<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration No. 333-09495
August 1996
To the Shareholders of W. R. Grace & Co.
and Fresenius USA, Inc.:
Earlier this month, you were sent proxy materials for Special Meetings of
Shareholders of Grace and Fresenius USA to be held on September 16, 1996. The
principal purpose of the Special Meetings is to consider and vote upon a
proposal to adopt and approve the February 1996 Agreement and Plan of
Reorganization between Grace and Fresenius AG and related transactions.
The proxy materials sent to you earlier this month contained financial
information for Grace, Fresenius USA and Fresenius Worldwide Dialysis through
the first quarter of 1996. To assure that you have the most current financial
information relating to the proposed transactions, copies of the Quarterly
Reports on Form 10-Q of each of Grace and Fresenius USA for the quarter ended
June 30, 1996 are enclosed. These Reports, which were recently filed with the
Securities and Exchange Commission, contain financial information for the second
quarter and/or the first six months of 1996, including updated special-purpose
financial statements for Grace and pro forma information for "New Grace" (in
Grace's 10-Q) and information concerning Fresenius Worldwide Dialysis and pro
forma information with respect to Fresenius Medical Care AG (in the 10-Q for
Fresenius USA). You are urged to read these Reports carefully.
For those of you who have not sent in your proxy card, or who wish to
change your vote, another proxy card is enclosed for your convenience. If you
have already returned your proxy card, you do not need to send another card
unless you wish to change your vote; if you have not yet returned your proxy
card, you are urged to do so promptly.
W. R. Grace & Co.
Fresenius USA, Inc.
<PAGE> 2
ERRATA -- JOINT PROXY STATEMENT-PROSPECTUS
1. In the discussion of the Reorganization appearing in the middle of the
third inside cover page of the Joint Proxy Statement-Prospectus, there
is an incorrect reference to the receipt of "Approximately 1,013 ADSs"
for each share of Grace Common Stock; the correct figure is 1.013
(based on information as of July 15, 1996).
2. On page 26 (second paragraph), page 139 (last paragraph) and page 141
(third full paragraph) of the Joint Proxy Statement-Prospectus, the
amount of NMC Homecare's IDPN receivable as of March 31, 1996 was
incorrectly stated as $103 million; the actual amount was $113 million
(and, as noted in the accompanying Grace 10-Q Report, the amount at
June 30, 1996 was $130 million).
3. In the last sentence on page 165 of the Joint Proxy
Statement-Prospectus, the reference to the "net income (loss)" for the
three-month and six-month periods ended June 30, 1996, expected to
result from the additional compensation expense referred to therein,
should have been a reference to "operating (loss) income" for such
periods.
<PAGE> 3
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
Commission File Number 1-3720
W. R. GRACE & CO.
New York 13-3461988
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Town Center Road
Boca Raton, Florida 33486-1010
(407) 362-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
90,870,737 shares of Common Stock, $1.00 par value, were outstanding at August
1, 1996.
================================================================================
<PAGE> 4
W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
- -------
Item 1. Financial Statements
Consolidated Statement of Operations I-1
Consolidated Statement of Cash Flows I-2
Consolidated Balance Sheet I-3
Notes to Consolidated Financial Statements I-4 to I-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition I-11 to I-18
Part II. Other Information
- -------
Item 1. Legal Proceedings II-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other Information II-3
Item 6. Exhibits and Reports on Form 8-K II-3
</TABLE>
As used in this Report, the term "Company" refers to W. R. Grace & Co., and the
term "Grace" refers to the Company and/or one or more of its subsidiaries.
<PAGE> 5
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Consolidated Statement of Operations (Unaudited) June 30, June 30,
------------------------------------------------ ---------------------- -----------------------
$ millions (except per share) 1996 1995 1996 1995
--------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Sales and revenues . . . . . . . . . . . . . . . . . . . $ 948.9 $932.3 $1,834.9 $1,785.7
Other income . . . . . . . . . . . . . . . . . . . . . . 14.1 4.5 17.9 8.8
-------- ------ -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 963.0 936.8 1,852.8 1,794.5
-------- ------ -------- --------
Cost of goods sold and operating expenses . . . . . . . 572.0 550.7 1,103.8 1,051.6
Selling, general and administrative expenses . . . . . . 206.4 219.7 405.7 450.5
Depreciation and amortization . . . . . . . . . . . . . 46.4 40.2 91.9 78.4
Interest expense and related financing costs . . . . . . 18.3 18.7 36.7 34.5
Research and development expenses . . . . . . . . . . . 29.0 31.1 57.8 61.6
Corporate expenses previously allocated to the
health care segment . . . . . . . . . . . . . . - 11.6 - 21.7
Restructuring costs . . . . . . . . . . . . . . . . . . 53.7 - 53.7 -
Gain on sales of businesses . . . . . . . . . . . . . . (326.4) - (326.4) -
------- ------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 599.4 872.0 1,423.2 1,698.3
------- ------- -------- --------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 363.6 64.8 429.6 96.2
Provision for income taxes . . . . . . . . . . . . . . . 130.5 19.8 154.9 28.3
------- ------ -------- --------
Income from continuing operations . . . . . . . . . . . 233.1 45.0 274.7 67.9
Income from discontinued operations . . . . . . . . . . 100.8 33.7 122.8 58.3
------- ------ -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 333.9 $ 78.7 $ 397.5 $ 126.2
======= ======= ========= ========
---------------------------------------------------------------------------------------------------------------------
Earnings per share:
Continuing operations . . . . . . . . . . . . . . . . $ 2.41 $ .47 $ 2.82 $ .71
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33
Fully diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . $ 2.37 $ .46 $ 2.76 $ .70
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30
Dividends declared per common share . . . . . . . . . . $ .125 $ .35 $ .25 $ .70
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements
are an integral part of this statement.
I-1
<PAGE> 6
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Six Months Ended
Consolidated Statement of Cash Flows (Unaudited) June 30,
- ------------------------------------------------ -----------------
$ millions 1996 1995
- ------------------------------------------------ ------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . $429.6 $ 96.2
Reconciliation to cash provided by/(used for) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.9 78.4
Noncash charge relating to restructuring costs . . . . . . . . . . . . . . . . . . . 53.7 -
Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326.4) -
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net . . . . . . . . . . . . . . . . . (78.4) (60.0)
Decrease/(increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . 33.3 (82.3)
Proceeds from asbestos-related insurance settlements . . . . . . . . . . . . . . 99.7 156.4
Payments made for asbestos-related litigation settlements,
judgments and defense costs . . . . . . . . . . . . . . . . . . . . . . (73.1) (60.2)
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (20.3) (51.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98.1) (37.2)
------ ------
Net pretax cash provided by operating activities of continuing operations . . . . . . . . 111.9 39.9
Net pretax cash provided by operating activities of discontinued operations . . . . . . . 47.1 27.8
------ ------
Net pretax cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 159.0 67.7
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40.5) (91.0)
------ ------
Net cash provided by/(used for) operating activities . . . . . . . . . . . . . . . . . . . 118.5 (23.3)
------ ------
INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234.5) (232.6)
Businesses acquired in purchase transactions, net of
cash acquired and assumed debt . . . . . . . . . . . . . . . . . . . . . . . . . . . - (31.1)
Increase in net investments in discontinued operations . . . . . . . . . . . . . . . . . . (97.6) (46.3)
Net proceeds from divestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697.1 7.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7 2.5
------ ------
Net cash provided by/(used for) investing activities . . . . . . . . . . . . . . . . . . . 379.7 (300.4)
------ ------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24.5) (66.3)
Repayments of borrowings having original maturities in excess of three months . . . . . . (50.8) (51.2)
Increase in borrowings having original maturities in excess of three months . . . . . . . - 85.3
Net (decrease)/increase in borrowings having original
maturities of less than three months . . . . . . . . . . . . . . . . . . . . . . . . (6.7) 251.0
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.2 84.3
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (398.2) (12.1)
(Decrease)/increase in net financing activities of discontinued operations . . . . . . . . (37.1) 2.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .1
------ ------
Net cash (used for)/provided by financing activities . . . . . . . . . . . . . . . . . . . (464.1) 293.3
------ ------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (1.0) 3.5
------ ------
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 33.1 $(26.9)
====== ======
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
<PAGE> 7
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
-------------------------------------- June 30, December 31,
$ millions (except par value) 1996 1995
-------------------------------------- --------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 73.7 $ 40.6
Notes and accounts receivable, net . . . . . . . . . . . . . . 712.5 596.8
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 402.4 491.9
Net assets of discontinued operations . . . . . . . . . . . . . 296.9 323.7
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 194.0 206.1
Other current assets . . . . . . . . . . . . . . . . . . . . . 25.4 22.2
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . 1,704.9 1,681.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,398.9
and $1,418.8, respectively . . . . . . . . . . . . . . . . 1,771.8 1,736.1
Goodwill, less accumulated amortization of $12.7
and $20.6, respectively . . . . . . . . . . . . . . . . . 39.6 111.8
Net assets of discontinued operations - health care . . . . . . . 1,571.6 1,435.3
Asbestos-related insurance receivable . . . . . . . . . . . . . . 241.2 321.2
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 380.1 386.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 596.6 625.3
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 603.9 $ 638.3
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 237.8 339.2
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 333.8 103.3
Other current liabilities . . . . . . . . . . . . . . . . . . . 828.6 836.4
Minority interest . . . . . . . . . . . . . . . . . . . . . . . 297.0 297.0
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . . 2,301.1 2,214.2
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,262.8 1,295.5
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 773.6 789.0
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 43.2 44.8
Noncurrent liability for asbestos-related litigation . . . . . . . 659.1 722.3
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 5,039.8 5,065.8
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value . . . . . . . . . . . . . . . 7.4 7.4
Common stock, $1 par value . . . . . . . . . . . . . . . . . . 98.7 97.4
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 513.4 459.8
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 709.0
Cumulative translation adjustments . . . . . . . . . . . . . . (40.4) (39.4)
Treasury stock - 5,189,124 common shares, at cost . . . . . . . (395.1) (2.4)
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . 1,266.0 1,231.8
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6
======== ========
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-3
<PAGE> 8
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(A) BASIS OF PRESENTATION
The financial statements in this Report at June 30, 1996 and 1995 and
for the three- and six-month interim periods then ended are unaudited
and should be read in conjunction with the consolidated financial
statements in the Company's 1995 Annual Report on Form 10-K (1995
Annual Report). Such interim financial statements reflect all
adjustments that, in the opinion of management, are necessary for a
fair presentation of the results of the interim periods presented; all
such adjustments are of a normal recurring nature. Certain amounts in
the prior periods' consolidated financial statements have been
reclassified to conform to the current periods' basis of presentation.
The results of operations for the three- and six-month interim periods
ended June 30, 1996 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1996.
(B) ASBESTOS AND RELATED INSURANCE LITIGATION
As previously reported, Grace is a defendant in property damage and
personal injury lawsuits relating to previously sold asbestos-
containing products, and anticipates that it will be named as a
defendant in additional asbestos-related lawsuits in the future. Due
to the unique nature of each property damage claim, Grace cannot
predict whether and to what extent asbestos-related property damage
lawsuits and claims will be brought against it in the future or the
expenses involved in defending against and disposing of any such
future lawsuits and claims. By contrast, Grace believes that there
are common features with respect to personal injury claims; therefore,
in 1995, Grace determined that it had adequate experience to
reasonably estimate the number of personal injury claims to be filed
against it through 1998 and established an accrual for such claims.
Grace was a defendant in approximately 44,100 asbestos-related
lawsuits at June 30, 1996 (39 involving claims for property damage and
the remainder involving approximately 109,000 claims for personal
injury), as compared to approximately 40,800 lawsuits at December 31,
1995 (47 involving claims for property damage and the remainder
involving approximately 92,400 claims for personal injury). During
the first half of 1996, Grace settled four property damage lawsuits
for a total of $11.3 (including one case that was on appeal); one new
property damage lawsuit was filed; four property damage lawsuits were
dismissed without the payment of any damages or settlement amounts by
Grace; and, in a case that had been on appeal and is now final, Grace
was held liable for $4.1. During the first half of 1996,
approximately 1,400 personal injury claims against Grace were
dismissed without payment and $13.6 was recorded to reflect
settlements in approximately 3,500 personal injury claims.
Based upon and subject to the factors discussed in Note 2 to Grace's
consolidated financial statements for the year ended December 31,
1995, Grace estimates that its probable liability with respect to the
defense and disposition of asbestos property damage and personal
injury lawsuits and claims pending at June 30, 1996 and December 31,
1995 (except for four property damage lawsuits as to which the
liabilities are not yet estimable because Grace has
I-4
<PAGE> 9
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
not yet been able to obtain sufficient information as to the relevant
properties through discovery proceedings), as well as personal injury
lawsuits and claims expected to be filed through 1998, is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Current liability for asbestos-related litigation (1) . . . . . . . . . . . . . . . $100.0 $100.0
Noncurrent liability for asbestos-related litigation . . . . . . . . . . . . . . . . 659.1 (2) 722.3
------ ------
Total asbestos-related liability . . . . . . . . . . . . . . . . . . . . . . . . . . $759.1 $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 six months ended
June 30, 1996.
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace has settled with and been
paid by its primary insurance carriers with respect to both property
damage and personal injury lawsuits and claims. With minor
exceptions, Grace has also settled with its excess insurance carriers
that wrote policies available for property damage claims; those
settlements involve amounts paid and to be paid to Grace. In
addition, Grace has settled with many excess insurance carriers that
wrote policies available for personal injury lawsuits and claims.
Grace is currently in litigation with its remaining excess insurance
carriers whose policies Grace believes are available for
asbestos-related personal injury lawsuits and claims. Recovery under
these policies is subject to lengthy litigation and legal
uncertainties. Insurance coverage for asbestos-related liabilities
has not been commercially available since 1985.
The following table shows Grace's total estimated insurance recoveries
in reimbursement for past and estimated future payments to defend
against and dispose of asbestos-related lawsuits and claims:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Notes receivable from insurance carriers - current, net of discounts of $4.0 (1995 - $4.3) (1) $ 69.1 $ 62.0
Notes receivable from insurance carriers - noncurrent, net of discounts of $5.1 (1995 - $7.3) (2) 33.4 56.4
Asbestos-related insurance receivable . . . . . . . . . . . . . . . . . . . . 241.2(3) 321.2
------ ------
Total amounts due from insurance carriers . . . . . . . . . . . . . . . . . . . . . $343.7 $439.6
====== ======
</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 $33.3 and the reclassification of $46.7 from
"Asbestos-related insurance receivable" to "Notes receivable
from insurance carriers - current" and "- noncurrent" as the
result of a 1996 settlement with an insurance carrier.
At June 30, 1996, settlements with certain insurance carriers provided
for the future receipt by Grace of $111.6, which Grace has recorded as
notes receivable (both current and noncurrent) of $102.5, net of
discounts. In the first half of 1996, Grace received net proceeds of
$99.7 pursuant to settlements with insurance carriers in reimbursement
for monies previously expended by Grace in connection with
asbestos-related lawsuits and claims; of this amount, $65.1 was
received pursuant to settlements entered into in 1993 through 1996,
which had previously been classified as notes receivable. Pursuant to
I-5
<PAGE> 10
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
settlements with two groups of carriers in 1995, Grace will continue
to receive payments based on future cash outflows for asbestos-
related lawsuits and claims; such payments are estimated to represent
approximately $215.8 of the asbestos-related receivable of $241.2 at
June 30, 1996.
Grace's ultimate exposure with respect to its asbestos-related
lawsuits and claims will depend on the extent to which its insurance
will cover damages for which it may be held liable, amounts paid in
settlement and litigation costs. However, in Grace's opinion (which
is not based on a formal opinion of counsel), it is probable that
recoveries from its insurance carriers (including amounts reflected in
the receivable discussed above), along with other funds, will be
available to satisfy the personal injury and property damage lawsuits
and claims pending at June 30, 1996, as well as personal injury
lawsuits and claims expected to be filed in the future. Consequently,
Grace believes that the resolution of its asbestos-related litigation
will not have a material adverse effect on its consolidated results of
operations or financial position.
For additional information, see Note 2 to the consolidated financial
statements in the 1995 Annual Report.
(C) ACQUISITIONS AND DIVESTMENTS - CONTINUING OPERATIONS
Acquisitions
In July 1996, Grace announced that it had completed the acquisition of
Cypress Packaging, Inc. (Cypress), a manufacturer of flexible
packaging. Cypress, with 1995 sales of more than $20.0, is a
leading supplier of plastic packaging materials for the retail pre-cut
produce market segment.
Divestments
In June 1996, Grace sold its water treatment and process chemicals
business to Betz Laboratories, Inc. (Betz). The purchase price in the
transaction was $632.0, subject to certain adjustments, plus the
assumption of certain liabilities. As initially adjusted, the
purchase price of $636.4 (which is subject to further adjustment) was
paid at closing as follows: $534.8 in cash, a $100.0 promissory note
(secured by a letter of credit) due in January 1997, and a $1.6
promissory note paid in July 1996. The sales and revenues of Grace's
water treatment and process chemicals business for the six months
ended June 30, 1996 and 1995 were $201.2 and $193.9, respectively; its
financial position and results of operations were not significant to
Grace.
As reflected in the consolidated statement of operations (in the line
captioned "Gain on sales of businesses"), the sales of this business
and the biopesticides business resulted in a pretax gain of $326.4,
and an after-tax gain of $210.1 ($2.18 per common share), in
continuing operations.
I-6
<PAGE> 11
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(D) DISCONTINUED OPERATIONS
Health Care
As previously reported, in February 1996 Grace and Fresenius AG
(Fresenius) entered into a definitive agreement to combine National
Medical Care, Inc. (NMC), Grace's principal health care subsidiary,
with Fresenius' worldwide dialysis business (FWD) to create Fresenius
Medical Care AG (FMC). The combination would follow the borrowing
and/or assumption of debt aggregating approximately $2,300 by NMC, a
tax-free distribution of the net cash proceeds by NMC to W. R. Grace &
Co.-Conn., a Connecticut subsidiary of the Company that conducts
Grace's packaging and specialty chemicals businesses (Grace Chemicals)
and a tax-free distribution by the Company, with respect to each share
of its Common Stock, of one share of a newly formed Delaware
corporation (New Grace) holding all of the stock of Grace Chemicals,
as well as Grace's other businesses other than NMC. As a result of
these transactions,the holders of the Company's Common Stock would own
100% of New Grace and would be allocated an aggregate of approximately
44.8% of FMC's ordinary shares on a fully diluted basis. The holders
of the Company's Common Stock would also own preferred stock, the
dividend on which would be linked to the performance of FMC.
The Company's shareholders are to vote on the combination and related
matters at a special meeting to be held on September 16, 1996, and
it is expected that the various transactions will be completed
following the date of the special meeting and prior to
October 1, 1996; however, there can be no assurance as to whether
or when such transactions will be completed.
Grace, on behalf of NMC, has obtained a commitment letter from various
financial institutions under which approximately $2,500 of financing is
expected to be made available to NMC and certain specified subsidiaries
and affiliates in connection with the above transactions. The credit
agreement is expected to provide that certain obligations thereunder
will be guaranteed by Grace Chemicals for specified periods of time and
subject to certain conditions. See "FINANCING" in the Company's Joint
Proxy Statement-Prospectus dated August 2, 1996 for additional
information.
In October 1995, NMC received five investigative subpoenas from the
Office of the Inspector General (OIG) of the U.S. Department of Health
and Human Services. In the event that a U.S. government agency
believes that any wrongdoing has occurred, civil and/or criminal
proceedings could be instituted, and if any such proceedings were to
be instituted and the outcome were unfavorable, NMC could be subject
to fines, penalties and damages or could become excluded from
government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of NMC and Grace. However, at the present time, the
results of the investigation and its impact cannot be predicted, as
management does not believe that the liability, if any, with respect
to the OIG investigation is estimable.
Under the terms of the combination of FWD and NMC described above, NMC
will remain responsible for all liabilities, if any, resulting from
the OIG investigation. In July 1996, an agreement was reached with
the U.S. government under which, subject to certain conditions
I-7
<PAGE> 12
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
and limitations, upon such combination, (i) FMC and the Company (which
will become a subsidiary of FMC) are to guarantee the payment of the
obligations, if any, of NMC to the U.S. government in respect of the
OIG investigation and another proceeding; (ii) Grace Chemicals is to
guarantee the obligations of FMC under the foregoing guarantee with
respect to acts and transactions that took place prior to the
consummation of the combination (but only if such obligations become
due and payable and remain uncollected for 120 days); and (iii) NMC is
to deliver a standby letter of credit in the principal amount of
$150.0 in favor of the U.S. government to support its payment of such
obligations. As a result of this agreement, the U.S. government has
agreed (i) to not take any action to delay or interfere with the
combination and (ii) to release Grace, NMC and certain other parties
from certain fraudulent conveyance and related claims arising from or
related to the combination (or any transaction comprising a part
thereof).
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation" and
" -- OIG Agreements" in the Company's Joint Proxy Statement-Prospectus
dated August 2, 1996 for additional information.
Discontinued Operations - Consolidated Statement of Operations
The sales and revenues and results of the discontinued health care
operations and the gain on the sale of the transgenic plant business
of Grace's Agracetus subsidiary (discussed below) were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------
1996 1995 1996 1995
------ ------ ----- -----
<S> <C> <C> <C> <C>
Sales and revenues - health care $565.5 $523.5 $1,105.2 $1,015.3
====== ====== ======== ========
Income from health care operations
before income taxes $ 38.9 $ 60.1 $ 77.1 $ 104.1
Provision for income taxes 17.5 26.4 33.7 45.8
------ ------ -------- --------
Income from health care operations $ 21.4 $ 33.7 $ 43.4 $ 58.3
------ ------ -------- --------
Gain on sale of business $129.0 $ - $ 129.0 $ -
Provision for income taxes on
sale of business 49.6 - 49.6 -
------ ------ -------- --------
Net gain on sale of business $ 79.4 $ - $ 79.4 $ -
------ ------ -------- --------
Income from discontinued operations $100.8 $ 33.7 $ 122.8 $ 58.3
====== ====== ======== ========
</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 ($24.4 and $21.6 for the
second quarters of 1996 and 1995, respectively,
I-8
<PAGE> 13
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
and $51.2 and $41.7 for the six months ended June 30, 1996 and 1995,
respectively) based on a ratio of the net assets of the health care
business as compared to Grace's total capital. Taxes have been
allocated to the health care business as if it were a stand-alone
taxpayer; however, these allocations are not necessarily indicative of
the taxes attributable to the health care business in the future. For
the quarter and six months ended June 30, 1995, net operating income
of the health care business also reflects an allocation of Grace's
health care-related research expenses (Grace management initiated the
phase-out of certain of its health care research programs in the third
quarter of 1995).
In May 1996, Grace completed the sale of the transgenic plant business
of its Agracetus subsidiary to the Monsanto Company for $150.0 in
cash, resulting in a pretax gain of $129.0, and an after-tax gain of
$79.4 ($0.82 per common share), in discontinued operations.
Discontinued Operations - Consolidated Balance Sheet
The net assets, excluding intercompany assets, of Grace's discontinued
operations included in the consolidated balance sheet at June 30,
1996, are as follows:
<TABLE>
<CAPTION>
Sub- Health
Cocoa Other Total Care Total
----- ----- ------ --------- --------
<S> <C> <C> <C> <C> <C>
Current assets $335.2 $ 4.7 $339.9 $ 726.2 $1,066.1
Properties and equipment, net 180.9 15.9 196.8 417.7 614.5
Investments in and advances to
affiliated companies - 28.4 28.4 - 28.4
Other assets 57.4 - 57.4 981.5 1,038.9
------ ----- ------ -------- --------
Total assets $573.5 $49.0 $622.5 $2,125.4 $2,747.9
------ ----- ------ -------- --------
Current liabilities $237.2 $ 5.0 $242.2 $ 476.0 $ 718.2
Other liabilities 79.2 4.2 83.4 77.8 161.2
------ ----- ------ -------- --------
Total liabilities $316.4 $ 9.2 $325.6 $ 553.8 $ 879.4
------ ----- ------ -------- --------
Net assets $257.1 $39.8 $296.9(1) $1,571.6(2) $1,868.5
====== ===== ====== ======== ========
</TABLE>
(1) Classified as a current asset in the consolidated balance sheet.
(2) Classified as a noncurrent asset in the consolidated balance
sheet.
Minority interest consists of a limited partnership interest in Grace
Cocoa Associates, L.P. (LP). LP's assets consist of Grace Cocoa's
worldwide cocoa and chocolate business, long-term notes and demand
loans due from various Grace entities and guaranteed by the Company
and its principal operating subsidiary, and cash. LP is a separate
and distinct legal entity from each of the Grace entities and has
separate assets, liabilities, business functions and operations. For
financial reporting purposes, the assets, liabilities, results of
operations and cash flows of LP are included in Grace's consolidated
financial statements as components of discontinued operations and the
outside investors' interest in LP is reflected as a minority interest.
The intercompany notes held by LP are eliminated in preparing the
consolidated financial statements and, therefore, have not been
classified as pertaining to discontinued operations.
I-9
<PAGE> 14
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(E) RESTRUCTURING COSTS
As discussed in Note 5 to the consolidated financial statements in the
1995 Annual Report, Grace began implementing in 1995 a worldwide
program focused on streamlining processes and reducing general and
administrative expenses, factory administration costs and noncore
corporate research and development expenses. As previously reported,
Grace expects to implement additional cost reduction and efficiency
improvements beyond those initiated in 1995, as its businesses further
evaluate and reengineer their operations. In furtherance of that
plan, in the second quarter of 1996, Grace recorded a pretax charge of
$53.7 million ($32.4 million after-tax), principally related to
restructuring the Company's European packaging operations. The
charge primarily relates to employee termination benefits and lease
termination costs.
(F ) OTHER
Components of Grace's inventories were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw and packaging materials $120.0 $137.1
In process 79.5 78.0
Finished products 252.9 325.2
------ ------
$452.4 $540.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (50.0) (48.4)
------ ------
Total Inventories $402.4 $491.9
====== ======
</TABLE>
Earnings per share are calculated on the basis of the following
weighted average number of common shares outstanding:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Three Months Ended June 30: . . . . . . . . . . . . 96,634,000 95,116,000
Six Months Ended June 30: . . . . . . . . . . . . . 97,259,000 94,629,000
</TABLE>
I-10
<PAGE> 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
REVIEW OF OPERATIONS
Overview
The second quarter of 1996 included an after-tax gain on the sales of
businesses, primarily the water treatment and process chemicals
business and the transgenic plant business, totaling $289.5 million
($455.4 million pretax), offset by an after-tax charge for
restructuring costs of $32.4 million ($53.7 million pretax). The
first quarter of 1995 included an after-tax charge of $12.5 million
($20.0 million pretax) relating to corporate governance matters.
Excluding the above items, net income for the second quarter of 1996
would have decreased 2% as compared to the second quarter of 1995, and
net income for the 1996 first half would have increased by 1% over the
1995 first half.
Operating Results
The following table compares results for the specialty chemicals
segment for the 1996 second quarter and first half to those for the
comparable periods of 1995:
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Specialty Chemicals Operating Results June 30, June 30,
------------------------------------- ----------------------- -----------------------
$ millions 1996 1995 1996 1995
------------------------------------- ------ ------ -------- --------
<S> <C> <C> <C> <C>
Sales and revenues $948.9 $932.3 $1,834.9 $1,785.7
====== ====== ======== ========
Operating income before taxes (i) $102.1 $ 85.3 $ 186.0 $ 153.7
Gain on sales of businesses 326.4 - 326.4 -
Restructuring costs (53.7) - (53.7) -
Provision for corporate governance - - - (20.0)
Interest expense/financing costs (ii) (18.3) (18.7) (36.7) (34.5)
Other income/(expenses), net (ii) 7.1 (1.8) 7.6 (3.0)
------ ------ -------- --------
Income from continuing operations
before income taxes $363.6 $ 64.8 $ 429.6 $ 96.2
====== ====== ======== ========
</TABLE>
(i) Reflects the allocation of general corporate overhead, general
corporate research expenses and certain other income and expense
items that can be identified with the specialty chemicals
operations.
(ii) Corporate interest and financing costs and nonallocable expenses
are not reflected in the results of the specialty chemicals
segment. Corporate interest and financing costs are not allocated
to the specialty chemicals operating results because all
significant financing decisions are centralized at the corporate
level.
Sales and revenues increased 2% and 3% in the second quarter and first
half of 1996, respectively, as compared to the 1995 periods. The
increase for the 1996 second quarter reflected a favorable volume
variance estimated at 4%, and unfavorable price/product mix and
currency translation variances estimated at 1% each, compared to 1995.
The increase for the first half of 1996 reflected a favorable volume
variance estimated at 3%, with price/product mix and currency
translation variances being flat.
I-11
<PAGE> 16
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Comparison of Second Quarter 1996 to Second Quarter 1995
Construction products, catalysts and other silica-based products,
packaging and water treatment product lines experienced improved
volumes, offset by a volume decline in container products.
# PACKAGING - Volume increases were offset by unfavorable
price/product mix variances, resulting in sales being flat for the
1996 quarter versus the 1995 quarter. Sales of bags declined,
particularly in Europe and Asia Pacific, due to the considerable
decrease in beef consumption caused by the outbreak of bovine
spongiform encephalopathy (commonly referred to a "mad cow
disease"). Sales of films were down, primarily in North America,
due to pricing pressures. Laminate sales increased, primarily as
a result of market share gains in Asia Pacific.
# CATALYSTS AND OTHER SILICA-BASED PRODUCTS - Sales were higher in
all regions. Market share gains in Asia Pacific and Europe
increased sales for refinery catalysts, and North America
polyolefin catalyst sales increased primarily due to an improved
resin market.
# CONSTRUCTION PRODUCTS - Volumes increased in all regions and in
all products, especially concrete and waterproofing products in
North America and Asia Pacific. These increases were due to
housing starts and projects that had been delayed by severe
weather in the first quarter of 1996 in North America and market
share gains in Asia Pacific. Volume increases were partially
offset by the effect of the 1995 divestment of the composite
material business.
# CONTAINER - The negative effects of currency exchange, coupled
with volume declines, led to decreased sales of can sealing
products in Asia Pacific and closure compounds in Europe,
partially offset by volume increases of can coating products in
Latin America as a result of continued market penetration.
# WATER TREATMENT - Volume increases, caused by market share gains,
resulted in higher paper industry process chemicals sales in
Europe. Water treatment chemicals sales in Latin America
increased, as management implemented various programs to improve
price/product mix. As discussed in note (c) to the consolidated
financial statements in this Report, Grace sold its water
treatment and process chemicals business in June 1996.
Operating income before taxes increased by 20% in the second quarter
of 1996 as compared to the 1995 second quarter, as cost management
programs continued to favorably impact results across all regions and
product lines. In addition to the favorable effects of the cost
management programs, operating income before taxes was affected by the
factors discussed below.
# NORTH AMERICA - Improved results in the second quarter of 1996
reflected improved operating margins resulting from the sales
volume increases in construction products, offset by continued
weakness in fluid cracking catalysts and resultant pricing
pressures.
I-12
<PAGE> 17
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
# EUROPE - Results improved versus the 1995 second quarter,
primarily due to the volume increases in refinery catalysts,
construction products and paper industry process chemicals.
These favorable results were offset by lower results in packaging
due to the volume decline in bags, discussed above.
# ASIA PACIFIC - 1996 second quarter results declined versus the
1995 period, as the volume increases in construction products
were offset by unfavorable results in can sealing products due to
certain depressed economies and the shortage of products to be
canned as a result of last year's floods in Southeast Asia, and
in packaging due to the volume decline in bags, discussed above.
# LATIN AMERICA - Results improved versus the 1995 second quarter,
primarily due to the increased water treatment chemical sales and
market share gains in coating products.
For the first half of 1996, operating income increased 21% over the
comparable period of 1995, primarily due to improved operating margins
and the growth in catalysts and other silica-based products,
construction products and water treatment, as discussed above.
Statement of Operations
Other Income
Other income includes interest income, dividends, royalties from
licensing agreements and equity in earnings of affiliated companies.
Included in other income in the second quarter and first half of
1996 was interest income of $7.5 million relating to the settlement
of prior years' Federal income tax returns.
Interest Expense and Related Financing Costs
Excluding amounts allocated to discontinued operations (as discussed
in Note (d) to the consolidated financial statements in this Report),
interest expense and related financing costs of $18.3 million and
$36.7 million in the second quarter and first half of 1996,
respectively, decreased 2% and increased 6%, respectively, versus the
comparable 1995 periods. Including amounts allocated to discontinued
operations, interest expense and related financing costs increased 6%
and 15% in the second quarter and first half of 1996, respectively,
over the comparable 1995 periods, to $42.7 million and $87.9 million,
respectively. The overall increase in interest expense and related
financing costs is primarily due to higher average debt levels.
See "Financial Condition: Liquidity and Capital Resources" below for
information on borrowings
Research and Development Expenses
Research and development spending decreased 7% and 6% in the second
quarter and first half of 1996, respectively, versus the 1995 periods,
reflecting cost management programs. Research and development
spending for 1996 has been directed to Grace's core packaging and
specialty chemicals businesses.
I-13
<PAGE> 18
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Research and development spending is expensed as incurred. Research
is carried out by product line laboratories in North America, Europe,
Latin America and Asia Pacific and at a corporate research facility in
the U.S. Corporate research spending is generally charged to the
product lines, based upon the costs incurred on projects directly
sponsored by the respective product lines.
Restructuring Costs
See note (e) to the consolidated financial statements in this Report
for information relating to restructuring costs.
Income Taxes
The effective tax rates were 35.9% and 36.1%, respectively, for the
second quarter and first half of 1996, compared with 30.6% and 29.4%,
respectively, for the second quarter and first half of 1995.
Excluding the items discussed under "Overview" above, Grace's
effective tax rates would have been 39.1% for the second quarter of
1996 and 38.2% and 30.8% for the first half of 1996 and 1995,
respectively.
The low effective tax rates in the second quarter and first half of
1995 were primarily due to a lower overall foreign tax rate, as the
result of a reassessment of the valuation allowance for certain
deferred tax assets.
Income from Discontinued Operations
The following table compares the results for the health care business
for the 1996 second quarter and first half to results for the
comparable periods of 1995:
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Health Care Operating Results June 30, June 30,
---------------------------------- ---------------------- ------------------------
$ millions 1996 1995 1996 1995
---------------------------------- ------ ------ -------- ---------
<S> <C> <C> <C> <C>
Sales and revenues $565.5 $523.5 $1,105.2 $1,015.3
====== ====== ======== ========
Operating income before taxes (i) $ 63.3 $ 81.7 $ 128.3 $ 145.8
====== ====== ======== ========
</TABLE>
(i) The above operating results do not include interest expense
allocated to the discontinued health care business of $24.4 and
$21.6 for the second quarters of 1996 and 1995, respectively, and
$51.2 and $41.7 for the first six months of 1996 and 1995,
respectively.
Sales and revenues for the second quarter and first half of 1996
increased by 8% and 9%, respectively, over the comparable periods of
1995. These improvements were due to 11% increases in kidney dialysis
services revenues in both the second quarter and first half of 1996,
and increases of 8% and 12% in the second quarter and first half of
1996, respectively, in medical products operations. The increases
were largely due to the effect of acquisitions subsequent to the first
half of 1995, partially offset by the decision, effective July 1,
1995, to discontinue recognizing incremental revenue relating to
certain dual eligible end
I-14
<PAGE> 19
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
stage renal disease patients; see the discussion below relating to the
Omnibus Budget Reconciliation Act of 1993 (OBRA 93). The number of
centers providing dialysis and related services increased 13%, from
623 at June 30, 1995 to 706 at June 30, 1996 (587 in North America, 66
in Europe, 37 in Latin America and 16 in Asia Pacific). The
improvements in dialysis services and medical products operations were
partially offset by a 5% decrease in both the second quarter and first
half of 1996 in home health care revenues resulting from a decrease in
infusion therapy revenues due to continued managed care pricing
pressure.
Operating income before taxes in the second quarter and first half of
1996 decreased by 23% and 12%, respectively, over the 1995 periods.
The decreases were principally attributable to the effects of OBRA 93
(which reduced revenues without a commensurate decrease in costs) on
kidney dialysis services results and a reduction in home health care
operating income due to the decreased revenues discussed above and
increased bad debt expense. Also negatively impacting operating
income were costs incurred in connection with the OIG investigation,
as discussed below and in note (d) to the consolidated financial
statements in this Report. These decreases were offset by the
increases in medical products operations due to the increased revenues
discussed above.
See below and note (d) to the consolidated financial statements in
this Report for a discussion concerning certain items relating to
NMC's operations and the possible material adverse effects of these
items.
Intradialytic Parenteral Nutrition (IDPN) Therapy
Among its other services, NMC administers IDPN therapy to chronic
dialysis patients who suffer from severe gastrointestinal
malfunctions. Since late 1993, Medicare claims processors have
sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN
claims currently being paid by Medicare represents an unauthorized
policy coverage change. Accordingly, NMC, along with certain other
IDPN providers, is pursuing various administrative and legal avenues,
including administrative appeals and a declaratory judgment action, to
address this problem.
Although NMC contends that its IDPN claims are consistent with
published Medicare coverage guidelines and ultimately will be approved
for payment, there can be no assurance that the claims will be
approved for payment. Such claims represent substantial accounts
receivable of NMC, amounting to approximately $130.0 million and $93.0
million as of June 30, 1996 and December 31, 1995, respectively, and
which have been increasing at the rate of approximately $6.0 million
per month; however, see below for information regarding a new IDPN
reimbursement policy. If NMC is unable to collect its IDPN accounts
receivable or if IDPN and/or Medicare Parenteral and Enteral Nutrition
(PEN) program coverage is reduced or eliminated, NMC's business,
financial position and results of operations could be materially
adversely affected.
In April 1996, the Medicare claims processors published new medical
review policies which restrict substantially the number of patients
for whom IDPN would be reimbursed by Medicare. The new policies are
final and effective for claims submitted on and after
I-15
<PAGE> 20
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
July 1, 1996. NMC and other PEN providers continue to review whether
and to what extent possible modifications to the new policies might be
obtained in legislative, judicial or administrative forums.
While the new policy permits continued coverage of IDPN and other PEN
therapies, and while the potential impact of the new policy is subject
to further analysis, NMC believes that the new policy will make it
substantially more difficult to qualify patients for future coverage
by, among other things, requiring certain patients to undergo onerous
and/or invasive tests in order to qualify for coverage. The new
policy also eliminates all reimbursement for infusion pumps. NMC,
together with other interested parties, may seek to effect certain
changes in the new policy (other than with respect to elimination of
pumps revenues), and NMC has developed changes to its patient
qualification procedures in order to comply with the policy. However,
if NMC is unable to achieve meaningful change in the new policy, if
physicians and patients fail to accept the new qualification
procedures and/or if patients fail to qualify under such procedures,
the policy could significantly reduce the number of patients eligible
for Medicare coverage of IDPN and other PEN therapies, which would
have a material adverse effect on NMC's financial position and results
of operations.
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- IDPN" and "--
Reimbursement -- U.S. -- IDPN" in the Company's Joint Proxy
Statement-Prospectus dated August 2, 1996 for additional information.
OBRA 93
NMC's business, financial position and results of operations could
also be materially adversely affected by an adverse outcome in the
pending litigation concerning the implementation of certain provisions
of OBRA 93 relating to the coordination of benefits between Medicare
and employer health plans in the case of certain dialysis patients.
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- OBRA 93" in the
Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for
additional information.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996, the net pretax cash provided by Grace's
continuing operating activities was $111.9 million, versus $39.9
million in the first half of 1995. The increase was primarily due to
improved operating results, partially offset by reduced net cash
inflows resulting from settlements with certain insurance carriers for
asbestos-related litigation, net of amounts paid for the defense and
disposition of asbestos-related litigation (as discussed below), of
$26.6 million in the first half of 1996 as compared to $96.2 million
in the first half of 1995. After giving effect to the net pretax cash
provided by operating activities of discontinued operations and
payments of income taxes, the net cash provided by operating
activities was $118.5 million in the first half of 1996 versus $23.3
million used in the first half of 1995.
I-16
<PAGE> 21
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Investing activities provided $379.7 million of cash in the first half
of 1996, largely reflecting the net cash proceeds of $697.1 million
from the divestments of businesses (excluding $101.6 million of
promissory notes received on the sale of the water treatment and
process chemicals business). This positive cash flow was partially
offset by capital expenditures of $234.5 million (more than 70% of
which relates to Grace's packaging and catalyst and other silica-based
businesses). Also, investing activities of discontinued operations
for the first half of 1996 used $97.6 million (compared to $46.3
million used in the first half of 1995), primarily reflecting the
classification of the health care business as a discontinued operation
in the 1995 second quarter. Management anticipates that capital
expenditures for 1996 will not exceed the capital expenditures for
1995.
Net cash used for financing activities in the first half of 1996 was
$464.1 million, primarily reflecting the purchase of stock (as
discussed below), reductions in debt and the payment of dividends,
partially offset by proceeds from the exercise of employee stock
options. Total debt was $1,866.7 million at June 30, 1996, reflecting
a decrease of $67.1 million from December 31, 1995. Grace's total
debt as a percentage of total capital (debt ratio) decreased from
61.1% at December 31, 1995 to 59.6% at June 30, 1996, primarily due to
the decrease in debt. At June 30, 1996 and December 31, 1995, the net
assets of the discontinued health care business included $188.1
million and $226.7 million of debt, respectively.
During the first six months of 1996, Grace received $697.1 million of
cash proceeds from divestments, principally from the sales of the
water treatment and process chemicals business and the transgenic
plant business, and it expects to receive approximately $2.3 billion
(in the form of cash and/or the assumption of debt) from the expected
distribution from NMC (as discussed in note (d) to the consolidated
financial statements in this Report). Grace has applied the cash
proceeds received to date, and expects to apply the cash proceeds
generated from the NMC distribution and, to a lesser extent, funds
generated by operations, to the reduction of borrowings, the
repurchase of stock and investments in core businesses.
See note (d) to the consolidated financial statements in this Report
for information concerning an agreement reached with the U.S.
government regarding the OIG investigation, and the commitment letter
for approximately $2.5 billion of financing obtained by Grace on
behalf of NMC.
In May 1996, Grace Chemicals entered into a new credit agreement
providing for total borrowings of $1.85 billion and terminated three
previous agreements providing for total borrowings of $850 million.
The new credit agreement is intended to provide liquidity to finance
the repurchase of stock and potential acquisitions pending the receipt
of the distribution from NMC. Borrowings under the new credit
agreement are to be guaranteed by New Grace and the Company. Upon the
completion of the disposition of NMC, the total borrowings available
under the new credit agreement will be reduced to $650 million and the
guarantee by the Company will terminate.
The Company initiated its previously announced share repurchase
program in April 1996. As of June 30, 1996, Grace had acquired
5,229,600 shares under this program at a cost of
I-17
<PAGE> 22
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
approximately $398.2 million (or an average price of approximately
$76.14 per share). In late July 1996, the Company temporarily
suspended the repurchase program. Through late July 1996, Grace had
purchased a total of 7,920,200 shares at a cost of approximately
$583.3 million (or an average price of approximately $73.65 per
share).
In July 1996, Grace announced that it had completed the acquisition of
Cypress Packaging, Inc. (Cypress), a manufacturer of flexible
packaging. Cypress, with 1995 sales of more than $20.0 million, is a
leading supplier of plastic packaging materials for the retail pre-cut
produce market segment. The acquisition of Cypress is in lieu of the
previously announced plan to construct a $50.0 million plant in
Seneca, South Carolina to serve the fresh-cut produce market.
Asbestos-Related Matters
As reported in note (b) to the consolidated financial statements in
this Report, Grace is a defendant in property damage and personal
injury lawsuits relating to previously sold asbestos-containing
products and is involved in related litigation with certain of its
insurance carriers. In the first half of 1996, Grace received $26.6
million under settlements with certain insurance carriers, net of
amounts paid for the defense and disposition of asbestos-related
property damage and personal injury litigation. The balance sheet at
June 30, 1996 includes a receivable due from insurance carriers, a
portion of which is subject to litigation, of $241.2 million. Grace
has also recorded notes receivable of $111.6 million ($102.5 million,
net of discounts) for amounts to be received in 1996 to 2001 pursuant
to settlement agreements with certain insurance carriers.
Although the amounts to be paid in 1996 in respect of asbestos-related
lawsuits and claims cannot be precisely estimated, Grace expects that
it will be required to expend approximately $40.0 million (pretax) in
1996 to defend against and dispose of such lawsuits and claims (after
giving effect to payments to be received from certain insurance
carriers, as discussed above and in note (b) to the consolidated
financial statements in this Report). As indicated therein, the
amounts reflected in the consolidated financial statements with
respect to the probable cost of defending against and disposing of
asbestos-related lawsuits and claims and probable recoveries from
insurance carriers represent estimates; neither the outcomes of such
lawsuits and claims nor the outcomes of Grace's continuing litigations
with certain of its insurance carriers can be predicted with
certainty.
Environmental Matters
There were no significant developments relating to environmental
liabilities in the first half of 1996.
For additional information relating to environmental liabilities, see
Note 12 to the consolidated financial statements in the 1995 Annual
Report.
I-18
<PAGE> 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(a) The section captioned "BUSINESS OF GRACE CHEMICALS--Legal Proceedings
and Regulatory Matters" on pages 20-27 of the Prospectus dated August 2, 1996
included in a Registration Statement on Form S-1 (Registration No. 333-09495)
filed by Grace Holding, Inc., a subsidiary of the Company, and the section
captioned "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal
Matters--Legal and Regulatory Proceedings" (insofar as such section contains
information relating to Grace and/or NMC) on pages 130-142 of the Joint Proxy
Statement-Prospectus dated August 2, 1996 included in a Registration Statement
on Form S-4 (Registration No. 333-09497) filed by the Company, are incorporated
herein by reference.
(b) Note (b) to the Consolidated Financial Statements in Part I of this
Report is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company's 1996 Annual Meeting of Shareholders ("Annual Meeting") was held
on May 10, 1996. At the Annual Meeting, the Company's shareholders (a) elected
three Class I Directors for a term expiring in 1999 and one Class II Director
for a term expiring in 1997; (b) ratified the selection of Price Waterhouse LLP
as independent certified public accountants of the Company and its consolidated
subsidiaries for 1996; (c) approved the Company's Long-Term Incentive Program;
(d) approved the
II-1
<PAGE> 24
Company's Annual Incentive Compensation Program; and (e) defeated a shareholder
proposal regarding nonemployee directors' retirement benefits.
The following sets forth the results of voting at the Annual Meeting:
<TABLE>
<CAPTION>
VOTES
---------------------------------------------------------
MATTER FOR AGAINST* ABSTENTIONS BROKER NON-VOTES
- ------ --- ------- ----------- ----------------
<S> <C> <C> <C> <C>
Election of Directors*
- ---------------------
Class I
A. J. Costello 77,650,539 7,517,194 -0- -0-
M. A. Fox 77,788,812 7,378,921 -0- -0-
T. A. Vanderslice 77,794,637 7,373,096 -0- -0-
Class II
C. L. Hampers 77,494,633 7,673,100 -0- -0-
Selection of
Independent
Accountants 77,618,746 7,223,154 325,833 -0-
Approval of
Long-Term
Incentive Program 69,625,813 14,758,408 783,509 -0-
Approval of
Annual Incentive
Compensation
Program 77,305,760 7,081,791 778,580 -0-
Shareholder
Proposal 24,044,222 52,093,064 1,004,906 -0-
</TABLE>
- ---------------------------
* With respect to the election of directors, the form of proxy permitted
shareholders to check boxes indicating votes either "for" or "withheld";
votes relating to directors designated above as "against" are votes cast as
"withheld".
II-2
<PAGE> 25
Item 5. Other Information.
In July 1996, Grace completed the acquisition of Cypress Packaging,
Inc. ("Cypress"), a manufacturer of flexible packaging located in Rochester,
N.Y. Cypress, with 1995 sales of more than $20 million, is a leading supplier
of plastic packaging materials for the retail pre-cut market segment.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this Report:
-- 364-Day Credit Agreement, dated as of May 17, 1996, among
W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding,
Inc., the several banks parties thereto, NationsBank, N.A.
(South), as documentation agent, and Chemical Bank, as
administrative agent, for such banks (filed as Exhibit 4.4
to the Registration Statement on Form S-1 (Registration No.
333-09495) of Grace Holding, Inc. filed on August 2, 1996
("S-1 Registration Statement") and incorporated herein by
reference)
-- Amended and Restated Credit Agreement, dated as of May 17,
1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co.,
Grace Holding, Inc., the several banks parties thereto and
Chemical Bank, as agent for such banks (filed as Exhibit
4.5 to the S-1 Registration Statement and incorporated
herein by reference)
-- Commitment letter for the Credit Agreement to be entered
into by National Medical Care, Inc., the principal health
care subsidiary of
II-3
<PAGE> 26
W. R. Grace & Co., and certain lenders (filed as
Exhibit 4.7 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Long-Term Incentive Program Award (filed as
Exhibit 10.13 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Stock Option Agreement (filed as Exhibit
10.14 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Executive Severance Agreement between W. R.
Grace & Co. and new officers (filed as Exhibit 10.23
to the S-1 Registration Statement and incorporated
herein by reference)
-- Form of Executive Severance Agreement between W. R.
Grace & Co. and others (filed as Exhibit 10.22 to the
S-1 Registration Statement and incorporated herein by
reference)
-- Letter Agreement dated June 14, 1996 between W. R.
Grace & Co. and Constantine L. Hampers (filed as
Exhibit 10.35 to the S-1 Registration Statement and
incorporated herein by reference)
-- Option Agreement between W. R. Grace & Co. and Albert
J. Costello, dated May 1, 1995 (filed as Exhibit
10.36 to the S-1 Registration Statement and
incorporated herein by reference)
-- Option Agreement between W. R. Grace & Co. and Albert
J. Costello, dated March 6, 1996 (filed as Exhibit
10.37 to the S-1 Registration Statement and
incorporated herein by reference)
II-4
<PAGE> 27
-- Form of Indemnification Agreement between W. R. Grace
& Co. and certain directors (filed as Exhibit 10.39
to the S-1 Registration Statement and incorporated
herein by reference)
-- Guarantee Agreement among Fresenius Medical Care AG,
the United States of America, W. R. Grace & Co., and
National Medical Care, Inc. dated July 31, 1996
(filed as Exhibit 10.41 to the S-1 Registration
Statement and incorporated herein by reference)
-- Guarantee Agreement between W. R. Grace & Co.-Conn.
and the United States of America dated July 31, 1996
(filed as Exhibit 10.42 to the S-1 Registration
Statement and incorporated herein by reference)
-- Letter Agreement among W. R. Grace & Co., W. R. Grace
& Co.-Conn. and Fresenius Medical Care AG dated July
31, 1996 (filed as Exhibit 10.43 to the S-1
Registration Statement and incorporated herein by
reference)
-- weighted average number of shares and earnings used
in per share computations
-- computation of ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends
-- financial data schedule
-- Pro forma financial information for Grace Holding,
Inc. for the six-month period ended June 30, 1996
II-5
<PAGE> 28
-- Special-purpose, consolidated interim financial
statements of the Company for the three-month and
six-month periods ended June 30, 1996
-- "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and
Regulatory Matters" section of the Prospectus dated
August 2, 1996 included in the S-1 Registration
Statement
-- "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and
Legal Matters--Legal and Regulatory Proceedings"
section of the Joint Proxy Statement-Prospectus dated
August 2, 1996 included in a Registration Statement
on Form S-4 (Registration No. 333-09497) filed by W.
R. Grace & Co. (insofar as such section contains
information relating to Grace and/or NMC)
(b) Reports on Form 8-K. The Company filed a Report on Form 8-K
on April 15, 1996, relating to an agreement to sell the transgenic plant
business of its Agracetus subsidiary to the Monsanto Company for $150 million.
The Company filed a Report on Form 8-K on May 6, 1996, relating to the
announcement of 1996 first quarter results. The Company filed a Report on Form
8-K on July 11, 1996, relating to the sale of the business and assets of its
Dearborn water treatment and process chemicals business to Betz Laboratories,
Inc. The Company also filed a Report on Form 8-K on August 9, 1996, relating
to the announcement of 1996 second quarter results.
II-6
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. GRACE & CO.
-------------------------------
(Registrant)
Date: August 14, 1996 By /s/ Kathleen A. Browne
---------------------------
Kathleen A. Browne
Vice President and Controller
(Principal Accounting Officer)
II-7
<PAGE> 30
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 6 Mos. Ended
6/30/96 - 6/30/95 6/30/96 - 6/30/95
----------------------- ---------------------
<S> <C> <C> <C> <C>
Weighted average number of shares of Common
Stock outstanding . . . . . . . . . . . . . . . . . 96,634 95,116 97,259 94,629
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method) . . . . . . . . . . . . . . . . . . . 1,878 2,486 2,022 2,486
------ ------ ------ ------
Weighted average number of shares of Common
Stock outstanding assuming full dilution . . . . . 98,512 97,602 99,281 97,115
====== ====== ====== ======
</TABLE>
Income used in the computation of earnings per share were as follows (in
millions except per share):
<TABLE>
<CAPTION>
3 Mos. Ended 6 Mos. Ended
6/30/96 - 6/30/95 6/30/96 - 6/30/95
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . $333.9 $78.7 $397.5 $126.2
Dividends paid on preferred stocks . . . . . . . . (.2) (.2) (.3) (.3)
------ ----- ------ ------
Income used in per share computation of
earnings and in per share computation of
earnings assuming full dilution . . . . . . . . . . $333.7 $78.5 $397.2 $125.9
====== ===== ====== ======
Earnings per share . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33
Earnings per share assuming full dilution . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30
</TABLE>
<PAGE> 31
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>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------------------------- -----------------
1995 (b) 1994 (c) 1993 (d) 1992 (e) 1991 1996 (f) 1995(g)
------- ------- ------- ------- ---- -------- -------
<S> <C> <C> <C> <C>
Net (loss)/income from continuing operations $(196.6) $(41.4) $ 19.1 $ 1.4 $157.4 $274.7 $ 67.9
Add/(deduct):
(Benefit from)/provision for income taxes (115.8) (46.6) 10.1 79.9 99.1 154.9 28.3
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) .5 (.9)
Interest expense and related financing
costs, including amortization of
capitalized interest . . . . . . . . . . . 179.8 138.5 122.7 162.7 209.6 93.1 83.7
Estimated amount of rental expense
deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 5.6 7.1
------- ------ ------ ------ ------ ------ ------
(Loss)/income as adjusted . . . . . . . . . . $(123.3) $ 60.0 $162.8 $258.1 $479.4 $528.8 $186.1
======= ====== ====== ====== ====== ====== ======
Combined fixed charges and preferred stock
dividends: Interest expense and related
financing costs, including capitalized
interest. . . . . . . $195.5 $143.2 $122.8 $176.3 $224.5 $104.2 $90.3
Estimated amount of rental expense
deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 5.6 7.1
------ ------ ------ ------ ------ ----- -----
Fixed charges . . . . . . . . . . . . . . . . 204.0 153.3 134.1 190.3 237.2 109.8 97.4
Preferred stock dividend requirements (a) . . .5 .5 .8 .8 .9 .4 .4
------ ------ ------ ------ ------ ------ -----
Combined fixed charges and preferred
stock dividends . . . . . . . . . . . . . $204.5 $153.8 $134.9 $191.1 $238.1 $110.2 $97.8
====== ====== ====== ====== ====== ====== =====
Ratio of earnings to fixed charges . . . . . (h) (h) 1.21 1.36 2.02 4.82 1.91
====== ====== ====== ====== ====== ====== =====
Ratio of earnings to combined fixed charges
and preferred stock dividends . . . . . . (h) (h) 1.21 1.35 2.01 4.80 1.90
======= ====== ====== ====== ====== ====== =====
</TABLE>
(a) For each period with an income tax provision, the preferred stock
dividend requirements are increased to include the pretax earnings
required to cover such requirements based on Grace's effective tax
rate for that period.
(b) Includes pretax provisions of $275.0 for asbestos-related
liabilities and insurance coverage; $220.0 relating to restructuring
costs, asset impairments and other activities; $77.0 for
environmental liabilities at former manufacturing sites; and $30.0
for corporate governance activities.
(c) Includes a pretax provision of $316.0 relating to asbestos-related
liabilities and insurance coverage.
(d) Includes a pretax provision of $159.0 relating to asbestos-related
liabilities and insurance coverage.
(e) Includes a pretax provision of $140.0 relating to a fumed silica
plant in Belgium.
(f) Includes a pretax gain of $326.4 on the sales of businesses,
principally the water treatment and process chemicals business; and
a pretax provision of $53.7 relating to restructuring costs.
(g) Includes a pretax provision of $20.0 for corporate governance
activities.
(h) As a result of the losses incurred for the years ended December 31,
1995 and 1994, Grace was unable to fully cover the indicated fixed
charges.
<PAGE> 32
EXHIBIT 99.1
On August 2, 1996, New Grace filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 (Registration No. 333-09495),
including a Prospectus dated August 2, 1996 ("Prospectus") that was sent to
the Company's shareholders in connection with a Special Meeting of
Shareholders to be held on September 16, 1996. The Prospectus contained
unaudited pro forma financial information for New Grace ("Pro Forma
Information"). The following unaudited pro forma financial information is
being provided to update the Pro Forma Information contained in the Prospectus,
and should be read in conjunction with the Consolidated Financial Statements
and the First Quarter Financial Statements (each as defined in the Prospectus),
as well as the consolidated financial statements and the notes thereto included
in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 ("Second Quarter Financial Statements"). The following unaudited pro
forma financial information does not necessarily indicate the financial
position and results of operations that would actually have occurred if New
Grace were a stand-alone entity on the dates and for the periods indicated.
Undefined terms used in the following unaudited pro forma financial information
have the meanings given those terms in the Prospectus.
<PAGE> 33
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 June 30, 1996.
<TABLE>
<CAPTION>
GRACE NEW YORK PRO FORMA ADJUSTMENTS NEW GRACE
---------------------------
HISTORICAL DEBIT CREDIT PRO FORMA
---------------- ---------- ----------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . $ 73.7 $2,259.1 (a) $1,199.1 (b)
60.0 (a) $ 1,073.7
Notes and accounts receivable, net . . . . . . 712.5 101.5 (b) 814.0
Other current assets . . . . . . . . . . . . . 918.7 918.7
--------- ---------
Total Current Assets . . . . . . . . . . . . 1,704.9 2,806.4
Properties and equipment, net . . . . . . . . . 1,771.8 1,771.8
Net assets of discontinued operations - health care 1,571.6 361.3 (b) 1,872.0 (c) 60.9
Other assets . . . . . . . . . . . . . . . . . . 1,257.5 1,257.5
--------- ---------
Total Assets . . . . . . . . . . . . . . . . $ 6,305.8 $ 5,896.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt . . . . . . . . . . . . . . . $ 603.9 566.2 (b) $ 37.7
Other current liabilities . . . . . . . . . . 1,697.2 1,697.2
--------- ---------
Total Current Liabilities . . . . . . . . . 2,301.1 1,734.9
Long-term debt . . . . . . . . . . . . . . . . . 1,262.8 170.1 (b) 1,092.7
Other liabilities . . . . . . . . . . . . . . . 816.8 816.8
Noncurrent liability for asbestos-related litigation 659.1 659.1
--------- ---------
Total Liabilities . . . . . . . . . . . . . 5,039.8 4,303.5
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Preferred stocks . . . . . . . . . . . . . . . 7.4 7.4 (e) --
Common stock . . . . . . . . . . . . . . . . . 98.7 97.7 (d) 1.0
Paid in capital . . . . . . . . . . . . . . . 513.4 297.4 (d) 216.0
Retained earnings . . . . . . . . . . . . . . 1,082.0 60.0 (a) 2,259.1 (a)
1,872.0 (c) 7.4 (e) 1,416.5
Cumulative translation adjustments . . . . . . (40.4) (40.4)
Treasury stock, at cost . . . . . . . . . . . (395.1) 395.1 (d) --
--------- ---------
Total Shareholders' Equity . . . . . . . . . 1,266.0 1,593.1
--------- ---------
Total Liabilities and Shareholders' Equity . $ 6,305.8 $ 5,896.6
========= =========
</TABLE>
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION PRESENTED.
1
<PAGE> 34
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
GRACE PRO FORMA NEW
NEW YORK ADJUSTMENTS 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>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------
GRACE PRO FORMA NEW
NEW YORK ADJUSTMENTS GRACE
----------------
HISTORICAL DEBIT CREDIT PRO FORMA
------------ ----- ------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales and revenues . . . . . . . . . . . . . . . . . . . . . . $1,834.9 $1,834.9
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 17.9 17.9
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,852.8 1,852.8
-------- --------
Cost of goods sold and operating expenses . . . . . . . . . . . 1,103.8 1,103.8
Selling, general and administrative expenses . . . . . . . . . 405.7 405.7
Depreciation and amortization . . . . . . . . . . . . . . . . . 91.9 91.9
Interest expense and related financing costs . . . . . . . . . 36.7 $8.9 (f) 45.6
Research and development expenses . . . . . . . . . . . . . . . 57.8 57.8
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . 53.7 53.7
Gain on sales of businesses . . . . . . . . . . . . . . . . . . (326.4) (326.4)
--------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,423.2 1,432.1
--------- --------
Income from continuing operations before income taxes . . . . . 429.6 420.7
Provision for income taxes . . . . . . . . . . . . . . . . . . 154.9 $3.6 (f) 151.3
-------- --------
Income from continuing operations . . . . . . . . . . . . . . $ 274.7 $ 269.4
======== ========
Earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . $ 2.82 $ 2.77
Fully diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . $ 2.76 $ 2.71
Weighted average shares of Common Stock outstanding (in thousands) 97,259 97,259
</TABLE>
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION
PRESENTED.
2
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PAR VALUE)
(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 $2,259.1. A portion of such net cash proceeds
will be applied to further reduce Grace Chemicals' debt, resulting in an
aggregate reduction of $1,199.1 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 (i) purchase shares
of New Grace Common Stock (which would result in a decrease in current
assets and a commensurate decrease in shareholders' equity); (ii) invest
in core businesses; and (iii) further reduce Grace Chemicals' debt.
(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
$1,199.1 in Grace Chemicals' debt, consisting of (i) $179.8 of
borrowings under NMC receivables financing arrangements; (ii) $181.5 of
other NMC debt; (iii) $566.2 of short-term debt (consisting of $336.0 of
commercial paper and bank borrowings and $230.2 of other short-term
borrowings); (iv) $170.1 of commercial paper classified as long-term
debt; and (v) $101.5 of borrowings under Grace Chemicals receivables
financing arrangements.
(c) Reflects the disposition of NMC's net assets of $1,872.0. 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 $387.1 (reflecting
net cash proceeds of $2,259.1, as described in note (a) above, less the
disposition of NMC's net assets of $1,872.0) 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 $395.1 of treasury stock will
be eliminated, (ii) Common stock will decrease by $97.7 and (iii) paid
in capital will decrease by $297.4.
(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 $36.7 for the six months ended June
30, 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 six months ended June
30, 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 $42.3 (increasing interest expense and related
financing costs attributable to continuing operations by $8.9 and
reducing interest expense and related financing costs attributable to
discontinued operations by $51.2).
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 $3.6 for
the six-month period ended June 30, 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.
3
<PAGE> 36
CAPITALIZATION
The following table sets forth the capitalization of Grace New York
and the pro forma capitalization of New Grace at June 30, 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 Second Quarter Financial Statements.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
GRACE NEW YORK NEW GRACE
HISTORICAL PRO FORMA
----------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PAR VALUE)
<S> <C> <C>
Debt, including short-term debt (a) . . . . . . . . . . . . . . . . . . . . . . . . $1,866.7 $1,130.4
-------- --------
Shareholders' equity:
Grace New York Common Stock:
Common stock, $1.00 par value; 300,000,000 shares authorized;
98,740,000 issued; 93,550,000 outstanding . . . . . . . . . . . . . $ 98.7 --
New Grace Common Stock:
Common stock, $.01 par value; 300,000,000 shares authorized;
93,550,000 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513.4 216.0
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 1,416.5
Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . (40.4) (40.4)
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . (395.1) --
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 1,266.0 1,593.1
-------- --------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . $3,132.7 $2,723.5
======== ========
- ----------------------
</TABLE>
(a) In addition to the retirement of debt reflected above, it is also
expected that $101.5 of borrowings under Grace Chemicals receivables
financing arrangement, $179.8 of borrowings under NMC receivables
financing arrangements and $181.5 of other NMC debt will be retired.
These amounts are classified within Notes and accounts receivable, net
and Net assets of discontinued operations - health care, respectively,
in the Grace New York historical balance sheet at June 30, 1996.
4
<PAGE> 37
EXHIBIT 99.2
On August 2, 1996, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-4 (Registration No. 333-09497),
including a Joint Proxy Statement-Prospectus dated August 2, 1996 ("Joint
Proxy Statement-Prospectus") that was sent to the Company's shareholders in
connection with a Special Meeting of Shareholders to be held on September 16,
1996. The Joint Proxy Statement-Prospectus included special-purpose financial
information of the Company ("Special-Purpose Information"). The following
unaudited financial information is being provided to update the Special-Purpose
Information contained in the Joint Proxy Statement-Prospectus, and should be
read in conjunction with the Special-Purpose, Consolidated Financial Statements
of the Company in the Joint Proxy Statement-Prospectus, as well as the Second
Quarter Financial Statements. The following unaudited special-purpose
financial information does not necessarily indicate the financial position and
results of operations that would have occurred if the NMC Business (as defined
in the Joint Proxy Statement-Prospectus) were a stand-alone entity on the dates
and for the periods indicated. Undefined terms used in the following unaudited
special-purpose financial information have the meanings given those terms in
the Joint Proxy Statement-Prospectus.
<PAGE> 38
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
NET REVENUES
Health care services . . . . . . . . . . . . . . . . . . . . . . . . $511,236 $471,825
Medical supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 40,883 36,720
-------- --------
552,119 508,545
-------- --------
EXPENSES
Cost of health care services . . . . . . . . . . . . . . . . . . . . 295,456 260,978
Cost of medical supplies . . . . . . . . . . . . . . . . . . . . . . 27,397 26,192
General and administrative expenses . . . . . . . . . . . . . . . . . 103,691 90,306
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 21,442 19,742
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 31,533 26,480
Research and development . . . . . . . . . . . . . . . . . . . . . . 622 597
Allocation of Grace Chemicals expenses . . . . . . . . . . . . . . . 1,769 10,101
Interest expense, net, and related financing costs . . . . . . . . . 7,459 5,791
-------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489,369 440,187
-------- --------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 62,750 68,358
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 28,832 31,253
-------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,918 $ 37,105
======== ========
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.35 $ 0.39
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
1
<PAGE> 39
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
NET REVENUES
Health care services . . . . . . . . . . . . . . . . . . . . . . . . $ 999,607 $ 916,305
Medical supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 80,803 70,298
---------- ----------
1,080,410 986,603
---------- ----------
EXPENSES
Cost of health care services . . . . . . . . . . . . . . . . . . . . 582,987 512,766
Cost of medical supplies . . . . . . . . . . . . . . . . . . . . . . 55,299 51,005
General and administrative expenses . . . . . . . . . . . . . . . . . 205,138 182,557
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 42,928 39,141
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 62,161 52,395
Research and development . . . . . . . . . . . . . . . . . . . . . . 1,308 1,368
Allocation of Grace Chemicals expenses . . . . . . . . . . . . . . . 3,786 19,649
Interest expense, net, and related financing costs . . . . . . . . . 14,463 11,541
---------- ----------
968,070 870,422
---------- ----------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 112,340 116,181
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 51,977 53,060
---------- ----------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,363 $ 63,121
========== ==========
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.66
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
2
<PAGE> 40
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,039 $ 33,530
Accounts receivable, less allowances of $124,309 and $119,914 . . . . . . . . 437,079 406,682
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,485 72,491
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,812 81,192
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,345 51,835
---------- ----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 708,760 645,730
---------- ----------
Properties and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 396,828 377,328
---------- ----------
Other Assets:
Excess of cost over the fair value of net assets acquired and other
intangible assets, net of accumulated amortization of $273,778
and $247,644 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949,732 954,811
Other assets and deferred charges . . . . . . . . . . . . . . . . . . . . . . 19,201 20,275
---------- ----------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968,933 975,086
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,074,521 $1,998,144
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease obligations . . . . $ 155,222 $ 183,488
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,332 104,586
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,980 220,771
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,194 12,555
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 478,728 521,400
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,577 27,903
Capitalized lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . 4,743 7,516
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,778 48,109
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,286 30,441
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592,112 635,369
---------- ----------
Commitments and Contingencies (Note 3) . . . . . . . . . . . . . . . . . . . .
Equity:
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,487,525 1,365,901
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . (5,116) (3,126)
---------- ----------
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,482,409 1,362,775
---------- ----------
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . $2,074,521 $1,998,144
========== ==========
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
3
<PAGE> 41
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,363 $ 63,121
Adjustments to reconcile net earnings to net cash provided by
Operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 62,161 52,395
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . 42,928 39,141
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . (4,283) (6,367)
Loss on disposal of properties and equipment . . . . . . . . . . . . . 3,194 1,598
Changes in operating assets and liabilities, net of effects of
purchase acquisitions and foreign exchange:
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . (71,578) (57,017)
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . (778) (3,257)
Increase in other current assets . . . . . . . . . . . . . . . . . . . (13,440) (12,319)
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . (5,403) (13,547)
Increase in accrued income taxes . . . . . . . . . . . . . . . . . . . 9,971 26,718
Decrease in accrued liabilities . . . . . . . . . . . . . . . . . . . . (10,809) (16,743)
(Decrease)/increase in other long-term liabilities . . . . . . . . . . (8,155) 4,088
Increase in other assets and deferred charges . . . . . . . . . . . . (106) (2,842)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225) (5,413)
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 63,840 69,556
-------- --------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (58,545) (46,881)
Payments for acquisitions, net of cash acquired . . . . . . . . . . . . (26,190) (63,774)
Payments for physicians' contract agreements . . . . . . . . . . . . . 0 (2,900)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (84,735) (113,555)
-------- --------
Cash Flows from Financing Activities:
Advances from Grace Chemicals, net . . . . . . . . . . . . . . . . . . 61,260 28,921
Proceeds on issuance of debt . . . . . . . . . . . . . . . . . . . . . 124,176 9,813
Payments on debt and capitalized leases . . . . . . . . . . . . . . . . (161,540) (5)
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . 23,896 38,729
-------- --------
Effects of changes in foreign exchange rates . . . . . . . . . . . . . . . 3,508 (5,011)
-------- --------
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . 6,509 (10,281)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 33,530 39,758
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 40,039 $ 29,477
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,429 $ 10,788
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,340 26,981
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
4
<PAGE> 42
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The Special-Purpose, Consolidated Interim Financial Statements of
Grace New York and NMC (together with Grace New York, the "Company") have been
prepared by the Company in accordance with the accounting policies stated in
the Special-Purpose, Consolidated Financial Statements in the Joint Proxy
Statement-Prospectus and should be read in conjunction with the Notes to
Special-Purpose, Consolidated Financial Statements appearing therein. In the
opinion of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation have been included in the
interim financial statements. The results for the six-month period ended June
30, 1996 may not necessarily be indicative of the results for the fiscal year
ending December 31, 1996.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------
<S> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,460
Manufactured goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . 3,378
Manufactured and purchased inventory available for sale . . . . . . . . . . . . . 32,608
-----------------
44,446
Health care supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,039
-----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,485
=================
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
See Note 15 to the Special-Purpose, Consolidated Financial Statements
in the Joint Proxy Statement-Prospectus.
5
<PAGE> 43
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average number of shares
of common stock outstanding . . . . . . . . . 96,634 95,116 97,259 94,629
====== ====== ====== ======
</TABLE>
Income used in the computation of
earnings per share was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . $33,918 $37,105 $60,363 $63,121
Dividends paid on preferred stocks . . . . . (130) (131) (261) (261)
------- ------- ------- -------
Income used in per share computation
of earnings . . . . . . . . . . . . . . . . $33,788 $36,974 $60,102 $62,860
======= ======= ======= =======
Earnings per share . . . . . . . . . . . . . $ 0.35 $ 0.39 $ 0.62 $ 0.66
</TABLE>
6
<PAGE> 44
FORM 10-Q A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
COMMISSION FILE NUMBER 1-8350
-----------------------------------------------
FRESENIUS USA, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2550576
- ---------------------------- --------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
2637 SHADELANDS DRIVE
WALNUT CREEK, CALIFORNIA 94598
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(510) 295-0200
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the most recent practicable date:
26,374,218 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE ISSUED
AND OUTSTANDING AT AUGUST 9, 1996.
<PAGE> 45
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Assets June 30, December 31,
------ 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 5,133 2,330
Trade accounts receivable, net 56,699 57,052
Inventories 70,644 65,706
Prepaid expenses and other
current assets 9,544 3,258
Deferred income taxes 6,628 4,594
------------ ------------
Total current assets 148,648 132,940
Property, plant, and equipment, net 49,471 48,492
Intangible assets 35,587 36,863
Other assets 10,442 6,626
------------ ------------
Total assets $ 244,148 224,921
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,219 16,276
Accounts payable to affiliates, net 39,249 41,229
Accrued expenses 18,072 13,577
Short term borrowings 41,148 33,149
Short term borrowings-Fresenius AG 3,116 3,650
Current portion long-term debt
and capital lease obligations 15,323 11,703
Income taxes payable (589) 365
------------ ------------
Total current liabilities 128,538 119,949
Long-term payable, less current portion 1,275 1,275
Note payable to Fresenius North America 274 274
Long-term debt and capital lease
obligations, less current portion 20,660 24,821
------------ ------------
Total liabilities 150,747 146,319
Stockholders' equity:
Series F preferred stock,
$1.00 par value --- 200
Common stock, $.01 par value 262 215
Capital in excess of par value 153,476 141,136
Currency translation adjustment (87) (80)
Accumulated deficit (60,250) (62,869)
------------ ------------
Total stockholders' equity 93,401 78,602
------------ ------------
$ 244,148 224,921
============ =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 46
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 87,564 76,744
Cost of sales 59,364 53,788
------------ ------------
Gross profit 28,200 22,956
Operating expenses:
Selling, general and
administrative 19,922 17,897
Research and development 684 879
Other compensation expense 9,758 ---
------------ ------------
Operating (loss) income (2,164) 4,180
Other expense (income):
Interest income (10) (57)
Interest expense 1,508 1,212
Other, net 83 48
------------ ------------
(Loss) income before income taxes (3,745) 2,977
Income tax benefit (1,017) (496)
------------ ------------
Net (loss) income $ (2,728) 3,473
============ ============
Net (loss) income per common and common
equivalent share:
Primary $ (.11) .13
============ ============
Fully diluted $ (.11) .13
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute net
(loss) income per common and common
equivalent share:
Primary 25,941 25,773
============ ============
Fully diluted 25,957 26,694
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 47
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 168,626 144,920
Cost of sales 114,930 100,828
------------ ------------
Gross profit 53,696 44,092
Operating expenses:
Selling, general and
administrative 38,289 34,459
Research and development 1,266 1,365
Other compensation expense 9,758 ---
------------ ------------
Operating income 4,383 8,268
Other expense (income):
Interest income (28) (64)
Interest expense 2,925 2,493
Other, net 146 72
------------ ------------
Income before income taxes 1,340 5,767
Income tax benefit (1,279) (1,024)
------------ ------------
Net income $ 2,619 6,791
============ ============
Net income per common and common
equivalent share:
Primary $ .10 .26
============ ============
Fully diluted $ .10 .26
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute net
income per common and common
equivalent share:
Primary 25,831 25,712
============ ============
Fully diluted 25,884 26,658
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 48
FRESENIUS USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Net cash used in operating
activities $ (8,355) (6,119)
Cash flows from investing activities:
Purchases of property, plant and
equipment (5,966) (23,617)
------------ ------------
Net cash used in investing
activities (5,966) (23,617)
Cash flows from financing activities:
Principal payments under debt and
capital lease obligations (11,021) (8,705)
Proceeds from sale/leaseback of
property,plant and equipment ---- 18,393
Proceeds from capital lease
financing arrangement 10,480 5,000
Change in accounts payable to
affiliates, net (1,980) 11,368
Proceeds from short-term borrowings 27,699 33,818
Change in short-term borrowings
- Fresenius AG (534) 70
Repayment of short-term borrowings (19,700) (29,880)
Proceeds from issuance of common
stock, net 12,187 498
------------ ------------
Net cash provided by
financing activities 17,131 30,562
Effect of exchange rates on cash (7) 20
------------ ------------
Net increase in cash
and cash equivalents 2,803 846
Cash and cash equivalents at
beginning of period 2,330 2,315
------------ ------------
Cash and cash equivalents at
end of period $ 5,133 3,161
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 49
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(1) Description of Business
Fresenius USA, Inc. and subsidiaries (the Company) is a manufacturer
and distributor of medical products and systems for sale primarily in the United
States and Canada for the treatment of kidney failure by hemodialysis and by
peritoneal dialysis. The Company is one of only two companies in the United
States offering a full line of both hemodialysis and peritoneal dialysis
machines and disposable products. These machines and products are used to
cleanse a patient's blood of waste products and fluids normally eliminated by
properly functioning kidneys. The Company also sells cell separation products
designed for the therapeutic removal of diseased blood components as well as
collection of donor blood components for transfusion.
(2) Inventories
Inventories are stated at the lower of cost (determined by using
first-in, first-out method) or market value, and consist of the following as of
June 30, 1996 and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw Materials $ 34,803 32,192
Work in process 8,902 10,504
Finished goods 30,104 25,707
------------ ------------
73,809 68,403
Reserves (3,165) (2,697)
------------ ------------
Inventories, net $ 70,644 65,706
============ ============
</TABLE>
6
<PAGE> 50
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
(3) Other Assets
In 1995, the Company completed construction of a dialyzer plant
addition to its manufacturing facility in Ogden, Utah. At June 30, 1996,
included in other assets are $7,989 of validation costs, less accumulated
amortization of $968, incurred to qualify the products and the associated
manufacturing processes for approval by the U.S. Food and Drug Administration.
Such costs are being amortized on a straight-line basis over an estimated useful
life of 3 years upon commencement of manufacturing.
(4) Income taxes
At December 31, 1995, the Company had net operating loss carryforwards
of approximately $38.4 million for federal income tax reporting purposes. The
net operating losses expire in varying amounts beginning in 1998 through 2006.
The ability of the Company to use carryforwards to offset taxes on its future
income is also subject to certain annual cumulative limitations. The Company
believes that it has sufficient net loss carryforwards to offset any 1996 net
income for federal income tax reporting purposes.
(5) Recent Development
On February 4, 1996, W. R. Grace & Co. ("Grace") and Fresenius AG
entered into a definitive agreement ("Agreement") to combine Grace's National
Medical Care, Inc. ("NMC") with Fresenius AG's worldwide dialysis business,
including the Company. The agreement provides that an aggregate of 55.2% of the
shares of the combined company, to be called Fresenius Medical Care, will be
issued to Fresenius AG and the Company's public shareholders provided that
Fresenius AG must retain at least 51% of the shares of the combined company and
that Grace shareholders will acquire the remaining 44.8%. Fresenius AG agreed
with Grace that the Company would become a wholly-owned subsidiary of Fresenius
Medical Care and that, when the economic terms of the participation of the
Company's minority shareholders in the transaction have been established,
Fresenius AG will vote its shares of the Company in favor of the transaction.
7
<PAGE> 51
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
(5) Recent Development (Continued)
On May 8, 1996, Fresenius AG and the Company jointly announced that an
agreement had been reached between Fresenius AG and a committee of independent
directors of the Company (the "Independent Committee") on the terms on which the
public stockholders of the Company will participate in the Reorganization and
the Company Merger. The Reorganization and the Company Merger were approved by
the Board of Directors of the Company on May 8, 1996.
Under the terms of the agreement with the Independent Committee, the
public shareholders of the Company were to receive the equivalent of 1.15
ordinary Shares of Fresenius Medical Care AG, based on the assumption that
Fresenius Medical Care AG would have 217,170,000 shares outstanding. It is
currently intended that Fresenius Medical Care AG will have an aggregate of
70,000,000 ordinary shares outstanding (instead of 217,170,000 as originally
proposed) and that U.S. stockholders will receive American Depository Shares
(ADSs) each evidencing one-third of an ordinary share of Fresenius Medical Care
AG. Thus, the public shareholders of the Company will receive, on a fully
diluted basis, approximately 1.112 ADSs of Fresenius Medical Care AG for each
share of Company Common Stock. The agreement with the Independent Committee also
assumes that the Company will reacquire outstanding stock options or other
equity securities, such that Fresenius AG's fully diluted interest in Fresenius
Medical Care AG is not reduced below 50.3%. Accordingly, the public stockholders
of the Company, on a fully diluted basis, will receive 4.9% of Fresenius Medical
Care AG's shares outstanding after the closing.
During the quarter ended June 30, 1996, Fresenius USA recorded
approximately $9.8 million in additional compensation expense in connection with
the repurchase from certain employees of shares of Fresenius USA Common Stock
and options to purchase Fresenius USA Common Stock. As described above, the
Company had agreed to reacquire such outstanding shares and options and other
equity securities in order to ensure that Fresenius AG's fully diluted interest
in Fresenius Medical Care AG was not reduced below 50.3%.
8
<PAGE> 52
FRESENIUS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
(6) Management Representation
The accompanying unaudited consolidated condensed financial statements
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments which, in the
opinion of management, consist only of normal and recurring adjustments that are
necessary for a fair statement of the results for the interim periods presented.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the year.
Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to such rules and regulations.
It is suggested that these consolidated condensed financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
contained in the Company's Form 10-K for the year ended December 31, 1995.
9
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1996 AND 1995
(UNAUDITED)
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1996 Compared to Three Months and Six
Months Ended June 30, 1995
NET SALES. Net sales were $87.6 million for the second quarter 1996, an
increase of $10.9 million or 14.1% compared with net sales of $76.7 million for
the second quarter 1995. Net sales for the first six months of 1996 were $168.6
million, an increase of $23.7 million or 16.4% compared with $144.9 million for
the first six months of 1995. The increase in sales for the first six months
of 1996 is the result of continued higher unit sales volumes for both
hemodialysis and peritoneal dialysis products.
GROSS PROFIT. Gross profit was $28.2 million for the second quarter
1996, an increase of $5.2 million or 22.8% compared with gross profit of $23.0
million for the second quarter 1995. Gross profit margin increased from 30.0%
for the second quarter 1995 to 32.2% for the second quarter 1996. Gross profit
was $53.7 million for the first six months of 1996, an increase of $9.6 million
or 21.8% compared with gross profit of $44.1 million for the first six months of
1995. Gross profit margin increased from 30.4% for the first six months of 1995
to 31.8% for the first six months of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense were $19.9 million for the second quarter 1996, an
increase of $2.0 million or 11.3% compared with $17.9 million for the second
quarter 1995, and $38.3 million for the first six months of 1996, an increase of
$3.8 million or 11.1% compared to the first six months of 1995. These expenses
as a percentage of net sales were 22.8% for the second quarter 1996 compared to
23.3% for the second quarter of 1995, and 22.7% for the first six months of 1996
compared with 23.8% for the first six months of 1995.
10
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense were
$684,000 for the second quarter 1996 compared with $879,000 for the same period
in 1995. Research and development expense were $1.3 million for the first six
months of 1996 compared with $1.4 million for the same period in 1995. Research
and development expenses as a percentage of sales were approximately 1.0% for
the second quarter 1996 and for the first six months of 1996, virtually
unchanged compared for the same periods in 1995. Fresenius USA relies primarily
on the research and development efforts of Fresenius AG, negotiating
distribution arrangements for new products from Fresenius AG when Fresenius AG
and Fresenius USA believe that there is market potential for these products in
the U.S. and when the products fit Fresenius USA's business strategy. Fresenius
USA believes that, in the absence of its access to the research and development
efforts of Fresenius AG, Fresenius USA would have had to spend significantly
more on research and development to develop its own line of dialysis products.
OTHER COMPENSATION EXPENSE. Other compensation expense was $9.8
million for the second quarter 1996, which the Company incurred in connection
with the repurchase from certain employees of shares of Fresenius USA Common
Stock and options to purchase Fresenius USA Common Stock. The Company had
agreed to reacquire such outstanding shares and options and other equity
securities in order to ensure that Fresenius AG's fully diluted interest in
Fresenius Medical Care AG was not reduced below 50.3%. The Company incurred no
such expense during the same period of 1995. (See Notes to the Consolidated
Condensed Financial Statements).
INTEREST EXPENSE (NET). Interest expense (net) was $1.5 million for the
second quarter 1996 and $2.9 million for the first six months ended June 30,
1996 compared to $1.2 million and $2.4 million for the same periods of 1995.
The increase is primarily related to the Company's increased short-term
borrowings.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit in the second quarter
of 1996 was $1.0 million, compared to an income tax benefit of $496,000 for the
same period in 1995. Income tax benefit for the first six months of 1996 was
$1.3 million, compared to income tax benefit of $1.0 in 1995. During the second
quarter of 1996, the Company recognized a tax benefit of approximately $1.0
million, compared with $850,000 during the same period in 1995. For the first
six months of 1996, the Company recognized a tax benefit of approximately $2.0
million, compared with $1.7 million during the same period in 1995. The
recognition of such tax benefit by the Company is related to the Company's net
operating loss carryforwards from previous years.
11
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
NET INCOME (LOSS). Net (loss) for the second quarter of 1996 was $(2.7)
million, compared with net income of $3.5 million for the second quarter 1995, a
decrease of $6.2 million or 178.5%, compared to net income of $3.5 million for
the second quarter 1995. Included in the net (loss) for the second quarter of
1996 was additional compensation expense of approximately $9.8 million which the
Company recorded in connection with the repurchase from certain employees of
shares of Fresenius USA Common Stock and options to purchase shares of Fresenius
USA Common Stock. Net income was $2.6 million for the first six months of 1996,
a decrease of $4.2 million or 61.4%, compared to net income of $6.8 million for
the first six months of 1995. Net income for the first six months of 1996
included the additional other compensation expense described above. The Company
incurred no such other compensation expense during the same period of 1995. Net
income for the second quarter of 1996 and 1995 and for the first six months of
1996 and 1995 included a tax benefit described above which resulted from
recognition of a portion of the Company's deferred tax asset.
12
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, working capital
and capital expenditures through bank borrowings obtained with credit support
from Fresenius AG, private placements of Preferred Stock and Common Stock to
Fresenius AG and internally generated funds. During 1995, the Company entered
into a sale leaseback arrangement with a bank without support from Fresenius AG.
In addition, during 1994, the Company successfully completed a public offering
of 3,450,000 shares of its Common Stock, realizing proceeds, after payment of
expenses, of approximately $16.2 million. Since 1990, the Company has realized
$19.5 million in net proceeds from private placements of Preferred and Common
Stock to Fresenius AG, all of which was utilized to reduce outstanding
obligations to Fresenius AG and affiliated companies.
In 1995, the Company completed construction of a 104,000 square foot
addition to its manufacturing facility in Ogden, Utah for the manufacture of
polysulfone dialyzers. The Company expended $39.5 million for the construction
and equipping of the expanded facility as of June 30, 1996. During 1995, the
Company entered into a sale leaseback arrangement with a bank which covers the
sale by the Company of approximately $27.0 million of certain new equipment of
the Company's dialyzer facility at its Ogden, Utah plant to the bank and the
leaseback of the equipment under a four year operating lease that has renewal
options and a purchase option at fair market value. Although the rent payments
on the lease are variable based on the three-month London Interbank Offered Rate
(LIBOR), the Company has effectively fixed its rent expense through the use of
interest rate swap agreements. If the Company elects not to purchase the
equipment or renew the lease at the end of the lease term, the Company will be
obligated to pay a termination fee of up to $20,250 to be offset by the sales
proceeds from the Company remarketing the equipment.
13
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
JUNE 30, 1996 AND 1995
(UNAUDITED)
As of June 30, 1996, the Company had outstanding short-term borrowings
of $41.1 million under lines of credit with six commercial banks. Fresenius AG
has provided credit support to enable the Company to obtain various term loans
and short-term lines of credit. In June 1996, the Company increased one of its
lines of credit from $20.0 million to $30.0 million. As of June 30, 1996, the
Company had borrowed $14.3 million under this $30.0 million line of credit. The
Company's lines of credit provide for a total credit availability of $57.0
million. In addition, at June 30, 1996, the Company had fully drawn the amount
available under a $3.1 million short-term line of credit with Fresenius AG, the
terms of which are similar to those of the lines of credit with the six
commercial banks described above.
At June 30, 1996, the Company had outstanding two interest rate swap
agreements with a commercial bank for an aggregate of $25.0 million. These
agreements effectively change the Company's rent expense on its variable payment
operating lease to fixed rates based on 8.02% and 5.60%, respectively.
During June 1996, Fresenius AG exercised warrants to purchase 1,515,221
shares of the Company's common stock for which the Company received
approximately $12.1 million. During June 1996, the Company repurchased from
certain employees shares of Fresenius USA Common Stock and options to purchase
shares of Fresenius USA Common Stock of approximately $11.2 million. As
previously announced, the Company had agreed to reacquire such outstanding
shares and options and other equity securities in order to ensure that Fresenius
AG's fully diluted interest in Fresenius Medical Care AG was not reduced below
50.3%.
The Company believes that its committed and possible future bank or
other commercial financing, combined with internally generated funds and the
sale of additional debt or equity securities, will be sufficient to fund the
Company's working capital requirements and other obligations.
On May 8, 1996, the Company entered into a letter agreement among the
Company, Fresenius AG and with W.R. Grace & Co. to which the Company will merge
with Fresenius Medical Care AG, a German corporation. (See Notes to the
Consolidated Condensed Financial Statements).
14
<PAGE> 58
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 11 Statement of Computation of Net (Loss)
Income Per Common Share.
Exhibit 99.1 Interim Combined Financial Statements for
Fresenius Worldwide Dialysis as of June 30,
1996.
Exhibit 99.2 Fresenius Medical Care AG Proforma Condensed
Combined Information.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the registrant during the
period covered by this report.
15
<PAGE> 59
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fresenius USA, Inc.
August 22, 1996 /s/ Heinz Schmidt
-----------------------
Corporate Croup
Vice President Finance
(Principal Financial
Officer)
/s/ Robert E. Farrell
-----------------------
Corporate Group
Vice President
Administration and
General Counsel
16
<PAGE> 60
EXHIBIT 11
FRESENIUS USA, INC. AND SUBSIDIARIES
COMPUTATION OF NET (LOSS) INCOME PER COMMON SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Net (loss) income $ (2,728) $ 3,473
============ ============
Primary net (loss) income per common
and common equivalent share $ (.11) $ .13
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute
primary net (loss) income per common
and common equivalent share 25,941 25,773
============ ============
Fully diluted net (loss) income per
common and common equivalent
share $ (.11) $ .13
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute fully
diluted net (loss) income per
common and common equivalent share 25,957 26,694
============ ============
</TABLE>
17
<PAGE> 61
EXHIBIT 11
FRESENIUS USA, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Net income $ 2,619 $ 6,791
============ ============
Primary net income per common
and common equivalent share $ .10 $ .26
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute
primary net income per common
and common equivalent share 25,831 25,712
============ ============
Fully diluted net income per
common and common equivalent
share $ .10 $ .26
============ ============
Weighted average number of shares
of common stock and common stock
equivalents used to compute fully
diluted net income per common
and common equivalent share 25,884 26,658
============ ============
</TABLE>
18
<PAGE> 62
Exhibit 99.1
FRESENIUS WORLDWIDE DIALYSIS
INTERIM COMBINED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS US $)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,035 12,091
Trade accounts receivables, less
allowance for doubtful accounts
of $11,270 in 1996 and $12,718
in 1995 194,094 183,878
Inventories, net 190,264 182,738
Prepaid expenses and other current assets 22,903 15,048
Deferred taxes 14,273 2,019
------------ ------------
Total current assets 461,569 395,774
Property, plant and equipment, net 138,541 134,767
Intangible assets, net 63,675 67,260
Investment in affiliates 18,108 19,121
Deferred taxes 399 2,710
Other assets 38,493 24,386
------------ ------------
$ 720,785 644,018
============ ============
LIABILITIES AND NET ASSETS (EQUITY)
Current liabilities:
Accounts payable $ 34,576 38,360
Accrued expenses 70,566 63,194
Short-term borrowings 118,756 109,444
Current portion of long-term debt
and capital lease obligations 21,924 20,195
Income tax payable 1,611 922
Deferred taxes 123 ---
Other current liabilities 13,392 21,312
------------ ------------
Total current labilities 260,948 253,427
Long-term payable, less current portion 1,275 1,275
Long-term debt and capital lease obligations,
less current portion 27,771 38,812
Non-current borrowing from affiliate 274 274
Other liabilities 5,493 3,322
Pension liability 17,022 16,767
Deferred taxes 5,442 ---
Minority interest 27,441 24,516
------------ ------------
Total labilities 345,666 338,393
------------ ------------
Net assets 375,119 305,625
------------ ------------
$ 720,785 644,018
============ ============
</TABLE>
See accompanying note to interim combined financial statements
1
<PAGE> 63
FRESENIUS WORLDWIDE DIALYSIS
INTERIM COMBINED STATEMENTS OF OPERATIONS AND NET ASSETS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS US $)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 471,224 431,672
Cost of sales 271,487 243,060
------------ ------------
Gross profit 199,737 188,612
Operating expenses:
Selling, general and administrative 124,583 118,262
Research and development 7,186 8,247
------------ ------------
Operating income 67,968 62,103
Other (income) expense:
Interest income (2,277) (912)
Interest expense 7,665 6,584
Other, net (4,139) (4,473)
------------ ------------
Income before income taxes 66,719 60,904
Income tax expense 22,685 23,413
------------ ------------
Income before minority interest 44,034 37,491
Minority interest 769 2,211
------------ ------------
Net income 43,265 35,280
Net assets at beginning of the period 305,625 261,337
Foreign currency translation adjustments (12,690) 21,270
Net activity with Fresenius 38,919 13,678
------------ ------------
Net assets at end of period $ 375,119 331,565
============ ============
</TABLE>
See accompanying note to interim combined financial statements
2
<PAGE> 64
FRESENIUS WORLDWIDE DIALYSIS
INTERIM COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS US $)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 43,265 35,280
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 20,628 19,093
Change in deferred tax (5,026) (1,686)
Gain on sale of fixed assets (405) (750)
Changes in assets and liabilities:
Trade accounts receivable, net (15,504) (25,434)
Inventories, net (13,028) (13,179)
Prepaid expenses and other current
assets (5,409) (1,137)
Other assets (5,319) (1,849)
Accounts payable and accrued expenses 8,320 4,234
Other current and non-current liabilities (4,782) (4,745)
Income taxes payable 761 565
------------ ------------
Net cash provided by operating activities 23,501 10,392
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (30,909) (46,068)
Proceeds from sale of property, plant and
equipment 4,562 22,837
Acquisitions and investments in affiliates (61) (953)
Cash paid for pending acquisitions (9,758) ---
------------ ------------
Net cash used in investing activities (36,166) (24,184)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 61,052 61,550
Repayments of short-term borrowings (51,081) (54,721)
Proceeds from long-term debt and
capital lease obligations 8,308 10,717
Principal payments of long-term debt
and capital lease obligations (15,792) (14,333)
Proceeds from issuance of common stock 65 498
Net activity with Fresenius 37,983 13,508
Changes in minority interest 769 2,211
------------ ------------
Net cash used in financing activities 41,304 19,430
------------ ------------
Net increase(decrease) in cash and
cash equivalents 28,639 5,638
Effect of exchange rates on cash and
cash equivalents (695) 1,079
Cash and cash equivalents at beginning
of year 12,091 11,973
------------ ------------
Cash and cash equivalents at end of year $ 40,035 18,690
============ ============
</TABLE>
See accompanying note to interim combined financial statements
3
<PAGE> 65
FRESENIUS WORLDWIDE DIALYSIS
Notes to Interim Combined Financial Statements
(UNAUDITED)
(IN THOUSANDS US $)
1. BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in
accordance with United States generally accepted accounting principles
("U.S. GAAP") on a basis which reflects the combined historical
financial statements of Fresenius Worldwide Dialysis business ("FWD" or
the "Company"), including Sterilpharma GmbH, assuming that the Company,
currently a business unit of Fresenius AG, was organized for all
periods presented as follows as a separate legal entity, owning certain
net assets and certain subsidiaries and associated companies of
Fresenius. The accompanying interim combined financial statements as of
June 30, 1996 and for the six-month period ended June 30, 1996 and 1995
should be read in conjunction with the Company's combined financial
statements for the years ended December 31, 1995 and 1994 and the notes
thereto.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
The business of the Company is the development, manufacture and
distribution of equipment and related products for all forms of kidney
dialysis treatment and the providing of kidney dialysis treatment and
related service.
(b) Inventories
Inventories are stated at the lower of cost (determined by using the
average or first-in, first-out method) or market value.
The inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials and
purchased components $ 64,060 69,102
Work in process 22,592 33,667
Finished goods 108,824 84,546
------------ ------------
195,476 187,315
Reserves (5,212) (4,577)
------------ ------------
Inventories, Net $ 190,264 182,738
============ ============
</TABLE>
4
<PAGE> 66
FRESENIUS WORLDWIDE DIALYSIS
Notes to Interim Combined Financial Statements
(UNAUDITED)
(IN THOUSANDS US $)
(c) Other Assets
In 1995, FUSA completed construction of a dialyzer plant addition to
its manufacturing facility in Ogden, Utah. At June 30, 1996, included
in other assets are $7,989 of validation costs less accumulated
amortization of $968, incurred to qualify the products and the
associated manufacturing processes for approval by the U.S. Food and
Drug Administration. Such costs are being amortized on a straight-line
basis over an estimated useful life of 3 years upon commencement of
manufacturing.
(d) Management Representation
The accompanying interim combined financial statements which are
unaudited have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission, and reflect all
adjustments (consisting only of normal recurring adjustments) which, in
the opinion of management, are necessary for a fair statement of the
results for the interim periods presented. Operating results for the
six month period ended June 30, 1996 are not necessarily indicative of
the results to be expected for the year.
3. Pending Acquisition
On February 4, 1996, Fresenius AG and W.R. Grace & Co. ("Grace")
entered into an Agreement of Reorganization (the "Reorganization
Agreement") under which they agreed to combine FWD, including Fresenius
USA, Inc. ("FUSA"), with the health care business of Grace conducted by
its subsidiary National Medical Care, Inc. ("NMC"). Pursuant to the
Reorganization Agreement, Fresenius will retain an aggregate 50.3% of
the shares of the combined entity, to be called "Fresenius Medical
Care AG" ("FMC") and FMC will, in consideration of Ordinary Shares
equal to 49.7% of FMC's total Ordinary Shares, acquire NMC and the
minority shareholders' interest in FUSA.
In connection with the transactions contemplated by the Reorganization
Agreement, during the six-month period ended June 30, 1996 FUSA
repurchased from certain employees shares of FUSA common stock and
options to purchase shares of FUSA common stock. As a result of the
foregoing FWD capitalized $9,758 representing the excess of the cost of
the shares and options repurchased over the book value of the share of
minority interest reacquired.
5
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1996 and 1995
(Unaudited)
Results of Operations
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995.
Net Sales. Net sales for the first six months of 1996 were $471.2 million,
an increase of 9.2% compared with net sales of $431.7 million for the first six
months of 1995. In local currency terms, Fresenius Worldwide Dialysis' sales
increased by 11.0%.
In the first six months of 1996, Fresenius Worldwide Dialysis'
operations in Germany experienced sales growth, including export sales, of
5.5%, or 9.5% in local currency, compared to the first six months of 1995. In
the U.S. sales growth was substantial, totaling 17.1%. Sales by Fresenius
Worldwide Dialysis' operations in the rest of the world increased by 4.6%, or
5.3% in local currency, compared to the first six months of 1995. The increase
in sales resulted primarily from higher unit volumes. Fresenius Worldwide
Dialysis' selling prices in local currencies were virtually unchanged. The sales
increase was also attributable to growth in the number of dialysis patients in
each of Fresenius Worldwide Dialysis principal markets.
Sales growth in Germany and the U.S. was mainly attributable to increased
sales of hemodialysis machines due to a high replacement rate by dialysis
centers in those markets and increased sales of dialyzers due to increased
production capacity. In addition, Fresenius Worldwide Dialysis' net sales
benefitted from strong demand in the growing markets of Eastern Europe.
In the first six months of 1996, net sales of hemodialysis machines and
related disposable products, including dialyzers, grew 13.1% to $341.3 million
from $301.7 million in the first six months of 1995. The increase resulted from
higher machine replacement rates and increased sales of dialyzers as a result
of the availability of additional manufacturing capacity.
Sales of peritoneal dialysis products and machines increased 10.8% to
$94.3 million in the first six months of 1996 compared to $85.1 million in the
first six months of 1995. The increase in sales of peritoneal dialysis products
resulted in part from the introduction of PD-NIGHT(TM). In the last quarter of
1995 and from higher sales volumes of existing products.
Sales of technical and other services decreased by 20.7% to $35.6 million
in the first six months ended 1996 compared to $44.9 million in the first six
months of 1995. The decrease resulted from one-time revenues in 1995 associated
with a construction project completed with a Fresenius Worldwide Dialysis
customer and another subsidiary of Fresenius AG.
Gross Profit. Gross profit for the first six months of 1996 was $199.7
million, an increase of 5.9% from gross profit for the first six months of
1995. Gross profit margin decreased from 43.7% for the first six months of 1995
to 42.4% for the first six months of 1996. The decrease in gross profit margin
was caused primarily by dialyzer production in the U.S. where production has
not yet reached its full capacity.
6
<PAGE> 68
Selling, General and Administrative Expenses. SG&A expenses were $124.6
Million in the first six months of 1996, an increase of 5.3% from the first six
months of 1995 of $118.3 million. As a percentage of net sales, SG&A expenses
decreased slightly from 27.4% in the first six months of 1995 to 26.4% in the
first six months of 1996.
Research and Development Expenses. Research and development expenses in
the first six months of 1996 decreased from $8.2 million to $7.2 million in the
first six months of 1995. The lower research and development expenses resulted
from the completion of the development of a new production line for non-PVC bags
in late 1995.
Operating Income. Operating income was $68.0 million for the first six
months of 1996, an increase of 9.4% from the first six months of 1995 of $62.1
million.
Interest Expense. Interest expense increased from $6.6 million in the
first six months of 1995 to $7.7 million in the first six months of 1996, due to
a higher level of borrowings in 1996 compared to 1995.
Income Tax Expense. Expenses for income taxes were $22.7 million in the
first six months of 1996 compared to $23.4 million in the first six months of
1995. Fresenius Worldwide Dialysis' effective tax rate decreased from 38.4% in
the first six months of 1995 to 34.0% in the first six months of 1996. Included
in the effective tax rate is the recognition of a tax benefit of approximately
$2.0 million for the first six months of 1996, compared with $1.7 million
during the same period in 1995 from Fresenius Worldwide Dialysis' U.S.
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995.
During the first six months of 1996 and 1995, Fresenius Worldwide
Dialysis utilized cash flow from operations and bank borrowings to fund
investments in property, plant and equipment. During the first six months of
1996 and 1995 cash provided by operating activities was $23.5 million and $10.4
million respectively, and was generated principally from net income plus
non-cash depreciation charges of $20.6 million in the first six months of 1996
and $19.1 million in the same period of 1995 and less increase in working
capital requirements of $40.4 million and $44.0 million, respectively. At June
30, 1996, Fresenius Worldwide Dialysis had cash of $40.0 million.
Fresenius Worldwide Dialysis had capital expenditures in the first six
months of 1996 and 1995 of $30.9 Million and $46.1 million, respectively. The
expenditures in each year were principally in Germany and the U.S. Expenditures
in Germany were incurred to further automate the production processes and
increase the production capacity at the St. Wendel and the Schweinfurt facility.
7
<PAGE> 69
Further capital expenditures in Germany included $2.4 million for rental
equipment, of which $1.4 million were additions to capital leases. The rental
equipment consisted of hemodialysis machines leased to hospitals and dialysis
centers. To finance the rental equipment Fresenius Worldwide Dialysis enters
into sale/leaseback agreements with a leasing company which cover the sale and
leaseback of rental equipment under three-year capital leases.
In addition in 1995, Fresenius Worldwide Dialysis' U.S. subsidiary
completed construction of a 104,000 square foot addition to its manufacturing
facility for the manufacture of polysulfone dialyzers. Fresenius USA had
expended $39.5 million for the construction and equipping of the expanded
facility as of June 31, 1996. During 1995, Fresenius USA entered into a
sale/leaseback arrangement with a bank which covers the sale of approximately
$27.0 million of certain new equipment of its dialyzer manufacturing facility to
the bank and leaseback of the equipment under a four-year operating lease that
has renewal options and purchase options at fair value. Although the rent
payments on the lease are variable based on the three-month LIBOR, Fresenius USA
has effectively fixed its rent expense through the use of interest rate swap
arrangements. If Fresenius USA elects not to purchase the equipment or renew the
lease at the end of the lease term, it will be obligated to pay a termination
fee of up to $20.25 million, to be offset by sales proceeds from Fresenius USA
remarketing the equipment.
On February 4, 1996, W.R. Grace & Co. ("Grace") and Fresenius AG entered into a
definitive agreement (the "Reorganization Agreement") to combine Grace's
National Medical Care Inc. (NMC) with Fresenius Worldwide Dialysis. In
connection with the Reorganization Agreement and pursuant to a separate
agreement between Fresenius USA and Fresenius AG (the "Supplemental Agreement"),
Fresenius USA among other things, declared its intention to repurchase
sufficient vested and unvested stock purchase options held by Fresenius USA
employees and other equity securities of Fresenius USA to satisfy the condition
that, immediately prior to the Company Merger, as described in the
Reorganization Agreement, there shall be no more than 9,253,331 Fresenius USA
Common Share Equivalents. Pursuant to the Supplemental Agreement Fresenius USA
repurchased shares of Fresenius USA Common Stock and options from certain
employees of approximately $11.2 million during June 1996. As the combination of
Fresenius Worldwide Dialysis and NMC, for accounting purposes, will be treated
as a purchase of NMC by Fresenius Worldwide Dialysis, the cash paid for
repurchase of Fresenius USA Common Stock and options has been capitalized as a
cost of the acquisition.
At June 30, 1996 and December 31, 1995, Fresenius Worldwide Dialysis had
short-term borrowings of $118.8 million and $109.4 million, respectively. The
borrowings were principally under lines of credit with commercial banks.
8
<PAGE> 70
EXHIBIT 99.2
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of earnings
and unaudited pro forma condensed combined balance sheet for Fresenius Medical
Care (collectively, the "Pro Forma Condensed Combined Financial Information")
have been prepared to illustrate the pro forma effects of the proposed
transactions in accordance with US GAAP and are based on the assumptions set
forth below and in the notes to the Fresenius Worldwide Dialysis Combined
Financial Statements and the W. R. Grace & Co. Special-Purpose, Consolidated
Financial Statements included in the Joint Proxy Statement-Prospectus
dated August 2, 1996 of Grace and Fresenius USA. The Fresenius Medical Care
unaudited pro forma condensed combined statement of earnings is based on the
statements of earnings of Fresenius Worldwide Dialysis and Grace for the six
months ending June 30, 1996 and is prepared as if the Reorganization had
occurred as of January 1, 1996. The Fresenius Medical Care unaudited pro forma
condensed combined balance sheet is based on the June 30, 1996 balance sheets of
Fresenius Worldwide Dialysis and Grace and is prepared as if the Reorganization
had occurred as of June 30, 1996. The financial statements of Grace on which
the Pro Forma Condensed Combined Financial Information is based represent the
National Medical Care, Inc. business of Grace only after completing the spin
off of New Grace.
The financial statements of Fresenius Worldwide Dialysis and Grace were
prepared as if each entity operated as an independent, stand-alone entity for
the period presented. Neither entity exists in the form presented and, as such,
the net assets (equity) for each entity represent the excess of its assets over
its liabilities and not the capital structure of its parent and reporting
entity. The accompanying unaudited pro forma condensed combined financial
information does not present historical earnings per share data since the
weighted average number of shares associated with each of these combining
segments to support such a calculation does not exist. The capital structure of
Fresenius Medical Care will consist of 70,000,000 FMC Ordinary Shares issued to
Fresenius AG and the shareholders of Fresenius USA and Grace in consideration
for the contribution of Fresenius Worldwide Dialysis and Grace to Fresenius
Medical Care. Fresenius AG, the public shareholders of Fresenius USA, and the
holders of common stock (and options) of Grace will receive 50.3%, 4.9% and
44.8% of the outstanding FMC Ordinary Shares, respectively, on a fully diluted
basis.
The Pro Forma Condensed Combined Financial Information does not give effect
to certain restructuring and rationalization costs expected to be incurred
following the Reorganization. In addition, although Fresenius Medical Care plans
to realize cost reductions from the Reorganization and such restructuring and
rationalization, no effect has been given in the Pro Forma Financial Statements
to any such benefits. However, such cost reduction will be a function of
numerous factors, and no assurance can be given that any such cost reduction
will be realized over time.
For accounting purposes, the Reorganization will be treated as a purchase
of Grace by Fresenius Medical Care. Accordingly, for the purpose of these Pro
Forma Condensed Combined Financial Statements, the excess of the purchase price
of Grace over the historical costs of Grace's assets is reflected in the pro
forma condensed combined balance sheet as "excess purchase price over cost" and
has been amortized over an estimated composite life in the unaudited pro forma
condensed combined statement of earnings. Fresenius Medical Care intends to
obtain a valuation study to value existing assets and liabilities and to
appropriately allocate the excess purchase price over the cost of the business
acquired. Fresenius Medical Care management believes that the composite life
used in the pro forma condensed combined statement of earnings will not vary
materially from the amounts charged to operations once a valuation study has
been completed and existing assets and liabilities have been recorded at their
fair values.
The pro forma adjustments recognize the increase in debt that is incurred
immediately prior to the Reorganization and the resultant increase in financing
costs in the unaudited pro forma condensed combined statement of earnings. In
accordance with the Reorganization Agreement, Grace will borrow an amount
sufficient to finance the payment to, and assumption of indebtedness of, Grace
Chemicals, such that the Debt of Grace on a consolidated basis at the Effective
Time, will not exceed $2.273 billion, subject to adjustment as provided therein.
See "THE REORGANIZATION -- The Distribution Agreement" in the Joint Proxy
Statement-Prospectus.
1
<PAGE> 71
For purposes of the Pro Forma Condensed Combined Financial Statements, the
Debt of $2,273,000 is comprised at June 30, 1996 of an off-balance sheet working
capital facility of $200,000; historical capital lease obligations of $8,847;
$18,800 related to certain accrued expenses; and new debt of $2,045,353.
Interest on the new borrowings ranges from LIBOR plus 1.375% to LIBOR plus 1.75%
while interest on the off-balance sheet facility is LIBOR plus .50%. (The
average LIBOR was 5.668% for the six-month period ended June 30, 1996.)
Interest also includes commitment fees related to letters of credit. See
"FINANCING -- NMC Credit Agreement" in the Joint Proxy Statement-Prospectus.
In addition, the acquisition of the minority interest of Fresenius USA has
been recorded in the Pro Forma Condensed Combined Financial Statements and the
resultant goodwill has been amortized over 40 years. The pro forma adjustments
include the elimination of the intercompany activity between Fresenius Worldwide
Dialysis and Grace during the six-month period ended June 30, 1996 and the
reclassification of the assets and liabilities as of June 30, 1996. The assets
and liabilities of Rena-Med are reclassified to assets held for disposal. The
Schiwa net assets and any gains on the disposition of those assets will be
retained by Fresenius AG. Certain pro forma adjustments have been made to
reflect the results of operations on a stand-alone basis, including the
elimination of Grace Chemicals' overhead allocations and the costs of the Grace
Chemicals long-term and other incentive plans, that will not be applicable
following the Reorganization. Fresenius Medical Care management believes that
the estimated added costs for Fresenius Medical Care to operate on a stand-alone
basis are reasonable and has made an adjustment to reflect the estimated
expenses for Fresenius Medical Care to operate as an independent entity.
THE PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION IS PROVIDED FOR
ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO REPRESENT WHAT THE FINANCIAL
POSITION OR RESULTS OF OPERATIONS OF FRESENIUS MEDICAL CARE WOULD ACTUALLY HAVE
BEEN IF THE REORGANIZATION HAD IN FACT OCCURRED AS OF THE DATES INDICATED OR TO
PROJECT THE COMBINED FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE
DATE OR PERIOD. THE PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE NOTES THERETO AND THE FINANCIAL STATEMENTS AND
RELATED NOTES THERETO CONTAINED IN THE JOINT PROXY STATEMENT-PROSPECTUS AND IN
THE RESPECTIVE QUARTERLY REPORTS ON FORM 10-Q FILED WITH THE COMMISSION BY
GRACE AND BY FRESENIUS USA FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
2
<PAGE> 72
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
-------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues...................... $471,224 $1,080,410 $ (24,912) 5 $1,506,236
(14,725) 9
(5,761) 10
Cost of revenues.................. 271,487 638,286 4,376 7 876,341
(21,647) 5
(12,426) 9
(3,735) 10
-------- ---------- ----------
Gross profit.................... 199,737 442,124 629,895
Operating expenses:
Selling, general and
administrative............... 124,583 205,138 (4,022) 9 332,023
(2,205) 10
1,000 6
1,459 7
6,070 6
Provision for doubtful
accounts..................... -- 42,928 42,928
Depreciation and amortization... -- 62,161 32,049 3 96,512
(excluding $20,628 for 2,500 8
Fresenius Worldwide Dialysis) (160) 5
(38) 10
Research and development........ 7,186 1,308 (12) 9 8,482
Allocation of Grace Chemicals
expenses..................... -- 3,786 (3,786) 6 --
-------- ---------- ----------
Operating income................ 67,968 126,803 149,950
Interest, net................... 5,388 14,463 80,265 2 87,018
(14,202) 2
1,785 4
(681) 10
Other, net...................... (4,139) -- 2,784 9 (1,355)
-------- --------- ----------
Earnings before income taxes...... 66,719 112,340 64,287
Provision for income taxes........ 22,685 51,977 (38,585) 15 35,263
(814) 9
-------- ---------- ----------
Earnings before minority
interest........................ 44,034 60,363 29,024
Minority interest................. 769 -- (769) 8 261
261 11
-------- ---------- --------- ----------
Net earnings...................... $ 43,265 $ 60,363 $ (74,865) $ 28,763
======== ========== ========= ==========
Earnings per ordinary share....... 16 $ 0.41
==========
Earnings per ADS.................. 16 $ 0.14
==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
3
<PAGE> 73
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
-------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..... $ 40,035 $ 40,039 $ (80,074) 1 $ --
Trade accounts receivable,
net........................ 194,094 437,079 (6,600) 5 601,933
(1,238) 9
(1,195) 10
(20,207) 2
Inventories, net.............. 190,264 73,485 (3,475) 9 257,172
(3,102) 10
Prepaid expenses and other
current assets............. 22,903 65,345 (5,076) 9 81,001
(2,171) 10
Deferred income taxes......... 14,273 92,812 (27) 9 107,058
-------- --------- ----------
Total current assets.. 461,569 708,760 1,047,164
Property, plant and equipment,
net........................... 138,541 396,828 (826) 9 532,043
(2,500) 10
Intangible assets, net.......... 63,675 949,732 199,502 8 1,212,903
(6) 9
Excess purchase price over
cost.......................... -- -- 1,776,328 3 1,776,328
Investments in affiliates....... 18,108 -- 18,108
Deferred taxes.................. 399 -- 399
Other assets.................... 38,493 19,201 25,000 4 82,694
Assets held for disposal........ 456 10 456
-------- ---------- ----------- ----------
Total Assets.................... $720,785 $2,074,521 $ 1,874,789 $4,670,095
======== ========== =========== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
(Continued)
4
<PAGE> 74
FRESENIUS MEDICAL CARE AG
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA NOTE
FWD GRACE ADJUSTMENTS REFERENCES ADJUSTED
--------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $34,576 $ 99,332 $ (34,783) 1 $ 85,769
(6,600) 5
(739) 9
(6,017) 10
Accrued expenses........................ 70,566 210,980 310,241
10,000 14
25,000 4
(3,884) 9
(2,421) 10
Short-term borrowings................... 118,756 -- 118,756
Current portion of long-term debt and
capital lease obligations............. 21,924 155,222 (151,118) 2 26,028
Income taxes payable.................... 1,611 13,194 (430) 9 14,301
(74) 10
Deferred taxes.......................... 123 -- -- 123
Other current liabilities............... 13,392 -- -- 13,392
-------- ---------- ----------
Total current liabilities........ 260,948 478,728 568,610
Long-term debt and capital lease
obligations, less current portion....... 29,320 26,320 (21,577) 2 34,063
New debt.................................. -- -- 2,045,353 2 2,045,353
Other liabilities......................... 5,493 22,286 (846) 9 26,933
Pension liabilities....................... 17,022 -- (951) 9 16,071
Deferred taxes............................ 5,442 64,778 171,177 3 241,397
Minority interest......................... 27,441 -- (27,441) 8 17,177
7,439 11
9,738 12
-------- ---------- ----------
Total Liabilities....................... 345,666 592,112 2,949,604
Stockholders' Equity:
Capital stock........................... 252,945 13 252,945
Additional paid in capital.............. 1,467,546 13 1,467,546
Retained earnings....................... --
Net assets.............................. 375,119 1,482,409 (5,256) 1 --
(171,177) 3
1,776,328 3
226,943 8
(7,439) 11
(9,738) 12
(10,000) 14
(1,892,865) 2
(3,798) 9
(40,035) 1
(1,720,491) 13 --
-------- ---------- ----------
Total Stockholders' Equity....... 375,119 1,482,409 1,720,491
-------- ---------- ----------- ----------
Total Liabilities and
Stockholders' Equity........... $720,785 $2,074,521 $ 1,874,789 $4,670,095
======== ========== =========== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
5
<PAGE> 75
FRESENIUS MEDICAL CARE AG
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
(1) Pursuant to the Reorganization Agreement, all cash and cash equivalents of
Grace and Fresenius Worldwide Dialysis shall be retained by Grace Chemicals
and Fresenius AG, respectively. See "THE REORGANIZATION" in the Joint Proxy
Statement-Prospectus. Accordingly, an adjustment has been recorded to
return the cash balance of $40,035 to Fresenius AG with an offsetting
decrease in the net assets of Fresenius Worldwide Dialysis. At June 30,
1996, Grace recorded an adjustment for $34,783 to reclassify its
outstanding checks to accounts payable. An adjustment has therefore been
recorded to eliminate the Grace financial statement cash balance of
$40,039; reverse the $34,783 reclassification entry to accounts payable,
and decrease net assets for the remaining balance of $5,256.
(2) For purposes of the Pro Forma Condensed Combined Financial Statements,
Grace will incur new debt of $2,045,353 prior to the Reorganization to be
used for payment of the Grace dividend of $1,892,865. Grace's Debt is
subject to adjustment in accordance with the Reorganization Agreement. See
"THE REORGANIZATION -- The Distribution Agreement" in the Joint Proxy
Statement-Prospectus.
Grace's Debt of $2,273,000 is comprised of an off-balance sheet working
capital facility of $200,000; historical capital lease obligations of
$8,847; $18,800 related to certain accrued expenses, and new debt of
$2,045,353. See "FINANCING -- NMC Credit Agreement" in the Joint Proxy
Statement-Prospectus. Interest on the new borrowings ranges from LIBOR plus
1.375% to LIBOR plus 1.75% while interest on the off-balance sheet facility
is LIBOR plus .50% (the average LIBOR was 5.668% for the six-month period
ended June 30, 1996). Interest also includes commitment fees related to
letters of credit. See "FINANCING -- NMC Credit Agreement" in the Joint
Proxy Statement-Prospectus.
Based upon the above, adjustments to record the new debt of $2,045,353,
eliminate existing Grace debt (except for capital lease obligations and
cash overdrafts) of $172,695, and to reduce the equity of Grace by
$1,892,865 for the payment of the Grace dividend have been recorded. In
addition, an adjustment has been recorded for $20,207 to reduce accounts
receivable for the difference between the off-balance sheet working capital
facility of $179,793 at June 30, 1996 and the facility of $200,000 to be
established prior to the Reorganization.
An adjustment has also been recorded to eliminate Grace interest expense
(less the interest on capital lease obligations retained) of $14,202 for
the six-month period ended June 30, 1996. Correspondingly, interest expense
on the total new debt (including the working capital facility) was recorded
at the above noted rates for $80,265 for the six-month period ended June
30, 1996.
(3) Adjustments have been made to record the excess purchase price over the
carrying value of the Grace assets and liabilities acquired of $1,776,328
and to establish a deferred tax liability of $171,177, representing the
estimated tax effect of specifically identified assets to be increased to
fair value. The excess purchase price over the historical cost has not been
allocated to specifically identified assets nor has the unidentified
portion been treated as goodwill. Fresenius Medical Care management intends
to undertake a valuation study to record the assets and liabilities
acquired at their fair market value.
Amortization of the excess purchase price in the amount of $32,049 for the
six-month period ended June 30, 1996, approximating a composite life of
27.7 years has been recorded in the unaudited pro forma condensed combined
income statement. This amount was determined by using a recently completed
Grace valuation study as an estimate of the amounts that will be recorded
upon the completion of the Fresenius Medical Care valuation. Fresenius
Medical Care management believes that the amortization recorded in the pro
forma financial statements will not vary materially from the amounts that
will be recorded once its valuation study is completed.
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An adjustment was made for $6,077 for the six-month period ended June 30,
1996, to reduce income tax expense for the estimated tax effect for
amortization of the estimated specifically identified assets that will be
recorded at fair value.
(4) Adjustments have been made to record estimated net financing costs of
$25,000 for new debt under the NMC Credit Agreement and to amortize such
debt over the seven year life of the financing.
(5) Adjustments have been made to eliminate intercompany balances and activity
between Grace and Fresenius Worldwide Dialysis at June 30, 1996 and for
the six-month period then ended.
(6) An adjustment has been made for the six-month period ended June 30, 1996 to
eliminate historical overhead allocations from Grace of $3,786 and to
establish an estimate of new replacement incentive compensation
arrangements of $3,750 and to record the estimated expenses to operate
on a stand-alone basis of $2,320. An adjustment has also been made to
record incremental overhead expenses related to Fresenius Medical Care
corporate of $1,000 for the six-month period ended June 30, 1996.
(7) An adjustment has been made to record expenses under the proposed operating
lease for land and buildings in Germany of $5,835 for the six-month period
ended June 30, 1996. See "THE REORGANIZATION -- Continuing Arrangements
between Fresenius Medical Care and Fresenius AG" in the Joint Proxy
Statement-Prospectus.
(8) An adjustment has been made to record the acquisition of the Fresenius USA
minority interest and option holders for $226,943. An adjustment has been
made to amortize the resultant goodwill of $199,502 over a 40 year life.
(9) An adjustment has been made to eliminate the assets, liabilities and net
assets of Schiwa at June 30, 1996 and to reverse all income statement
activity for the period then ended. Any proceeds on the disposition of
those proceeds will be retained by Fresenius AG. Accordingly, the net
assets of Schiwa have been removed from Fresenius Medical Care. See "THE
REORGANIZATION -- Conditions" in the Joint Proxy Statement-Prospectus.
(10) An adjustment has been made to reclassify the assets and liabilities of
Rena-Med as net assets held for sale at June 30, 1996 and to reverse all
activity for the six-month period then ended. See "THE REORGANIZATION --
Conditions" in the Joint Proxy Statement-Prospectus.
(11) Adjustments have been made to record the Grace Preferred Stock existing
prior to the Reorganization of $7,439 as a minority interest and to record
the related dividends of $261 for the period then ended, as minority
interest expense.
(12) An adjustment has been made to record the New Preferred Stock to be issued
in the Reorganization at its par value of $.10 per share for 97,375 shares
outstanding of FNMC in minority interest.
(13) An adjustment has been made to establish the capital structure of Fresenius
Medical Care at 70 million shares with a par value per share of $3.61 (DM
5), with the remaining net asset balance recorded as additional paid in
capital.
(14) An adjustment has been recorded to accrue $10,000 for transition related
expenses, including retention distributions to be paid to employees
subsequent to closing.
(15) Adjustments have been made to reflect the tax effects of the pro forma
adjustments described in notes 2, 3, 4, 5, 6 and 7 above. The adjustments
to record the costs of incremental Fresenius Medical Care corporate expense
and the lease of German land and buildings were given a German tax
adjustment of 47%; all other adjustments received tax adjustments of 40%.
(16) Earnings per FMC Ordinary Share and earnings per ADS have been calculated
as if all shares of Fresenius Medical Care stock were outstanding as of
January 1, 1996.
7
