<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
W.R. GRACE & CO.
(Name of Registrant as Specified in its Charter)
N/A
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was
determined):
---------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
<PAGE>
(GRACE LOGO)
Paul J. Norris
Chairman, President & Chief Executive Officer
W. R. Grace & Co.
1750 Clint Moore Road
Boca Raton, FL 33487-2707
March 29, 1999
To Our Stockholders:
I am pleased to invite you to the Annual Meeting of Stockholders of W. R. Grace
& Co. to be held on Tuesday, May 11, 1999 at 10:00 a.m. at the Sheraton Hotel,
10207 Wincopin Circle, Columbia, Maryland. As we announced in January, Columbia
will become the new headquarters of Grace later this year when our executive
offices relocate from Boca Raton, Florida.
At the meeting, I will present an overview of Grace, discuss the recently
implemented productivity initiatives and describe my plans for growth.
This year, for the first time, we are offering you the opportunity to vote by
telephone, as well as by proxy or in person. Details about the meeting and how
to vote are contained in the accompanying Annual Notice of Meeting and Proxy
Statement. I look forward to seeing you at the meeting.
Sincerely,
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Notice of Annual Meeting...........................................................................1
Election of Directors..............................................................................2
Board Committees and Meetings.............................................................2
Nominees..................................................................................3
Directors Continuing in Office............................................................4
Compensation..............................................................................6
Summary Compensation Table...........................................................6
Stock Options........................................................................8
LTIP.................................................................................9
Pension Arrangements.................................................................9
Employment Agreements...............................................................11
Severance Agreements................................................................12
Executive Salary Protection Plan....................................................12
Directors' Compensation and Consulting Arrangements.................................13
Compensation Committee Interlocks and Insider Participation.........................13
Performance Comparison..............................................................13
Report of the Compensation Committee on Executive Compensation......................14
Relationships and Transactions with Management and Others................................18
Commercial Transactions.............................................................18
Legal Proceedings; Indemnification..................................................18
Security Ownership of Management and Others.......................................................18
Management Security Ownership............................................................18
Ownership and Transactions Reports.......................................................20
Selection of Independent Accountants..............................................................20
Other Matters.....................................................................................21
Other Business...........................................................................21
Proxy and Voting Procedures..............................................................21
Votes Required...........................................................................21
Solicitation Procedures..................................................................22
Proposals for 2000 Annual Meeting........................................................22
</TABLE>
<PAGE>
NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders of W. R. Grace & Co. will be held at
the Sheraton Hotel, 10207 Wincopin Circle, Columbia, Maryland at 10:00 a.m. on
Tuesday, May 11, 1999. At the Annual Meeting, stockholders will vote on the
following matters:
(1) the election of two directors for a term expiring in 2002;
(2) the selection of PricewaterhouseCoopers LLP as independent
accountants of the Company and its consolidated subsidiaries for 1999; and
(3) any other business that properly comes before the Annual Meeting.
The Board of Directors has fixed the close of business on March 12,
1999 as the record date for the determination of stockholders entitled to notice
of and to vote at the Annual Meeting.
David B. Siegel
Secretary
March 29, 1999
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<PAGE>
PROXY STATEMENT
The Annual Meeting of Stockholders of W. R. Grace & Co. will be held on
May 11, 1999. The Company is furnishing this Proxy Statement in connection with
the solicitation of proxies to be used at the Annual Meeting and any
adjournments. The Company's mailing address is 1750 Clint Moore Road, Boca
Raton, Florida 33487-2707. This Proxy Statement and the enclosed proxy are first
being sent to stockholders on March 30, 1999.
Only stockholders of record at the close of business on March 12, 1999
are entitled to vote at the Annual Meeting and any adjournments. At that record
date, 71,523,877 shares of the Company's Common Stock were outstanding. The
Common Stock is the Company's only class of voting securities outstanding. See
"Other Matters" for additional information concerning the voting of proxies.
As used in this Proxy Statement, the term "Grace" or "Company" refers
to W. R. Grace & Co., a Delaware corporation or its predecessors and, where
applicable, their consolidated subsidiaries, and the term "Common Stock" refers
to the Company's Common Stock.
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for the division of
the Board of Directors into three classes, each to serve for a three-year term.
The term of the Class I Directors expires at the 1999 Annual Meeting.
Accordingly, the stockholders will vote on the election of two Class I Directors
to serve for a term expiring in 2002. The biographies of the nominees, Dr. Marye
Anne Fox and Thomas A. Vanderslice, are set forth on pages 3 and 4, and the
biographies of the directors continuing in office are set forth on pages 4
and 5.
The Board of Directors has designated Dr. Fox and Mr. Vanderslice as
nominees (on the recommendation of the Nominating Committee), and it is
anticipated that both nominees will be candidates when the election is held.
However, if for any reason either nominee is not a candidate at that time,
proxies will be voted for any substitute nominee designated by the Company
(except where a proxy withholds authority with respect to the election of
directors).
On March 15, 1999, the Board of Directors amended the Company's By-laws
to permit the Board to nominate only a person who, at the time of his or her
election, would be less than 69 years old. Previously, the By-laws permitted the
Board to nominate only a person who would be less than 70 years old upon the
expiration of his or her term. This amendment permitted the Board of Directors
(on the recommendation of the Nominating Committee) to nominate Mr. Vanderslice
as a candidate for a Class I Director at the 1999 Annual Meeting of
Stockholders, and would permit the Board to nominate Mr. Murphy, currently a
Class II Director, as a candidate for reelection as a Class II Director at the
2000 Annual Meeting of Stockholders if the Nominating Committee chooses to do
so. The Board believes this amendment is in the best interests of the Company
and its stockholders in light of the need for continuity during a period of
change in the management of the Company, including the election of a new
President and Chief Executive Officer.
BOARD COMMITTEES AND MEETINGS
To facilitate independent director review and to make the most
effective use of the directors' time and capabilities, the Board of Directors
has established the committees described below. None of the members of these
committees is an executive or former executive of the Company or serves or has
ever served as a consultant to the Company.
The Audit Committee is responsible for reviewing the financial
information the Company provides to stockholders and others, the Company's
internal controls, and its auditing, accounting and financial reporting
processes generally. The Committee's specific responsibilities include (1)
recommending to the Board the selection of independent accountants to audit
the annual financial statements of the Company and its consolidated
subsidiaries, (2)
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<PAGE>
reviewing the annual financial statements and (3) meeting with the Company's
senior financial officers, internal auditors and independent accountants to
review the scope and results of the audit and other matters regarding the
Company's accounting, financial reporting and internal control systems. The
current members of the Committee are Mr. Murphy (Chair), Mr. Akers, Mr. Cambre,
Dr. Fox and Mr. Vanderslice. The Committee met four times during 1998.
The Compensation Committee makes recommendations to the Board with
respect to the salary and annual and long-term incentive compensation of certain
officers and other high-level employees, as well as the Company's benefit plans,
programs and arrangements generally. The Compensation Committee also takes
actions with respect to and administers the Company's stock incentive plans,
determining the recipients and terms of stock incentives. The current members of
the Compensation Committee are Mr. Akers (Chair), Mr. Cambre, Dr. Fox, Mr.
Murphy and Mr. Vanderslice. In 1998, the Compensation Committee met nine times.
The Nominating Committee recommends to the Board candidates for
nomination as directors of the Company and candidates for election as chief
executive officer. The current members of the Committee are Mr. Murphy (Chair),
Mr. Akers, Mr. Cambre, Dr. Fox and Mr. Vanderslice. The Committee met three
times in 1998. The Committee will consider candidates recommended by
stockholders for nomination as directors; recommendations should be sent to the
Chair of the Nominating Committee, c/o David B. Siegel, Secretary, W. R. Grace &
Co., 1750 Clint Moore Road, Boca Raton, Florida 33487-2707.
The Company's employment policy prohibits discrimination and encourages
diversity. Consistent with this policy, the Board (including the Nominating
Committee) recognizes that its composition should reflect the global nature of
the Company's operations and the diversity of its workforce. Consequently, the
Board intends to achieve greater diversity as vacancies and other opportunities
occur.
The Committee on Corporate Responsibility advises management on the
Company's role in the public sector and its responsibility with respect to
matters of public policy. The Committee met once in 1998. Its members are Dr.
Fox (Chair), Mr. Akers, Mr. Cambre, Mr. Murphy and Mr. Vanderslice.
The Board of Directors held nine meetings in 1998. Each current
director attended 75% or more of the 1998 meetings of the Board and the Board
committees on which he or she served in 1998.
NOMINEES
NOMINEES FOR ELECTION AS CLASS I DIRECTORS
TERM EXPIRING IN 2002
Marye Anne Fox Dr. Fox is Chancellor of North Carolina State University and
Director since 1996 Professor of Chemistry at that institution. Previously she
Age: 51 was Vice President for Research and the Waggoner Regents
Chair in Chemistry of the University of Texas, positions she
held from 1994 and 1992, respectively, until 1998; she was
on the faculty of the University of Texas from 1976 until
1998. Dr. Fox received a B.S. in chemistry from Notre Dame
College, an M.S. in organic chemistry from Cleveland State
University and a Ph.D. in organic chemistry from Dartmouth
College; she also holds honorary doctoral degrees from Notre
Dame College and Cleveland State University. Dr. Fox has
served as Vice Chair of the National Science Board and has
received numerous honors and awards from a wide variety of
educational and professional organizations. She has also
served on several editorial boards and has authored
approximately 350 publications, including five books and
more than 20 book chapters.
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<PAGE>
Thomas A. Vanderslice Mr. Vanderslice began his career with General Electric
Director since 1996 Company, where he spent 23 years in various technical,
Age: 67 management and executive positions, including Executive
Vice President and sector executive of General Electric's
power systems business. He subsequently served as
President and Chief Operating Officer of GTE Corporation,
as Chairman and Chief Executive Officer of Apollo
Computer, Inc., and, from 1989 to 1995, as Chairman and
Chief Executive Officer of M/A-COM, Inc., a designer and
manufacturer of radio frequency and microwave components,
devices and subsystems for commercial and defense
applications. He is a director of Texaco Inc., a trustee
of Boston College, and Chairman of the Massachusetts High
Technology Council. He is also a member of the National
Academy of Engineering, the American Chemical Society and
the American Institute of Physics. Mr. Vanderslice
received a B.S. in chemistry and philosophy from Boston
College and a Ph.D. in chemistry and physics from Catholic
University; he holds several patents and has written
numerous technical articles.
DIRECTORS CONTINUING IN OFFICE
CLASS II DIRECTORS - TERM EXPIRING IN 2000
John F. Akers Mr. Akers served as Chairman of the Board and Chief
Director since 1997 Executive Officer of International Business Machines
Age: 64 Corporation from 1985 until his retirement in 1993,
completing a 33-year career with IBM. He is a director of
Hallmark Cards, Inc., Lehman Brothers Holdings, Inc., The
New York Times Company, PepsiCo, Inc. and Springs
Industries, Inc. He also serves on the U.S. advisory board
of Zurich Insurance Company and on the advisory board of
Directorship. A graduate of Yale University with a B.S. in
industrial administration, Mr. Akers formerly served on
the boards of trustees of the California Institute of
Technology and the Metropolitan Museum of Art, as Chairman
of the Board of Governors of United Way of America, and as
a member of President Bush's Education Policy Advisory
Committee.
John J. Murphy Mr. Murphy retired in 1996 as Chairman of the Board of
Director since 1997 Dresser Industries, Inc., a supplier of products and
Age: 67 technical services to the energy industry. He joined
Dresser as an engineer in 1952 and spent his entire career
with Dresser, serving as its Chief Executive Officer from
1983 to 1995. Since January 1997, he has been a Managing
Director of SMG Management L.L.C., a privately owned
investment group. Mr. Murphy is a director of CARBO
Ceramics, Inc., Kerr-McGee Corporation, PepsiCo, Inc. and
Shaw Industries Ltd.; a former trustee of Southern
Methodist University and St. Bonaventure University; a
former Chairman of the Board of the U.S.-Russia Business
Council; and currently a graduate member of The Business
Council. He received a bachelor's in mechanical
engineering from Rochester Institute of Technology, a
master's of business administration from Southern
Methodist University and an honorary doctorate of
commercial science from St. Bonaventure University.
-4-
<PAGE>
CLASS III DIRECTORS -TERM EXPIRING IN 2001
Ronald C. Cambre Mr. Cambre is Chairman, President and Chief Executive
Director since 1998 Officer of Newmont Mining Corporation. He joined Newmont
Age: 60 as Vice Chairman and CEO in 1993 and has served as
Chairman since 1995. He began his career with
International Paper and subsequently spent 30 years
managing mining and manufacturing operations for
Freeport-McMoRan, both in the U.S. and internationally.
Mr. Cambre is a director of Cleveland-Cliffs Inc. He
also serves on the Louisiana State University College of
Engineering Advisory Council, the University of Colorado's
Institute for International Business Global Advisory Board
and Harvard University's John F. Kennedy School of
Government Advisory Board. Mr. Cambre is a chemical
engineering graduate of Louisiana State University and
also attended the Harvard Business School Program for
management development.
Paul J. Norris Mr. Norris is Chairman, President and Chief Executive
Director since 1998 Officer of Grace. He was elected President and CEO when he
Age: 51 joined Grace in November 1998. He assumed the title of
Chairman in January 1999. Mr. Norris was previously Senior
Vice President of AlliedSignal Incorporated and President
of its specialty chemicals business since January 1997.
Mr. Norris joined AlliedSignal in 1989 as President of its
fluorine products/chemicals and catalysts businesses. From
1981 to 1989, Mr. Norris served in various executive
capacities with Engelhard Corporation, including President
of catalysts and chemicals, Senior Vice President and
General Manager of catalysts, and Vice President and
Business Director for petroleum catalysts. Mr. Norris
started his career with Grace in 1971, working in Grace
Davison's catalysts and silica products business. Mr.
Norris is a graduate of Mt. St. Mary's College in
Emmitsburg, Maryland and holds an M.B.A. from the
University of Maryland.
See "Compensation," "Relationships and Transactions with Management and
Others" and "Security Ownership of Management and Others" for additional
information.
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<PAGE>
COMPENSATION
Summary Compensation Table. The following Summary Compensation Table
contains information concerning the compensation of (a) Paul J. Norris, Chief
Executive Officer; (b) the other four most highly compensated executive officers
of Grace who were serving as such at year-end 1998; and (c) Albert J. Costello,
who served as Chief Executive Officer until November 1, 1998 and Chairman until
December 31, 1998. Certain information has been omitted from the Summary
Compensation Table because it is not applicable or because it is not required
under the rules of the Securities and Exchange Commission ("SEC").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- --------------------------------------------
AWARDS PAYOUTS
----------------------------- -------------
NO. OF SHARES
OTHER RESTRICTED UNDERLYING ALL
NAME AND PRINCIPAL ANNUAL STOCK OPTIONS LTIP OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARD(a) GRANTED(b) PAYOUTS(c) COMPENSATION(d)
-------- ---- ------ ----- ------------ --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
P. J. Norris 1998(e) $120,833 $250,000 $2,966,486 439,026 $ 3,819
Chairman, President 1997
and Chief Executive 1996
Officer
L. Ellberger 1998 324,167 151,000 280,000 155,000 $2,591,374 54,921
Senior Vice 1997 302,083 280,000 36,411 779,717 30,388
President and Chief 1996 283,083 200,000 56,531 178,369 46,464
Financial Officer
J. R. Hyde 1998 289,800 125,000 155,000 2,300,496 29,129
Senior Vice 1997 282,600 36,411 1,155,112 28,047
President 1996 272,600 130,000 73,370 670,596 30,568
R. J. Bettacchi 1998 242,500 170,000 130,000 1,905,438 37,358
Senior Vice 1997 229,550 170,000 28,320 831,416 23,899
President 1996 214,100 170,000 43,967 205,183 17,030
D. B. Siegel (f) 1998 240,000 108,000 202,000 130,000 1,491,352 16,737
Senior Vice 1997 224,450 125,000 20,903 719,791 14,638
President, General 1996 214,550 115,000 60,716 428,085 12,649
Counsel and
Secretary
A. J. Costello (g) 1998 970,000 624,826 62,563 (h) 100,000 11,739,326 107,218
Chairman, President 1997 958,333 762,271 190,143 3,346,724 228,251
and Chief Executive 1996 900,000 582,075 348,933 799,116 40,122
Officer
</TABLE>
(Footnotes appear on following page)
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<PAGE>
- ------------------
(a) At December 31, 1998, the dollar value of the restricted shares was
$2,678,374 for Mr. Norris, $219,625 for Mr. Ellberger and $158,444 for
Mr. Siegel. The restrictions on shares issued to Mr. Norris lapse in
one-third increments over three years, and the restrictions on shares
issued to Mr. Ellberger and Mr. Siegel expire April 2, 2001.
Restrictions will lapse earlier under certain circumstances such as a
change of control.
(b) The share amounts shown in this column reflect adjustments made to give
effect to (i) the September 1996 separation of Grace's principal health
care businesses and merger of such businesses with a subsidiary of
Fresenius A.G. (the "1996 Transaction"), and (ii) the March 1998
separation of Grace's packaging business and merger of such business
with Sealed Air Corporation (the "1998 Transaction").
(c) The amounts in this column for 1998 represent amounts paid under the
Long-Term Incentive Program ("LTIP") for the 1995-1997 Performance
Period, the 1996-1998 Performance Period and the 1997-1999 Performance
Period. (See "LTIP" for discussion of LTIP termination and the impact
of the 1998 Transaction.) The amounts in this column for 1997 represent
amounts paid under the LTIP for the 1994-1996 Performance Period. The
amounts in this column for 1996 represent amounts paid under the LTIP
for the 1993-1995 Performance Period.
(d) The amounts in this column for 1998 consist of the following:
(i) above-market interest earned on deferred compensation, as
follows: Mr. Ellberger -- $33,724; Mr. Hyde -- $12,472;
Mr. Bettacchi -- $18,851; and Mr. Costello -- $40,338;
(ii) the actuarially determined value of company-paid premiums on
"split-dollar" life insurance, as follows: Mr. Ellberger --
$2,495; Mr. Hyde -- $7,387; Mr. Bettacchi -- $5,556; Mr. Siegel
-- $5,359; and Mr. Costello -- $13,750;
(iii) payments made to persons whose personal and/or company
contributions to Grace's Salaried Employees Savings and
Investment Plan ("Savings Plan") would be subject to limitations
under federal income tax law, as follows: Mr. Ellberger --
$13,325; Mr. Hyde -- $3,894; Mr. Bettacchi -- $7,575; Mr. Siegel
-- $6,150 and Mr. Costello -- $47,168;
(iv) company contributions to the Savings Plan of $3,625 for
Mr. Norris and $4,800 for each of Messrs. Ellberger, Hyde,
Bettacchi, Siegel and Costello; and
(v) the value of company-provided personal liability insurance, as
follows: Mr. Norris -- $194; Messrs. Ellberger, Hyde and
Bettacchi -- $577; Mr. Siegel -- $428; and Mr. Costello --
$1,162.
(e) Mr. Norris became President and Chief Executive Officer on November 1,
1998 and Chairman on January 1, 1999.
(f) Mr. Siegel became an executive officer on July 9, 1998.
(g) Mr. Costello was President and Chief Executive Officer until October
31, 1998 and Chairman until December 31, 1998.
(h) This amount includes $40,235 as the value attributable to the personal
use by Mr. Costello of the corporate aircraft, and $16,460 as the value
of a company-provided automobile.
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<PAGE>
Stock Options. The following table contains information concerning
stock options granted in 1998, including the potential realizable value of each
grant assuming that the market value of the Grace Common Stock were to
appreciate from the date of grant to the expiration of the option at annualized
rates of (a) 5% and (b) 10%, in each case compounded annually over the term of
the option. For example, the options granted to Mr. Norris in 1998 would produce
a pretax gain of $11,719,887 shown in the table only if the market price of the
Common Stock rises to $43.45 per share by the time the options are exercised;
based on the number and market price of the shares outstanding at year-end 1998,
such an increase in the price of the Common Stock would produce a corresponding
aggregate pretax gain of nearly $1.8 billion for the Company's stockholders. The
assumed rates of appreciation shown in the table have been specified by the SEC
for illustrative purposes only and are not intended to predict future stock
prices, which will depend upon various factors, including market conditions and
future performance and prospects.
Options become exercisable at the time or times determined by the
Compensation Committee of the Board of Directors; the options shown below become
exercisable in three approximately equal annual installments beginning one year
after the date of grant or upon the earlier occurrence of a "change in control"
(see "Employment Agreements" and "Severance Agreements"). Mr. Costello's options
became exercisable in full upon his retirement on December 31, 1998. All of the
options shown below have purchase prices equal to the fair market value of Grace
Common Stock at the date of grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
1998 GRANTS TERM
---------------------------------------------------------------- --------------------------------
NO. OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO PURCHASE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED IN 1998 ($/SHARE) DATE 5% 10%
- ---- -------------- --------------- ------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
P. J. Norris. . . . . . 439,026 13.24% $16.7500 10/31/08 $4,624,700 $11,719,887
L. Ellberger. . . . . . 155,000 4.67 19.4688 3/31/08 1,897,789 4,809,387
J. R. Hyde. . . . . . . 155,000 4.67 19.4688 3/31/08 1,897,789 4,809,387
R. J. Bettacchi . . . . 130,000 3.92 19.4688 3/31/08 1,591,694 4,033,679
D. B. Siegel. . . . . . 130,000 3.92 19.4688 3/31/08 1,591,694 4,033,679
A. J. Costello (1) . . 100,000 3.01 19.4688 12/31/01 306,880 644,420
All Stockholders . . . -- -- -- -- 703,900,509 1,783,814,947
Named Executive
Officers' Percentage of
Realizable Value Gained
by All Stockholders. . -- -- -- -- 1.7% 1.7%
</TABLE>
(1) Mr. Costello's options became exercisable in full upon his retirement
on December 31, 1998 and have a three year expiration date, i.e.,
December 31, 2001.
The following table contains information concerning stock options
exercised in 1998, including the "value realized" upon exercise (the difference
between the total purchase price of the options exercised and the market
value, at the date of exercise, of the shares acquired), and the value of
unexercised "in-the-money" options
-8-
<PAGE>
held at December 31, 1998 (the difference between the aggregate purchase price
of all such options held and the market value of the shares covered by such
options at December 31, 1998). As noted above, upon his retirement on
December 31, 1998, all of Mr. Costello's options became exercisable.
<TABLE>
<CAPTION>
OPTION EXERCISES IN 1998 AND OPTION VALUES AT 12/31/98 (1)
-------------------------------------------------------------------------------------------------
NO. OF
SHARES NO. OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-
ACQUIRED UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
ON VALUE 12/31/98 12/31/98
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------- ----------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C>
P. J. Norris. . . . 0 0 0 / 439,026 $0 / $0 (2)
L. Ellberger. . . . 15,863 65,715 536,424 / 198,118 3,393,545 / 157,672
J. R. Hyde . . . . . 153,531 2,153,319 711,401 / 204,398 6,452,747 / 182,741
R. J. Bettacchi. . . 0 0 548,197 / 163,536 5,051,866 / 122,633
D. B. Siegel. . . . 80,912 1,034,929 134,020 / 164,175 970,588 / 128,127
A. J. Costello. . . 600,000 5,848,250 2,132,669 / 0 13,886,672 / NA
</TABLE>
(1) The number of shares covered by each option and the purchase price of
each option reflect adjustments made in connection with the 1996
Transaction and the 1998 Transaction.
(2) Option price greater than market value.
Long-Term Incentive Program (LTIP)
In connection with the 1998 Transaction and the determination of the
Compensation Committee: (a) Performance Units granted for the 1996-1998 and
1997-1999 Performance Periods vested on a pro rata basis on March 31, 1998, the
completion date of the 1998 Transaction; (b) the amounts earned under those
Units were calculated based on results achieved through March 31, 1998; (c) 75%
of the estimated value of such vested portions was paid in cash prior to
completion of the 1998 Transaction; (d) the balance of such vested portions was
paid in cash following completion of the 1998 Transaction; and (e) the value of
the unvested portions, which is based on targeted Performance Units and on the
final average price of Grace Common Stock immediately prior to completion of the
1998 Transaction, will be paid in cash following the end of the respective
Performance Periods (subject to continued service). The Compensation Committee
also determined that no further grants will be made under the LTIP.
Pension Arrangements. Salaried employees of designated units who are 21
or older and who have one or more years of service are eligible to participate
in the Retirement Plan for Salaried Employees. Under this basic retirement plan,
pension benefits are based upon (a) the employee's average annual compensation
for the 60 consecutive months in which his or her compensation is highest during
the last 180 months of continuous participation and (b) the number of years of
the employee's credited service. For purposes of this basic retirement plan,
compensation generally includes nondeferred base salary and nondeferred annual
incentive compensation (bonus) awards; however, for 1998, federal income tax law
limited to $160,000 the annual compensation on which benefits under this plan
may be based.
Grace also has a Supplemental Executive Retirement Plan under which a
covered employee will receive the full pension to which he or she would be
entitled in the absence of the above and other limitations imposed
-9-
<PAGE>
under federal income tax law. In addition, this supplemental plan recognizes
deferred base salary, deferred annual incentive compensation awards and, in some
cases, periods of employment during which an employee was ineligible to
participate in the basic retirement plan. An employee will generally be eligible
to participate in the supplemental plan if he or she has an annual base salary
of at least $75,000 and is earning credited service under the basic retirement
plan.
The following table shows the annual pensions payable under the basic
and supplemental plans for different levels of compensation and years of
credited service. The amounts shown have been computed on the assumption that
the employee retired at age 65 on January 1, 1999, with benefits payable on a
straight life annuity basis. Such amounts are subject to (but do not reflect) an
offset of 1.25% of an estimate of the employee's primary Social Security benefit
at retirement age for each year of credited service under the basic and
supplemental plans.
<TABLE>
<CAPTION>
HIGHEST
AVERAGE
ANNUAL
COMPENSATION YEARS OF CREDITED SERVICE
- ------------------ ------------------------------------------------------------------------------------------------------------
10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------------ ---------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $15,000 $22,500 $30,000 $37,500 $45,000 $52,500
200,000 30,000 45,000 60,000 75,000 90,000 105,000
300,000 45,000 67,500 90,000 112,500 135,000 157,500
400,000 60,000 90,000 120,000 150,000 180,000 210,000
500,000 75,000 112,500 150,000 187,500 225,000 262,500
600,000 90,000 135,000 180,000 225,000 270,000 315,000
700,000 105,000 157,500 210,000 262,500 315,000 367,500
800,000 120,000 180,000 240,000 300,000 360,000 420,000
900,000 135,000 202,500 270,000 337,500 405,000 472,500
1,000,000 150,000 225,000 300,000 375,000 450,000 525,000
1,100,000 165,000 247,500 330,000 412,500 495,000 577,500
1,200,000 180,000 270,000 360,000 450,000 540,000 630,000
1,300,000 195,000 292,500 390,000 487,500 585,000 682,500
1,400,000 210,000 315,000 420,000 525,000 630,000 735,000
1,500,000 225,000 337,500 450,000 562,500 675,000 787,500
1,600,000 240,000 360,000 480,000 600,000 720,000 840,000
1,700,000 255,000 382,500 510,000 637,500 765,000 892,500
1,800,000 270,000 405,000 540,000 675,000 810,000 945,000
1,900,000 285,000 427,500 570,000 712,500 855,000 997,500
2,000,000 300,000 450,000 600,000 750,000 900,000 1,050,000
2,100,000 315,000 472,500 630,000 787,500 945,000 1,102,500
2,200,000 330,000 495,000 660,000 825,000 990,000 1,155,000
</TABLE>
At December 31, 1998, Messrs. Norris, Ellberger, Bettacchi, Hyde,
Siegel and Costello had 6.83, 3.6, 27, 36, 21.75 and 3.7 years of credited
service, respectively, under the basic and supplemental retirement plans. (Mr.
Norris' years of credited service includes his eligible service with Grace from
1975 to 1981.) For purposes of those plans, the 1998 compensation of such
executive officers was as follows: Mr. Norris -- $120,833; Mr. Ellberger --
$604,167; Mr. Hyde -- $289,800; Mr. Bettacchi -- $412,500; Mr. Siegel --
$365,000; and Mr. Costello -- $1,732,271. Mr. Ellberger is entitled to
additional pension benefits under his employment agreement, and Mr. Norris
is eligible for additional pension benefits under his employment agreement
if his employment continues beyond October 31, 2001, or if he is
terminated without cause (see "Employment Agreements").
-10-
<PAGE>
Employment Agreements. Mr. Norris has an employment agreement providing
for his service as Chairman, President and Chief Executive Officer of Grace
through October 31, 2001, subject to extension by agreement between Mr. Norris
and the Board of Directors. Under this agreement, Mr. Norris is entitled to an
annual base salary of $725,000, and an annual incentive award (bonus) for each
calendar year that is equal to 65% of his annual base salary, except that
$250,000 was specified as his incentive award for the 1998 calendar year. The
agreement also provides that Mr. Norris' annual base salary and incentive award
is generally subject to annual review by the Board and the Compensation
Committee. Under the agreement, Mr. Norris received a "non-statutory" stock
option grant covering 439,026 shares of Grace Common Stock, pursuant to Grace's
1998 Stock Incentive Plan, which will generally govern the terms of the grant
(the "Stock Option Grant"). The "strike price" of those shares is equal to the
fair market value of a share of Grace Common Stock at the close of business as
of October 29, 1998, which was $16.75. The Stock 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, all unvested installments
will vest immediately if Mr. Norris is terminated not for cause (or under
certain other circumstances). The Compensation Committee will also consider Mr.
Norris for future stock option grants, at the same time that the Committee
considers such grants for other officers of Grace. Mr. Norris also received a
restricted stock award covering 170,733 shares of Grace Common Stock, which will
vest in three equal installments, each covering 56,911 shares, on the same dates
(and generally under the same conditions) outlined above with respect to the
vesting of the options under the Stock Option Grant. Mr. Norris will be eligible
to vote the restricted shares during the period of restriction. Grace will also
make a stock appreciation payment to Mr. Norris, at the time he elects to
exercise any vested options under the Stock Option Grant, provided that the
price of a share of Grace Common Stock is above $10.25 at that time. The payment
will be equal to the number of such shares exercised, multiplied by the
difference between (a) the "strike price" of $16.75, or the price of a share of
Grace Common Stock on the date of such exercise if less than $16.75, and (b)
$10.25.
In the event that Mr. Norris is terminated by Grace, without cause,
before October 31, 2001, or if Grace does not (before December 31, 2000) offer
to extend his employment agreement beyond October 31, 2001 (on terms at least as
favorable as applicable to the current agreement), he will generally be entitled
to a severance payment equal to 2 times the amount that is 165% of his annual
base salary at the time of his termination. If his employment does not cease
prior to October 31, 2001 (or if he is terminated without cause prior to that
date), the agreement provides that, in determining the benefits payable to Mr.
Norris under Grace's basic and supplemental retirement plans, his years of
service with Grace and his prior employer will be recognized as if those years
were continuous service with Grace, with an offset for any retirement benefits
payable from his prior employer's retirement plans. Grace will also provide Mr.
Norris with residential relocation assistance that is generally comparable to
such assistance that applies to other newly hired employees who are asked to
relocate, except that any capital loss protection upon the sale of his current
residence will not be limited. The agreement also provides for Mr. Norris'
participation in other benefits and compensation programs generally covering
other senior executives of the Company. The foregoing description of Mr. Norris'
employment agreement does not purport to be complete and is qualified in its
entirety by reference to such agreement, which has been filed with the SEC as an
exhibit to Grace's Quarterly Report on Form 10-Q filed November 13, 1998 for the
quarter ended September 30, 1998.
Mr. Ellberger previously had an employment agreement providing for his
service (initially as Senior Vice President, Strategic Planning and Development)
through May 14, 1998, at which time the agreement terminated (except with
respect to the retirement arrangements described below). The agreement provided
for an initial annual base salary of $275,000; participation in the annual
incentive compensation program, and other compensation and benefit plans and
programs; the grant of stock options; and the grant of a restricted stock award
of 10,468 shares in 1995 (as adjusted for the 1996 Transaction and the 1998
Transaction). In addition, the agreement provides that, in determining the
benefits payable to Mr. Ellberger under Grace's basic and supplemental
retirement plans, his service with his prior employer will be recognized as if
it were continuous service with Grace, with an offset for any retirement
benefits payable from his prior employer's retirement plans. The agreement
also provided for a leased car. The foregoing description of Mr. Ellberger's
employment agreement does not purport to be complete and is qualified in its
entirety by reference to such agreement and
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<PAGE>
related agreements, which were filed as exhibits to the Company's
predecessors' Annual Report on Form 10-K for the year ended December 31, 1996.
Mr. Costello previously had an employment agreement providing for his
service as Chairman, President and Chief Executive Officer through April 1999;
except that the agreement was terminated before that date, under the terms
described below. During the term of agreement, Mr. Costello was entitled to an
annual base salary of at least $900,000; an annual incentive award (bonus) of at
least $900,000 for 1995 and awards thereafter based on performance, in
accordance with the annual incentive compensation program; participation in any
LTIP on the same basis as other senior executives; grants of stock options; and
participation in all other compensation and benefit plans and programs generally
available to senior executives. The foregoing description of Mr. Costello's
employment agreement does not purport to be complete and is qualified in its
entirety by reference to such agreement, which was filed with the SEC as an
exhibit to the Quarterly Report on Form 10-Q of Grace's predecessor for the
quarter ended June 30, 1995, and by reference to the two amendments to such
agreement, one of which was filed with the SEC as an exhibit to Grace's
predecessor's Current Report on Form 8-K filed on October 10, 1996; and the
other as an exhibit to Grace's Form 10-Q for the quarter ended March 31, 1998.
Mr. Costello resigned as President and Chief Executive Officer on
November 1, 1998, and resigned as Chairman and retired as an employee on
December 31, 1998 (his "Retirement Date"). Under the terms of his employment
agreement, as amended, Mr. Costello is entitled to an annual incentive
compensation award for 1998 based on the performance of Grace (as more fully
described in the Report of the Compensation Committee, included in this Proxy
Statement). In connection with his retirement, Mr. Costello is entitled to a
payment of $390,279 under the LTIP for the 1996-1998 performance period and will
be entitled to a prorated (as of his Retirement Date) payment of $296,602 under
the LTIP for the 1997-1999 Performance Period. The LTIP payments for the
1997-1999 Performance Period will be made to Mr. Costello at the same time as
such LTIP payments are made to other LTIP participants. Also, as a result of his
retirement, all unvested stock options held by Mr. Costello on his Retirement
Date became fully vested on that date.
Grace has also agreed to provide Mr. Costello with post-retirement
administrative assistance, for a period not extending beyond December 31, 2003.
Such assistance will be provided at Grace's expense by Mr. Costello's former
administrative assistant, who will be paid an annual amount of $20,000 and be
reimbursed for out-of-pocket expenses incurred as a result of providing such
services to Mr. Costello.
Severance Agreements. Grace has severance agreements with all of its
officers. These agreements generally provide that in the event of the
involuntary termination of the individual's employment without cause (including
constructive termination caused by a material reduction in his or her authority
or responsibility or by certain other circumstances) following a "change in
control" of Grace, he or she will generally receive a severance payment equal to
three times the sum of his or her annual base salary plus target annual
incentive compensation (bonus), subject to pro rata reduction in the case of an
officer who is within 36 months of normal retirement age (65). For purposes of
the severance agreements, "change in control" means the acquisition of 20% or
more of Grace's Common Stock (but not if such acquisition is the result of the
sale of Common Stock by Grace that has been approved by the Board), the failure
of Board-nominated directors to constitute a majority of any class of the Board
of Directors, the occurrence of a transaction in which the stockholders of Grace
immediately preceding such transaction do not own more than 50% of the combined
voting power of the corporation resulting from such transaction, or the
liquidation or dissolution of Grace. This description of the severance
agreements does not purport to be complete and is qualified in its entirety by
reference to the form of such agreement, which was filed as an exhibit to the
Registration Statement on Form 10 filed with the SEC by Grace (named Grace
Specialty Chemicals, Inc. at the time of filing) on March 13, 1998.
Executive Salary Protection Plan. All officers participate in the
Executive Salary Protection Plan ("ESPP"), which provides that, in the event of
a participant's disability or death prior to age 70, Grace will continue to pay
all or a portion of base salary to the participant or a beneficiary for a period
based on the participant's age at the time of disability or death. Payments
under the ESPP may not exceed 100% of base salary
-12-
<PAGE>
for the first year and 60% thereafter in the case of disability (50% in the
case of death). This description of the ESPP does not purport to be complete
and is qualified in its entirety by reference to the text of the ESPP, as
amended, which was filed as an exhibit to the Company's predecessor's Annual
Report on Form 10-K for the year ended December 31, 1996.
Directors' Compensation and Consulting Arrangements. Under the
compensation program for nonemployee directors, (a) each nonemployee director
receives an annual retainer of $50,000, of which $35,000 is in the form of Grace
Common Stock and the balance is in cash and/or Grace Common Stock, at the
election of the director; (b) each committee chair receives an additional annual
retainer of $3,000 in cash and/or Grace Common Stock, at the election of the
director; and (c) each nonemployee director receives $2,000 for each Board
meeting and $1,000 for each committee meeting attended (except that committee
chairs receive $1,200 per committee meeting), in cash and/or Grace Common Stock,
at the election of the director.
A nonemployee director may defer payment of all or part of the fees
received for attending Board and committee meetings and/or all or part of the
annual or committee chair retainers referred to above. The cash portion of any
deferral (plus an interest equivalent) is payable to the director or his or her
heirs or beneficiaries in a lump sum or in quarterly installments over two to 20
years following a date specified by the director (but in no event earlier than
the director's termination from service). The interest equivalent on deferred
cash is computed at the higher of (a) the prime rate plus two percentage points
or (b) 120% of the prime rate, in either case compounded semiannually. The
portion of the annual retainer payable in Grace Common Stock may be deferred and
held, and the balance of the annual retainer or other retainers and/or fees a
director elects to receive in the form of Grace Common Stock will be deferred
and held, in a deferred compensation trust established by Grace. Grace Common
Stock held in the trust will be delivered to the director following his or her
termination from service (or a subsequent date specified by the director).
Nonemployee directors are reimbursed for expenses they incur in
attending Board and committee meetings; Grace also maintains business travel
accident insurance coverage for them. In addition, nonemployee directors may
receive $1,000 per day for work performed at the request of Grace.
Compensation Committee Interlocks and Insider Participation. During
1998, no current or former officer or employee of Grace served on the
Compensation Committee.
Performance Comparison. The following graph and table compare the
cumulative total stockholder return on Grace Common Stock from December 31, 1993
through December 31, 1998 with the Standard & Poor's 500 Stock Index and the
Standard & Poor's Specialty Chemicals Index (both of which include the Company),
using data supplied by the Compustat Services unit of Standard & Poor's
Corporation. The comparisons reflected in the graph and table are not intended
to forecast the future performance of the Common Stock and may not be indicative
of such future performance. The graph and table assume an investment of $100 in
the Common Stock and each index on December 31, 1993, as well as the
reinvestment of dividends.
(GRAPHIC OMITTED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
W. R. Grace & Co. $100 $ 98.30 $153.55 $196.55 $308.33 $252.82
S&P 500 Stock Index 100 101.32 139.40 171.40 228.59 293.91
S&P Specialty Chemicals Index 100 87.30 114.74 117.69 145.73 124.11
</TABLE>
-13-
<PAGE>
Report of the Compensation Committee on Executive Compensation. The
Board of Directors approves compensation actions with respect to the Company's
executive officers (including the Chief Executive Officer), other officers who
report to the Chief Executive Officer, and other executives whose annual base
salaries exceed $250,000; however, the Board acts on the recommendation of the
Compensation Committee, with the exception that the Compensation Committee
approves all actions under the Company's Stock Incentive Plans (which actions
are reported to the Board). The Compensation Committee is composed of directors
who are not, and have never been, employees of the Company or any of its
subsidiaries and who have no consulting arrangements or other significant
relationships with the Company.
This Report describes the Company's performance-based compensation
philosophy and executive compensation program, as approved by the Compensation
Committee. In particular, it discusses the compensation decisions and
recommendations made by the Compensation Committee in 1998 regarding Mr.
Costello, the Company's President and Chief Executive Officer through October
31, 1998 and Chairman through December 31, 1998 at which time he retired as an
employee of the Company, and Mr. Norris, the Company's President and Chief
Executive Officer from November 1, 1998 through December 31, 1998, and the other
executive officers named in the Summary Compensation Table (collectively
referred to in this Report as the "executive officers").
Management and the Compensation Committee use the services of an
independent executive compensation consulting firm for competitive data and
advice regarding the Company's executive compensation program.
Executive Compensation Philosophy and Program Components
The Company's executive compensation program is structured to enable
the Company to compete effectively with other firms in attracting, motivating
and retaining executives of the caliber needed to ensure the Company's future
growth and profitability. The components of this program consist of base salary
and, if warranted, annual incentive compensation (both paid in cash) and
long-term incentives tied to the performance of the Company's Common Stock (in
the form of stock options, restricted stock or a combination of the two). These
compensation components are intended to (1) stimulate performance that benefits
the Company and its stockholders by increasing stockholder value, (2) reward
such performance with competitive levels of compensation, (3) employ and retain
key executives, and (4) unite executive and stockholder interests.
The Company measures the competitiveness of its executive officer
compensation relative to U.S.-based specialty chemicals companies, with an
emphasis on such companies of similar size. In 1995 (and continuing through
1998), the Compensation Committee adopted a philosophy that annual compensation
paid to executives (consisting of salary plus annual incentive compensation)
should approximate the 50th percentile, and that long-term incentive
opportunities should approximate the 60th percentile, of those companies'
practices when performance objectives are achieved, and that executive
compensation should be above those levels only when performance objectives are
exceeded and should be below those levels when performance objectives are not
achieved.
The following sections of this Report describe the compensation program
for executive officers in effect in 1998 and the manner in which the
Compensation Committee and the Board reached their determinations as to
performance-based compensation.
Base Salary
During 1998, salaries of Company executives were generally eligible for
review at intervals of not less than 12 months from the date of the last
increase. Salary increases for executive officers in 1998 were based on (1)
individual performance (as evaluated by the Compensation Committee in its
discretion) and (2) salaries paid to executives in comparable positions in other
companies of similar size in the specialty chemicals industry. To
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<PAGE>
assure comparability with other companies, as well as consistency and uniformity
within the Company, executive officers' positions, as well as all other
management positions, have been assigned to grades with salary ranges based on
the median salary paid to individuals who hold comparable positions at
companies of similar size in the specialty chemicals industry. Individual
salaries are set with reference to the salary ranges, individual performance,
the time since the last increase, the amount budgeted for salary increases and
discretionary factors. Such factors may include leadership; overall strategic
positioning; ability to contribute to the achievement of the Company's
long-term goals; corporate/business unit strategy; stockholder value creation;
environmental, health and safety achievements; social policy matters; and the
development and implementation of the Company's human resources initiatives,
including diversity initiatives.
Annual Incentive Compensation
For 1998, incentive compensation pools were generated for the business
units, and for the Company overall, based on the extent to which pre-established
targeted 1998 pretax income, as adjusted by a charge for working capital, was
achieved. Awards to individual executives were allocated from these
formula-based pools.
In order to relate awards under the Company's annual incentive
compensation program more closely to business and individual performance, and to
align the program with those of comparable companies, a targeted award,
expressed as a percentage of base salary, was established for each salary grade
in 1996 and thereafter continued in 1997 and 1998. Actual awards were allocated
from the incentive pools established for each strategic business unit and for
the Company, based upon the extent to which targeted adjusted pretax earnings
are achieved. Individual awards may range from zero to 200% of the targeted
award, based on business and/or individual performance. Beginning in 1997 and
continuing in 1998, the incentive pool for executives employed in corporate
functions was based upon the extent to which targeted earnings per share were
achieved; incentive pools for executives employed in the business units
continued to be based on the achievement of adjusted pretax income targets,
consistent with the Company's targeted earnings per share.
In 1996, on the recommendation of the Compensation Committee, the Board
of Directors also adopted, and the stockholders approved, a separate annual
incentive compensation program in which the Chairman, President and Chief
Executive Officer would participate, along with other executive officers whose
compensation may exceed $1 million in any year. Under this program, which
continued in 1997 and 1998, the Board, on the recommendation of the Compensation
Committee, will, by the end of the first calendar quarter of each year, approve
the participants in the program, the amount of incentive compensation that may
be earned at various levels of performance, the maximum amount that may be
earned by each executive officer (which may not exceed 130% of the annual base
salary of the Chief Executive Officer in effect at the beginning of the year),
and the criteria by which performance will be measured. The performance criteria
is to be selected each year by the Compensation Committee from one or more of
the following: earnings, earnings per share, rate of return on assets or capital
employed, cash flow, or net worth of the Company or one or more of its units.
The factors that the Compensation Committee took into consideration in
proposing individual awards for the executive officers (excluding Mr. Costello
and Mr. Norris, whose compensation is discussed below), were that (1) the 1998
results of the Company, as adjusted, met its pre-established basic earnings per
share (EPS) target. In addition, in determining Mr. Hyde's award, the
Compensation Committee took into consideration that the adjusted 1998 pretax and
pre-interest income of the Grace Davison business exceeded its 1997 pretax
income, and in determining Mr. Bettacchi's award, the Compensation Committee
considered his key role in achieving the
global integration of the Grace Construction Products business and the
significant increase in adjusted pretax income in 1998 over 1997.
Based on these factors, the Board, on the recommendation of the
Compensation Committee, approved awards for the executive officers (including
for these purposes, Mr. Costello and Mr. Norris) ranging from 35% to 68% of
their year-end 1998 annual base salaries.
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<PAGE>
Long-Term Incentives
The Company's long-term incentives now consist (beginning in 1998) of
annual grants of (1) stock options and (2) occasional ad hoc (generally
restricted) stock grants. Long-term incentive opportunities (stock options)
generally are set at the 60th percentile of opportunities provided by other
specialty chemicals companies of similar size.
Under the LTIP as in effect through the 1996-1998 Performance Period,
such grants provided opportunities for rewards based on performance versus
pre-established targets with respect to value contribution (after-tax cash flow
less a capital charge) and stockholder value creation (i.e., the performance of
the Common Stock as compared to other companies). In 1997, the LTIP was modified
so that, effective with the 1997-1999 Performance Period, Performance Units
would be earned based solely on stockholder value performance. Beginning in
1998, the LTIP program was discontinued and no such awards were made in 1998 or
1999.
In 1996 and 1997, the executive officers and certain other key
employees were granted Performance Units for the 1996-1998 and 1997-1999
Performance Periods, respectively, as well as stock options. The number of
Performance Units and the number of options granted were based on the salary
grades of the recipients' positions.
Through the 1996-1998 Performance Period, Performance Units granted to
executives employed in the business unit functions had been weighted 67% on the
value contribution performance of their respective business units, and 33% on
the Company's stockholder value performance; Performance Units granted to
executives employed in corporate functions had been weighted 50% on the basis of
the Company's value contribution performance and 50% on the basis of the
Company's stockholder value performance. This weighting was intended to reflect
the respective responsibilities of the Company's corporate managers and those of
the managers of the business units. Half of the Performance Units granted to
Messrs. Hyde and Bettacchi in 1996 were weighted 67%/33%, and the other half
were weighted 50%/50%, reflecting their responsibilities as both managers of the
business units (with regard to the Grace Davison business unit, in the case of
Mr. Hyde, and the Grace Construction Products business unit, in the case of Mr.
Bettacchi) and corporate managers (as Senior Vice Presidents with policy-making
responsibilities on a Company-wide basis). The Compensation Committee determined
these weightings and approved the targeted levels of business unit and Company
performance based on its assessment of the extent to which the approved
weighting and targeted levels would act as challenging - but realizable -
incentives for senior managers. For the 1997-1999 Performance Period,
Performance Units granted were the same for all participants (business unit and
corporate managers) based solely on stockholder value performance relative to
other companies.
Payments for the Performance Units earned under the 1995-1997
Performance Period were made in March 1998. Partial payments earned with respect
to both the 1996-1998 and 1997-1999 Performance Periods were made in March 1998
in connection with the separation of the Company's Packaging business unit. The
remaining payments due for the remainder of these Performance Periods following
the transaction (after March 31, 1998) were made in January 1999 with respect to
the 1996-1998 period and are scheduled to be made in January 2000 with respect
to the 1997-1999 period.
All stock options granted to executive and other officers become
exercisable in installments over a three-year term beginning one year after the
date of the grant (rather than being exercisable in full on the date of grant,
as was the case in years prior to 1996), and the number of options granted to an
individual generally is based on the salary grade to which his/her position is
assigned.
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<PAGE>
Compensation of the Chief Executive Officers
Mr. Costello's 1998 base salary of $970,000 was determined in
accordance with his 1995 employment agreement which initially provided for an
annual base salary of $900,000 and was subsequently increased effective March 1,
1997 as approved by the Board at its March 1997 meeting.
Mr. Costello's annual incentive compensation award for 1998 was
$624,826, determined according to the formula approved by the Compensation
Committee in March 1998. As specified in his employment agreement, upon the
commencement of his employment he was granted 34,582* Performance Units with
respect to the 1995-1997 Performance Period under the LTIP, and stock options
covering 465,750* shares of Common Stock; these options became exercisable in
full upon his retirement on December 31, 1998. He was also granted 8,694*,
21,658* and 34,582* Performance Units with regard to the 1993-1995, 1994-1996,
and 1995-1997 Performance Periods, respectively. The size of these grants was
determined based on (1) the number of Performance Units and stock options
granted to the Company's previous Chief Executive Officer and (2) the need to
attract to the Company an experienced chief executive officer from the chemical
industry.
With respect to the 1996-1998 and 1997-1999 Performance Periods, Mr.
Costello was granted 18,630* and 14,100 Performance Units, respectively, based
on the salary grade established for his position. In 1998 he was granted a stock
option covering 100,000 shares; however, as discussed above, no LTIP Performance
Units were granted as the LTIP was discontinued in 1998.
Mr. Norris' base salary of $120,833 reflects two months in 1998 from
November 1, his date of hire, through December 31, 1998. This amount was based
on his annual base salary of $725,000 as provided in his employment agreement
dated November 1, 1998, described in the section "Employment Agreements" in this
Proxy Statement. Mr. Norris' Annual Incentive Compensation award for 1998 was
$250,000, the amount specified in his employment agreement. Upon commencement of
his employment, he was granted a stock option award on November 1, 1998 covering
439,026 shares of Grace Common Stock, at an option price of $16.75 per share;
these options become exercisable in three annual installments, beginning in
November 1999. He was also granted a restricted stock award covering 170,733
shares of Grace Common Stock on November 1, 1998; the restrictions on these
shares will lapse in three equal installments, beginning in November 1999.
Further, as part of his employment agreement, the Company will make a stock
appreciation payment, as more fully described in the section "Employment
Agreements."
Mr. Norris' base salary and the size of his stock option and restricted
stock grants were determined based on competitive practices among (1) companies
of similar size in the specialty chemicals industry, (2) the need to employ an
experienced executive officer from the specialty chemicals industry, and (3) the
need to replace certain compensation which Mr. Norris forfeited upon leaving his
previous employer.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code prohibits the Company from
deducting annual compensation in excess of $1 million paid to the executive
officers named in the Summary Compensation Table of the Proxy Statement, unless
such compensation is performance-based and satisfies certain other conditions.
It is the Committee's view that, with the exception of base salaries
and any discretionary annual incentive compensation payments or
non-performance-based payments provided for under Mr. Costello's and Mr. Norris'
employment agreements, amounts awarded under the Company's executive
compensation program qualify as performance-based compensation and are therefore
expected to be fully deductible.
* The numbers of Performance Units and options granted to Mr. Costello, as
discussed in this paragraph (excluding the 1997 and 1998 awards), reflect
adjustments made in September 1996 in connection with the separation of the
Company's health care business in September 1996.
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<PAGE>
COMPENSATION COMMITTEE*
John F. Akers, Chair
Marye Anne Fox
John J. Murphy
Thomas A. Vanderslice
RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT AND OTHERS
Commercial Transactions. Mr. Costello is a director of FMC Corporation
("FMC"). During 1998 various Grace business units purchased approximately
$883,000 of materials and/or products from, and sold approximately $185,000 of
products to, FMC. These transactions were in the ordinary course of business and
were on terms believed to be similar to those with unaffiliated parties.
Mr. Vanderslice is a director of Texaco, Inc. During 1998, Grace
purchased approximately $11,000 of products from, and sold approximately $12.9
million of products ($12.8 million of which were sold by Grace's Davison
business unit) to Texaco. These transactions were in the ordinary course of
business and were on terms believed to be similar to those with unaffiliated
parties.
Mr. Murphy is a director of NationsBank Corporation. During 1998, Grace
maintained a depository account with NationsBank of approximately $550,000 and
sold approximately $175,000 of products to NationsBank. Also, a majority-owned
subsidiary of Grace owed approximately $4.8 million to NationsBank under a
revolving credit line as of December 31, 1998.
Legal Proceedings; Indemnification. During 1998 there were no legal
proceedings pending in which any current officers or directors of the Company
were parties or had a material interest adverse to the Company.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
MANAGEMENT SECURITY OWNERSHIP
The following table sets forth the Common Stock beneficially owned,
directly or indirectly, as of January 31, 1999 by (1) each person known to Grace
to be the beneficial owner of more than 5% of the outstanding shares of Common
Stock, and (2) each current director and nominee, each of the executive officers
named in the Summary Compensation Table set forth under "Election of Directors
- -- Compensation," and such directors and all executive officers as a group. The
table includes shares owned by (a) those persons and their spouses, minor
children and certain relatives, (b) trusts and custodianships for their benefit,
and (c) trusts and other entities as to which the persons have the power to
direct the voting or investment of securities (including shares as to which the
persons disclaim beneficial ownership). The table also includes shares in
accounts under the Savings Plan and shares covered by currently exercisable
stock options; it does not reflect shares covered by unexercisable stock
options.
- ------------------
* Messrs. Akers, Murphy and Vanderslice and Ms. Fox joined the
Compensation Committee in January 1997, March 1997, May 1996 and April 1998,
respectively. Mr. Cambre joined the Compensation Committee in March 1999.
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<PAGE>
<TABLE>
<CAPTION>
Shares of Grace Common
Beneficial Owner Stock Beneficially Owned Percent
- -------------------------------------------- ------------------------ -------
<S> <C> <C>
Iridian Asset Management LLC (1) (2) . . . . . . . . . . . 5,697,680 6.96
276 Post Road West
Westport, CT 06880-4704
Morgan Stanley Dean Witter & Co.(1) (3) . . . . . . . . 5,577,880 6.82
1585 Broadway
New York, NY 10036
Sasco Capital, Inc. (1) . . . . . . . . . . . . . . . . 4,729,993 5.78
10 Sasco Hill Road
Fairfield, CT 06430
Loomis, Sayles & Company, L.P. . . . . . . . . . . . . . . 4,470,275 5.46
One Financial Center
Boston, MA 02111
J. F. Akers . . . . . . . . . . . . . . . . . . . . . . . 1,205 *
3,727 (T)
R. J. Bettacchi . . . . . . . . . . . . . . . . . . . . . 305 *
572,293 (O)
5,969 (T)
R. C. Cambre . . . . . . . . . . . . . . . . . . . . . . 758 *
A. J. Costello . . . . . . . . . . . . . . . . . . . . . 32,600 2.68
2,132,669 (O)
31,124 (T)
L. Ellberger . . . . . . . . . . . . . . . . . . . . . . 16,443 *
567,405 (O)
14,502 (T)
M. A. Fox . . . . . . . . . . . . . . . . . . . . . . . 3,455 *
230 (T)
J. R. Hyde . . . . . . . . . . . . . . . . . . . . . . . 30,702 *
748,662 (O)
J. J. Murphy . . . . . . . . . . . . . . . . . . . . . . 1,139 *
2,093 (T)
P. J. Norris . . . . . . . . . . . . . . . . . . . . . . 186,001. *
D. B. Siegel . . . . . . . . . . . . . . . . . . . . . . 26,996 *
161,227 (O)
T. A. Vanderslice . . . . . . . . . . . . . . . . . . . 1,731 *
3,917 (T)
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<PAGE>
Shares of Grace Common
Beneficial Owner Stock Beneficially Owned Percent
- -------------------------------------------- ------------------------ -------
Directors and executive officers as a group . . . . . . . . 379,063 5.84
4,335,872 (O)
63,151 (T)
</TABLE>
* Indicates less than 1%
(O) Shares covered by stock options exercisable on or within 60 days after
January 31, 1999.
(T) Shares owned by trusts and other entities as to which the person has
the power to direct voting and/or investment.
(1) The ownership information set forth is based in its entirety on
material contained in a Schedule 13G, dated February 1999, filed with
the SEC, which stated that the securities were not acquired for the
purpose of changing or influencing the control of Grace.
(2) Joint filing with LC Capital Management, LLC, CL Investors, Inc., David
L. Cohen and Harold J. Levy. Beneficial ownership claimed by David L.
Cohen is 6,130,290 shares and beneficial ownership claimed by Harold J.
Levy is 6,127,290 shares.
(3) Joint filing with Miller Anderson & Sherrerd, LLP, 1 Tower Bridge Suite
1100, West Conshohocken, PA 19428, of which Morgan Stanley Asset
Management Holdings Inc., an affiliate of Morgan Stanley Dean Witter &
Co., is the sole general partner.
OWNERSHIP AND TRANSACTIONS REPORTS
Under Section 16 of the Securities Exchange Act of 1934, the Company's
directors, certain of its officers, and beneficial owners of more than 10% of
the outstanding Common Stock are required to file reports with the SEC and the
New York Stock Exchange concerning their ownership of and transactions in Common
Stock; such persons are also required to furnish the Company with copies of such
reports. Based solely upon the reports and related information furnished to the
Company, the Company believes that all such filing requirements were complied
with in a timely manner during and with respect to 1998, except that Mr.
Ellberger filed a Form 4 Report on November 5, 1998 that was due on October 10,
1998.
SELECTION OF INDEPENDENT ACCOUNTANTS
On the recommendation of the Audit Committee, the Board of Directors
has selected PricewaterhouseCoopers LLP ("PwC") to be the independent
accountants of the Company and its consolidated subsidiaries for 1999. Although
the submission of this matter for stockholder ratification at the Annual Meeting
is not required by law or the Company's By-laws, the Board is nevertheless doing
so to determine the stockholders' views. If the selection is not ratified, the
Board will reconsider its selection of independent accountants.
PwC and its predecessors have acted as independent accountants of the
Company and its consolidated subsidiaries since 1906. Its fees and expenses for
the 1998 audit are expected to be approximately $1.9 million. In addition,
during 1998 PwC performed special audits and reviews in connection with
acquisitions and divestments, consulted with the Company on various matters and
performed other services for the Company (including audits of the financial
statements of certain employee benefit plans and certain units of the Company)
for fees and expenses totaling approximately $9.4 million (excluding fees and
expenses for services relating to the
-20-
<PAGE>
Company that were performed and/or paid for by third parties). A representative
of PwC will attend the Annual Meeting, will be available to answer questions
and will have an opportunity to make a statement if he wishes to do so. Members
of the Audit Committee are also expected to attend.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
SELECTION OF PRICEWATERHOUSECOOPERS LLP.
OTHER MATTERS
OTHER BUSINESS
The Company does not know of any other business that will be presented
for consideration at the Annual Meeting. However, if any other business should
come before the Annual Meeting, the persons named in the enclosed proxy (or
their substitutes) will have discretion to act in accordance with their best
judgment.
PROXY AND VOTING PROCEDURES
The enclosed proxy covers the shares held of record by a stockholder at
the close of business on March 12, 1999. In addition, the proxy covers shares
held at that date in such stockholder's accounts under the Company's Dividend
Reinvestment Plan and/or Savings Plan if such accounts carry the same federal
tax identification number as the shares held of record.
The proxy enables a stockholder to vote on the proposals covered by
this Proxy Statement. The shares represented by each valid proxy received in a
timely manner will be voted in accordance with the choices indicated on the
proxy. Stockholders may also vote by using the toll-free number listed on the
proxy card. The telephone voting procedure is designed to verify stockholders
through use of a control number printed on each proxy card. The procedure allows
you to vote your shares and to confirm that your instructions have been properly
recorded. Please see your proxy card for specific instructions. Whether voting
by mail or telephone, a proxy may be revoked by written notice to the Company
prior to the Annual Meeting, or at the Annual Meeting before it is voted or, if
voting by telephone, a subsequent vote at a later time will supersede a prior
vote.
The Company has adopted a policy that all proxies, ballots and other
voting materials that identify the votes of specific stockholders are to be kept
permanently confidential, except as required by law. The policy provides that
access to such materials is limited to the vote tabulators and the independent
inspectors of voting, who must certify compliance with such policy.
VOTES REQUIRED
Under the Company's By-laws, the election of directors requires the
affirmative vote of a plurality of the votes cast on the election at the Annual
Meeting, and the approval of the other matters to be voted on at the Annual
Meeting requires the affirmative vote of a majority of the votes cast on each
matter at the Annual Meeting.
Under Delaware law and the Company's Certificate of Incorporation and
By-laws, abstentions and votes withheld, as well as "non-votes," (1) are counted
in determining the number of shares represented at the Annual Meeting, but are
not voted for the election of directors (thereby having the effect of a vote
withheld with respect to such election), and (2) are not voted or deemed cast
for or against other proposals submitted to the stockholders (thereby having no
effect on the vote with respect to such other proposals).
-21-
<PAGE>
SOLICITATION PROCEDURES
Proxies will be solicited primarily by mail; however, employees of the
Company may also solicit proxies in person or otherwise. In addition, the
Company has retained D. F. King & Co., Inc. to solicit proxies by mail,
telephone and/or otherwise and will pay such firm a fee estimated at $13,000,
plus reasonable expenses, for these services. Certain holders of record (such as
brokers, custodians and nominees) are being requested to distribute proxy
materials to beneficial owners and to obtain such beneficial owners'
instructions concerning the voting of proxies. The Company will pay all costs of
the proxy solicitation, and will reimburse brokers and other persons for the
expenses they incur in sending proxy materials to beneficial owners and
compensate them for such services in accordance with the rules of the New York
Stock Exchange.
PROPOSALS FOR 2000 ANNUAL MEETING
Any stockholder wishing to submit a proposal for inclusion in the Proxy
Statement for the 2000 Annual Meeting, pursuant to the stockholder proposal
rules of the SEC, should submit the proposal in writing to Secretary, W. R.
Grace & Co., 7500 Grace Drive, Columbia, Maryland 21044. The Company must
receive a proposal during the period from February 10, 2000 through March 12,
2000 in order to consider it for inclusion in the 2000 Proxy Statement.
In addition, the Company's By-laws require that stockholders give
advance notice and furnish certain information to the Company in order to bring
a matter of business before an annual meeting or to nominate a person for
election as a director. Any communications relating to those By-law provisions
should be directed to the Company's Secretary at the above address.
-22-
