<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 1-13953
W. R. GRACE & CO.
Delaware 65-0773649
- --------------------------------- --------------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1750 Clint Moore Road
Boca Raton, Florida 33487
(561) 362-2000
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(Address of Principal Executive Offices)
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 [ ]
73,504,860 shares of Common Stock, $.01 par value, were outstanding on
November 1, 1998.
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W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Statement of Operations I - 1
Consolidated Statement of Cash Flows I - 2
Consolidated Balance Sheet I - 3
Consolidated Statement of Shareholders' Equity I - 4
Notes to Consolidated Financial Statements I - 5 to I - 15
Item 2. Management's Discussion and Analysis of Results I - 16 to I - 31
of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About I - 31
Market Risk
Part II. Other Information
Item 1. Legal Proceedings II - 1
Item 6. Exhibits and Reports on Form 8-K II - 1
As used in this Report, the term "Company" refers to W. R. Grace & Co. (a
Delaware corporation formerly named "Grace Specialty Chemicals, Inc."), and the
term "Grace" refers to the Company and/or one or more of its subsidiaries and,
in certain cases, their respective predecessors.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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W. R. GRACE & CO. AND SUBSIDIARIES Three Months Ended Nine Months Ended
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------------------
In millions, except per share amounts 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and revenues............................................... $ 380.3 $ 372.4 $1,091.0 $1,112.8
Other income..................................................... 10.2 15.5 31.4 47.2
------- ------- -------- --------
390.5 387.9 1,122.4 1,160.0
------- ------- -------- --------
Cost of goods sold and operating expenses ....................... 228.5 225.9 662.3 684.1
Selling, general and administrative expenses..................... 80.8 97.4 240.1 282.3
Depreciation and amortization.................................... 23.4 22.4 68.7 69.4
Interest expense and related financing costs..................... 3.9 7.8 15.1 18.6
Research and development expenses................................ 10.9 9.9 31.9 31.5
Restructuring costs.............................................. -- -- -- 4.0
Gain on sale of business......................................... -- -- -- (103.1)
------- ------- -------- --------
347.5 363.4 1,018.1 986.8
------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES............................................. 43.0 24.5 104.3 173.2
Provision for income taxes....................................... 16.7 8.9 40.7 65.9
------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS ......................... 26.3 15.6 63.6 107.3
Income/(loss) from discontinued operations....................... -- 55.5 (2.6) 127.6
Extraordinary item - loss from extinguishment
of debt, net of tax........................................ -- -- (35.2) --
------- ------- -------- --------
NET INCOME................................................. $ 26.3 $ 71.1 $ 25.8 $ 234.9
======= ======= ======== ========
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Basic earnings per share:
Continuing operations...................................... $.35 $.21 $.85 $1.45
Net income................................................. $.35 $.97 $.34 $3.18
Diluted earnings per share:
Continuing operations...................................... $.33 $.20 $.79 $1.41
Net income................................................. $.33 $.93 $.32 $3.08
Dividends declared per common share.............................. -- $.145 -- $.415
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</TABLE>
The Notes to Consolidated Financial Statements are integral
parts of these statements.
I-1
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<TABLE>
<CAPTION>
W. R. GRACE & CO. AND SUBSIDIARIES NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) SEPTEMBER 30,
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In millions 1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes......................................... $ 104.3 $ 173.2
Reconciliation to cash provided by operating activities:
Depreciation and amortization............................................................ 68.7 69.4
Provision relating to restructuring costs................................................ -- 4.0
Gain on sale of business................................................................. -- (103.1)
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign currency exchange:
Increase in notes and accounts receivable............................................. (43.2) (63.6)
Increase in inventories............................................................... (8.7) (13.3)
Proceeds from asbestos-related insurance settlements.................................. 65.2 53.3
Payments for asbestos-related litigation.............................................. (207.3) (88.2)
Decrease in accounts payable.......................................................... (6.6) (15.2)
Decrease in accrued liabilities....................................................... (144.2) (21.7)
Other................................................................................. (27.5) (30.7)
------- -------
NET PRETAX CASH USED FOR OPERATING ACTIVITIES OF CONTINUING OPERATIONS .................. (199.3) (35.9)
Net pretax cash (used for)/provided by operating activities of discontinued
operations............................................................................... (55.4) 226.9
------- -------
NET PRETAX CASH (USED FOR)/PROVIDED BY OPERATING ACTIVITIES ............................. (254.7) 191.0
Income taxes paid............................................................................. (34.3) (54.5)
------- -------
NET CASH (USED FOR)/PROVIDED BY OPERATING ACTIVITIES..................................... (289.0) 136.5
------- -------
INVESTING ACTIVITIES
Capital expenditures.......................................................................... (65.1) (164.4)
Net investing activities of discontinued operations........................................... (14.3) (70.7)
Net proceeds from divestments................................................................. 3.5 684.8
Businesses acquired in purchase transactions, net of cash acquired and
debt assumed............................................................................. -- (16.3)
Other......................................................................................... .5 19.5
------- -------
NET CASH (USED FOR)/PROVIDED BY INVESTING ACTIVITIES..................................... (75.4) 452.9
------- -------
FINANCING ACTIVITIES
Dividends paid................................................................................ -- (30.5)
Increase in borrowings having original maturities in excess of three months .................. -- .5
Repayments of borrowings having original maturities in excess of three months ................ (698.4) (105.7)
Net repayments of borrowings having original maturities of less than three months............. (163.2) (165.1)
Stock options exercised....................................................................... 44.1 49.1
Net financing activities of discontinued operations........................................... 1,256.6 --
Purchase of treasury stock.................................................................... (35.5) (335.9)
------- -------
NET CASH PROVIDED BY/(USED FOR) FINANCING ACTIVITIES..................................... 403.6 (587.6)
------- -------
Effect of exchange rate changes on cash and cash equivalents.................................. .6 (3.9)
------- -------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS......................................... $ 39.8 $ (2.1)
======= =======
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</TABLE>
The Notes to Consolidated Financial Statements are integral
parts of these statements.
I-2
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<TABLE>
<CAPTION>
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
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SEPTEMBER 30, DECEMBER 31,
In millions, except par value and common shares 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 87.4 $ 47.6
Notes and accounts receivable, net ................................ 384.9 353.1
Inventories ....................................................... 138.5 129.6
Net assets of discontinued operations ............................. 8.2 1,424.0
Deferred income taxes ............................................. 246.3 209.6
Other current assets .............................................. 13.6 11.6
-------- --------
TOTAL CURRENT ASSETS ......................................... 878.9 2,175.5
Properties and equipment, net of accumulated depreciation and
amortization of $856.2 (1997 - $789.4) ....................... 656.8 663.3
Goodwill, less accumulated amortization of $8.8 (1997 - $5.8) ..... 39.0 42.9
Asbestos-related insurance receivable ............................. 183.2 215.9
Deferred income taxes ............................................. 256.7 238.1
Other assets ...................................................... 456.9 437.3
-------- --------
TOTAL ASSETS ................................................. $2,471.5 $3,773.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt ................................................... $ 248.8 $ 413.6
Accounts payable .................................................. 100.0 106.5
Income taxes ...................................................... 142.2 175.6
Other current liabilities ......................................... 380.3 662.0
-------- --------
TOTAL CURRENT LIABILITIES .................................... 871.3 1,357.7
Long-term debt .................................................... 32.8 658.7
Deferred income taxes ............................................. 57.1 20.2
Noncurrent liability for asbestos-related litigation .............. 541.8 619.4
Other liabilities ................................................. 643.3 649.1
-------- --------
TOTAL LIABILITIES ............................................ 2,146.3 3,305.1
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock issued, par value $.01 ............................... .8 .7
Paid in capital ................................................... 396.9 563.4
Retained earnings ................................................. 51.8 108.3
Deferred compensation trust ....................................... (.4) (5.7)
Accumulated other comprehensive loss .............................. (87.9) (198.8)
Treasury stock, at cost: 2,318,200 common shares .................. (36.0) --
-------- --------
TOTAL SHAREHOLDERS' EQUITY ................................... 325.2 467.9
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $2,471.5 $3,773.0
======== ========
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</TABLE>
The Notes to Consolidated Financial Statements are integral
parts of these statements.
I-3
<PAGE>
<TABLE>
<CAPTION>
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
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Accumulated
Deferred Other Total
Common Paid in Retained Compensation Treasury Comprehensive Shareholders' Comprehensive
In millions Stock Capital Earnings Trust Stock Income/(Loss) Equity Income/(Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ..... $ .8 $524.1 $172.6 $ -- $ (.5) $ (64.6) $632.4 $ --
Net income ..................... -- -- 234.9 -- -- -- 234.9 234.9
Dividends paid ................. -- -- (30.5) -- -- -- (30.5) --
Issuance/delivery of shares
under stock plans ............ -- 69.0 -- (5.2) 4.7 -- 68.5 --
Purchase of common stock ....... -- -- -- -- (335.9) -- (335.9) --
Foreign currency translation
adjustment ................... -- -- -- -- -- (89.4) (89.4) (89.4)
------ ------ ------ ------ ------- ------- ------ ------
Balance, September 30, 1997 .... $ .8 $593.1 $377.0 $ (5.2) $(331.7) $(154.0) $480.0 $145.5
====== ====== ====== ====== ======= ======= ====== ======
Balance, December 31, 1997 ..... $ .7 $563.4 $108.3 $ (5.7) $ -- $(198.8) $467.9 $ --
Net income ..................... -- -- 25.8 -- -- -- 25.8 25.8
Separation of Packaging
Business ..................... -- (233.8) (82.3) .5 -- 119.2 (196.4) --
Issuance/delivery of shares
under stock plans ............ .1 67.3 -- .1 -- -- 67.5 --
Reclassification of assets in
deferred compensation trust .. -- -- -- 4.7 -- -- 4.7 --
Purchase of common stock ....... -- -- -- -- (36.0) -- (36.0) --
Foreign currency translation
adjustment ................... -- -- -- -- -- (11.6) (11.6) (11.6)
Unrealized gain on security,
net of reclassification
adjustment ................... -- -- -- -- -- 13.2 13.2 13.2
Minimum pension liability
adjustment ................. -- -- -- -- -- (9.9) (9.9) (9.9)
------ ------ ------ ------ ------- ------- ------ ------
BALANCE, SEPTEMBER 30, 1998 .... $ .8 $396.9 $ 51.8 $ (.4) $ (36.0) $ (87.9) $325.2 $ 17.5
====== ====== ====== ====== ======= ======= ====== ======
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</TABLE>
The Notes to Consolidated Financial Statements are integral
parts of these statements.
I-4
<PAGE>
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in millions, except per share)
1. CHANGE IN ORGANIZATION AND BASIS OF PRESENTATION
Grace is primarily engaged in specialty chemicals businesses on a worldwide
basis. These businesses consist of catalysts and silica-based products (Grace
Davison), specialty construction chemicals and building materials (Grace
Construction Products) and container sealants and coatings (Darex Container
Products). Grace also owns businesses and investments involved in health care
services, the development of bioartificial organs, and other products and
services. Grace has classified certain other businesses as discontinued
operations.
Packaging Business Transaction
On March 31, 1998, a predecessor of the Company (Old Grace) completed a
transaction in which Grace's former flexible packaging business (Packaging
Business) was combined with Sealed Air Corporation (Sealed Air). Old Grace
effected this transaction by transferring its specialty chemicals businesses
along with certain other businesses and assets to the Company, distributing the
shares of the Company's common stock to Old Grace's shareholders on a
one-for-one basis (Spin-off) and merging a subsidiary of Old Grace with Sealed
Air (Merger). Immediately following the combination, the Company changed its
name to "W. R. Grace & Co." and Old Grace changed its name to "Sealed Air
Corporation" (New Sealed Air).
For further information, see Old Grace's Joint Proxy Statement/Prospectus dated
February 13, 1998, the Company's Information Statement dated February 13, 1998,
Notes 1 and 3 to the Consolidated Financial Statements in Old Grace's Annual
Report on Form 10-K for 1997 (1997 10-K), and Note 4 below.
Basis of Presentation
The interim consolidated financial statements in this Report are unaudited and
should be read in conjunction with the Consolidated Financial Statements in the
1997 10-K. Such interim consolidated financial statements reflect all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented; all such
adjustments are of a normal recurring nature. Certain amounts in the
consolidated financial statements for prior periods have been reclassified to
conform to the current period's basis of presentation and as required with
respect to discontinued operations.
The results of operations for the three- and nine-month interim periods ended
September 30, 1998 are not necessarily indicative of the results of operations
for the year ending December 31, 1998.
The Consolidated Balance Sheet is only adjusted prospectively for a business
that is classified as a discontinued operation and included under the caption
"Net assets of discontinued
I-5
<PAGE>
operations." Accordingly, "Net pretax cash (used for)/provided by operating
activities of discontinued operations" excludes the effects of changes in
working capital of discontinued operations prior to their classification as
such. Similarly, the net investing and financing activities of discontinued
operations represent cash flows of discontinued operations subsequent to the
respective dates of such classifications.
2. ASBESTOS AND RELATED INSURANCE LITIGATION
Grace is a defendant in property damage and personal injury lawsuits relating
to previously sold asbestos-containing products and expects that it will be
named as a defendant in additional asbestos-related lawsuits in the future.
Grace was a defendant in approximately 45,900 asbestos-related lawsuits on
September 30, 1998 (17 involving claims for property damage and the remainder
involving approximately 97,100 claims for personal injury), as compared to
approximately 40,600 lawsuits on December 31, 1997 (18 involving claims for
property damage and the remainder involving approximately 96,900 claims for
personal injury).
Property Damage Litigation
Through September 30, 1998, 140 asbestos property damage cases were dismissed
without payment of any damages or settlement amounts; judgments were entered in
favor of Grace in nine cases (excluding cases settled following appeals of
judgments in favor of Grace); judgments were entered in favor of the plaintiffs
in seven cases for a total of $60.3; and 197 property damage cases were settled
for a total of $574.2. Property damage case activity for the nine months ended
September 30, 1998 was as follows:
<TABLE>
<CAPTION>
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<S> <C>
Cases outstanding, December 31, 1997 ................................ 18
New cases filed ..................................................... 2
Settlements ......................................................... (2)
Dismissals .......................................................... (1)
--
Cases outstanding, September 30, 1998 .......................... 17
==
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</TABLE>
Personal Injury Litigation
Through September 30, 1998, approximately 13,500 asbestos personal injury
lawsuits involving 30,400 claims were dismissed without payment of any damages
or settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 41,900 lawsuits involving 104,900 claims were
disposed of (through settlements and judgments) for a total of $336.4. Personal
injury claim activity for the nine months ended September 30, 1998 was as
follows:
<TABLE>
<CAPTION>
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<S> <C>
Claims outstanding, December 31, 1997 ............................... 96,933
New claims .......................................................... 16,873
Settlements ......................................................... (15,661)
Dismissals .......................................................... (1,070)
Judgments ........................................................... (5)
------
Claims outstanding, September 30, 1998 ......................... 97,070
======
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</TABLE>
I-6
<PAGE>
Asbestos-Related Liability
Based upon, and subject to, the factors discussed in Note 2 to the Consolidated
Financial Statements in the 1997 10-K, Grace's estimate of its probable
liability with respect to the defense and disposition of asbestos property
damage and personal injury cases and claims as of the respective date, as well
as the defense and disposition of personal injury cases and claims expected to
be filed through 2002, was as follows on September 30, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
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SEPTEMBER 30, December 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current liability for asbestos-
related litigation .......................... $106.8 $236.5
Noncurrent liability for asbestos-
related litigation .......................... 541.8 619.4
------ ------
Total asbestos-related liability ......... $648.6 $855.9
====== ======
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</TABLE>
Asbestos-Related Insurance Receivable
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Activity in Grace's notes receivable from
insurance carriers and asbestos-related insurance receivable during the nine
months ended September 30, 1998 was as follows:
<TABLE>
<CAPTION>
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<S> <C>
NOTES RECEIVABLE
Notes receivable from insurance carriers on December 31, 1997,
net of discount of $4.8 .......................................... $ 31.3
Proceeds received under asbestos-related insurance settlements ..... (13.8)
Current period amortization of discount ............................ 1.8
------
Notes receivable from insurance carriers on
September 30, 1998, net of discount of $3.0 ................. $ 19.3
------
INSURANCE RECEIVABLE
Asbestos-related insurance receivable on December 31, 1997 ......... $282.4
Proceeds received under asbestos-related insurance settlements ..... (51.4)
------
Asbestos-related insurance receivable on September 30, 1998 ... $231.0
------
Total amounts due from insurance carriers ..................... $250.3
======
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</TABLE>
Insurance Litigation
Grace's ultimate exposure with respect to its asbestos-related cases and claims
will depend on the extent to which its insurance will cover damages for which
it may be held liable, amounts paid in settlements, and litigation costs. In
Grace's opinion, it is probable that recoveries from its insurance carriers
(including amounts reflected in the receivable discussed above), along with
other funds, will be available to satisfy the property damage and personal
injury cases and claims pending at September 30, 1998, as well as personal
injury claims expected to be filed through 2002. Consequently, Grace believes
that the resolution of its asbestos-related litigation will not have a material
adverse effect on its consolidated financial position.
For additional information, see Note 2 to the Consolidated Financial Statements
in the 1997 10-K.
I-7
<PAGE>
3. DIVESTMENTS
Divestments
In May 1997, Grace sold its specialty polymers business to National Starch and
Chemical Company for $148.0, subject to a purchase price adjustment. The sales
and revenues of this business for the period from January through May 1, 1997
(the date of sale) were $24.9; its financial position and results of operations
were not significant to Grace. In October 1997, Grace paid National Starch $1.9
in settlement of the purchase price adjustment. The sale of this business
resulted in a pretax gain of $103.1, and an after-tax gain of $63.0.
4. DISCONTINUED OPERATIONS
Packaging Business Transaction
As discussed in Note 1 above, the Spin-off and the Merger were completed on
March 31, 1998. Prior to the Spin-off and the Merger, Old Grace and a Packaging
Business subsidiary borrowed $1,258.8 (inclusive of $2.2 of bank fees) and made
a cash transfer of $1,256.6 to Grace, which used the transferred funds to repay
substantially all of Grace's debt (see Note 6). The borrowed funds are shown as
a net financing activity of discontinued operations in the Consolidated
Statement of Cash Flows. In the Merger and a related recapitalization, for each
Old Grace common share outstanding at the close of trading on March 31, 1998,
each shareholder received .536 shares of New Sealed Air common stock and .475
shares of New Sealed Air convertible preferred stock. Upon the completion of
the Spin-off and the Merger, the shareholders of Old Grace owned (a) 100% of
the specialty chemicals businesses (through their ownership of 100% of the
Company's outstanding shares) and (b) approximately 63% of New Sealed Air, on a
fully diluted basis.
The Packaging Business transaction resulted in an adjustment to shareholders'
equity of $196.4, representing Grace's investment in the Packaging Business
less the $1,258.8 of borrowings discussed above.
Cocoa Business Divestment
In February 1997, Grace sold its cocoa business to Archer-Daniels-Midland
Company (ADM) for total proceeds of $477.6 (inclusive of debt assumed by the
buyer), subject to adjustment. The pretax and after-tax effects of the
divestment were consistent with prior estimates and were charged against
previously established reserves. In October 1997, ADM paid Grace an additional
$7.9 (including $.4 of interest income) in settlement of the purchase price
adjustment. In anticipation of this settlement, in the third quarter of 1997,
Grace reversed previously recorded provisions of $12.4 (net of an applicable
tax effect of $6.6), in discontinued operations.
I-8
<PAGE>
Financial Information for Discontinued Operations
Results of discontinued operations for the three months and nine months ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and revenues ................................................. $ -- $460.6 $431.2 $1,346.6
------- ------ ------ --------
Income from operations before taxes (1) ............................ $ -- $ 68.7 $ 6.2 $ 183.4
Income tax provision ............................................... -- 25.6 8.8 68.2
------- ------ ------ --------
Income/(loss) from discontinued packaging operations .......... $ -- $ 43.1 $ (2.6) $ 115.2
------- ------ ------ --------
Reversal of previously recorded provision for cocoa business........ $ -- $ 19.0 $ -- $ 19.0
Income tax provision ............................................... -- 6.6 -- 6.6
------- ------ ------ --------
Total income from discontinued operations .......................... $ -- $ 55.5 $ (2.6) $ 127.6
======= ====== ====== ========
Basic earnings/(loss) per share from discontinued operations ....... $ -- $ .76 $ (.04) $ 1.73
Diluted earnings/(loss) per share from discontinued operations ..... $ -- $ .73 $ (.03) $ 1.67
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects allocated interest expense of $13.3 ($8.7 after-tax) through
March 31, 1998, the date of the Spin-off and Merger, and $13.1 ($8.2
after-tax) and $44.7 ($28.1 after-tax) for the three months and nine
months ended September 30, 1997, respectively, based on the ratio of the
net assets of the Packaging Business compared to Grace's total capital.
Results for the nine months ended September 30, 1998 also include $32.6
($28.3 after-tax) of costs related to the Packaging Business transaction
through March 31, 1998 and $8.4 ($5.5 after-tax) for a related pension
plan curtailment loss.
The operating results of Grace's other discontinued operations have been
charged against previously established reserves and are not reflected in the
above results. The net assets of Grace's discontinued operations (excluding
intercompany assets) on September 30, 1998 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SEPTEMBER 30,
1998
- -------------------------------------------------------------------------------
<S> <C>
Current assets ................................................. $ 6.7
Properties and equipment, net .................................. 3.4
Other assets ................................................... .6
-----
Total assets .............................................. $10.7
-----
Current liabilities ............................................ 2.1
Other liabilities .............................................. .4
-----
Total liabilities ......................................... 2.5
-----
Net assets of discontinued operations ..................... $ 8.2
=====
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</TABLE>
I-9
<PAGE>
5. OTHER BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES
Raw materials ........................................ $ 44.2 $ 47.9
In process ........................................... 12.8 10.3
Finished products .................................... 86.0 78.8
General merchandise .................................. 22.8 20.2
Less: Adjustment of certain inventories to a
last-in/first-out (LIFO) basis ................ (27.3) (27.6)
------- -------
$ 138.5 $ 129.6
======= =======
- ----------------------------------------------------------------------------------
OTHER ASSETS
Prepaid pension costs ................................ $ 242.9 $ 245.2
Intangible asset - pension ........................... 18.5 --
Deferred charges ..................................... 47.3 60.4
Long-term receivables, less allowance of $23.9
(1997 - $16.1) ..................................... 42.4 48.4
Long-term investments ................................ 82.8 56.4
Notes receivable from insurance carriers, net of
discount of $1.2 (1997 - $2.3) .................... 6.9 18.0
Other ................................................ 16.1 8.9
------- -------
$ 456.9 $ 437.3
======= =======
- ----------------------------------------------------------------------------------
OTHER CURRENT LIABILITIES
Reserves for divested businesses ..................... $ 85.6 $ 123.5
Liability for asbestos-related litigation ............ 106.8 236.5
Accrued compensation ................................. 33.0 121.9
Restructuring reserves ............................... 25.0 35.6
Environmental reserves ............................... 24.6 38.8
Accrued interest ..................................... 4.2 22.5
Other ................................................ 101.1 83.2
------- -------
$ 380.3 $ 662.0
======= =======
- ----------------------------------------------------------------------------------
OTHER LIABILITIES
Other postretirement benefits ........................ $ 214.2 $ 214.8
Environmental reserves ............................... 174.3 191.4
Pension benefits ..................................... 128.5 91.0
Deferred compensation ................................ 44.7 58.4
Long-term self-insurance reserves .................... 23.4 31.6
Other ................................................ 58.2 61.9
------- -------
$ 643.3 $ 649.1
======= =======
- ----------------------------------------------------------------------------------
</TABLE>
I-10
<PAGE>
6. EXTRAORDINARY ITEM
As discussed in Notes 1 and 4 above, Grace received a cash transfer of $1,256.6
in connection with the Spin-off and Merger. Grace used the transferred funds to
repay substantially all of its debt. On March 31, 1998, Grace used $600.0 of
the cash transfer to repay bank borrowings. On April 1, 1998, Grace repaid
$611.3 principal amount of 8.0% Notes Due 2004, 7.4% Notes Due 2000, and 7.75%
Notes Due 2002 (collectively, Notes), pursuant to a tender offer that expired
on March 27, 1998. On April 1, 1998, Grace also repaid $3.5 principal amount of
the Medium-Term Notes, Series A (MTNs) and $6.0 of sundry indebtedness.
As a result of this extinguishment of debt, Grace incurred a pretax charge of
$56.3 ($35.2 after-tax, or a basic loss per share of $.47; diluted loss per
share of $.44) for premiums paid in excess of the Notes' principal amounts and
other costs incurred in connection with the purchase of the Notes and MTNs
(including the costs of settling related interest rate swap agreements). These
costs are presented as an extraordinary item in the Consolidated Statement of
Operations in this Report.
On September 30, 1998 and December 31, 1997, the Company's short-term and
long-term debt was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM DEBT
Bank borrowings $ 236.1 $ 370.2
Commercial paper 6.7 34.0
Current maturities of long-term debt -- .5
Other short-term borrowing 6.0 8.9
------- -------
$ 248.8 $ 413.6
======= =======
LONG-TERM DEBT
8.0% Notes Due 2004 $ 5.7 $ 276.0
7.4% Notes Due 2000 24.7 248.7
7.75% Notes Due 2002 2.0 119.0
Medium-Term Notes, Series A -- 8.5
Sundry indebtedness .4 6.5
------- -------
$ 32.8 $ 658.7
======= =======
- -------------------------------------------------------------------------------
</TABLE>
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on September 30, 1998, approximately 18,411,000 shares
were reserved for issuance pursuant to stock options and other stock
incentives.
The Certificate of Incorporation also authorizes 53,000,000 shares of preferred
stock, $.01 par value, none of which has been issued. 3,000,000 of such shares
have been designated as Series A Junior Participating Preferred Stock and are
reserved for issuance in connection with the
I-11
<PAGE>
Company's Preferred Stock Purchase Rights (Rights). A Right trades together
with each outstanding share of common stock and entitles the holder to purchase
one-hundredth of a share of Series A Junior Participating Preferred Stock under
certain circumstances and subject to certain conditions. The Rights are not and
will not become exercisable unless and until certain events occur, and at no
time will the Rights have any voting power.
In April 1998, the Company's Board of Directors approved a program to
repurchase up to 20% of the Company's outstanding shares in the open market.
Through September 30, 1998, the Company had acquired 2,318,200 shares of common
stock for $36.0 under the program (an average price per share of $15.49). Cash
payments for settled share repurchases were $35.5 through September 30, 1998.
During the first quarter of 1997, Grace substantially completed a share
repurchase program initiated in 1996 by acquiring 6,306,300 additional shares
of common stock for $335.9.
In 1997, Grace established a trust to fund certain deferred employee incentive
compensation and nonemployee director compensation and benefits; the trust has
been continued by the Company. Prior to the Packaging Business transaction
discussed in Notes 1 and 4, the trust held only shares of Grace. Subsequent to
the transaction, the trust held shares of common stock of the Company
(classified as a component of Shareholders' Equity in the Consolidated Balance
Sheet) and New Sealed Air common and convertible preferred stock (classified as
a component of "Other assets" in the Consolidated Balance Sheet). The trust
held 70,457 shares of the Company's common stock, 37,159 shares of New Sealed
Air common stock and 32,932 shares of New Sealed Air convertible preferred
stock on September 30, 1998 and 71,476 shares of Grace common stock on December
31, 1997.
For additional information, see Note 12 to the Consolidated Financial
Statements in the 1997 10-K.
8. STOCK INCENTIVE PLANS
As described in Note 14 to the Consolidated Financial Statements in the 1997
10-K, stock options have been granted under Grace's stock incentive plans. In
connection with the transaction described in Notes 1 and 4 above, all
outstanding options (other than those held by employees of the Packaging
Business) became options to purchase the Company's common stock, and the number
of shares covered by, and purchase prices of, such options were adjusted to
preserve their economic value. The options held by employees of the Packaging
Business became options to purchase common stock of New Sealed Air, and
accordingly, were terminated with respect to Grace.
In April and May 1998, the Company granted a total of 76,200 shares of the
Company's common stock to certain executives, subject to various restrictions.
For more information, see the Form of Restricted Share Award Agreements filed
with the Company's Form 10-Q for the Quarter ended March 31, 1998.
I-12
<PAGE>
9. PENSION PLANS
The Packaging Business transaction described in Notes 1 and 4 above required
the Company to split certain pension plans and recognize a net curtailment loss
for other plans. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 88, " Employers' Accounting for Settlements and Curtailments of
Defined Benefit Plans and for Termination Benefits," the Company recognized a
net pretax loss of $8.4 for the three months ended March 31, 1998 in connection
with these plans. The loss is comprised of the following in relation to active
employees of the Packaging Business: (a) a $9.8 curtailment loss from the
immediate recognition of prior service costs, (b) an $11.6 loss related to a
contractual termination benefit, and (c) a $13.0 curtailment gain from the
decrease in the projected benefit obligation. This net pretax loss is included
in "Income/(loss) from discontinued operations" in the Consolidated Statement
of Operations in this Report.
10. EARNINGS PER SHARE
The following table reconciles the components of the calculation of basic and
diluted earnings per share from continuing operations for the three-month and
nine-month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations ........................ $ 26.3 $ 15.6 $ 63.6 $107.3
------ ------ ------ ------
Weighted average common shares - basic calculation ....... 74.6 73.7 75.1 73.9
Effect of dilutive securities:
Employee stock options and restricted stock awards .. 3.9 2.3 5.1 2.3
------ ------ ------ ------
Weighted average common shares - diluted calculation ..... 78.5 76.0 80.2 76.2
====== ====== ====== ======
BASIC EARNINGS PER SHARE ................................. $ .35 $ .21 $ .85 $ 1.45
====== ====== ====== ======
DILUTED EARNINGS PER SHARE ............................... $ .33 $ .20 $ .79 $ 1.41
====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11. BUSINESS SEGMENT INFORMATION
The table below presents information related to Grace's operating business
segments for the three-month and nine-month periods ended September 30, 1998
and 1997. Grace has restated pretax operating results for all periods presented
to exclude previously allocated corporate expenses from the results of each
business segment.
I-13
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES AND REVENUES
Grace Davison ................. $184.7 $175.9 $ 541.1 $ 526.0
Grace Construction Products ... 135.2 128.9 366.2 359.7
Darex Container Products ...... 60.4 67.6 183.7 202.2
------ ------ -------- --------
TOTAL .............................. $380.3 $372.4 $1,091.0 $1,087.9
====== ====== ======== ========
PRETAX OPERATING INCOME
Grace Davison ................. $ 29.2 $ 25.0 $ 81.9 $ 73.3
Grace Construction Products ... 19.9 16.0 43.7 37.5
Darex Container Products ...... 5.8 9.2 20.1 23.9
------ ------ -------- --------
TOTAL .............................. $ 54.9 $ 50.2 $ 145.7 $ 134.7
====== ====== ======== ========
- ------------------------------------------------------------------------------------------
</TABLE>
The sales and revenues and pretax operating income of Grace's business segments
for the three-month and nine-month periods ended September 30, 1998 and 1997
are reconciled below to amounts presented in the Consolidated Statement of
Operations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and revenues - operating segments ....................... $380.3 $372.4 $1,091.0 $1,087.9
Other (1) ..................................................... -- -- -- 24.9
------ ------ -------- --------
Total sales and revenues ................................. $380.3 $372.4 $1,091.0 $1,112.8
====== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------
Pretax operating income - operating segments .................. $ 54.9 $ 50.2 $ 145.7 $ 134.7
Pretax operating income - divested business (1) ............... - - - 3.8
Interest expense and related financing costs .................. (3.9) (7.8) (15.1) (18.6)
Interest income ............................................... 1.2 1.7 3.5 7.7
Corporate expenses ............................................ (9.1) (23.9) (29.9) (61.6)
Provision for restructuring ................................... - - - (4.0)
Gain on sale of business ...................................... - - - 103.1
Other, net .................................................... (0.1) 4.3 0.1 8.1
------ ------ -------- --------
Income from continuing operations before income taxes .... $ 43.0 $ 24.5 $ 104.3 $ 173.2
====== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of Grace's specialty polymers business, divested in May 1997.
12. COMPREHENSIVE INCOME/(LOSS)
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the reporting of changes in equity
resulting from certain transactions and economic events, other than changes
reflected in the Consolidated Statement of Operations. The tables below present
the pretax, tax and after-tax components of the Company's other comprehensive
income/(loss) for the nine months ended September 30, 1998:
I-14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Tax
Other Comprehensive Income/(Loss) Pretax (Expense)/ After-
Nine Months Ended September 30, 1998 Amount Benefit Tax Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation adjustments ...................... $ (11.6) $ -- $ (11.6)
------- -------- -------
Unrealized gain on security:
Unrealized holding gains arising during period ........... 22.5 (7.8) 14.7
Reclassification adjustment for gains realized in net income .. (2.2) 0.7 (1.5)
------- -------- -------
Net unrealized gains .......................................... 20.3 (7.1) 13.2
------- -------- -------
Minimum pension liability adjustments ......................... (15.2) 5.3 (9.9)
------- -------- -------
Other comprehensive loss ...................................... $ (6.5) $ (1.8) $ (8.3)
======= ======== =======
- --------------------------------------------------------------------------------------------------------
</TABLE>
Grace holds certain restricted equity securities that are listed on a foreign
stock exchange and have limited trading activity. A portion of these
securities, which had a zero book basis, have become free of restrictions, and
the remaining portion will become free of restrictions in the 1999 second
quarter.
I-15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
THIRD QUARTER 1998 AS COMPARED TO THIRD QUARTER 1997
SALES
Grace is primarily engaged in specialty chemicals businesses on a worldwide
basis. These businesses consist of catalysts and silica-based products (Grace
Davison), specialty construction chemicals and building materials (Grace
Construction Products), and container sealants and coatings (Darex Container
Products). Grace Davison, which contributes approximately 50% of Grace's annual
sales, Grace Construction Products (33% of total sales), and Darex Container
Products (17% of sales) are Grace's core businesses and constitute its three
operating business segments.
Sales and revenues of these segments increased 2.1% to $380.3 million in the
third quarter of 1998; excluding translation, these sales grew 6.2%. Grace
Davison sales grew 8.2% on strong worldwide catalysts sales. Grace Construction
Products sales increased 8.4%, with strong sales in the rest of the world more
than offsetting weakness in Southeast Asia. Darex Container Products sales
declined 3.0% for the quarter due to global economic troubles that have reduced
demand for customers' end products, particularly can sealants in North America
and Asia Pacific.
EARNINGS
It is difficult to compare 1998 to 1997 considering the operational changes
Grace initiated with the Spin-off of the Packaging Business in the first
quarter of 1998. While the three operating business segments were impacted by
the transaction, Grace's corporate expenses such as overhead, interest, and
taxes, were the most affected. For more information on the Packaging Business
transaction, refer to Notes 1 and 4 in this Report.
Pretax income from continuing operations was $43.0 million, up significantly
from $24.5 million in 1997. While some of the improvement can be attributed to
gross margins in the operating segments, much of the earnings growth is due to
operating expense reductions.
General and administrative expenses declined $14.8 million, primarily due to
lower charges for employee compensation programs. With the change in business
structure, Grace management initiated stock-based compensation plans to more
directly align management's performance incentives with shareholder objectives.
In addition, overhead expenses declined as a result of restructuring activities
undertaken in connection with the Packaging Business transaction, as well as
ongoing cost containment efforts initiated in 1997.
I-16
<PAGE>
Included in the third quarter 1997 earnings was a gain on the sale of real
property of $6.6 million.
Interest expense and related financing costs for continuing operations were
$3.9 million in third quarter 1998, down from $7.8 million in third quarter
1997. Including the interest expense and related financing costs allocated to
discontinued operations, total interest costs amounted to $20.9 million for
third quarter 1997. While the average interest rate decreased approximately 100
basis points, most of the decline in interest costs was due to lower average
debt levels as a result of using the $1,256.6 million cash transfer related to
the Spin-off and Merger to pay down substantially all of Grace's debt (see Note
6 in this Report).
Grace's effective tax rate was 39.0% for the third quarter of 1998, versus
36.4% in 1997. The higher effective tax rate resulted primarily from increases
in taxable income of the Company's worldwide operations in jurisdictions with
higher effective tax rates.
Included in 1997 third quarter net income of $71.1 million were earnings from
discontinued operations of $55.5 million.
FIRST NINE MONTHS OF 1998 AS COMPARED TO THE FIRST NINE MONTHS OF 1997
SALES
Year-to-date sales and revenues of Grace's three operating segments were
essentially flat with 1997, but increased 5.0% before currency translation.
Grace Davison sales grew 7.3% on double-digit catalyst sales growth, despite
flat sales from its silica-based products. Grace Construction Products sales
increased 5.4% in the face of continued weak economic conditions in Southeast
Asia. Darex Container Products sales declined 1.8% as can sealants continued to
struggle.
Including the sales and revenues of the Specialty Polymers business, divested
May 1997, Grace's total sales for the first nine months of 1998 decreased 2.0%
versus 1997.
EARNINGS
For the first nine months of 1998, pretax income from continuing operations was
$104.3 million, down from $173.2 million in 1997 due primarily to the $103.1
million gain on the sale of the Specialty Polymers business in 1997.
Year-to-date general and administrative expenses decreased $32.1 million
(excluding the operating results of Specialty Polymers before divestment),
primarily due to a $16.9 million decline in employee compensation programs.
Also contributing to the decline were ongoing cost containment efforts and the
results of restructuring activities.
Year-to-date interest expense and related financing costs for continuing
operations were $15.1 million, down from $18.6 million in 1997. Including the
interest expense and related financing costs allocated to discontinued
operations, total interest costs amounted to $28.5 million in 1998
I-17
<PAGE>
and $63.3 million in 1997. This decline is primarily due to significantly lower
average debt levels, as substantially all of Grace's debt was paid down by
April 1, 1998 (see Note 6 in this Report).
In the second quarter of 1997, Grace recorded a pretax restructuring charge of
$4.0 million ($2.6 million after-tax) in continuing operations. This charge
primarily consisted of costs incurred by Darex Container Products and corporate
costs resulting from the restructuring of the Packaging Business from a group
of regional units into an integrated global organization. The charge was
primarily composed of employee termination costs and asset write-downs for
certain corporate research facilities.
In May 1997, Grace sold its Specialty Polymers business to National Starch and
Chemical Company for $148.0 million, subject to a purchase price adjustment.
The year-to-date 1997 sales and revenues of this business were $24.9 million;
its financial position and results of operations were not significant to Grace.
In October 1997, Grace paid National Starch $1.9 million in settlement of the
purchase price adjustment. The sale of this business resulted in a pretax gain
of $103.1 million, or $63.0 million after tax.
Grace's effective tax rate for the first nine months of 1998 was 39.0% versus
36.9% in 1997. The higher effective tax rate resulted primarily from increases
in taxable income of the Company's worldwide operations in jurisdictions with
higher effective tax rates.
Grace reported year-to-date net income of $25.8 million, versus $234.9 million
in 1997. Included in 1998 net income was a $2.6 million loss from discontinued
operations and the extraordinary loss from the early extinguishment of debt as
described in Note 6 in this Report. 1997 net income included earnings from
discontinued operations of $127.6 million and the gain on the sale of Specialty
Polymers mentioned above.
The following discussion includes projections and/or other "forward-looking"
information. Grace is subject to risks and other uncertainties that could cause
its actual results to differ materially from any such projections or that could
cause other forward-looking information to prove incorrect. For a discussion of
such risks and uncertainties, see "Introduction and Overview - Projections and
Other Forward-Looking Information" in Item 1 of the 1997 10-K and "Certain Risk
Factors" in the Company's Information Statement dated February 13, 1998.
I-18
<PAGE>
GRACE DAVISON
THIRD QUARTER 1998 AS COMPARED TO THIRD QUARTER 1997
SALES
Grace Davison is a leading global supplier of catalysts and silica products.
Refining catalysts, representing approximately 58% of total Davison sales,
include fluid cracking catalysts (FCC) used by petroleum refiners to convert
distilled crude oil into more valuable transportation fuels and other
petroleum-based products, and hydroprocessing catalysts that upgrade heavy oils
and remove certain impurities. Silica products and adsorbents (28% of Davison
sales) are used in a wide variety of industrial and consumer applications.
Polyolefin catalysts and catalyst supports (11% of total Davison sales) are
essential components in the manufacture of polyethylene resins used in products
such as plastic film, high performance plastic pipe, and plastic household
containers.
Grace Davison's sales and revenues of $184.7 million grew 5.0% for the third
quarter of 1998. Excluding the effect of currency translation, sales grew 8.2%
as a result of strong polyolefin and refining catalysts sales. Volume growth of
5.5%, coupled with favorable price/mix variances of 2.7%, drove the sales
improvement.
The following discussion of Grace Davison sales excludes the effect of currency
translation.
Refining catalysts sales increased 8.7%, led by a favorable price/mix
variance of 5.4%, reflecting a continued shift toward higher grade
catalysts, particularly in North America and Asia Pacific. Europe volumes
grew 8.3% as a result of increased shipments to existing and new customers
in the hydroprocessing market. North America experienced volume declines of
1.0% primarily due to reduced refinery usage of FCC's, partially offset by
increased shipments of hydroprocessing catalysts. A new hydroprocessing
plant was brought on-stream in April 1998 and is currently operating at
approximately 65% of capacity.
Polyolefin catalysts sales increased significantly on strong sales volumes
in all geographic regions. Volume growth of 29.3% continued to reflect the
strength of Grace Davison's catalysts as recognized by the plastics
manufacturing industry. Grace Davison is investing to add capacity by early
next year in order to meet anticipated demand. If the profitability of the
resin manufacturing industry continues to be stressed by new manufacturing
capacity, pressure will likely be placed upon polyolefin catalysts pricing.
Silicas and adsorbents sales increased 1.8% as volume gains in Europe and
Asia Pacific offset continued volume declines in the North American
dentifrice market, where consumer preferences favored toothpaste brands
that do not contain Grace Davison silicas. Price/mix was slightly favorable
as increased sales of value-added premium products in Asia Pacific and
North America offset worldwide competitive pricing pressures that have
impacted the insulated glass market, particularly in Europe.
I-19
<PAGE>
EARNINGS
Grace Davison's pretax operating income increased 16.9% to $29.2 million.
Excluding currency translation, operating income grew 22.8%.
Gross margins improved $5.1 million primarily as a result of manufacturing
efficiencies due to increased volumes and cost containment efforts, and
favorable sales price/mix variances.
Factory administration and depreciation expenses increased as new plants were
brought on-stream during 1998.
Selling and general and administrative costs were flat with 1997. Increased
Year 2000 and SAP costs were offset by lower expenses related to employee
compensation programs.
In keeping with Grace's dedication to new technology, research and development
costs increased as a result of ongoing organometallic research.
FIRST NINE MONTHS OF 1998 AS COMPARED TO THE FIRST NINE MONTHS OF 1997
SALES
For the first nine months of 1998, Grace Davison's sales and revenues of $541.1
million increased 2.9%. Excluding the effect of currency translation, sales
increased 7.3%, primarily due to volume growth in all product lines totaling
7.5%.
The following discussion of Grace Davison sales excludes the effect of currency
translation.
Refining catalysts sales grew 10.6%, primarily as a result of higher
worldwide volumes driven by increased refinery catalyst usage, a shift
toward higher quality catalysts, and new refinery business in Indonesia and
China. Future Grace Davison sales into China may be impacted by a
governmental effort to push refineries to use local catalysts.
Polyolefin catalysts sales improved significantly, especially in North
America and Asia Pacific. Worldwide volume growth of 20.8% continued to
reflect the strength of Grace Davison's catalysts as recognized by the
plastics manufacturing industry.
Silicas and adsorbents sales were essentially flat due to the continued
problems in the North America dentifrice market and pricing pressures for
global IG molecular sieves. In addition, volumes declined in Latin America
due to weakened economic conditions in Brazil and a decline in demand for
beer gels. Offsetting these declines were volume gains in Europe as Grace
Davison has increased market share in the insulated glass molecular sieves
market.
I-20
<PAGE>
EARNINGS
In the first nine months of 1998, Grace Davison's pretax operating income of
$81.9 million improved 11.6%. Excluding the effect of currency translation,
operating income improved 19.2%.
Gross margins improved $10.3 million, which continued to reflect increased
sales and manufacturing productivity improvements.
The reduction in general and administrative expenses related to reduced
employee compensation programs was more than offset by increased factory
administration and depreciation expenses due to new plants brought on-stream in
1998 and the continued focus on research and development.
GRACE CONSTRUCTION PRODUCTS
THIRD QUARTER 1998 AS COMPARED TO THIRD QUARTER 1997
SALES
Grace Construction Products is a leading supplier of specialty chemicals and
building materials to the nonresidential (commercial and government)
construction industry, and to a lesser extent, the residential construction
industry. Specialty construction chemicals, which contribute approximately 60%
of Grace Construction Products sales, add strength, control corrosion, and
enhance the handling and application of concrete. Specialty building materials
prevent water damage to structures and protect structural steel against
collapse due to fire.
Grace Construction Products sales and revenues were $135.2 million, a 4.9%
increase over 1997. Excluding the effect of currency translation, sales
increased 8.4%. Volumes increased 6.9%, up in each region except Asia Pacific,
where volumes were down 12.9%.
The following discussion of Grace Construction Products sales excludes the
effect of currency translation.
Specialty construction chemicals sales increased 7.8%, driven by
value-added concrete and masonry products in North America and Europe. In
Asia Pacific, volumes decreased as a result of the continued economic
weakness in Southeast Asia; exceptions in the region were Australia and
Taiwan, where sales were up 8.7% and 58.1%, respectively, versus 1997.
Grace Construction Products continues to focus its efforts to take
advantage of its position in the stronger economies in the region.
Specialty building materials sales increased 9.2% on higher waterproofing
and fire protection volumes in North America and Europe.
I-21
<PAGE>
EARNINGS
Grace Construction Products' pretax operating income of $19.9 million increased
24.2%. Excluding the effect of currency translation, pretax operating income
was up 27.0%.
Gross margin was up slightly compared to 1997 and reflects sales increases and
improvements in manufacturing processes, production rates, and material costs.
Partially offsetting these improvements is a non-recurring charge taken during
the quarter for the start-up of a new calcium nitrite plant commissioned in
September 1998. Asia Pacific margins declined, reflecting sales volume
decreases, as well as the effect of local currency prices combined with raw
materials and some finished products imported from the United States. In an
effort to minimize this currency impact, Grace Construction Products has
implemented a program to qualify local raw material sources.
Similar to Grace's consolidated results, general and administrative expenses
related to employee compensation programs were down. In the first quarter of
1998, a $1.0 million charge was taken for workforce reductions in the European
organization for waterproofing products. The benefit is seen in the third
quarter as selling expenses for Europe waterproofing were down 15.8% from the
third quarter 1997 level.
FIRST NINE MONTHS OF 1998 AS COMPARED TO THE FIRST NINE MONTHS OF 1997
SALES
Grace Construction Products sales and revenues for the first nine months of
1998 were $366.2 million, a 1.8% increase over 1997. Excluding the effect of
currency translation, sales increased 5.4%, primarily on volume increases in
all product groups and across all regions except Asia Pacific.
The following discussion of Grace Construction Products sales excludes the
effect of currency translation.
Similar to third quarter, sales of specialty construction chemicals were up
7.8% with strong volumes in every region except Asia Pacific and worldwide
favorable price/mix.
Sales of specialty building materials increased 2.2% with increased volumes
in every region except Asia Pacific.
EARNINGS
In the first nine months of 1998, pretax operating income of $43.7 million
increased 16.4% over the same period in 1997. Gross margins increased $5.3
million compared to 1997, driven by sales increases and margin improvements
from value-added product penetration and manufacturing cost reduction programs.
The general and administrative expense reductions (down 9.9%) also contributed
to the year-to-date earnings improvement.
I-22
<PAGE>
DAREX CONTAINER PRODUCTS
THIRD QUARTER 1998 AS COMPARED TO THIRD QUARTER 1997
SALES
Darex Container Products is a leading global producer of can sealants, closure
sealants, coatings for metal packaging, and other related products. Can
sealants, which represent approximately 50% of Darex's sales, hermetically seal
beverage, food, and other cans; closure sealants (15% of sales) seal glass and
plastic bottles and jars used in beverage and food applications; coatings (20%
of sales) protect metal packaging from corrosion and its contents from the
influences of the metal.
Darex Container Products sales and revenues of $60.4 million were down 10.6%
from third quarter 1997. Excluding the effect of currency translation, sales
declined 3.0%. Contributing to Darex's sales decline were the divestments of a
niche segment of the coatings business in Europe (September 1997) and the can
forming lubricants business in North America (May 1998). Excluding the impact
of these divestments, sales were essentially flat before currency translation.
The following discussion of Darex Container Products sales excludes the effect
of currency translation.
Can sealant sales decreased 4.0%, primarily due to volume decreases,
especially in the Asia Pacific region. Asia Pacific volumes were down due
to continued poor economic conditions in Japan and the continued trends
toward conversion to two-piece cans and the use of plastic bottles in lieu
of cans. The region's volume decline was partially offset by a favorable
price/mix variance. North America volumes were lower due to a significant
reduction in the California tomato harvest, which resulted in decreased
demand for can sealants. Coatings sales increased 6.6%, led by market share
gains in Latin America.
EARNINGS
Darex Container Products' pretax operating income of $5.8 million decreased
36.8% from third quarter 1997 (a 27.6% decline excluding currency translation).
Total gross margins declined 1.6 percentage points, due to lower sales of
high-margin products and higher raw material costs. Partially offsetting these
declines were lower operating expenses resulting from cost reduction actions
implemented in late 1997 and the consolidation of research and development
sites.
Included in operating income were gains on the sales of real property of $.7
million in the third quarter of 1998 and $2.7 million in the third quarter of
1997.
I-23
<PAGE>
FIRST NINE MONTHS OF 1998 AS COMPARED TO THE FIRST NINE MONTHS OF 1997
SALES
Darex Container Products sales and revenues for the first nine months of 1998
were $183.7 million, down 9.1% from 1997. Excluding the effect of currency
translation, sales decreased 1.8%. Excluding the sales related to the
divestments mentioned above and the termination of an alliance in Brazil (May
1997), sales were essentially flat with 1997 before currency translation.
The following discussion of Darex Container Products sales excludes the effect
of currency translation.
Year-to-date, can sealant sales were down 2.6%. In addition to the
continued challenges in Asia Pacific, Latin America sales were down 11.8%,
primarily due to the weakened economy in Brazil.
Closure sealant sales increased 6.4%, primarily in Latin America and Asia
Pacific. Latin America volumes were up due to increased demand of dryblends
in Mexico. The sales increase in Asia Pacific was mainly due to increased
customer demand in Japan for food applications and market share gains in
the Philippines.
Coatings sales increased 4.2%, with strong sales in Latin America and Asia
Pacific more than offsetting a decline in Europe due to the divestment of a
niche segment of the coatings business. In addition to the market share
gains in Latin America, Darex also experienced increased sales in Asia
Pacific on market share gains in the Philippines.
EARNINGS
Year-to-date pretax operating income decreased 15.6% to $20.1 million in the
first nine months of 1998 (an 8.1% decline excluding currency translation).
Lower operating expenses continued to partially offset the impact of gross
margin declines.
Included in year-to-date 1998 operating income were a $1.5 million gain from
the sale of the can forming lubricants business (May 1998) and a $.7 million
gain on the sale of real property (September 1998), as compared to a $2.7
million gain on the sale of real property reported in third quarter 1997.
DISCONTINUED OPERATIONS
PACKAGING BUSINESS
As discussed in Notes 1 and 4 to the interim consolidated financial statements
in this Report, the Spin-off and Merger were completed on March 31, 1998.
Results from discontinued operations for the first nine months of 1998 included
$32.6 million ($28.3 million after-tax) of costs related to
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<PAGE>
the Packaging Business transaction and $8.4 million ($5.5 million after-tax)
for a related pension plan curtailment loss.
COCOA BUSINESS DIVESTMENT
In February 1997, Grace sold its cocoa business to Archer-Daniels-Midland
Company (ADM) for total proceeds of $477.6 million (inclusive of debt assumed
by the buyer), subject to adjustment. The pretax and after-tax effects of the
divestment were consistent with prior estimates and were charged against
previously established reserves. In October 1997, ADM paid Grace an additional
$7.9 million (including $.4 million of interest income) in settlement of the
purchase price adjustment. In anticipation of this settlement, in the third
quarter of 1997 Grace reversed previously recorded provisions of $12.4 million
(net of an applicable tax effect of $6.6 million), in discontinued operations.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The increase in cash used in the first nine months of 1998 was primarily due to
the expenditure of $142.1 million for the defense and disposition of
asbestos-related litigation, net of amounts received from settlements with
certain insurance carriers in connection with such litigation, as compared to
the net cash outflow of $34.9 million for asbestos-related litigation in the
first nine months of 1997, and an increase in long-term incentive compensation
program disbursements of approximately $60.0 million in 1998 compared to 1997.
The decrease in net pretax cash provided by operating activities of
discontinued operations from the first nine months of 1997 reflects that the
Packaging Business operating results are included for only the first three
months of 1998 due to the spin-off while a full nine months of Packaging
Business operating results are included in 1997.
The increase in notes and accounts receivable of $43.2 million in the first
nine months of 1998 reflects seasonality in the Grace Construction Products
business, increased Grace Davison sales in Asia Pacific, and the temporary
delay in payments by two Grace Davison customers. Accounts receivable are
expected to decrease in the fourth quarter of 1998 from third quarter levels
due to collection of the Grace Construction Products and Grace Davison
receivables discussed above. Expenditures for defense and disposition of
asbestos-related litigation in the first nine months of 1998 were impacted by
two large settlements (one for bodily injury and one for property damage).
Although the probable cost of defending against and disposing of
asbestos-related claims cannot be predicted with certainty, 1999 expenditures
are expected to be significantly below the 1998 level. The prior year's
long-term incentive compensation program was discontinued in 1998. Future
disbursements on the runoff of existing plans will total less than $5.0 million
over the next two years.
The decrease in cash from investing activities was primarily due to the receipt
of net proceeds from divestments in the first nine months of 1997 (most of
which related to the divestment of the cocoa business), partially offset by a
reduction in net investing activities of discontinued
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operations. Grace made capital expenditures of $65.1 million in the nine months
ended September 30, 1998, primarily related to the Grace Davison business.
Grace anticipates that total 1998 capital expenditures will not exceed $100.0
million, all of which will be directed towards its operating business segments.
In connection with the Packaging Business transaction, Grace received $1,256.6
million in cash, which was used to repay substantially all of its debt. On
March 31, 1998, Grace used $600.0 million of the cash transfer to repay bank
borrowings. On April 1, 1998, Grace repaid $611.3 million principal amount of
Notes pursuant to a tender offer that expired on March 27, 1998. On April 1,
1998, Grace also repaid $3.5 million principal amount of MTNs and $6.0 million
of sundry indebtedness. As a result of this extinguishment of debt, Grace
incurred an after-tax charge of $35.2 million for premiums paid in excess of
the Notes' principal amounts and other costs related to the purchase of the
Notes and MTNs (including the costs of settling related interest rate swap
agreements). These costs are presented as an extraordinary item in the
Consolidated Statement of Operations in this Report.
On September 30, 1998, Grace had committed borrowing facilities totaling $850.0
million, consisting of $600.0 million under a 364-day facility expiring in May
1999 (extendible for successive 364-day periods at the discretion of Grace and
the lenders) and $250.0 million under a long-term facility expiring in May
2003. These facilities also supported the issuance of commercial paper and bank
borrowings, of which $242.8 million was outstanding on September 30, 1998.
Grace has targeted a ratio of debt to EBITDA (earnings before interest, taxes
and depreciation and amortization) of less than 1.0, although Grace will
continue to have the flexibility to exceed this target as business needs
dictate. The debt to EBITDA ratio for the twelve months ended September 30,
1998 was estimated at 1.2.
During the first quarter of 1997, Grace substantially completed the share
repurchase program initiated in 1996 by acquiring 6,306,300 additional shares
of its common stock for $335.9 million. Prior to year-end 1997, Grace retired
all of its treasury stock using the cost method.
In April 1998, the Company's Board of Directors approved a new program to
repurchase up to 20% of the Company's outstanding shares in the open market.
Through September 30, 1998, the Company had acquired 2,318,200 shares of common
stock for $36.0 million under the program (an average price per share of
$15.49). Cash payments for settled share repurchases were $35.5 million through
September 30, 1998. This program is expected to be executed over time,
depending on market conditions and other factors.
Grace believes that cash flows generated from future operations and committed
borrowing facilities will be sufficient to meet its cash requirements for the
foreseeable future.
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<PAGE>
CROSFIELD ACQUISITION
In October 1998, Grace terminated its April 1998 agreement with Imperial
Chemical Industries PLC to acquire its Crosfield catalysts and silicas business
for $455.0 million. The agreement was terminated because the parties were
unable to obtain U.S. Federal Trade Commission clearance of the complete
transaction as negotiated. The termination of the agreement did not subject
Grace to any termination fees except for a nominal investment banker fee and
legal expenses.
ASBESTOS-RELATED MATTERS
Through September 30, 1998, Grace paid $142.1 million for the defense and
disposition of asbestos-related property damage and personal injury litigation
(including payments made under a property damage settlement and a block
settlement of personal injury claims effected in 1997), net of amounts received
under settlements with insurance carriers. Although the total amount to be paid
in 1998 with respect to asbestos-related claims (after giving effect to
payments to be received from insurance carriers) cannot be precisely estimated,
Grace expects that it will expend approximately $170.0 million (pretax) in 1998
to defend against and dispose of such claims (after giving effect to
anticipated insurance recoveries). The amounts, with respect to the probable
cost of defending against and disposing of asbestos-related claims and probable
recoveries from insurance carriers, represent estimates and are on an
undiscounted basis; the outcomes of such claims cannot be predicted with
certainty.
See Note 2 to the interim consolidated financial statements in this Report for
further information concerning asbestos-related lawsuits and claims.
ENVIRONMENTAL MATTERS
In April 1998, Grace reached a settlement with the federal government relating
to a site in Wayne, New Jersey. Under the terms of the settlement, which
remains subject to court approval, Grace will pay approximately $32.0 million
in settlement of claims by the U.S. Army Corps of Engineers, the U.S.
Environmental Protection Agency and the U.S. Departments of Energy and the
Interior. Grace has paid $19.0 million of this amount into an escrow account
and will pay the remaining $13.0 million over the next two years. All amounts
paid and to be paid in the settlement are being charged against previously
established reserves.
For additional information relating to environmental liabilities, see Note 11
to the Consolidated Financial Statements in the 1997 10-K.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
OVERVIEW
Grace has reviewed its Year 2000 compliance efforts by business segment. Each
business segment and Grace Corporate has appointed a project leader to
coordinate a comprehensive review of all systems used by Grace to determine to
what extent Grace may be affected by the
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failure of its systems to be Year 2000 compliant. In addition, the project
leader for Grace Corporate also functions as Grace's overall Project Director,
reporting directly to the Chief Executive Officer.
Grace is reviewing both its information technology ("IT") and non-information
technology ("non-IT") systems for Year 2000 compliance. IT systems include
hardware, infrastructure, local and wide area networks, software, application
systems, electronic data exchange and interfaces. Non-IT systems cover process
control and manufacturing support equipment, laboratory systems, instruments
and scales, telecommunications, and facility and utility support systems.
Non-IT systems include systems containing date dependent software as well as
embedded date dependent chip technology. Grace is targeting to achieve Year
2000 compliance for all of its critical IT and non-IT systems by mid-1999.
GRACE'S CURRENT STATE OF YEAR 2000 READINESS
INVENTORY: Grace is currently documenting the inventory of its IT and non-IT
systems that could potentially be affected by the Year 2000 issue for each of
its business segments and Grace Corporate. All systems are being prioritized as
being either critical or non-critical. A critical system is one where failure
to be Year 2000 compliant may have a material adverse effect on health and
safety, the environment or on Grace's financial condition or results of
operations. A non-critical system is one where failure to be Year 2000
compliant could produce brief business interruptions or system failures that
may be remedied promptly and that are not reasonably likely to have any such
material adverse effect.
The inventory of IT systems is approximately 90% complete for both critical and
non-critical systems. The inventory of non-IT systems is approximately 60%
complete for both critical and non-critical systems. Grace expects to complete
the inventories by the end of January 1999.
COMPLIANCE: Of the critical items currently inventoried as having possible Year
2000 issues, approximately 50% have been identified as Year 2000 compliant. The
remaining items are either known to be non-compliant or their compliance status
has not yet been determined.
Grace expects to have test plans to determine the compliance of all critical
items potentially affected by the Year 2000 issue available by the end of
January 1999 and to complete all testing for compliance of these items by the
end of February 1999.
For non-IT systems, Grace's most significant Year 2000 exposure is with the
process control systems that control the major Grace Davison plants. Grace has
requested the vendor that supplies a majority of the primary digital control
systems for key Grace Davison plants in North America, to perform a Year 2000
anlaysis of their respective systems. The results of this analysis for three of
the North American plants indicate that the hardware and the system operating
and application software associated with these systems have no significant Year
2000 problems. The analysis for the remaining North American plants is in
process. Grace is considering whether to use this approach or develop internal
compliance tests, to determine Year 2000 compliance of digital control systems
for other plants outside of North America.
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<PAGE>
Grace Construction Products' facilities primarily utilize a batch process
approach for manufacturing and have limited automated process controls that may
be directly impacted by Year 2000 issues. Darex Container Products has more
than 20 manufacturing facilities worldwide and certain facilities have
automated process controls that are being reviewed for Year 2000 compliance.
Grace is also contacting its key customers and vendors (including
telecommunications and utility providers, banks and governmental agencies) in
an effort to ascertain their compliance status. Grace expects to complete the
assessment of the Year 2000 status of its key customers and vendors by the end
of April 1999.
REMEDIATION AND TESTING: Grace is targeting to have remediation plans
(including validation testing) in place for all critical IT and non-IT systems
that are shown to be non-compliant by the end of February 1999, and to have
completed the remediation of all such systems by mid-1999. Remediation for
non-critical systems will take place throughout 1999. Grace will have
contingency plans in place for those non-critical systems that have not been
remediated by the end of 1999.
Grace will primarily use internal resources to validate the remediation
procedures as they relate to critical IT and non-IT systems. The Grace Year
2000 Project Director will review the Grace Year 2000 effort on an on-going
basis, reporting regularly to the Audit Committee of the Board of Directors of
Grace.
A major component of Grace's IT remediation activity is in place as a result of
the conversion of its financial and certain operational support systems to
programs using software of SAP America, Inc. (SAP), which has represented that
its systems used by Grace are Year 2000 compliant. Grace commenced this project
in 1995 irrespective of its Year 2000 efforts. Grace Construction Products and
Darex Container Products have completed the implementation of the SAP software
in North America and many countries throughout the rest of the world, and
expect to complete the implementation in the remaining countries by mid-1999.
Grace Davison is implementing SAP in conjunction with Grace Construction
Products and Darex Container Products in Asia Pacific and Latin America,
respectively. In North America and Europe, Grace Davison will not convert to
SAP until after December 31, 1999. Until Grace Davison converts to SAP, it
plans to install new software releases to upgrade existing systems and is
contracting with outside programming services to resolve its Year 2000 issue in
North America, with completion expected by the second quarter of 1999. In
Europe, Grace Davison uses a largely internally developed software program that
is now supported and maintained by a third party, to provide its business and
financial systems support. Grace has contracted with such third party to
provide Grace Davison with a version of system software that is Year 2000
compliant.
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<PAGE>
COSTS
Grace estimates that the total cost of its Year 2000 efforts is not expected to
exceed $10.0 million, of which approximately $1.0 million has been spent to
date. This amount excludes the cost of the SAP implementation since, despite
being a critical component of the Grace Year 2000 remediation effort, this was
a project that was already planned and was not accelerated due to Year 2000
issues. No material IT or non-IT projects were delayed due to the Grace Year
2000 remediation effort.
CONTINGENCY PLANS
Grace does not currently have in place any formal contingency plans to cover
situations where systems are not remediated on a timely basis. Grace will be
developing such contingency plans covering all critical IT and non-IT systems
during the first and second quarters of 1999. Contingency plans will also be
developed for some non-critical systems that will not be tested or remediated;
such contingency plans will provide for the remediation of these systems in the
event that they are affected by Year 2000 issues. Contingency plans will also
address key customer and vendor non-compliance for Year 2000.
RISK
If Grace fails to take any remedial action, Year 2000 non-compliance could have
a material adverse effect on the financial condition or results of operations
of Grace. In particular, the failure of process control equipment,
infrastructure such as utilities, or non-compliance by third parties could
affect the ability of Grace to manufacture products and meet the demands of its
customers. Also, the failure of Grace's wide area communications network could
disrupt its SAP systems and financial reporting processes. However, Grace
believes that the efforts being taken to ensure Year 2000 compliance outlined
above, together with contingency planning, will be effective to minimize
interruptions or loss of business, or environmental, health and safety risks.
The foregoing Year 2000 discussion is based on management's current evaluation
using available information. Factors that might cause material changes include,
but are not limited to, the readiness of third parties and Grace's ability to
respond to unforeseen Year 2000 complications.
THE EURO
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union will adopt one common currency known as the euro. Grace's
operating business segments affected by the euro conversion have established
plans to address the issues raised by the euro currency conversion. These
issues include, among other things, the impact of one currency on pricing and
the need to adapt computer and financial systems and certain business processes
to accommodate the euro-denominated transactions.
The Company's financial systems and business processes currently accommodate
multiple currencies. Grace's plans contemplate conversion by modifications to
current systems at
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a nominal cost or completion of the implementation of the
new SAP system software in Europe. Grace will consider the change in functional
currency for the eleven member countries by the year 2000. Due to numerous
uncertainties, Grace cannot reasonably estimate the effects that European
conversion to one common currency will have on pricing for products or
suppliers costs and the resulting impact, if any, on the results of operations,
financial position or liquidity of its European businesses, but it is not
expected to have a material adverse effect on Grace's consolidated financial
position. Grace's diversification of production sites and product lines for its
operating businesses should mitigate any significant impact from the euro
conversion.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first six months of 1998, Grace terminated its position in all
interest rate swap agreements which were outstanding on December 31, 1997. The
interest rate swap agreements were used to modify the rate profile of the
underlying debt and were not used for trading purposes. Grace had no
outstanding interest rate swap agreements on September 30, 1998. For further
information concerning Grace's quantitative and qualitative disclosures about
market risk, refer to Note 10 in the Consolidated Financial Statements in the
1997 10-K.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 2 to the interim consolidated financial statements in Part I of
this Report is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following is a list of Exhibits filed as part of
this Quarterly Report on Form 10-Q:
10.1 Employment Agreement, dated October 26, 1998, by and between
the Company and Paul J. Norris
10.2 Consulting Agreement, dated August 3, 1998, by and between the
Company and Robert H. Beber
12.1 Computation of Ratio of Earnings to Fixed Charges and Combined
Fixed Charges and Preferred Stock Dividends
27.1 Financial Data Schedule
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
by the Company during the fiscal quarter ended September 30, 1998. None of
these reports contained any financial statements.
1. Form 8-K, dated July 14, 1998, as filed with the Securities and
Exchange Commission on July 14, 1998.
2. Form 8-K, dated July 23, 1998, as filed with the Securities and
Exchange Commission on July 28, 1998.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
W. R. GRACE & CO.
---------------------
(Registrant)
DATE: November 12, 1998 By: /s/ Kathleen A. Browne
-----------------------------
Kathleen A. Browne
Vice President and Controller
(Principal Accounting Officer)
II-2
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.1 Employment Agreement, dated October 26, 1998, by and between the
Company and Paul J. Norris
10.2 Consulting Agreement, dated August 3, 1998, by and between the
Company and Robert H. Beber
12.1 Computation of Ratio of Earnings to Fixed Charges and Combined
Fixed Charges and Preferred Stock Dividends
27.1 Financial Data Schedule
<PAGE>
GRACE CORPORATE HEADQUARTERS
W. R. Grace & Co.
1750 Clint Moore Road
Boca Raton, FL 33487-2707
Tel: (561)362-2000
October 26, 1998
Mr. Paul J. Norris
3 Meadowbrook Road
Chester, New Jersey 07930
Dear Paul:
This letter agreement specifies the terms of your employment with W.
R. Grace & Co. (the "Company") as President & Chief Executive Officer
(collectively, the "CEO"), which have been approved by the Company's Board of
Directors (the "Board") and/or the Compensation Committee of the Board, as
applicable. As you know, the Board is extremely pleased that you will be
joining the Company and believes you will make a valuable contribution to the
Company's future.
If you agree with the terms of this letter agreement, please sign
where indicated below and return one fully executed copy to me. An additional
copy of this letter is also enclosed for your records.
Responsibilities
Your employment with the Company as CEO will begin November 1, 1998.
The Board will also elect you as a member of the Board commencing that date.
Your title will be "President & Chief Executive Officer" of the Company; until
the current Chairman retires (expected to be March 1, 1999), at which time it
is the Board's intention that you will be elected Chairman and your title will
become "Chairman, President & Chief Executive Officer".
Your principal obligations, duties and responsibilities will be those
that are generally inherent in the office and title of CEO. In this regard, all
employees of the Company (and its subsidiaries) will report directly or
indirectly to you. Your office will be located at the Company's Headquarters.
Term Of Agreement
The initial term of your employment under this agreement will be for a
period of three years, beginning on the date your employment with the Company
commences, November 1, 1998, and ending on October 31, 2001 (such period is
referred to in this
<PAGE>
agreement as your "Initial Employment Term"). Of course, you and the Board may
agree to extend the term of your employment beyond your Initial Employment
Term, under the same or different arrangements as those described in this
agreement. Any such extension must be in writing, signed by you and an
authorized member of the Board.
If your employment as CEO of the Company continues after the Initial
Employment Term, and no other arrangements have been mutually agreed in writing
between you and the Board, then the arrangements described in this agreement
will continue until changed by such mutual agreement, except as provided under
the following section entitled "Severance Pay Arrangements".
In any event, however, the Board will notify you of its intention
regarding renewal or non-renewal of your employment as CEO beyond your Initial
Employment Term, by no later than the end of December 2000.
Compensation
During your Initial Employment Term, the following compensation
provisions will apply:
1. Your annual base salary will be $725,000.00 (subject to annual review
by the Board and the Committee), which will accrue and be paid to you
in 24 semi-monthly regular payroll installments during each 12-month
period. Your salary will cease to accrue immediately upon your
termination of employment with the Company, whether you voluntarily
cease performing services or otherwise. (Note, however, the severance
provisions described below will apply if your employment terminates
under certain circumstances during the Initial Employment Term.)
2. You will be eligible to participate in the Company's Annual Incentive
Compensation Program beginning with the 1998 calendar year. The awards
under this Program are in cash, are contingent upon individual
performance, are paid on a calendar year basis and will be determined
by the financial results of the Company as a whole. In addition, all
annual incentive compensation awards are subject to approval by the
Compensation Committee and the Board (except with respect to the
special provisions for 1998 and 1999 described in the following
paragraph).
As CEO, you will be eligible for a targeted award under the program of
65% of your annual base salary; provided, however, your actual award
for 1998 will be at a fixed amount of $250,000 and for 1999 your
actual award will not be less than $471,250. (Note, the awards for
each calendar year are currently scheduled to be paid in March of the
following calendar year.)
Annual incentive compensation awards are contingent upon your
remaining an employee of the Company through the date of actual
payment. However, with regard to the 1998 and 1999 award payments
described above, if your employment
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<PAGE>
is terminated by the Company without "Cause" (as defined below) before
the date of payment (including termination of your employment by the
Company without "Cause" following a "change in control" of the
Company, within the meaning of your "Executive Severance Agreement"
described below), these payments (after reduced in accordance with the
following paragraph) will be made in March 1999 and March 2000,
respectively.
If you become qualified for severance payments under the section below
entitled "Severance Pay Arrangement", prior to the payment of the
incentive award for 1999, then the amount of that award will be
reduced to an amount equal to the percentage of 1999 that you were
employed by the Company prior to your last date of employment with the
Company. (For instance, if your last date of employment was March 31,
1999 - therefore you would have been employed for 25% of 1999 - then
your incentive award for 1999 under this section would be reduced so
that it would be equal to 25% of its orignal amount.)
3. You will receive a "non-statutory" stock option grant covering 439,026
shares of Grace Common Stock on November 1, 1998 with a strike price
equal to the fair market value as of October 30, 1998. That grant will
be made under the Company's 1998 Stock Incentive Plan, which will
govern the terms of the grant, except as provided in this agreement.
This option grant will vest in three equal installments, each covering
146,342 shares, on November 1, 1999, November 1, 2000 and November 1,
2001, respectively. However, if your are terminated by the Company
without "Cause" during your Initial Employment Term (including
termination of your employment by the Company without "Cause"
following a "change in control" of the Company, within the meaning of
your "Executive Severance Agreement" described below), or if the
Company fails to offer to extend your employment term beyond October
31, 2001 (on conditions no less favorable to you as described in this
agreement), or upon your death or disability as defined under the
Company's Long- Term Disability Income Plan, then: (i) all such
installments will vest immediately upon your termination of employment
with the Company and (ii) you will have a period of 3 years after the
date you cease such employment to exercise those options.
Of course, the Compensation Committee will consider you for future
stock option grants, at the time such grants are considered for other
officers of the Company or at other appropriate times, in the judgment
of the Committee.
4. You will be granted a restricted stock award covering 170,733 shares
of Grace Common Stock on November 1, 1998, with the provision that you
will vest in shares and the restrictions will lapse in three equal
installments, each covering 56,911 shares, on November 1, 1999,
November 1, 2000 and November 1, 2001 respectively; provided, however,
all such installments will vest immediately upon termination of your
employment by the Company without "Cause" (including termination of
your employment by the Company without "Cause" following a
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<PAGE>
"change in control" of the Company, within the meaning of your
"Executive Severance Agreement" described below), or upon your death
or disability as defined under the Company's Long-Term Disability
Income Plan.
You will be eligible to vote such shares during the period of
restriction and receive applicable dividends, if any, on such shares.
Special Stock Appreciation Payment
The Company will make a stock appreciation payment to you calculated
as described in the next sentence, in the event that you exercise any portion
of the stock option granted to you under part 3 of the "Compensation" section
of this agreement that become vested (such vested options are referred to below
as the "Vested Initial Options"), at a time when the market value of a share of
Grace Common Stock is greater than the option price per share of the grant.
With regard to any such Vested Initial Options exercised by you, the stock
appreciation payment by the Company will be equal to the result of the
following equation: (i) the number of Vested Initial Options exercised,
multiplied by (ii) a dollar amount equal to the option price per share of the
grant minus $10.25.
Alternatively, the Company will make a stock appreciation payment to
you, if you cancel any portion of your Initial Vested Options, at a time when
the market value of a share of Grace Common Stock is less than (or equal to)
the option price per share of the grant, but greater than $10.25. In order to
receive such a payment for canceled options, you must inform the Company's
chief human resources officer in writing of your election to cancel any portion
of your Initial Vested Options, and such cancellation will be effective on the
date such writing is received by that officer. With regard to any Vested
Initial Options cancelled in accordance with that procedure, the payment by the
Company under this section will be equal to the result of the following
equation: (i) the number of Vested Initial Options that are canceled,
multiplied by (ii) a dollar amount equal to the "Fair Market Value" (as defined
in the 1998 Grace Stock Incentive Plan) of a share of Grace common stock on the
date that the cancellation is effective minus $10.25.
In the event of your death at a time when your estate (or other
authorized person) is entitled to exercise Vested Initial Options, in
accordance with the terms of the 1998 Stock Incentive Plan, then the payments
and procedures described in this section will apply with regard to such person.
Change In Control Severance Agreement
Consistent with your election as an officer of the Company, the
Company will enter into an "Executive Severance Agreement" (i.e., a so-called
"golden parachute" agreement) with you, effective your first date of employment
with the Company (i.e., November 1, 1998). The agreement will, in general,
provide for a severance payment of 3 times the sum of your annual base salary
plus your targeted annual incentive compensation award, and
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<PAGE>
certain other benefits, in the event your employment terminates under certain
conditions following a "change in control" of the Company (within the meaning
of your Executive Severance Agreement).
The form of your Executive Severance Agreement will be the same as
applicable to other elected officers of the Company.
Severance Pay Arrangement
If your employment is terminated by the Company without "Cause" during
your Initial Employment Term, or if the Company does not, by the end of
December 2000, offer to extend your employment beyond October 31, 2001 (on
conditions no less favorable to you as described in this agreement) and you in
fact cease employment on October 31, 2001, then you will be entitled to the
severance payment described in the next sentence. The severance payment will be
2 times a dollar amount equal to 165% of your annual base salary at the time
your employment is terminated. The severance payment may be made to you in
installments, at the same time and in the same manner as salary continuation
payments, over a period of two years beginning as of the date you are
terminated. However, at your option, the entire severance payment may be paid
to you in a single lump sum as soon as practical after your termination (if
approved by the Compensation Committee). If you receive this severance payment,
you will not be entitled to any other severance pay from the Company.
You will not, in any event, however, be entitled to the severance
payment described above if, at the time your employment terminates, you are
entitled to payments under your Executive Severance Agreement described above,
or to disability income payments under the Grace "LTD Plan" and/or "ESP Plan"
described below.
Unless otherwise agreed by you and the Board (or as provided above),
on the date your Initial Employment Term expires (i.e., October 31, 2001), this
severance pay arrangement will no longer be applicable to you, and your
continued employment with the Company will be as an employee "at will", subject
to whatever other Company severance programs are applicable to senior officers
at the time your employment terminates.
Supplemental Pension Arrangement
You will be entitled to a supplemental pension from the Company, which
considers your prior service with W. R. Grace & Co. (the successor of the
Company) and with AlliedSignal, as if such service had been continuous service
with the Company. The supplemental pension will be payable from the general
assets of the Company -- it will not be pre-funded in any manner.
The supplemental pension will be calculated by applying the Grace
Salaried Retirement Plan and SERP benefit formula to all such prior service and
all future service with the Company, and using your "final average
compensation" (as defined by those plans) to
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derive a total retirement benefit. Then, any retirement benefits to which you
are entitled to under the Grace Salaried Retirement Plan, the Grace SERP and
any AlliedSignal defined-benefit retirement plans will be subtracted from such
total retirement benefit. The supplemental pension that the Company provides
will be equal to the amount of the remaining total retirement benefit after
such subtraction.
The benefit payment option applicable to the supplemental pension
(e.g., a lifetime annuity, joint-and-spousal survivor annuity, etc.) will be
the same as the payment option applicable to you under the Grace Salaried
Retirement Plan.
This supplemental pension arrangement will be paid to you only if your
employment with the Company does not cease during your Initial Employment Term,
or if you are terminated during that Term without "Cause" (including
termination of your employment by the Company without "Cause" following a
"change in control" of the Company, within the meaning of your Executive
Severance Agreement). Thus, if you voluntarily terminate your employment before
your Initial Employment Term expires, or if you are terminated for "Cause"
prior to the expiration of that Term, you will not be entitled to the
supplemental pension.
For purposes of determining any supplemental pension that may be
payable to you if you cease employment with the Company prior to receiving
sixty consecutive months of compensation from the Company, your "final average
compensation" (used to determine the supplemental pension) will only utilize
compensation paid to you by the Company from November 1, 1998.
Note, if the Grace Salaried Retirement Plan is amended in a manner
that affects the calculation of benefits, while you are employed by the
Company, then the supplemental pension may be adjusted in an equitable manner
consistent with such amendment. Any such adjustment will be determined by the
actuary for the Salaried Retirement Plan; but such adjustment may not in any
event decrease your supplemental pension below an amount that would be
calculated based on your years of service and "final average compensation" as
of the day before the effective date of such amendment.
Definition Of Cause
"Cause", for purposes of this agreement, means:
(i) Commission by you of a criminal act (i.e., any act which, if
successfully prosecuted by the appropriate authorities would constitute a crime
under State or Federal law) or of significant misconduct, which has had or will
have a direct material adverse effect upon the business affairs, properties,
operations or results of operations or financial condition of Company,
(ii) Refusal or failure of you to comply with the mandates of the
Board, or failure by you to substantially perform your duties hereunder, other
than such failure resulting from
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your total or partial incapacity due to physical or mental illness, which
refusal or failure has not been cured within 30 days after notice has been
given to you, or
(iii) Breach of any of the terms of this agreement by you, which
breach has not been cured within 30 days after notice has been given to you.
Relocation Assistance
The Company will provide you with the relocation assistance under the
Headquarters Office Relocation Policy for current employees (copy attached),
except that the Company will provide you with 2 months salary, "grossed up" for
taxes, to cover incidental relocation expenses (instead of 1 monthly salary
provided by the Policy) and your "capital loss protection", if you sell your
current residence to relocate to the Company's Headquarters, will not be
limited to $25,000. In addition, appropriate temporary housing of your choice
will be provided by the Company.
Company-Sponsored Benefit Plans and Programs
As an employee and senior officer of the Company, you will be eligible
to participate in various Company-sponsored benefit plans and programs (subject
to their respective provisions and as they may be amended from time to time).
Following is a brief description of the principal plans and programs:
1. The Grace Deferred Compensation Program.
This Program provides that you may elect to defer a portion of your
base salary (from a minimum of $200 per month to a maximum of 25% of
base salary) and all or a portion of your annual incentive
compensation. Deferred amounts are credited with interest equal to the
greater of (i) the prime rate plus 2 percentage points or (ii) 120% of
the prime rate.
2. The W. R. Grace & Co. Retirement Plan for Salaried Employees
("Salaried Retirement Plan").
This Plan is a "tax qualified" plan that provides a pension at
retirement equal to 1.50% of "final average compensation" (as defined
by the Plan, which includes annual base salary and annual incentive
compensation for the 60 consecutive highest-paid months during the
last 180 months of employment with the Company), less 1.25% of the
primary Social Security benefits, multiplied by years of credited
service.
Your participation in the Grace Salaried Retirement Plan will commence
on November 1, 1998 (i.e., your first date of employment) since you
already satisfy the 1 year of service plan participation requirement,
as a result of your prior eligible service with the Company. You have
also satisfied the vesting requirements under the Plan, as a result of
your prior service with the Company.
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3. The W. R. Grace & Co. Supplemental Executive Retirement Plan ("SERP").
The SERP is an unfunded Company plan that supplements benefits under
the Grace Salaried Retirement Plan. The SERP pays retirement benefits
which would otherwise be paid under the terms of the Salaried
Retirement Plan, but for limits and exclusions imposed by tax law. For
example, pension benefits related to base salary or incentive
compensation awards, which an executive elects to defer, will be paid
under the provisions of the SERP (not the Grace Salaried Retirement
Plan). The SERP also pays any pension benefits that an executive
accrues in excess of the "tax qualified" plan limits (currently
$130,000 per year) and compensation limit (currently $160,000 per
year). Participation, vesting and payment options in the SERP follow
the same rules as the Grace Salaried Retirement Plan.
4. The W. R. Grace & Co. Salaried Employee Savings & Investment Plan
("S&I Plan").
Since you already satisfy the 1 year of service participation
requirement, as a result of your prior eligible service with the
Company, the S&I Plan permits you (beginning on November 1, 1998) to
save a portion of your compensation up to a maximum permitted by law
by contributing such amount to the Plan by payroll deduction. With
respect to the first 6% you contribute, the Company will match $1 of
Grace stock for each $2 you save. Your contributions are invested in
one or more of seven funds at your option. Grace's S&I Plan is a
so-called "401(k) plan" and, therefore, a portion of your contribution
can, at your election, be treated as deferred income for tax purposes.
Amounts of allowable contributions are subject to certain Internal
Revenue Code limits, one of which limits annual before-tax savings
amounts (for 1998, this limit is $10,000). The S&I Plan currently
permits an 8% maximum savings rate for before-tax amounts.
Note, however, your ability to contribute to the S&I Plan on a
before-tax basis for 1998 may be limited, based on tax law limits and
the contributions you may have already made during 1998 to an
AlliedSignal 401(k) plan.
5. The W. R. Grace & Co. Savings & Investment Plan Replacement Payment
Program.
This Program is designed to "make-up" matching Company contributions
that are not paid due to the compensation threshold limit under the
Internal Revenue Code. To be eligible to receive a "make-up" payment
each year, an executive must participate in the S&I Plan at a rate of
at least 6% during the entire year until he or she reaches the
compensation limit. The replacement payment then equals 3% of the
year's plan compensation in excess of the legally-imposed compensation
limit (which is $160,000 for 1998).
You may elect to receive your replacement payment by check at the time
annual incentive compensation awards are paid or credited (which is
currently in March of the year following the year to which the payment
relates), or you may elect to defer the replacement payment you would
otherwise receive. If you choose to defer the
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payment, you will receive earnings credited under the Deferred
Compensation Program.
6. The W. R. Grace & Co. Long-Term Disability Income Plan ("LTD Plan").
You will become eligible to participate in the LTD Plan on a voluntary
and contributory basis on the first of the month following or
coincident with your date of employment. (In your case, you will be
eligible to commence participation on November 1, 1998.) Generally,
the LTD Plan provides for a monthly income of 60% of base monthly
earnings should you become disabled, within the meaning of the Plan.
The maximum monthly benefit under the Plan is $30,000.
7. Executive Salary Protection Plan ("ESP Plan").
Consistent with your status as a senior officer of the Company,
beginning with the first date of your employment with the Company
(i.e., November 1, 1998), you will commence participation in the ESP
Plan. Under the ESP Plan, in the event of your death while employed by
the Company and prior to age 70, the Company will continue to pay a
portion of your base salary to your beneficiary(ies) for a period of
time depending upon your age at death. This Plan also provides certain
disability benefits which are supplemental to the Company's LTD Plan.
8. The W. R. Grace & Co. Voluntary Group Accident Insurance Plan.
You will become eligible to participate in this Plan effective on the
first date of employment (i.e., November 1, 1998). Participation is
voluntary and requires employee contributions. Under the terms of the
Plan, you may elect coverage of $10,000 through $500,000. Coverage is
available on an individual basis or under a family plan.
9. The W. R. Grace & Co. Business Travel Accident Insurance Plan.
You will become a participant in this Plan effective on the first date
of your employment with the Company (i.e., November 1, 1998). The Plan
provides protection against death, permanent total disability or
dismemberment. The principal sum is 5 times your annual base salary
(with a maximum principal sum of $1,500,000). In your case, as in the
case of other executives, the usual requirements that you be away from
home or normal place of work and that you be on Company business do
not apply in --- order to be eligible for coverage.
10. The W. R. Grace & Co. Split-Dollar Life Insurance Program.
Commencing on August 1, 1999, you will have life insurance coverage
equal to 2 times your annual base salary rate under this Program. This
Program provides for split premiums between you and the Company with
life insurance coverage continuation into retirement and significant
accumulation of cash value after fifteen years of participation.
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Prior to the date you begin to participate in the Program, you will
participate in the Company's basic group term life insurance plan
under which coverage is 2 times your annual base salary.
Supplemental life insurance coverage, which is voluntary, is also
available at moderate rates based on your age, up to an additional 3
times your annual base salary (with a maximum of $1,500,000 of
supplemental coverage). Dependent life insurance is also available to
your spouse and unmarried dependent children to age 19 (or to age 23
if the child regularly attends school full-time).
11. The W. R. Grace & Co. Group Medical and Dental Plans.
Your participation under these plans are effective for eligible claims
incurred commencing on the first day of your employment (i.e.,
November 1, 1998) and offers protection to you, your spouse and
unmarried children to age 19 (age 23 if the child regularly attends
school full-time). The Headquarters network medical plan utilizes an
established network of doctors and hospitals in the South Florida
area. Employees in the network area have a choice of two options: a
Point-of-Service (POS) option allows them the choice of a network
provider or the freedom to go outside the network for medical care; an
HMO-like option locks them into using network providers. The network
has been assembled by United Healthcare and includes Board Certified
or Board Eligible physicians and quality area hospitals. Employees and
their family get to choose a primary care physician who oversees all
of their medical needs. As the medical plan is currently designed,
your cost for participation will be 30% of the monthly cost of
coverage (the Company will pay the remaining 70%).
Also available is a flexible spending account plan (the "FSA Plan")
for certain healthcare expenses (which are not covered by the basic
medical or dental plan). By using the FSA Plan, you may pay those
healthcare expenses on a pretax basis, up to $5,000 per year.
Finally, the Company currently sponsors a plan that provides
post-retirement medical coverage for eligible former employees. Under
current plan provisions, you will qualify for that coverage, if you
retire from the Company after you reach age 55 (since you currently
satisfy the other eligibility requirement - i.e., you have 10 years of
prior eligible service with the Company). In addition, as an
alternative to the age 55 eligibility requirement, you will be deemed
to satisfy that requirement (and the Company will provide you that
coverage, or coverage that duplicates that coverage), if you are
terminated by the Company without "Cause" during your Initial
Employment Term (including termination of your employment by the
Company without "Cause" following a "change in control" of the
Company, within the meaning of your "Executive Severance Agreement).
The cost of post-retirement medical coverage will be shared by you and
the Company.
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12. Executive Registry Program.
Under this Program you will have access to a network of medical
services offered by leading hospitals and medical centers in large
cities throughout the U.S. and abroad. These hospitals and medical
centers serve as sources where members can obtain high-quality
emergency medical care while traveling or temporarily living away from
home either in the U.S. or abroad.
Financial Counseling Program
As an officer of the Company, you will be eligible to participate in
the Company's Financial Counseling Program. This Program provides you with
financial and estate planning and income tax preparation assistance. The
Company will pay up to $9,000 per calendar year for reasonable expenses
regarding such assistance.
Company Car
The Company will arrange for you to lease, at the Company's expense,
an automobile for use on Company business and for your personal use. The terms
of the coverage will be the same as those provided for other officers of the
Company, and you may elect either (i) to have the Company provide you with a
new automobile of your choice in the larger Cadillac/Lincoln category or (ii)
to have the Company purchase for you from AlliedSignal your current vehicle (a
Lexus LX 470).
Executive Physical Program
As an officer of the Company, you will be eligible to receive a
Company-paid annual executive physical examination through the Cleveland Clinic
of Florida.
Club Membership
The Company will provide you with a membership at a country and
luncheon club of your choice. The Company will pay your membership deposit; and
annual dues will be paid by you.
Vacation
As an officer of Grace, you will be entitled to four weeks paid
vacation per full calendar year during your Initial Employment Term. You will
be entitled to carryover unused vacation time in accordance with applicable
Company policy.
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Security
During your period of employment with the Company, the Company will
provide appropriate security for you, your spouse and your primary residence
(including your residence in New Jersey, until that residence is sold).
Indemnification Commitment
The Company shall, to the extent permitted by applicable law,
indemnify you and hold you harmless from and against any liability you may
incur as a result of your performance of duties hereunder in accordance with
the provisions of this agreement. The Company shall obtain such policy or
policies of insurance as it may deem appropriate to effect this
indemnification.
Air Travel
In addition to the usual Company policies regarding air travel by
senior officers on Company business, the Company will provide you with travel
by chartered aircraft or with travel on an aircraft fractionally owned by the
Company, at times requested by you, after the aircraft currently owned by the
Company is no longer available.
Miscellaneous
This Agreement may be amended, superseded or canceled only by a
written instrument specifically stating that it amends, supersedes or cancels
this Agreement, executed by you and the Company.
You and the Company acknowledge that this agreement supersedes any
other agreement between you and the Company concerning the subject matter
hereof.
If you have any questions regarding any expectations of your new
position, please call me.
If you have any questions regarding the compensation and Company
benefit plans and programs, please feel free to call Bill Monroe, Vice
President, Human Resources, at (561) 362-2221.
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Paul, we are very excited about your joining the Grace organization
and look forward to a productive and mutually rewarding relationship.
Sincerely,
Albert J. Costello
Chairman, President
& Chief Executive Officer
Attachment
cc: J. F. Akers
W. L. Monroe
J. J. Murphy
AGREED AND ACCEPTED:
- -----------------------------
Paul J. Norris
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GRACE Albert J. Costello
Chairman, President & CEO
W. R. Grace & Co.
1750 Clint Moore Road
Boca Raton, FL 33487-2707
Tel: (561)362-2121
Tel: (561)362-2100
August 3, 1998
Mr. Robert H. Beber
One Town Center Road
Boca Raton, Florida 33486
Dear Bob:
This letter agreement specifies the terms of your consulting
arrangement with W. R. Grace & Co.-Conn. ("Grace"), which will commence on
September 1, 1998 (i.e., immediately after you retire as an active employee of
Grace). You will serve as a consultant to Grace, at the request of W. R. Grace
& Co., a Delaware corporation (and the parent of Grace). If you agree with the
terms of this letter, please sign where indicated below and return this letter
to me.
Services And Base Compensation
As you and I have discussed, your duties as a consultant to Grace will
include assisting Grace (and W. R. Grace & Co.) with respect to the management
of asbestos- related litigation, as well as other litigation, involving Grace
and W. R. Grace & Co., and their subsidiaries and affiliates, and other
projects mutually agreed to by you and Grace's General Counsel (the
"Litigation/Projects"). You will report to, and receive assignments from, the
General Counsel of Grace (or his designee).
During the "Initial Term" (as defined below) you will be available to
perform services for a total of 910 hours. (In counting such hours, travel time
to-and-from work locations -- e.g., the Boca Raton office, time on airplanes or
other modes of transportation -- will not be counted.) You will maintain
regular office hours at a Grace office in Boca Raton, Florida, as agreed
between you and Grace's General Counsel. You will be provided by Grace with
office space and secretarial support for those office hours, at that location,
at no cost to you.
As compensation for the services that you provide hereunder during the
Initial Term you will receive $150,000, accruing and payable in 24 equal
bi-monthly installments (each in the gross amount of $6,250). As further
compensation for those services, you may receive an award described under the
"Additional Compensation" section below.
<PAGE>
2
If, during the Initial Term, you perform services under this
consulting agreement for more than 910 hours, you will receive an additional
payment for each additional hour. That additional payment, along with the
manner of payment, will be agreed between you and Grace, when (and if) it
becomes clear that your services will be required for more than 910 hours
during the Initial Term. (The payments specified in the immediately preceding
paragraph, and any additional compensation amount payable to you under this
paragraph, are collectively referred to as your "Base Compensation".)
In no event may your Base Compensation during the Initial Term exceed
$300,000.
In order to effectuate these Base Compensation provisions, it will, of
course, be necessary for you to keep Grace apprised of the hours you perform
services hereunder. Therefore, as soon as practicable after the end of each
calendar month during the Initial Term, you will report, in writing (in a
manner acceptable to Grace), to Grace's General Counsel the actual number of
hours you performed services hereunder during the preceding calendar month,
along with a brief description of the specific services performed.
Grace will reimburse you for reasonable and necessary (which terms
shall be interpreted in accordance with Grace's practices with respect to its
senior officers) expenses (including travel expenses) directly related to
services performed by you for Grace pursuant to this letter agreement. In
addition, you will be entitled to the following prerequisites on the same basis
as senior officers of Grace: an annual executive physical, financial planning
advice and a company car, to the same extent that these items are available to
Grace senior officers. Also, if you travel on Grace business by air, you will
be permitted to fly first-class. Reimbursement of authorized expenditures will,
of course, be made only upon you providing itemized records of those
expenditures and related receipts that are acceptable to Grace. Periodically,
you will submit to Grace's General Counsel a statement (in a form that is
acceptable to Grace) that specifies a list of the reimbursable expenses
incurred by you that are related to such services and the appropriate records
and receipts regarding such expenses.
Term
The initial term of your consulting arrangement under this letter
agreement will be for a period of 1 year commencing on September 1, 1998 (the
"Commencement Date") and ending on August 31, 1999 (the "Initial Term Ending
Date") (such initial term is referred to in this letter agreement as the
"Initial Term"). The term of your consulting agreement may be extended for
succeeding periods on terms agreed by you and Grace.
This letter agreement will terminate and your Base Compensation will
cease to accrue immediately upon your failure or inability to observe or
perform your agreements, duties or responsibilities hereunder (including your
voluntary cessation of services hereunder), as determined by Grace. Further,
this letter agreement and your consulting arrangement is subject to termination
by Grace or you at any time for any reason, upon at least 60 days' notice to
the other party. Upon such termination, your Base Compensation shall cease to
accrue.
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3
Additional Compensation
Effective August 31, 1998, you will be awarded 40,000 additional
compensation units (the "Initial Units"). If you continue as a consultant under
this letter agreement until the Initial Term Ending Date, the 40,000 Initial
Units will become non-forfeitable as of that Date. Depending on your
performance during the Initial Term, the Grace Compensation Committee may
increase the number of Initial Units awarded to you by an amount not exceeding
25%. Any such increase will be based upon the recommendation of Grace's General
Counsel. That recommendation will be based upon the General Counsel's
evaluation of your overall performance as a consultant and your contribution to
the financial condition of Grace and its parent.
If, before the Initial Term Ending Date, Grace terminates your
consulting arrangement (except as provided in the next paragraph), or if you
die or become unable to perform your consulting duties as a result of your
physical disability (as determined by Grace), then the above-mentioned 40,000
Initial Units (which may be increased by a number not exceeding 25%, by the
Compensation Committee, in accordance with the immediately preceding paragraph)
will nevertheless become non-forfeitable as of the Initial Term Ending Date.
(In the event of your death, the Initial Units will become non-forfeitable on
behalf of, and exercisable by, your estate.)
If, before the Initial Term Ending Date, you voluntarily terminate
your consulting arrangement, or if Grace terminates your consulting arrangement
because of your failure to observe or perform your agreements, duties or
responsibilities hereunder (as determined by Grace), then no Initial Units will
be awarded to you.
If the Initial Units become non-forfeitable, you may elect to receive
a payment (or payments) from Grace, as a result of a valid election on any
business day during the "Election Period" (as defined below). Each such payment
will be calculated in accordance with the following formula: the price of a
share of W. R. Grace & Co. Common Stock ("Grace Common Stock") on the NYSE at
the close of business on a date elected by you in accordance with the election
procedures described below (the "Election Date") minus $17.03125 (which was the
average price of such a share on July 9, 1998).
The election procedure that you must follow in order to make a valid
election to exercise any number of Initial Units is as follows: Grace's highest
ranking human resources official (or his or her designee) must receive your
written request to exercise a specific number of Initial Units, between 8:30
a.m. and 4:00 p.m. on the business day you propose to exercise any number of
Initial Units (i.e., the proposed Election Date). That written request (which
may be faxed) must be signed by you. Regarding any such request received by
Grace after 4:00 p.m. on any business day, the Election Date will be the next
following business day. Once submitted, such a request may not be revoked. (You
should note that it will be your responsibility to assure that Grace receives
your written election in a timely manner. Therefore, you may wish to call Grace
to confirm receipt, if you fax or otherwise send the election to Grace.)
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4
Any payment due to you as a result of a valid election will be made as
soon as practicable after the Election Date (and you will not be permitted to
defer any payment due as a result of such an election).
If your first valid election to exercise Initial Units contains a
request to exercise less than 100% of your Initial Units, then you may exercise
your remaining (i.e., unexercised) Initial Units in one or more subsequent
elections during the Election Period. Each Initial Unit may only be exercised
once.
Elections may be made only during the Election Period, and you will
forfeit all rights to all unexercised Initial Units and payments attributable
thereto, as of 4:00 p.m. on the last day of the Election Period.
Notwithstanding the foregoing, you will forfeit all rights to all
unexercised Initial Units, and payments attributable thereto, if at any time
you engage in actions that are injurious to Grace (or its parent or
subsidiaries), monetarily or otherwise, or if you fail to adhere to any
agreement between you and Grace (or its parent or subsidiaries).
If any event occurs, before or after the Initial Term Ending Date,
which results in an adjustment with respect to options on Grace Common Stock
held by Grace employees, then the above formula will be equitably adjusted as
determined by the Grace Compensation Committee consistent with the adjustment
made with respect to such options. In all other respects, if any determinations
or clarifications are necessary or appropriate to the administration of, or
payments related to, Initial Units, that Committee will be solely responsible
for providing those determinations and clarifications, and its good-faith
determinations and clarifications will be binding on you, Grace and all other
interested parties.
"Exercise Period" means the period commencing on the Initial Term
Ending Date and ending on the 3rd anniversary of that Date.
Additional Arrangements
At your request, Grace will maintain for you subscriptions to
work-related professional publications, at a cost not to exceed $1,000 during
any 12-month period during the term of this letter agreement.
For the term of this agreement, you will be covered under the
"Directors and Officers" liability insurance policies, and general liability
(including excess liability) insurance policies, maintained by Grace, on the
same terms as applicable to senior officers of Grace. If you would like to
discuss the provisions of that coverage, please call Jeff Posner.
<PAGE>
5
Business Travel Accident Insurance
You will be covered, at no cost to you, for $600,000 under Grace's
Business Travel Accident Insurance Plan applicable to outside directors and
consultants. If you would like to discuss the provisions of that coverage,
please call Bill Monroe. You will not, of course, be entitled to participate in
any other employee benefit program maintained by Grace for active employees. Of
course, any Grace employee benefits inuring to you as a result of your prior
employment with Grace are not affected by the terms of this letter agreement.
General
The following provisions of this letter agreement shall survive the
termination of this letter agreement.
You will not (except in the performance of your duties under this
letter agreement) at any time make or cause to be made any copies or summaries
of any reports, manuals, records or other printed or otherwise recorded
materials of any kind belonging to, or in the possession of, Grace or any
parent or affiliate of Grace. You will have no right or interest in any such
material, and you agree that (except in the performance of your services
hereunder), you will not, without prior written consent of Grace, remove any
such material from any premises of Grace or any parent or affiliate of Grace,
and that you will surrender all such material to Grace immediately upon the
termination of this letter agreement or any time prior to such termination upon
the request of Grace.
Without the prior written consent of Grace, you will not at any time
(whether during or after the term of this letter agreement):
(i) use for your own benefit or purposes, or for the benefit or
purposes of any other person, firm, corporation or business
entity, or
(ii) disclose (except in the performance of your duties under this
letter agreement) in any manner to any person, firm, corporation
or business entity,
any trade secrets, data, knowledge or information belonging to, or relating to
the affairs of, Grace or any parent, subsidiary or affiliate of Grace.
Notwithstanding any other provision of this letter agreement to the
contrary, this letter agreement does not supersede, but is in addition to, any
non-competition or confidentiality agreement or understanding between you and
Grace or any parent, subsidiary or affiliate of Grace. The rights and remedies
of Grace under this letter agreement are independent of, and separate and
distinct from, its rights and remedies under any such other agreement or
understanding, and no default or termination under any such other agreement or
understanding shall in any way affect the obligations of you or the rights and
remedies of Grace under this letter agreement.
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6
You will promptly disclose to Grace (and to no one else) all
improvements and ideas that relate to the Litigation/Projects, which are made
or conceived by you alone or in conjunction with others during the term of this
letter agreement, or made or conceived within one year after the termination of
this letter agreement.
This letter agreement may be amended or superseded, and any of its
terms may be waived, only by a written instrument signed by you and Grace
specifically stating that it amends or supersedes this letter agreement, or
waives any such term.
All services under this letter agreement will be performed by you as
an independent contractor, and not as an employee of Grace. During the term of
your consulting arrangement, you are, of course, not authorized to: (i) enter
into contracts on behalf of Grace or (ii) otherwise commit Grace to any legally
binding obligations.
No representation, promise or inducement has been made by or on behalf
of you or Grace related to your consulting arrangement that is not set forth in
this letter agreement.
You acknowledge that Grace's remedy at law for any breach of any of
your duties or obligations enumerated under this "General" section would be
inadequate, that damages would be difficult or impossible to ascertain, and
that you consent that temporary and permanent injunctive relief may be granted
in accordance with equity in any proceeding which may be brought to enforce any
provision of this section without the necessity of proof of actual damage.
The failure of either you or Grace to require performance of the other
party's duties or obligations under this letter agreement at any time shall in
no manner affect either party's right to enforce any provision of this letter
agreement at a subsequent time, and the waiver by you or Grace of any right
arising out of any breach of this letter agreement shall not be construed as a
waiver of any right arising out of any other or subsequent breach of this
letter agreement.
If the scope of any restriction contained in this letter agreement is
too broad to permit enforcement of such restriction to its full extent, then
such restriction shall be enforced to the maximum extent permitted at law and
in equity, and in that event, you hereby consent that such scope may be
judicially modified accordingly in any proceeding brought to enforce such
restriction.
<PAGE>
7
This letter agreement is governed by and construed and enforced in
accordance with the laws of the State of New York, other than the
conflict-of-laws provisions of that State that would otherwise require the
application of the law of any other jurisdiction.
Bob, I look forward to working with you in your new capacity as a
consultant working on the Litigation/Projects.
Sincerely,
Accepted and Agreed to: Accepted and Agreed
by W. R. Grace & Co.
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
Date Date
<PAGE>
Exhibit 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a)
(in millions, except ratios)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31 (c) September 30,
----------------------------------------------------- ------------------
1997(d) 1996(e) 1995(f) 1994(g) 1993(h) 1998 1997 (c)(d)
------- ------- ------- ------- ------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income/(loss) from
continuing operations ......................... $ 88.2 $112.9 $(324.8) $(185.4) $(106.7) $ 63.6 $107.3
Add/(deduct)
Provision for/(benefit from)
income taxes .................................. 55.2 70.4 (192.4) (120.9) (55.5) 40.7 65.9
Income taxes of 50%-owned companies ........... -- -- -- -- .1 -- --
Equity in unremitted (earnings)/losses of
less than 50%-owned companies ................. (7.0) (.4) .8 (.6) (.5) (7.6) (.7)
Interest expense and related financing costs,
including amortization of capitalized
interest .................................... 87.6 160.8 179.8 138.5 122.7 28.6 65.0
Estimated amount of rental expense
deemed to represent the interest factor ....... 6.9 8.4 8.5 10.1 11.3 2.9 3.9
------ ------ ------- ------- ------- ------ ------
Income/(loss) as adjusted ......................... $230.9 $352.1 $(328.1) $(158.3) $ (28.6) $128.2 $241.4
====== ====== ======= ======= ======= ====== ======
Combined fixed charges and preferred stock
dividends
Interest expense and related
financing costs, including capitalized
interest .................................... $ 92.4 $177.1 $ 195.5 $ 143.2 $ 122.8 $ 28.3 $ 72.9
Estimated amount of rental expense
deemed to represent the interest factor ....... 6.9 8.4 8.5 10.1 11.3 2.9 3.9
------ ------ ------- ------- ------- ------ ------
Fixed charges ..................................... 99.3 185.5 204.0 153.3 134.1 31.2 76.8
Preferred stock dividend requirements (b).......... -- .6 .5 .5 .8 -- --
------ ------ ------- ------- ------- ------ ------
Combined fixed charges and preferred
stock dividends ................................. $ 99.3 $186.1 $ 204.5 $ 153.8 $ 134.9 $ 31.2 $ 76.8
====== ====== ======= ======= ======= ====== ======
Ratio of earnings to fixed charges ................ 2.33 1.90 (i) (i) (i) 4.11 3.14
====== ====== ======= ======= ======= ====== ======
Ratio of earnings to combined fixed charges
and preferred stock dividends ................. 2.33 1.89 (i) (i) (i) 4.11 3.14
====== ====== ======= ======= ======= ====== ======
</TABLE>
(a) Grace's preferred stocks were retired in 1996; for additional information,
see Note 1 to the Consolidated Financial Statements in the 1996 10-K.
(b) For each period with an income tax provision, the preferred stock dividend
requirements have been increased to an amount representing the pretax
earnings required to cover such requirements based on Grace's effective tax
rate.
(c) Certain amounts have been restated to conform to the 1998 presentation.
(d) Includes a pretax gain of $103.1 on sale of business, offset by a pretax
provision of $4.0 for restructuring costs and asset impairments.
(e) Includes a pretax gain of $326.4 on the sale of a business, offset by
pretax provisions of $229.1 for asbestos-related liabilities and insurance
coverage and $34.7 for restructuring costs and asset impairments.
(f) Includes pretax provisions of $275.0 for asbestos-related liabilities and
insurance coverage; $151.3 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.
(g) Includes a pretax provision of $316.0 relating to asbestos-related
liabilities and insurance coverage.
(h) Includes a pretax provision of $159.0 relating to asbestos-related
liabilities and insurance coverage.
(i) As a result of the losses incurred for the years ended December 31, 1995,
1994 and 1993, Grace was unable to fully cover the indicated fixed charges.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 87,400
<SECURITIES> 0
<RECEIVABLES> 391,000
<ALLOWANCES> 6,100
<INVENTORY> 138,500
<CURRENT-ASSETS> 878,900<F1>
<PP&E> 1,513,000
<DEPRECIATION> 856,200
<TOTAL-ASSETS> 2,471,500<F1>
<CURRENT-LIABILITIES> 871,300
<BONDS> 0
0
0
<COMMON> 800
<OTHER-SE> 324,400
<TOTAL-LIABILITY-AND-EQUITY> 2,471,500
<SALES> 1,091,000<F2>
<TOTAL-REVENUES> 1,122,400
<CGS> 662,300
<TOTAL-COSTS> 662,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,100<F3>
<INCOME-PRETAX> 104,300
<INCOME-TAX> 40,700
<INCOME-CONTINUING> 63,600
<DISCONTINUED> (2,600)<F4>
<EXTRAORDINARY> (35,200)<F5>
<CHANGES> 0
<NET-INCOME> 25,800
<EPS-PRIMARY> .34
<EPS-DILUTED> .32
<FN>
<F1> Includes net assets of discontinued operations of $8,200.
- -------------------------------------------------------------------------------
<F2> Excludes sales of $431,200 of the Packaging Business, which was
classified as a discontinued operation as of December 31, 1997.
- -------------------------------------------------------------------------------
<F3> Excludes interest expense allocated to Grace's discontinued operations
of $13,300 ($8,700 after-tax).
- -------------------------------------------------------------------------------
<F4> Includes pretax operating income of the Packaging Business of $60,500
($39,900 after-tax), allocated interest expense of $13,300 ($8,700
after-tax), costs related to the Packaging Business transaction of
$32,600 ($28,300 after-tax) and a related pension plan curtailment
loss of $8,400 ($5,500 after-tax).
- -------------------------------------------------------------------------------
<F5> Reflects extraordinary loss on extinguishment of debt, net of tax.
- -------------------------------------------------------------------------------
</FN>
</TABLE>
