRECTORS
The New Grace Certificate provides that a director will not be personally
liable for monetary damages to New Grace or its shareholders for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to New Grace or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for paying a dividend or approving a stock repurchase in
violation of Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
While the New Grace Certificate provides directors with protection against
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the New Grace Certificate will have no effect
on the availability of equitable remedies such as an injunction or rescission
based on a director's breach of his or her duty of care. The provisions of the
New Grace Certificate described above apply to an officer of New Grace only if
he or she is a director of New Grace and is acting in his or her capacity as
director, and do not apply to officers of New Grace who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The New Grace Certificate provides that each individual who is or was or
had agreed to become a director or officer of New Grace, or each such person who
is or was serving or who had agreed to serve at the request of the New Grace
Board as an employee or agent of New Grace or as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans (also
including the heirs, executors, administrators or estate of such person), will
be indemnified by New Grace, in accordance with the New Grace By-laws, to the
fullest extent permitted by the DGCL, as the same exists or may in the future be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits New Grace to provide broader indemnification rights than said
law permitted prior to such amendment). The New Grace Certificate also
specifically authorizes New Grace to enter into agreements with any person
providing for indemnification greater than or different from that provided by
the New Grace Certificate.
The New Grace By-laws provide that each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative is or was a director, officer or employee of New
Grace or is or was serving at the request of New Grace as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such Proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, will be indemnified and
held harmless by New Grace to the fullest extent authorized by the DGCL as the
same exists or may in the future be amended (but, in the case of any such
amendment, only to the extent that such amendment permits New Grace to provide
broader indemnification rights than said law permitted prior to such amendment),
against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or
to be paid in settlement) reasonably incurred or suffered by such person in
connection therewith, and such indemnification will continue as to a person who
has ceased to be a director, officer, employee or agent and will inure to the
benefit of his or her heirs, executors and administrators; however, except as
described in the next paragraph with respect to Proceedings seeking to enforce
rights to indemnification, New Grace will indemnify any such person seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was authorized by the New
Grace Board.
Pursuant to the New Grace By-laws, if a claim for indemnification as
described in the preceding paragraph is not paid in full by New Grace within 30
days after a written claim has been received by New Grace, the claimant may, at
any time thereafter, bring suit against New Grace to recover the unpaid amount
of the claim and, if successful, in whole or in part, the claimant will be
entitled to be paid also the expense of prosecuting such claim. The New Grace
By-laws provide that it will be a defense to any such action (other
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than an action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to New Grace, as discussed below) that the claimant
has not met the standards of conduct which make it permissible under the DGCL
for New Grace to indemnify the claimant for the amount claimed, but the burden
of proving such defense will be on New Grace. Neither the failure of New Grace
(including the New Grace Board, independent legal counsel or shareholders) to
have made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the DGCL, nor an actual
determination by New Grace (including the New Grace Board, independent legal
counsel or shareholders) that the claimant has not met such applicable standard
of conduct, will be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
The New Grace By-laws provide that the right conferred in the New Grace
By-laws to indemnification and the payment of expenses incurred in defending a
Proceeding in advance of its final disposition will not be exclusive of any
other right which any person may have or may in the future acquire under any
statute, provision of the New Grace Certificate or the New Grace By-laws,
agreement, vote of shareholders or disinterested directors or otherwise. The New
Grace By-laws permit New Grace to maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of New Grace or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not New Grace would have the power to
indemnify such person against such expense, liability or loss under the DGCL.
New Grace intends to obtain directors and officers liability insurance providing
coverage to its directors and officers. In addition, the New Grace By-laws
authorize New Grace, to the extent authorized from time to time by the New Grace
Board, to grant rights to indemnification, and rights to be paid by New Grace
the expenses incurred in defending any Proceeding in advance of its final
disposition, to any agent of New Grace to the fullest extent of the provisions
of the New Grace By-laws with respect to the indemnification and advancement of
expenses of directors, officers and employees of New Grace.
The New Grace By-laws provide that the right to indemnification conferred
therein will be a contract right and will include the right to be paid by New
Grace the expenses incurred in defending any such Proceeding in advance of its
final disposition, except that if the DGCL requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a Proceeding
will be made only upon delivery to New Grace of an undertaking by or on behalf
of such director or officer to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to be indemnified under
the New Grace By-laws or otherwise.
Grace New York is currently advancing the defense costs being incurred by
certain current and former directors (including the estate of a deceased
director) in certain of the litigations discussed in the Grace New York 1996
Proxy Excerpt and the Joint Proxy Statement-Prospectus. As contemplated by New
York law, such individuals (and the estate) are entering into agreements in
which they undertake to reimburse Grace New York for such advances in the event
it is determined that they were not entitled thereto.
CERTAIN OTHER INFORMATION
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of New
Grace, acting in such capacity, in which indemnification would be required or
permitted by the New Grace By-Laws. In addition, the New Grace Board is not
aware of any threatened litigation or proceeding which may result in a claim for
indemnification under the New Grace By-Laws. However, certain litigation and
proceedings involving such persons in their respective capacities with Grace New
York are pending. Under the Distribution Agreement, Grace Chemicals has agreed
to indemnify Grace New York and NMC with respect to such pending litigations and
proceedings. For information with respect to the above, reference is hereby made
to the Grace New York 1996 Proxy Excerpt.
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COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS OF
GRACE NEW YORK AND NEW GRACE
Upon consummation of the Distribution, the shareholders of Grace New York
will become shareholders of New Grace and their rights will be governed by the
New Grace Certificate, the New Grace By-laws and the DGCL, which differ in
certain material respects from the Grace New York Certificate, the Grace New
York By-Laws and the NYBCL.
The following comparison of the New Grace Certificate, the New Grace
By-Laws and the DGCL, on the one hand, and the Grace New York Certificate, the
Grace New York By-laws and the NYBCL, on the other hand, is not intended to be
complete and is qualified in its entirety by reference to the relevant
provisions of the New Grace Certificate, the New Grace By-laws, the DGCL, the
Grace New York Certificate, the Grace New York By-Laws and the NYBCL. Copies of
the New Grace Certificate and the New Grace By-laws are attached hereto as Annex
A and Annex B, respectively. Copies of the Grace New York Certificate and the
Grace New York By-Laws are filed as exhibits to the registration statements,
filed with the Commission, covering the ADSs and the New Preferred Shares. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE"
in the Joint Proxy Statement-Prospectus. See also "DESCRIPTION OF NEW GRACE
CAPITAL STOCK" and "CERTAIN ANTI-TAKEOVER EFFECTS" in this Prospectus.
DUTIES OF DIRECTORS
Grace New York
Section 717(b) of the NYBCL permits a board of directors to consider,
including in connection with a change or potential change in control of the
corporation, both the long-term and short-term effects of a decision on the
corporation and, specifically, the effects on: (i) the potential growth,
development, productivity and profitability of the corporation; (ii) current
employees; (iii) retired employees and other beneficiaries of the corporation
still entitled to receive, directly or indirectly, benefits from the
corporation; (iv) customers and creditors of the corporation; and (v) the
ability of the corporation to continuously provide goods, services, employment
opportunities and benefits and to make any other contributions to the
communities in which it does business.
New Grace
Section 141 of the DGCL provides that the duties of a board are to manage
the business and affairs of a corporation, except as may otherwise be provided
in the DGCL or the certificate of incorporation of such corporation; the New
Grace Certificate does not provide otherwise.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Grace New York
Pursuant to the Grace New York Certificate, the Grace New York Board is
divided into three classes, with the classes to be as nearly equal in number as
possible, and directors are elected to serve staggered three-year terms. The
Grace New York Certificate provides that the number of directors of Grace New
York will be not less than nine and not more than 50, as determined by a
majority of the Grace New York Board, provided that the number of directors may
not be reduced to shorten the term of any incumbent director.
New Grace
Pursuant to the New Grace Certificate and the New Grace By-laws, the New
Grace Board is divided into three classes, with the classes to be as nearly
equal in number as possible, and directors are elected to serve staggered
three-year terms. The New Grace By-laws provide that the number of directors of
Grace will be fixed from time to time exclusively pursuant to a resolution
adopted by the directors constituting a majority of the Whole Board, provided
that the number of directors may not be reduced to shorten the term of any
incumbent director.
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REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Grace New York
Directors of Grace New York may be removed only for cause (as defined in
the Grace New York Certificate) and only upon the affirmative vote of a majority
of the voting power of all shares of capital stock of Grace New York. The Grace
New York By-Laws provide that if a vacancy occurs in any class of directors, it
may be filled by the vote of a majority of the directors remaining in office, or
by the sole remaining director. Any vacancy in the Grace New York Board
resulting from an increase in the number of directors may be filled by a vote of
directors constituting a majority of the entire Grace New York Board prior to
such increase. Any director elected by the Grace New York Board is required to
stand for election at the next annual meeting of shareholders.
New Grace
Directors of New Grace may be removed by the shareholders only for cause.
The New Grace By-laws provide that if a vacancy occurs, including a vacancy
resulting from an increase in the number of directors, it may be filled only by
the affirmative vote of a majority of the directors remaining in office, though
less than a quorum. Any director so chosen shall remain in office until the next
annual meeting of shareholders at which the term of office of the class to which
he or she shall have been elected expires and until such director's successor
shall have been duly elected and qualified.
SHAREHOLDER NOMINATIONS
Grace New York
The Grace New York By-Laws establish procedures that must be followed for
shareholders to nominate individuals for election to the Grace New York Board.
Nominations by shareholders of individuals for election to the Grace New York
Board must be made by delivering written notice of such nomination to the
Secretary of Grace New York not less than 60 days nor more than 90 days prior to
an annual meeting, unless the annual meeting takes place on a date other than
the ordinary date specified in the Grace New York By-Laws, in which case notice
by a shareholder to be timely must be so received not later than the close of
business on the 10th day following the date on which notice or disclosure of the
date of the meeting is first given. The nomination notice must set forth certain
information about the shareholder making the nomination, including the
shareholder's name and address, the number of shares of capital stock of Grace
New York beneficially owned by the shareholder, a representation that the
shareholder will be a holder of record of stock entitled to vote at the meeting,
and intends to appear in person or by proxy, and a description of any material
interest of the shareholder and each proposed nominee in any matter to be voted
upon. The nomination notice must set forth certain information about each person
to be nominated, including information concerning the nominee's principal
occupation or employment and the class and number of shares of Grace New York
beneficially owned by such nominee. If the presiding officer at the
shareholders' meeting determines that a nomination was not made in accordance
with these procedures, the presiding officer may so declare at the meeting and
the nomination will not be acted upon.
New Grace
The New Grace By-laws establish procedures that must be followed for
shareholders to nominate individuals for election to the New Grace Board.
Nominations by shareholders of individuals for election to the New Grace Board
must be made by delivering written notice of such nomination to the Secretary of
New Grace not less than 60 days nor more than 90 days prior to the first
anniversary of the previous year's annual meeting (or if the date of the annual
meeting is more than 30 days before or more than 60 days after such anniversary
date, not earlier than the 90th day prior to such meeting and not later than the
later of (x) the 60th day prior to such meeting or (y) the 10th day after public
announcement or disclosure of the date of such meeting is first made).
Notwithstanding the foregoing, in the event that the number of directors to be
elected is increased and there is no public announcement or disclosure by New
Grace, within 70 days prior to the first anniversary of the preceding year's
annual meeting, naming all of the nominees for election as director or
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specifying the increased size of the New Grace Board, a shareholder's notice
will be timely, but only with respect to nominees for any new positions created
by such increase, if it is received by New Grace not later than the 10th day
after such public announcement or disclosure is first made by New Grace. The
nomination notice must set forth certain information about the shareholder
making the nomination, including the shareholder's name and address, the class
and number of shares of capital stock of New Grace beneficially owned by the
shareholder, and a description of any material interest of the shareholder and
each proposed nominee in any matter to be voted upon. The nomination notice must
set forth such information about the proposed nominee that would be required to
be included in a proxy statement soliciting proxies for the proposed nominee. If
the presiding officer at the shareholders' meeting determines that a nomination
was not made in accordance with these procedures, he or she may so declare at
the meeting and the nomination will not be acted upon.
ACTION BY WRITTEN CONSENT
Grace New York
Under the NYBCL, whenever shareholders are required or permitted to take
any action by vote, such action may be taken without a meeting on written
consent signed by the holders of all outstanding shares entitled to vote
thereon, unless the certificate of incorporation authorizes written consent of
the holders of less than all outstanding shares. The Grace New York Certificate
does not authorize action by less than all such holders and, as a practical
matter, since action by written consent must be unanimous, shareholders of Grace
New York cannot act by written consent.
New Grace
The New Grace Certificate and the New Grace By-laws provide that, subject
to the rights of holders of any New Grace preferred stock to elect additional
directors under specified circumstances, shareholder action can only be taken at
an annual or special meeting of shareholders and shareholder action by written
consent in lieu of a meeting is prohibited.
SPECIAL MEETINGS OF SHAREHOLDERS; QUORUM
Grace New York
A special meeting of shareholders of Grace New York may be called only by
the Chairman, the President or the Grace New York Board.
A quorum for a meeting of the shareholders of Grace New York generally
consists of the holders of shares constituting a majority of the voting power of
the outstanding shares of Grace New York entitled to vote. A majority of the
votes cast is generally required for an action by the shareholders of Grace New
York. The NYBCL provides that these quorum requirements may be increased or
decreased by a change to the Grace New York Certificate or By-Laws (the latter
of which may be effected by the Grace New York Board), so long as the
requirement for a quorum does not fall below one-third of the shares entitled to
vote.
New Grace
The New Grace By-laws provide that, subject to the rights of holders of any
New Grace preferred stock to elect additional directors under specified
circumstances, special meetings of shareholders of New Grace may be called only
by the Chairman, the President or the New Grace Board.
A quorum for a meeting of the shareholders of New Grace generally consists
of the holders of a majority of the voting power of the shares of New Grace
entitled to vote. A majority of the votes cast is generally required for an
action by the shareholders of New Grace. The DGCL provides that these quorum
requirements may be increased or decreased by a change to the New Grace
Certificate or By-laws, so long as the requirement for a quorum does not fall
below one-third of the shares entitled to vote.
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SHAREHOLDER PROPOSALS
Grace New York
The Grace New York By-Laws establish procedures that must be followed for a
shareholder to submit a proposal at an annual meeting of the shareholders of
Grace New York (other than a proposal submitted under the Commission's
shareholder proposal rules). No such proposal may be submitted unless the
submitting shareholder has timely filed with the Secretary of Grace New York a
written statement setting forth specified information, including the name and
address of the person making the proposal, the class and number of shares of
capital stock of Grace New York beneficially owned by such person, a description
of the proposal and the reasons for bringing such business before the annual
meeting, a representation that such person is or will be a holder of record of
stock of Grace New York entitled to vote at such meeting and intends to appear
in person or by proxy to make the proposal, and any material interest of the
shareholder in such business. If the presiding officer at any shareholders'
meeting determines that any such proposal was not made in accordance with these
procedures or is otherwise not in accordance with law, he or she will so declare
at the meeting and such defective proposal will not be acted upon.
New Grace
The New Grace By-laws establish procedures that must be followed for a
shareholder to submit a proposal at an annual meeting of the shareholders of New
Grace (other than a proposal submitted under the Commission's shareholder
proposal rules). No such proposal may be submitted unless the submitting
shareholder has timely filed with the Secretary of New Grace a written statement
setting forth specified information, including the name and address of the
person making the proposal, the class and number of shares of capital stock of
New Grace beneficially owned by such person, a description of the proposal and
the reasons for bringing such business and the class and number of shares which
are owned beneficially and of record by such person. If the presiding officer at
any shareholders' meeting determines that any such proposal was not made in
accordance with these procedures or is otherwise not in accordance with the law,
he or she will so declare at the meeting and such defective proposal will not be
acted upon.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
Grace New York
Under the NYBCL, subject to the provisions described under " -- State
Anti-takeover Statutes -- Grace New York," the recommendation of the Grace New
York Board and the approval of two-thirds of the outstanding voting power of
Grace New York is required to effect a merger or consolidation with Grace New
York, or the sale, lease or exchange of all or substantially all of Grace New
York's assets. The NYBCL provides that holders of Grace New York Preferred Stock
are entitled to vote on a merger or consolidation, and to vote as a class if the
merger or consolidation would have certain adverse effects on such holders, such
as limiting their voting rights, changing their shares into different shares,
altering their rights, preferences or limitations, or subordinating their rights
by authorizing shares with superior rights.
New Grace
Under the DGCL, an agreement of merger or consolidation involving New
Grace, or a sale, lease or exchange of all or substantially all of New Grace's
assets, must generally be approved by the directors of New Grace and adopted by
the affirmative vote of the holders of a majority of the outstanding shares
entitled to vote thereon.
AMENDMENT OF CORPORATE CHARTER AND BY-LAWS
Grace New York
An amendment to the Grace New York Certificate requires the approval of
both the Grace New York Board and a majority of the voting power of all
outstanding shares of capital stock of Grace New York. Holders of Grace New York
Preferred Stock may be entitled to vote as a class on amendments to the Grace
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New York Certificate that would have certain adverse effects on such holders,
such as limiting their voting rights. Except as prohibited by the NYBCL, the
Grace New York Board may adopt, amend or repeal the Grace New York By-Laws
without the assent or vote of the shareholders. The shareholders may amend or
repeal the Grace New York By-Laws by the affirmative vote of the holders of a
majority of the voting power of shares entitled to vote in the election of
directors.
New Grace
Under the DGCL, shareholders have the right to adopt, amend or repeal the
certificate of incorporation and by-laws of a corporation. In addition, if the
certificate of incorporation so provides, the by-laws may be amended by the
board of directors. The New Grace Certificate provides that the affirmative vote
of the holders of at least 80% of the voting power of the outstanding shares of
Voting Stock, voting together as a single class, is required to amend provisions
of the New Grace Certificate relating to the prohibition of shareholder action
without a meeting; the number, election and term of New Grace's directors; the
removal of directors; and the amendment of the New Grace By-laws. The New Grace
Certificate further provides that the New Grace By-laws may be amended by the
New Grace Board or by the affirmative vote of the holders of at least 80% of the
outstanding shares of Voting Stock, voting together as a single class.
APPRAISAL RIGHTS
Grace New York
The NYBCL provides appraisal rights to holders entitled to vote thereon for
(i) certain mergers and consolidations; (ii) dispositions of assets requiring
shareholder approval; and (iii) certain amendments to the certificate of
incorporation of a corporation which adversely affect the rights of such
shareholder.
New Grace
Section 262 of the DGCL provides appraisal rights to holders entitled to
vote thereon for certain mergers or consolidations, provided, however, that
appraisal rights are generally not available if the stock of the corporation is
listed on a national securities exchange or held of record by more than 200
holders.
FAIR PRICE AND ANTI-GREENMAIL PROVISIONS
Grace New York
The NYBCL prohibits, subject to certain exceptions, a corporation subject
to Section 912 of the NYBCL from purchasing or agreeing to purchase more than
10% of its stock from a shareholder for more than the market value thereof
unless such purchase or agreement is approved by shareholders. See "-- State
Antitakeover Statutes -- Grace New York."
New Grace
The DGCL has no comparable provisions.
STOCK RIGHTS PLAN
Grace New York
Each share of Grace New York Common Stock has an attendant Grace Right (as
defined in the Joint Proxy Statement-Prospectus). The Grace Rights may have
certain anti-takeover effects, but are not, and will not become, exercisable
unless and until certain events occur.
The Grace Rights may be redeemed by Grace New York at $.025 per Grace Right
(payable in cash, Grace New York Common Stock or any other form of consideration
deemed appropriate by the Grace New York Board) at any time through the tenth
business day (or such later business day as may be fixed by the Grace New York
Board) after a public announcement that a person or group has become an
"interested shareholder," as defined in the Rights Agreement respecting the
Grace Rights, this right of redemption may
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be reinstated if all interested shareholders reduce their holdings to 10% or
less of the outstanding Grace New York Common Stock. The Grace Rights will
expire in January 1997. In contemplation of the Reorganization, the Grace New
York Board authorized the amendment of the Grace Rights so as to prevent the
Grace Rights from becoming exercisable as a result of the transactions
contemplated by the Reorganization Agreement.
New Grace
Each share of New Grace Common Stock will have an attendant New Grace
Right. The New Grace Rights may have certain anti-takeover effects, but are not,
and will not become, exercisable unless and until certain events occur.
The New Grace Rights will be redeemable by New Grace at $.01 per New Grace
Right (payable in cash, New Grace Common Stock or any other form of
consideration deemed appropriate by the New Grace Board) at such time, on such
basis and with such conditions as the New Grace Board may determine, in its sole
discretion. The New Grace Rights will expire in 2006.
STATE ANTI-TAKEOVER STATUTES
Grace New York
Section 912 of the NYBCL prohibits a "business combination" (as defined in
Section 912 of the NYBCL, generally including mergers, sales and leases of
assets, issuances of securities and similar transactions) by Grace New York or a
Grace New York subsidiary with an interested shareholder (as defined in Section
912 of the NYBCL, generally the beneficial owner of 20% or more of Grace New
York voting stock) within five years after the person or entity becomes an
interested shareholder, unless (i) prior to the person or entity becoming an
interested shareholder, the business combination or the transaction pursuant to
which such person or entity became an interested shareholder has been approved
by the Grace New York Board, or (ii) the business combination is approved by the
holders of a majority of the voting power of the capital stock of Grace New
York, excluding shares held by the interested shareholder, at a meeting called
for such purpose no earlier than five years after such interested shareholder's
"stock acquisition date". In addition, Section 912 of the NYBCL specifies
certain minimum consideration that must be paid in a business combination with
an interested shareholder. In approving the Reorganization Agreement, the Grace
New York Board approved the Reorganization, so that it is not subject to the
limitations set forth in Section 912 of the NYBCL.
New Grace
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested shareholder" for a three-year period following the date
that such shareholder becomes an interested shareholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder, (ii) upon consummation of the transaction which resulted
in the shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting stock (as defined in Section 203 of
the DGCL) of the corporation outstanding at the time the transaction commenced
(excluding certain shares), or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock not owned
by the interested shareholder. Except as specified in Section 203, an
"interested shareholder" is defined to include (i) any person that is the owner
of 15% or more of the outstanding Voting Stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding Voting Stock of the corporation at any time within three years
immediately prior to the relevant date and (ii) the affiliates and associates of
any such person.
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LIMITATION ON DIRECTORS' LIABILITY
Grace New York
Under Section 402 of the NYBCL, a corporation may limit or eliminate the
personal liability of directors to the corporation or its shareholders for
damages for breach of duty in such capacity. This limitation on liability is not
available for acts or omissions by a director which (i) were in bad faith, (ii)
involved intentional misconduct or a knowing violation of law, (iii) involved
financial profit or other advantage to which the director was not entitled or
(iv) resulted in a violation of a statute prohibiting certain dividend
declarations, certain payments to shareholders after dissolution and particular
types of loans. The Grace New York Certificate provides for the limitation on
directors' liability as permitted by this statute.
New Grace
As permitted by the DGCL, the New Grace Certificate provides that a
director will not be personally liable for monetary damages to New Grace or its
shareholders for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to New Grace or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for paying a
dividend or approving a stock repurchase in violation of Section 174 of the DGCL
or (iv) for any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Grace New York
Sections 722 and 723 of the NYBCL provide that a corporation may indemnify
its officers and directors party to any action, suit or proceeding by reason of
the fact that he or she was a director, officer or employee of the corporation
by, among other things, a majority vote of a quorum consisting of directors who
were not parties to such action, suit, or proceeding, provided that such
officers and directors acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation. The
Grace New York By-Laws provide for indemnification of officers and directors as
permitted by this statute.
New Grace
The New Grace Certificate provides that each individual who is or was or
has agreed to become a director or officer of New Grace, or each such person who
is or was serving or who has agreed to serve at the request of the New Grace
Board as an employee or agent of New Grace or as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans (also
including the heirs, executors, administrators or estate of such person), will
be indemnified by New Grace, in accordance with the New Grace By-laws, to the
fullest extent permitted by the DGCL, as the same exists or may in the future be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits New Grace to provide broader indemnification rights than said
law permitted prior to such amendment). The New Grace Certificate also
specifically authorizes New Grace to enter into agreements with any person
providing for indemnification greater than or different from that provided by
the New Grace Certificate.
CUMULATIVE VOTING
Grace New York
The Grace New York Certificate does not provide for cumulative voting.
New Grace
The New Grace Certificate does not provide for cumulative voting.
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<PAGE> 73
CONFLICT-OF-INTEREST TRANSACTIONS
Grace New York
Section 713 of the NYBCL permits contracts or transactions between a
corporation and an interested director if the material facts as to such
director's interests are disclosed in good faith or known to the board or a
committee thereof, and the board approves the contract or transaction by a vote
sufficient for such purpose without counting the interested director, or, if
such a vote is not possible, by unanimous vote of disinterested directors. The
NYBCL also provides that such contracts or transactions are also permitted if
the material facts as to such director's interests are disclosed in good faith
or known to the shareholders and are approved by a vote of the shareholders.
New Grace
Section 144 of the DGCL permits contracts or transactions between a
corporation and an interested director if the material facts as to such
director's interests are disclosed or are known to the board of directors or a
committee thereof and the board or committee in good faith authorizes the
contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum. The DGCL also provides that such contracts or transactions are also
permitted if the material facts as to such director's interests are disclosed or
are known to the shareholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by a vote of the
shareholders, or, if the contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified by the board of directors,
a committee of the board or the shareholders.
DIVIDENDS AND OTHER DISTRIBUTIONS
Grace New York
The NYBCL generally allows dividends to be paid out of surplus of the
corporation only, so that the net assets of the corporation remaining after such
payment shall be at least equal to the amount of its stated capital.
New Grace
The DGCL generally allows dividends to be paid out of a company's surplus,
or, if there is no surplus, out of such company's net profits for the fiscal
year in which the dividend is declared and/or for the preceding fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES
TO DIRECTORS, OFFICERS AND EMPLOYEES
Grace New York
The NYBCL requires that the issuance to directors, officers and/or
employees of rights or options to purchase shares must be authorized by a
majority of the total voting power of Grace New York's outstanding capital
stock.
New Grace
The DGCL does not contain any provision requiring the issuance of rights or
options to officers, directors and employees to be approved by a shareholder
vote.
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LOANS TO DIRECTORS
Grace New York
The NYBCL requires that any loan made by a corporation to any director must
be authorized by a vote of the shareholders. For purposes of this authorization,
the shares held by the director who would be the borrower are not entitled to
vote. A loan made in violation of the above conditions shall be a violation of
the duty to the corporation of the directors approving it, but the obligation of
the borrower with respect to the loan shall not be affected thereby.
New Grace
The DGCL allows loans to and guarantees of obligations of officers and
directors without any shareholder approval.
RIGHT TO INSPECT CORPORATE BOOKS AND RECORDS; RIGHT TO INSPECT SHAREHOLDER LISTS
Grace New York
Section 624 of the NYBCL provides a right of inspection of a corporation's
books, records and shareholder lists to any person who shall have been a
shareholder for at least six months immediately preceding his or her demand or
any person holding at least 5% of a class of outstanding shares on at least five
days' written demand.
New Grace
Section 219 of the DGCL allows any shareholder, following a written
request, the right to inspect the corporation's books and records, including the
shareholder list, during usual business hours for a proper purpose. In addition,
Section 220 of the DGCL provides that stockholders have a right, for a period of
at least ten days prior to any shareholder meeting, and during such meeting, to
examine a list of shareholders arranged in alphabetical order and showing the
address and the number of shares held by each shareholder, for any purposes
germane to such meeting.
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VALIDITY OF SECURITIES
The validity of the New Grace Common Stock and the New Grace Rights will be
passed upon for New Grace by Robert H. Beber, Esq., Executive Vice President and
General Counsel of Grace. Mr. Beber owns shares of Grace New York Common Stock,
as well as options to acquire shares of Grace New York Common Stock.
EXPERTS
The Consolidated Financial Statements included in this Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
New Grace has filed with the Commission a registration statement on Form
S-1 (including exhibits and amendments thereto, the "Registration Statement")
under the Exchange Act with respect to the New Grace Common Stock and the
associated New Grace Rights. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information included in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement, as permitted by the rules and
regulations of the Commission, but all material terms of each such document are
described herein. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete;
with respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. Items of information
omitted from this Prospectus but contained in the Registration Statement may be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; at the New York
Regional Office of the Commission, Seven World Trade Center, 13th Floor, New
York, New York 10048; and the Chicago Regional Office of the Commission, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates. In addition, following the Distribution, reports, proxy
statements and other information concerning New Grace may be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Acquiring Person................... 55
ADRs............................... 8
ADSs............................... Cover
Amicon............................. 19
Code............................... 6
Commission......................... 25
Compensation Committee............. 45
Consolidated Financial
Statements....................... 21
Counsel............................ 6
Covered Period..................... 26
DGCL............................... 52
Dissenting Shares.................. 5
Distribution....................... Cover
Distribution Agent................. Cover
Distribution Agreement............. 2
Distribution Payment............... 2
DOE................................ 23
EHS................................ 20
EMS................................ 39
EPA................................ 23
Exchange Act....................... 49
Facility 2......................... 9
Facility 3......................... 9
Final Expiration Date.............. 57
First Quarter Financial
Statements....................... 21
Flip-in Right...................... 56
Florida Action..................... 10
FMC Ordinary Share................. Cover
FNMC............................... Cover
Fresenius AG....................... Cover
Fresenius Medical Care............. Cover
Fresenius Merger................... Cover
Fresenius USA...................... Cover
Government Claims.................. 10
Grace.............................. Cover
Grace Chemicals.................... Cover
Grace Cocoa........................ 18
Grace Construction................. 16
Grace Container.................... 17
Grace Davison...................... 15
Grace Merger....................... Cover
Grace New York..................... Cover
Grace New York 1996 Proxy
Excerpt.......................... 46
Grace New York Board............... 2
Grace New York Certificate......... Cover
Grace New York Common Stock........ Cover
Grace New York Preferred Stock..... Cover
Grace Packaging.................... 14
Grace TEC Systems.................. 18
Hatco.............................. 23
LTIP............................... 46
IRS................................ 6
Joint Proxy Statement-Prospectus... Cover
Lenders............................ 2
New Grace.......................... Cover
New Grace Board.................... 9
New Grace By-laws.................. 8
New Grace Certificate.............. Cover
New Grace Common Stock............. Cover
New Grace Employees................ 47
New Grace Junior Preferred Stock... 50
New Grace Preferred Stock.......... 50
New Grace Right.................... 7
New Preferred Share................ Cover
NMC................................ Cover
NMC Credit Agreement............... 2
NMC Credit Facility................ 2
NYSE............................... Cover
Obligations........................ 10
OIG................................ 26
OIG Agreements..................... 10
OIG Investigation.................. 26
Opinions........................... 7
Primary Guarantee.................. 10
Proceeding......................... 59
Prospectus......................... Cover
PRP................................ 23
Purchase Price..................... 55
Recapitalization................... Cover
Redemption Price................... 56
Registration Statement............. 70
Releasees.......................... 10
Reorganization..................... Cover
Reorganization Agreement........... Cover
Representations.................... 7
Research Division.................. 19
Rights Agreement................... 55
Rights Certificates................ 55
Rights Distribution Date........... 55
Secondary Guarantee................ 10
Securities Act..................... 8
Shareholder Notice Procedure....... 52
Time of Distribution............... Cover
TSCA............................... 24
Voting Stock....................... 54
Whole Board........................ 52
WRC................................ 19
</TABLE>
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ANNEX A
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
W. R. GRACE & CO.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
1. The name of the corporation (the "Corporation") is "W. R. Grace & Co."
2. The original Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware on January 29, 1996, under the name W. R.
Grace & Co.
3. This Amended and Restated Certificate of Incorporation has been duly
proposed by resolutions adopted and declared advisable by the Board of Directors
of the Corporation, duly adopted by written consent of the sole stockholder of
the Corporation in lieu of a meeting and vote and duly executed and acknowledged
by the officers of the Corporation in accordance with the provisions of Sections
103, 228, 242 and 245 of the General Corporation Law of the State of Delaware
(the "GCL") and, upon filing with the Secretary of State in accordance with
Section 103, shall thenceforth supercede the original Certificate of
Incorporation and shall, as it may thereafter be amended in accordance with its
terms and applicable law, be the Certificate of Incorporation of the
Corporation.
4. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read in its entirety as follows:
ARTICLE I
The name of the Corporation is:
W. R. Grace & Co.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is The Prentice-Hall Corporation System, Inc., 1013 Centre Road, Wilmington,
Delaware. The name of the Corporation's registered agent at such address is The
Prentice-Hall Corporation System, Inc.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the GCL.
ARTICLE IV
(a) The total number of shares of stock which the Corporation shall have
authority to issue is Three Hundred and Fifty-Three Million (353,000,000),
consisting of Fifty-Three Million (53,000,000) shares of Preferred Stock, par
value $.01 per share (hereinafter referred to as "Preferred Stock"), and Three
Hundred Million (300,000,000) shares of Common Stock, par value $.01 per share
(hereinafter referred to as "Common Stock").
(b) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to provide for the issuance
of shares of Preferred Stock in series and, by filing a certificate pursuant to
the applicable law of the State of Delaware ("Preferred Stock Designation"), to
establish from
A-1
<PAGE> 78
time to time the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. The
authority of the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:
(1) The designation of the series, which may be by distinguishing
number, letter or title.
(2) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
(3) Whether dividends, if any, shall be cumulative or noncumulative
and the dividend rate of the series.
(4) The dates on which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for shares of
the series.
(6) The terms and amount of any sinking fund provided for the purchase
or redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of shares of,
the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(8) Whether the shares of the series shall be convertible into shares
of any other class or series, or any other security, of the Corporation or
any other corporation, and, if so, the specification of such other class or
series of such other security, the conversion price or prices or rate or
rates, any adjustments thereof, the date or dates at which such shares
shall be convertible and all other terms and conditions upon which such
conversion may be made.
(9) Restrictions on the issuance of shares of the same series or of
any other class or series.
(10) The voting rights, if any, of the holders of shares of the
series.
(c) The Common Stock shall be subject to the express terms of the Preferred
Stock and any series thereof. Each share of Common Stock shall be equal to each
other share of Common Stock. The holders of shares of Common Stock shall be
entitled to one vote for each such share upon all questions presented to the
stockholders.
Except as may be provided in this Certificate of Incorporation or in a
Preferred Stock Designation, or as may be required by law, the Common Stock
shall have the exclusive right to vote for the election of directors and for all
other purposes, and holders of Preferred Stock shall not be entitled to receive
notice of any meeting of stockholders at which they are not entitled to vote.
(d) The Corporation shall be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes and shall
not be bound to recognize any equitable or other claim to, or interest in, such
share on the part of any other person, whether or not the Corporation shall have
notice thereof, except as expressly provided by applicable law.
(e) There shall be designated a series of the Corporation's Preferred
Stock, as follows:
(1) Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series
A Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be 3,000,000. Such number of shares may be increased
or decreased by resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options,
rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred Stock.
A-2
<PAGE> 79
(2) Dividends and Distributions
a. Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of
Common Stock, par value $.01 per share (the "Common Stock"), of the
Corporation, and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash
on the first day of March, June, September and December in each year
(each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Payment Dividend
Payment Date after the first issuance of a share or fraction of a share
of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per
share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share of a fraction of a share of Series A Preferred Stock. In
the event the Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common stock that were outstanding immediately prior to such event.
b. The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in subparagraph a. of this
paragraph (2) immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
c. Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Preferred Stock in an
amount less than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
(3) Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
A-3
<PAGE> 80
a. Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then in each such case the
number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
b. Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock,
or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one
class on all matters submitted to a vote of stockholders of the
Corporation.
c. Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
(4) Certain Restrictions.
a. Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in paragraph (2) are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred
Stock outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock, and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series A Preferred Stock, or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except in
accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series of classes.
b. The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
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subparagraph a. of this paragraph (4), purchase or otherwise acquire
such shares at such time and in such manner.
(5) Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other
Certificate of Designations creating a series of Preferred Stock or any
similar stock or as otherwise required by law.
(6) Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made
(1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares
of Series A Preferred Stock shall be entitled to receive an aggregate
amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 100 times the aggregate amount to be distributed per share
to holders of shares of Common Stock, or (2) to the holders of shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except
distributions made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all
such shares are entitled upon such liquidation, dissolution or winding up.
In the event the Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the aggregate amount to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(7) Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
share of Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by re-classification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change
of shares of Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(8) No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
(9) Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all
series of any other class of the Corporation's Preferred Stock.
(10) Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change
the powers, preferences or special rights of the
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Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock, voting together as a single class.
ARTICLE V
The Board of Directors is hereby authorized to create and issue, whether or
not in connection with the issuance and sale of any of its stock or other
securities or property, rights entitling the holders thereof to purchase from
the Corporation shares of stock or other securities of the Corporation or any
other corporation. The times at which and the terms upon which such rights are
to be issued will be determined by the Board of Directors and set forth in the
contracts or instruments that evidence such rights. The authority of the Board
of Directors with respect to such rights shall include, but not be limited to,
determination of the following:
(1) The initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights.
(2) Provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise transferred,
either together with or separately from, any other stock or other
securities of the Corporation.
(3) Provisions which adjust the number or exercise price of such
rights or amount or nature of the stock or other securities or property
receivable upon exercise of such rights in the event of a combination,
split or recapitalization of any stock of the Corporation, a change in
ownership of the Corporation's stock or other securities or a
reorganization, merger, consolidation, sale of assets or other occurrence
relating to the Corporation or any stock of the Corporation, and provisions
restricting the ability of the Corporation to enter into any such
transaction absent an assumption by the other party or parties thereto of
the obligations of the Corporation under such rights.
(4) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the Corporation the right to
exercise such rights and/or cause the rights held by such holder to become
void.
(5) Provisions which permit the Corporation to redeem or exchange such
rights.
(6) The appointment of a rights agent with respect to such rights.
ARTICLE VI
In furtherance of, and not in limitation of, the powers conferred by law,
the Board of Directors is expressly authorized and empowered:
(1) to adopt, amend or repeal the By-laws of the Corporation;
provided, however, that the By-laws adopted by the Board of Directors under
the powers hereby conferred may be amended or repealed by the Board of
Directors or by the stockholders having voting power with respect thereto,
provided further that in the case of amendments by stockholders, the
affirmative vote of the holders of at least 80 percent of the voting power
of the then outstanding Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal any provision of the By-laws;
and
(2) from time to time to determine whether and to what extent, and at
what times and places, and under what conditions and regulations, the
accounts and books of the Corporation, or any of them, shall be open to
inspection of stockholders; and, except as so determined or as expressly
provided in this Certificate of Incorporation or in any Preferred Stock
Designation, no stockholder shall have any right to inspect any account,
book or document of the Corporation other than such rights as may be
conferred by applicable law.
The Corporation may in its By-laws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by applicable law.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the
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affirmative vote of the holders of at least 80 percent of the voting power of
the then outstanding Voting Stock, voting together as a single class, shall be
required to amend, repeal or adopt any provision inconsistent with paragraph (1)
of this Article VI. For the purposes of this Certificate of Incorporation,
"Voting Stock" shall mean the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors.
ARTICLE VII
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specific circumstances, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing in lieu of a
meeting of such stockholders. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of at least
80 percent of the voting power of the then outstanding Voting Stock, voting
together as a single class, shall be required to amend, repeal or adopt any
provision inconsistent with this Article VII.
ARTICLE VIII
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specified circumstances, the
number of directors of the Corporation shall be fixed, and may be increased or
decreased from time to time, in such manner as may be prescribed by the By-laws.
Unless and except to the extent that the By-laws of the Corporation shall
so require, the election of directors of the Corporation need not be by written
ballot.
The directors, other than those who may be elected by the holders of any
series of Preferred Stock or any other series or class of stock as set forth in
this Certificate of Incorporation, shall be divided into three classes, as
nearly equal in number as possible. One class of directors shall be initially
elected for a term expiring at the annual meeting of stockholders to be held in
1997, another class shall be initially elected for a term expiring at the annual
meeting of stockholders to be held in 1998, and another class shall be initially
elected for a term expiring at the annual meeting of stockholders to be held in
1999. Members of each class shall hold office until their successors are elected
and qualified. At each succeeding annual meeting of the stockholders of the
Corporation, the successors of the class of directors whose term expires at that
meeting shall be elected by a plurality vote of all votes cast at such meeting
to hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election.
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specified circumstances, any
director may be removed from office at any time by the shareholders, but only
for cause.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with this Article VIII.
ARTICLE IX
Each person who is or was or has agreed to become a director or officer of
the Corporation, or each such person who is or was serving or who has agreed to
serve at the request of the Board of Directors or an officer of the Corporation
as an employee or agent of the Corporation or as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans (including
the heirs, executor, administrators or estate of such person), shall be
indemnified by the Corporation, in accordance with the By-laws of the
Corporation, to the fullest extent
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permitted from time to time by the GCL as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted prior to such amendment) or any other applicable laws as
presently or hereafter in effect. Without limiting the generality or the effect
of the foregoing, the Corporation may enter into one or more agreements with any
person which provide for indemnification greater than or different from that
provided in this Article IX. Any amendment or repeal of this Article IX shall
not adversely affect any right or protection existing hereunder in respect of
any act or omission occurring prior to such amendment or repeal.
ARTICLE X
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) under Section 174 of the GCL, or (4) for any transaction
from which the director derived an improper personal benefit. Any amendment or
repeal of this Article X shall not adversely affect any right or protection of a
director of the Corporation existing hereunder in respect of any act or omission
occurring prior to such amendment or repeal.
ARTICLE XI
Except as may be expressly provided in this Certificate of Incorporation,
the Corporation reserves the right at any time and from time to time to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation or a Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by
applicable law, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article XI;
provided, however, that any amendment or repeal of Article IX or Article X of
this Certificate of Incorporation shall not adversely affect any right or
protection existing hereunder in respect of any act or omission occurring prior
to such amendment or repeal; and provided further that no Preferred Stock
Designation shall be amended after the issuance of any shares of the series of
Preferred Stock created thereby, except in accordance with the terms of such
Preferred Stock Designation and the requirements of applicable law.
IN WITNESS WHEREOF, W. R. Grace & Co. has caused this Amended and Restated
Certificate of Incorporation to be signed by its President and attested by its
Secretary and has caused its corporate seal to be hereunto affixed, this
day of , 1996.
W. R. GRACE & CO.
By:
------------------------------------
President
Attest:
--------------------------------
Secretary
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ANNEX B
FORM OF
AMENDED AND RESTATED
BY-LAWS
OF
W. R. GRACE & CO.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
Section 1.1. Delaware Office. The principal office of the Corporation in
the State of Delaware shall be located in Wilmington, Delaware, and the name and
address of its registered agent is The Prentice-Hall Corporation System, Inc.,
1013 Centre Road, Wilmington, Delaware.
Section 1.2. Other Offices. The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
Section 1.3. Books and Records. The books and records of the Corporation
may be kept outside the State of Delaware at such place or places as may from
time to time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 2.1. Annual Meeting. The annual meeting of the stockholders of
the Corporation shall be held annually (a) on the tenth day of May, or (b) if
such day be a Saturday, Sunday or a holiday at the place where the meeting is to
be held, on the last business day preceding or on the first business day after
such tenth day of May, as may be fixed by the Board of Directors, or (c) on such
other date as may be fixed by the Board of Directors.
Section 2.2. Special Meeting. Subject to the rights of the holders of any
series of stock having a preference over the Common Stock of the Corporation as
to dividends or upon liquidation ("Preferred Stock") with respect to such series
of Preferred Stock, special meetings of the stockholders may be called only by
the Chairman, by the President or by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies (the "Whole Board").
Section 2.3. Place of Meeting. The Chairman, the President or the Board
of Directors, as the case may be, may designate the place of meeting for any
annual meeting or for any special meeting of the stockholders called by the
Chairman, the President or the Board of Directors. If no designation is so made,
the place of meeting shall be the principal office of the Corporation.
Section 2.4. Notice of Meeting. Written or printed notice, stating the
place, date and time of the meeting and the purpose or purposes for which the
meeting is called, shall be delivered by the Corporation not less than ten (10)
days nor more than sixty (60) days before the date of the meeting, either
personally or by mail, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the U.S. mail with postage thereon prepaid, addressed to the stockholder at
his address as it appears on the stock transfer books of the Corporation. Such
further notice shall be given as may be required by law. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Meetings may be held without notice if all stockholders entitled to vote are
present, or if notice is waived by those not present in accordance with Section
6.4 of these By-laws. Any previously scheduled meeting of the stockholders may
be postponed, and (unless the Certificate of Incorporation otherwise provides)
any special meeting of the stockholders may be cancelled, by resolution of the
Board of Directors upon public notice given prior to the date previously
scheduled for such meeting of stockholders.
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Section 2.5. Quorum and Adjournment. Except as otherwise provided by law
or by the Certificate of Incorporation, the holders of a majority of the
outstanding shares of the Corporation entitled to vote generally in the election
of directors (the "Voting Stock"), represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders, except that when specified
business is to be voted on by a class or series of stock voting as a class, the
holders of a majority of the voting power of the shares of such class or series
shall constitute a quorum of such class or series for the transaction of such
business. The chairman of the meeting or a majority of the shares so represented
may adjourn the meeting from time to time, whether or not there is a quorum. No
notice of the time and place of adjourned meetings need be given except as
required by law. The stockholders present at a duly called meeting at which a
quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
Section 2.6. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing (or in any other manner permitted by law) by
the stockholder, or by his duly authorized attorney in fact.
Section 2.7. Notice of Stockholder Business and Nominations. (A) Annual
Meetings of Stockholders. (1) Nominations of persons for election to the Board
of Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (a) pursuant
to the Corporation's notice of meeting, (b) by or at the direction of the Board
of Directors or (c) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of the notice provided for in this Section 2.7,
who is entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 2.7.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Section 2.7, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation, and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30 days
before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Rule 14a-11 thereunder (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of
this Section 2.7 to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and there
is no public announcement by the Corporation naming all of the nominees for
election as director or specifying the size of the increased Board of Directors
at least 70 days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 2.7 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall
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be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 10th day following the
day on which such public announcement is first made by the Corporation.
(B) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 2.7, who shall be entitled to vote at the meeting
and who complies with the notice procedures set forth in this Section 2.7. In
the event the Corporation calls a special meeting of stockholders for the
purpose of electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section 2.7 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
(C) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 2.7 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 2.7. Except as otherwise provided by law, the
Certificate of Incorporation or these By-laws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Section 2.7 and, if any
proposed nomination or business is not in compliance with this Section 2.7, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 2.7, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 2.7, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this by-law. Nothing in this Section 2.7 shall be deemed to affect any
rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
Section 2.8. Procedure for Election of Directors; Required Vote. Election
of directors at all meetings of the stockholders at which directors are to be
elected shall be by ballot, and, subject to the rights of the holders of any
series of Preferred Stock to elect directors under specified circumstances, a
plurality of the votes cast thereat shall elect directors. Except as otherwise
provided by law, the Certificate of Incorporation, or these By-laws, in all
matters other than the election of directors, the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting and
entitled to vote on the matter shall be the act of the stockholders.
Section 2.9. Inspectors of Elections; Opening and Closing the Polls. The
Board of Directors by resolution shall appoint one or more inspectors, which
inspector or inspectors may include individuals who serve the Corporation in
other capacities, including, without limitation, as officers, employees, agents
or representatives, to act at meetings of stockholders and make written reports
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has
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been appointed to act or is able to act at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by law.
The chairman of the meeting shall fix and announce at the meeting the date
and time of the opening and the closing of the polls for each matter upon which
the stockholders will vote at a meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1. General Powers. The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors. In addition to
the powers and authorities by these By-laws expressly conferred upon them, the
Board of Directors may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-laws required to be exercised or done by the
stockholders.
Section 3.2. Number, Tenure and Qualifications. Subject to the rights of
the holders of any series of Preferred Stock to elect directors under specified
circumstances, the number of directors shall be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the Whole Board.
The directors, other than those who may be elected by the holders of any series
of Preferred Stock under specified circumstances, shall be divided, with respect
to the time for which they severally hold office, into three classes, as nearly
equal in number as is reasonably possible, designated Class I, Class II and
Class III, with the initial term of office of the Class I directors to expire at
the 1997 annual meeting of stockholders, the initial term of office of the Class
II directors to expire at the 1998 annual meeting of stockholders and the
initial term of office of the Class III directors to expire at the 1999 annual
meeting of stockholders, with each director to hold office until his or her
successor shall have been duly elected and qualified. No person shall be
nominated for election as a director if such person will have attained the age
of 70 prior to the expiration of his or her term of office. At each annual
meeting of stockholders, commencing with the 1997 annual meeting, directors
elected to succeed those directors whose terms then expire shall be elected for
a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified.
Section 3.3. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this Section 3.3 immediately
after, and at the same place as, the Annual Meeting of Stockholders. The Board
of Directors may fix the time and place for the holding of additional regular
meetings without notice.
Section 3.4. Special Meetings. Special meetings of the Board of Directors
shall be called at the request of the Chairman, the President or a majority of
the directors then in office. The person or persons authorized to call special
meetings of the Board of Directors may fix the place and time of such meetings.
Section 3.5. Notice. Notice of any special meeting or notice of a change
in the time or place of any regular meeting of the Board of Directors shall be
given to each director at his or her business or residence in writing by hand
delivery, first-class or overnight mail or courier service, telegram or
facsimile transmission, or orally by telephone. If mailed by first-class mail,
such notice shall be deemed adequately delivered when deposited in the U.S.
mails so addressed, with postage thereon prepaid, at least five (5) days before
such meeting. If by telegram, overnight mail or courier service, such notice
shall be deemed adequately delivered when the telegram is delivered to the
telegraph company or the notice is delivered to the overnight mail or courier
service company at least twenty-four (24) hours before such meeting. If by
facsimile transmission, such notice shall be deemed adequately delivered when
the notice is transmitted at least twelve (12) hours before such meeting. If by
telephone, the notice shall be communicated to the director or his or her
representative or answering machine. If by telephone or by hand delivery, the
notice shall be given at least twenty-four (24) hours prior to the time set for
the meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice of such meeting, except for amendments to these By-laws, as provided
under Section 8.1. A meeting may be held at
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any time without notice if all the directors are present or if those not present
waive notice of the meeting in accordance with Section 6.4 of these by-laws.
Section 3.6. Action by Consent of Board of Directors. Any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
Section 3.7. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 3.8. Quorum. Subject to Section 3.9, a number of directors equal
to at least a majority of the Whole Board shall constitute a quorum for the
transaction of business. If at any meeting of the Board of Directors there shall
be less than a quorum present, a majority of the directors present may adjourn
the meeting from time to time without further notice. The act of the majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors. The directors present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough directors to leave less than a quorum.
Section 3.9. Vacancies. Subject to applicable law and the rights of the
holders of any series of Preferred Stock with respect to such series of
Preferred Stock, and unless the Board of Directors otherwise determines,
vacancies resulting from death, resignation, retirement, disqualification,
removal from office or other cause, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled only by
the affirmative vote of a majority of the remaining directors, though less than
a quorum of the Board of Directors, and directors so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of authorized directors constituting the Whole Board shall shorten
the term of any incumbent director.
Section 3.10. Committees. The Board of Directors may establish one or more
committees. Each Committee shall consist of two or more directors of the
Corporation designated by the Board of Directors. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee may to the extent permitted by law exercise such powers and shall
have such responsibilities as shall be specified in the designating resolution.
In the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Each committee shall keep
written minutes of its proceedings and shall report such proceedings to the
Board of Directors when requested.
A majority of any committee may determine its action and fix the time and
place of its meetings, unless the Board of Directors shall otherwise provide.
Notice of such meetings shall be given to each member of the committee in the
manner provided for in Section 3.5 of these By-laws. The Board of Directors
shall have the power at any time to fill vacancies in, to change the membership
of, or to dissolve any such committee. Nothing herein shall be deemed to prevent
the Board of Directors from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority of the
Board of Directors.
The term of office of a committee member shall be as provided in the
resolution of the Board designating him or her but shall not exceed his or her
term as a director. If prior to the end of his term, a committee member should
cease to be a director, he or she shall cease to be a committee member. Any
member of a committee may resign at any time by giving written notice to the
Board of Directors, the Chairman, the President or the Secretary. Such
resignation shall take effect as provided in Section 6.6 of these By-laws in the
case of resignations by directors. Any member of a committee may be removed from
such committee, either with or without cause, at any time, by resolution adopted
by a majority of the whole Board. Any vacancy in a
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committee shall be filled by the Board of Directors in the manner prescribed by
these By-Laws for the original designation of the members of such committee.
Section 3.11. Committee on Officers' Compensation. Pursuant to Section
3.10 of these By-laws, the Board of Directors shall designate a committee to
evaluate the performance of, and to recommend the appropriate level of
compensation for, officers of the Corporation. Such committee shall have access
to an advisor not otherwise serving the Corporation. Each member of such
committee shall be an "independent director", as that term is defined in the
following sentence. For purposes of this Section 3.11, an "independent director"
shall mean a person who (a) has not been employed by the Corporation within the
past five years; (b) is not, and is not affiliated with, a firm that is an
advisor or consultant to the Corporation; (c) is not affiliated with any
customer or supplier of the Corporation whose purchases from and/or sales to the
Corporation exceed 3% of the sales and revenues of such customer or supplier for
its most recently completed fiscal year; (d) has no personal services contract
with the Corporation; (e) is not affiliated with a tax-exempt entity, not
otherwise affiliated with the Corporation, that receives contributions from the
Corporation that exceed 3% of such entity's gross contributions for its most
recently completed fiscal year; and (f) is not a member of the "immediate
family" (as defined in Item 404(a) of Securities and Exchange Commission
Regulation S-K) of any person described in clauses (a) through (e).
Section 3.12. Removal. Subject to the rights of the holders of any series
of Preferred Stock with respect to such series of Preferred Stock, any director,
or the entire Board of Directors, may be removed from office at any time by the
shareholders, but only for cause.
Section 3.13. Records. The Board of Directors shall cause to be kept a
record containing the minutes of the proceedings of the meetings of the Board of
Directors and of the stockholders, appropriate stock books and registers and
such books of records and accounts as may be necessary for the proper conduct of
the business of the Corporation.
ARTICLE IV
OFFICERS
Section 4.1. Elected Officers. The elected officers of the Corporation
shall be a Chairman, a President, a Secretary, a Treasurer, and such other
officers (including, without limitation, a Chief Financial Officer) as the Board
of Directors may deem proper from time to time. The Chairman shall be chosen
from among the directors. Each officer elected by the Board of Directors shall
have such powers and duties as generally pertain to his or her respective
office, subject to the specific provisions of this ARTICLE IV. Such officers
shall also have such powers and duties as may be conferred from time to time by
the Board of Directors. The Board of Directors may from time to time elect, or
the Chairman or President may appoint, such assistant officers (including one or
more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers and
Assistant Controllers) as may be necessary or desirable for the conduct of the
business of the Corporation. Such assistant officers shall have such duties and
shall hold their offices for such terms as shall be provided in these By-laws or
as may be prescribed by the Board of Directors or by the Chairman or President,
as the case may be.
Section 4.2. Election and Term of Office. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after the annual meeting of the
stockholders or at any other time as the Board of Directors may deem proper.
Each officer shall hold office until his successor shall have been duly elected
and shall have qualified or until his death or until he shall resign, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the Whole Board or, except in the case of an officer elected by the
Board of Directors, by the Chairman or President. Such removal shall be without
prejudice to the contractual rights, if any, of the person so removed.
Section 4.3. Chairman. The Chairman shall preside at all meetings of the
stockholders and of the Board of Directors and shall be the Chief Executive
Officer of the Company. The Chairman shall be responsible for the general
management of the affairs of the Corporation and shall perform all duties
incidental to his office which may be required by law and all such other duties
as are properly required of him by the Board of Directors. He shall make reports
to the Board of Directors and the stockholders, and shall see that all
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orders and resolutions of the Board of Directors and of any committee thereof
are carried into effect. The Chairman may also serve as President, if so elected
by the Board of Directors.
Section 4.4. President. The President shall act in a general executive
capacity and shall assist the Chairman in the administration and operation of
the Corporation's business and the general supervision of its policies and
affairs. In the absence of or the inability to act of the Chairman, the
President shall perform all duties of the Chairman and preside at all meetings
of stockholders and of the Board of Directors.
Section 4.5. Vice Presidents. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the Board of
Directors.
Section 4.6. Chief Financial Officer. The Chief Financial Officer (if any)
shall be a Vice President and act in an executive financial capacity. He shall
assist the Chairman and the President in the general supervision of the
Corporation's financial policies and affairs.
Section 4.7. Treasurer. The Treasurer shall exercise general supervision
over the receipt, custody and disbursement of corporate funds. The Treasurer
shall cause the funds of the Corporation to be deposited in such banks as may be
authorized by the Board of Directors, or in such banks as may be designated as
depositaries in the manner provided by resolution of the Board of Directors. He
shall have such further powers and duties and shall be subject to such
directions as may be granted or imposed upon him from time to time by the Board
of Directors, the Chairman or the President.
Section 4.8. Secretary. The Secretary shall keep or cause to be kept in
one or more books provided for that purpose, the minutes of all meetings of the
Board of Directors, the committees of the Board of Directors and the
stockholders; he shall see that all notices are duly given in accordance with
the provisions of these By-laws and as required by law; he shall be custodian of
the records and the seal of the Corporation and affix and attest the seal to all
stock certificates of the Corporation (unless the seal of the Corporation on
such certificates shall be a facsimile, as hereinafter provided) and affix and
attest the seal to all other documents to be executed on behalf of the
Corporation under its seal; and he shall see that the books, reports,
statements, certificates and other documents and records required by law to be
kept and filed are properly kept and filed; and in general, he shall perform all
the duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him by the Board of Directors, the Chairman or
the President.
Section 4.9. Controller. The Controller shall have general control, charge
and supervision of the accounts of the Corporation. He shall see that proper
accounts are maintained and that all accounts are properly credited from time to
time. He shall prepare or cause to be prepared the financial statements of the
Corporation.
Section 4.10. Removal. Any officer elected by the Board of Directors may
be removed by the affirmative vote of a majority of the Whole Board whenever, in
their judgment, the best interests of the Corporation would be served thereby.
Any assistant officer appointed by the Chairman or the President may be removed
by him whenever, in his judgment, the best interests of the Corporation would be
served thereby. No elected officer shall have any contractual rights against the
Corporation for compensation by virtue of such election beyond the date of the
election of his successor, his death, his resignation or his removal, whichever
event shall first occur, except as otherwise provided in an employment contract
or under an employee deferred compensation plan.
Section 4.11. Vacancies. A newly created elected office and a vacancy in
any elected office because of death, resignation, or removal may be filled by
the Board of Directors for the unexpired portion of the term at any meeting of
the Board of Directors.
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ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1. Stock Certificates and Transfers. The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares of
stock in such form as the appropriate officers of the Corporation may from time
to time prescribe. The shares of the stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof in person or
by his attorney, upon surrender for cancellation of certificates for at least
the same number of shares, with an assignment and power of transfer endorsed
thereon or attached thereto, duly executed, with such proof of the authenticity
of the signature as the Corporation or its agents may reasonably require.
The certificates of stock shall be signed, countersigned and registered in
such manner as the Board of Directors may by resolution prescribe, which
resolution may permit all or any of the signatures on such certificates to be in
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
Section 5.2. Lost, Stolen or Destroyed Certificates. No certificate for
shares of stock in the Corporation shall be issued in place of any certificate
alleged to have been lost, destroyed or stolen, except on production of such
evidence of such loss, destruction or theft and on delivery to the Corporation
of a bond of indemnity in such amount, upon such terms and secured by such
surety, as the Board of Directors or any financial officer may in its or his
discretion require.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.1. Fiscal Year. The fiscal year of the Corporation shall begin
on the first day of January and end on the thirty-first day of December of each
year.
Section 6.2. Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and the Certificate of
Incorporation.
Section 6.3. Seal. The corporate seal shall have enscribed thereon the
words "Corporate Seal", the year of incorporation and around the margin thereof
the words "W. R. Grace & Co."
Section 6.4. Waiver of Notice. Whenever any notice is required to be given
to any stockholder or director of the Corporation under the provisions of the
General Corporation Law of the State of Delaware or these by-laws, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. The attendance of any shareholder at a meeting in
person or by proxy, without protesting at the beginning of the meeting the lack
of notice of such meeting, shall constitute a waiver of notice of such
shareholder. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders or the Board of Directors or
committee thereof need be specified in any waiver of notice of such meeting.
Section 6.5. Audits. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be done annually.
Section 6.6. Resignations. Any director or any officer or assistant
officer, whether elected or appointed, may resign at any time by giving written
notice of such resignation to the Chairman, the President, or the Secretary, and
such resignation shall be deemed to be effective as of the close of business on
the date said notice is received by the Chairman, the President, or the
Secretary, or at such later time as is specified therein. No formal action shall
be required of the Board of Directors or the stockholders to make any such
resignation effective.
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Section 6.7. Indemnification and Insurance. (A) Each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit, or proceeding, whether civil, criminal, administrative or
investigative (hereinafter, a "proceeding"), by reason of the fact that he or
she or a person of whom he or she is the legal representative is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans maintained or sponsored by the
Corporation, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection therewith, and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of his or her heirs, executors and administrators; provided,
however, that except as provided in paragraph (C) of this Section 6.7, the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors. The
right to indemnification conferred in this Section 6.7 shall be a contract right
and shall include the right to be paid by the Corporation the expenses incurred
in defending any such proceeding in advance of its final disposition, such
advances to be paid by the Corporation within 20 days after the receipt by the
Corporation of a statement or statements from the claimant requesting such
advance or advances from time to time; provided, however, that if the General
Corporation Law of the State of Delaware requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking by or on behalf of such director or officer, to repay all amounts so
advanced if it shall ultimately be determined that such director or officer is
not entitled to be indemnified under this Section 6.7 or otherwise.
(B) To obtain indemnification under this Section 6.7, a claimant shall
submit to the Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to the claimant and is
reasonably necessary to determine whether and to what extent the claimant is
entitled to indemnification. Upon written request by a claimant for
indemnification pursuant to the first sentence of this paragraph (B), a
determination, if required by applicable law, with respect to the claimant's
entitlement thereto shall be made as follows: (1) if requested by the claimant,
by Independent Counsel (as hereinafter defined), or (2) if no request is made by
the claimant for a determination by Independent Counsel, (i) by the Board of
Directors by a majority vote of a quorum consisting of Disinterested Directors
(as hereinafter defined), or (ii) if a quorum of the Board of Directors
consisting of Disinterested Directors is not obtainable or, even if obtainable,
such quorum of Disinterested Directors so directs, by Independent Counsel in a
written opinion to the Board of Directors, a copy of which shall be delivered to
the claimant, or (iii) if a quorum of Disinterested Directors so directs, by the
stockholders of the Corporation. In the event the determination of entitlement
to indemnification is to be made by Independent Counsel at the request of the
claimant, the Independent Counsel shall be selected by the Board of Directors
unless there shall have occurred within two years prior to the date of the
commencement of the action, suit or proceeding for which indemnification is
claimed a "Change of Control", as defined below, in which case the Independent
Counsel shall be selected by the claimant unless the claimant shall request that
such selection be made by the Board of Directors. If it is so determined that
the claimant is entitled to indemnification, payment to the claimant shall be
made within 10 days after such determination.
(C) If a claim under paragraph (A) of this Section 6.7 is not paid in full
by the Corporation within 30 days after a written claim pursuant to paragraph
(B) of this Section 6.7 has been received by the Corporation, the claimant may
at any time thereafter bring suit against the Corporation to recover the unpaid
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amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standard of
conduct which makes it permissible under the General Corporation Law of the
State of Delaware for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
Independent Counsel or stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an actual
determination by the Corporation (including its Board of Directors, Independent
Counsel or stockholders) that the claimant has not met such applicable standard
of conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(D) If a determination shall have been made pursuant to paragraph (B) of
this Section 6.7 that the claimant is entitled to indemnification, the
Corporation shall be bound by such determination in any judicial proceeding
commenced pursuant to paragraph (C) of this Section 6.7.
(E) The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to paragraph (C) of this Section 6.7 that the
procedures and presumptions of this Section 6.7 are not valid, binding and
enforceable and shall stipulate in such proceeding that the Corporation is bound
by all the provisions of this Section 6.7.
(F) The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Section 6.7 shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, these By-laws, agreement, vote of stockholders or Disinterested
Directors or otherwise. No repeal or modification of this Section 6.7 shall in
any way diminish or adversely affect the rights of any director, officer,
employee or agent of the Corporation hereunder in respect of any occurrence or
matter arising prior to any such repeal or modification.
(G) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware. To the extent that
the Corporation maintains any policy or policies providing such insurance, each
such director or officer, and each such agent or employee to which rights to
indemnification have been granted as provided in paragraph (H) of this Section
6.7, shall be covered by such policy or policies in accordance with its or their
terms to the maximum extent of the coverage thereunder for any such director,
officer, employee or agent.
(H) The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and rights to be paid by
the Corporation the expenses incurred in defending any proceeding in advance of
its final disposition, to any employee or agent of the Corporation to the
fullest extent of the provisions of this Section 6.7 with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
(I) If any provision or provisions of this Section 6.7 shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
legality and enforceability of the remaining provisions of this Section 6.7
(including, without limitation, each portion of any paragraph of this By-law
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself held to be invalid, illegal or unenforceable) shall not in any way
be affected or impaired thereby; and (2) to the fullest extent possible, the
provisions of this Section 6.7 (including, without limitation, each such portion
of any paragraph of this By-law containing any such provision held to be
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested by the provision held invalid, illegal or unenforceable.
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(J) For purposes of this Section 6.7:
(1) "Disinterested Director" means a director of the Corporation who
is not and was not a party to the matter in respect of which
indemnification is sought by the claimant.
(2) "Independent Counsel" means a law firm, a member of a law firm, or
an independent practitioner, that is experienced in matters of corporation
law and shall include any person who, under the applicable standards of
professional conduct then prevailing, would not have a conflict of interest
in representing either the Corporation or the claimant in an action to
determine the claimant's rights under this Section 6.7.
(3) "Change of Control" has the meaning given such term in the
Corporation's 1996 Stock Incentive Plan, as the same may be amended or
superseded from time to time.
(K) Any notice, request or other communication required or permitted to be
given to the Corporation under this Section 6.7 shall be in writing and either
delivered in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid, return
receipt requested, to the Secretary of the Corporation and shall be effective
only upon receipt by the Secretary.
ARTICLE VII
CONTRACTS, PROXIES, ETC.
Section 7.1. Contracts. Except as otherwise required by law, the
Certificate of Incorporation or these By-laws, any contracts or other
instruments may be executed and delivered in the name and on the behalf of the
Corporation by such officer or officers of the Corporation as the Board of
Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman, the
President or any Vice President may execute bonds, contracts, deeds, leases and
other instruments to be made or executed for or on behalf of the Corporation.
Subject to any restrictions imposed by the Board of Directors or the Chairman,
the President or any Vice President of the Corporation may delegate contractual
powers to others under his jurisdiction, it being understood, however, that any
such delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
Section 7.2. Proxies. Unless otherwise provided by resolution adopted by
the Board of Directors, the Chairman, the President or any Vice President may
from time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as the holder of stock or other
securities in any other corporation, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation, or to consent in writing, in the name of
the Corporation as such holder, to any action by such other corporation, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal or otherwise,
all such written proxies or other instruments as he may deem necessary or proper
in the premises.
ARTICLE VIII
AMENDMENTS
Section 8.1. Amendments. These By-laws may be altered, amended, or
repealed at any meeting of the Board of Directors or of the stockholders,
provided notice of the proposed change was given in the notice of the meeting
and, in the case of a meeting of the Board of Directors, in a notice given not
less than two days prior to the meeting; provided, however, that, in the case of
amendments by stockholders, notwithstanding any other provisions of these
By-laws or any provision of law which might otherwise permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any particular
class or series of the capital stock of the Corporation required by law, the
Certificate of Incorporation or these By-laws, the affirmative vote of the
holders of at least 80 percent of the voting power of all the then outstanding
shares of the Voting Stock, voting together as a single class, shall be required
to alter, amend or repeal any provision of these By-laws.
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ANNEX C
SUMMARY OF GRACE HOLDING, INC.
1996 STOCK INCENTIVE PLAN
Before the Distribution, New Grace will adopt, and Grace New York will
approve, as sole shareholder of New Grace, the Grace Holding, Inc. 1996 Stock
Incentive Plan (the "1996 Plan"). The 1996 Plan is designed to enable New Grace
to attract and retain key employees and to link their incentives directly to the
performance of New Grace. The terms of the 1996 Plan are substantially similar
to those of the New Grace New York 1994 Stock Incentive Plan.
The 1996 Plan will be administered by the Compensation Committee (although
the Board of Directors may exercise the powers of the Compensation Committee
under certain circumstances). Under the 1996 Plan, stock incentives may be
granted to key employees, including directors who are employees. Stock
incentives under the 1996 Plan may be granted in the form of stock options,
stock awards or a combination thereof, for such consideration and upon such
other terms as the Compensation Committee may determine.
STOCK OPTIONS. The 1996 Plan permits New Grace to grant to key employees
options to purchase New Grace Common Stock at a purchase price equal to not less
than 100% of the fair market value of the New Grace Common Stock on the date an
option is granted. The maximum term of an option is ten years and one month from
the date of grant. The purchase price and any withholding tax that may be due on
the exercise of an option may be paid in cash, in shares of New Grace Common
Stock (subject to certain conditions), or a combination thereof. Each option is
exercisable at the time or times determined by the Compensation Committee (or
the Board of Directors). In general, unless otherwise specifically provided, an
option terminates three months after the optionee ceases to be an employee,
except that it terminates (i) immediately, if the employee resigns without the
consent of the Compensation Committee (or the Board of Directors), or if his
employment is terminated for cause and (ii) three years after death, incapacity
or retirement.
The 1996 Plan authorizes the grant of Incentive Stock Options ("ISOs")
(which are accorded special tax treatment under Section 422 of the Code, as
discussed below), as well as nonstatutory options.
The 1996 Plan authorizes New Grace to cancel an option to the extent it is
exercisable and either (i) pay the holder of the option cash equal to the
excess, if any, of the fair market value of the shares covered by the option
over their purchase price on the date of cancellation, (ii) transfer to the
holder New Grace Common Stock with a fair market value equal to such excess, or
(iii) pay such excess partly in cash and partly in New Grace Common Stock; the
right to cancel an option is referred to as a "stock appreciation right" or
"SAR." However, New Grace is not expected to grant SARs in the future.
Under the 1996 Plan, an outstanding option may be amended by the
Compensation Committee, provided that the holder of the option agrees to any
amendment that would adversely affect the option and that the option as so
amended is consistent with the 1996 Plan. The 1996 Plan does not preclude the
surrender of an outstanding option and the grant of a new option with a lower
purchase price. However, New Grace is not expected to engage in such
transactions.
The foregoing outlines certain provisions of the 1996 Plan relating to
stock options; documentation relating to individual stock options may have
additional permitted terms.
STOCK AWARDS. The 1996 Plan permits New Grace to grant stock awards to key
employees. A stock award is an issuance of shares of New Grace Common Stock or
an undertaking to issue such shares in the future (other than an option). Shares
subject to a stock award are valued at not less than 100% of their fair market
value on the date the award is granted, whether or not they are subject to
restrictions. If the shares subject to a stock award are not issued at the time
of grant, payments may be made, in cash or in shares of New Grace Common Stock,
in amounts not exceeding the dividends that would have been paid if the shares
awarded had been issued at the time of grant. It is anticipated that stock
awards will in some cases be (i) made contingent upon the attainment of one or
more specified performance objectives and/or (ii) subject to restrictions on the
sale or other disposition of the stock awards.
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The foregoing outlines certain features of stock awards required or
permitted under the 1996 Plan. The documentation relating to individual stock
awards, however, may contain other permitted terms.
LIMITATIONS. Up to 7,000,000 shares of New Grace Common Stock (subject to
adjustment for stock splits, stock dividends and the like) may be issued
pursuant to stock incentives under the 1996 Plan. These shares of New Grace
Common Stock would represent 7.6% of the New Grace Common Stock estimated to be
outstanding immediately following the Time of Distribution. Shares not issued
pursuant to stock incentives because of their termination or other reasons, and
shares issued pursuant to stock incentives and subsequently reacquired by New
Grace or a subsidiary from the recipient of his/her estate, will again be
available for grants under the 1996 Plan. In addition, (i) stock options granted
to any one person may not represent more than 10% of the total number of shares
issuable pursuant to stock incentives under the 1996 Plan; (ii) stock incentives
granted to any one person may not represent more than 15% of such total number
of shares; and (iii) no more than 3% of such shares may be subject to stock
awards that are neither contingent upon the attainment of performance objectives
nor subject to restrictions on sale or other disposition. In addition, the 1996
Plan imposes certain limitation upon the grant of ISOs.
Options are not assignable or transferable except as may be provided in the
relevant option agreement and except by will or the laws of descent and
distribution and, in the case of nonstatutory options, pursuant to a qualified
domestic relations order (as defined in the Code).
CHANGE IN CONTROL PROVISIONS. Upon a "Change in Control" of New Grace (as
defined in the 1996 Plan), all stock options will vest and become fully
exercisable, and all stock awards will vest and become free of all restrictions.
In addition, option holders will have the right, subject to certain
restrictions, to elect, within the 60-day period following a "Change in
Control", to receive, in cancellation of their options, a cash payment equal to
(i) the difference between the change in control price (as defined in the 1996
Plan) and the purchase price per share under their options times (ii) the number
of shares as to which they are exercising this right.
TAX TREATMENT OF STOCK INCENTIVES. Under the present provisions of the
Code, the federal income tax treatment of stock incentives under the 1996 Plan
is as follows. Generally, holders are not taxed upon the receipt of options, but
recognize ordinary income upon the exercise of nonstatutory stock options in an
amount equal to the difference between the fair market value of the stock
acquired and the purchase price paid for such stock. Holders of ISOs do not
recognize ordinary income as a result of the exercise of such options if certain
holding period requirements are met. Holders of stock awards are generally taxed
when stock is delivered and vested or when cash is paid pursuant to such awards.
New Grace will generally be permitted a tax deduction upon recognition of
ordinary income by an award holder, in the same amount. However, the ability of
New Grace to take a tax deduction with respect to an option or stock award of a
holder who is the chief executive officer or one of the four other most highly
compensated executive officers of New Grace in any year may be limited if it
fails to comply with the requirements for "qualified performance-based
compensation" under the Code. Moreover, the acceleration of vesting of options
and stock awards as a result of a change in control could result in "excess
parachute payments," which could also reduce or eliminate New Grace's deduction.
THE FOREGOING DISCUSSION IS PROVIDED AS GENERAL INFORMATION ONLY AND IS NOT
INTENDED TO BE AND DOES NOT CONSTITUTE SPECIFIC TAX ADVICE. IN ADDITION, IT DOES
NOT ADDRESS THE IMPACT OF STATE AND LOCAL TAXES OR SECURITIES LAWS RESTRICTIONS.
WITHHOLDING. New Grace has a right to withhold any sums required by
federal, state or local tax laws with respect to the exercise of any option or
SAR or the vesting of any stock award, or to require payment of such amounts
before shares are delivered under a stock option or award.
ACCOUNTING TREATMENT OF STOCK INCENTIVES. No expense is incurred when an
option not containing an SAR is granted or exercised, so long as the purchase
price equals the fair market value of the New Grace Common Stock on the date of
grant. New Grace's tax deduction described above in the case of nonstatutory
options is reported as an adjustment to stockholders' equity. Stock awards
result in compensation expense
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based on the fair market value of the shares covered by the awards, the timing
and recording of which depend on the terms of the individual award.
GENERAL. Authorized but unissued shares of New Grace Common Stock, as well
as shares held by New Grace or a subsidiary, may be used for purposes of the
1996 Plan.
The 1996 Plan permits certain variations from the terms described above in
the case of grants of stock incentives to foreign employees and the assumption
of, or the grant of options in substitution for, options held by employees of
acquired companies. The 1996 Plan may be amended or terminated by the New Grace
Board upon the recommendation of the Compensation Committee without shareholder
approval, except as specified in the 1996 Plan, and except that no amendment or
termination of the 1996 Plan may adversely affect any stock incentive granted
under the 1996 Plan without the consent of the holder thereof. No preemptive
rights are applicable to the shares covered by the 1996 Plan. Any cash proceeds
to be received by New Grace in connection with stock incentives granted under
the 1996 Plan are expected to be used for general corporate purposes.
It is not possible to state which key employees will be granted stock
incentives under the 1996 Plan, or the value or number of shares subject to any
particular stock incentive, since these matters will be determined by the
Compensation Committee in the future based on an individual's ability to
contribute to the profitability, growth and success of New Grace. However,
subject to such considerations, it is anticipated that stock incentives will be
granted under the 1996 Plan to key employees in executive, operating,
administrative, professional and technical positions on a basis generally
comparable to prior grants under stock incentive plans of Grace New York.
The text of the 1996 Plan is set forth in full below.
GRACE HOLDING, INC.
1996 STOCK INCENTIVE PLAN
1. Purposes. The purposes of this Plan are (a) to enable Key Persons to
have incentives related to Common Stock, (b) to encourage Key Persons to
increase their interest in the growth and prosperity of the Company and to
stimulate and sustain constructive and imaginative thinking by Key Persons, (c)
to further the identity of interests of Key Persons with the interests of the
Company's stockholders, and (d) to induce the service or continued service of
Key Persons and to enable the Company to compete with other organizations
offering similar or other incentives in obtaining and retaining the services of
the most highly qualified individuals.
2. Definitions. When used in this Plan, the following terms shall have
the meanings set forth in this section 2.
Board of Directors: The Board of Directors of the Company.
cessation of service (or words of similar import): When a person ceases to
be an employee of the Company or a Subsidiary. For purposes of this definition,
if an entity that was a Subsidiary ceases to be a Subsidiary, persons who
immediately thereafter remain employees of that entity (and are not employees of
the Company or an entity that is a Subsidiary) shall be deemed to have ceased
service.
Change in Control: Shall be deemed to have occurred if (a) the Company
determines that any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, has become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of 20% or more of the outstanding Common Stock of the Company;
(b) individuals who are "Continuing Directors" (as defined below) cease to
constitute a majority of any class of the Board of Directors; (c) there occurs a
reorganization, merger, consolidation or other corporate transaction involving
the Company (a "Corporate Transaction"), in each case, with respect to which the
stockholders of the Company immediately prior to such Corporate Transaction do
not, immediately after the
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Corporate Transaction, own more than 60% of the combined voting power of the
corporation resulting from such Corporate Transaction; or (d) the stockholders
of the Company approve a complete liquidation or dissolution of the Company.
Notwithstanding any other provision of this Plan, the distribution of all of the
shares of Common Stock of the Company to the shareholders of W. R. Grace & Co.
shall not be deemed a Change in Control.
Change in Control Price: The higher of (a) the highest reported sales
price, regular way, as reported in The Wall Street Journal or another newspaper
of general circulation, of a share of Common Stock in any transaction reported
on the New York Stock Exchange Composite Tape or other national exchange on
which such shares are listed or on NASDAQ during the 60-day period prior to and
including the date of a Change in Control or (b) if the Change in Control is the
result of a tender or exchange offer or a Corporate Transaction, the highest
price per share of Common Stock paid in such tender or exchange offer or
Corporate Transaction; provided, however, that in the case of Incentive Stock
Options, the Change in Control Price shall be in all cases the Fair Market Value
of the Common Stock on the date such Incentive Stock Option is exercised. To the
extent that the consideration paid in any Corporate Transaction or other
transaction described above consists in whole or in part of securities or other
noncash consideration, the value of such securities or other noncash
consideration shall be determined in the sole discretion of the Board of
Directors.
Code: The Internal Revenue Code of 1986, as amended.
Committee: The Compensation, Employee Benefits and Stock Incentive
Committee of the Board of Directors of the Company or any other committee
designated by the Board of Directors to administer stock incentive and stock
option plans of the Company and the Subsidiaries generally or this Plan
specifically.
Common Stock: The common stock of the Company, par value $.01 per share,
or such other class of shares or other securities or property as may be
applicable pursuant to the provisions of section 8.
Company: Grace Holding, Inc., a Delaware corporation.
Corporate Transaction: The meaning set forth in the definition of "Change
in Control" above.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exercise Period: The meaning set forth in section 14(b) of this Plan.
Fair Market Value: (a) The mean between the high and low sales prices of a
share of Common Stock in New York Stock Exchange composite transactions on the
applicable date, as reported in The Wall Street Journal or another newspaper of
general circulation, or, if no sales of shares of Common Stock were reported for
such date, for the next preceding date for which such sales were so reported, or
(b) the fair market value of a share of Common Stock determined in accordance
with any other reasonable method approved by the Committee.
Incentive Stock Option: A stock option that states that it is an incentive
stock option and that is intended to meet the requirements of Section 422 of the
Code and the regulations thereunder applicable to incentive stock options, as in
effect from time to time.
issuance (or words of similar import): The issuance of authorized but
unissued Common Stock or the transfer of issued Common Stock held by the Company
or a Subsidiary.
Key Person: An employee of the Company or a Subsidiary who, in the opinion
of the Committee, has contributed or can contribute significantly to the growth
and successful operations of the Company or one or more Subsidiaries. The grant
of a Stock Incentive to an employee shall be deemed a determination by the
Committee that such person is a Key Person.
Nonstatutory Stock Option: An Option that is not an Incentive Stock
Option.
Option: An option granted under this Plan to purchase shares of Common
Stock.
Option Agreement: An agreement setting forth the terms of an Option.
Plan: The 1996 Stock Incentive Plan of the Company herein set forth, as
the same may from time to time be amended.
service: Service to the Company or a Subsidiary as an employee. "To serve"
has a correlative meaning.
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Spread: The meaning set forth in section 14(b) of this Plan.
Stock Award: An issuance of shares of Common Stock or an undertaking
(other than an Option) to issue such shares in the future.
Stock Incentive: A stock incentive granted under this Plan in one of the
forms provided for in section 3.
Subsidiary: A corporation (or other form of business association) of which
shares (or other ownership interests) having 50% or more of the voting power
regularly entitled to vote for directors (or equivalent management rights) are
owned, directly or indirectly, by the Company, or any other entity designated as
such by the Board of Directors; provided, however, that in the case of an
Incentive Stock Option, the term "Subsidiary" shall mean a Subsidiary (as
defined by the preceding clause) that is also a "subsidiary corporation" as
defined in section 424(f) of the Code and the regulations thereunder, as in
effect from time to time.
3. Grants of Stock Incentives. (a) Subject to the provisions of this
Plan, the Committee may at any time and from time to time grant Stock Incentives
under this Plan to, and only to, Key Persons.
(b) The Committee may grant a Stock Incentive to be effective at a
specified future date or upon the future occurrence of a specified event. For
the purposes of this Plan, any such Stock Incentive shall be deemed granted on
the date it becomes effective. An agreement or other commitment to grant a Stock
Incentive that is to be effective in the future shall not be deemed the grant of
a Stock Incentive until the date on which such Stock Incentive becomes
effective.
(c) A Stock Incentive may be granted in the form of:
(i) a Stock Award, or
(ii) an Option, or
(iii) a combination of a Stock Award and an Option.
4. Stock Subject to this Plan. (a) Subject to the provisions of paragraph
(c) of this section 4 and the provisions of section 8, the maximum number of
shares of Common Stock that may be issued pursuant to Stock Incentives granted
under this Plan shall not exceed seven million (7,000,000).
(b) Authorized but unissued shares of Common Stock and issued shares of
Common Stock held by the Company or a Subsidiary, whether acquired specifically
for use under this Plan or otherwise, may be used for purposes of this Plan.
(c) If any shares of Common Stock subject to a Stock Incentive shall not be
issued and shall cease to be issuable because of the termination, in whole or in
part, of such Stock Incentive or for any other reason, or if any such shares
shall, after issuance, be reacquired by the Company or a Subsidiary from the
recipient of such Stock Incentive, or from the estate of such recipient, for any
reason, such shares shall no longer be charged against the limitation provided
for in paragraph (a) of this section 4 and may again be made subject to Stock
Incentives.
(d) Of the total number of shares specified in paragraph (a) of this
section 4 (subject to adjustment as specified therein), during the term of this
Plan as defined in section 9, (i) no more than 10% may be subject to Options
granted to any one Key Person and (ii) no more than 15% may be subject to Stock
Incentives granted to any one Key Person.
5. Stock Awards. Except as otherwise provided in section 12, Stock
Incentives in the form of Stock Awards shall be subject to the following
provisions:
(a) For purposes of this Plan, all shares of Common Stock subject to a
Stock Award shall be valued at not less than 100% of the Fair Market Value
of such shares on the date such Stock Award is granted, regardless of
whether or when such shares are issued pursuant to such Stock Award and
whether or not such shares are subject to restrictions affecting their
value.
(b) Shares of Common Stock subject to a Stock Award may be issued to a
Key Person at the time the Stock Award is granted, or at any time
subsequent thereto, or in installments from time to time. In the event that
any such issuance shall not be made at the time the Stock Award is granted,
the Stock
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Award may provide for the payment to such Key Person, either in cash or
shares of Common Stock, of amounts not exceeding the dividends that would
have been payable to such Key Person in respect of the number of shares of
Common Stock subject to such Stock Award (as adjusted under section 8) if
such shares had been issued to such Key Person at the time such Stock Award
was granted. Any Stock Award may provide that the value of any shares of
Common Stock subject to such Stock Award may be paid in cash, on each date
on which shares would otherwise have been issued, in an amount equal to the
Fair Market Value on such date of the shares that would otherwise have been
issued.
(c) The material terms of each Stock Award shall be determined by the
Committee. Each Stock Award shall be evidenced by a written instrument
consistent with this Plan. It is intended that a Stock Award would be (i)
made contingent upon the attainment of one or more specified performance
objectives and/or (ii) subject to restrictions on the sale or other
disposition of the Stock Award or the shares subject thereto for a period
of three or more years; provided, however, that (x) a Stock Award may
include restrictions and limitations in addition to those provided for
herein and (y) of the total number of shares specified in paragraph (a) of
section 4 (subject to adjustment as specified therein), up to 3% may be
subject to Stock Awards not subject to clause (i) or clause (ii) of this
sentence.
(d) A Stock Award shall be granted for such lawful consideration as
may be provided for therein.
6. Options. Except as otherwise provided in section 12, Stock Incentives
in the form of Options shall be subject to the following provisions:
(a) The purchase price per share of Common Stock shall be not less
than 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted. The purchase price and any withholding tax that may
be due on the exercise of an Option may be paid in cash, or, if so provided
in the Option Agreement, (i) in shares of Common Stock (including shares
issued pursuant to the Option being exercised and shares issued pursuant to
a Stock Award granted subject to restrictions as provided for in paragraph
(c) of section 5), or (ii) in a combination of cash and such shares;
provided, however, that no shares of Common Stock delivered in payment of
the purchase price may be "immature shares," as determined in accordance
with generally accepted accounting principles in effect at the time. Any
shares of Common Stock delivered to the Company in payment of the purchase
price or withholding tax shall be valued at their Fair Market Value on the
date of exercise. No certificate for shares of Common Stock shall be issued
upon the exercise of an Option until the purchase price for such shares has
been paid in full.
(b) If so provided in the Option Agreement, the Company shall, upon
the request of the holder of the Option and at any time and from time to
time, cancel all or a portion of the Option then subject to exercise and
either (i) pay the holder an amount of money equal to the excess, if any,
of the Fair Market Value, at such time or times, of the shares subject to
the portion of the Option so canceled over the purchase price for such
shares, or (ii) issue shares of Common Stock to the holder with a Fair
Market Value, at such time or times, equal to such excess, or (iii) pay
such excess by a combination of money and shares.
(c) Each Option may be exercisable in full at the time of grant, or
may become exercisable in one or more installments and at such time or
times or upon the occurrence of such events, as may be specified in the
Option Agreement, as determined by the Committee. Unless otherwise provided
in the Option Agreement, an Option, to the extent it is or becomes
exercisable, may be exercised at any time in whole or in part until the
expiration or termination of such Option.
(d) Each Option shall be exercisable during the life of the holder
only by him and, after his death, only by his estate or by a person who
acquires the right to exercise the Option by will or the laws of descent
and distribution. An Option, to the extent that it shall not have been
exercised or canceled, shall terminate as follows after the holder ceases
to serve: (i) if the holder shall voluntarily cease to serve without the
consent of the Committee or shall have his service terminated for cause,
the Option shall terminate immediately upon cessation of service; (ii) if
the holder shall cease to serve by reason of death, incapacity or
retirement under a retirement plan of the Company or a Subsidiary, the
Option shall terminate three years after the date on which he ceased to
serve; and (iii) except as provided in the next
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sentence, in all other cases the Option shall terminate three months after
the date on which the holder ceased to serve unless the Committee shall
approve a longer period (which approval may be given before or after
cessation of service) not to exceed three years. If the holder shall die or
become incapacitated during the three-month period (or such longer period
as the Committee may approve) referred to in the preceding clause (iii),
the Option shall terminate three years after the date on which he ceased to
serve. A leave of absence for military or governmental service or other
purposes shall not, if approved by the Committee (which approval may be
given before or after the leave of absence commences), be deemed a
cessation of service within the meaning of this paragraph (d).
Notwithstanding the foregoing provisions of this paragraph (d) or any other
provision of this Plan, no Option shall be exercisable after expiration of
a period of ten years and one month from the date the Option is granted.
Where a Nonstatutory Option is granted for a term of less than ten years
and one month, the Committee may, at any time prior to the expiration of
the Option, extend its term for a period ending not later than ten years
and one month from the date the Option was granted. Such an extension shall
not be deemed the grant of a new Option under this Plan.
(e) No Option nor any right thereunder may be assigned or transferred
except by will or the laws of descent and distribution and except, in the
case of a Nonstatutory Option, pursuant to a qualified domestic relations
order (as defined in the Code), unless otherwise provided in the Option
Agreement.
(f) An Option may, but need not, be an Incentive Stock Option. All
shares of Common Stock that may be made subject to Stock Incentives under
this Plan may be made subject to Incentive Stock Options; provided,
however, that (i) no Incentive Stock Option may be granted more than ten
years after the effective date of this Plan, as provided in section 9; and
(ii) the aggregate Fair Market Value (determined as of the time an
Incentive Stock Option is granted) of the shares subject to each
installment becoming exercisable for the first time in any calendar year
under Incentive Stock Options granted on or after January 1, 1987 (under
all plans, including this Plan, of his employer corporation and its parent
and subsidiary corporations) to the Key Employee to whom such Incentive
Stock Option is granted shall not exceed $100,000.
(g) The material terms of each Option shall be determined by the
Committee. Each Option shall be evidenced by a written instrument
consistent with this Plan, and shall specify whether the Option is an
Incentive Stock Option or a Nonstatutory Option. An Option may include
restrictions and limitations in addition to those provided for in this
Plan.
(h) Options shall be granted for such lawful consideration as may be
provided for in the Option.
7. Combination of Stock Awards and Options. Stock Incentives authorized
by paragraph (c)(iii) of section 3 in the form of combinations of Stock Awards
and Options shall be subject to the following provisions: (a) A Stock Incentive
may be a combination of any form of Stock Award and any form of Option;
provided, however, that the terms and conditions of such Stock Incentive
pertaining to a Stock Award are consistent with section 5 and the terms and
conditions of such Stock Incentive pertaining to an Option are consistent with
section 6.
(b) Such combination Stock Incentive shall be subject to such other terms
and conditions as may be specified therein, including without limitation a
provision terminating in whole or in part a portion thereof upon the exercise in
whole or in part of another portion thereof.
(c) The material terms of each combination Stock Incentive shall be
determined by the Committee. Each combination Stock Incentive shall be evidenced
by a written instrument consistent with this Plan.
8. Adjustment Provisions. (a) In the event that any reclassification,
split-up or consolidation of the Common Stock shall be effected, or the
outstanding shares of Common Stock are, in connection with a merger or
consolidation of the Company or a sale by the Company of all or a part of its
assets, exchanged for a different number or class of shares of stock or other
securities or property of the Company or for shares of the stock or other
securities or property of any other corporation or person, or a record date for
determination of holders of Common Stock entitled to receive a dividend payable
in Common Stock shall occur, (i) the number, kind and class of shares or other
securities or property that may be issued pursuant to Stock Incentives
thereafter granted, (ii) the number, kind and class of shares or other
securities or property that
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have not been issued under outstanding Stock Incentives, (iii) the purchase
price to be paid per share or other unit under outstanding Stock Incentives, and
(iv) the price to be paid per share or other unit by the Company or a Subsidiary
for shares or other securities or property issued pursuant to Stock Incentives
that are subject to a right of the Company or a Subsidiary to re-acquire such
shares or other securities or property, shall in each case be equitably adjusted
as determined by the Committee.
(b) In the event that there shall occur any spin-off or other distribution
of assets of the Company to its shareholders (including without limitation an
extraordinary dividend), (i) the number, kind and class of shares or other
securities or property that may be issued pursuant to Stock Incentives
thereafter granted, (ii) the number, kind and class of shares or other
securities or property that have not been issued under outstanding Stock
Incentives, (iii) the purchase price to be paid per share or other unit under
outstanding Stock Incentives, and (iv) the price to be paid per share or other
unit by the Company or a Subsidiary for shares or other securities or property
issued pursuant to Stock Incentives that are subject to a right of the Company
or a Subsidiary to re-acquire such shares or other securities or property, shall
in each case be equitably adjusted as determined by the Committee.
9. Term. This Plan shall be deemed adopted and shall become effective on
the date as of which it is approved by W. R. Grace & Co., as sole shareholder of
the Company. No Stock Incentives shall be granted under this Plan after the
tenth anniversary of such date.
10. Administration. (a) This Plan shall be administered by the Committee.
No director shall be designated as or continue to be a member of the Committee
unless he shall at the time of designation and at all times during service as a
member of the Committee be an "outside director" within the meaning of Section
162(m) of the Code. The Committee shall have full authority to act in the matter
of selection of Key Persons and in granting Stock Incentives to them and such
other authority as is granted to the Committee by this Plan. Notwithstanding any
other provision of this Plan, the Board of Directors may exercise any and all
powers of the Committee with respect to this Plan, except to the extent that the
possession or exercise of any power by the Board of Directors would cause any
Stock Incentive to become subject to, or to lose an exemption from, Section
162(m) of the Code or Section 16(b) of the Exchange Act.
(b) The Committee may establish such rules and regulations, not
inconsistent with the provisions of this Plan, as it deems necessary to
determine eligibility to be granted Stock Incentives under this Plan and for the
proper administration of this Plan, and may amend or revoke any rule or
regulation so established. The Committee may make such determinations and
interpretations under or in connection with this Plan as it deems necessary or
advisable. All such rules, regulations, determinations and interpretations shall
be binding and conclusive upon the Company, its Subsidiaries, its shareholders
and its directors, officers and employees, and upon their respective legal
representatives, beneficiaries, successors and assigns, and upon all other
persons claiming under or through any of them.
(c) Members of the Board of Directors and members of the Committee acting
under this Plan shall be fully protected in relying in good faith upon the
advice of counsel and shall incur no liability in the performance of their
duties, except as otherwise provided by applicable law.
11. General Provisions. (a) Nothing in this Plan or in any instrument
executed pursuant hereto shall confer upon any person any right to continue in
the service of the Company or a Subsidiary, or shall affect the right of the
Company or of a Subsidiary to terminate the service of any person with or
without cause.
(b) No shares of Common Stock shall be issued pursuant to a Stock Incentive
unless and until all legal requirements applicable to the issuance of such
shares have, in the opinion of counsel to the Company, been complied with. In
connection with any such issuance, the person acquiring the shares shall, if
requested by the Company, give assurances, satisfactory to counsel to the
Company, in respect of such matters as the Company or a Subsidiary may deem
desirable to assure compliance with all applicable legal requirements.
(c) No person (individually or as a member of a group), and no beneficiary
or other person claiming under or through him, shall have any right, title or
interest in or to any shares of Common Stock allocated or reserved for the
purposes of this Plan or subject to any Stock Incentive except as to such shares
of Common Stock, if any, as shall have been issued to him.
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(d) In the case of a grant of a Stock Incentive to a Key Person who is
employed by a Subsidiary, such grant may provide for the issuance of the shares
covered by the Stock Incentive to the Subsidiary, for such consideration as may
be provided, upon the condition or understanding that the Subsidiary will
transfer the shares to the Key Person in accordance with the terms of the Stock
Incentive.
(e) In the event the laws of a country in which the Company or a Subsidiary
has employees prescribe certain requirements for Stock Incentives to qualify for
advantageous tax treatment under the laws of that country (including, without
limitation, laws establishing options analogous to Incentive Stock Options), the
Committee, may, for the benefit of such employees, amend, in whole or in part,
this Plan and may include in such amendment additional provisions for the
purposes of qualifying the amended plan and Stock Incentives granted thereunder
under such laws; provided, however, that (i) the terms and conditions of a Stock
Incentive granted under such amended plan may not be more favorable to the
recipient than would be permitted if such Stock Incentive had been granted under
this Plan as herein set forth, (ii) all shares allocated to or utilized for the
purposes of such amended plan shall be subject to the limitations of section 4,
and (iii) the provisions of the amended plan may restrict but may not extend or
amplify the provisions of sections 9 and 13.
(f) The Company or a Subsidiary may make such provisions as either may deem
appropriate for the withholding of any taxes that the Company or a Subsidiary
determines is required to be withheld in connection with any Stock Incentive.
(g) Nothing in this Plan is intended to be a substitute for, or shall
preclude or limit the establishment or continuation of, any other plan, practice
or arrangement for the payment of compensation or benefits to directors,
officers or employees generally, or to any class or group of such persons, that
the Company or any Subsidiary now has or may hereafter put into effect,
including, without limitation, any incentive compensation, retirement, pension,
group insurance, stock purchase, stock bonus or stock option plan.
12. Acquisitions. If the Company or any Subsidiary should merge or
consolidate with, or purchase stock or assets or otherwise acquire the whole or
part of the business of, another entity, the Company, upon the approval of the
Committee, (a) may assume, in whole or in part and with or without modifications
or conditions, any stock incentives granted by the acquired entity to its
directors, officers, employees or consultants in their capacities as such, or
(b) may grant new Stock Incentives in substitution therefor. Any such assumed or
substitute Stock Incentives may contain terms and conditions inconsistent with
the provisions of this Plan (including the limitations set forth in paragraph
(d) of section 4), including additional benefits for the recipient; provided,
however, that if such assumed or substitute Stock Incentives are Incentive Stock
Options, such terms and conditions are permitted under the plan of the acquired
entity. For the purposes of any applicable plan provision involving time or a
date, a substitute Stock Incentive shall be deemed granted as of the date of
grant of the original stock incentive.
13. Amendments and Termination. (a) This Plan may be amended or terminated
by the Board of Directors upon the recommendation of the Committee; provided,
however, that, without the approval of the stockholders of the Company, no
amendment shall be made which (i) causes this Plan to cease to comply with
applicable law, (ii) permits any person who is not a Key Person to be granted a
Stock Incentive (except as otherwise provided in section 12), (iii) amends the
provisions of paragraph (d) of section 4, paragraph (a) of section 5 or
paragraph (a) or paragraph (f) of section 6 to permit shares to be valued at, or
to have a purchase price of, respectively, less than the percentage of Fair
Market Value specified therein, (iv) amends section 9 to extend the date set
forth therein, or (v) amends this section 13.
(b) No amendment or termination of this Plan shall adversely affect any
Stock Incentive theretofore granted, and no amendment of any Stock Incentive
granted pursuant to this Plan shall adversely affect such Stock Incentive,
without the consent of the holder thereof.
14. Change in Control Provisions. (a) Notwithstanding any other provision
of this Plan to the contrary, in the event of a Change in Control:
(i) Any Options outstanding as of the date on which such Change in
Control occurs, and which are not then exercisable and vested, shall become
fully exercisable and vested to the full extent of the original grant; and
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<PAGE> 105
(ii) All restrictions and deferral limitations applicable to Stock
Incentives shall lapse, and Stock Incentives shall become free of all
restrictions and become fully vested and transferable to the full extent of
the original grant.
(b) Notwithstanding any other provision of this Plan, during the 60-day
period from and after a Change in Control (the "Exercise Period"), unless the
Committee shall determine otherwise at the time of grant, the holder of an
Option shall have the right, in lieu of the payment of the purchase price for
the shares of Common Stock being purchased under the Option, by giving notice to
the Company, to elect (within the Exercise Period) to surrender all or part of
the Option to the Company and to receive cash, within 30 days after such notice,
in an amount equal to the amount by which the Change in Control Price per share
of Common Stock on the date of such election shall exceed the purchase price per
share of Common Stock under the Option (the "Spread") multiplied by the number
of shares of Common Stock subject to the Option as to which the right subject to
this Section 14(b) shall have been exercised.
(c) Notwithstanding any other provision of this Plan, if any right granted
pursuant to this Plan to receive cash in respect of a Stock Incentive would make
a Change in Control transaction ineligible for pooling-of-interests accounting
that, but for the nature of such grant, would otherwise be eligible for such
accounting treatment, the Committee shall have the ability to substitute for
such cash Common Stock with a Fair Market Value equal to the amount of such
cash.
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<PAGE> 106
ANNEX D
SUMMARY OF GRACE HOLDING, INC. 1996 STOCK RETAINER
PLAN FOR NONEMPLOYEE DIRECTORS
Before the Distribution, New Grace will adopt, and Grace New York will
approve, as sole shareholder of New Grace, the Grace Holding, Inc. 1996 Stock
Retainer Plan for Nonemployee Directors (the "Retainer Plan"). Among other
things, the Retainer Plan contemplates that each nonemployee director will
receive an annual retainer of $24,000, payable in shares of New Grace Common
Stock. The payment of an annual retainer to nonemployee directors in shares of
New Grace Common Stock is expected to further unite the interests of the New
Grace Board with those of New Grace's shareholders and to be of substantial
value in attracting, motivating and retaining the most highly qualified
nonemployee directors. The terms of the Retainer Plan will be substantially
similar to those of the Grace New York 1994 Stock Employee Plan for Nonemployee
Directors.
The Retainer Plan provides that, beginning on July 1, 1997, and on each
subsequent July 1 through July 1, 2002, each person serving as a nonemployee
director will be paid a retainer consisting of a whole number of shares of
Common Stock equal to the quotient obtained by dividing (1) $24,000 ("Retainer
Amount") by (2) the fair market value of the New Grace Common Stock on such July
1; any fractional share resulting from such calculation will be rounded upwards
to the next whole share. The Retainer Amount will be proportionately decreased
with respect to a person whose service as a nonemployee director commenced
subsequent to January 1 of such calendar year and increased for a person whose
service as a nonemployee director commenced subsequent to July 1 of the prior
calendar year. No shares will be issued in a calendar year to a nonemployee
director who, prior to July 1 of such calendar year, is removed from the New
Grace Board for cause or voluntarily terminates service prior to retirement
under the directors' retirement plan. However, once shares are issued to a
nonemployee director under the Retainer Plan, they are not forfeited upon the
director's termination of service, regardless of the reason for such
termination.
As defined in the Retainer Plan, a nonemployee director is an individual
not employed by New Grace or any subsidiary.
LIMITATIONS. Up to 75,000 shares of Common Stock (subject to adjustment
for stock splits, stock dividends and the like) may be issued pursuant to the
Retainer Plan. This number of shares is expected to be sufficient to pay
retainers to nonemployee directors through at least July 1, 2002; the Retainer
Plan does not provide for the payment of retainers with respect to any period
after July 1, 2002.
TAX TREATMENT OF RETAINERS. Under the present provisions of the Code, a
nonemployee director will realize taxable compensation equal to the fair market
value of the shares delivered in payment of his annual retainer. Such
nonemployee director's tax basis for such shares will be the amount of such
taxable compensation. If such shares are subsequently sold, the nonemployee
director will realize a capital gain (or loss) equal to the amount by which the
proceeds of the sale exceed (or are less than) his basis for such New Grace
Common Stock.
New Grace will generally be entitled to a tax deduction in the amount of
taxable compensation realized by the nonemployee director.
THE FOREGOING DISCUSSION IS PROVIDED AS GENERAL INFORMATION ONLY AND IS NOT
INTENDED TO BE AND DOES NOT CONSTITUTE SPECIFIC TAX ADVICE. IN ADDITION, IT DOES
NOT ADDRESS THE IMPACT OF STATE AND LOCAL TAXES OR SECURITIES LAWS RESTRICTIONS.
ACCOUNTING TREATMENT OF RETAINERS. The issuance of shares in payment of
annual retainers will result in compensation expense based on the fair market
value of such shares.
GENERAL. Authorized but unissued shares of New Grace Common Stock, as well
as shares held by New Grace or a subsidiary, may be used for purposes of the
Retainer Plan.
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The Retainer Plan may be amended or terminated by the New Grace Board upon
the recommendation of the Compensation Committee without shareholder approval,
except as specified in Section 9 of the Retainer Plan.
The text of the Retainer Plan is set forth in full below.
GRACE HOLDING, INC.
1996 STOCK RETAINER PLAN FOR NONEMPLOYEE DIRECTORS
1. Purposes: The purposes of this Plan are (a) to further the identity of
interests of nonemployee directors of the Company with the interests of the
Company's shareholders, (b) to stimulate and sustain constructive and
imaginative thinking by such nonemployee directors, and (c) to induce the
service or continued service of the most highly qualified individuals to serve
as nonemployee directors of the Company.
2. Definitions: When used in this Plan, the following terms shall have
the meanings set forth in this section 2.
Board of Directors: The Board of Directors of the Company.
Common Stock: The common stock of the Company, par value $.01 per share,
or such other class of shares or other securities or property as may be
applicable pursuant to the provisions of section 6.
Company: Grace Holding, Inc., a Delaware corporation.
Fair Market Value: (a) The mean between the high and low sales prices of a
share of Common Stock in New York Stock Exchange composite transactions for the
applicable date, as reported in The Wall Street Journal or another newspaper of
general circulation, or, if no sales of shares of Common Stock were reported for
such date, for the next preceding date for which such sales were so reported, or
(b) the fair market value of a share of Common Stock determined in accordance
with any other reasonable method.
issuance (or words of similar import): The issuance of authorized but
unissued Common Stock or the transfer of issued Common Stock held by the
Company or a Subsidiary.
Nonemployee Director: An individual, not employed by the Company or a
Subsidiary, who is serving as a director of the Company.
Plan: The 1996 Stock Retainer Plan for Nonemployee Directors herein set
forth, as the same may from time to time be amended.
service: Service to the Company as a nonemployee director. "To serve" has
a correlative meaning.
Stock Retainer: An issuance of shares of Common Stock in payment of an
annual retainer for service as a nonemployee director.
Subsidiary: A corporation (or other form of business association) of which
shares (or other ownership interests) having 50% or more of the voting power
regularly entitled to vote for directors (or equivalent management rights) are
owned, directly or indirectly, by the Company.
3. Eligibility and Participation: All nonemployee directors are eligible
to participate in the Plan and each such director will participate as described
in section 5.
4. Stock Subject to this Plan:
(a) Subject to the provisions of paragraph (c) of this section 4 and
the provisions of section 6, the maximum number of shares of Common Stock
that may be issued pursuant to Stock Retainers under this Plan shall be
75,000 shares of Common Stock.
D-2
<PAGE> 108
(b) Authorized but unissued shares of Common Stock and issued shares
of Common Stock held by the Company or a Subsidiary, whether acquired
specifically for use under this Plan or otherwise, may be used for purposes
of this Plan.
(c) If any shares of Common Stock issued pursuant to a Stock Retainer
shall, after issuance, be reacquired by the Company or a Subsidiary from
the recipient of such Stock Retainer, or from the estate of such recipient,
for any reason, such shares shall no longer be charged against the
limitation provided for in paragraph (a) of this section 4 and may be
issued pursuant to Stock Retainers.
5. Stock Retainers. Stock Retainers shall be subject to the following
provisions:
(a) For the purposes of this Plan, all shares of Common Stock issued
pursuant to a Stock Retainer shall be valued at not less than 100% of the
Fair Market Value of such shares on the effective date as of which such
Stock Retainer is paid, regardless of when such shares are actually issued
to the nonemployee director and whether or not such shares are subject to
restrictions that affect their value.
(b) Except as provided in paragraph (c) of this section 5, effective
as of July 1, 1997, and on each following July 1 through July 1, 2002, each
person serving as a nonemployee director on such July 1 will, for service
as such, be paid a Stock Retainer consisting of a whole number of shares of
Common Stock equal to the quotient obtained by dividing (i) $24,000 (the
"Retainer Amount") by (ii) the Fair Market Value of a share of Common Stock
on such July 1. To the extent that such calculation does not result in a
whole number of shares, the fractional share shall be rounded upwards to
the next whole number so that no fractional shares shall be issued.
(c) (i) In the event that a Stock Retainer is to be paid, effective
July 1 of any calendar year, to a person who shall have commenced service
as a nonemployee director subsequent to January 1 of such calendar year,
the Retainer Amount shall be proportionately reduced to reflect the
percentage of such calendar year prior to such commencement of service.
(ii) In the event that a Stock Retainer is to be paid, effective July
1 of any calendar year, to a person who shall have commenced service as a
nonemployee director prior to January 1 of such calendar year but
subsequent to July 1 of the prior calendar year, the Retainer Amount shall
be proportionately increased to reflect the percentage of the prior
calendar year during which such nonemployee director served as such;
provided, however, that this subsection shall not apply with respect to any
individual who commenced service as a nonemployee director in 1996 in
connection with the distribution of shares of Common Stock by W. R. Grace &
Co., a New York corporation.
(d) The shares referred to in paragraph (b) of this section 5 shall be
delivered to each nonemployee director as soon as practicable following
each July 1 during the term of this Plan. After the delivery of the shares,
each nonemployee director shall have all the rights of a shareholder with
respect to such shares (including the right to vote such shares and the
right to receive all dividends paid with respect to such shares).
(e) No shares will be issued in a calendar year to a nonemployee
director who, prior to July 1 of such calendar year, is removed for cause
or who voluntarily terminates service prior to retirement under the
Company's Retirement Plan for Outside Directors, as the same may be
amended.
6. Adjustment Provisions:
(a) In the event that any reclassification, split-up or consolidation
of the Common Stock shall be effected, or the outstanding shares of Common
Stock are, in connection with a merger or consolidation of the Company or a
sale by Company of all or a part of its assets, exchanged for a different
number or class of shares of stock or other securities or property of the
Company or for shares of the stock or other securities or property of any
other corporation or person, or a record date for determination of holders
of Common Stock entitled to receive a dividend payable in Common Stock
shall occur, (i) the number, class and kind of shares that may be issued
pursuant to Stock Retainers thereafter paid, and (ii) the
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<PAGE> 109
number, class and kind of shares that have not been issued under effective
Stock Retainers, shall in each case be equitably adjusted.
(b) In the event that any spin-off or other distribution of assets of
the Company to its shareholders (including without limitation an
extraordinary dividend) shall occur, the number, class and kind of shares
that may be issued pursuant to Stock Retainers thereafter paid shall be
equitably adjusted.
7. Term: This Plan shall be deemed adopted and shall become effective on
the date it is approved by the shareholders of the Company. No Stock Retainers
shall be paid under this Plan with respect to any period beginning after July 1,
2002.
8. General Provisions:
(a) Nothing in this Plan or in any instrument executed pursuant hereto
shall confer upon any person any right to continue to serve as a
nonemployee director of the Company.
(b) No shares of Common Stock shall be issued pursuant to a Stock
Retainer unless and until all legal requirements applicable to the issuance
of such shares have, in the opinion of counsel to the Company, been
complied with. In connection with any such issuance, the person acquiring
the shares shall, if requested by the Company, give assurances,
satisfactory to counsel to the Company, in respect of such matters as the
Company or a Subsidiary may deem desirable to assure compliance with all
applicable legal requirements.
(c) No person, individually or as a member of a group, and no
beneficiary or other person claiming under or through him, shall have any
right, title or interest in or to any shares of Common Stock allocated or
reserved for the purposes of this Plan or subject to any Stock Retainer
except as to such shares of Common Stock if any, as shall have been issued
to him.
(d) Nothing in this Plan is intended to be a substitute for, or shall
preclude or limit the establishment or continuation of, any other plan,
practice or arrangement for the payment of compensation or benefits to
nonemployee directors that the Company now has or may hereafter put into
effect.
9. Amendments and Termination:
(a) This Plan may be terminated, suspended or amended at any time by
the Board of Directors upon the recommendation of its Compensation,
Employee Benefits and Stock Incentive Committee; provided, however, that no
amendment shall become effective without the approval of the shareholders
of the Company to the extent shareholder approval is required by applicable
law.
(b) No termination, suspension or amendment of this Plan shall
adversely affect any Stock Retainer theretofore paid.
D-4
<PAGE> 110
ANNEX E
The following is an excerpt from the Grace New York's 1996 Proxy Statement.
The following excerpt does not purport to be complete and is qualified in its
entirety by reference to such Proxy Statement itself, which has been filed with
the Securities and Exchange Commission. As used herein, the "Company" refers to
Grace New York and/or one or more of its subsidiaries.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information concerning
the 1995 compensation of (1) Mr. Costello, the Company's chief executive officer
since May 1, 1995; (2) the other four most highly compensated executive officers
of the Company who were serving as such at year-end 1995; (3) J.P. Bolduc, who
served as the Company's chief executive officer from January 1 to March 2, 1995;
(4) Mr. Holmes, who was the Company's Acting President and Chief Executive
Officer from March 2 to May 1, 1995; and (5) F. Peter Boer and Brian J. Smith,
who resigned as executive officers on June 15, 1995 and July 18, 1995,
respectively, and whose compensation would have been reportable under clause (2)
above but for the fact that they were not executive officers of the Company at
year-end 1995. Certain information has been omitted from the Summary
Compensation Table because it is not applicable or because it is not required
under SEC rules. See "Resignations of Executive Officers" below for additional
information.
Mr. Holmes did not participate in any of the Company's executive
compensation plans and programs during his tenure as Acting President and Chief
Executive Officer of the Company; accordingly, the disclosures relating to such
plans and programs in and following the Summary Compensation Table do not
contain any information concerning Mr. Holmes.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
AWARDS(A) PAYOUTS
ANNUAL COMPENSATION ------------- ----------
------------------------------------------- NO. OF SHARES
OTHER UNDERLYING
NAME AND ANNUAL OPTIONS LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED PAYOUTS(B) COMPENSATION (C)
- ---------------------- ---- -------- ---------- ------------ ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
A. J. Costello........ 1995 $600,000 $ 900,000 $106,599 300,000
Chairman, President
and Chief Executive
Officer
J-L. Greze............ 1995 335,000 320,000 42,191 36,000 $ 108,905 $ 50,191
Executive Vice 1994 323,333 400,000 22,166 30,000 31,451
President 1993 300,000 175,000 14,676 30,000 108,905 30,841
C. L. Hampers......... 1995 821,068 422,755 210,915(d) 70,000 105,564
Executive Vice 1994 786,250 720,000 85,425 70,000 89,278
President 1993 736,000 600,000 52,098 70,000 1,012,000 90,391
P. D. Houchin......... 1995 250,604 250,000 638 22,000 21,389 25,941
Senior Vice
President and Chief
Financial Officer(e)
D. H. Kohnken......... 1995 371,725 394,000 9,576 60,000 153,716 55,567
Executive Vice 1994 357,000 410,000 86 50,000 36,200
President 1993 357,000 310,000 2,372 50,000 157,167 33,948
J. P. Bolduc.......... 1995 225,000 122,809(f) 391,201 6,496,477
President and Chief 1994 883,333 1,262,000 283,320 100,000 176,969
Executive Officer 1993 800,000 986,000 9,470 100,000 389,700 177,756
T. A. Holmes.......... 1995 174,231 5,709
Acting President and
Chief Executive
Officer
F. P. Boer............ 1995 343,400 180,000 9,467 30,000 132,779 59,349
Executive Vice 1994 343,400 180,000 52,759 30,000 43,407
President 1993 343,400 150,000 5,696 30,000 132,223 46,855
</TABLE>
E-1
<PAGE> 111
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
AWARDS(A) PAYOUTS
ANNUAL COMPENSATION ------------- ----------
------------------------------------------- NO. OF SHARES
OTHER UNDERLYING
NAME AND ANNUAL OPTIONS LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED PAYOUTS(B) COMPENSATION (C)
- ---------------------- ---- -------- ---------- ------------ ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
B. J. Smith........... 1995 345,000 400,000 9,087 50,000 176,746 65,675
Executive Vice 1994 335,333 400,000 333 40,000 43,373
President and Chief 1993 316,000 300,000 5,414 40,000 176,022 42,250
Financial Officer
</TABLE>
- ---------------
(a) No restricted share awards have been made to any of the executive officers
named in the above table since 1992. The number and dollar values of the
restricted shares held at December 31, 1995 by the persons named in the
table were as follows: Mr. Kohnken -- 12,676 shares ($749,469); and Mr.
Smith -- 11,150 shares ($659,244). Recipients of restricted shares receive
all dividends paid on such shares.
(b) Except as to Dr. Hampers, the amounts in this column represent the second
installment and the third and final installment (paid or payable in 1993 and
1995, respectively) of awards under the Company's Long-Term Incentive
Program ("LTIP") for the 1990-1992 Performance Period; the 1993 payments
were to have been made in early 1994 but were made in 1993 to facilitate tax
planning. Dr. Hampers did not participate in the LTIP for the 1990-1992
Performance Period. No payments were made under the LTIP in 1994. See Note
(c) below for information concerning payments made to Mr. Bolduc with
respect to the 1993-1995 and 1994-1996 Performance Periods under the LTIP in
connection with his resignation.
The amount shown in this column for Dr. Hampers represents the second of two
payments in connection with the Company's 1989 purchase of the NMC stock not
already owned by the Company. In early 1989, the Company agreed to purchase
such stock in 1992 for approximately $27 million, subject to NMC's
achievement of certain targets relating to earnings and return on capital;
approximately 79% of such stock was owned by Dr. Hampers. However, later in
1989, the Company purchased the stock for approximately $14 million ($13
million less than initially agreed to). In consideration for their agreement
to accelerate the transaction, the Company agreed to make a payment to the
NMC shareholders (including Dr. Hampers) in 1993 based on NMC's earnings
during the 1990-1992 period. As a result of NMC's performance during this
period, the payment to Dr. Hampers amounted to $27,480,000, of which
$26,468,000 was paid in 1992 to facilitate tax planning.
(c) The amounts in this column for 1995 consist of the following: (1) the
actuarially determined value of Company-paid premiums on "split-dollar" life
insurance, as follows: Mr. Greze -- $12,918; Dr. Hampers -- $59,332; Mr.
Houchin -- $9,433; Mr. Kohnken -- $10,737; Mr. Bolduc -- $75,419; Dr.
Boer -- $25,087; and Mr. Smith -- $18,619; (2) payments made to persons
whose personal and/or Company contributions to the Company's Salaried
Employees Savings and Investment Plan ("Savings Plan") would be subject to
limitations under federal income tax law, as follows: Mr. Greze -- $17,550;
Dr. Hampers -- $46,232; Mr. Houchin -- $9,018; Mr. Kohnken -- $18,951; Mr.
Bolduc -- $40,110; Dr. Boer -- $11,202; and Mr. Smith -- $17,850; (3)
Company contributions to such Plan of $4,500 for each of Messrs. Greze,
Houchin, Kohnken, Bolduc and Smith and Dr. Boer; (4) $9,557 of imputed
interest on a loan made to Mr. Bolduc in 1987 (see "Relationships and
Transactions with Management and Others" below); (5) interest on
involuntarily deferred payments of awards under the LTIP, as follows: Mr.
Greze -- $15,223; Mr. Houchin -- $2,990; Mr. Kohnken -- $21,469; Mr.
Bolduc -- $54,683; Dr. Boer -- $18,560; and Mr. Smith -- $24,706; and (6) in
the case of Mr. Bolduc, $6,312,208 paid in connection with the termination
of his employment agreement and with respect to the 1993-1995 and 1994-1996
Performance Periods under the LTIP (see "Resignations of Executive Officers"
below for additional information).
(d) This amount includes the value of personal benefits received by Dr. Hampers
during 1995, including $111,481 attributable to his personal use of
corporate aircraft.
(e) Mr. Houchin became an executive officer of the Company during 1995.
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(f) This amount includes the value of personal benefits received by Mr. Bolduc
during 1995, including $80,526 attributable to an automobile transferred to
him as part of his termination arrangements. See "Resignations of Executive
Officers" below for additional information.
Stock Options. The following table sets forth information concerning stock
options granted in 1995, including the potential realizable value of each grant
assuming that the market value of the Company's Common Stock appreciates from
the date of grant to the expiration of the option at annualized rates of (a) 5%
and (b) 10%, in each case compounded annually over the term of the option. These
assumed rates of appreciation have been specified by the SEC for illustrative
purposes only and are not intended to predict future prices of the Company's
Common Stock, which will depend upon various factors, including market
conditions and the Company's future performance and prospects. For example, the
option granted to Mr. Costello in 1995 would produce the pretax gain of
$25,041,690 shown in the table only if the market price of the Common Stock
rises to nearly $136 per share by the time the option is exercised. Based on the
number and market price of the shares outstanding at year-end 1995, such an
increase in the price of the Common Stock would produce a corresponding
aggregate pretax gain of $9.2 billion for the Company's shareholders. Options
become exercisable at the time or times determined by the Compensation
Committee. Except for the options granted to Mr. Costello, the options shown
below were exercisable in full at the date of grant; Mr. Costello's options
become exercisable in three approximately equal annual installments beginning
one year after the date of grant or upon the earlier occurrence of a "change in
control" of the Company or certain other events, as specified in his employment
agreement (see "Employment Agreements" below). All of the options shown below
have exercise prices equal to the fair market value of the Common Stock at the
date of grant.
<TABLE>
<CAPTION>
1995 GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF STOCK
NO. OF SHARES OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------------------
NAME GRANTED IN 1995* ($/SHARE) DATE 5% 10%
- -------------------------- ------------- ---------- --------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
A.J. Costello............. 300,000 17.6% $52.375 4/30/05 $ 9,881,520 $ 25,041,690
J-L. Greze................ 36,000 2.1 44.50 3/1/05 1,007,489 2,553,174
C.L. Hampers.............. 70,000 4.1 44.50 3/1/05 1,959,006 4,964,505
P.D. Houchin.............. 22,000 1.3 44.50 3/1/05 615,688 1,560,273
D.H. Kohnken.............. 60,000 3.5 44.50 3/1/05 1,679,148 4,255,290
J.P. Bolduc............... -0- -- -- -- -- --
F.P. Boer................. 30,000 1.8 44.50 3/1/05 839,574 2,127,645
B.J. Smith................ 50,000 2.9 44.50 3/1/05 1,399,290 3,546,075
All Shareholders.......... -- -- -- -- 3,622,755,348 9,180,769,818
Named Executive Officers'
Percentage of Realizable
Value Gained by All
Shareholders............ -- -- -- -- 0.5% 0.5%
</TABLE>
- ---------------
* In 1995, options were granted covering 1,704,150 shares of Common Stock,
including an option covering 40,000 shares granted to D. Walter Robbins, Jr.,
a former director of the Company, in his capacity as a consultant to the
Company (see "Directors' Compensation and Consulting Arrangements" below).
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The following table sets forth information concerning stock options
exercised in 1995, including the "value realized" upon exercise (the difference
between the total exercise price of the options exercised and the market value,
at the date of exercise, of the shares acquired), and the value of unexercised
"in-the-money" options held at December 31, 1995 (the difference between the
aggregate exercise price of all such options held and the market value of the
shares covered by such options at December 31, 1995).
<TABLE>
<CAPTION>
OPTION EXERCISES IN 1995 AND OPTION VALUES AT 12/31/95
----------------------------------------------------------------------
NUMBER OF VALUE OF
SHARES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NO. OF SHARES 12/31/95 12/31/95
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED($) UNEXERCISABLE UNEXERCISABLE*
- --------------------------------- ------------- ----------- ----------------- --------------------
<S> <C> <C> <C> <C>
A.J. Costello.................... -0- -0- 0/300,000 $ -/2,006,250
J-L. Greze....................... -0- -0- 168,000/0 3,391,344/-
P.D. Houchin..................... -0- -0- 94,000/0 1,732,000/-
C.L. Hampers..................... -0- -0- 290,000/0 5,305,625/-
D.H. Kohnken..................... -0- -0- 275,500/49,000 5,822,875/869,441
J.P. Bolduc...................... 655,000 $13,094,423 0/0 0/0
F.P. Boer........................ 130,000 2,833,438 177,500/0 3,054,071/-
B.J. Smith....................... 170,000 3,850,938 35,000/47,500 509,688/842,826
</TABLE>
- ---------------
* Except for Messrs. Costello, Kohnken and Smith, none of the individuals listed
in the table held unexercisable options at year-end 1995.
LTIP. Under the LTIP as in effect during 1995, executive officers and
other senior managers could be granted contingent "Performance Units" under
which awards could be earned based on (1) value contribution performance
(measured by the extent to which the return on gross assets of the participant's
product line or other unit, or, in the case of corporate participants, the
Company, exceeds the cost of capital by a specified targeted amount), and/or (2)
shareholder value performance (measured by appreciation in the price of the
Common Stock and dividends paid) as compared to that of the companies in the
Standard & Poor's Industrials, during a three-year "Performance Period." It is
anticipated that a new three-year Performance Period will commence each year and
that contingent Performance Units will be granted for each such Performance
Period (however, the terms of such contingent Performance Units granted
subsequent to 1995 will differ from those granted in 1995, as discussed below
under "Approval of Long-Term Incentive Program"). Performance Units granted in
1995 to employees of product lines were weighted 67% on the value contribution
performance of their respective product lines or other units, and 33% on
shareholder value performance, during the Performance Period; Performance Units
granted to corporate employees were weighted 50% on the basis of the Company's
value contribution performance and 50% on the basis of shareholder value
performance during the Performance Period. The number of Performance Units
earned under the LTIP may be decreased by up to 20%, at the discretion of the
Compensation Committee, based upon individual performance.
Amounts, if any, earned under Performance Units are paid following the end
of each Performance Period. In keeping with the Company's compensation
philosophy of uniting executive interests with those of the shareholders (see
"Report of the Compensation Committee on Executive Compensation -- Stock
Ownership Guidelines" below), any such payments may be made up to 100% in shares
of Common Stock issued under the Company's stock incentive plans (subject to
shareholder approval, as discussed below under "Approval of Long-Term Incentive
Program"); however, the Compensation Committee has authority to reduce the
portion of earned Performance Units payable in Common Stock or to pay such Units
entirely in cash.
E-4
<PAGE> 114
The following table shows the Performance Units granted during 1995 to the
executive officers named in the Summary Compensation Table. Half of the
Performance Units granted to Mr. Greze and Dr. Hampers are weighted 50%/50%, as
discussed above, and the other half are weighted 67%/33%, as discussed above;
the Performance Units granted to the other recipients are all weighted 50%/50%.
<TABLE>
<CAPTION>
1995 AWARDS OF CONTINGENT PERFORMANCE UNITS UNDER LTIP
---------------------------------------------------------------
MAXIMUM
NUMBER PERFORMANCE NUMBER OF
NAME OF UNITS PERIOD THRESHOLD(A)(B) TARGET(B)(C) UNITS (D)
- -------------------------------------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
A. J. Costello........................ 5,600 1993-1995 $0 or $ 55,164 $ 330,750 56,000
13,950 1994-1996 0 or 162,750 976,500 139,500
22,275 1995-1997 0 or 80 1,782,000 222,750
J.L. Greze............................ 9,000 1995-1997 0 or 80 720,000 90,000
C.L. Hampers.......................... 17,500 1995-1997 0 or 80 1,400,000 175,000
P.D. Houchin.......................... 5,500 1995-1997 0 or 80 440,000 55,000
D.H. Kohnken.......................... 15,000 1995-1997 0 or 80 1,200,000 150,000
J.P. Bolduc........................... -0- -- -- -- -- --
B.J. Smith............................ 12,500 1995-1997 0 or 80 1,000,000 125,000
F.P. Boer............................. 7,500 1995-1997 0 or 80 600,000 75,000
</TABLE>
- ---------------
(a) Refers to the minimum amount payable under the LTIP with respect to the
indicated Performance Period. No payment will be made unless the minimum
targeted level of pretax earnings or shareholder value performance is
achieved with respect to the 1993-1995 and 1994-1996 Performance Periods,
and no payment will be made unless the minimum targeted level of value
contribution or shareholder value performance is achieved with respect to
the 1995-1997 Performance Period. The "threshold" payments will be made if
the minimum targeted level of value contribution performance is achieved
with regard to the 1995-1997 Performance Period. With respect to the
1993-1995 and 1994-1996 Performance Periods, the "threshold" payments will
be made if either the minimum targeted level of pretax earnings or
shareholder value performance is achieved.
(b) The threshold and target payments shown in the table have been calculated on
the basis of a per share market price of the Common Stock of $59.0625 at the
end of the 1993-1995 Performance Period, and on assumed per share market
prices of $70 and $80 at the end of the 1994-1996 and 1995-1997 Performance
Periods, respectively.
(c) Refers to the amount payable with respect to the 1995-1997 Performance
Period if the minimum targeted levels of both value contribution and
shareholder value performance are achieved.
(d) Refers to the maximum number of Performance Units that can be earned with
respect to the Performance Periods under the LTIP, as amended.
Employees to whom Performance Units are granted also receive grants of
stock options based on the number of Performance Units granted. Information
concerning options granted to the above executive officers in 1995 appears under
"Stock Options" above.
Additional information concerning the LTIP is set forth below under
"Approval of Long-Term Incentive Program."
Pension Arrangements. Salaried employees of designated units of the
Company who are 21 or older and who have one or more years of service are
eligible to participate in the Company's Retirement Plan for Salaried Employees.
Under this basic retirement plan, pension benefits are based upon (1) the
employee's average annual compensation for the 60 consecutive months in which
his or her compensation is highest during the last 180 months of continuous
participation and (2) the number of years of the employee's credited service.
For purposes of this basic retirement plan, compensation generally includes
nondeferred base salary and nondeferred annual incentive compensation (bonus)
awards; however, for 1995, federal income tax law limited to $150,000 the annual
compensation on which benefits under this plan may be based.
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<PAGE> 115
The Company also has a Supplemental Executive Retirement Plan under which a
covered employee will receive the full pension to which he or she would be
entitled in the absence of the above and other limitations imposed under federal
income tax law. In addition, this supplemental plan recognizes deferred base
salary, deferred annual incentive compensation awards and, in some cases,
periods of employment with the Company during which an employee was ineligible
to participate in the basic retirement plan. An employee will generally be
eligible to participate in the supplemental plan if he or she has an annual base
salary of at least $75,000 and is earning credited service under the basic
retirement plan.
The following table shows the annual pensions payable under the basic and
supplemental plans for different levels of compensation and years of credited
service. The amounts shown have been computed on the assumption that the
employee retired at age 65 on January 1, 1996, with benefits payable on a
straight life annuity basis. Such amounts are subject to (but do not reflect) an
offset of 1.25% of the employee's primary Social Security benefit at retirement
age for each year of credited service under the basic and supplemental plans.
<TABLE>
<CAPTION>
HIGHEST YEARS OF CREDITED SERVICE
AVERAGE ANNUAL ---------------------------------------------------------------------
COMPENSATION 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- -------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 100,000...................... $ 15,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
200,000...................... 30,000 45,000 60,000 75,000 90,000 105,000
300,000...................... 45,000 67,500 90,000 112,500 135,000 157,000
400,000...................... 60,000 90,000 120,000 150,000 180,000 210,000
500,000...................... 75,000 112,500 150,000 187,500 225,000 262,500
600,000...................... 90,000 135,000 180,000 225,000 270,000 315,000
700,000...................... 105,000 157,500 210,000 262,500 315,000 367,500
800,000...................... 120,000 180,000 240,000 300,000 360,000 420,000
900,000...................... 135,000 202,500 270,000 337,500 405,000 472,500
1,000,000...................... 150,000 225,000 300,000 375,000 450,000 525,000
1,100,000...................... 165,000 247,500 330,000 412,500 495,000 577,500
1,200,000...................... 180,000 270,000 360,000 450,000 540,000 630,000
1,300,000...................... 195,000 292,500 390,000 487,500 585,000 682,500
1,400,000...................... 210,000 315,000 420,000 525,000 630,000 735,000
1,500,000...................... 225,000 337,500 450,000 562,500 675,000 787,500
</TABLE>
Messrs. Costello, Houchin, Kohnken, Bolduc and Smith and Dr. Boer had 0, 3,
27, 11, 21 and 12 years of credited service, respectively, under the basic and
supplemental retirement plans at year-end 1995 (March 31, 1995 in the case of
Mr. Bolduc). For purposes of those plans, the 1995 compensation of such
executive officers was as follows: Mr. Costello -- $600,000; Mr.
Houchin -- $450,604; Mr. Kohnken -- $781,725; Mr. Bolduc -- $1,487,000; Dr.
Boer -- $523,400; and Mr. Smith -- $745,000. Neither Mr. Greze nor Dr. Hampers
is covered by the basic or supplemental plan. At year-end 1995, the accrued
annual benefit payable to Mr. Greze at age 65 under the Company's Swiss pension
plan was approximately $314,040, and the accrued annual benefit payable to Dr.
Hampers at age 65 under the NMC retirement plan (in which he is an inactive
participant) was approximately $120,000. The Company has agreed to provide
certain pension benefits to Messrs. Bolduc and Greze and Dr. Hampers (see
"Employment Agreements" and "Resignations of Executive Officers" below).
Directors' Compensation and Consulting Arrangements. Under the Company's
compensation program for nonemployee directors, (1) each nonemployee director
receives an annual retainer of $24,000, payable in shares of the Company's
Common Stock; (2) the Chairmen of the Audit and Compensation Committees receive
annual cash retainers of $12,000, and the Chairmen of the Nominating Committee
and the Committee on Corporate Responsibility receive annual cash retainers of
$2,000; and (3) each nonemployee director receives $2,000 in cash for each Board
meeting and $1,000 for each committee meeting attended (except that committee
chairmen receive $1,200 per committee meeting).
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<PAGE> 116
Nonemployee directors are reimbursed for expenses they incur in attending
Board and committee meetings, and the Company maintains business travel accident
insurance coverage for them. In addition, nonemployee directors receive a fee of
$1,000 per day for work performed at the Company's request.
A director may defer payment of all or part of the fees received for
attending Board and committee meetings and/or the cash retainers referred to
above. The amounts deferred (plus an interest equivalent) are payable to the
director or his or her heirs or beneficiaries in a lump sum or in quarterly
installments over two to 20 years following a date specified by the director.
The interest equivalent on amounts deferred is computed at the higher of (1) the
prime rate plus two percentage points and (2) 120% of the prime rate, in either
case compounded semiannually. This program provides for the payment of
additional survivors' benefits in certain circumstances.
The Company also has a retirement plan under which a person who has been a
nonemployee director for more than four years will receive annual payments of
$24,000 for a period equal to the length of service as a nonemployee director
(but not more than 15 years) after the director ceases to be eligible to receive
directors' fees. In the event of a director's death, payments are made to his or
her surviving spouse.
The Company has consulting agreements with Kamsky Associates Inc. (of which
Ms. Kamsky is president and co-chief executive officer) relating to the
Company's interests in The People's Republic of China. The agreements expire in
1997 (subject to earlier termination) and provide for monthly fees of $25,000,
plus additional payments based on the extent to which the Company establishes
certain business relationships in The People's Republic of China. In 1995, the
Company paid fees totaling $300,000 under these agreements. The Company also has
a consulting agreement with another company of which Ms. Kamsky is a principal
relating to business opportunities in nine other countries in the Asia Pacific
region. The agreement expires in 1997 (or earlier, in certain cases) and
currently provides for monthly fees of $10,000, plus additional payments based
on the extent to which the Company establishes certain business relationships in
the relevant countries. The Company paid Ms. Kamsky $120,000 under this
agreement in 1995. The foregoing description does not purport to be complete and
is qualified in its entirety by reference to the agreements referred to above,
which have been filed with the SEC as exhibits to the Company's Annual Reports
on Form 10-K for the years ended December 31, 1992 and 1994, respectively, and
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995.
George P. Jenkins, D. Walter Robbins, Jr. and David L. Yunich were
directors of the Company who retired on May 10, 1995. The Company had consulting
arrangements with Mr. Jenkins (relating to pension and savings plan investment
management), Mr. Robbins (relating to pension investment management and
divestitures) and Mr. Yunich (relating to corporate investments) under which
they received fees totaling $200,000, $350,000 and $225,000, respectively, in
1995. During 1995, the Company also granted a stock option covering 40,000
shares of Common Stock to Mr. Robbins (in his capacity as a consultant) at an
exercise price of $44.50 per share (see "Stock Options" above). In addition,
during 1995 the Company provided car services to Messrs. Jenkins and Yunich at a
cost to the Company of approximately $47,000 and $13,000, respectively. The
consulting arrangements with Messrs. Jenkins, Robbins and Yunich were terminated
by the Company during 1995.
As previously reported, in 1991 the Company granted Mr. Yunich an option to
purchase a portion of a minority investment held by the Company; in 1995, he
received net proceeds of $126,000 upon the cancellation of the option in
connection with the Company's sale of such investment.
Effective December 1, 1995, the Company entered into a consulting agreement
with Gordon J. Humphrey, who resigned as a director in November 1995. Under the
agreement, Mr. Humphrey is to provide such services as are assigned to him by
the Company, including promoting projects related to the Company's business
interests in the Commonwealth of Independent States. The agreement expires in
November 1997 (subject to earlier termination in certain circumstances) and
provides for a monthly retainer of $5,000 plus such additional fees as may be
agreed to in connection with specific projects. During 1995, Mr. Humphrey earned
$5,000 under the agreement. The foregoing description does not purport to be
complete and is qualified in its entirety by reference to the agreement, which
has been filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
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<PAGE> 117
Arrangements with J. Peter Grace, Jr. J. Peter Grace, Jr. served as the
Company's Chief Executive Officer for 48 years until his retirement at year-end
1992; following his retirement, he continued to serve as the Company's Chairman
until his death in April 1995. Upon his retirement as Chief Executive Officer,
Mr. Grace entered into an agreement ("Grace Retirement Agreement") with the
Company under which, among other things, he agreed to act as a consultant to the
Company and provide such consulting services as the Board requested; for such
consulting arrangement, Mr. Grace received a fee of $50,000 per month from
January 1993 until his death.
The Grace Retirement Agreement provided for a pension of $1 million per
year to Mr. Grace until his death (and thereafter, to his wife until her death)
in lieu of any other pension to which Mr. Grace might otherwise have been
entitled. The Grace Retirement Agreement also provided benefits and arrangements
to Mr. Grace consisting of: (1) a continuation of insurance benefits in effect
on the date of such Agreement, consisting of (a) basic life insurance in the
amount of $900,000 (for which the cost to the Company was approximately $33,695
in 1995), (b) payment of a portion of the premium for supplemental life
insurance in the amount of $750,000 (for which the cost to the Company was
approximately $18,046 in 1995), (c) business travel accident insurance in the
amount of $1.5 million (for which the cost to the Company was approximately
$1,338 in 1995) and (d) voluntary group accident insurance in the amount of
$350,000 (for which Mr. Grace paid the full premium); (2) a "gross-up" payment
to cover income tax obligations for 1995 in respect of the foregoing insurance
benefits (with respect to which the Company paid approximately $31,633 in 1995);
and (3) a continuation of all other benefits and arrangements provided to Mr.
Grace as Chief Executive Officer, which included private nursing services and
related expenses (for which the cost to the Company was approximately $96,900 in
1995), security services (for which the cost to the Company was approximately
$102,400 in 1995), the services of a cook (for which the cost to the Company was
approximately $12,700 in 1995), the use of an apartment (for which the cost to
the Company was approximately $81,430 in 1995), limousine services (for which
the cost to the Company was approximately $59,700 in 1995), and club membership
dues (for which the cost to the Company was approximately $8,700 in 1995). In
addition, the Grace Retirement Agreement provided for Mr. Grace's continued use
of Company aircraft, consistent with the Company's policy of making Company
aircraft available for the use of certain senior executives. The value of such
usage to Mr. Grace in 1995, calculated in accordance with the Standard Industry
Fare Level method of Internal Revenue Service guidelines, was approximately
$3,600. The costs for the benefits and arrangements listed in this paragraph
have been stated on a pre-tax basis. In addition, until his death, the Company
provided Mr. Grace with office space, secretarial services and business expense
reimbursement (including reimbursement for business travel and entertainment
expenses), as well as medical insurance coverage in accordance with the
Company's policies applicable to retirees generally, subject to payment by Mr.
Grace of a portion of the premium on the same basis as other retirees.
Employment Agreements. The Company has an employment agreement with Mr.
Costello providing for his service as the Company's Chairman, President and
Chief Executive Officer through April 1998, subject to (1) earlier termination
in certain circumstances and (2) automatic one-year extensions unless either
party gives notice that the agreement is not to be extended. The agreement also
provides that Mr. Costello will stand for election as a director during its
term. Under the agreement, Mr. Costello is entitled to an annual base salary of
at least $900,000; an annual incentive compensation award (bonus) of at least
$900,000 for 1995 and awards thereafter based on the performance of the Company,
in accordance with its annual incentive compensation program; participation in
the LTIP on the same basis as other senior executives (including the grant of
the awards for the 1993-1995, 1994-1996 and 1995-1997 Performance Periods set
forth above under "LTIP"); grants of stock options (including those granted to
him in 1995, as set forth above under "Stock Options"); and participation in all
other compensation and benefit plans and programs generally available to senior
executives of the Company. The agreement also provides for payments in the case
of Mr. Costello's disability or death, or the termination of his employment with
or without cause, including termination following a "change in control" and
termination by Mr. Costello for "good reason." For purposes of the agreement,
"change in control" means the acquisition of 20% or more of the Company's Common
Stock, the failure of Company-nominated directors to constitute a majority of
any class of the Board of Directors, or the occurrence of a transaction in which
the Company's shareholders immediately preceding such transaction do not own
more than 50% of the combined voting power of the corporation resulting from
such transaction;
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<PAGE> 118
however, the Board of Directors has authorized, and Mr. Costello has agreed to,
the amendment of the agreement so as to (1) increase such percentage from 50% to
60%, (2) exempt from the definition of "change in control" the previously
reported transaction between the Company and Fresenius AG (which is described in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
and (3) expand such definition to include the liquidation or dissolution of the
Company. In the event of the termination of Mr. Costello's employment following
a change in control, he would receive a multiple of the sum of his annual base
salary plus bonus, pro rated bonus and LTIP awards, earned but unpaid
compensation, and the balance of the LTIP awards for all Performance Periods
during which the change in control takes place. The foregoing description of Mr.
Costello's employment agreement does not purport to be complete and is qualified
in its entirety by reference to such agreement, which has been filed with the
SEC as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995.
Prior to his retirement in February 1996, the Company had an agreement with
Mr. Greze relating to his assignment an Executive Vice President of the Company
and head of its global packaging business and his related relocation from
Switzerland to the United States. The agreement provided that the Company would
pay tuition and related fees in connection with the education of Mr. Greze's son
(up to, but not including, college); reimburse Mr. Greze for the cost of one
round trip between Florida and Switzerland for his family each year; and provide
Mr. Greze with a Company-leased car. The agreement also provided for the loan
referred to below under "Relationships and Transactions with Management and
Others;" for arrangements relating to his return to Switzerland following the
end of his assignment (including reimbursement for the cost of his family's move
to Switzerland and provisions relating to the sale of his Florida residence in
accordance with the Company's policy applicable to expatriate employees
generally); and for Mr. Greze's continued participation in the Company's Swiss
pension plan and the payment of pension benefits under that plan based on a
schedule of final average salary, including payment if Mr. Greze's employment
had been involuntarily terminated (not for cause) prior to August 1, 1996.
Dr. Hampers has an employment agreement that originally provided for his
employment as an Executive Vice President of the Company and head of its health
care business through March 1996, at which time he would have the right to
become a consultant to the Company for a five-year period for an annual
consulting fee equal to 50% of his annual base salary, subject to cost-of-living
adjustments. In March 1996, the Company and Dr. Hampers agreed to extend his
employment until the first to occur of (1) December 31, 1996 or (2) completion
of the transaction with Fresenius AG. The agreement, as extended, provides that
Dr. Hampers will resign from the Board upon termination of his employment, as
described above. Under the agreement, Dr. Hampers was initially entitled to an
annual base salary of at least $675,000, subject to increases of at least 9%
every 18 months, and to participate in the Company's annual incentive
compensation (bonus) program. The agreement also provides for benefits generally
available to senior executives of the Company, as well as the use of a corporate
aircraft (and an option to purchase the aircraft at its fair market value upon
the termination of his employment or consulting relationship). Further, the
agreement entitles Dr. Hampers to a supplementary annual pension benefit equal
to the amount by which (1) the lesser of (a) $300,000 and (b) three times his
actual annual pension benefit exceeds (2) such actual pension benefit, subject
to certain cost-of-living adjustments. The agreement prohibits Dr. Hampers from
engaging in certain competitive activities during its term and for three years
thereafter and provides for the continuation of compensation for the term of the
agreement in the event his employment terminates other than for cause. The
foregoing description of Dr. Hampers' employment agreement does not purport to
be complete and is qualified in its entirety by reference to such agreement,
which was filed with the SEC as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
The Company has an employment agreement with Mr. Bolduc that was terminated
in connection with his resignation in March 1995. The agreement provided for his
employment as Chief Executive Officer of the Company through July 1999 (subject
to earlier termination in certain circumstances), but provided for automatic
one-year extensions unless either party gave notice that the agreement was not
to be extended. The agreement also provided that Mr. Bolduc would be nominated
for election as a director during the term of the agreement. Under the
agreement, Mr. Bolduc was entitled to participate in all incentive compensation
and bonus plans maintained by the Company for its senior executives and to
participate in all benefit plans
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<PAGE> 119
available to employees generally, as well as to the following: an annual base
salary of at least $800,000; an annual incentive compensation award (bonus)
equal to at least 50% of his base salary for the relevant year; an annual grant
of options covering at least 30,000 shares of Common Stock; and an annual
supplementary pension equal to the sum of the amounts payable annually under the
Company's basic and supplemental retirement plans (see "Pension Arrangements"
above), but in no event less than 50% of Mr. Bolduc's "pensionable compensation"
(annual base salary and annual incentive compensation, without giving effect to
any voluntary deferrals) during specified periods of his employment. The
agreement also provided for payments in the case of Mr. Bolduc's disability or
death or the termination of his employment with or without cause; in the latter
case, the agreement provided that Mr. Bolduc would be entitled to receive 150%
of his annual base salary for the remaining term of the agreement, subject to a
reduction of up to 50% for income earned for personal services following the
termination of his employment by the Company.
See "Resignations of Executive Officers" below for information concerning
arrangements with respect to Mr. Bolduc's resignation.
Severance Agreements. The Company has severance agreements with all of its
executive officers (other than Mr. Costello, whose employment agreement,
discussed above, provides for severance arrangements), as well as its other
officers. Each agreement provides that in the event of the involuntary
termination of the individual's employment or consulting services or a material
reduction in his or her authority or responsibility, in either case without
cause, following a change in control of the Company, he or she will receive a
severance payment equal to 2.99 times his or her average annual taxable
compensation for the five years preceding the change in control, plus certain
additional benefits, subject to reduction in certain cases to prevent the
recipient from incurring liability for excise taxes and the Company from
incurring nondeductible compensation expense. Dr. Hampers may instead elect to
receive the payments provided for under his employment agreement, if applicable.
For purposes of these severance agreements, a change in control would occur upon
the acquisition of 20% or more of the Company's Common Stock or the failure of
Company-nominated directors to constitute a majority of any class of the Board
of Directors.
The Board of Directors has authorized the amendment of such severance
agreements to conform the definition of "change in control" contained in such
agreements to the definition contained in Mr. Costello's employment agreement,
as it is to be amended (see "Employment Agreements" above). In addition,
pursuant to such amendment, the severance payment to be made under each
agreement would, until 1999, equal the greater of (1) the severance payment
described in the preceding paragraph or (2) three times the individual's annual
base salary plus bonus, plus a "gross up" payment to cover any excise tax
obligations resulting from the severance payment; in the event a change in
control occurs in 1999 or a subsequent year, the severance payment would be made
solely in accordance with clause (2).
Resignations of Executive Officers. In connection with his resignation in
March 1995, Mr. Bolduc and the Company entered into agreements providing for his
resignation and related matters ("Bolduc Resignation Arrangements"). Pursuant to
the Bolduc Resignation Arrangements, Mr. Bolduc's employment agreement with the
Company was terminated, he received a lump sum payment of $5,062,208 in
connection with the termination of the agreement and in lieu of monthly
severance payments that would otherwise have been due thereunder, and the
Company acquired from him 268,348 shares of the Company's Common Stock
(including 101,148 shares subject to restrictions on resale and 5,725 shares not
previously vested) for a purchase price of $12,075,660 (or $45 per share), less
$4,900 repaid to the Company pursuant to Section 16 of the Securities Exchange
Act of 1934, and less $400,000 in repayment of a loan made in 1987 to Mr. Bolduc
by a subsidiary of the Company. The Bolduc Resignation Arrangements also
provided for the payment to Mr. Bolduc of deferred compensation owed to him in
the aggregate principal amount of $1,529,604, plus interest, in quarterly
installments over a 10-year period commencing June 30, 1995, and for the payment
of gross pension benefits to Mr. Bolduc until his death (and, if his wife shall
survive him, to her until her death) of $848,585 per year commencing in April
1995, such pension benefits having been calculated as though Mr. Bolduc were
retiring at age 62 (rather than at his actual age of 55 years and 7 months).
Under the Bolduc Resignation Arrangements, Mr. Bolduc and his wife will continue
to receive medical coverage under the Company's retiree medical plan (subject to
payment by Mr. Bolduc of a portion of the premium on the same basis as other
retirees) and continued coverage under the Company's "split-dollar" life
insurance policy in the face amount
E-10
<PAGE> 120
of $4.5 million previously maintained for Mr. Bolduc by the Company (with annual
premiums continuing to be shared by Mr. Bolduc and the Company in accordance
with the terms of the policy at a cost to the Company of approximately $300,000
per year until 2008, at which time the Company will receive a full return of all
premiums paid). In addition, Mr. Bolduc continued to hold previously granted
options covering 655,000 shares of the Company's Common Stock (including
previously unexercisable options covering 290,000 shares that, pursuant to the
Bolduc Resignation Arrangements, became exercisable immediately and at any time
through March 31, 1998). Mr. Bolduc received a payment of $1,250,000 in payment
of his rights under the LTIP, and his balance of approximately $620,000 under
the Savings Plan was paid to him in accordance with his election under the terms
of that Plan. The Bolduc Resignation Arrangements also provided Mr. Bolduc with
ownership of a car and certain office furniture previously provided to him by
the Company for his use and provided that the Company would reimburse Mr. Bolduc
for certain legal fees associated with his resignation and that he would be
entitled to the benefit of certain rights of indemnification by the Company, as
provided in its By-laws. In addition, in connection with Mr. Bolduc's
resignation as a director, the Company confirmed to Mr. Bolduc that he would be
entitled to indemnification by the Company to the full extent permitted by New
York law with respect to his service as a director. Mr. Bolduc agreed, in the
Bolduc Resignation Arrangements, not to engage in any business which is in
substantial competition with the Company in any of the Company's then core
businesses until he reaches the age of 62. Pursuant to the Bolduc Resignation
Arrangements, Mr. Bolduc released the Company and its affiliates, as well as
certain individuals, and the Company released Mr. Bolduc, with respect to all
claims, including any matters arising out of or related to Mr. Bolduc's
employment by the Company and his resignation (other than claims arising under
the Bolduc Resignation Arrangements). The agreements providing for the Bolduc
Resignation Arrangements were filed with the SEC as exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994; the foregoing
description of such agreements does not purport to be complete and is qualified
in its entirety by reference to such agreements.
In connection with Dr. Boer's resignation as an executive officer of the
Company on June 15, 1995, he entered into an agreement with the Company
providing that (1) he would remain an employee, and continue to receive salary
and participate in the Company's benefit plans and program (other than its
Long-Term Disability Plan), through year-end 1995, at which time he would be
entitled to receive severance pay for 5 1/2 months (which, combined with the
salary received from June 15 to December 31, 1995, would equal one year of
severance pay); (2) he would be considered for an annual incentive compensation
award for 1995 consistent with the award paid to him in respect of 1994; (3) he
would remain a participant in the LTIP for the 1993-1995 Performance Period and,
on a pro rata basis, the 1994-1996 and 1995-1997 Performance Periods; (4)
certain restrictions on shares and stock options granted to him in 1991 would be
removed; and (5) his participation in the Company's split-dollar life insurance
program would be terminated, although he could elect to purchase the policy by
reimbursing the Company for the premiums paid on his behalf (approximately
$408,000). The agreement also provided that he would receive payment of amounts
due him under other Company plans and programs in accordance with their terms.
In connection with Mr. Smith's resignation as an executive officer of the
Company on July 18, 1995, he entered into arrangements with the Company
providing that (1) he would remain an employee, and continue to receive salary
and participate in the Company's benefit plans and programs (other than its
Long-Term Disability Plan), through July 1996; (2) he would be considered for an
annual incentive compensation award for 1995 consistent with the award paid to
him in respect of 1994; (3) he would remain a participant in the LTIP for the
1993-1995 Performance Period and, on a pro rata basis, the 1994-1996 and
1995-1997 Performance Periods; (4) certain restrictions on shares and stock
options granted to him in 1991 would be removed; and (5) his participation in
the Company's split-dollar life insurance program would be terminated, although
he could elect to purchase the policy by reimbursing the Company for the
premiums paid on his behalf (approximately $325,000). The agreement also
provided that he would receive payment of amounts due him under other Company
plans and programs in accordance with their terms.
The foregoing descriptions of the agreements with Dr. Boer and Mr. Smith do
not purport to be complete and are qualified in their entirety by reference to
such agreements, which have been filed with the SEC as exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
E-11
<PAGE> 121
Compensation Committee Interlocks and Insider Participation. Prior to May
10, 1995, the Compensation Committee consisted of Mr. Eckmann, as well as Roger
Milliken, John A. Puelicher and Eben W. Pyne (who retired from the Board on that
date); Peter S. Lynch (a director who has advised the Company that he will
resign from the Board effective the date of the Annual Meeting); and Robert C.
Macauley (a director who is not standing for re-election at the Annual Meeting).
On May 10, 1995, the Compensation Committee was reconstituted to consist of its
current members: Messrs. Eckmann, Holmes, Lynch and Phipps, as well as Edward W.
Duffy (a director who is not standing for re-election at the Annual Meeting). In
addition, Mr. Gossage served on the Compensation Committee from August 1995
until March 1996. As noted above, Mr. Holmes served as Acting President and
Chief Executive Officer of the Company from March 2 to May 1, 1995. During 1995,
the Company purchased approximately $1.1 million of products from, and sold
approximately $46,000 of products to, Hercules, of which Mr. Gossage is Chairman
and Chief Executive Officer. See "Report of the Compensation Committee on
Executive Compensation" below for information concerning the modification of the
Company's executive compensation program by the reconstituted Compensation
Committee.
RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT AND OTHERS
The following are descriptions of certain relationships and transactions
between the Company and its directors and executive officers (or members of
their families) and/or businesses with which they are affiliated. Information
regarding certain consulting arrangements appears above under "Directors'
Compensation and Consulting Arrangements" and "Arrangements with J. Peter Grace,
Jr." under the heading "Executive Compensation."
Commercial Transactions. Mr. Costello is a director of FMC Corp. ("FMC").
During 1995, various units of the Company purchased approximately $3.4 million
of materials and/or products from, and sold approximately $161,000 of materials
and/or products to, units of FMC.
Mr. Gossage, Chairman and Chief Executive Officer of Hercules, was a
director of the Company from July 1995 to March 1996. During 1995, the Company
purchased approximately $1.1 million of products from, and sold approximately
$46,000 of products to, Hercules.
The foregoing transactions were in the ordinary course of business and were
on terms believed to be similar to those with unaffiliated parties.
Loans to Officers. In 1987, a subsidiary of the Company made an
interest-free loan of $400,000 to Mr. Bolduc in connection with his previous
relocation to the New York City area; this loan was repaid in 1995 in connection
with Mr. Bolduc's severance arrangements (see "Executive
Compensation -- Resignations of Executive Officers" above). The Company has also
made interest-free loans to the following executive officers in connection with
relocations: Mr. Greze -- $400,000; Fred Lempereur (a Senior Vice President) --
$350,000; and Ian Priestnell (a Vice President) -- $458,000. Mr. Greze's loan is
to be repaid upon the sale of his Florida residence or, if earlier, December 31,
1996.
J. Peter Grace, III. J. Peter Grace, III is a son of J. Peter Grace, Jr.
From July 1990 until his resignation in November 1994, Mr. Grace III was the
Chairman of Grace Hotel Services Corporation ("GHSC"), a wholly owned subsidiary
of the Company engaged in the business of providing food and beverage service at
hotels. As reported in the Proxy Statement for the Company's 1995 Annual
Meeting, in connection with discussions between Mr. Grace III and the Company
regarding the possible acquisition of GHSC by Mr. Grace III and others, Mr.
Grace III formed a new corporation, HSC Holding Co., Inc. ("HSC"), to facilitate
such acquisition. Following Mr. Grace III's resignation, the Company, GHSC, Mr.
Grace III and HSC entered into negotiations providing for the repayment of all
funds that had been provided to HSC by GHSC. As a result of these negotiations,
HSC, GHSC and the Company entered into a letter agreement in December 1994
("December 1994 Letter Agreement").
Pursuant to the December 1994 Letter Agreement, HSC paid $1 million to GHSC
and deposited $381,000 into an escrow account ("Escrow Amount") pending a final
determination of the amounts due to GHSC in repayment of all working capital
provided by GHSC to HSC and for other costs and expenses
E-12
<PAGE> 122
incurred by GHSC on behalf of HSC. In March 1995, $213,425 of the Escrow Amount
was released to the Company. The Company claimed that HSC owed an additional
$201,069 to GHSC; HSC disputed this claim. Following the commencement of an
arbitration proceeding in accordance with the terms of the December 1994 Letter
Agreement, the Company and GHSC entered into a settlement agreement with HSC
pursuant to which (1) GHSC was paid $110,313 of the remaining Escrow Amount
(together with interest) and (2) the balance of the Escrow Amount was returned
to HSC.
To date, no demands from any third party have been made against either GHSC
or the Company arising out of the activities of HSC that have resulted in any
payment by either GHSC or the Company. The December 1994 Letter Agreement also
granted HSC the opportunity, on a nonexclusive basis, to acquire GHSC on or
before March 14, 1995, subject to terms and conditions to be agreed upon.
However, neither Mr. Grace III nor HSC has entered into any agreement or
understanding with the Company concerning the acquisition of GHSC, and this
provision of the December 1994 Letter Agreement has lapsed in accordance with
its terms.
The December 1994 Letter Agreement and other agreements relating to the
above matters were filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, and the settlement agreement referred to
above was filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995. The foregoing description of such
documents does not purport to be complete and is qualified in its entirety by
reference to such documents and to the Proxy Statement for the Company's 1995
Annual Meeting, which contained additional information concerning the foregoing
matters.
Legal Proceedings; Insurance; Indemnification.
[Text omitted.]
In March 1996, two purported shareholder derivative class actions were
filed in New York State Supreme Court, New York County, against the Company and
Mr. Costello alleging that the defendants breached their fiduciary duties to the
Company's shareholders by failing to investigate and consider fully a proposal
by Hercules to acquire or merge with Grace. The lawsuits seek injunctive relief
ordering defendants to carry out their fiduciary duties by considering and
evaluating such proposal, unspecified monetary damages, costs and counsel fees
and such other relief as the Court deems proper.
[Text omitted.]
The Company maintains director and officer liability insurance covering
directors and officers of the Company and its subsidiaries. Such insurance
includes, among other things, coverage with respect to claims made against
directors and officers within six years after May 10, 1995 relating to conduct
prior to that date. However, such insurance provides for various deductibles and
exclusions, some of which are substantial, and may therefore not provide
coverage with respect to all or a portion of certain claims, including certain
of the lawsuits described above. Such insurance is currently provided by
Corporate Officers' and Directors' Assurance Ltd., X.L. Insurance Company Ltd.,
Gulf Insurance Company and A.C.E. Insurance Company Ltd. under contracts dated
November 4, 1995. The annual premiums for such insurance total approximately
$1.2 million.
In April 1995, the Board of Directors resolved that the Company would
provide certain contractual rights of indemnification (including related
reimbursement and advances of expenses) to directors, and would seek to maintain
directors' and officers' liability insurance covering certain potential
obligations for at least six years, provided that the Company would not be
obligated to spend more than 150% of the then current annual premiums to
maintain such insurance.
E-13
<PAGE> 123
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
MANAGEMENT SECURITY OWNERSHIP
The following tables set forth the Common and Preferred Stock of the
Company beneficially owned at February 1, 1996 by each current director and
nominee, by each of the executive officers named in the Summary Compensation
Table set forth under "Election of Directors -- Executive Compensation" above
(other than those who resigned in 1995), and by such directors and executive
officers as a group. The tables include shares owned by (1) those persons and
their spouses, minor children and certain relatives, (2) trusts and
custodianships for their benefit and (3) trusts and other entities as to which
the persons have the power to direct the voting or investment of securities
(including shares as to which the persons disclaim beneficial ownership). The
Common Stock table includes shares in accounts under the Savings Plan and shares
covered by currently exercisable stock options; it does not reflect shares
covered by unexercisable stock options (see "Election of Directors -- Executive
Compensation -- Stock Options" above). The bracketed figures in the tables
indicate the percentage of the class represented by the shares shown (if over
1%), based on the shares outstanding at March 21, 1996. The Common and Preferred
Stocks owned by directors and executive officers as a group (excluding option
shares) at February 1, 1996 represent approximately 1.7% of the voting power of
all the Company's stock outstanding at March 21, 1996.
COMMON STOCK
<TABLE>
<CAPTION>
AMOUNT/NATURE
OF OWNERSHIP
-------------
<S> <C>
A. J. Costello*................ 5,000
G. C. Dacey.................... 1,195
E. W. Duffy.................... 2,490
H. A. Eckmann.................. 2,923
M. A. Fox...................... 200
J. W. Frick.................... 2,400
J. L. Greze.................... 26,695
168,000(O)
C. L. Hampers.................. 8,600
50,000(T)
290,000(O)
T. A. Holmes................... 3,590
P.D. Houchin................... 7,719
94,000(O)
V. A. Kamsky................... 2,100
<CAPTION>
AMOUNT/NATURE
OF OWNERSHIP
-------------
<S> <C>
D. H. Kohnken.................. 37,731
275,500(O)
P. S. Lynch.................... 6,505
R. C. Macauley................. 2,005
J. E. Phipps................... 11,090
17,450(T,S)
E. J. Sullivan................. 2,700
T. A. Vanderslice.............. 0
Various directors, executive
officers and others, as
Trustees..................... 2,696(T,S)
Directors and executive
officers as a group.......... 170,886*
50,000(T)
20,146(T,S)
1,390,834(O)
</TABLE>
PREFERRED STOCKS
<TABLE>
<CAPTION>
AMOUNT/NATURE OF OWNERSHIP
--------------------------------------
CLASS B
6% PREFERRED PREFERRED
------------------ ---------------
<S> <C> <C>
Various executive officers and others, with respect to
the W. R. Grace & Co. Retirement Plan for Salaries
Employees........................................... 9,648 (T,S)[26.5%] 959 (T,S)[4.4%]
Directors and executive officers as a group........... 9,648 (T,S)[26.5%] 959 (T,S)[4.4%]
</TABLE>
- ---------------
* Does not include 20,100 shares purchased by Mr. Costello in February 1996.
(O) Shares covered by stock options exercisable on or within 60 days after
February 1, 1996.
(T) Shares owned by trusts and other entities as to which the person has the
power to direct voting and/or investment.
(S) Shares as to which the person shares voting and/or investment power with
others.
E-14
<PAGE> 124
ANNEX F
FINANCIAL SUPPLEMENT
TO
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
W. R. GRACE & CO. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants on Financial Statement
Schedule........................................................................ F-2
Consent of Independent Certified Public Accountants............................... F-2
Report of Independent Certified Public Accountants................................ F-3
Consolidated Statement of Operations for the three years in the period ended
December 31, 1995............................................................... F-4
Consolidated Statement of Cash Flows for the three years in the period ended
December 31, 1995............................................................... F-5
Consolidated Balance Sheet at December 31, 1995 and 1994.......................... F-6
Consolidated Statement of Shareholders' Equity for the three years in the period
ended December 31, 1995......................................................... F-7
Notes to Consolidated Financial Statements........................................ F-8-F-26
Quarterly Summary and Statistical Information -- Unaudited........................ F-27
Capital Expenditures, Net Fixed Assets and Depreciation and Lease Amortization.... F-28
Financial Summary................................................................. F-29
Management's Discussion and Analysis of Results of Operations and Financial
Condition....................................................................... F-30
Financial Statement Schedule
Schedule VIII-Valuation and Qualifying Accounts and Reserves.................... F-36
Exhibit 11: Weighted Average Number of Shares and Earnings Used in Per Share
Computations.................................................................... F-37
Exhibit 12: Computation of Ratio of Earnings to Fixed Charges and Combined Fixed
Charges and Preferred Stock Dividends........................................... F-38
</TABLE>
The financial data listed above appearing in this Financial Supplement are
incorporated by reference herein. The Financial Statement Schedule should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto. Financial statements of 50%- or less-owned persons and other persons
accounted for by the equity method have been omitted as provided in Rule 3-09 of
Securities and Exchange Commission Regulation S-X. Financial Statement Schedules
not included have been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
F-1
<PAGE> 125
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of W. R. Grace & Co.
Our audits of the consolidated financial statements referred to in our report
dated January 31, 1996 appearing on page 50 of the 1995 Annual Report to
Shareholders of W. R. Grace & Co. (which report and consolidated financial
statements are included in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed on page F-1 in the Index to
Consolidated Financial Statements and Financial Statement Schedule and Exhibits
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Ft. Lauderdale, Florida
January 31, 1996
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting parts of the Registration Statements on Form S-3 (Nos. 33-51041,
33-50983 and 33-25962) and Form S-8 (Nos. 33-7504, 33-15182, 33-27960,
33-54201, 33-54203 and 33-59041) of W. R. Grace & Co. of our report dated
January 31, 1996 appearing on page 50 of the 1995 Annual Report to
Shareholders, which report is included at page F-3 of this Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule, which appears above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Ft. Lauderdale, Florida
March 29, 1996
F-2
<PAGE> 126
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, as well as the integrity and
objectivity, of the consolidated financial statements and other financial
information included in this report. Such financial information has been
prepared in conformity with generally accepted accounting principles and
accordingly includes certain amounts that represent management's best
estimates and judgments.
For many years, management has maintained internal control systems to
assist it in fulfilling its responsibility for financial reporting,
including careful selection of personnel; segregation of duties; formal
business, accounting and reporting policies and procedures; and an internal
audit function. While no system can ensure elimination of all errors and
irregularities, Grace's systems, which are reviewed and modified in response
to changing conditions, have been designed to provide reasonable assurance
that assets are safeguarded, policies and procedures are followed and
transactions are properly executed and reported. The concept of reasonable
assurance is based on the recognition that there are limitations in all
systems and that the cost of such systems should not exceed the benefits to
be derived.
The Audit Committee of the Board of Directors, which is comprised of
directors who are neither officers nor employees of nor consultants to
Grace, meets regularly with Grace's senior financial personnel, internal
auditors and independent certified public accountants to review audit plans
and results as well as the actions taken by management in discharging its
responsibilities for accounting, financial reporting and internal control
systems. The Audit Committee reports its findings, and recommends the
selection of independent certified public accountants, to the Board of
Directors. Grace's management, internal auditors and independent certified
public accountants have direct and confidential access to the Audit
Committee at all times.
The independent certified public accountants are engaged to conduct the
audits of and render a report on the consolidated financial statements in
accordance with generally accepted auditing standards. These standards
require a review of the systems of internal controls and tests of
transactions to the extent considered necessary by the independent certified
public accountants for purposes of supporting their opinion as set forth in
their report.
Albert J. Costello Peter D. Houchin
Chairman, President and Senior Vice President
Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PRICE WATERHOUSE LLP January 31, 1996
One East Broward Boulevard
Ft. Lauderdale, FL 33301
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF W. R. GRACE & CO.
In our opinion, the consolidated financial statements appearing on pages F-4
through F-25 of this report present fairly, in all material respects, the
financial position of W. R. Grace & Co. and subsidiaries (Grace) at December
31, 1995 and 1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Grace's management; our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
F-3
<PAGE> 127
CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
W. R. Grace & Co. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and revenues .................................................................. $3,665.5 $3,218.2 $2,895.5
Other income (Note 4) ............................................................... 41.9 42.6 57.8
-------- -------- --------
Total ........................................................................... 3,707.4 3,260.8 2,953.3
-------- -------- --------
Cost of goods sold and operating expenses ........................................... 2,243.7 1,900.8 1,746.7
Selling, general and administrative expenses ........................................ 905.6 773.6 673.1
Depreciation and amortization ....................................................... 186.3 165.0 153.5
Interest expense and related financing costs (Note 10) .............................. 71.3 49.5 42.9
Research and development expenses ................................................... 120.6 106.8 111.5
Corporate expenses previously allocated to health care operations ................... 37.8 37.1 37.4
Restructuring costs and asset impairments (Note 5) .................................. 179.5 -- --
Provision relating to asbestos-related liabilities and insurance coverage (Note 2) .. 275.0 316.0 159.0
-------- -------- --------
Total ........................................................................... 4,019.8 3,348.8 2,924.1
-------- -------- --------
(Loss)/income from continuing operations before income taxes ........................ (312.4) (88.0) 29.2
(Benefit from)/provision for income taxes (Note 6) .................................. (115.8) (46.6) 10.1
-------- -------- --------
(Loss)/income from continuing operations ............................................ (196.6) (41.4) 19.1
(Loss)/income from discontinued operations (Note 7) ................................. (129.3) 124.7 6.9
-------- -------- --------
Net (loss)/income ................................................................... $ (325.9) $ 83.3 $ 26.0
======== ======== ========
(Loss)/earnings per share:
Continuing operations ........................................................... $ (2.05) $ (.45) $ .20
Net (loss)/earnings ............................................................. $ (3.40) $ .88 $ .28
Fully diluted (loss)/earnings per share:
Continuing operations ........................................................... $ - (1)$ - (1)$ .20
Net (loss)/earnings ............................................................. $ - (1)$ .88 $ .28
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, pages F-8 to F-25, are integral
parts of these statements.
(1) Not presented as the effect is anti-dilutive.
F-4
<PAGE> 128
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars in millions 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
(Loss)/income from continuing operations before income taxes ...................... $ (312.4) $ (88.0) $ 29.2
Reconciliation to cash provided by operating activities:
Depreciation and amortization ................................................. 186.3 165.0 153.5
Provision relating to asbestos-related liabilities and insurance coverage ..... 275.0 316.0 159.0
Noncash charge relating to restructuring costs and asset impairments .......... 159.9 -- --
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net ............................ (44.7) (159.5) (103.2)
Increase in inventories ................................................... (62.1) (43.4) (50.5)
Net (payments for)/proceeds from settlements of interest rate agreements .. -- (4.0) 67.9
Proceeds from asbestos-related insurance settlements ...................... 257.3 138.6 74.6
Payments made for asbestos-related litigation settlements, judgments and
defense costs ............................................................ (160.3) (198.6) (177.7)
(Decrease)/increase in accounts payable ................................... (48.3) 10.3 50.1
Other ..................................................................... (21.0) 74.5 (173.9)
-------- ------- -------
Net pretax cash provided by operating activities of continuing operations ......... 229.7 210.9 29.0
Net pretax cash provided by operating activities of discontinued operations ....... 114.2 328.6 316.8
-------- ------- -------
Net pretax cash provided by operating activities .................................. 343.9 539.5 345.8
Income taxes paid ................................................................. (236.9) (86.0) (102.7)
-------- ------- -------
Net cash provided by operating activities ......................................... 107.0 453.5 243.1
-------- ------- -------
INVESTING ACTIVITIES (1)
Capital expenditures .............................................................. (537.6) (444.6) (309.6)
Businesses acquired in purchase transactions, net of cash acquired and debt assumed (37.4) (276.9) (306.6)
Increase in net assets of discontinued operations ................................. (295.2) (32.9) (43.1)
Net proceeds from divestments ..................................................... 56.7 583.9 464.8
Net proceeds from sale/leaseback transactions ..................................... -- -- 27.2
Proceeds from disposals of assets ................................................. 17.9 34.0 15.4
Other ............................................................................. (6.0) 34.9 --
-------- ------- -------
Net cash used for investing activities ............................................ (801.6) (101.6) (151.9)
-------- ------- -------
FINANCING ACTIVITIES (2)
Dividends paid .................................................................... (112.6) (132.0) (128.4)
Repayments of borrowings having original maturities in excess of three months ..... (68.1) (141.2) (512.6)
Increase in borrowings having original maturities in excess of three months ....... 148.5 535.1 373.0
Net increase in/(repayments of) borrowings having original maturities
of less than three months. ....................................................... 414.9 (605.8) 155.7
Stock options exercised ........................................................... 164.1 20.9 21.0
Increase/(decrease) in net financing activities of discontinued operations ........ 120.8 .2 (15.5)
Other ............................................................................. (11.9) -- .9
-------- ------- -------
Net cash provided by/(used for) financing activities .............................. 655.7 (322.8) (105.9)
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents ...................... 1.2 1.6 (.5)
-------- ------- -------
(Decrease)/increase in cash and cash equivalents .................................. (37.7) 30.7 (15.2)
-------- ------- -------
Cash and cash equivalents, beginning of year ...................................... 78.3 47.6 62.8
-------- ------- -------
Cash and cash equivalents, end of year ............................................ $ 40.6 $ 78.3 $ 47.6
======== ======= =======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, pages F-8 to F-25, are integral
parts of these statements.
(1) See Note 3 to the Consolidated Financial Statements for supplemental
information relating to noncash investing activities.
(2) See Notes 3 and 10 to the Consolidated Financial Statements for
supplemental information relating to noncash financing activities.
F-5
<PAGE> 129
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Dollars in millions, except par value December 31, 1995 1994
- -------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 40.6 $ 78.3
Notes and accounts receivable, net (Note 8) ........................... 596.8 975.7
Inventories (Note 8) .................................................. 491.9 514.2
Net assets of discontinued operations (Note 7) ........................ 323.7 335.6
Deferred income taxes ................................................. 206.1 295.4
Other current assets .................................................. 22.2 29.7
-------- --------
TOTAL CURRENT ASSETS ............................................... 1,681.3 2,228.9
Properties and equipment, net (Note 9) ................................ 1,736.1 1,730.1
Goodwill, less accumulated amortization of $20.6 (1994 - $71.8) ....... 111.8 672.5
Net assets of discontinued operations - health care (Note 7) .......... 1,435.3 --
Asbestos-related insurance receivable (Note 2) ........................ 321.2 512.6
Deferred income taxes ................................................. 386.6 115.7
Other assets (Note 8) ................................................. 625.3 970.8
-------- --------
TOTAL ASSETS ....................................................... $6,297.6 $6,230.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt (Note 10) ............................................. $ 638.3 $ 430.9
Accounts payable ...................................................... 339.2 433.7
Income taxes .......................................................... 103.3 197.0
Other current liabilities ............................................. 836.4 872.9
Minority interest (Note 13) ........................................... 297.0 297.0
-------- --------
TOTAL CURRENT LIABILITIES .......................................... 2,214.2 2,231.5
Long-term debt (Note 10) .............................................. 1,295.5 1,098.8
Other liabilities ..................................................... 789.0 690.9
Deferred income taxes ................................................. 44.8 92.5
Noncurrent liability for asbestos-related litigation (Note 2) ......... 722.3 612.4
-------- --------
TOTAL LIABILITIES .................................................. 5,065.8 4,726.1
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 2, 7, 10 and 12)
SHAREHOLDERS' EQUITY (Note 14)
Preferred stocks, $100 par value ...................................... 7.4 7.4
Common stock, $1 par value; 300,000,000 shares authorized;
outstanding at December 31: 1995 - 97,375,000; 1994 - 94,083,000 .. 97.4 94.1
Paid in capital ....................................................... 459.8 308.8
Retained earnings ..................................................... 709.0 1,147.5
Cumulative translation adjustments .................................... (39.4) (53.3)
Treasury stock, 53,000 common shares, at cost ......................... (2.4) --
-------- --------
TOTAL SHAREHOLDERS' EQUITY ......................................... 1,231.8 1,504.5
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $6,297.6 $6,230.6
======== ========
- -------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, pages F-8 to F-25, are
integral parts of these statements.
F-6
<PAGE> 130
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Dollars in millions 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS
Balance, beginning of year ............................................ $ 7.4 $ 7.4 $ 7.5
Other ................................................................. -- -- (.1)
--------- -------- --------
Balance, end of year .................................................. 7.4 7.4 7.4
--------- -------- --------
COMMON STOCK
Balance, beginning of year ............................................ 94.1 93.5 89.9
Conversion of notes and debentures .................................... -- -- 2.8
Stock options and awards .............................................. 3.3 .6 .7
Acquisition ........................................................... -- -- .1
--------- -------- --------
Balance, end of year .................................................. 97.4 94.1 93.5
--------- -------- --------
PAID IN CAPITAL
Balance, beginning of year ............................................ 308.8 287.8 151.4
Conversion of notes and debentures .................................... -- -- 109.7
Stock options and awards .............................................. 151.1 20.5 22.9
Acquisition ........................................................... -- -- 3.7
Other ................................................................. (.1) .5 .1
--------- -------- --------
Balance, end of year .................................................. 459.8 308.8 287.8
--------- -------- --------
RETAINED EARNINGS
Balance, beginning of year ............................................ 1,147.5 1,196.2 1,298.6
Net (loss)/income ..................................................... (325.9) 83.3 26.0
Dividends paid ........................................................ (112.6) (132.0) (128.4)
--------- -------- --------
Balance, end of year .................................................. 709.0 1,147.5 1,196.2
--------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year ............................................ (53.3) (67.3) (2.4)
Translation adjustments ............................................... 13.9 14.0 (64.9)
--------- -------- --------
Balance, end of year .................................................. (39.4) (53.3) (67.3)
--------- -------- --------
TREASURY STOCK
Balance, beginning of year ............................................ -- -- --
Purchases of common stock ............................................. (12.1) -- --
Shares issued under stock option plans ................................ 9.7 -- --
--------- -------- --------
Balance, end of year .................................................. (2.4) -- --
--------- -------- --------
TOTAL SHAREHOLDERS' EQUITY ............................................ $1,231.8 $1,504.5 $1,517.6
======== ======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, pages F-8 to F-25, are
integral parts of these statements.
F-7
<PAGE> 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Dollars in millions, except per share amounts
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
- --------------------------------------------------------------------------------
W. R. Grace & Co., through its subsidiaries, is primarily engaged in the
packaging and specialty chemicals businesses on a worldwide basis. W. R.
Grace & Co. has classified its other businesses as discontinued operations,
the most significant of which are its health care and cocoa businesses. As
used in these notes to the consolidated financial statements, the term
"Company" refers to W. R. Grace & Co., a New York corporation, and the term
"Grace" refers to the Company and/or one or more of its subsidiaries.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of Grace and majority-owned companies. Intercompany
transactions and balances are eliminated in consolidation. Investments in
affiliated companies (20%-50% owned) are accounted for under the equity
method.
RECLASSIFICATIONS Certain amounts in the prior years' consolidated
financial statements and related notes have been reclassified to conform to
the current year's presentation and as required with respect to discontinued
operations.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities (including disclosed amounts of contingent assets and
liabilities) at the date of the consolidated financial statements and the
reported revenues and expenses during the reporting period. Actual amounts
could differ from those estimates.
CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with
maturities of three months or less when purchased. The recorded amounts
approximate fair value because of the short maturities of these investments.
INVENTORIES Inventories are stated at the lower of cost or market. The
methods used to determine cost include first-in/first-out and, for
substantially all U.S. chemical inventories, last-in/first-out. Market
values for raw and packaging materials are based on current cost and, for
other inventory classifications, on net realizable value.
PROPERTIES AND EQUIPMENT Properties and equipment are stated at the lower
of cost or net realizable value. Depreciation of properties and equipment
is generally computed using the straight-line method over the estimated
useful lives of the assets. Interest is capitalized in connection with
major project expenditures and amortized, generally on a straight-line
basis, over the estimated useful lives of the assets.
Fully depreciated assets are retained in properties and equipment and
related accumulated depreciation accounts until they are removed from
service. In the case of disposals, assets and related depreciation are
removed from the accounts and the net amount, less any proceeds from
disposal, is charged or credited to income.
GOODWILL Goodwill arises from certain purchase transactions and is
amortized using the straight-line method over appropriate periods not
exceeding 40 years.
IMPAIRMENT Grace has adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." In accordance with this Statement,
Grace reviews long-lived assets and related goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.
INCOME TAXES Grace uses an asset and liability approach for the accounting
and financial reporting of income taxes.
FOREIGN CURRENCY TRANSLATION Foreign currency transactions and financial
statements (except for those relating to countries with highly inflationary
economies) are translated into U.S. dollars at current exchange rates,
except that revenues, costs and expenses are translated at average exchange
rates during each reporting period. The financial statements of
subsidiaries located in countries with highly inflationary economies must be
remeasured as if the functional currency were the U.S. dollar. The
remeasurement creates translation adjustments that are reflected in net
income. Allocations for income taxes included in the translation
adjustments account in shareholders' equity were not significant.
F-8
<PAGE> 132
FINANCIAL INSTRUMENTS Grace enters into interest rate agreements and
foreign exchange forward and option contracts to manage exposure to
fluctuations in interest and foreign currency exchange rates.
The cash differentials paid or received on interest rate agreements are
accrued and recognized as adjustments to interest expense. Gains and losses
realized upon settlement of these agreements (recorded as other liabilities
and other assets, respectively) are deferred and either amortized to
interest expense over a period relevant to the agreement if the underlying
hedged instrument remains outstanding, or recognized immediately if the
underlying hedged instrument is settled. Cash flows related to the
agreements are classified as operating activities in the Consolidated
Statement of Cash Flows, consistent with the interest payments on the
underlying debt.
Gains and losses on foreign currency forward and option contracts
offset gains and losses resulting from the underlying transactions. Gains
and losses on contracts that hedge specific foreign currency commitments are
deferred and recorded in net income in the period in which the related
transaction is consummated. Gains and losses on contracts that hedge net
investments in foreign subsidiaries are recorded in the cumulative
translation adjustments account in shareholders' equity.
EARNINGS PER SHARE Primary earnings per share are computed on the basis of
the weighted average number of common shares outstanding. Fully diluted
earnings per share assume the issuance of common stock equivalents related
to employee stock options and, prior to 1994, the conversion of convertible
debt (with an increase in net income for the after-tax interest savings).
- -------------------------------------------------------------------------------
2. ASBESTOS AND RELATED INSURANCE LITIGATION
- -------------------------------------------------------------------------------
Grace is a defendant in 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. Grace was
a defendant in approximately 40,800 asbestos-related lawsuits at December
31, 1995 (47 involving claims for property damage and the remainder
involving approximately 92,400 claims for personal injury), as compared to
approximately 38,700 lawsuits at December 31, 1994 (65 involving claims for
property damage and the remainder involving approximately 67,900 claims for
personal injury).
PROPERTY DAMAGE LITIGATION
The plaintiffs in property damage lawsuits generally seek, among other
things, to have the defendants absorb the cost of removing, containing or
repairing the asbestos-containing materials in the affected buildings.
Through December 31, 1995, 129 asbestos property damage cases were dismissed
with respect to Grace without payment of any damages or settlement amounts;
judgments were entered in favor of Grace in 10 cases (excluding cases
settled following appeals of judgments in favor of Grace and a case in which
the plaintiff was granted a new trial on appeal); Grace was held liable for
a total of $74.7 in 7 cases (2 of which are on appeal); and 177 property
damage suits and claims were settled for a total of $421.8.
Included in the asbestos property damage lawsuits pending against Grace
and others at year-end 1995 was a class action, conditionally certified by
the U.S. Court of Appeals for the Fourth Circuit in 1993 and pending in a
U.S. District Court in South Carolina, covering all public and private
colleges and universities in the U.S. whose buildings contain asbestos
materials.
In July 1994, a South Carolina state court judge dismissed the claims
of most class members from another purported nationwide class action
asbestos property damage lawsuit. In his ruling, the judge held that a
South Carolina statute prohibits nonresidents from pursuing claims in the
South Carolina state courts with respect to buildings located outside the
state. The plaintiffs have requested that the court reconsider its
decision.
In December 1995, Grace entered into an agreement to settle a
Pennsylvania state court action, certified as a class action in 1992,
covering all commercial buildings in the U.S. leased in whole or in part to
the U.S. government on or after May 30, 1986. The terms of the settlement
agreement (which is subject to judicial review and approval after class
members have an opportunity to be heard) are not expected to have a
significant effect on Grace's consolidated results of operations or
financial position.
PERSONAL INJURY LITIGATION
Through December 31, 1995, approximately 10,100 asbestos personal injury
lawsuits involving 24,500 claims were dismissed with respect to Grace
without payment of any damages or settlement amounts (primarily on the basis
that Grace products were not involved), and approximately 23,700 such suits
involving 29,600 claims were disposed of for a total of $109.0.
ASBESTOS-RELATED LIABILITY
Subject to the factors discussed below, 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 December 31, 1995
and 1994 (and, in the case of the 1995 estimate, personal injury lawsuits
and claims expected to be filed through 1998), is as follows:
F-9
<PAGE> 133
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Current liability for asbestos-related litigation (1) .. $100.0 $100.0
Noncurrent liability for asbestos-related litigation ... 722.3 612.4
------ ------
Total asbestos-related liability ..................... $822.3 $712.4
- --------------------------------------------------------------------------------
</TABLE>
(1) Included in "Other current liabilities" in the Consolidated Balance Sheet.
In the fourth quarter of 1995, Grace recorded a noncash pretax charge
of $260.0 ($169.0 after-tax) for asbestos-related liabilities, primarily to
reflect the estimated costs to defend against and dispose of personal injury
claims expected to be filed through 1998; Grace believes that it now has
adequate experience to reasonably estimate the number of personal injury
claims to be filed through 1998 and the costs of defending against and
disposing of these claims. Other components of the 1995 provision include
increases in the estimated costs of defending against and disposing of
certain property damage cases pending at year-end 1995 and personal injury
lawsuits and claims filed during 1995.
While personal injury cases and claims are generally similar to each
other (differing only in the type of asbestos-related illness allegedly
suffered by the plaintiff), Grace's estimated liability for such cases and
claims is influenced by numerous variables that are difficult to predict
(including the insolvency of other former asbestos producers, cross-claims
by co-defendants, the rate at which new cases and claims are filed and the
defense and disposition costs associated with these cases and claims).
Consequently, actual costs may vary from any estimate. For these reasons,
Grace believes that it is not possible to reasonably estimate the number of
cases and claims to be filed after 1998 or the costs of defending against
and disposing of such cases and claims.
Each property damage case is unique in that the age, type, size and use
of the building, and the difficulty of asbestos abatement, if necessary,
vary from structure to structure; thus, the amounts involved in prior
dispositions of property damage cases are not necessarily indicative of the
amounts that may be required to dispose of such cases in the future. In
addition, in property damage cases, information regarding product
identification on a building-by-building basis (i.e., whether or not Grace
products were actually used in the construction of the building), the age,
type, size and use of the building, the jurisdictional history of prior
cases and the court in which the case is pending provide the only meaningful
guidance as to potential future costs. However, much of this information is
not yet available in some of the property damage cases currently pending
against Grace. Accordingly, it is not possible to estimate with precision
the costs of defending against and disposing of these cases. Further, Grace
believes that the number of property damage cases to be filed in the future
and the costs associated with these filings are not estimable.
ASBESTOS-RELATED INSURANCE RECEIVABLE
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. The following table shows Grace's total estimated insurance
recoveries in reimbursement for past and estimated future payments to defend
against and dispose of asbestos-related litigation and claims:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes receivable from insurance carriers - current, net of discounts of $4.3 in 1995 (1) ..... $ 62.0 $127.0
Notes receivable from insurance carriers - noncurrent, net of discounts of $7.3 in 1995 (2) .. 56.4 60.0
Asbestos-related insurance receivable ........................................................ 321.2 512.6
------ ------
Total amounts due from insurance carriers ................................................ $439.6 $699.6
====== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Included in "Notes and accounts receivable, net" in the Consolidated
Balance Sheet.
(2) Included in "Other assets" in the Consolidated Balance Sheet.
At December 31, 1995, settlements with certain insurance carriers
provided for the future receipt by Grace of $130.0, which Grace has recorded
as notes receivable (both current and noncurrent) of $118.4, after
discounts. In 1995, Grace received a total of $257.3 pursuant to
settlements with insurance carriers in reimbursement for monies previously
expended by Grace in connection with asbestos-related litigation; of this
amount, $127.0 was received pursuant to settlements entered into in 1993 and
1994, which had previously been classified as notes receivable.
During 1995, Grace settled with an affiliated group of carriers that
had agreed to a settlement in 1993, had made a series of payments under that
agreement and had subsequently notified Grace that it would no longer honor
the agreement. Pursuant to the 1995 settlement, the group of carriers paid
Grace $44.0 in 1995 and agreed to make additional payments totalling $60.2
in 1996 and 1997 (which Grace has recorded as notes receivable, after
discounts, of $54.5). Pursuant to a settlement with another group of
carriers, Grace received $26.8 in 1995 and expects to receive an additional
payment of $9.7 in 1996. Under both settlements, Grace will continue to
receive payments based on future cash outflows for asbestos-related
litigation and claims; such payments are estimated to represent
approximately $237.3 of the asbestos-related receivable of $321.2 at
December 31, 1995.
F-10
<PAGE> 134
As a result of these settlements and a reassessment of its insurance
receivable, Grace recorded a noncash net pretax charge of $15.0 ($9.7
after-tax) during the fourth quarter of 1995 to reflect a reduction in the
receivable, primarily due to lower than anticipated settlements with
insurance carriers and a discount on notes receivable in connection with
prior settlements, partially offset by an increase in expected future
reimbursements of costs to defend against and dispose of property damage
cases pending at year-end 1995 and personal injury claims to be filed
through 1998.
INSURANCE LITIGATION
Grace continues to seek to recover from its excess insurers the balance of
the payments it has made with respect to asbestos-related litigation. As
part of this effort, Grace continues to be involved in litigation with
certain of its insurance carriers (having previously settled with certain
primary and excess carriers, as discussed above). For the period October
1962 through June 1985 -- the most relevant period for asbestos-related
litigation -- Grace purchased, on an annual basis, as much as eight levels
of excess insurance coverage. (In general, excess policies provide that
when claims paid exhaust coverage at one level, the insured may seek payment
from the carriers at the next higher level.) For that 23-year period, the
first six levels of excess insurance available from the insurance companies
that Grace believes to be solvent (based primarily upon reports from a
leading independent insurance rating service) provide nominal coverage of
approximately $1,200.0 (including the amounts reflected in the receivable
discussed above). However, (a) a portion of the personal injury lawsuits
and claims pending at year-end 1995 and expected to be filed against Grace
through 1998 will likely relate to periods for which no excess coverage is
available; and (b) even where such excess coverage is available, the number
of personal injury lawsuits and claims expected to be filed against Grace in
the future is not expected to be sufficient to result in significant
payments under such coverage. Further, as a result of the May 1994 decision
of the U.S. Court of Appeals for the Second Circuit, discussed below, a
significant portion of the nominal excess coverage is not available in
connection with property damage lawsuits. In addition, $142.0 of the
$1,200.0 relates to excess coverage written by a group of insurance carriers
that, while currently solvent, has experienced financial difficulties in
recent years. This group of carriers settled with Grace in 1995 (as
discussed above). The asbestos-related receivable of $321.2 at December 31,
1995 includes $54.7 to be paid by this group; management believes this
amount is fully collectible.
As previously reported, in September 1993 the U.S. Court of Appeals for
the Second Circuit ruled that, under New York law (which governs a
significant portion of the policies that provide Grace's asbestos-related
insurance coverage), such coverage is triggered based on the date of
installation of asbestos-containing materials. As a result of this decision
(which had the effect of reducing the amount of insurance coverage available
to Grace with respect to asbestos property damage litigation and claims),
Grace recorded a noncash pretax charge of $475.0 ($300.0 after-tax) in the
1993 third quarter. Grace reversed $316.0 ($200.0 after-tax) of the pretax
charge in the 1993 fourth quarter after the court withdrew its September
1993 decision and agreed to rehear the case, but reinstated the $316.0
pretax charge ($200.0 after-tax) in the second quarter of 1994, when the
court issued a new decision confirming its September 1993 decision. Because
Grace's insurance covers both property damage and personal injury lawsuits
and claims, the May 1994 decision has had the concomitant effect of reducing
the insurance coverage available with respect to Grace's asbestos personal
injury lawsuits and claims. However, in Grace's opinion, 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 December 31, 1995, as well as personal injury lawsuits and claims
expected to be filed through 1998. 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.
- -------------------------------------------------------------------------------
3. ACQUISITIONS AND DIVESTMENTS
- -------------------------------------------------------------------------------
ACQUISITIONS
During 1995, Grace made acquisitions totalling $260.8 (inclusive of cash
acquired and debt assumed), all of which involved cash purchases of kidney
dialysis centers and medical imaging facilities by National Medical Care,
Inc. (NMC), Grace's principal health care subsidiary. Acquisitions in the
first quarter of 1995, prior to the classification of NMC as a discontinued
operation (see Note 7), totalled $41.1 (inclusive of cash acquired and debt
assumed). Acquisitions by NMC subsequent to the first quarter of 1995 are
presented as an investing activity and are included in "Increase in net
assets of discontinued operations" in the Consolidated Statement of Cash
Flows.
In 1994, Grace made acquisitions totalling $351.7 (inclusive of cash
acquired and debt assumed), primarily in health care. Grace acquired Home
Nutritional Services, Inc. for approximately $131.8 (inclusive of cash and
assumed debt totalling $30.4) and acquired kidney dialysis centers and other
health care businesses during 1994 for an aggregate of approximately $145.3
in cash. 1994 acquisitions also included construction chemicals businesses
and a European flexible packaging business.
In 1993, Grace acquired Home Intensive Care, Inc. for approximately
$129.0 in cash and acquired other health care businesses for an aggregate of
$115.0 in cash and $3.8 in common stock. Additionally, during 1993 Grace
acquired Latin America's largest water treatment business for approximately
$57.6 in cash.
F-11
<PAGE> 135
DIVESTMENTS
During 1995, Grace realized gross proceeds of $58.8 (inclusive of debt
assumed by the buyers) from divestments, including payments received in
connection with divestments completed in prior years. The operations
divested in 1995 consisted of three small units of Grace's construction
products business, the composite materials business (previously classified
as a discontinued operation), Grace's transportation services business and
various investments.
In 1994, Grace realized gross proceeds of $646.2 (inclusive of debt
assumed by the buyers) from divestments, including payments received in
connection with divestments completed in prior years. Substantially all of
the businesses divested during 1994 had previously been classified as
discontinued operations. Divestment proceeds received in 1994 included
$42.8 for Grace's remaining interest in The Restaurant Enterprises Group,
Inc. (REG).
In 1993, Grace completed the sale of substantially all of its oil and
gas operations, as well as certain corporate investments, all of which had
previously been classified as discontinued operations. Other noncore
businesses divested during 1993 included a 50% interest in a Japanese
chemical operation and a food industry hygiene services business for
approximately $31.4 and $11.2, respectively.
See Note 7 for a discussion of divestment activity related to
discontinued operations.
- -------------------------------------------------------------------------------
4. OTHER INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income ............................. $15.8 $1.3 $22.6
Equity in earnings of affiliated companies .. .2 2.1 .6
Gains on sales of investments ............... 3.1 27.3 22.9
Other, net .................................. 22.8 11.9 11.7
----- ----- -----
$41.9 $42.6 $57.8
===== ===== =====
- -------------------------------------------------------------------------------
</TABLE>
Interest income in 1995 and 1993 includes $9.8 and $20.0, respectively,
relating to the settlement of prior years' Federal income tax returns.
Gains on sales of investments include a 1994 gain of $27.0 on the sale of
Grace's remaining interest in REG and a 1993 gain of $21.7 on the sale of a
50% interest in a Japanese chemical operation (see Note 3). Other, net in
1995 includes a $5.4 gain on the sale of Grace's transportation services
business.
- -------------------------------------------------------------------------------
5. RESTRUCTURING COSTS AND ASSET IMPAIRMENTS
- -------------------------------------------------------------------------------
RESTRUCTURING COSTS
During the third quarter of 1995, Grace began implementing a worldwide
restructuring program aimed at streamlining processes and reducing general
and administrative expenses, factory administration costs and noncore
corporate research and development expenses. The program is expected to be
substantially completed by the end of 1996. In the third and fourth
quarters of 1995, Grace recorded pretax charges totalling $44.3 and $91.7
($27.2 and $61.9 after-tax), respectively, comprised of $77.4 for employee
termination benefits; $13.4 for plant closure and related costs, including
lease termination costs; $15.5 for prior business exits and related costs;
$20.8 for asset writedowns; and $8.9 for other costs. The $77.4 for
employee termination benefits primarily represents severance pay and other
benefits associated with the elimination of approximately 1,000 positions
worldwide; more than 50% of the total cost reductions will come from
corporate staff functions worldwide.
Through December 31, 1995, Grace recorded approximately $25.4 in costs
against its 1995 restructuring reserve, of which $19.6 represented cash
expenditures and $5.8 represented the noncash effects of asset writedowns
and losses on asset sales. The $19.6 of cash expenditures were comprised of
$13.0 in partial payments of employee termination benefits for over 500
employees, $3.0 for consulting services to develop the restructuring
program, and $3.6 of other costs.
ASSET IMPAIRMENTS
During 1995, Grace determined that, due to various events and changes in
circumstances (including the worldwide restructuring program described
above), certain long-lived assets and related goodwill were impaired. As a
result, in the fourth quarter of 1995, Grace recorded a $43.5 pretax charge
($29.0 after-tax), the majority of which related to assets that will
continue to be held and used in Grace's continuing operations; the charge
included no significant individual components. Grace determined the amount
of the charge based on various valuation techniques, including discounted
cash flow, replacement cost and net realizable value for assets to be
disposed of.
F-12
<PAGE> 136
- --------------------------------------------------------------------------------
6. INCOME TAXES
- --------------------------------------------------------------------------------
Grace applies SFAS No. 109, "Accounting for Income Taxes," which uses an
asset and liability approach requiring the recognition of deferred tax
assets and liabilities with respect to the expected future tax consequences
of events that have been recorded in the consolidated financial statements
and tax returns. If it is more likely than not that all or a portion of a
deferred tax asset will not be realized, a valuation allowance must be
recognized.
The components of (loss)/income from continuing operations before
income taxes and the related (benefit from)/provision for domestic and
foreign taxes are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic ................................ $ (424.0) $ (181.7) $ (70.5)
Foreign ................................. 111.6 93.7 99.7
-------- --------- -------
$ (312.4) $ (88.0) $ 29.2
======== ========= =======
Federal income taxes:
Current ................................ $ 34.3 $ (80.9) $ (.6)
Deferred ............................... (160.0) (6.4) (30.5)
State and local income taxes - current .. .7 1.9 3.0
Foreign income taxes:
Current ................................ 61.0 44.0 39.8
Deferred ............................... (51.8) (5.2) (1.6)
-------- --------- -------
$ (115.8) $ (46.6) $ 10.1
======== ========= =======
- ---------------------------------------------------------------------------
</TABLE>
The components of (loss)/income from consolidated operations before
income taxes and the related (benefit from)/provision for domestic and
foreign taxes are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic ............................................................................ $ (480.5) $ 44.3 $ (4.6)
Foreign ............................................................................. 72.7 94.8 95.9
-------- ------ -------
$ (407.8) $139.1 $ 91.3
======== ====== =======
Federal income taxes:
Current ......................................................................... $ 105.6 $ 25.3 $ 114.9
Deferred ........................................................................ (226.3) (34.8) (147.4)
State and local income taxes - current .............................................. 21.7 21.8 32.7
Foreign income taxes:
Current ......................................................................... 68.5 49.1 44.4
Deferred ........................................................................ (51.4) (5.6) 20.7
-------- ------ -------
$ (81.9) $ 55.8 $ 65.3
======== ====== =======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The components of consolidated (benefit from)/provision for taxes are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations ............................................................ $ (115.8) $(46.6) $ 10.1
Discontinued operations:
Operations .................................................................... 82.6 102.4 77.5
Loss on disposals of operations................................................ (48.7) -- (22.3)
-------- ------ -------
$ (81.9) $ 55.8 $ 65.3
======== ====== =======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE> 137
At December 31, 1995 and 1994, deferred tax assets and liabilities
consisted of the following items:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reserves not yet deductible for tax purposes ...................................................... $223.6 $254.4
Provision relating to net asbestos-related expenses ............................................... 219.4 36.2
Research and development expenses ................................................................. 115.8 107.3
Postretirement benefits other than pensions ....................................................... 88.9 93.3
State deferred taxes .............................................................................. 70.1 37.5
Pension and insurance reserves .................................................................... 35.2 14.8
Capitalized inventory costs and inventory reserves ................................................ 11.9 15.3
Net operating loss carryforwards .................................................................. 47.1 54.4
Tax credit carryforwards .......................................................................... 27.2 49.0
Other ............................................................................................. 43.9 54.4
------ ------
Total deferred tax assets ..................................................................... 883.1 716.6
------ ------
Depreciation and amortization ..................................................................... 112.6 167.4
Prepaid pension cost .............................................................................. 104.8 72.3
Other ............................................................................................. 20.1 21.3
------ ------
Total deferred tax liabilities ................................................................ 237.5 261.0
------ ------
Valuation allowance for deferred tax assets ....................................................... 97.7 137.0
------ ------
Net deferred tax assets ....................................................................... $547.9 $318.6
====== ======
</TABLE>
The valuation allowance shown above arises from uncertainty as to the
realization of certain deferred tax assets, including U.S. tax credit
carryforwards, state and local net operating loss carryforwards and net
deferred tax assets. As a result of the favorable resolution of an audit,
the valuation allowance on net operating loss carryforwards in foreign
jurisdictions was reversed in 1995. Based upon anticipated future results,
Grace has concluded, after consideration of the valuation allowance, that it
is more likely than not that the remaining balance of the net deferred tax
assets will be realized.
At December 31, 1995, there were $25.3 of tax credit carryforwards with
expiration dates primarily through 1996 and $1.9 of tax credit carryforwards
with no expiration. Additionally, there were state and local and foreign
net operating loss carryforwards with a tax benefit of $47.1 and various
expiration dates.
The U.S. Federal corporate tax rate reconciles to the effective tax
rate for continuing operations as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal corporate tax rate ........................................ (35.0)% (35.0)% 35.0%
Increase/(decrease) in tax rate resulting from:
Nontaxable income/nondeductible expenses .............................. (.7) (1.4) (29.5)
Basis difference on sale of investment ................................ -- (10.5) --
State and local income taxes, net of U.S. Federal income tax benefit .. .2 1.5 6.8
U.S. and foreign taxes on foreign operations .......................... 9.8 .3 75.0
Utilization of general business credits ............................... (.5) (9.1) (18.5)
Impact of U.S. and foreign tax rate changes on deferred taxes ......... -- -- (25.2)
Valuation allowance for deferred tax assets ........................... (14.4) -- (2.8)
Other, net ............................................................ 3.5 1.2 (6.2)
------- ------- ------
Effective tax rate ..................................................... (37.1)% (53.0)% 34.6%
======= ======= ======
- --------------------------------------------------------------------------------------------------
</TABLE>
U.S. and foreign taxes have not been provided on approximately $256.1
of undistributed earnings of certain foreign subsidiaries, as such earnings
are expected to be retained indefinitely by such subsidiaries for
reinvestment. The distribution of these earnings would result in additional
foreign withholding taxes of approximately $14.9 and additional U.S. Federal
income taxes to the extent they are not offset by foreign tax credits. It
is not practicable to estimate the total tax liability that would be
incurred upon such a distribution.
F-14
<PAGE> 138
- --------------------------------------------------------------------------------
7. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
HEALTH CARE
In June 1995, the Company announced that its Board of Directors had approved
a plan to spin off NMC. As a result, Grace classified its health care
business as a discontinued operation in the second quarter of 1995 and,
accordingly, NMC's operations are included in "(Loss)/income from
discontinued operations" in the Consolidated Statement of Operations.
Following NMC's receipt in October 1995 of five investigative subpoenas
from the Office of the Inspector General of the U.S. Department of Health
and Human Services (OIG), as discussed below, the completion of the spin-off
of NMC, originally expected in the 1995 fourth quarter, was delayed.
In February 1996, Grace and Fresenius AG (Fresenius) entered into a
definitive agreement to combine NMC with Fresenius' worldwide dialysis
business (FWD) to create Fresenius Medical Care (FMC). As a result of the
combination, FMC would acquire NMC, which would remain responsible for all
liabilities arising out of the investigations, discussed below. However,
Grace would retain certain health care assets, primarily a bioseparation
sciences business, a health care services company and other assets
(including cash and marketable securities).
The combination would follow a borrowing of approximately $2.3 billion
by NMC, a tax-free distribution of the proceeds by NMC to Grace, and a
tax-free distribution by the Company, with respect to each share of its
Common Stock, of one share of a newly formed corporation holding all of
Grace's businesses (principally its specialty chemicals businesses) other
than NMC. As a result of the separation of Grace's specialty chemicals
businesses from NMC and the subsequent combination of NMC and FWD, the
holders of the Company's Common Stock would own 100% of the specialty
chemicals company and 44.8% of FMC, and Fresenius and other shareholders
would own 55.2% of FMC. The holders of the Company's Common Stock would
also own preferred stock, the value of which would be linked to the
performance of FMC. Completion of the various transactions is subject to
customary conditions, including the approval of the shareholders of the
Company and Fresenius; U.S., German and European regulatory actions; and
obtaining financing on satisfactory terms. Commitments for financing have
been received, and it is expected that the various transactions will be
completed by the third quarter of 1996.
OIG Investigative Subpoenas
In October 1995, NMC received five investigative subpoenas from the OIG.
The subpoenas call for the production of extensive documents relating to
various aspects of NMC's business. A letter accompanying the subpoenas
stated that they had been issued in conjunction with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts
and others, concerning possible violations of Federal laws relating to
health care payments and reimbursements.
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services
business, principally medical director contracts and compensation; (c) NMC's
treatment of credit balances resulting from overpayments received under the
Medicare end stage renal disease (ESRD) program and its payment of
supplemental medical insurance premiums on behalf of indigent patients; (d)
NMC's LifeChem laboratory business, including documents relating to testing
procedures, marketing, customers, competition and certain overpayments
totalling approximately $4.9 that were received by LifeChem from the
Medicare program with respect to laboratory services rendered between 1989
and 1993; and (e) NMC's Homecare Division and, in particular, information
concerning the intradialytic parenteral nutrition (IDPN) business described
below, including billing practices related to various services, equipment
and supplies and payments made to third parties as compensation for
administering IDPN therapy.
The results of the investigation and its impact, if any, cannot be
predicted at this time. In the event that a U.S. government agency believes
that any wrongdoing has occurred, civil and/or criminal proceedings could be
instituted, and if any such proceedings were to be instituted and the
outcome were unfavorable, NMC could be subject to fines, penalties and
damages or could become excluded from government reimbursement programs.
Any such result could have a material adverse effect on NMC's financial
position or the results of operations of NMC and Grace.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) affected the payment
of benefits under Medicare and employer health plans for certain eligible
ESRD patients. In July 1994, the Health Care Financing Administration
(HCFA) issued an instruction to Medicare claims processors to the effect
that Medicare benefits for the patients affected by OBRA 93 would be subject
to a new 18-month "coordination of benefits" period. This instruction had a
positive impact on NMC's dialysis revenues because, during the 18-month
coordination of benefits period, the patient's employer health plan was
responsible for payment, which was generally at a rate higher than that
provided under Medicare.
In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive
effect of the initial instruction on NMC's dialysis business. Under the new
instruction, no 18-month coordination of benefits period would arise, and
Medicare would remain the primary payor. HCFA further proposed that its new
instruction be effective retroactive to August 1993, the effective date of
OBRA 93. Consequently, NMC may be required to refund payments
F-15
<PAGE> 139
received from employer health plans for services provided after August 1993
under HCFA's original instruction and to re-bill Medicare for the same
services, which would result in a cumulative reduction of net revenues to
NMC totalling approximately $120.0 as of December 31, 1995. Effective July
1, 1995, NMC ceased to recognize the incremental revenue realized under the
original instruction, which has resulted in a material reduction in NMC's
operating earnings in comparison to prior periods in which NMC recognized
such incremental revenue. However, NMC continued to bill the employer
health plans as primary payors through December 31, 1995, at which time NMC
commenced billing Medicare for the patients affected by OBRA 93.
In May 1995, NMC filed suit in the U.S. District Court for the District
of Columbia seeking a declaratory judgment with respect to HCFA's
instructions relating to OBRA 93. In June 1995, the court granted NMC's
motion for a preliminary injunction to preclude HCFA from retroactively
enforcing its new instruction. The litigation is continuing with respect to
NMC's request to permanently enjoin HCFA's new instruction, both
retroactively and prospectively. While there can be no assurance that a
permanent injunction will be issued, NMC believes that it will ultimately
prevail in its claim that the retroactive reversal by HCFA of its original
instruction relating to OBRA 93 was impermissible under applicable law. If
HCFA's revised instruction is upheld, NMC's business, financial position and
results of operations would be materially adversely affected, particularly
if the revised instruction is applied retroactively.
IDPN Therapy
NMC administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. Since late 1993, Medicare claims
processors have applied medical coverage interpretations in a manner that
has sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN claims
currently being paid by Medicare represents an unauthorized policy coverage
change. Accordingly, NMC and other IDPN providers are pursuing various
administrative and legal remedies, including administrative appeals, to
address this reduction. In November 1995, NMC filed a complaint in the U.S.
District Court for the Middle District of Pennsylvania seeking a declaratory
judgment and injunctive relief to prevent the implementation to this policy
coverage change.
NMC management believes that its IDPN claims are consistent with
published Medicare coverage guidelines and ultimately will be approved for
payment. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $93.0 and $28.0 as of December 31, 1995 and 1994,
respectively, and currently increasing at the rate of approximately $5.0 per
month. If NMC is unable to collect its IDPN receivable, or if IDPN coverage
is reduced or eliminated, depending on the amount of the receivable that is
not collected and/or the nature of the coverage change, NMC's business,
financial position and results of operations could be materially adversely
affected. In addition, a current draft of a new coverage policy would limit
or preclude continued coverage of IDPN therapy and thereby have a material
adverse effect on NMC's financial position and results of operations.
Other Legal Proceedings
NMC has received multiple subpoenas from a Federal grand jury in the
District of New Jersey investigating, among other things, NMC's efforts to
persuade the U.S. Food and Drug Administration to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland facility, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
the development of a new dialyzer product line. Grace has also received two
subpoenas relating to this investigation. In February 1996, the U.S.
Attorney for the District of New Jersey notified NMC that it is a target of
the New Jersey grand jury investigation, insofar as it relates to possible
violations of Federal criminal law in connection with efforts to affect the
January 1991 import hold referred to above; the material element of the
import hold was lifted in 1992. In addition, in December 1994, a subsidiary
of NMC received a subpoena from a Federal grand jury in the Eastern District
of Virginia investigating the contractual relationships between subsidiaries
of NMC that provide dialysis services and third parties that provide medical
directorship and related services to those subsidiaries. The outcome of
these investigations and their impact, if any, on NMC's business, financial
condition and results of operations cannot be predicted at this time.
COCOA, BATTERY SEPARATORS AND ENGINEERED MATERIALS AND SYSTEMS
In the second quarter of 1993, Grace classified as discontinued operations
its cocoa business; its battery separators business; certain engineered
materials businesses, principally its printing products, material technology
and electromagnetic radiation control businesses (collectively, EMS); and
other noncore businesses. At that time, a provision of $105.0 (net of an
applicable tax benefit of $22.3) was recorded to reflect the losses expected
on the divestment of these businesses.
During the fourth quarter of 1995, Grace revised the divestment plan
for its cocoa business. The revised plan focuses on the improvement of
operating cash flow through the adoption of new strategies and a new global
organizational structure, while simultaneously positioning the business for
sale. Grace expects to implement the revised plan and to conclude the sale
of its cocoa business by the fourth quarter of 1996. As a result of this
revised divestment plan, recent trends and a reassessment of forecasts for
all remaining discontinued operations, Grace recorded an additional
provision of $151.3 (net of an applicable tax benefit of $48.7) related to
its remaining discontinued operations, principally the cocoa business.
F-16
<PAGE> 140
During 1994, Grace sold its battery separators business and other EMS
businesses for gross proceeds of $316.2, approximating prior estimates. In
February 1995, Grace sold its composite materials business for gross
proceeds of $3.0, leaving its microwave business as the only unsold EMS
business.
GRACE ENERGY
In 1994, Grace sold substantially all of its interests in Colowyo Coal
Company (Colowyo), Grace's only remaining significant energy operation, for
proceeds of $218.3, including $192.8 of proceeds from a nonrecourse
financing secured by a portion of the revenues from certain long-term coal
contracts. Grace retained a limited partnership interest in Colowyo,
entitling it to share in the revenues from these coal contracts. In 1993,
Grace sold substantially all of its oil and gas operations for net cash
proceeds of $386.0. The total proceeds received from these divestments
approximated prior estimates.
OTHER
In 1994, Grace sold its animal genetics and Caribbean fertilizer operations
for proceeds of $44.1. These and other businesses were classified as
discontinued operations in 1993. In 1993, Grace completed the sale of its
minority interests in Canonie Environmental Services Corporation and
Grace-Sierra Horticultural Products Company for total proceeds of $41.3.
Losses from Grace's discontinued operations, other than its
discontinued health care operations, subsequent to their classification as
such were $45.2, $14.2 and $54.6 in 1995, 1994 and 1993, respectively; these
amounts have been charged against established reserves, including
adjustments to those reserves in 1995. The sales and revenues and results
of the discontinued health care operations for 1995, 1994 and 1993, and the
1993 sales and revenues and results of the other discontinued operations,
prior to their classification as such, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------
HEALTH CARE
Sales and revenues ................................ $2,076.8 $1,875.1 $1,512.9
-------- -------- --------
Income from operations before taxes (1) ........... $ 104.6 $ 227.1 $ 192.0
Income tax provision .............................. 82.6 102.4 76.7
-------- -------- --------
Income from discontinued operations ............... $ 22.0 $ 124.7 $ 115.3
-------- -------- --------
- -----------------------------------------------------------------------------------
COCOA, BATTERY SEPARATORS AND EMS
Sales and revenues ................................ $ -- $ -- $ 235.9
-------- -------- --------
Loss from operations before taxes (1) ............. $ -- $ -- $ (.9)
Income tax provision .............................. -- -- (1.1)
-------- -------- --------
Loss from discontinued operations ................. $ -- $ -- $ (2.0)
-------- -------- --------
- -----------------------------------------------------------------------------------
OTHER
Sales and revenues ................................ $ -- $ -- $ 14.4
-------- -------- --------
Loss from operations before taxes (1) ............. $ -- $ -- $ (1.7)
Income tax benefit ................................ -- -- .3
-------- -------- --------
Loss from discontinued operations ................. $ -- $ -- $ (1.4)
-------- -------- --------
Total operating results of discontinued operations .. $ 22.0 $ 124.7 $ 111.9
Net pretax loss on disposals of operations .......... (200.0) -- (127.3)
Income tax benefit on disposals of operations ....... 48.7 -- 22.3
-------- -------- --------
Total (loss)/income from discontinued operations .... $ (129.3) $ 124.7 $ 6.9
======== ======== ========
- -----------------------------------------------------------------------------------
</TABLE>
(1) Reflects an allocation of interest expense based on the ratio of the
net assets of the businesses classified as discontinued operations as
compared to Grace's total capital. The above operating results include
interest expense allocations of $93.5, $60.4 and $43.9 for 1995, 1994
and 1993, respectively.
For financial reporting purposes, the assets, liabilities, results of
operations and cash flows of Grace Cocoa Associates, L.P. (LP) (see Note 13)
are included in Grace's consolidated financial statements as a component of
discontinued operations, and the outside investors' interest in LP is
reflected as a minority interest in the Consolidated Balance Sheet.
F-17
<PAGE> 141
The net assets of Grace's remaining discontinued operations (excluding
intercompany assets) at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
HEALTH
CARE COCOA OTHER TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets ....................................... $ 665.9 $280.4 $21.1 $ 967.4
Properties and equipment, net ........................ 399.3 193.8 21.9 615.0
Investments in and advances to affiliated companies .. -- -- 35.2 35.2
Other assets ......................................... 993.7 62.2 18.0 1,073.9
-------- ------ ----- --------
Total assets ...................................... $2,058.9 $536.4 $96.2 $2,691.5
-------- ------ ----- --------
Current liabilities .................................. $ 533.8 $193.1 $12.7 $ 739.6
Other liabilities .................................... 89.8 92.5 10.6 192.9
-------- ------ ----- --------
Total liabilities ................................. $ 623.6 $285.6 $23.3 $ 932.5
-------- ------ ----- --------
Net assets ........................................ $1,435.3 $250.8 $72.9 $1,759.0
======== ====== ===== ========
- -----------------------------------------------------------------------------------------
</TABLE>
8. OTHER BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NOTES AND ACCOUNTS RECEIVABLE
Trade receivables, less allowances of $12.8 (1994 - $95.1) ............................... $488.5 $742.0
Notes receivable from insurance carriers - current, net of discounts of $4.3 in 1995 ..... 62.0 127.0
Other receivables, less allowances of $.1 (1994 - $.1) ................................... 46.3 106.7
------ ------
$596.8 $975.7
====== ======
- ----------------------------------------------------------------------------------------------------------
INVENTORIES
Raw and packaging materials .............................................................. $137.1 $129.8
In process ............................................................................... 78.0 75.3
Finished products ........................................................................ 248.6 289.5
General merchandise ...................................................................... 76.6 62.7
Less: Adjustment of certain inventories to a last-in/first-out (LIFO) basis .............. (48.4) (43.1)
------ ------
$491.9 $514.2
====== ======
- ----------------------------------------------------------------------------------------------------------
OTHER ASSETS
Prepaid pension costs .................................................................... $245.8 $226.6
Patient relationships, less accumulated amortization of $117.2 in 1994 ................... -- 214.9
Deferred charges ......................................................................... 106.9 124.9
Long-term receivables, less allowances of $24.7 (1994 - $20.6) ........................... 83.5 92.3
Long-term investments .................................................................... 69.4 79.3
Notes receivable from insurance carriers - noncurrent, net of discounts of $7.3 in 1995 .. 56.4 60.0
Patents and licenses ..................................................................... 34.0 39.9
Investments in and advances to affiliated companies ...................................... 17.4 56.0
Other .................................................................................... 11.9 76.9
------ ------
$625.3 $970.8
====== ======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
During 1995 and 1994, Grace entered into agreements to sell up to $120.0 and
$320.0, respectively, of interests in designated pools of trade receivables
(excluding $180.0 in 1995 pertaining to the discontinued health care
operations). At December 31, 1995 and 1994, $116.0 and $296.8,
respectively, had been received pursuant to such sales (excluding $179.8 in
1995 pertaining to the discontinued health care operations); these amounts
are reflected as reductions to trade accounts receivable. Under the terms
of these agreements, new interests in trade receivables are sold as
collections reduce previously sold trade receivables. While only interests
in designated pools of trade receivables are sold, the entire designated
pools are available as the sole recourse with respect to the interests sold.
There is no further recourse to Grace, nor is Grace required to repurchase
any of the trade receivables in the pools. The costs related to such sales
are expensed as incurred and recorded as interest expense and related
financing costs. There were no gains or losses on these transactions.
Inventories valued at LIFO cost comprised 21.6% and 18.9% of total
inventories at December 31, 1995 and 1994, respectively. The liquidation of
prior years' LIFO inventory layers in 1995, 1994 and 1993 did not materially
affect cost of goods sold in any of these years.
F-18
<PAGE> 142
- -------------------------------------------------------------------------------
9. PROPERTIES AND EQUIPMENT
- -------------------------------------------------------------------------------
<TABLE>
1995 1994
- -------------------------------------------------------------------------
<S> <C> <C>
Land ....................................... $ 44.1 $ 52.4
Buildings .................................. 595.5 698.3
Machinery, equipment and other ............. 1,967.1 2,080.2
Projects under construction ................ 548.2 397.4
--------- ---------
Properties and equipment, gross ........... 3,154.9 3,228.3
Accumulated depreciation and amortization .. (1,418.8) (1,498.2)
--------- ---------
Properties and equipment, net ............. $ 1,736.1 $ 1,730.1
========= =========
- -------------------------------------------------------------------------
</TABLE>
Interest costs are incurred in connection with the financing of certain
assets prior to placing them in service. Interest costs capitalized in
1995, 1994 and 1993 were $21.3, $9.4 and $7.4, respectively.
Depreciation and lease amortization expense relating to properties and
equipment amounted to $170.4, $158.0 and $146.3 in 1995, 1994 and 1993,
respectively.
Grace's rental expense for operating leases amounted to $25.7, $28.8
and $34.3 in 1995, 1994 and 1993, respectively. See Note 12 for information
regarding contingent rentals.
At December 31, 1995, minimum future payments for operating leases are:
<TABLE>
- -------------------------------------------------------------------------
<S> <C>
1996 .......................... $ 28.0
1997 .......................... 22.6
1998 .......................... 19.0
1999 .......................... 15.4
2000 .......................... 14.5
Later years ................... 26.8
------
Total minimum lease payments .. $126.3
======
- -------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------
The above minimum lease payments reflect sublease income of $11.6 per
year for 1996 through 2000 and a total of $28.0 in later years.
- -------------------------------------------------------------------------
10. DEBT
- -------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Bank borrowings (6.2% weighted average interest rate at year-end 1995) (1) ................................ $ 295.3 $ --
Current maturities of long-term debt ...................................................................... 22.2 166.6
Other short-term borrowings (2) ........................................................................... 320.8 264.3
-------- --------
$ 638.3 $ 430.9
======== ========
LONG-TERM DEBT
Commercial paper (6.2% and 6.0% weighted average interest rates at year-end
1995 and 1994, respectively) (1) $ 45.7 $ 5.5
Bank borrowings (6.2% and 5.8% weighted average interest rates at year-end 1995 and 1994, respectively) (1) 304.3 103.5
8.0% Notes Due 2004 (3) ................................................................................... 300.0 300.0
7.4% Notes Due 2000 (4) ................................................................................... 287.0 300.0
7.75% Notes Due 2002 (5) .................................................................................. 131.0 150.0
6.5% Notes Due 1995 (6) ................................................................................... -- 150.0
Term Loan Agreement (6.3% weighted average interest rate at year-end 1995) (7) ............................ 30.0 --
Medium-Term Notes, Series A (6.9% weighted average interest rate at year-end 1995 and 1994) (8) ........... 128.5 128.5
Sundry indebtedness with various maturities through 2002 .................................................. 91.2 127.9
-------- --------
1,317.7 1,265.4
Less current maturities of long-term debt ................................................................. 22.2 166.6
-------- --------
$1,295.5 $1,098.8
======== ========
Full-year weighted average interest rate on total debt (9) ................................................ 7.8% 5.8%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 143
(1) Under bank revolving credit agreements in effect at year-end 1995,
Grace may borrow up to $950.0 at interest rates based upon the
prevailing prime, Federal funds and/or Eurodollar rates. Of that
amount, $600.0 is available under short-term facilities, with $350.0
expiring on August 29, 1996 and $250.0 expiring on September 30, 1996;
and $350.0 is available under a long-term facility expiring on
September 1, 1999. These agreements also support the issuance of
commercial paper and bank borrowings, $645.3 of which was outstanding
at December 31, 1995 (included in Short-Term and Long-Term Debt above).
At December 31, 1995, the aggregate amount of net unused and
unreserved borrowings under the short-term and long-term facilities was
$304.7. Grace's ability to borrow under the current facilities is
subject to compliance with various covenants, including maintenance of
ratios of total debt to total capitalization and interest coverage.
(2) Represents borrowings under various lines of credit and other
miscellaneous borrowings, primarily of non-U.S. subsidiaries.
(3) During the third quarter of 1994, Grace sold $300.0 of 8.0% Notes Due
2004 at an initial public offering price of 99.794% of par, to yield
8.03%. Interest is payable semiannually, and the Notes may not be
redeemed prior to maturity.
(4) During the first quarter of 1993, Grace sold at par $300.0 of 7.4%
Notes Due 2000. Interest is payable semiannually, and the Notes may
not be redeemed prior to maturity; however, Grace has repurchased Notes
from time to time in response to unsolicited offers received through
banks and brokers.
(5) During the third quarter of 1992, Grace sold at par $150.0 of 7.75%
Notes Due 2002. Interest is payable semiannually, and the Notes may
not be redeemed prior to maturity; however, Grace has repurchased Notes
from time to time in response to unsolicited offers received through
banks and brokers.
(6) During the fourth quarter of 1992, Grace sold $150.0 of 6.5% Notes Due
1995 at an initial public offering price of 99.758% of par, to yield
6.59%. The Notes were paid at maturity in the fourth quarter of 1995.
(7) During the second quarter of 1995, Grace entered into a three-year
term loan agreement with a maturity date of April 24, 1998. The
agreement provides for interest at a Eurodollar floating rate, with
interest payable semiannually.
(8) During the second quarter of 1994, Grace entered into an agreement
providing for the issuance and sale from time to time of its
Medium-Term Notes, Series A (MTNs), with an aggregate issue price of up
to $300.0. The MTNs may bear interest at either fixed or floating
rates and have maturity dates more than nine months from their
respective dates of issuance. Interest on each fixed rate MTN is
payable semiannually, and interest on each floating rate MTN is payable
as established at the time of issuance.
(9) Computation includes interest expense allocated to discontinued
operations.
Payment of a majority of Grace's borrowings may be accelerated, and its
principal borrowing agreements terminated, upon the occurrence of a default
under certain Grace borrowings.
Scheduled maturities of long-term debt outstanding at December 31, 1995
are: 1996 - $22.2; 1997 - $113.2; 1998 - $46.4; 1999 - $351.2; 2000 -
$350.3; and thereafter - $434.4.
Interest expense, excluding related financing costs and amounts
allocated to discontinued operations, for 1995, 1994 and 1993 amounted to
$53.3, $30.9 and $33.7, respectively. Including amounts allocated to
discontinued operations, interest payments made in 1995, 1994 and 1993,
excluding related financing costs, amounted to $183.1, $101.8 and $109.0,
respectively.
A registration statement that became effective in 1994 covers $750.0 of
debt and/or equity securities that may be sold from time to time. At
December 31, 1995, $321.5 (including up to $171.5 of MTNs) remain available
under the registration statement.
- --------------------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
LONG-TERM DEBT/INTEREST RATE AGREEMENTS
To manage exposure to changes in interest rates, Grace enters into interest
rate agreements, most of which have the effect of converting fixed-rate debt
into variable-rate debt based on the London Interbank Offered Rate. At
December 31, 1995 and 1994, the notional amounts of Grace's interest rate
swaps consist of the following: $1,219.5 and $1,013.5, respectively, which
convert fixed-rate debt into variable-rate debt; and $626.0 and $1,200.0,
respectively, which convert variable-rate debt into fixed-rate debt.
Notional amounts do not quantify risk or represent assets or liabilities of
Grace, but are used in the calculation of cash settlements under the
agreements.
Grace's debt and interest rate management objective is to reduce its
cost of funding over the long term, considering economic conditions and
their potential impact on Grace. The strategy emphasizes improving
liquidity by developing and maintaining access to a variety of long-term and
short-term capital markets. Grace enters into standard interest rate swaps
that have readily identifiable impacts on interest cost and are
characterized by broad market liquidity. Grace is not a party to leveraged
interest rate agreements.
During 1995 and 1994, Grace realized (negative)/positive cash flows of
$(16.5) and $10.0, respectively, from interest rate agreements. Realized
gains and losses on interest rate agreements are amortized to interest
expense over a period relevant to the agreement (1 - 10 years); at December
31, 1995 and 1994, unamortized net gains were $31.7 and $43.0, respectively.
At December 31, 1995 and 1994, Grace would have been required to pay $32.5
and $118.1, respectively, to retire these agreements. The maturities and
notional amounts of the swaps closely match underlying debt instruments.
This will result in the changes in the fair value of swaps being
substantially offset by changes in the fair value of the debt.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995 and 1994, the recorded value of financial instruments
such as cash, short-term investments, trade receivables and payables and
short-term debt approximated their fair values, based on the short-term
maturities and floating rate characteristics
F-20
<PAGE> 144
of these instruments. Additionally, the recorded value of both long-term
investments and receivables approximated fair values. At December 31, 1995
and 1994, the fair value of long-term debt was $1,361.1 and $1,212.1,
respectively. Fair value is determined based on expected future cash flows
(discounted at market interest rates), quotes from financial institutions
and other appropriate valuation methodologies. Grace does not hold or issue
financial instruments for trading purposes.
FOREIGN CURRENCY CONTRACTS
Grace conducts business in a wide variety of currencies and consequently
enters into foreign exchange forward and option contracts to manage its
exposure to fluctuations in foreign currency exchange rates. These
contracts generally involve the exchange of one currency for another at a
future date. At December 31, 1995 and 1994, Grace had notional principal
amounts of approximately $45.5 and $10.0, respectively, in contracts to buy
or sell foreign currency in the future. The recorded values at December 31,
1995 and 1994, which approximated fair value based on exchange rates at
December 31, 1995 and 1994, were not significant.
CREDIT RISK
Grace is exposed to credit risk to the extent of potential nonperformance by
counterparties on financial instruments. The counterparties to Grace's
interest rate swap agreements and currency exchange contracts comprise a
diversified group of major financial institutions, all of which are rated
investment grade. Credit risk is further reduced by bilateral netting
agreements between Grace and its counterparties. As of December 31, 1995,
Grace's credit exposure was insignificant and limited to the fair value
stated above; Grace believes the risk of incurring losses due to credit risk
is remote.
MARKET RISK
Exposure to market risk on financial instruments results from fluctuations
in interest and currency rates during the periods in which the contracts are
outstanding. The mark-to-market valuations of interest rate, foreign
currency agreements and of associated underlying exposures are closely
monitored at all times. Grace uses portfolio sensitivities and stress tests
to monitor risk. Overall financial strategies and the effects of using
derivatives are reviewed periodically.
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
Grace is the named tenant or guarantor with respect to certain leases
entered into by previously divested businesses. The leases, some of which
extend through the year 2015, have future minimum lease payments aggregating
$121.6 (including leases assigned to the previously divested Hermans
business having future minimum lease payments of $14.6), offset by $119.8 of
future minimum rental income from tenants and subtenants.
In addition, Grace is the named tenant or guarantor with respect to
leases entered into by a previously divested home center business that had
been rejected in bankruptcy. These leases have future minimum lease
payments of $47.0, fully offset by $48.5 of future minimum rental income
from tenants and subtenants.
Grace is also contingently liable with respect to leases entered into
by REG's subsidiaries. After undergoing a reorganization in 1993, REG (now
named Family Restaurants, Inc.) has agreed to indemnify Grace with respect
to these leases. At December 31, 1995, these leases have future minimum
lease payments of $64.2, fully offset by future minimum rental income from
tenants and subtenants.
Grace believes that the risk of significant loss from the above lease
obligations is remote, except that Grace may incur losses relating to the
Hermans and REG leases as the result of recent developments. The likelihood
and amounts of these losses cannot be reasonably estimated. In addition,
Grace is liable for other expenses (primarily property taxes) relating to
the above leases; these expenses are paid by the tenants and subtenants.
Grace is subject to loss contingencies resulting from environmental
laws and regulations that, among other things, impose obligations to remove
or mitigate the effects on the environment of the disposal or release of
substances at various sites. Grace accrues for anticipated costs associated
with investigatory and remediation efforts where an assessment has indicated
that a loss is probable and can be reasonably estimated. At December 31,
1995, Grace's liability for environmental investigatory and remediation
costs related to continuing and discontinued operations totalled
approximately $280.3, as compared to $216.0 at December 31, 1994. The
principal reason for this increase is a change in the estimated costs of
remediation at former manufacturing sites.
In 1995 and 1994, periodic provisions were recorded for environmental
and plant closure expenses, which include the costs of future environmental
investigatory and remediation activities. Additionally, in the fourth
quarter of 1995 and first quarter of 1994, Grace recorded pretax provisions
of $77.0 and $40.0 ($50.0 and $26.0 after-tax), respectively, principally
to provide for future costs related to remediation activities required at
former manufacturing sites. These provisions are included in the
Consolidated Statement of Operations as part of cost of goods sold and
operating expenses. In 1995, 1994 and 1993, Grace incurred costs of $31.3,
$30.8 and $44.4, respectively, to remediate its environmentally impaired
sites. These amounts have been charged against the previously established
reserves. Future cash outlays for remediation costs are expected to total
$30.0 in 1996 and $20.0 in 1997. Grace considers its current reserves to be
adequate to cover its environmental liabilities. Additionally, Grace's
classification between
F-21
<PAGE> 145
current and noncurrent liabilities with respect to its environmental
reserves is considered appropriate in relation to expected future cash
outlays.
Grace's environmental liabilities are reassessed whenever circumstances
become better defined and/or remediation efforts and their costs can be
better estimated. The measurement of the liability is evaluated quarterly
based on currently available information, including the progress of remedial
investigation at each site, the current status of discussions with
regulatory authorities regarding the method and extent of remediation at
each site, and the apportionment of costs among potentially responsible
parties. As some of these issues are decided (the outcome of which is
subject to various uncertainties) and/or new sites are assessed and costs
can be reasonably estimated, Grace will continue to review and analyze the
need for adjustments to the recorded accruals.
See Note 7 for a discussion of commitments and contingent liabilities
pertaining to NMC.
- --------------------------------------------------------------------------------
13. MINORITY INTEREST
- --------------------------------------------------------------------------------
Minority interest consists of a limited partnership interest in LP. The
total capital of LP at December 31, 1995 was approximately $1,488.0. 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.
Grace had $347.0 of borrowings from LP at December 31, 1995. Four Grace
entities serve as general partners of LP and own general partnership
interests totalling 79.03% in LP; the sole limited partner of LP, which
initially acquired its interest in LP in exchange for a $300.0 cash capital
contribution ($297.0 of which was funded by outside investors), owns a
20.97% limited partnership interest in LP. 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 a component
of discontinued operations and the outside investors' interest in LP is
reflected as a minority interest.
- --------------------------------------------------------------------------------
14. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The weighted average number of shares of common stock outstanding during
1995 was 95,822,000 (1994 - 93,936,000; 1993 - 91,461,000).
The Company is authorized to issue 300,000,000 shares of common stock.
Of the common stock unissued at December 31, 1995, approximately 7,655,000
shares were reserved for issuance pursuant to stock options and other stock
incentives. In addition, at December 31, 1995, approximately 105,084,000
shares were reserved for issuance under Common Stock Purchase Rights
(Rights). A Right is issued for each outstanding share of common stock; 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.
Preferred stocks authorized, issued and outstanding are:
<TABLE>
<CAPTION>
Par Value of
Shares as of December 31, 1995 Shares Outstanding
---------------------------------------------------- -----------------------------
Authorized In Out-
and Issued Treasury standing 1995 1994 1993
------------------- ------------------- ---------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
6% Cumulative (1) 40,000 3,540 36,460 $3.6 $3.6 $3.6
8% Cumulative Class A (2) 50,000 33,644 16,356 1.6 1.6 1.6
8% Noncumulative Class B (2) 40,000 18,423 21,577 2.2 2.2 2.2
------ --------- ------
$7.4 $7.4 $7.4
====== ========= ======
- --------------------------------------------------------------------------------
</TABLE>
(1) 160 votes per share.
(2) 16 votes per share.
Dividends paid on the preferred stocks amounted to $.5 in each of 1995,
1994 and 1993.
The Certificate of Incorporation also authorizes 5,000,000 shares of
Class C Preferred Stock, $1 par value, none of which
has been issued.
- --------------------------------------------------------------------------------
15. STOCK INCENTIVE PLANS
- --------------------------------------------------------------------------------
Stock options are granted under the Company's stock incentive plans. Each
option has an exercise price equal to the fair market value of the Company's
Common Stock on the date of grant. Options become exercisable at the time
or times determined by the Compensation Committee and may have terms of up
to ten years and one month.
F-22
<PAGE> 146
Changes in outstanding common stock options are summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------- ------------------------- -------------------------
AVERAGE Average Average
NUMBER EXERCISE Number Exercise Number Exercise
OF SHARES PRICE of Shares Price of Shares Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year .... 7,612,888 $38.08 6,965,304 $36.48 6,365,187 $35.09
Options granted ................. 1,704,150 46.66 1,358,900 42.27 1,461,425 38.00
----------- --------- ---------
9,317,038 8,324,204 7,826,612
Options exercised ............... (3,551,123) 38.30 (606,444) 29.21 (683,255) 25.89
Options terminated or canceled .. (71,719) 42.27 (104,872) 37.33 (178,053) 40.13
----------- --------- ---------
Balance at end of year .......... 5,694,196 40.45 7,612,888 38.08 6,965,304 36.48
=========== ========= =========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, options covering 4,172,391 shares (1994 -
5,633,761; 1993 - 5,056,256) were exercisable and 1,913,163 shares (1994 -
3,547,094; 1993 - 1,804,122) were available for additional grants.
Currently outstanding options expire on various dates between February 1996
and July 2005.
Grace will adopt the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" in 1996. However, Grace
anticipates that it will continue to follow the measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as permitted by SFAS No. 123.
- --------------------------------------------------------------------------------
16. PENSION PLANS
- --------------------------------------------------------------------------------
Grace maintains defined benefit pension plans covering employees of certain
units who meet age and service requirements. Benefits are generally based
on final average salary and years of service. Grace funds its U.S. pension
plans in accordance with Federal laws and regulations. Non-U.S. pension
plans are funded under a variety of methods because of differing local laws
and customs and therefore cannot be summarized. Approximately 60% of U.S.
and non-U.S. plan assets at December 31, 1995 were common stocks, with the
remainder primarily fixed income securities.
Pension cost/(benefit) is comprised of the following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------- ---------------- ---------------------
U.S. NON-U.S. U.S. Non-U.S. U.S. Non-U.S.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost on benefits earned during the year .... $ 14.6 $ 10.5 $ 19.8 $ 13.4 $ 12.7 $ 9.5
Interest cost on benefits earned in prior years .... 50.6 21.4 46.9 19.3 33.8 17.1
Actual (return)/loss on plan assets ................ (132.3) (52.0) 16.9 10.6 (101.7) (56.7)
Deferred loss/(gain) on plan assets ................ 71.1 26.2 (84.6) (37.4) 55.1 36.0
Amortization of net gains and prior service costs .. (.8) (.8) (7.1) (1.6) (4.9) (1.7)
------- ------ ------ ------ ------- ------
Net pension cost/(benefit) ......................... $ 3.2 $ 5.3 $ (8.1) $ 4.3 $ (5.0) $ 4.2
======= ====== ====== ====== ======= ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The funded status of these plans was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
U.S. NON-U.S.
- ---------------------------------------------------------------------------------------------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- -------------- ------------- -------------
1995 1994 1995 1994 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested........................................... $679.6 $536.2 $ 52.0 $ 39.0 $133.5 $114.2 $ 67.5 $ 57.2
------ ------ ------ ------ ------ ------ ------ ------
Accumulated benefit obligation................... $680.4 $540.8 $ 52.0 $ 39.0 $133.9 $115.3 $ 75.1 $ 64.4
------ ------ ------ ------ ------ ------ ------ ------
Total projected benefit obligation............... $710.0 $596.3 $ 55.7 $ 40.4 $189.4 $158.5 $ 92.4 $ 81.8
Plan assets at fair value........................ 795.8 751.6 -- -- 302.5 255.8 7.3 12.5
------ ------ ------ ------ ------ ------ ------ ------
Plan assets in excess of/(less than) projected
benefit obligation............................... 85.8 155.3 (55.7) (40.4) 113.1 97.3 (85.1) (69.3)
Unamortized net (gain)/loss at initial adoption.. (73.7) (89.5) 4.9 5.6 (6.3) (8.4) 4.5 4.6
Unamortized prior service cost................... 41.7 13.0 16.3 18.3 3.6 4.0 -- --
Unrecognized net loss/(gain)..................... 97.6 62.3 8.6 1.1 (16.0) (7.4) (3.2) (5.6)
------ ------ ------ ------ ------ ------ ------ ------
Prepaid/(accrued) pension cost................... $151.4 $141.1 $(25.9) $(15.4) $ 94.4 $ 85.5 $(83.8) $(70.3)
====== ====== ====== ====== ====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE> 147
The following significant assumptions were used in 1995, 1994 and 1993:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
U.S. NON-U.S. U.S. Non-U.S. U.S. Non-U.S.
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Discount rate at December 31, ...................... 7.25% 5.1 - 11.6% 8.5% 5.0 - 12.0% 7.5% 4.5 - 9.2%
Expected long-term rate of return .................. 9.0 6.0 - 10.5 9.0 6.0 - 10.5 9.0 6.0 - 10.5
Rate of compensation increase ...................... 4.5 4.0 - 7.5 5.5 4.0 - 7.5 5.5 3.5 - 7.5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Grace's Retirement Plan for Salaried Employees (Plan) contains
provisions under which the Plan would automatically terminate in the event
of a change in control of the Company, and Plan benefits would be secured
through the purchase of annuity contracts. Upon such termination, a portion
of the Plan's excess assets would be placed in an irrevocable trust to fund
various employee benefit plans and arrangements of Grace, and any balance
would be returned to Grace.
During 1995, Grace approved a cost-of-living increase, effective
January 1, 1996, for retirees under the Plan and Grace's Retirement Plan for
Hourly Employees of Canadian subsidiaries.
- --------------------------------------------------------------------------------
17. OTHER POSTRETIREMENT BENEFIT PLANS
- --------------------------------------------------------------------------------
Grace provides certain other postretirement health care and life insurance
benefits for retired employees of specified U.S. units. These retiree
medical and life insurance plans provide various levels of benefits to
employees (depending on their date of hire) who retire from Grace after age
55 with at least 10 years of service. The plans are currently unfunded.
Grace applies SFAS No. 106, which requires the accrual method of
accounting for the future costs of postretirement health care and life
insurance benefits over the employees' years of service. Grace pays the
costs of postretirement benefits as they are incurred.
Included in other liabilities as of December 31, 1995 and 1994 are the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ..................................... $209.0 $192.6
Fully eligible participants .................. 15.2 12.1
Active ineligible participants ............... 34.4 26.3
------ ------
Accumulated postretirement benefit obligation .. 258.6 231.0
Unrecognized net loss ........................ (54.9) (28.5)
Unrecognized prior service benefit ........... 44.3 48.6
------ ------
Accrued postretirement benefit obligation ...... $248.0 $251.1
====== ======
- -----------------------------------------------------------------------------
</TABLE>
Net periodic postretirement benefit cost for the years ended December
31, 1995, 1994 and 1993 is comprised of the following components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost .................................................... $ 1.6 $ 2.1 $ 2.2
Interest cost on accumulated postretirement benefit obligation .. 18.3 16.2 13.2
Amortization of net loss ........................................ .2 1.2 .2
Amortization of prior service benefit ........................... (4.3) (4.3) (4.5)
----- ----- -----
Net periodic postretirement benefit cost ........................ $15.8 $15.2 $11.1
===== ===== =====
- ----------------------------------------------------------------------------------------
</TABLE>
During 1992, Grace's retiree medical plans were amended to increase
cost sharing by employees retiring after January 1, 1993. This amendment
decreased the accumulated postretirement benefit obligation by $44.3 at
December 31, 1995 and will be amortized over an average remaining future
service life of approximately 11 years.
Medical care cost trend rates were projected at 10.7% in 1995,
declining to 6.0% through 2003 and remaining level thereafter. A one
percentage point increase in each year's assumed medical care cost trend
rate, holding all other assumptions constant, would increase the annual net
periodic postretirement benefit cost by $2.5 and the accumulated
postretirement benefit obligation by $20.2. The discount rates at December
31, 1995, 1994 and 1993 were 7.25%, 8.5% and 7.5%, respectively.
Effective January 1, 1994, Grace adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which requires accrual accounting
for nonaccumulating postemployment benefits. Grace's primary postemployment
obligation is for disabled workers' medical benefits. These are currently
included in accrued postretirement costs under SFAS No. 106. The adoption
of SFAS No. 112 did not have a material effect on Grace's results of
operations or financial position.
F-24
<PAGE> 148
- --------------------------------------------------------------------------------
18. GEOGRAPHIC AREA INFORMATION
- --------------------------------------------------------------------------------
The table below presents information related to Grace's specialty chemicals
segment (its only industry segment) by geographic area for the years 1995
- -1993.
<TABLE>
<CAPTION>
United Asia Latin
States Canada Europe Pacific America Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues .................. 1995 $1,693 $128 $1,147 $445 $253 $3,666
1994 1,558 121 955 366 218 3,218
1993 1,432 123 852 307 182 2,896
Pretax operating (loss)/income (1) .. 1995 (120) 23 39 62 10 14
1994 (133) 9 69 56 20 21
1993 23 7 38 44 13 125
Identifiable assets (2) ............. 1995 2,031 101 998 411 246 3,787
1994 1,796 83 905 308 208 3,300
1993 2,042 81 720 243 154 3,240
- ---------------------------------------------------------------------------------------------
</TABLE>
Pretax operating income and total identifiable assets for the specialty
chemicals segment are reconciled below to income from continuing operations
before income taxes and consolidated total assets, respectively, as
presented in the Consolidated Statement of Operations and the Consolidated
Balance Sheet. Grace allocates to its specialty chemicals segment general
corporate overhead expenses, general corporate research expenses and certain
other income and expense items that can be identified with specialty
chemicals operations.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax operating income - specialty chemicals segment (1) ....................... $ 14 $ 21 $ 125
Interest expense and related financing costs .................................... (71) (50) (43)
Corporate restructuring costs and asset impairments/other activities ............ (122) -- --
Provisions relating to environmental liabilities at former manufacturing sites .. (77) (40) --
Provision for corporate governance .............................................. (30) -- --
Gain on sale of remaining interest in REG ....................................... -- 27 --
Corporate expenses previously allocated to health care operations (3) ........... (38) (37) (37)
Other income/(expenses), net .................................................... 12 (9) (16)
------ ------ ------
(Loss)/income from continuing operations before income taxes .................... $ (312) $ (88) $ 29
====== ====== ======
- ---------------------------------------------------------------------------------------------------------
Identifiable assets - specialty chemicals segment (2) ........................... $3,787 $3,300 $3,240
General corporate assets (4) .................................................... 752 860 811
Discontinued operations' net assets ............................................. 1,759 2,071 2,058
------ ------ ------
Total assets .................................................................... $6,298 $6,231 $6,109
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes (a) 1995, 1994 and 1993 pretax provisions of $275, $316 and
$159, respectively, relating to asbestos-related liabilities and
insurance coverage (see Note 2 for further information); and (b) a 1995
pretax charge of $98 relating to restructuring costs, asset impairments
and other costs (see Note 5 for further information).
(2) Includes asbestos-related receivables and settlements due from
insurance carriers, net of discounts, of $321 and $118, respectively,
in 1995; $513 and $187, respectively, in 1994; and $962 and $114,
respectively, in 1993.
(3) These costs will not be assumed by NMC following the completion of its
proposed separation from Grace, and it is expected that these costs
will be eliminated.
(4) General corporate assets consist principally of deferred tax assets,
prepaid pension costs, and corporate receivables and investments.
- --------------------------------------------------------------------------------
19. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
As more fully discussed in Note 7, in February 1996, Grace and Fresenius
entered into a definitive agreement to combine NMC with Fresenius' worldwide
dialysis business. The transaction is expected to be completed by the third
quarter of 1996.
In March 1996, Grace announced that it had entered into a definitive
agreement to sell its Grace Dearborn water treatment and process chemicals
business to Betz Laboratories, Inc. for $632.0. The transaction is expected
to be completed in the second quarter of 1996.
F-25
<PAGE> 149
- -------------------------------------------------------------------------------
NOTE 20. SUBSEQUENT EVENT -- GUARANTEE (UNAUDITED)
- -------------------------------------------------------------------------------
Under the terms of the combination of FWD and NMC described in Note 7, NMC
will remain responsible for all liabilities, if any, resulting from the OIG
investigation. In July 1996, an agreement was reached with the United States
government under which, subject to certain conditions and limitations, upon such
combination, (a) FMC is to guarantee the payment of the obligations, if any, of
NMC to the United States in respect of the OIG investigation; (b) the
corporation holding Grace's packaging and specialty chemicals businesses (Grace
Chemicals) is to guarantee the collection of the amounts, if any, due under the
foregoing guarantee of FMC; (c) NMC is to deliver a standby letter of credit in
the principal amount of $150 million in favor of the United States to support
its payment of such obligations; and (d) Grace Chemicals is to guarantee
repayment of such amount to the issuer of such letter of credit. At the present
time, management does not believe that the liability, if any, with respect to
the OIG investigation is estimable. See Note 7 for additional information.
In connection with the matters discussed above, the United States has
agreed to release Grace, NMC, and certain other parties from certain fraudulent
conveyance and related claims arising from or related to the combination (or any
transaction comprising a part thereof).
F-26
<PAGE> 150
- --------------------------------------------------------------------------------
QUARTERLY SUMMARY AND STATISTICAL INFORMATION Unaudited - dollars in
millions, except per share
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
QUARTER ENDED 1Q 2Q 3Q 4Q
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Total sales and revenues ................... $ 853.4 $ 932.3 $ 946.4 $ 933.4
Cost of goods sold and operating expenses .. 500.9 550.7 566.0 626.1
Net income/(loss) .......................... 47.5(3) 78.7 21.7(4) (473.8)(5)
Earnings/(loss) per share: (1)
Net earnings/(loss) .................... $ .50 $ .83 $ .22 $ (4.87)
Fully diluted earnings per share:
Net earnings/(loss) .................... $ .49 $ .80 $ .22 $ -- (6)
Dividends declared per common share ........ $ .35 $ .35 $ .35 $ .125
Market price of common stock: (2)
High ................................... $54 1/2 $65 1/8 $71 1/4 $66 1/4
Low .................................... 38 1/2 51 3/8 61 9/16 54 3/4
Close .................................. 53 1/4 61 3/8 66 3/4 59 1/8
- -------------------------------------------------------------------------------------------------------
1994 (7)
Total sales and revenues ................... $ 675.4 $ 782.9 $ 815.5 $ 944.4
Cost of goods sold and operating expenses .. 437.8 464.5 475.0 523.5
Net income/(loss) .......................... 38.2(8) (134.3)(9) 76.0 103.4
Earnings/(loss) per share: (1)
Net earnings/(loss) .................... $ .41 $ (1.43) $ .81 $ 1.10
Fully diluted earnings per share:
Net earnings/(loss) .................... $ .40 $ -- (6) $ .80 $ 1.09
Dividends declared per common share ........ $ .35 $ .35 $ .35 $ .35
Market price of common stock: (2)
High ................................... $46 1/2 $ 43 $42 3/8 $41 1/8
Low .................................... 40 3/8 39 38 1/4 36
Close .................................. 41 1/4 39 7/8 41 1/2 38 5/8
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share results for the four quarters differ from full-year per
share results, as a separate computation of earnings per share is made
for each quarter presented.
(2) Principal market: New York Stock Exchange.
(3) Includes a $12.5 charge for matters relating to corporate governance.
(4) Includes a $27.1 charge for restructuring costs; a $6.1 charge for
matters relating to corporate governance; and a $33.5 charge to the
discontinued health care operations, primarily relating to asset
impairments.
(5) Includes a $178.7 provision relating to asbestos-related liabilities
and insurance coverage; a $50.0 provision for environmental
liabilities; a $116.9 charge for restructuring costs, asset impairments
and other items; a $151.3 provision for other discontinued operations;
and a $68.9 charge to the discontinued health care operations,
primarily relating to asset impairments and other items.
(6) Not presented as the effect is anti-dilutive.
(7) Certain amounts have been reclassified to conform to the 1995
presentation.
(8) Includes a $27.0 gain on the sale of Grace's remaining interest in The
Restaurant Enterprises Group, Inc. (REG), offset by a $26.0 provision,
primarily for environmental liabilities.
(9) Includes a $200.0 reinstatement of a provision relating to
asbestos-related insurance coverage.
F-27
<PAGE> 151
<TABLE>
- -------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES, NET FIXED ASSETS AND DEPRECIATION AND
LEASE AMORTIZATION Dollars in millions
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Depreciation and
Capital Expenditures (1) Net Fixed Assets Lease Amortization (2)
------------------------ -------------------------- ---------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING GROUP
Specialty chemicals .......... $459 $329 $209 $1,581 $1,262 $1,049 $155 $144 $135
General corporate ............ 49 30 21 155 144 128 15 14 11
---- ---- ---- ------ ------ ------ ---- ---- ----
Total continuing operations .. 508 359 230 1,736 1,406 1,177 170 158 146
Discontinued operations ...... 30 86 80 -- 324 277 -- -- --
---- ---- ---- ------ ------ ------ ---- ---- ----
Total ........................ $538 $445 $310 $1,736 $1,730 $1,454 $170 $158 $146
==== ==== ==== ====== ====== ====== ==== ==== ====
- -------------------------------------------------------------------------------------------------------------
GEOGRAPHIC LOCATION
United States and Canada ..... $246 $202 $126 $ 869 $ 714 $ 608 $ 75 $ 77 $ 74
Europe ....................... 100 75 57 441 382 321 59 51 46
Other areas .................. 113 52 26 271 166 120 21 16 15
---- ---- ---- ------ ------ ------ ---- ---- ----
Subtotal ..................... 459 329 209 1,581 1,262 1,049 155 144 135
General corporate ............ 49 30 21 155 144 128 15 14 11
---- ---- ---- ------ ------ ------ ---- ---- ----
Total continuing operations .. 508 359 230 1,736 1,406 1,177 170 158 146
Discontinued operations ...... 30 86 80 -- 324 277 -- -- --
---- ---- ---- ------ ------ ------ ---- ---- ----
Total ........................ $538 $445 $310 $1,736 $1,730 $1,454 $170 $158 $146
==== ==== ==== ====== ====== ====== ==== ==== ====
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes capital expenditures of discontinued operations subsequent to
their classification as such.
(2) Certain 1994 and 1993 amounts have been reclassified to conform to the
1995 presentation.
F-28
<PAGE> 152
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY (1) Dollars in millions, except per share amounts
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Sales and revenues ............................................ $3,665.5 $3,218.2 $2,895.5 $3,061.8 $3,326.2
Cost of goods sold and operating expenses ..................... 2,243.7 1,900.8 1,746.7 1,871.8 2,027.9
Depreciation and amortization ................................. 186.3 165.0 153.5 164.5 178.3
Interest expense and related financing costs .................. 71.3 49.5 42.9 49.4 73.7
Research and development expenses ............................. 120.6 106.8 111.5 105.2 102.0
(Loss)/income from continuing operations before
income taxes................................................. (312.4) (88.0) 29.2 81.3 256.5
(Benefit from)/provision for income taxes ..................... (115.8) (46.6) 10.1 79.9 99.1
Income from continuing operations before special items (2) .... 194.7 157.6 119.1 146.5 153.9
(Loss)/income from continuing operations ...................... (196.6) (41.4) 19.1 1.4 157.4
(Loss)/income from discontinued operations (3) ................ (129.3) 124.7 6.9 (105.9) 61.2
Cumulative effect of accounting changes ....................... -- -- -- (190.0) --
Net (loss)/income ............................................. (325.9) 83.3 26.0 (294.5) 218.6
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Current assets ................................................ $1,681.3 $2,228.9 $2,077.6 $2,091.4 $1,990.0
Current liabilities ........................................... 2,214.2 2,231.5 1,992.6 1,639.6 1,622.1
Properties and equipment, net ................................. 1,736.1 1,730.1 1,454.1 1,707.9 2,558.2
Total assets .................................................. 6,297.6 6,230.6 6,108.6 5,598.6 6,007.1
Total debt .................................................... 1,933.8 1,529.7 1,706.1 1,819.2 2,259.4
Shareholders' equity - common stock ........................... 1,224.4 1,497.1 1,510.2 1,537.5 2,017.7
- ---------------------------------------------------------------------------------------------------------------------------------
DATA PER COMMON SHARE
Earnings from continuing operations before special items (2) .. $ 2.03 $ 1.68 $ 1.30 $ 1.63 $ 1.76
(Loss)/earnings from continuing operations .................... (2.05) (.45) .20 .01 1.80
Cumulative effect of accounting changes ....................... -- -- -- (2.12) --
Net (loss)/earnings ........................................... (3.40) .88 .28 (3.29) 2.50
Dividends ..................................................... 1.175 1.40 1.40 1.40 1.40
Book value .................................................... 12.57 15.91 16.16 17.10 22.77
Average common shares outstanding (thousands) ................. 95,822 93,936 91,461 89,543 87,236
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Dividends paid on common stock ................................ $ 112.1 $ 131.5 $ 127.9 $ 125.4 $ 122.0
Capital expenditures .......................................... 537.6 444.6 309.6 398.4 447.0
% Total debt to total capital ................................. 61.1% 50.4% 52.9% 54.1% 52.7%
Common shareholders of record ................................. 19,496 18,501 19,358 20,869 21,949
Common stock price range ..................................... 71 1/4-38 1/2 46 1/2-36 41 1/4-34 5/8 45-32 40 3/4-23 3/8
Number of employees - continuing operations (thousands) ....... 21.2 20.6 20.4 20.0 21.5
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Certain prior year amounts have been reclassified to conform to the
1995 presentation.
(2) Income from continuing operations before special items reconciles to
(loss)/income from continuing operations as follows:
<CAPTION>
1995 1994 1993 1992 1991
-------- ------- ------- ------- ------
<C> <C> <C> <C> <C> <C>
Income from continuing operations before special items .... $ 194.7 $ 157.6 $ 119.1 $ 146.5 $153.9
Special items (after-tax):
Provision for corporate governance ....................... (18.6) -- -- -- --
Gain on sale of remaining interest in REG ................ -- 27.0 -- -- --
Restructuring costs and asset impairments/other activities (144.0) -- -- -- --
Provisions for environmental liabilities at former
manufacturing sites ................................... (50.0) (26.0) -- -- --
Provision relating to a fumed silica plant ............... -- -- -- (140.0) --
Postretirement benefits prior to plan amendments ......... -- -- -- (5.1) --
Strategic restructuring gain ............................. -- -- -- -- 3.5
Provisions relating to asbestos-related liabilities
and insurance coverage ................................ (178.7) (200.0) (100.0) -- --
-------- ------- ------- ------- ------
(Loss)/income from continuing operations .................. $ (196.6) $ (41.4) $ 19.1 $ 1.4 $157.4
======== ======= ======= ======= ======
</TABLE>
The special items included in the foregoing table have also been excluded
in determining earnings per common share from continuing operations before
special items.
(3) Includes income of $22.0, $124.7 and $115.3 in 1995, 1994 and 1993,
respectively, from the discontinued health care operations. 1995
health care results reflect special charges totalling $102.4, relating
to asset impairments of $83.6, the phase-out of certain of Grace's
health care research programs of $5.6, additional costs associated with
Grace's long-term incentive programs applicable to NMC of $4.8, changes
in accounting estimates of $1.8 and other items totalling $6.6.
F-29
<PAGE> 153
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
REVIEW OF OPERATIONS
OVERVIEW
Sales and revenues increased 14% in 1995 over 1994, as compared to an
increase of 11% in 1994 over 1993.
(Loss)/income from continuing operations was $(196.6) million, $(41.4)
million and $19.1 million in 1995, 1994 and 1993, respectively. These
results reflected (a) 1995, 1994 and 1993 pretax provisions of $275.0
million, $316.0 million and $159.0 million ($178.7 million, $200.0 million
and $100.0 million after-tax), respectively, relating to asbestos-related
liabilities and insurance coverage (see "Financial Condition:
Asbestos-Related Matters" below and Note 2 to the Consolidated Financial
Statements for further information); (b) 1995 and 1994 pretax provisions of
$77.0 million and $40.0 million ($50.0 million and $26.0 million after-tax),
respectively, relating to environmental liabilities (see "Financial
Condition: Environmental Matters" below for further information); (c) a 1995
pretax charge of $220.0 million ($144.0 million after-tax) relating to
restructuring costs, asset impairments and other costs (see "Statement of
Operations: Restructuring Costs, Asset Impairments and Other Costs" below
for further information); (d) a 1995 pretax charge of $30.0 million ($18.6
million after-tax) relating to corporate governance matters; and (e) a 1994
gain of $27.0 million (pre- and after-tax) on the sale of Grace's remaining
interest in The Restaurant Enterprises Group, Inc. Excluding these
provisions and charges from all years, income from continuing operations in
1995 increased 24%, to $194.7 million, as compared to 1994, and in 1994
increased 32%, to $157.6 million, over 1993.
Income from continuing operations reflects corporate expenses of $37.8
million, $37.1 million and $37.4 million in 1995, 1994 and 1993,
respectively, previously allocated to the discontinued health care
operations. These expenses will not be assumed by National Medical Care,
Inc. (NMC), Grace's principal health care subsidiary, following completion
of its proposed separation from Grace, and it is expected that these costs
will be eliminated. See below for additional information regarding the
proposed separation of NMC from Grace and Grace's cost management efforts.
For all periods presented, the Consolidated Statement of Operations has
been restated to reflect the classification of certain businesses as
discontinued operations, as discussed in Note 7 to the Consolidated
Financial Statements.
SPECIALTY CHEMICALS
Operating Results - 1995 Compared to 1994
As noted above, sales and revenues increased 14% in 1995 as compared to
1994, reflecting favorable volume, price/product mix and currency
translation variances estimated at 7%, 4% and 3%, respectively. All product
lines experienced improved volumes in 1995. Packaging volume increases
reflected higher sales of bags and films in all regions, and higher sales of
laminates in all regions other than Latin America. Volume increases in
catalysts and other silica-based products reflected higher sales in all
regions, especially refinery catalysts in Asia Pacific and Europe, and
silica/adsorbent products in Europe and Asia Pacific. Container volume
increases were due to increased sales of specialty polymers and can sealing
products in Asia Pacific, and coating products in Latin America. Volume
increases in water treatment reflected higher paper industry process
chemicals sales in Europe and North America caused by market share gains, as
well as higher water treatment chemicals sales in Latin America.
Construction products experienced volume increases, primarily in Asia
Pacific, due to increased construction activity, partially offset by volume
decreases in both fire protection products in North America (due to a small
market share loss) and waterproofing products in Europe and North America.
Operating income before taxes (which excludes for all years the items
discussed in the second paragraph of "Overview" above) increased by 15% in
1995 as compared to 1994. North American results in 1995 improved,
reflecting strong growth in packaging due to the volume increases noted
above (especially in bags). However, this was partially offset by reduced
profitability in refinery catalysts, as North American refiners continued to
experience low margins. The narrow spread between light and heavy crude oil
prices led customers to crack higher quality light crude rather than heavy
crude oil (which requires more catalysts). In addition, water treatment
chemicals in North America experienced lower profitability due to ongoing
market consolidations. European results in 1995 improved significantly
versus 1994, primarily in packaging, reflecting volume increases caused by
an economic recovery that revitalized key markets, partially offset by
unfavorable results in construction waterproofing products due to higher
material costs and a slowdown in the nonresidential construction market.
European results also benefited from the absence of costs incurred in 1994
to streamline European packaging, water treatment and container operations.
In Asia Pacific, favorable results were achieved versus 1994, primarily in
refinery catalysts and silica/adsorbent and construction products (due to
the volume increases noted above), partially offset by higher operating
costs incurred to increase market share in the region. Latin American 1995
results declined slightly versus 1994, primarily due to the effect of
inflation indexation on wage and employee benefit costs in the Brazilian
water treatment operations, partially offset by increased profitability in
packaging due to improved volumes and in container products due to market
share gains in coating products. The above results reflect the allocation
of corporate overhead and corporate research expenses; corporate interest
and financing costs and nonallocable expenses are not reflected in the
results of specialty chemicals.
F-30
<PAGE> 154
Operating Results - 1994 Compared to 1993
Sales and revenues increased by 11%, and operating income before taxes
increased by 19%, in 1994 as compared to 1993. The increase in sales and
revenues reflected favorable volume, price/product mix and currency
translation variances estimated at 9%, 1% and 1%, respectively. Volume
increases were experienced by all core product lines. North American
results in 1994 were positively affected by strong growth in construction
and packaging, mainly due to the volume increases, partially offset by
reduced profitability in refinery catalysts due to volume decreases as a
result of customers' use of higher quality crude oil and an increase in
customer maintenance shutdowns. European results in 1994 improved
significantly versus 1993, primarily due to improvements in refinery and
polyolefin catalysts and construction products (due to the volume
increases), partially offset by costs associated with streamlining European
operations. In Asia Pacific, favorable results were achieved versus 1993,
primarily due to volume increases in refinery and polyolefin catalysts and
container products. Latin American 1994 results improved versus 1993,
primarily due to increased profitability in packaging (due to increased
volumes in bags, films and laminates). Latin American results also
benefited from improved economic conditions in Brazil; however, this was
partially offset by the devaluation of the Mexican peso in late 1994.
STATEMENT OF OPERATIONS
OTHER INCOME
See Note 4 to the Consolidated Financial Statements for information relating
to other income.
INTEREST EXPENSE AND RELATED FINANCING COSTS
Excluding amounts allocated to discontinued operations (as discussed in Note
7 to the Consolidated Financial Statements), interest expense and related
financing costs of $71.3 million in 1995 increased 44% versus 1994.
Including amounts allocated to discontinued operations, interest expense and
related financing costs increased 50% in 1995 over 1994, to $164.8 million,
primarily due to higher average effective short-term interest rates and
higher debt levels.
Grace's debt and interest rate management objectives are to reduce its
cost of funding over the long term, considering economic conditions and
their potential impact on Grace, and to improve liquidity by developing and
maintaining access to a variety of long-term and short-term capital markets.
To manage its exposure to changes in interest rates, Grace enters into
interest rate agreements; during 1995, most of these agreements effectively
converted fixed-rate debt into variable-rate debt. These agreements have
readily identifiable impacts on interest cost and are characterized by broad
market liquidity. See Note 11 to the Consolidated Financial Statements for
further information on interest rate agreements.
See "Financial Condition: Liquidity and Capital Resources" below and
Note 10 to the Consolidated Financial Statements for information on
borrowings.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development spending increased 13% in 1995 versus 1994.
Research and development spending continues to be directed toward Grace's
core specialty chemicals businesses. As discussed below, during 1995 Grace
undertook a worldwide restructuring program, including a study of
company-wide research and development expenses. Certain actions have
already been taken based on this study, including the shutdown of Grace's
Japan research center and the phase-out of certain research programs related
to noncore operations.
RESTRUCTURING COSTS, ASSET IMPAIRMENTS AND OTHER COSTS
Restructuring Costs
As discussed in Note 5 to the Consolidated Financial Statements, during the
third quarter of 1995, Grace began implementing a worldwide restructuring
program aimed at streamlining processes and reducing general and
administrative expenses, factory administration costs and noncore corporate
research and development expenses. The program is expected to be
substantially completed by the end of 1996. In the third and fourth
quarters of 1995, Grace recorded pretax charges totalling $44.3 million and
$91.7 million ($27.2 million and $61.9 million after-tax), respectively,
comprised of $77.4 million for employee termination benefits; $13.4 million
for plant closure and related costs, including lease termination costs;
$15.5 million for prior business exits and related costs; $20.8 million for
asset writedowns; and $8.9 million for other costs. The $77.4 million for
employee termination benefits primarily represents severance pay and other
benefits associated with the elimination of approximately 1,000 positions
worldwide; more than 50% of the total cost reductions will come from
corporate staff functions worldwide.
Grace expects to implement additional cost reductions and efficiency
improvements beyond those discussed above, as its businesses further
evaluate and reengineer their operations. These reductions and efficiencies
are expected in areas such as purchasing, logistics, working capital
management and manufacturing.
F-31
<PAGE> 155
Asset Impairments
During 1995, Grace determined that, due to various events and changes
in circumstances (including the worldwide restructuring program described
above), certain long-lived assets and related goodwill were impaired. As a
result, in the fourth quarter of 1995, Grace recorded a $43.5 million pretax
charge ($29.0 million after-tax), the majority of which related to assets
that will continue to be held and used in Grace's continuing operations; the
charge included no significant individual components. Grace determined the
amount of the charge based on various valuation techniques, including
discounted cash flow, replacement cost and net realizable value for assets
to be disposed of.
Other Costs
Also, in the fourth quarter of 1995, Grace recorded pretax charges
totalling $40.5 million ($25.9 million after-tax) relating to the writedown
of corporate assets ($27.0 million) and working capital assets ($13.5
million). These amounts are included in "Cost of goods sold and operating
expenses" in the Consolidated Statement of Operations.
INCOME TAXES
Grace's effective tax rates were (37.1)%, (53.0)% and 34.6% in 1995, 1994
and 1993, respectively. Excluding the items discussed in the second
paragraph of "Review of Operations: Overview" above, Grace's effective tax
rates were 32.8%, 34.6% and 36.7% in 1995, 1994 and 1993, respectively. The
lower effective tax rate in 1995, as compared to 1994, was largely due to
the reversal of the valuation allowance on foreign net operating losses and
lower state income taxes, partially offset by higher taxes on foreign
operations. The lower effective tax rate in 1994, as compared to 1993, was
largely due to lower taxes on foreign operations.
Grace has recognized a valuation allowance relating to uncertainty as
to the realization of certain deferred tax assets, including U.S. tax credit
carryforwards, state and local net operating loss carryforwards and net
deferred tax assets. As a result of the favorable resolution of an audit,
the valuation allowance on net operating loss carryforwards in foreign
jurisdictions was reversed in 1995. Based upon anticipated future results,
Grace has concluded, after consideration of the valuation allowance, that it
is more likely than not that the remaining balance of the net deferred tax
assets will be realized.
See Note 6 to the Consolidated Financial Statements for further
information on income taxes.
DISCONTINUED OPERATIONS
HEALTH CARE
In June 1995, the Company announced that its Board of Directors had approved
a plan to spin off NMC. As a result, Grace classified its health care
business as a discontinued operation in the second quarter of 1995 and,
accordingly, NMC's operations are included in "(Loss)/income from
discontinued operations" in the Consolidated Statement of Operations.
Following NMC's receipt in October 1995 of five investigative subpoenas
from the Office of the Inspector General of the U.S. Department of Health
and Human Services (OIG), as discussed below, the completion of the spin-off
of NMC, originally expected in the 1995 fourth quarter, was delayed.
In February 1996, Grace and Fresenius AG (Fresenius) entered into a
definitive agreement to combine NMC with Fresenius' worldwide dialysis
business (FWD) to create Fresenius Medical Care (FMC). As a result of the
combination, FMC would acquire NMC, which would remain responsible for all
liabilities arising out of the investigations, discussed below. However,
Grace would retain certain health care assets, primarily a bioseparation
sciences business, a health care services company and other assets
(including cash and marketable securities).
The combination would follow a borrowing of approximately $2.3 billion
by NMC, a tax-free distribution of the proceeds by NMC to Grace, and a
tax-free distribution by the Company, with respect to each share of its
Common Stock, of one share of a newly formed corporation holding all of
Grace's businesses (principally its specialty chemicals businesses) other
than NMC. As a result of the separation of Grace's specialty chemicals
businesses from NMC and the subsequent combination of NMC and FWD, the
holders of the Company's Common Stock would own 100% of the specialty
chemicals company and 44.8% of FMC, and Fresenius and other shareholders
would own 55.2% of FMC. The holders of the Company's Common Stock would
also own preferred stock, the value of which would be linked to the
performance of FMC. Completion of the various transactions is subject to
customary conditions, including the approval of the shareholders of the
Company and Fresenius; U.S., German and European regulatory actions; and
obtaining financing on satisfactory terms. Commitments for financing have
been received, and it is expected that the various transactions will be
completed by the third quarter of 1996.
Operating Results - 1995 Compared to 1994
Health care sales and revenues for 1995 increased by 11% over 1994, due to
increases of 13%, 3% and 10%, respectively, in kidney dialysis services,
home health care and medical products operations. The increase in kidney
dialysis services reflects acquisitions in 1995 and 1994, and the increase
in home health care reflects the full-year ownership of Home Nutritional
Services, Inc., a national provider of home infusion therapy services
acquired in April 1994. The number of centers providing dialysis and
related services increased 15%, from 590 at December 31, 1994 to 681 at
December 31, 1995 (574 in North America, 62 in Europe, 33 in Latin America
and 12 in Asia Pacific).
F-32
<PAGE> 156
Operating income before taxes in 1995 increased 10%, to $315.6 million,
as compared to 1994, excluding 1995 pretax charges totalling $117.5 million
($102.4 million after-tax). These pretax charges are comprised of (a) asset
impairments of $84.3 million ($83.6 million after-tax); (b) the phase-out of
certain of Grace's health care research programs of $8.8 million ($5.6
million after-tax); (c) changes in accounting estimates totalling $8.7
million ($1.8 million after-tax); (d) additional costs associated with
Grace's long-term incentive programs applicable to NMC of $8.3 million ($4.8
million after-tax); and (e) other items totalling $7.4 million ($6.6 million
after-tax). Health care results reflect the allocation of Grace's health
care-related research expenses; however, corporate interest and financing
costs allocated to the health care business are not reflected in operating
income before taxes. These allocations are not necessarily indicative of
the costs that would be incurred by the health care business on a
stand-alone basis.
The 1995 asset impairments totalling $84.3 million pretax, referred to
above, are comprised of: (a) NMC's investment in a German dialysis machine
manufacturing operation - $39.8 million (pre- and after-tax); (b) NMC's
investment in a dialyzer development operation in Ireland - $16.6 million
(pre- and after-tax); (c) Grace's investment in a health care services
company - $26.2 million (pre- and after-tax); and (d) other items of $1.7
million pretax ($1.0 million after-tax).
Operating Results - 1994 Compared to 1993
Sales and revenues for 1994 increased by 24% over 1993, due to increases of
28% and 47%, respectively, in kidney dialysis services and home health care
operations, partially offset by a decrease of 7% in medical products
revenues. The decrease in medical products operations reflects a decline in
bloodline sales resulting from warning letters and import alerts issued by
the U.S. Food and Drug Administration (FDA) in the second quarter of 1993.
Operating income before income taxes for 1994 increased 23%, to $287.5
million, over 1993, reflecting the continued growth of all health care
businesses, as well as improvements in cost controls, operating efficiencies
and capacity utilization. These favorable results were partially offset by
the costs of improving and expanding quality assurance systems for medical
products manufacturing operations, as a result of the FDA warning letters
and import alerts.
Other Significant Health Care Matters
In October 1995, NMC received five investigative subpoenas from the OIG.
The subpoenas call for the production of extensive documents relating to
various aspects of NMC's business. A letter accompanying the subpoenas
stated that they had been issued in conjunction with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts
and others concerning possible violations of Federal laws relating to health
care payments and reimbursements. The results of the investigation and its
impact, if any, cannot be predicted at this time. In the event that any
government agency believes that wrongdoing related to the investigation has
occurred, civil and/or criminal proceedings could be instituted, and if any
such proceedings were to be instituted and the outcome were unfavorable, NMC
could be subject to fines, penalties and damages or could become excluded
from government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of NMC and Grace.
NMC's business, financial position and results of operations could also
be materially adversely affected by (a) an adverse outcome in the pending
litigation concerning the implementation of certain provisions of the
Omnibus Budget Reconciliation Act of 1993 relating to the coordination of
benefits between Medicare and employer health plans in the case of certain
dialysis patients; (b) an adverse outcome in the pending challenge by NMC of
changes effected by Medicare in approving reimbursement claims relating to
the administration of intradialytic parenteral nutrition (IDPN) therapy; or
(c) the adoption of pending Medicare proposals to change IDPN coverage
prospectively.
See Note 7 to the Consolidated Financial Statements for additional
information relating to the above matters.
COCOA AND OTHER BUSINESSES
In the second quarter of 1993, Grace classified as discontinued operations
its cocoa business; its battery separators business; certain engineered
materials businesses, principally its printing products, material technology
and electromagnetic radiation control businesses (collectively, EMS); and
other noncore businesses. At that time, a provision of $105.0 million (net
of an applicable tax benefit of $22.3 million) was recorded to reflect the
losses expected on the divestment of these businesses.
During the fourth quarter of 1995, Grace revised the divestment plan
for its cocoa business. As a result of this revised divestment plan, recent
trends and a reassessment of forecasts for all remaining discontinued
operations, Grace recorded an additional provision of $151.3 million (net of
an applicable tax benefit of $48.7 million) related to its remaining
discontinued operations, principally the cocoa business.
See Note 7 to the Consolidated Financial Statements for additional
information relating to the above matters.
F-33
<PAGE> 157
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the net pretax cash provided by Grace's continuing operating
activities was $229.7 million, versus $210.9 million in 1994. The increase
was primarily due to net cash inflows of $97.0 million in 1995 from
settlements with certain insurance carriers for asbestos-related litigation,
net of amounts paid for the defense and disposition of asbestos-related
litigation (see discussion below), as compared to the net outflow of $60.0
million for asbestos-related litigation in 1994. However, the 1995 increase
was offset by an increase in the use of operating working capital. After
giving effect to the net pretax cash provided by operating activities of
discontinued operations (including an increase in the use of operating
working capital by NMC in 1995) and increased payments of income taxes
(attributable to taxable income resulting from settlements of
asbestos-related litigation, as well as audit adjustments to prior years'
Federal income tax returns), the net cash provided by operating activities
was $107.0 million in 1995 versus $453.5 million in 1994.
Investing activities used $801.6 million of cash in 1995, largely
reflecting capital expenditures of $537.6 million (more than 75% of which
relates to Grace's packaging and catalyst and other silica-based businesses)
and the acquisition of dialysis centers and medical products facilities for
a total of $37.4 million in the first quarter of 1995. Also, investing
activities of discontinued operations for 1995 used $295.2 million,
primarily reflecting the classification of the health care segment as a
discontinued operation in the second quarter. Management anticipates that
the level of capital expenditures in 1996 will approximate that of 1995. In
1995, Grace launched a $350.0 million global capital expansion program in
its packaging product line, including $50.0 million to build a plant in
Seneca, South Carolina to serve the fresh-cut produce market. In 1996,
Grace is also scheduled to open new silica and packaging plants in Kuantan,
Malaysia.
Net cash provided by financing activities in 1995 was $655.7 million,
primarily reflecting an increase in total debt from December 31, 1994 and
the exercise of employee stock options, offset by the payment of $112.6
million of dividends. Total debt was $1,933.8 million at December 31, 1995,
an increase of $404.1 million from December 31, 1994. Grace's total debt as
a percentage of total capital (debt ratio) increased from 50.4% at December
31, 1994 to 61.1% at December 31, 1995, primarily due to the reduction in
shareholders' equity (due to the charges discussed in the second paragraph
of "Review of Operations: Overview" and "Statement of Operations:
Discontinued Operations" above) and the increase in total debt. At December
31, 1995, the net assets of the discontinued health care segment included
$226.7 million of debt.
Grace expects to receive a substantial amount of cash in 1996 from the
expected distribution by NMC (as discussed in "Statement of Operations:
Discontinued Operations" above and Note 7 to the Consolidated Financial
Statements), the sale of the Grace Dearborn water treatment and process
chemicals business (see discussion below), and, to a lesser extent, funds
generated by operations. Grace expects to apply a substantial portion of
the cash proceeds generated by these transactions to the reduction of
borrowings. Any net excess is expected to be applied to the repurchase of
shares of the Company's Common Stock and selected strategic acquisitions
that complement existing businesses.
In the third quarter of 1995, Grace announced that its Board of
Directors had authorized management to pursue options to maximize the value
of its Grace Dearborn water treatment and process chemicals business. In
March 1996, Grace announced that it had entered into a definitive agreement
to sell Grace Dearborn to Betz Laboratories, Inc. for $632.0 million. The
transaction is expected to be completed in the second quarter of 1996.
In October 1995, in anticipation of the then pending spin-off of NMC,
the Company's Board of Directors declared a quarterly cash dividend of 12.5
cents per share on the Company's Common Stock, a reduction from the previous
quarterly cash dividend of 35 cents per share. At that time, the Board also
approved a policy of paying dividends at a rate of 20% - 30% of the prior
year's net earnings and authorized the repurchase of up to 10 million shares
of the Company's Common Stock. In February 1996, after entering into the
definitive agreement to combine NMC with FWD, the Board increased the number
of shares that may be repurchased to 20% of the Company's outstanding Common
Stock (see "Statement of Operations: Discontinued Operations" above and Note
7 to the Consolidated Financial Statements).
ASBESTOS-RELATED MATTERS
As reported in Note 2 to the Consolidated Financial Statements, Grace is a
defendant in lawsuits relating to previously sold asbestos-containing
products and is involved in related litigation with certain of its insurance
carriers. In 1995, Grace received $97.0 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. During the fourth quarter of 1995, Grace recorded a noncash
pretax charge of $275.0 million ($178.7 million after-tax), primarily to
reflect the estimated costs of defending against and disposing of personal
injury lawsuits and claims expected to be filed through 1998. The balance
sheet at December 31, 1995 includes a receivable due from insurance
carriers, a portion of which is subject to litigation, of $321.2 million.
Grace has also recorded notes receivable of $130.0 million ($118.4 million
after discounts) for amounts to be received in 1996 to 1999 pursuant to
settlement agreements previously entered into with certain insurance
carriers.
F-34
<PAGE> 158
Although the amounts to be paid in 1996 in respect of asbestos-related
lawsuits and claims cannot be precisely estimated, Grace expects that it
will be required to expend approximately $40.0 million (pretax) in 1996 to
defend against and dispose of such lawsuits and claims (after giving effect
to payments to be received from certain insurance carriers, as discussed
above and in Note 2 to the Consolidated Financial Statements). As indicated
therein, the amounts reflected in the Consolidated Financial Statements with
respect to the probable cost of defending against and disposing of
asbestos-related lawsuits and claims and probable recoveries from insurance
carriers represent estimates; neither the outcomes of such lawsuits and
claims nor the outcomes of Grace's continuing litigations with certain of
its insurance carriers can be predicted with certainty.
ENVIRONMENTAL MATTERS
Grace incurs costs to comply with environmental laws and regulations and to
fulfill its commitment to industry initiatives and Grace standards.
Worldwide expenses of continuing operations related to the operation and
maintenance of environmental facilities and the disposal of hazardous and
nonhazardous wastes totalled $43.5 million, $35.7 million and $40.7 million
in 1995, 1994 and 1993, respectively. Such costs are estimated to be
approximately $45.0 million and $47.0 million in 1996 and 1997,
respectively. In addition, worldwide capital expenditures for continuing
operations relating to environmental protection totalled $14.9 million in
1995, compared to $21.5 million and $19.3 million in 1994 and 1993,
respectively. Capital expenditures to comply with environmental initiatives
in future years are estimated to be $20.0 million and $17.0 million in 1996
and 1997, respectively. Grace has also incurred costs to remediate
environmentally impaired sites. These costs were $31.3 million, $30.8
million and $44.4 million in 1995, 1994 and 1993, respectively. These
amounts have been charged against previously established reserves. Future
cash outlays for remediation costs are expected to total $30.0 million in
1996 and $20.0 million in 1997. Expenditures have been funded from internal
sources of cash and are not expected to have a significant effect on
liquidity.
Grace accrues for anticipated costs associated with investigatory and
remediation efforts relating to the environment in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies,"
which requires estimating the probability and amount of future costs. At
December 31, 1995, Grace's liability for environmental investigatory and
remediation costs related to continuing and discontinued operations totalled
approximately $280.3 million, which amount does not take into account any
discounting for future expenditures or possible future insurance recoveries.
The measurement of the liability is evaluated quarterly based on currently
available information. In 1995 and 1994, periodic provisions were recorded
for environmental and plant closure expenses, which include the costs of
future environmental investigatory and remediation activities.
Additionally, in the fourth quarter of 1995 and first quarter of 1994, Grace
recorded pretax provisions of $77.0 million and $40.0 million ($50.0 million
and $26.0 million after-tax), respectively, principally to provide for
future costs related to remediation activities required at former
manufacturing sites.
F-35
<PAGE> 159
SCHEDULE VIII
W. R. GRACE & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in millions)
<TABLE>
<CAPTION>
For the Year 1995
Additions (deductions)
---------------------
Charged
Balance at (credited) to Balance
beginning costs and Other, at end
Description of period expenses net** of period
----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivable................. $ 95.2 $ 131.2 $ (213.5) $ 12.9
------------ ---------- ----------- -----------
Allowances for long-term receivables......................... $ 20.6 $ 3.7 $ .4 $ 24.7
------------ ---------- ----------- -----------
Securities of divested businesses............................ $ 4.9 $ - $ (1.4) $ 3.5
------------ ---------- ----------- -----------
Valuation allowance for deferred tax assets.................. $ 137.0 $ (32.0) $ (7.3) $ 97.7
------------ ---------- ----------- -----------
Reserves:
Foreign employee benefit obligations* ....................... $ 82.5 $ 10.6 $ 2.2 $ 95.3
------------ ---------- ----------- -----------
Discontinued operations...................................... $ 239.3 $ 127.4 $ - $ 366.7
------------ ---------- ----------- -----------
For the Year 1994
Additions (deductions)
---------------------
Charged
Balance at (credited) to Balance
beginning costs and Other, at end
Description of period expenses net** of period
----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivable................. $ 50.3 $ 102.2 $ (57.3) $ 95.2
------------ --------- --------- -----------
Allowances for long-term receivables......................... $ 13.4 $ 6.9 $ .3 $ 20.6
------------ --------- --------- -----------
Securities of divested businesses............................ $ 161.2 $ - $ (156.3) $ 4.9
------------ --------- --------- -----------
Valuation allowance for deferred tax assets.................. $ 129.7 $ - $ 7.3 $ 137.0
------------ --------- --------- -----------
Reserves:
Foreign employee benefit obligations* ....................... $ 64.4 $ 11.6 $ 6.5 $ 82.5
------------ --------- --------- -----------
Discontinued operations ..................................... $ 132.1 $ 107.2 $ - $ 239.3
------------ --------- --------- -----------
For the Year 1993
Additions (deductions)
---------------------
Charged
Balance at (credited) to Balance
beginning costs and Other, at end
Description of period expenses net** of period
----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Valuation and qualifying accounts deducted from assets:
Allowances for notes and accounts receivable................. $ 39.3 $ 67.4 $ (56.4) $ 50.3
------------ --------- --------- -----------
Allowances for long-term receivables......................... $ 8.4 $ 5.3 $ (.3) $ 13.4
------------ --------- --------- -----------
Securities of divested businesses............................ $ 152.9 $ 8.3 $ - $ 161.2
------------ --------- --------- -----------
Valuation allowance for deferred tax assets.................. $ 143.1 $ - $ (13.4) $ 129.7
------------ --------- --------- -----------
Reserves:
Foreign employee benefit obligations* ....................... $ 83.4 $ 12.2 $ (31.2) $ 64.4
------------ --------- --------- -----------
Discontinued operations ..................................... $ 144.7 $ (12.6) $ - $ 132.1
------------ --------- --------- -----------
</TABLE>
* Represents legally mandated employee benefit obligations, primarily
pension benefits, relating to Grace's operations in Europe.
** Consists of additions and deductions applicable to businesses
acquired, disposals of businesses, bad debt write-offs, foreign
currency translation, reclassifications (including the deconsolidation
of amounts relating to discontinued operations) and miscellaneous
other adjustments.
F-36
<PAGE> 160
Exhibit 11
W. R. GRACE & CO. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS
The weighted average number of shares of Common Stock outstanding were as
follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------
1995 1994 1993
-------- ----------- --------
<S> <C> <C> <C>
Weighted average number of shares of Common
Stock outstanding . . . . . . . . . . . . . . . . . 95,822 93,936 91,461
Conversion of convertible debt obligations . . . . . . . . . - - 46
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method) . . . . . . . . . . . . . . . . . . 2,189 659 680
------ ------ ------
Weighted average number of shares of Common
Stock outstanding assuming full dilution . . . . . 98,011 94,595 92,187
====== ====== ======
</TABLE>
(Loss)/income used in the computation of (loss)/earnings per share were as
follows:
<TABLE>
<CAPTION>
(in millions, except per share)
----------------------------------------
1995 1994 1993
--------- ----------- ---------
<S> <C> <C> <C>
Net (loss)/income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (325.9) $ 83.3 $ 26.0
Dividends paid on preferred stocks . . . . . . . . . . . . . . . . . . . . . . (.5) (.5) (.5)
--------- ----------- ---------
(Loss)/income used in per share computation of earnings and in
per share computation of earnings assuming full dilution . . . . . . $ (326.4) $ 82.8 $ 25.5
========= =========== =========
(Loss)/earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.40) $ .88 $ .28
(Loss)/earnings per share assuming full dilution . . . . . . . . . . . . . . . $ (3.33) $ .88 $ .28
</TABLE>
F-37
<PAGE> 161
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> Years Ended December 31, (b)
-----------------------------------------------------------------
1995(c) 1994(d) 1993(e) 1992(f) 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net (loss)/income from continuing operations.......... $ (196.6) $ (41.4) $ 19.1 $ 1.4 $ 157.4
Add (deduct):
(Benefit from)/provision for income taxes ....... (115.8) (46.6) 10.1 79.9 99.1
Income taxes of 50%-owned companies ............ - - .1 2.1 1.5
Minority interest in income of
majority-owned subsidiaries................... - - - - -
Equity in unremitted losses/(earnings)
of less than 50%-owned companies.............. .8 (.6) (.5) (2.0) (.9)
Interest expense and related financing costs,
including amortization of capitalized interest 179.8 138.5 122.7 162.7 209.6
Estimated amount of rental expense
deemed to represent the interest factor....... 8.5 10.1 11.3 14.0 12.7
------ ------- ------- ------- -------
(Loss)/income as adjusted............................ $ (123.3) $ 60.0 $ 162.8 $ 258.1 $ 479.4
========= ======== ======= ======= =======
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
Estimated amount of rental expense
deemed to represent the interest factor...... 9.1 10.1 11.3 14.0 12.7
-------- ------- ------- ------- -------
Fixed charges........................................ 204.6 153.3 134.1 190.3 237.2
Preferred stock dividend requirements(a)............. .5 .5 .8 .8 .9
-------- ------- ------- ------- -------
Combined fixed charges and preferred
stock dividends................................. $ 205.1 $ 153.8 $ 134.9 $ 191.1 $ 238.1
======== ======= ======== ======= =======
Ratio of earnings to fixed charges................... (g) (g) 1.21 1.36 2.02
======== ======= ======== ======= =======
Ratio of earnings to combined fixed charges and
preferred stock dividends....................... (g) (g) 1.21 1.35 2.01
======== ======= ======== ======= =======
</TABLE>
(a) For each period with an income tax provision, the preferred stock
dividend requirements are increased to an amount representing the
pretax earnings required to cover such requirements based on
Grace's effective tax rate.
(b) Certain amounts have been restated to conform to the 1995
presentation.
(c) 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.
(d) Includes a pretax provision of $316.0 relating to asbestos-related
liabilities and insurance coverage.
(e) Includes a pretax provision of $159.0 relating to asbestos-related
liabilities and insurance coverage.
(f) Includes a pretax provision of $140.0 relating to a fumed silica
plant in Belgium.
(g) 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.
F-38
<PAGE> 162
PART I. FINANCIAL INFORMATION ANNEX G
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended
Consolidated Statement of Operations (Unaudited) March 31,
------------------------------------------------------------------------------------- ----------------------
Dollars in millions, except per share 1996 1995
------------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Sales and revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $886.0 $853.4
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 4.3
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 889.8 857.7
------ ------
Cost of goods sold and operating expenses . . . . . . . . . . . . . . . . . . . . . 531.8 500.9
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . 199.3 230.8
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.5 38.2
Interest expense and related financing costs . . . . . . . . . . . . . . . . . . . . 18.4 15.8
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . 28.8 30.5
Corporate expenses previously allocated to health care operations . . . . . . . . . - 10.1
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823.8 826.3
------ ------
Income from continuing operations before income taxes . . . . . . . . . . . . . . . 66.0 31.4
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.4 8.5
------ ------
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . 41.6 22.9
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . 22.0 24.6
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63.6 $ 47.5
====== ======
-----------------------------------------------------------------------------------------------------------------
Earnings per share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .42 $ .24
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .65 $ .50
Fully diluted earnings per share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .41 $ .24
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .63 $ .49
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . $ .125 $ .35
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
G-1
<PAGE> 163
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended
Consolidated Statement of Cash Flows (Unaudited) March 31,
- ---------------------------------------------------------------------------------------------- -------------------------
Dollars in millions 1996 1995
- ---------------------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . $ 66.0 $ 31.4
Reconciliation to cash used for operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.5 38.2
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net . . . . . . . . . . . . . . . . . (34.4) (.1)
Decrease/(increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . 9.0 (41.6)
Proceeds from asbestos-related insurance settlements . . . . . . . . . . . . . . 23.7 100.0
Payments made for asbestos-related litigation settlements
and defense costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31.2) (30.9)
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (11.5) (70.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114.8) (95.1)
-------- -------
Net pretax cash used for operating activities of continuing operations . . . . . . . . . . (47.7) (68.5)
Net pretax cash (used for)/provided by operating activities
of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.1) 65.6
-------- -------
Net pretax cash used for operating activities . . . . . . . . . . . . . . . . . . . . . . (79.8) (2.9)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11.5) (59.6)
-------- -------
Net cash used for operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . (91.3) (62.5)
-------- -------
INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112.5) (110.4)
Businesses acquired in purchase transactions, net of
cash acquired and debt assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . - (31.3)
Increase in net assets of discontinued operations . . . . . . . . . . . . . . . . . . . . (33.8) (3.3)
Net proceeds from divestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 7.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.4) .7
-------- -------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (139.8) (137.2)
-------- -------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.4) (33.1)
Repayments of borrowings having original maturities in excess of three months . . . . . . (33.8) (10.5)
Increase in borrowings having original maturities in excess of three months . . . . . . . - 9.3
Net increase in borrowings having original maturities of less than three months . . . . . 264.9 209.6
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.8 16.1
Decrease in net financing activities of discontinued operations . . . . . . . . . . . . . (16.2) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.5) (12.0)
--------- -------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . 246.8 179.4
--------- -------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . .2 3.2
--------- -------
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 15.9 $ (17.1)
========= =======
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
G-2
<PAGE> 164
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
March 31, December 31,
Dollars in millions, except par value 1996 1995
------------------------------------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 56.5 $ 40.6
Notes and accounts receivable, net . . . . . . . . . . . . . . 666.8 596.8
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 481.1 491.9
Net assets of discontinued operations . . . . . . . . . . . . . 314.4 323.7
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 193.5 206.1
Other current assets . . . . . . . . . . . . . . . . . . . . . 35.6 22.2
------------ -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . 1,747.9 1,681.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,446.7
and $1,418.8, respectively . . . . . . . . . . . . . . . . 1,810.0 1,736.1
Goodwill, less accumulated amortization of $20.9
and $20.6, respectively . . . . . . . . . . . . . . . . . 112.5 111.8
Net assets of discontinued operations - health care . . . . . . . 1,540.5 1,435.3
Asbestos-related insurance receivable . . . . . . . . . . . . . . 281.5 321.2
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 381.6 386.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 611.5 625.3
------------ -----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,485.5 $ 6,297.6
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 895.2 $ 638.3
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 278.0 339.2
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 102.5 103.3
Other current liabilities . . . . . . . . . . . . . . . . . . . 816.5 836.4
Minority interest . . . . . . . . . . . . . . . . . . . . . . . 297.0 297.0
------------ -----------
Total Current Liabilities . . . . . . . . . . . . . . . . . 2,389.2 2,214.2
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,265.4 1,295.5
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 769.9 789.0
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 37.7 44.8
Noncurrent liability for asbestos-related litigation . . . . . . . 692.4 722.3
------------ -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 5,154.6 5,065.8
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value . . . . . . . . . . . . . . . 7.4 7.4
Common stock, $1 par value . . . . . . . . . . . . . . . . . . 98.5 97.4
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 503.1 459.8
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 760.2 709.0
Cumulative translation adjustments . . . . . . . . . . . . . . (35.9) (39.4)
Treasury stock, 53,000 common shares, at cost . . . . . . . . . (2.4) (2.4)
------------ -----------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . 1,330.9 1,231.8
------------ -----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,485.5 $ 6,297.6
============ ===========
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
G-3
<PAGE> 165
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
(Dollars in millions)
(a) The financial statements in this Report are unaudited and should be read
in conjunction with the consolidated financial statements in the Company's
1995 Annual Report on Form 10-K. Such interim financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented; all such
adjustments are of a normal recurring nature. Certain amounts in the prior
period's consolidated financial statements have been reclassified to
conform to the current basis of presentation.
The results of operations for the three-month interim period ended
March 31, 1996 are not necessarily indicative of the results of operations
for the fiscal year ending December 31, 1996.
(b) As previously reported, Grace is a defendant in 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.
Grace was a defendant in approximately 42,900 asbestos-related lawsuits at
March 31, 1996 (44 involving claims for property damage and the remainder
involving approximately 100,200 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 quarter of 1996, Grace settled one
property damage lawsuit for a total of $4.0 and two property damage lawsuits
were dismissed; in addition, approximately 200 personal injury claims
against Grace were dismissed without payment and $7.1 was recorded to
reflect settlements in approximately 2,100 personal injury claims.
Based upon and subject to the factors discussed in Note 2 to Grace's
consolidated financial statements for the year ended December 31, 1995,
Grace estimates that its probable liability with respect to the defense and
disposition of asbestos property damage and personal injury lawsuits and
claims pending at March 31, 1996 and December 31, 1995, and personal injury
lawsuits and claims expected to be filed through 1998, is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liability for asbestos-related litigation (1) . . . . . . . . . . . . . . . $100.0 $100.0
Noncurrent liability for asbestos-related litigation . . . . . . . . . . . . . . . . 692.4 (2) 722.3
------ ------
Total asbestos-related liability . . . . . . . . . . . . . . . . . . . . . . . . . . $792.4 $822.3
====== ======
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Included in "Other current liabilities" in the Consolidated Balance
Sheet.
(2) The decrease from December 31, 1995 reflects payments made by Grace
for settlements and defense costs in connection with asbestos-related
lawsuits and claims during the first quarter of 1996.
G-4
<PAGE> 166
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
(Dollars in millions)
The following table shows Grace's total estimated insurance recoveries in
reimbursement for past and estimated future payments to defend against and
dispose of asbestos-related lawsuits and claims:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes receivable from insurance carriers - current, net of discounts of $5.7 (1995 - $4.3) (1) . . . . $ 99.3 $ 62.0
Notes receivable from insurance carriers - noncurrent, net of discounts of $4.8 (1995 - $7.3) (2). . . 37.5 56.4
Asbestos-related insurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281.5 (3) 321.2
------ -------
Total amounts due from insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $418.3 $ 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 $12.6 and the reclassification of $27.1 from
"Asbestos-related insurance receivable" to "Notes receivable from
insurance carriers - current and noncurrent" as the result of a first
quarter 1996 settlement of a dispute with an insurance carrier.
At March 31, 1996, settlements with certain insurance carriers provided
for the future receipt by Grace of $147.3, which Grace has recorded as
notes receivable (both current and noncurrent) of $136.8, net of
discounts. In the first quarter of 1996, Grace received net proceeds
of $23.7 pursuant to settlements with insurance carriers in
reimbursement for monies previously expended by Grace in connection
with asbestos-related lawsuits and claims; of this amount, $9.7 was
received pursuant to settlements entered into in 1995, 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 $223.3 of the asbestos-related receivable of $281.5 at
March 31, 1996.
Grace continues to seek to recover from its excess insurers the balance
of the payments it has made with respect to asbestos-related lawsuits
and claims. As part of this effort, Grace continues to be involved in
litigation with certain of its excess insurance carriers (having
previously settled with its primary and certain of its excess
carriers). However, in Grace's opinion, 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 March 31, 1996, as well as personal injury lawsuits and
claims expected to be filed through 1998. Consequently, Grace
believes that the resolution of its asbestos-related litigation will
not have a material adverse effect on its consolidated results of
operations or financial position.
For additional information, see Note 2 to the consolidated financial
statements in the Company's 1995 Annual Report on Form 10-K.
G-5
<PAGE> 167
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
(Dollars in millions)
(c) As previously reported, in February 1996 Grace and Fresenius AG
(Fresenius) entered into a definitive agreement to combine National
Medical Care, Inc. (NMC), Grace's principal health care subsidiary,
with Fresenius' worldwide dialysis business (FWD) to create Fresenius
Medical Care AG (FMC). The combination would follow the borrowing
and/or assumption of debt aggregating approximately $2.3 billion by
NMC, a tax-free distribution of the net cash proceeds by NMC to Grace,
and a tax-free distribution by the Company, with respect to each share
of its Common Stock, of one share of a newly formed corporation
holding all of Grace's businesses (principally its packaging and
specialty chemicals businesses) other than NMC. As a result of these
transactions, the holders of the Company's Common Stock would own 100%
of the packaging and specialty chemicals company and would be
allocated an aggregate of approximately 44.8% of FMC's ordinary
shares, and Fresenius and other shareholders would be allocated 55.2%
of such shares. The holders of the Company's Common Stock would also
own preferred stock, the value of which would be linked to the
performance of FMC. It is expected that the various transactions will
be completed by the third quarter of 1996. See Note 7 to the
consolidated financial statements in the Company's 1995 Annual Report
on Form 10-K for additional information.
Grace classified its health care business as a discontinued operation
in the second quarter of 1995. Summary results of operations for the
health care business are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
------- --------
<S> <C> <C>
Sales and revenues $539.7 $ 491.8
====== =======
Income from discontinued operations - health care $ 38.2 $ 44.0
before income taxes
Provision for income taxes 16.2 19.4
------ -------
Income from discontinued operations - health care $ 22.0 $ 24.6
====== =======
</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 ($26.8 and $20.1 for the first
quarters of 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 1995 period, 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).
G-6
<PAGE> 168
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
(Dollars in millions)
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.
The net assets, excluding intercompany assets, of Grace's cocoa
business and other discontinued operations (classified as current
assets) and Grace's health care business (classified as noncurrent
assets) included in the consolidated balance sheet at March 31, 1996,
are as follows:
<TABLE>
<CAPTION>
Sub- Health
Cocoa Other Total Care Total
------- ----- --------- ------- ------
<S> <C> <C> <C> <C> <C>
Current assets $327.5 $ 10.3 $337.8 $ 667.2 $1,005.0
Properties and equipment, net 187.0 21.1 208.1 412.3 620.4
Investments in and advances to
affiliated companies - 30.6 30.6 - 30.6
Other assets 61.7 10.5 72.2 1,002.0 1,074.2
------ ------- ------ -------- --------
Total assets $576.2 $ 72.5 $648.7 $2,081.5 $2,730.2
------ ------- ------ -------- --------
Current liabilities $234.6 $ 10.9 $245.5 $ 454.2 $ 699.7
Other liabilities 84.3 4.5 88.8 86.8 175.6
------ ------- ------ -------- --------
Total liabilities $318.9 $ 15.4 $334.3 $ 541.0 $ 875.3
------ ------- ------ -------- --------
Net assets $257.3 $ 57.1 $314.4 $1,540.5 $1,854.9
====== ======= ====== ======== ========
</TABLE>
(d) Inventories consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Raw and packaging materials $ 137.4 $137.1
In process 89.0 78.0
Finished products 304.2 325.2
------- ------
$ 530.6 $540.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (49.5) (48.4)
------- ------
Total Inventories $ 481.1 $491.9
======= ======
</TABLE>
(e) Earnings per share are calculated on the basis of the following
weighted average number of common shares outstanding:
Three Months Ended March 31:
1996 - 97,888,000
1995 - 94,137,000
G-7
<PAGE> 169
] 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
------------
3/31/96 3/31/95
------- -------
<S> <C> <C>
Weighted average number of shares of Common
Stock outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,888 94,137
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,166 2,018
------- ------
Weighted average number of shares of Common
Stock outstanding assuming full dilution . . . . . . . . . . . . . . . . . . 100,054 96,155
======= ======
</TABLE>
Income used in the computation of earnings per share were as follows (in
millions, except per share):
<TABLE>
<CAPTION>
3 Mos. Ended
----------------------
3/31/96 3/31/95
------- -------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63.6 $47.5
Dividends paid on preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . (.1) (.1)
----- -----
Income used in per share computation of earnings and in per
share computation of earnings assuming full dilution . . . . . . . . . . . . $63.5 $47.4
===== =====
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .65 $ .50
Earnings per share assuming full dilution . . . . . . . . . . . . . . . . . . . . . $ .63 $ .49
</TABLE>
G-8
<PAGE> 170
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>
Three Months Ended
Years Ended December 31, March 31,
-------------------------------------------------- -----------------------
1995 (b) 1994 (c) 1993 (d) 1992 (e) 1991 1996 1995 (f)
--------- --------- -------- ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net (loss)/income from continuing operations...... $(196.6) $ (41.4) $ 19.1 $ 1.4 $157.4 $ 41.6 $22.9
Add/(deduct):
(Benefit from)/provision for income taxes...... (115.8) (46.6) 10.1 79.9 99.1 24.4 8.5
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) .2 -
Interest expense and related financing costs,
incl. amortization of capitalized interest 179.8 138.5 122.7 162.7 209.6 47.6 40.1
Estimated amount of rental expense
deemed to represent the interest factor...... 8.5 10.1 11.3 14.0 12.7 2.8 2.5
------- ------- ------- ------- ------ ------- -----
(Loss)/Income as adjusted......................... $(123.3) $ 60.0 $ 162.8 $ 258.1 $479.4 $ 116.6 $74.0
======= ======= ======= ======= ====== ======= =====
Combined fixed charges and pref. stock dividends:
Interest expense and related financing costs,
including capitalized interest............... $ 195.5 $ 143.2 $ 122.8 $ 176.3 $224.5 $ 53.1 $43.0
Estimated amount of rental expense
deemed to represent the interest factor ..... 8.5 10.1 11.3 14.0 12.7 2.8 2.5
------- ------- ------- ------- ------ ------- -----
Fixed charges .................................... 204.0 153.3 134.1 190.3 237.2 55.9 45.5
Preferred stock dividend requirements (a)......... .5 .5 .8 .8 .9 .2 .2
------- ------- ------- ------- ------ ------- -----
Combined fixed charges and preferred
stock dividends .............................. $ 204.5 $ 153.8 $ 134.9 $ 191.1 $238.1 $ 56.1 $45.7
======= ======= ======= ======= ====== ======= =====
Ratio of earnings to fixed charges .............. (g) (g) 1.21 1.36 2.02 2.09 1.63
======= ======= ======= ======= ====== ======= =====
Ratio of earnings to combined fixed charges
and preferred stock dividends ................. (g) (g) 1.21 1.35 2.01 2.08 1.62
======= ======= ======= ======= ====== ======= =====
</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 provision of $20.0 for corporate governance
activities.
(g) 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.
G-9
