<PAGE> 1
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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 June 30, 1996
Commission File Number 1-3720
W. R. GRACE & CO.
New York 13-3461988
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Town Center Road
Boca Raton, Florida 33486-1010
(407) 362-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
90,870,737 shares of Common Stock, $1.00 par value, were outstanding at August
1, 1996.
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<PAGE> 2
W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
- -------
Item 1. Financial Statements
Consolidated Statement of Operations I-1
Consolidated Statement of Cash Flows I-2
Consolidated Balance Sheet I-3
Notes to Consolidated Financial Statements I-4 to I-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition I-11 to I-18
Part II. Other Information
- -------
Item 1. Legal Proceedings II-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other Information II-3
Item 6. Exhibits and Reports on Form 8-K II-3
</TABLE>
As used in this Report, the term "Company" refers to W. R. Grace & Co., and the
term "Grace" refers to the Company and/or one or more of its subsidiaries.
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Consolidated Statement of Operations (Unaudited) June 30, June 30,
------------------------------------------------ ---------------------- -----------------------
$ millions (except per share) 1996 1995 1996 1995
--------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Sales and revenues . . . . . . . . . . . . . . . . . . . $ 948.9 $932.3 $1,834.9 $1,785.7
Other income . . . . . . . . . . . . . . . . . . . . . . 14.1 4.5 17.9 8.8
-------- ------ -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 963.0 936.8 1,852.8 1,794.5
-------- ------ -------- --------
Cost of goods sold and operating expenses . . . . . . . 572.0 550.7 1,103.8 1,051.6
Selling, general and administrative expenses . . . . . . 206.4 219.7 405.7 450.5
Depreciation and amortization . . . . . . . . . . . . . 46.4 40.2 91.9 78.4
Interest expense and related financing costs . . . . . . 18.3 18.7 36.7 34.5
Research and development expenses . . . . . . . . . . . 29.0 31.1 57.8 61.6
Corporate expenses previously allocated to the
health care segment . . . . . . . . . . . . . . - 11.6 - 21.7
Restructuring costs . . . . . . . . . . . . . . . . . . 53.7 - 53.7 -
Gain on sales of businesses . . . . . . . . . . . . . . (326.4) - (326.4) -
------- ------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 599.4 872.0 1,423.2 1,698.3
------- ------- -------- --------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 363.6 64.8 429.6 96.2
Provision for income taxes . . . . . . . . . . . . . . . 130.5 19.8 154.9 28.3
------- ------ -------- --------
Income from continuing operations . . . . . . . . . . . 233.1 45.0 274.7 67.9
Income from discontinued operations . . . . . . . . . . 100.8 33.7 122.8 58.3
------- ------ -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 333.9 $ 78.7 $ 397.5 $ 126.2
======= ======= ========= ========
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Earnings per share:
Continuing operations . . . . . . . . . . . . . . . . $ 2.41 $ .47 $ 2.82 $ .71
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33
Fully diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . $ 2.37 $ .46 $ 2.76 $ .70
Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30
Dividends declared per common share . . . . . . . . . . $ .125 $ .35 $ .25 $ .70
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements
are an integral part of this statement.
I-1
<PAGE> 4
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Six Months Ended
Consolidated Statement of Cash Flows (Unaudited) June 30,
- ------------------------------------------------ -----------------
$ millions 1996 1995
- ------------------------------------------------ ------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . $429.6 $ 96.2
Reconciliation to cash provided by/(used for) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.9 78.4
Noncash charge relating to restructuring costs . . . . . . . . . . . . . . . . . . . 53.7 -
Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326.4) -
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign exchange:
Increase in notes and accounts receivable, net . . . . . . . . . . . . . . . . . (78.4) (60.0)
Decrease/(increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . 33.3 (82.3)
Proceeds from asbestos-related insurance settlements . . . . . . . . . . . . . . 99.7 156.4
Payments made for asbestos-related litigation settlements,
judgments and defense costs . . . . . . . . . . . . . . . . . . . . . . (73.1) (60.2)
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (20.3) (51.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98.1) (37.2)
------ ------
Net pretax cash provided by operating activities of continuing operations . . . . . . . . 111.9 39.9
Net pretax cash provided by operating activities of discontinued operations . . . . . . . 47.1 27.8
------ ------
Net pretax cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 159.0 67.7
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40.5) (91.0)
------ ------
Net cash provided by/(used for) operating activities . . . . . . . . . . . . . . . . . . . 118.5 (23.3)
------ ------
INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234.5) (232.6)
Businesses acquired in purchase transactions, net of
cash acquired and assumed debt . . . . . . . . . . . . . . . . . . . . . . . . . . . - (31.1)
Increase in net investments in discontinued operations . . . . . . . . . . . . . . . . . . (97.6) (46.3)
Net proceeds from divestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697.1 7.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7 2.5
------ ------
Net cash provided by/(used for) investing activities . . . . . . . . . . . . . . . . . . . 379.7 (300.4)
------ ------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24.5) (66.3)
Repayments of borrowings having original maturities in excess of three months . . . . . . (50.8) (51.2)
Increase in borrowings having original maturities in excess of three months . . . . . . . - 85.3
Net (decrease)/increase in borrowings having original
maturities of less than three months . . . . . . . . . . . . . . . . . . . . . . . . (6.7) 251.0
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.2 84.3
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (398.2) (12.1)
(Decrease)/increase in net financing activities of discontinued operations . . . . . . . . (37.1) 2.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .1
------ ------
Net cash (used for)/provided by financing activities . . . . . . . . . . . . . . . . . . . (464.1) 293.3
------ ------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (1.0) 3.5
------ ------
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 33.1 $(26.9)
====== ======
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-2
<PAGE> 5
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
-------------------------------------- June 30, December 31,
$ millions (except par value) 1996 1995
-------------------------------------- --------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 73.7 $ 40.6
Notes and accounts receivable, net . . . . . . . . . . . . . . 712.5 596.8
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 402.4 491.9
Net assets of discontinued operations . . . . . . . . . . . . . 296.9 323.7
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 194.0 206.1
Other current assets . . . . . . . . . . . . . . . . . . . . . 25.4 22.2
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . 1,704.9 1,681.3
Properties and equipment, net of accumulated
depreciation and amortization of $1,398.9
and $1,418.8, respectively . . . . . . . . . . . . . . . . 1,771.8 1,736.1
Goodwill, less accumulated amortization of $12.7
and $20.6, respectively . . . . . . . . . . . . . . . . . 39.6 111.8
Net assets of discontinued operations - health care . . . . . . . 1,571.6 1,435.3
Asbestos-related insurance receivable . . . . . . . . . . . . . . 241.2 321.2
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 380.1 386.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 596.6 625.3
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 603.9 $ 638.3
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 237.8 339.2
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 333.8 103.3
Other current liabilities . . . . . . . . . . . . . . . . . . . 828.6 836.4
Minority interest . . . . . . . . . . . . . . . . . . . . . . . 297.0 297.0
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . . 2,301.1 2,214.2
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,262.8 1,295.5
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 773.6 789.0
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 43.2 44.8
Noncurrent liability for asbestos-related litigation . . . . . . . 659.1 722.3
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 5,039.8 5,065.8
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stocks, $100 par value . . . . . . . . . . . . . . . 7.4 7.4
Common stock, $1 par value . . . . . . . . . . . . . . . . . . 98.7 97.4
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 513.4 459.8
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 709.0
Cumulative translation adjustments . . . . . . . . . . . . . . (40.4) (39.4)
Treasury stock - 5,189,124 common shares, at cost . . . . . . . (395.1) (2.4)
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . 1,266.0 1,231.8
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6
======== ========
</TABLE>
The Notes to Consolidated Financial Statements
are integral parts of these statements.
I-3
<PAGE> 6
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(A) BASIS OF PRESENTATION
The financial statements in this Report at June 30, 1996 and 1995 and
for the three- and six-month interim periods then ended are unaudited
and should be read in conjunction with the consolidated financial
statements in the Company's 1995 Annual Report on Form 10-K (1995
Annual Report). Such interim financial statements reflect all
adjustments that, in the opinion of management, are necessary for a
fair presentation of the results of the interim periods presented; all
such adjustments are of a normal recurring nature. Certain amounts in
the prior periods' consolidated financial statements have been
reclassified to conform to the current periods' basis of presentation.
The results of operations for the three- and six-month interim periods
ended June 30, 1996 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1996.
(B) ASBESTOS AND RELATED INSURANCE LITIGATION
As previously reported, Grace is a defendant in property damage and
personal injury lawsuits relating to previously sold asbestos-
containing products, and anticipates that it will be named as a
defendant in additional asbestos-related lawsuits in the future. Due
to the unique nature of each property damage claim, Grace cannot
predict whether and to what extent asbestos-related property damage
lawsuits and claims will be brought against it in the future or the
expenses involved in defending against and disposing of any such
future lawsuits and claims. By contrast, Grace believes that there
are common features with respect to personal injury claims; therefore,
in 1995, Grace determined that it had adequate experience to
reasonably estimate the number of personal injury claims to be filed
against it through 1998 and established an accrual for such claims.
Grace was a defendant in approximately 44,100 asbestos-related
lawsuits at June 30, 1996 (39 involving claims for property damage and
the remainder involving approximately 109,000 claims for personal
injury), as compared to approximately 40,800 lawsuits at December 31,
1995 (47 involving claims for property damage and the remainder
involving approximately 92,400 claims for personal injury). During
the first half of 1996, Grace settled four property damage lawsuits
for a total of $11.3 (including one case that was on appeal); one new
property damage lawsuit was filed; four property damage lawsuits were
dismissed without the payment of any damages or settlement amounts by
Grace; and, in a case that had been on appeal and is now final, Grace
was held liable for $4.1. During the first half of 1996,
approximately 1,400 personal injury claims against Grace were
dismissed without payment and $13.6 was recorded to reflect
settlements in approximately 3,500 personal injury claims.
Based upon and subject to the factors discussed in Note 2 to Grace's
consolidated financial statements for the year ended December 31,
1995, Grace estimates that its probable liability with respect to the
defense and disposition of asbestos property damage and personal
injury lawsuits and claims pending at June 30, 1996 and December 31,
1995 (except for four property damage lawsuits as to which the
liabilities are not yet estimable because Grace has
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<PAGE> 7
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
not yet been able to obtain sufficient information as to the relevant
properties through discovery proceedings), as well as personal injury
lawsuits and claims expected to be filed through 1998, is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Current liability for asbestos-related litigation (1) . . . . . . . . . . . . . . . $100.0 $100.0
Noncurrent liability for asbestos-related litigation . . . . . . . . . . . . . . . . 659.1 (2) 722.3
------ ------
Total asbestos-related liability . . . . . . . . . . . . . . . . . . . . . . . . . . $759.1 $822.3
====== ======
</TABLE>
(1) Included in "Other current liabilities" in the consolidated
balance sheet.
(2) The decrease from December 31, 1995 reflects payments made by
Grace for settlements and defense costs in connection with
asbestos-related lawsuits and claims during the six months ended
June 30, 1996.
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace has settled with and been
paid by its primary insurance carriers with respect to both property
damage and personal injury lawsuits and claims. With minor
exceptions, Grace has also settled with its excess insurance carriers
that wrote policies available for property damage claims; those
settlements involve amounts paid and to be paid to Grace. In
addition, Grace has settled with many excess insurance carriers that
wrote policies available for personal injury lawsuits and claims.
Grace is currently in litigation with its remaining excess insurance
carriers whose policies Grace believes are available for
asbestos-related personal injury lawsuits and claims. Recovery under
these policies is subject to lengthy litigation and legal
uncertainties. Insurance coverage for asbestos-related liabilities
has not been commercially available since 1985.
The following table shows Grace's total estimated insurance recoveries
in reimbursement for past and estimated future payments to defend
against and dispose of asbestos-related lawsuits and claims:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Notes receivable from insurance carriers - current, net of discounts of $4.0 (1995 - $4.3) (1) $ 69.1 $ 62.0
Notes receivable from insurance carriers - noncurrent, net of discounts of $5.1 (1995 - $7.3) (2) 33.4 56.4
Asbestos-related insurance receivable . . . . . . . . . . . . . . . . . . . . 241.2(3) 321.2
------ ------
Total amounts due from insurance carriers . . . . . . . . . . . . . . . . . . . . . $343.7 $439.6
====== ======
</TABLE>
(1) Included in "Notes and accounts receivable, net" in the
consolidated balance sheet.
(2) Included in "Other assets" in the consolidated balance sheet.
(3) The decrease from December 31, 1995 reflects the receipt of net
insurance proceeds of $33.3 and the reclassification of $46.7 from
"Asbestos-related insurance receivable" to "Notes receivable
from insurance carriers - current" and "- noncurrent" as the
result of a 1996 settlement with an insurance carrier.
At June 30, 1996, settlements with certain insurance carriers provided
for the future receipt by Grace of $111.6, which Grace has recorded as
notes receivable (both current and noncurrent) of $102.5, net of
discounts. In the first half of 1996, Grace received net proceeds of
$99.7 pursuant to settlements with insurance carriers in reimbursement
for monies previously expended by Grace in connection with
asbestos-related lawsuits and claims; of this amount, $65.1 was
received pursuant to settlements entered into in 1993 through 1996,
which had previously been classified as notes receivable. Pursuant to
I-5
<PAGE> 8
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
settlements with two groups of carriers in 1995, Grace will continue
to receive payments based on future cash outflows for asbestos-
related lawsuits and claims; such payments are estimated to represent
approximately $215.8 of the asbestos-related receivable of $241.2 at
June 30, 1996.
Grace's ultimate exposure with respect to its asbestos-related
lawsuits and claims will depend on the extent to which its insurance
will cover damages for which it may be held liable, amounts paid in
settlement and litigation costs. However, in Grace's opinion (which
is not based on a formal opinion of counsel), it is probable that
recoveries from its insurance carriers (including amounts reflected in
the receivable discussed above), along with other funds, will be
available to satisfy the personal injury and property damage lawsuits
and claims pending at June 30, 1996, as well as personal injury
lawsuits and claims expected to be filed in the future. Consequently,
Grace believes that the resolution of its asbestos-related litigation
will not have a material adverse effect on its consolidated results of
operations or financial position.
For additional information, see Note 2 to the consolidated financial
statements in the 1995 Annual Report.
(C) ACQUISITIONS AND DIVESTMENTS - CONTINUING OPERATIONS
Acquisitions
In July 1996, Grace announced that it had completed the acquisition of
Cypress Packaging, Inc. (Cypress), a manufacturer of flexible
packaging. Cypress, with 1995 sales of more than $20.0, is a
leading supplier of plastic packaging materials for the retail pre-cut
produce market segment.
Divestments
In June 1996, Grace sold its water treatment and process chemicals
business to Betz Laboratories, Inc. (Betz). The purchase price in the
transaction was $632.0, subject to certain adjustments, plus the
assumption of certain liabilities. As initially adjusted, the
purchase price of $636.4 (which is subject to further adjustment) was
paid at closing as follows: $534.8 in cash, a $100.0 promissory note
(secured by a letter of credit) due in January 1997, and a $1.6
promissory note paid in July 1996. The sales and revenues of Grace's
water treatment and process chemicals business for the six months
ended June 30, 1996 and 1995 were $201.2 and $193.9, respectively; its
financial position and results of operations were not significant to
Grace.
As reflected in the consolidated statement of operations (in the line
captioned "Gain on sales of businesses"), the sales of this business
and the biopesticides business resulted in a pretax gain of $326.4,
and an after-tax gain of $210.1 ($2.18 per common share), in
continuing operations.
I-6
<PAGE> 9
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(D) DISCONTINUED OPERATIONS
Health Care
As previously reported, in February 1996 Grace and Fresenius AG
(Fresenius) entered into a definitive agreement to combine National
Medical Care, Inc. (NMC), Grace's principal health care subsidiary,
with Fresenius' worldwide dialysis business (FWD) to create Fresenius
Medical Care AG (FMC). The combination would follow the borrowing
and/or assumption of debt aggregating approximately $2,300 by NMC, a
tax-free distribution of the net cash proceeds by NMC to W. R. Grace &
Co.-Conn., a Connecticut subsidiary of the Company that conducts
Grace's packaging and specialty chemicals businesses (Grace Chemicals)
and a tax-free distribution by the Company, with respect to each share
of its Common Stock, of one share of a newly formed Delaware
corporation (New Grace) holding all of the stock of Grace Chemicals,
as well as Grace's other businesses other than NMC. As a result of
these transactions,the holders of the Company's Common Stock would own
100% of New Grace and would be allocated an aggregate of approximately
44.8% of FMC's ordinary shares on a fully diluted basis. The holders
of the Company's Common Stock would also own preferred stock, the
dividend on which would be linked to the performance of FMC.
The Company's shareholders are to vote on the combination and related
matters at a special meeting to be held on September 16, 1996, and
it is expected that the various transactions will be completed
following the date of the special meeting and prior to
October 1, 1996; however, there can be no assurance as to whether
or when such transactions will be completed.
Grace, on behalf of NMC, has obtained a commitment letter from various
financial institutions under which approximately $2,500 of financing is
expected to be made available to NMC and certain specified subsidiaries
and affiliates in connection with the above transactions. The credit
agreement is expected to provide that certain obligations thereunder
will be guaranteed by Grace Chemicals for specified periods of time and
subject to certain conditions. See "FINANCING" in the Company's Joint
Proxy Statement-Prospectus dated August 2, 1996 for additional
information.
In October 1995, NMC received five investigative subpoenas from the
Office of the Inspector General (OIG) of the U.S. Department of Health
and Human Services. In the event that a U.S. government agency
believes that any wrongdoing has occurred, civil and/or criminal
proceedings could be instituted, and if any such proceedings were to
be instituted and the outcome were unfavorable, NMC could be subject
to fines, penalties and damages or could become excluded from
government reimbursement programs. Any such result could have a
material adverse effect on NMC's financial position or the results of
operations of NMC and Grace. However, at the present time, the
results of the investigation and its impact cannot be predicted, as
management does not believe that the liability, if any, with respect
to the OIG investigation is estimable.
Under the terms of the combination of FWD and NMC described above, NMC
will remain responsible for all liabilities, if any, resulting from
the OIG investigation. In July 1996, an agreement was reached with
the U.S. government under which, subject to certain conditions
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<PAGE> 10
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
and limitations, upon such combination, (i) FMC and the Company (which
will become a subsidiary of FMC) are to guarantee the payment of the
obligations, if any, of NMC to the U.S. government in respect of the
OIG investigation and another proceeding; (ii) Grace Chemicals is to
guarantee the obligations of FMC under the foregoing guarantee with
respect to acts and transactions that took place prior to the
consummation of the combination (but only if such obligations become
due and payable and remain uncollected for 120 days); and (iii) NMC is
to deliver a standby letter of credit in the principal amount of
$150.0 in favor of the U.S. government to support its payment of such
obligations. As a result of this agreement, the U.S. government has
agreed (i) to not take any action to delay or interfere with the
combination and (ii) to release Grace, NMC and certain other parties
from certain fraudulent conveyance and related claims arising from or
related to the combination (or any transaction comprising a part
thereof).
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal
Matters -- Legal and Regulatory Proceedings -- OIG Investigation" and
" -- OIG Agreements" in the Company's Joint Proxy Statement-Prospectus
dated August 2, 1996 for additional information.
Discontinued Operations - Consolidated Statement of Operations
The sales and revenues and results of the discontinued health care
operations and the gain on the sale of the transgenic plant business
of Grace's Agracetus subsidiary (discussed below) were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------
1996 1995 1996 1995
------ ------ ----- -----
<S> <C> <C> <C> <C>
Sales and revenues - health care $565.5 $523.5 $1,105.2 $1,015.3
====== ====== ======== ========
Income from health care operations
before income taxes $ 38.9 $ 60.1 $ 77.1 $ 104.1
Provision for income taxes 17.5 26.4 33.7 45.8
------ ------ -------- --------
Income from health care operations $ 21.4 $ 33.7 $ 43.4 $ 58.3
------ ------ -------- --------
Gain on sale of business $129.0 $ - $ 129.0 $ -
Provision for income taxes on
sale of business 49.6 - 49.6 -
------ ------ -------- --------
Net gain on sale of business $ 79.4 $ - $ 79.4 $ -
------ ------ -------- --------
Income from discontinued operations $100.8 $ 33.7 $ 122.8 $ 58.3
====== ====== ======== ========
</TABLE>
The operating results of Grace's cocoa business and other discontinued
operations have been charged against previously established reserves
and are, therefore, not reflected in the above results.
The net operating income of the health care business reflects an
allocation of Grace's interest expense ($24.4 and $21.6 for the
second quarters of 1996 and 1995, respectively,
I-8
<PAGE> 11
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
and $51.2 and $41.7 for the six months ended June 30, 1996 and 1995,
respectively) based on a ratio of the net assets of the health care
business as compared to Grace's total capital. Taxes have been
allocated to the health care business as if it were a stand-alone
taxpayer; however, these allocations are not necessarily indicative of
the taxes attributable to the health care business in the future. For
the quarter and six months ended June 30, 1995, net operating income
of the health care business also reflects an allocation of Grace's
health care-related research expenses (Grace management initiated the
phase-out of certain of its health care research programs in the third
quarter of 1995).
In May 1996, Grace completed the sale of the transgenic plant business
of its Agracetus subsidiary to the Monsanto Company for $150.0 in
cash, resulting in a pretax gain of $129.0, and an after-tax gain of
$79.4 ($0.82 per common share), in discontinued operations.
Discontinued Operations - Consolidated Balance Sheet
The net assets, excluding intercompany assets, of Grace's discontinued
operations included in the consolidated balance sheet at June 30,
1996, are as follows:
<TABLE>
<CAPTION>
Sub- Health
Cocoa Other Total Care Total
----- ----- ------ --------- --------
<S> <C> <C> <C> <C> <C>
Current assets $335.2 $ 4.7 $339.9 $ 726.2 $1,066.1
Properties and equipment, net 180.9 15.9 196.8 417.7 614.5
Investments in and advances to
affiliated companies - 28.4 28.4 - 28.4
Other assets 57.4 - 57.4 981.5 1,038.9
------ ----- ------ -------- --------
Total assets $573.5 $49.0 $622.5 $2,125.4 $2,747.9
------ ----- ------ -------- --------
Current liabilities $237.2 $ 5.0 $242.2 $ 476.0 $ 718.2
Other liabilities 79.2 4.2 83.4 77.8 161.2
------ ----- ------ -------- --------
Total liabilities $316.4 $ 9.2 $325.6 $ 553.8 $ 879.4
------ ----- ------ -------- --------
Net assets $257.1 $39.8 $296.9(1) $1,571.6(2) $1,868.5
====== ===== ====== ======== ========
</TABLE>
(1) Classified as a current asset in the consolidated balance sheet.
(2) Classified as a noncurrent asset in the consolidated balance
sheet.
Minority interest consists of a limited partnership interest in Grace
Cocoa Associates, L.P. (LP). LP's assets consist of Grace Cocoa's
worldwide cocoa and chocolate business, long-term notes and demand
loans due from various Grace entities and guaranteed by the Company
and its principal operating subsidiary, and cash. LP is a separate
and distinct legal entity from each of the Grace entities and has
separate assets, liabilities, business functions and operations. For
financial reporting purposes, the assets, liabilities, results of
operations and cash flows of LP are included in Grace's consolidated
financial statements as components of discontinued operations and the
outside investors' interest in LP is reflected as a minority interest.
The intercompany notes held by LP are eliminated in preparing the
consolidated financial statements and, therefore, have not been
classified as pertaining to discontinued operations.
I-9
<PAGE> 12
W. R. Grace & Co. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(E) RESTRUCTURING COSTS
As discussed in Note 5 to the consolidated financial statements in the
1995 Annual Report, Grace began implementing in 1995 a worldwide
program focused on streamlining processes and reducing general and
administrative expenses, factory administration costs and noncore
corporate research and development expenses. As previously reported,
Grace expects to implement additional cost reduction and efficiency
improvements beyond those initiated in 1995, as its businesses further
evaluate and reengineer their operations. In furtherance of that
plan, in the second quarter of 1996, Grace recorded a pretax charge of
$53.7 million ($32.4 million after-tax), principally related to
restructuring the Company's European packaging operations. The
charge primarily relates to employee termination benefits and lease
termination costs.
(F ) OTHER
Components of Grace's inventories were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw and packaging materials $120.0 $137.1
In process 79.5 78.0
Finished products 252.9 325.2
------ ------
$452.4 $540.3
Less: Adjustment of certain inventories
to a last-in/first-out (LIFO) basis (50.0) (48.4)
------ ------
Total Inventories $402.4 $491.9
====== ======
</TABLE>
Earnings per share are calculated on the basis of the following
weighted average number of common shares outstanding:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Three Months Ended June 30: . . . . . . . . . . . . 96,634,000 95,116,000
Six Months Ended June 30: . . . . . . . . . . . . . 97,259,000 94,629,000
</TABLE>
I-10
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
REVIEW OF OPERATIONS
Overview
The second quarter of 1996 included an after-tax gain on the sales of
businesses, primarily the water treatment and process chemicals
business and the transgenic plant business, totaling $289.5 million
($455.4 million pretax), offset by an after-tax charge for
restructuring costs of $32.4 million ($53.7 million pretax). The
first quarter of 1995 included an after-tax charge of $12.5 million
($20.0 million pretax) relating to corporate governance matters.
Excluding the above items, net income for the second quarter of 1996
would have decreased 2% as compared to the second quarter of 1995, and
net income for the 1996 first half would have increased by 1% over the
1995 first half.
Operating Results
The following table compares results for the specialty chemicals
segment for the 1996 second quarter and first half to those for the
comparable periods of 1995:
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Specialty Chemicals Operating Results June 30, June 30,
------------------------------------- ----------------------- -----------------------
$ millions 1996 1995 1996 1995
------------------------------------- ------ ------ -------- --------
<S> <C> <C> <C> <C>
Sales and revenues $948.9 $932.3 $1,834.9 $1,785.7
====== ====== ======== ========
Operating income before taxes (i) $102.1 $ 85.3 $ 186.0 $ 153.7
Gain on sales of businesses 326.4 - 326.4 -
Restructuring costs (53.7) - (53.7) -
Provision for corporate governance - - - (20.0)
Interest expense/financing costs (ii) (18.3) (18.7) (36.7) (34.5)
Other income/(expenses), net (ii) 7.1 (1.8) 7.6 (3.0)
------ ------ -------- --------
Income from continuing operations
before income taxes $363.6 $ 64.8 $ 429.6 $ 96.2
====== ====== ======== ========
</TABLE>
(i) Reflects the allocation of general corporate overhead, general
corporate research expenses and certain other income and expense
items that can be identified with the specialty chemicals
operations.
(ii) Corporate interest and financing costs and nonallocable expenses
are not reflected in the results of the specialty chemicals
segment. Corporate interest and financing costs are not allocated
to the specialty chemicals operating results because all
significant financing decisions are centralized at the corporate
level.
Sales and revenues increased 2% and 3% in the second quarter and first
half of 1996, respectively, as compared to the 1995 periods. The
increase for the 1996 second quarter reflected a favorable volume
variance estimated at 4%, and unfavorable price/product mix and
currency translation variances estimated at 1% each, compared to 1995.
The increase for the first half of 1996 reflected a favorable volume
variance estimated at 3%, with price/product mix and currency
translation variances being flat.
I-11
<PAGE> 14
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Comparison of Second Quarter 1996 to Second Quarter 1995
Construction products, catalysts and other silica-based products,
packaging and water treatment product lines experienced improved
volumes, offset by a volume decline in container products.
# PACKAGING - Volume increases were offset by unfavorable
price/product mix variances, resulting in sales being flat for the
1996 quarter versus the 1995 quarter. Sales of bags declined,
particularly in Europe and Asia Pacific, due to the considerable
decrease in beef consumption caused by the outbreak of bovine
spongiform encephalopathy (commonly referred to a "mad cow
disease"). Sales of films were down, primarily in North America,
due to pricing pressures. Laminate sales increased, primarily as
a result of market share gains in Asia Pacific.
# CATALYSTS AND OTHER SILICA-BASED PRODUCTS - Sales were higher in
all regions. Market share gains in Asia Pacific and Europe
increased sales for refinery catalysts, and North America
polyolefin catalyst sales increased primarily due to an improved
resin market.
# CONSTRUCTION PRODUCTS - Volumes increased in all regions and in
all products, especially concrete and waterproofing products in
North America and Asia Pacific. These increases were due to
housing starts and projects that had been delayed by severe
weather in the first quarter of 1996 in North America and market
share gains in Asia Pacific. Volume increases were partially
offset by the effect of the 1995 divestment of the composite
material business.
# CONTAINER - The negative effects of currency exchange, coupled
with volume declines, led to decreased sales of can sealing
products in Asia Pacific and closure compounds in Europe,
partially offset by volume increases of can coating products in
Latin America as a result of continued market penetration.
# WATER TREATMENT - Volume increases, caused by market share gains,
resulted in higher paper industry process chemicals sales in
Europe. Water treatment chemicals sales in Latin America
increased, as management implemented various programs to improve
price/product mix. As discussed in note (c) to the consolidated
financial statements in this Report, Grace sold its water
treatment and process chemicals business in June 1996.
Operating income before taxes increased by 20% in the second quarter
of 1996 as compared to the 1995 second quarter, as cost management
programs continued to favorably impact results across all regions and
product lines. In addition to the favorable effects of the cost
management programs, operating income before taxes was affected by the
factors discussed below.
# NORTH AMERICA - Improved results in the second quarter of 1996
reflected improved operating margins resulting from the sales
volume increases in construction products, offset by continued
weakness in fluid cracking catalysts and resultant pricing
pressures.
I-12
<PAGE> 15
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
# EUROPE - Results improved versus the 1995 second quarter,
primarily due to the volume increases in refinery catalysts,
construction products and paper industry process chemicals.
These favorable results were offset by lower results in packaging
due to the volume decline in bags, discussed above.
# ASIA PACIFIC - 1996 second quarter results declined versus the
1995 period, as the volume increases in construction products
were offset by unfavorable results in can sealing products due to
certain depressed economies and the shortage of products to be
canned as a result of last year's floods in Southeast Asia, and
in packaging due to the volume decline in bags, discussed above.
# LATIN AMERICA - Results improved versus the 1995 second quarter,
primarily due to the increased water treatment chemical sales and
market share gains in coating products.
For the first half of 1996, operating income increased 21% over the
comparable period of 1995, primarily due to improved operating margins
and the growth in catalysts and other silica-based products,
construction products and water treatment, as discussed above.
Statement of Operations
Other Income
Other income includes interest income, dividends, royalties from
licensing agreements and equity in earnings of affiliated companies.
Included in other income in the second quarter and first half of
1996 was interest income of $7.5 million relating to the settlement
of prior years' Federal income tax returns.
Interest Expense and Related Financing Costs
Excluding amounts allocated to discontinued operations (as discussed
in Note (d) to the consolidated financial statements in this Report),
interest expense and related financing costs of $18.3 million and
$36.7 million in the second quarter and first half of 1996,
respectively, decreased 2% and increased 6%, respectively, versus the
comparable 1995 periods. Including amounts allocated to discontinued
operations, interest expense and related financing costs increased 6%
and 15% in the second quarter and first half of 1996, respectively,
over the comparable 1995 periods, to $42.7 million and $87.9 million,
respectively. The overall increase in interest expense and related
financing costs is primarily due to higher average debt levels.
See "Financial Condition: Liquidity and Capital Resources" below for
information on borrowings
Research and Development Expenses
Research and development spending decreased 7% and 6% in the second
quarter and first half of 1996, respectively, versus the 1995 periods,
reflecting cost management programs. Research and development
spending for 1996 has been directed to Grace's core packaging and
specialty chemicals businesses.
I-13
<PAGE> 16
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Research and development spending is expensed as incurred. Research
is carried out by product line laboratories in North America, Europe,
Latin America and Asia Pacific and at a corporate research facility in
the U.S. Corporate research spending is generally charged to the
product lines, based upon the costs incurred on projects directly
sponsored by the respective product lines.
Restructuring Costs
See note (e) to the consolidated financial statements in this Report
for information relating to restructuring costs.
Income Taxes
The effective tax rates were 35.9% and 36.1%, respectively, for the
second quarter and first half of 1996, compared with 30.6% and 29.4%,
respectively, for the second quarter and first half of 1995.
Excluding the items discussed under "Overview" above, Grace's
effective tax rates would have been 39.1% for the second quarter of
1996 and 38.2% and 30.8% for the first half of 1996 and 1995,
respectively.
The low effective tax rates in the second quarter and first half of
1995 were primarily due to a lower overall foreign tax rate, as the
result of a reassessment of the valuation allowance for certain
deferred tax assets.
Income from Discontinued Operations
The following table compares the results for the health care business
for the 1996 second quarter and first half to results for the
comparable periods of 1995:
<TABLE>
<CAPTION>
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended
Health Care Operating Results June 30, June 30,
---------------------------------- ---------------------- ------------------------
$ millions 1996 1995 1996 1995
---------------------------------- ------ ------ -------- ---------
<S> <C> <C> <C> <C>
Sales and revenues $565.5 $523.5 $1,105.2 $1,015.3
====== ====== ======== ========
Operating income before taxes (i) $ 63.3 $ 81.7 $ 128.3 $ 145.8
====== ====== ======== ========
</TABLE>
(i) The above operating results do not include interest expense
allocated to the discontinued health care business of $24.4 and
$21.6 for the second quarters of 1996 and 1995, respectively, and
$51.2 and $41.7 for the first six months of 1996 and 1995,
respectively.
Sales and revenues for the second quarter and first half of 1996
increased by 8% and 9%, respectively, over the comparable periods of
1995. These improvements were due to 11% increases in kidney dialysis
services revenues in both the second quarter and first half of 1996,
and increases of 8% and 12% in the second quarter and first half of
1996, respectively, in medical products operations. The increases
were largely due to the effect of acquisitions subsequent to the first
half of 1995, partially offset by the decision, effective July 1,
1995, to discontinue recognizing incremental revenue relating to
certain dual eligible end
I-14
<PAGE> 17
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
stage renal disease patients; see the discussion below relating to the
Omnibus Budget Reconciliation Act of 1993 (OBRA 93). The number of
centers providing dialysis and related services increased 13%, from
623 at June 30, 1995 to 706 at June 30, 1996 (587 in North America, 66
in Europe, 37 in Latin America and 16 in Asia Pacific). The
improvements in dialysis services and medical products operations were
partially offset by a 5% decrease in both the second quarter and first
half of 1996 in home health care revenues resulting from a decrease in
infusion therapy revenues due to continued managed care pricing
pressure.
Operating income before taxes in the second quarter and first half of
1996 decreased by 23% and 12%, respectively, over the 1995 periods.
The decreases were principally attributable to the effects of OBRA 93
(which reduced revenues without a commensurate decrease in costs) on
kidney dialysis services results and a reduction in home health care
operating income due to the decreased revenues discussed above and
increased bad debt expense. Also negatively impacting operating
income were costs incurred in connection with the OIG investigation,
as discussed below and in note (d) to the consolidated financial
statements in this Report. These decreases were offset by the
increases in medical products operations due to the increased revenues
discussed above.
See below and note (d) to the consolidated financial statements in
this Report for a discussion concerning certain items relating to
NMC's operations and the possible material adverse effects of these
items.
Intradialytic Parenteral Nutrition (IDPN) Therapy
Among its other services, NMC administers IDPN therapy to chronic
dialysis patients who suffer from severe gastrointestinal
malfunctions. Since late 1993, Medicare claims processors have
sharply reduced the number of IDPN claims approved for payment as
compared to prior periods. NMC believes that the reduction in IDPN
claims currently being paid by Medicare represents an unauthorized
policy coverage change. Accordingly, NMC, along with certain other
IDPN providers, is pursuing various administrative and legal avenues,
including administrative appeals and a declaratory judgment action, to
address this problem.
Although NMC contends that its IDPN claims are consistent with
published Medicare coverage guidelines and ultimately will be approved
for payment, there can be no assurance that the claims will be
approved for payment. Such claims represent substantial accounts
receivable of NMC, amounting to approximately $130.0 million and $93.0
million as of June 30, 1996 and December 31, 1995, respectively, and
which have been increasing at the rate of approximately $6.0 million
per month; however, see below for information regarding a new IDPN
reimbursement policy. If NMC is unable to collect its IDPN accounts
receivable or if IDPN and/or Medicare Parenteral and Enteral Nutrition
(PEN) program coverage is reduced or eliminated, NMC's business,
financial position and results of operations could be materially
adversely affected.
In April 1996, the Medicare claims processors published new medical
review policies which restrict substantially the number of patients
for whom IDPN would be reimbursed by Medicare. The new policies are
final and effective for claims submitted on and after
I-15
<PAGE> 18
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
July 1, 1996. NMC and other PEN providers continue to review whether
and to what extent possible modifications to the new policies might be
obtained in legislative, judicial or administrative forums.
While the new policy permits continued coverage of IDPN and other PEN
therapies, and while the potential impact of the new policy is subject
to further analysis, NMC believes that the new policy will make it
substantially more difficult to qualify patients for future coverage
by, among other things, requiring certain patients to undergo onerous
and/or invasive tests in order to qualify for coverage. The new
policy also eliminates all reimbursement for infusion pumps. NMC,
together with other interested parties, may seek to effect certain
changes in the new policy (other than with respect to elimination of
pumps revenues), and NMC has developed changes to its patient
qualification procedures in order to comply with the policy. However,
if NMC is unable to achieve meaningful change in the new policy, if
physicians and patients fail to accept the new qualification
procedures and/or if patients fail to qualify under such procedures,
the policy could significantly reduce the number of patients eligible
for Medicare coverage of IDPN and other PEN therapies, which would
have a material adverse effect on NMC's financial position and results
of operations.
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- IDPN" and "--
Reimbursement -- U.S. -- IDPN" in the Company's Joint Proxy
Statement-Prospectus dated August 2, 1996 for additional information.
OBRA 93
NMC's business, financial position and results of operations could
also be materially adversely affected by an adverse outcome in the
pending litigation concerning the implementation of certain provisions
of OBRA 93 relating to the coordination of benefits between Medicare
and employer health plans in the case of certain dialysis patients.
See Note 7 to the consolidated financial statements in the 1995 Annual
Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and
Legal Matters -- Legal and Regulatory Proceedings -- OBRA 93" in the
Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for
additional information.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996, the net pretax cash provided by Grace's
continuing operating activities was $111.9 million, versus $39.9
million in the first half of 1995. The increase was primarily due to
improved operating results, partially offset by reduced net cash
inflows resulting from settlements with certain insurance carriers for
asbestos-related litigation, net of amounts paid for the defense and
disposition of asbestos-related litigation (as discussed below), of
$26.6 million in the first half of 1996 as compared to $96.2 million
in the first half of 1995. After giving effect to the net pretax cash
provided by operating activities of discontinued operations and
payments of income taxes, the net cash provided by operating
activities was $118.5 million in the first half of 1996 versus $23.3
million used in the first half of 1995.
I-16
<PAGE> 19
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
Investing activities provided $379.7 million of cash in the first half
of 1996, largely reflecting the net cash proceeds of $697.1 million
from the divestments of businesses (excluding $101.6 million of
promissory notes received on the sale of the water treatment and
process chemicals business). This positive cash flow was partially
offset by capital expenditures of $234.5 million (more than 70% of
which relates to Grace's packaging and catalyst and other silica-based
businesses). Also, investing activities of discontinued operations
for the first half of 1996 used $97.6 million (compared to $46.3
million used in the first half of 1995), primarily reflecting the
classification of the health care business as a discontinued operation
in the 1995 second quarter. Management anticipates that capital
expenditures for 1996 will not exceed the capital expenditures for
1995.
Net cash used for financing activities in the first half of 1996 was
$464.1 million, primarily reflecting the purchase of stock (as
discussed below), reductions in debt and the payment of dividends,
partially offset by proceeds from the exercise of employee stock
options. Total debt was $1,866.7 million at June 30, 1996, reflecting
a decrease of $67.1 million from December 31, 1995. Grace's total
debt as a percentage of total capital (debt ratio) decreased from
61.1% at December 31, 1995 to 59.6% at June 30, 1996, primarily due to
the decrease in debt. At June 30, 1996 and December 31, 1995, the net
assets of the discontinued health care business included $188.1
million and $226.7 million of debt, respectively.
During the first six months of 1996, Grace received $697.1 million of
cash proceeds from divestments, principally from the sales of the
water treatment and process chemicals business and the transgenic
plant business, and it expects to receive approximately $2.3 billion
(in the form of cash and/or the assumption of debt) from the expected
distribution from NMC (as discussed in note (d) to the consolidated
financial statements in this Report). Grace has applied the cash
proceeds received to date, and expects to apply the cash proceeds
generated from the NMC distribution and, to a lesser extent, funds
generated by operations, to the reduction of borrowings, the
repurchase of stock and investments in core businesses.
See note (d) to the consolidated financial statements in this Report
for information concerning an agreement reached with the U.S.
government regarding the OIG investigation, and the commitment letter
for approximately $2.5 billion of financing obtained by Grace on
behalf of NMC.
In May 1996, Grace Chemicals entered into a new credit agreement
providing for total borrowings of $1.85 billion and terminated three
previous agreements providing for total borrowings of $850 million.
The new credit agreement is intended to provide liquidity to finance
the repurchase of stock and potential acquisitions pending the receipt
of the distribution from NMC. Borrowings under the new credit
agreement are to be guaranteed by New Grace and the Company. Upon the
completion of the disposition of NMC, the total borrowings available
under the new credit agreement will be reduced to $650 million and the
guarantee by the Company will terminate.
The Company initiated its previously announced share repurchase
program in April 1996. As of June 30, 1996, Grace had acquired
5,229,600 shares under this program at a cost of
I-17
<PAGE> 20
Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
approximately $398.2 million (or an average price of approximately
$76.14 per share). In late July 1996, the Company temporarily
suspended the repurchase program. Through late July 1996, Grace had
purchased a total of 7,920,200 shares at a cost of approximately
$583.3 million (or an average price of approximately $73.65 per
share).
In July 1996, Grace announced that it had completed the acquisition of
Cypress Packaging, Inc. (Cypress), a manufacturer of flexible
packaging. Cypress, with 1995 sales of more than $20.0 million, is a
leading supplier of plastic packaging materials for the retail pre-cut
produce market segment. The acquisition of Cypress is in lieu of the
previously announced plan to construct a $50.0 million plant in
Seneca, South Carolina to serve the fresh-cut produce market.
Asbestos-Related Matters
As reported in note (b) to the consolidated financial statements in
this Report, Grace is a defendant in property damage and personal
injury lawsuits relating to previously sold asbestos-containing
products and is involved in related litigation with certain of its
insurance carriers. In the first half of 1996, Grace received $26.6
million under settlements with certain insurance carriers, net of
amounts paid for the defense and disposition of asbestos-related
property damage and personal injury litigation. The balance sheet at
June 30, 1996 includes a receivable due from insurance carriers, a
portion of which is subject to litigation, of $241.2 million. Grace
has also recorded notes receivable of $111.6 million ($102.5 million,
net of discounts) for amounts to be received in 1996 to 2001 pursuant
to settlement agreements with certain insurance carriers.
Although the amounts to be paid in 1996 in respect of asbestos-related
lawsuits and claims cannot be precisely estimated, Grace expects that
it will be required to expend approximately $40.0 million (pretax) in
1996 to defend against and dispose of such lawsuits and claims (after
giving effect to payments to be received from certain insurance
carriers, as discussed above and in note (b) to the consolidated
financial statements in this Report). As indicated therein, the
amounts reflected in the consolidated financial statements with
respect to the probable cost of defending against and disposing of
asbestos-related lawsuits and claims and probable recoveries from
insurance carriers represent estimates; neither the outcomes of such
lawsuits and claims nor the outcomes of Grace's continuing litigations
with certain of its insurance carriers can be predicted with
certainty.
Environmental Matters
There were no significant developments relating to environmental
liabilities in the first half of 1996.
For additional information relating to environmental liabilities, see
Note 12 to the consolidated financial statements in the 1995 Annual
Report.
I-18
<PAGE> 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(a) The section captioned "BUSINESS OF GRACE CHEMICALS--Legal Proceedings
and Regulatory Matters" on pages 20-27 of the Prospectus dated August 2, 1996
included in a Registration Statement on Form S-1 (Registration No. 333-09495)
filed by Grace Holding, Inc., a subsidiary of the Company, and the section
captioned "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal
Matters--Legal and Regulatory Proceedings" (insofar as such section contains
information relating to Grace and/or NMC) on pages 130-142 of the Joint Proxy
Statement-Prospectus dated August 2, 1996 included in a Registration Statement
on Form S-4 (Registration No. 333-09497) filed by the Company, are incorporated
herein by reference.
(b) Note (b) to the Consolidated Financial Statements in Part I of this
Report is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company's 1996 Annual Meeting of Shareholders ("Annual Meeting") was held
on May 10, 1996. At the Annual Meeting, the Company's shareholders (a) elected
three Class I Directors for a term expiring in 1999 and one Class II Director
for a term expiring in 1997; (b) ratified the selection of Price Waterhouse LLP
as independent certified public accountants of the Company and its consolidated
subsidiaries for 1996; (c) approved the Company's Long-Term Incentive Program;
(d) approved the
II-1
<PAGE> 22
Company's Annual Incentive Compensation Program; and (e) defeated a shareholder
proposal regarding nonemployee directors' retirement benefits.
The following sets forth the results of voting at the Annual Meeting:
<TABLE>
<CAPTION>
VOTES
---------------------------------------------------------
MATTER FOR AGAINST* ABSTENTIONS BROKER NON-VOTES
- ------ --- ------- ----------- ----------------
<S> <C> <C> <C> <C>
Election of Directors*
- ---------------------
Class I
A. J. Costello 77,650,539 7,517,194 -0- -0-
M. A. Fox 77,788,812 7,378,921 -0- -0-
T. A. Vanderslice 77,794,637 7,373,096 -0- -0-
Class II
C. L. Hampers 77,494,633 7,673,100 -0- -0-
Selection of
Independent
Accountants 77,618,746 7,223,154 325,833 -0-
Approval of
Long-Term
Incentive Program 69,625,813 14,758,408 783,509 -0-
Approval of
Annual Incentive
Compensation
Program 77,305,760 7,081,791 778,580 -0-
Shareholder
Proposal 24,044,222 52,093,064 1,004,906 -0-
</TABLE>
- ---------------------------
* With respect to the election of directors, the form of proxy permitted
shareholders to check boxes indicating votes either "for" or "withheld";
votes relating to directors designated above as "against" are votes cast as
"withheld".
II-2
<PAGE> 23
Item 5. Other Information.
In July 1996, Grace completed the acquisition of Cypress Packaging,
Inc. ("Cypress"), a manufacturer of flexible packaging located in Rochester,
N.Y. Cypress, with 1995 sales of more than $20 million, is a leading supplier
of plastic packaging materials for the retail pre-cut market segment.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following are being filed as exhibits to this Report:
-- 364-Day Credit Agreement, dated as of May 17, 1996, among
W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding,
Inc., the several banks parties thereto, NationsBank, N.A.
(South), as documentation agent, and Chemical Bank, as
administrative agent, for such banks (filed as Exhibit 4.4
to the Registration Statement on Form S-1 (Registration No.
333-09495) of Grace Holding, Inc. filed on August 2, 1996
("S-1 Registration Statement") and incorporated herein by
reference)
-- Amended and Restated Credit Agreement, dated as of May 17,
1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co.,
Grace Holding, Inc., the several banks parties thereto and
Chemical Bank, as agent for such banks (filed as Exhibit
4.5 to the S-1 Registration Statement and incorporated
herein by reference)
-- Commitment letter for the Credit Agreement to be entered
into by National Medical Care, Inc., the principal health
care subsidiary of
II-3
<PAGE> 24
W. R. Grace & Co., and certain lenders (filed as
Exhibit 4.7 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Long-Term Incentive Program Award (filed as
Exhibit 10.13 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Stock Option Agreement (filed as Exhibit
10.14 to the S-1 Registration Statement and
incorporated herein by reference)
-- Form of Executive Severance Agreement between W. R.
Grace & Co. and new officers (filed as Exhibit 10.23
to the S-1 Registration Statement and incorporated
herein by reference)
-- Form of Executive Severance Agreement between W. R.
Grace & Co. and others (filed as Exhibit 10.22 to the
S-1 Registration Statement and incorporated herein by
reference)
-- Letter Agreement dated June 14, 1996 between W. R.
Grace & Co. and Constantine L. Hampers (filed as
Exhibit 10.35 to the S-1 Registration Statement and
incorporated herein by reference)
-- Option Agreement between W. R. Grace & Co. and Albert
J. Costello, dated May 1, 1995 (filed as Exhibit
10.36 to the S-1 Registration Statement and
incorporated herein by reference)
-- Option Agreement between W. R. Grace & Co. and Albert
J. Costello, dated March 6, 1996 (filed as Exhibit
10.37 to the S-1 Registration Statement and
incorporated herein by reference)
II-4
<PAGE> 25
-- Form of Indemnification Agreement between W. R. Grace
& Co. and certain directors (filed as Exhibit 10.39
to the S-1 Registration Statement and incorporated
herein by reference)
-- Guarantee Agreement among Fresenius Medical Care AG,
the United States of America, W. R. Grace & Co., and
National Medical Care, Inc. dated July 31, 1996
(filed as Exhibit 10.41 to the S-1 Registration
Statement and incorporated herein by reference)
-- Guarantee Agreement between W. R. Grace & Co.-Conn.
and the United States of America dated July 31, 1996
(filed as Exhibit 10.42 to the S-1 Registration
Statement and incorporated herein by reference)
-- Letter Agreement among W. R. Grace & Co., W. R. Grace
& Co.-Conn. and Fresenius Medical Care AG dated July
31, 1996 (filed as Exhibit 10.43 to the S-1
Registration Statement and incorporated herein by
reference)
-- weighted average number of shares and earnings used
in per share computations
-- computation of ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends
-- financial data schedule
-- Pro forma financial information for Grace Holding,
Inc. for the six-month period ended June 30, 1996
II-5
<PAGE> 26
-- Special-purpose, consolidated interim financial
statements of the Company for the three-month and
six-month periods ended June 30, 1996
-- "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and
Regulatory Matters" section of the Prospectus dated
August 2, 1996 included in the S-1 Registration
Statement
-- "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and
Legal Matters--Legal and Regulatory Proceedings"
section of the Joint Proxy Statement-Prospectus dated
August 2, 1996 included in a Registration Statement
on Form S-4 (Registration No. 333-09497) filed by W.
R. Grace & Co. (insofar as such section contains
information relating to Grace and/or NMC)
(b) Reports on Form 8-K. The Company filed a Report on Form 8-K
on April 15, 1996, relating to an agreement to sell the transgenic plant
business of its Agracetus subsidiary to the Monsanto Company for $150 million.
The Company filed a Report on Form 8-K on May 6, 1996, relating to the
announcement of 1996 first quarter results. The Company filed a Report on Form
8-K on July 11, 1996, relating to the sale of the business and assets of its
Dearborn water treatment and process chemicals business to Betz Laboratories,
Inc. The Company also filed a Report on Form 8-K on August 9, 1996, relating
to the announcement of 1996 second quarter results.
II-6
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. GRACE & CO.
-------------------------------
(Registrant)
Date: August 14, 1996 By /s/ Kathleen A. Browne
---------------------------
Kathleen A. Browne
Vice President and Controller
(Principal Accounting Officer)
II-7
<PAGE> 28
W. R. GRACE & CO.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
4.1 364-Day Credit Agreement, dated as of May 17, 1996, among W. R.
Grace & Co.-Conn., W. R. Grace & Co., Grace Holding, Inc., the
several banks parties thereto, NationsBank, N.A. (South), as
documentation agent, and Chemical Bank, as administrative
agent, for such banks (filed as Exhibit 4.4 to the Registration
Statement on Form S-1 (Registration No. 333-09495) of Grace
Holding, Inc. filed on August 2, 1996 ("S-1 Registration
Statement") and incorporated herein by reference)
4.2 Amended and Restated Credit Agreement, dated as of May 17,
1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace
Holding, Inc., the several banks parties thereto and Chemical
Bank, as agent for such banks (filed as Exhibit 4.5 to the S-1
Registration Statement and incorporated herein by reference)
4.3 Commitment letter for the Credit Agreement to be entered into
by National Medical Care, Inc., the principal health care
subsidiary of W. R. Grace & Co., and certain lenders (filed as
Exhibit 4.7 to the S-1 Registration Statement and incorporated
herein by reference)
10.1 Form of Long-Term Incentive Program Award (filed as Exhibit
10.13 to the S-1 Registration Statement and incorporated
herein by reference)
10.2 Form of Stock Option Agreement (filed as Exhibit 10.14 to the
S-1 Registration Statement and incorporated herein by
reference)
10.3 Form of Executive Severance Agreement between W. R. Grace &
Co. and new officers (filed as Exhibit 10.23 to the S-1
Registration Statement and incorporated herein by reference)
10.4 Form of Executive Severance Agreement between W. R. Grace &
Co. and others (filed as Exhibit 10.22 to the S-1 Registration
Statement and incorporated herein by reference)
<PAGE> 29
10.5 Letter Agreement dated June 14, 1996 between W. R. Grace & Co.
and Constantine L. Hampers (filed as Exhibit 10.35 to the S-1
Registration Statement and incorporated herein by reference)
10.6 Option Agreement between W. R. Grace & Co. and Albert J.
Costello, dated May 1, 1995 (filed as Exhibit 10.36 to the S-1
Registration Statement and incorporated herein by reference)
10.7 Option Agreement between W. R. Grace & Co. and Albert J.
Costello, dated March 6, 1996 (filed as Exhibit 10.37 to the
S-1 Registration Statement and incorporated herein by
reference)
10.8 Form of Indemnification Agreement between W. R. Grace & Co.
and certain directors (filed as Exhibit 10.39 to the S-1
Registration Statement and incorporated herein by reference)
10.9 Guarantee Agreement among Fresenius Medical Care AG, the
United States of America, W. R. Grace & Co., and National
Medical Care, Inc. dated July 31, 1996 (filed as Exhibit 10.41
to the S-1 Registration Statement and incorporated herein by
reference)
10.10 Guarantee Agreement between W. R. Grace & Co.-Conn. and the
United States of America dated July 31, 1996 (filed as Exhibit
10.42 to the S-1 Registration Statement and incorporated
herein by reference)
10.11 Letter Agreement among W. R. Grace & Co., W. R. Grace &
Co.-Conn. and Fresenius Medical Care AG dated July 31, 1996
(filed as Exhibit 10.43 to the S-1 Registration Statement and
incorporated herein by reference)
11 Weighted average number of shares and earnings used in per
share computations
12 Computation of ratio of earnings to fixed charges and combined
fixed charges and preferred stock dividends
27 Financial Data Schedule
99.1 Pro forma financial information for Grace Holding, Inc.
for the six-month period ended June 30, 1996
99.2 Special-purpose, consolidated interim financial statements of
the Company for the three-month and six-month periods ended
June 30, 1996
<PAGE> 30
99.3 "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and
Regulatory Matters" section of the Prospectus dated August 2,
1996 included in the S-1 Registration Statement
99.4 "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal
Matters--Legal and Regulatory Proceedings" section of the
Joint Proxy Statement-Prospectus dated August 2, 1996 included
in a Registration Statement on Form S-4 (Registration No.
333-09497) filed by W. R. Grace & Co. (insofar as such section
contains information relating to Grace and/or NMC)
<PAGE> 1
EXHIBIT 11
W. R. GRACE & CO. AND SUBSIDIARIES
WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS
(Unaudited)
The weighted average number of shares of Common Stock outstanding were as
follows (in thousands):
<TABLE>
<CAPTION>
3 Mos. Ended 6 Mos. Ended
6/30/96 - 6/30/95 6/30/96 - 6/30/95
----------------------- ---------------------
<S> <C> <C> <C> <C>
Weighted average number of shares of Common
Stock outstanding . . . . . . . . . . . . . . . . . 96,634 95,116 97,259 94,629
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method) . . . . . . . . . . . . . . . . . . . 1,878 2,486 2,022 2,486
------ ------ ------ ------
Weighted average number of shares of Common
Stock outstanding assuming full dilution . . . . . 98,512 97,602 99,281 97,115
====== ====== ====== ======
</TABLE>
Income used in the computation of earnings per share were as follows (in
millions except per share):
<TABLE>
<CAPTION>
3 Mos. Ended 6 Mos. Ended
6/30/96 - 6/30/95 6/30/96 - 6/30/95
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . $333.9 $78.7 $397.5 $126.2
Dividends paid on preferred stocks . . . . . . . . (.2) (.2) (.3) (.3)
------ ----- ------ ------
Income used in per share computation of
earnings and in per share computation of
earnings assuming full dilution . . . . . . . . . . $333.7 $78.5 $397.2 $125.9
====== ===== ====== ======
Earnings per share . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33
Earnings per share assuming full dilution . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30
</TABLE>
<PAGE> 1
EXHIBIT 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in millions except ratios)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------------------------- -----------------
1995 (b) 1994 (c) 1993 (d) 1992 (e) 1991 1996 (f) 1995(g)
------- ------- ------- ------- ---- -------- -------
<S> <C> <C> <C> <C>
Net (loss)/income from continuing operations $(196.6) $(41.4) $ 19.1 $ 1.4 $157.4 $274.7 $ 67.9
Add/(deduct):
(Benefit from)/provision for income taxes (115.8) (46.6) 10.1 79.9 99.1 154.9 28.3
Income taxes of 50%-owned companies . . . . - - .1 2.1 1.5 - -
Equity in unremitted losses/(earnings)
of less than 50%-owned companies . . . . .8 (.6) (.5) (2.0) ( .9) .5 (.9)
Interest expense and related financing
costs, including amortization of
capitalized interest . . . . . . . . . . . 179.8 138.5 122.7 162.7 209.6 93.1 83.7
Estimated amount of rental expense
deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 5.6 7.1
------- ------ ------ ------ ------ ------ ------
(Loss)/income as adjusted . . . . . . . . . . $(123.3) $ 60.0 $162.8 $258.1 $479.4 $528.8 $186.1
======= ====== ====== ====== ====== ====== ======
Combined fixed charges and preferred stock
dividends: Interest expense and related
financing costs, including capitalized
interest. . . . . . . $195.5 $143.2 $122.8 $176.3 $224.5 $104.2 $90.3
Estimated amount of rental expense
deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 5.6 7.1
------ ------ ------ ------ ------ ----- -----
Fixed charges . . . . . . . . . . . . . . . . 204.0 153.3 134.1 190.3 237.2 109.8 97.4
Preferred stock dividend requirements (a) . . .5 .5 .8 .8 .9 .4 .4
------ ------ ------ ------ ------ ------ -----
Combined fixed charges and preferred
stock dividends . . . . . . . . . . . . . $204.5 $153.8 $134.9 $191.1 $238.1 $110.2 $97.8
====== ====== ====== ====== ====== ====== =====
Ratio of earnings to fixed charges . . . . . (h) (h) 1.21 1.36 2.02 4.82 1.91
====== ====== ====== ====== ====== ====== =====
Ratio of earnings to combined fixed charges
and preferred stock dividends . . . . . . (h) (h) 1.21 1.35 2.01 4.80 1.90
======= ====== ====== ====== ====== ====== =====
</TABLE>
(a) For each period with an income tax provision, the preferred stock
dividend requirements are increased to include the pretax earnings
required to cover such requirements based on Grace's effective tax
rate for that period.
(b) Includes pretax provisions of $275.0 for asbestos-related
liabilities and insurance coverage; $220.0 relating to restructuring
costs, asset impairments and other activities; $77.0 for
environmental liabilities at former manufacturing sites; and $30.0
for corporate governance activities.
(c) Includes a pretax provision of $316.0 relating to asbestos-related
liabilities and insurance coverage.
(d) Includes a pretax provision of $159.0 relating to asbestos-related
liabilities and insurance coverage.
(e) Includes a pretax provision of $140.0 relating to a fumed silica
plant in Belgium.
(f) Includes a pretax gain of $326.4 on the sales of businesses,
principally the water treatment and process chemicals business; and
a pretax provision of $53.7 relating to restructuring costs.
(g) Includes a pretax provision of $20.0 for corporate governance
activities.
(h) As a result of the losses incurred for the years ended December 31,
1995 and 1994, Grace was unable to fully cover the indicated fixed
charges.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 73,700
<SECURITIES> 0
<RECEIVABLES> 712,500<F1>
<ALLOWANCES> 0
<INVENTORY> 402,400
<CURRENT-ASSETS> 1,704,900<F2>
<PP&E> 3,170,700
<DEPRECIATION> 1,398,900
<TOTAL-ASSETS> 6,305,800<F2>
<CURRENT-LIABILITIES> 2,301,100
<BONDS> 1,262,800
0
7,400
<COMMON> 98,700
<OTHER-SE> 1,159,900
<TOTAL-LIABILITY-AND-EQUITY> 6,305,800
<SALES> 1,834,900<F3>
<TOTAL-REVENUES> 1,852,800
<CGS> 1,103,800
<TOTAL-COSTS> 1,103,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,700
<INCOME-PRETAX> 429,600<F4>
<INCOME-TAX> 154,900
<INCOME-CONTINUING> 274,700<F4>
<DISCONTINUED> 122,800<F5>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397,500
<EPS-PRIMARY> 4.09
<EPS-DILUTED> 4.00
<FN>
<F1>Amount shown is net of allowances.
<F2>Included within current assets and total assets are net assets of discontinued
operations of $296,900 and $1,868,500, respectively.
<F3>Excludes sales reported by the discontinued health care segment of $1,105,200
for the first half of 1996.
<F4>Includes (i) a gain of $326,400 ($210,100 after-tax) on the sales of businesses,
principally the water treatment and process chemicals business, and (ii) a
charge of $53,700 ($32,400 after-tax) relating to restructuring costs.
<F5>Includes (i) after-tax income of $43,400 from health care operations and (ii)
an after-tax gain of $79,400 on the sale of the transgenic plant business of
Grace's Agracetus subsidiary.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
On August 2, 1996, New Grace filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 (Registration No. 333-09495),
including a Prospectus dated August 2, 1996 ("Prospectus") that was sent to
the Company's shareholders in connection with a Special Meeting of
Shareholders to be held on September 16, 1996. The Prospectus contained
unaudited pro forma financial information for New Grace ("Pro Forma
Information"). The following unaudited pro forma financial information is
being provided to update the Pro Forma Information contained in the Prospectus,
and should be read in conjunction with the Consolidated Financial Statements
and the First Quarter Financial Statements (each as defined in the Prospectus),
as well as the consolidated financial statements and the notes thereto included
in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 ("Second Quarter Financial Statements"). The following unaudited pro
forma financial information does not necessarily indicate the financial
position and results of operations that would actually have occurred if New
Grace were a stand-alone entity on the dates and for the periods indicated.
Undefined terms used in the following unaudited pro forma financial information
have the meanings given those terms in the Prospectus.
<PAGE> 2
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The unaudited pro forma condensed consolidated balance sheet of New Grace
has been derived from the historical consolidated balance sheet of Grace New
York, adjusted for the disposition of NMC and for certain costs and expenses to
be incurred in connection with the Reorganization. The pro forma condensed
consolidated balance sheet has been prepared on the assumption that the
Reorganization occurred on June 30, 1996.
<TABLE>
<CAPTION>
GRACE NEW YORK PRO FORMA ADJUSTMENTS NEW GRACE
---------------------------
HISTORICAL DEBIT CREDIT PRO FORMA
---------------- ---------- ----------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . $ 73.7 $2,259.1 (a) $1,199.1 (b)
60.0 (a) $ 1,073.7
Notes and accounts receivable, net . . . . . . 712.5 101.5 (b) 814.0
Other current assets . . . . . . . . . . . . . 918.7 918.7
--------- ---------
Total Current Assets . . . . . . . . . . . . 1,704.9 2,806.4
Properties and equipment, net . . . . . . . . . 1,771.8 1,771.8
Net assets of discontinued operations - health care 1,571.6 361.3 (b) 1,872.0 (c) 60.9
Other assets . . . . . . . . . . . . . . . . . . 1,257.5 1,257.5
--------- ---------
Total Assets . . . . . . . . . . . . . . . . $ 6,305.8 $ 5,896.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt . . . . . . . . . . . . . . . $ 603.9 566.2 (b) $ 37.7
Other current liabilities . . . . . . . . . . 1,697.2 1,697.2
--------- ---------
Total Current Liabilities . . . . . . . . . 2,301.1 1,734.9
Long-term debt . . . . . . . . . . . . . . . . . 1,262.8 170.1 (b) 1,092.7
Other liabilities . . . . . . . . . . . . . . . 816.8 816.8
Noncurrent liability for asbestos-related litigation 659.1 659.1
--------- ---------
Total Liabilities . . . . . . . . . . . . . 5,039.8 4,303.5
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Preferred stocks . . . . . . . . . . . . . . . 7.4 7.4 (e) --
Common stock . . . . . . . . . . . . . . . . . 98.7 97.7 (d) 1.0
Paid in capital . . . . . . . . . . . . . . . 513.4 297.4 (d) 216.0
Retained earnings . . . . . . . . . . . . . . 1,082.0 60.0 (a) 2,259.1 (a)
1,872.0 (c) 7.4 (e) 1,416.5
Cumulative translation adjustments . . . . . . (40.4) (40.4)
Treasury stock, at cost . . . . . . . . . . . (395.1) 395.1 (d) --
--------- ---------
Total Shareholders' Equity . . . . . . . . . 1,266.0 1,593.1
--------- ---------
Total Liabilities and Shareholders' Equity . $ 6,305.8 $ 5,896.6
========= =========
</TABLE>
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION PRESENTED.
1
<PAGE> 3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma condensed consolidated statement of operations of
New Grace has been derived from the historical consolidated statement of
operations of Grace New York, adjusted to reflect the reduction in interest
expense expected to result from the Reorganization. The pro forma condensed
consolidated statement of operations has been prepared on the assumption that
the Reorganization occurred on January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
GRACE PRO FORMA NEW
NEW YORK ADJUSTMENTS GRACE
----------------
HISTORICAL DEBIT CREDIT PRO FORMA
------------------ ----- ------ --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales and revenues . . . . . . . . . . . . . . . . . . . . . . $3,665.5 $ 3,665.5
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 41.9 41.9
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 3,707.4 3,707.4
-------- ---------
Cost of goods sold and operating expenses . . . . . . . . . . . 2,243.7 2,243.7
Selling, general and administrative expenses . . . . . . . . . 905.6 905.6
Depreciation and amortization . . . . . . . . . . . . . . . . . 186.3 186.3
Interest expense and related financing costs . . . . . . . . . 71.3 $0.7 (f) 70.6
Research and development expenses . . . . . . . . . . . . . . . 120.6 120.6
Corporate expenses previously allocated to health care operations 37.8 37.8
Restructuring costs and asset impairments . . . . . . . . . . . 179.5 179.5
Provision relating to asbestos-related liabilities and insurance
coverage . . . . . . . . . . . . . . . . . . . . . . . 275.0 275.0
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,019.8 4,019.1
-------- ---------
Loss from continuing operations before income taxes . . . . . . (312.4) (311.7)
Benefit from income taxes . . . . . . . . . . . . . . . . . . . (115.8) $0.3 (f) (115.5)
-------- ---------
Loss from continuing operations . . . . . . . . . . . . . . . $ (196.6) $ (196.2)
======== =========
Loss per share:
Continuing operations . . . . . . . . . . . . . . . . . . $ (2.05) $ (2.05)
Fully diluted loss per share:
Continuing operations . . . . . . . . . . . . . . . . . . $ -- (1) $ -- (1)
Weighted average shares of Common Stock outstanding (in thousands) 95,822 95,822
- ------------
</TABLE>
(1) Not presented as the effect is anti-dilutive.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------
GRACE PRO FORMA NEW
NEW YORK ADJUSTMENTS GRACE
----------------
HISTORICAL DEBIT CREDIT PRO FORMA
------------ ----- ------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales and revenues . . . . . . . . . . . . . . . . . . . . . . $1,834.9 $1,834.9
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 17.9 17.9
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,852.8 1,852.8
-------- --------
Cost of goods sold and operating expenses . . . . . . . . . . . 1,103.8 1,103.8
Selling, general and administrative expenses . . . . . . . . . 405.7 405.7
Depreciation and amortization . . . . . . . . . . . . . . . . . 91.9 91.9
Interest expense and related financing costs . . . . . . . . . 36.7 $8.9 (f) 45.6
Research and development expenses . . . . . . . . . . . . . . . 57.8 57.8
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . 53.7 53.7
Gain on sales of businesses . . . . . . . . . . . . . . . . . . (326.4) (326.4)
--------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,423.2 1,432.1
--------- --------
Income from continuing operations before income taxes . . . . . 429.6 420.7
Provision for income taxes . . . . . . . . . . . . . . . . . . 154.9 $3.6 (f) 151.3
-------- --------
Income from continuing operations . . . . . . . . . . . . . . $ 274.7 $ 269.4
======== ========
Earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . $ 2.82 $ 2.77
Fully diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . $ 2.76 $ 2.71
Weighted average shares of Common Stock outstanding (in thousands) 97,259 97,259
</TABLE>
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION
PRESENTED.
2
<PAGE> 4
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PAR VALUE)
(a) The Reorganization Agreement provides that, prior to the Reorganization,
NMC will borrow and/or will assume debt of Grace Chemicals in an
aggregate amount of approximately $2,263 (as adjusted pursuant to the
Reorganization Agreement), and will distribute the net cash proceeds to
Grace Chemicals; it is currently estimated that such aggregate amount
will be approximately $2,259.1. A portion of such net cash proceeds
will be applied to further reduce Grace Chemicals' debt, resulting in an
aggregate reduction of $1,199.1 in Grace Chemicals' debt (see note (b)
below). In addition, Grace will incur expenses totaling approximately
$60.0 (net of applicable tax benefit) in connection with the
Reorganization. The remaining net cash proceeds received from NMC
(estimated at $1,000.0) are expected to be used to (i) purchase shares
of New Grace Common Stock (which would result in a decrease in current
assets and a commensurate decrease in shareholders' equity); (ii) invest
in core businesses; and (iii) further reduce Grace Chemicals' debt.
(b) As discussed in note (a) above, the assumption of Grace Chemicals' debt
by NMC and the application of a portion of the net cash proceeds
distributed to Grace Chemicals by NMC to the reduction of Grace
Chemicals' debt is expected to result in an aggregate reduction of
$1,199.1 in Grace Chemicals' debt, consisting of (i) $179.8 of
borrowings under NMC receivables financing arrangements; (ii) $181.5 of
other NMC debt; (iii) $566.2 of short-term debt (consisting of $336.0 of
commercial paper and bank borrowings and $230.2 of other short-term
borrowings); (iv) $170.1 of commercial paper classified as long-term
debt; and (v) $101.5 of borrowings under Grace Chemicals receivables
financing arrangements.
(c) Reflects the disposition of NMC's net assets of $1,872.0. Subsequent to
the disposition of NMC, New Grace will retain as discontinued operations
certain health care assets, primarily a bioseparation sciences business,
a health care services company and other assets (including NMC's cash
and marketable securities). The resulting gain of $387.1 (reflecting
net cash proceeds of $2,259.1, as described in note (a) above, less the
disposition of NMC's net assets of $1,872.0) is not reflected in the
pro forma condensed consolidated statement of operations.
(d) As part of the Reorganization, Grace New York will distribute, on a
one-share-for-one-share basis, all of the issued and outstanding New
Grace Common Stock (which has a par value of $.01 per share) to the
holders of shares of Grace New York Common Stock (which has a par value
of $1.00 per share) at the Time of Distribution. The treasury stock
held by Grace New York at the Time of Distribution will not be
transferred to New Grace and is therefore eliminated in the pro forma
adjustments. As a result of the retirement of the treasury stock and
the difference in the par values, (i) the $395.1 of treasury stock will
be eliminated, (ii) Common stock will decrease by $97.7 and (iii) paid
in capital will decrease by $297.4.
(e) The currently issued and outstanding shares of Grace New York Preferred
Stock will remain issued and outstanding following the Reorganization
and the Distribution, and no New Grace preferred stock will be issued.
The resulting reduction in outstanding Preferred stock is presented as
an increase in retained earnings within the shareholders' equity
section of the pro forma balance sheet.
(f) Grace Chemicals has allocated interest expense to discontinued
operations (including NMC), based on the ratio of the net assets of the
businesses classified as discontinued operations as compared to Grace
Chemicals' total capital. Excluding amounts allocated to discontinued
operations, interest expense and related financing costs were $71.3 for
the year ended December 31, 1995 and $36.7 for the six months ended June
30, 1996. For the year ended December 31, 1995, the assumed reduction
in debt as of January 1, 1995 would have the pro forma effect of
reducing total interest expense and related financing costs by $94.2 (of
which $0.7 was attributable to continuing operations and $93.5 was
attributable to discontinued operations). For the six months ended June
30, 1996, the assumed reduction in debt as of January 1, 1995 would have
the pro forma effect of reducing total interest expense and related
financing costs by $42.3 (increasing interest expense and related
financing costs attributable to continuing operations by $8.9 and
reducing interest expense and related financing costs attributable to
discontinued operations by $51.2).
The above adjustments to interest expense and related financing costs
would have the pro forma effect of increasing tax expense by $0.3 for
the year ended December 31, 1995 and reducing tax expense by $3.6 for
the six-month period ended June 30, 1996. The tax effects were
calculated using an effective tax rate of approximately 40%, which
represents the U.S. federal corporate tax rate of 35%, plus state and
local income taxes, net of U.S. federal income tax benefit.
________________
For accounting purposes, Grace Chemicals will receive the Distribution
Payment and will be deemed to receive a 44.8% common equity interest in FMC
and to immediately distribute such interest to the holders of Grace New York
Common Stock; however, the receipt and distribution of the interest in FMC
Ordinary Shares are not reflected in the pro forma condensed consolidated
balance sheet and statement of operations.
3
<PAGE> 5
CAPITALIZATION
The following table sets forth the capitalization of Grace New York
and the pro forma capitalization of New Grace at June 30, 1996, giving effect
to the Reorganization and related transactions described in the notes to the
unaudited pro forma condensed consolidated balance sheet and statement of
operations. This table should be read in conjunction with such notes, the
Consolidated Financial Statements and the Second Quarter Financial Statements.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
GRACE NEW YORK NEW GRACE
HISTORICAL PRO FORMA
----------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PAR VALUE)
<S> <C> <C>
Debt, including short-term debt (a) . . . . . . . . . . . . . . . . . . . . . . . . $1,866.7 $1,130.4
-------- --------
Shareholders' equity:
Grace New York Common Stock:
Common stock, $1.00 par value; 300,000,000 shares authorized;
98,740,000 issued; 93,550,000 outstanding . . . . . . . . . . . . . $ 98.7 --
New Grace Common Stock:
Common stock, $.01 par value; 300,000,000 shares authorized;
93,550,000 outstanding . . . . . . . . . . . . . . . . . . . . . . . -- $ 1.0
Grace New York Preferred Stock:
6% Preferred Stock, Cumulative, $100 par value; 40,000 shares authorized;
36,460 outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 --
Class A Preferred Stock, 8% Cumulative, $100 par value; 50,000 shares authorized;
16,256 outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 --
Class B Preferred Stock, 8% Noncumulative, $100 par value; 40,000 shares
authorized; 21,577 outstanding . . . . . . . . . . . . . . . . . . . . 2.2 --
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513.4 216.0
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 1,416.5
Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . (40.4) (40.4)
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . (395.1) --
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 1,266.0 1,593.1
-------- --------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . $3,132.7 $2,723.5
======== ========
- ----------------------
</TABLE>
(a) In addition to the retirement of debt reflected above, it is also
expected that $101.5 of borrowings under Grace Chemicals receivables
financing arrangement, $179.8 of borrowings under NMC receivables
financing arrangements and $181.5 of other NMC debt will be retired.
These amounts are classified within Notes and accounts receivable, net
and Net assets of discontinued operations - health care, respectively,
in the Grace New York historical balance sheet at June 30, 1996.
4
<PAGE> 1
EXHIBIT 99.2
On August 2, 1996, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-4 (Registration No. 333-09497),
including a Joint Proxy Statement-Prospectus dated August 2, 1996 ("Joint
Proxy Statement-Prospectus") that was sent to the Company's shareholders in
connection with a Special Meeting of Shareholders to be held on September 16,
1996. The Joint Proxy Statement-Prospectus included special-purpose financial
information of the Company ("Special-Purpose Information"). The following
unaudited financial information is being provided to update the Special-Purpose
Information contained in the Joint Proxy Statement-Prospectus, and should be
read in conjunction with the Special-Purpose, Consolidated Financial Statements
of the Company in the Joint Proxy Statement-Prospectus, as well as the Second
Quarter Financial Statements. The following unaudited special-purpose
financial information does not necessarily indicate the financial position and
results of operations that would have occurred if the NMC Business (as defined
in the Joint Proxy Statement-Prospectus) were a stand-alone entity on the dates
and for the periods indicated. Undefined terms used in the following unaudited
special-purpose financial information have the meanings given those terms in
the Joint Proxy Statement-Prospectus.
<PAGE> 2
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
NET REVENUES
Health care services . . . . . . . . . . . . . . . . . . . . . . . . $511,236 $471,825
Medical supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 40,883 36,720
-------- --------
552,119 508,545
-------- --------
EXPENSES
Cost of health care services . . . . . . . . . . . . . . . . . . . . 295,456 260,978
Cost of medical supplies . . . . . . . . . . . . . . . . . . . . . . 27,397 26,192
General and administrative expenses . . . . . . . . . . . . . . . . . 103,691 90,306
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 21,442 19,742
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 31,533 26,480
Research and development . . . . . . . . . . . . . . . . . . . . . . 622 597
Allocation of Grace Chemicals expenses . . . . . . . . . . . . . . . 1,769 10,101
Interest expense, net, and related financing costs . . . . . . . . . 7,459 5,791
-------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489,369 440,187
-------- --------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 62,750 68,358
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 28,832 31,253
-------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,918 $ 37,105
======== ========
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.35 $ 0.39
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
1
<PAGE> 3
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
NET REVENUES
Health care services . . . . . . . . . . . . . . . . . . . . . . . . $ 999,607 $ 916,305
Medical supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 80,803 70,298
---------- ----------
1,080,410 986,603
---------- ----------
EXPENSES
Cost of health care services . . . . . . . . . . . . . . . . . . . . 582,987 512,766
Cost of medical supplies . . . . . . . . . . . . . . . . . . . . . . 55,299 51,005
General and administrative expenses . . . . . . . . . . . . . . . . . 205,138 182,557
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 42,928 39,141
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 62,161 52,395
Research and development . . . . . . . . . . . . . . . . . . . . . . 1,308 1,368
Allocation of Grace Chemicals expenses . . . . . . . . . . . . . . . 3,786 19,649
Interest expense, net, and related financing costs . . . . . . . . . 14,463 11,541
---------- ----------
968,070 870,422
---------- ----------
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 112,340 116,181
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 51,977 53,060
---------- ----------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,363 $ 63,121
========== ==========
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.66
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
2
<PAGE> 4
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,039 $ 33,530
Accounts receivable, less allowances of $124,309 and $119,914 . . . . . . . . 437,079 406,682
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,485 72,491
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,812 81,192
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,345 51,835
---------- ----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 708,760 645,730
---------- ----------
Properties and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 396,828 377,328
---------- ----------
Other Assets:
Excess of cost over the fair value of net assets acquired and other
intangible assets, net of accumulated amortization of $273,778
and $247,644 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949,732 954,811
Other assets and deferred charges . . . . . . . . . . . . . . . . . . . . . . 19,201 20,275
---------- ----------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968,933 975,086
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,074,521 $1,998,144
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and capitalized lease obligations . . . . $ 155,222 $ 183,488
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,332 104,586
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,980 220,771
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,194 12,555
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 478,728 521,400
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,577 27,903
Capitalized lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . 4,743 7,516
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,778 48,109
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,286 30,441
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592,112 635,369
---------- ----------
Commitments and Contingencies (Note 3) . . . . . . . . . . . . . . . . . . . .
Equity:
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,487,525 1,365,901
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . (5,116) (3,126)
---------- ----------
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,482,409 1,362,775
---------- ----------
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . $2,074,521 $1,998,144
========== ==========
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
3
<PAGE> 5
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,363 $ 63,121
Adjustments to reconcile net earnings to net cash provided by
Operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 62,161 52,395
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . 42,928 39,141
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . (4,283) (6,367)
Loss on disposal of properties and equipment . . . . . . . . . . . . . 3,194 1,598
Changes in operating assets and liabilities, net of effects of
purchase acquisitions and foreign exchange:
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . (71,578) (57,017)
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . (778) (3,257)
Increase in other current assets . . . . . . . . . . . . . . . . . . . (13,440) (12,319)
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . (5,403) (13,547)
Increase in accrued income taxes . . . . . . . . . . . . . . . . . . . 9,971 26,718
Decrease in accrued liabilities . . . . . . . . . . . . . . . . . . . . (10,809) (16,743)
(Decrease)/increase in other long-term liabilities . . . . . . . . . . (8,155) 4,088
Increase in other assets and deferred charges . . . . . . . . . . . . (106) (2,842)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225) (5,413)
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 63,840 69,556
-------- --------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (58,545) (46,881)
Payments for acquisitions, net of cash acquired . . . . . . . . . . . . (26,190) (63,774)
Payments for physicians' contract agreements . . . . . . . . . . . . . 0 (2,900)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (84,735) (113,555)
-------- --------
Cash Flows from Financing Activities:
Advances from Grace Chemicals, net . . . . . . . . . . . . . . . . . . 61,260 28,921
Proceeds on issuance of debt . . . . . . . . . . . . . . . . . . . . . 124,176 9,813
Payments on debt and capitalized leases . . . . . . . . . . . . . . . . (161,540) (5)
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . 23,896 38,729
-------- --------
Effects of changes in foreign exchange rates . . . . . . . . . . . . . . . 3,508 (5,011)
-------- --------
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . 6,509 (10,281)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 33,530 39,758
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 40,039 $ 29,477
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,429 $ 10,788
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,340 26,981
</TABLE>
See accompanying Notes to Special-Purpose, Consolidated Interim Financial
Statements.
4
<PAGE> 6
W. R. GRACE & CO.
NOTES TO SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The Special-Purpose, Consolidated Interim Financial Statements of
Grace New York and NMC (together with Grace New York, the "Company") have been
prepared by the Company in accordance with the accounting policies stated in
the Special-Purpose, Consolidated Financial Statements in the Joint Proxy
Statement-Prospectus and should be read in conjunction with the Notes to
Special-Purpose, Consolidated Financial Statements appearing therein. In the
opinion of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation have been included in the
interim financial statements. The results for the six-month period ended June
30, 1996 may not necessarily be indicative of the results for the fiscal year
ending December 31, 1996.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------
<S> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,460
Manufactured goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . 3,378
Manufactured and purchased inventory available for sale . . . . . . . . . . . . . 32,608
-----------------
44,446
Health care supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,039
-----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,485
=================
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
See Note 15 to the Special-Purpose, Consolidated Financial Statements
in the Joint Proxy Statement-Prospectus.
5
<PAGE> 7
W. R. GRACE & CO.
SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
WEIGHTED AVERAGE NUMBER OF SHARES AND
EARNINGS USED IN PER SHARE COMPUTATIONS
(UNAUDITED)
The weighted average number of shares of Common
Stock outstanding were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average number of shares
of common stock outstanding . . . . . . . . . 96,634 95,116 97,259 94,629
====== ====== ====== ======
</TABLE>
Income used in the computation of
earnings per share was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . $33,918 $37,105 $60,363 $63,121
Dividends paid on preferred stocks . . . . . (130) (131) (261) (261)
------- ------- ------- -------
Income used in per share computation
of earnings . . . . . . . . . . . . . . . . $33,788 $36,974 $60,102 $62,860
======= ======= ======= =======
Earnings per share . . . . . . . . . . . . . $ 0.35 $ 0.39 $ 0.62 $ 0.66
</TABLE>
6
<PAGE> 1
EXHIBIT 99.3
LEGAL PROCEEDINGS AND REGULATORY MATTERS
Asbestos Litigation. Grace Chemicals is a defendant in property damage and
personal injury lawsuits relating to previously sold asbestos-containing
products, and anticipates that it will be named as a defendant in additional
asbestos-related lawsuits in the future. Due to the unique nature of each
property damage claim, Grace Chemicals cannot predict whether and to what extent
asbestos-related property damage lawsuits and claims will be brought against it
in the future or the expenses involved in defending against and disposing of any
such future lawsuits and claims. By contrast, Grace Chemicals believes that
there are common features with respect to personal injury claims; in the fourth
quarter of 1995, Grace Chemicals determined that it had adequate experience to
reasonably estimate the number of personal injury claims to be filed against it
through 1998 and established an accrual for such claims. Grace Chemicals'
aggregate accrual for asbestos liabilities as of March 31, 1996 was $792.4
million; this amount reflects all asbestos-related property damage and personal
injury lawsuits and claims pending at that date (except for four property damage
lawsuits as to which the liabilities are not yet estimable because Grace
Chemicals has not yet been able to obtain sufficient information as to the
relevant properties through discovery proceedings), as well as personal injury
lawsuits and claims expected to be filed through 1998.
Grace Chemicals previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace Chemicals has settled with and been
paid by its primary insurance carriers with respect to both property damage and
personal injury lawsuits and claims. With minor exceptions, Grace Chemicals has
also
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settled with its excess insurance carriers that wrote policies available for
property damage claims; those settlements involve amounts paid and to be paid to
Grace Chemicals. In addition, Grace Chemicals has settled with many excess
insurance carriers that wrote policies available for personal injury lawsuits
and claims. Grace Chemicals is currently in litigation with its remaining excess
insurance carriers whose policies Grace Chemicals believes are available for
asbestos-related personal injury lawsuits and claims. Recovery under these
policies is subject to lengthy litigation and legal uncertainties. Insurance
coverage for asbestos-related liabilities has not been commercially available
since 1985.
As of March 31, 1996, Grace Chemicals had recorded a receivable of $281.5
million, which is the amount estimated to be the probable recovery from its
insurance carriers with respect to pending and projected asbestos claims. In
Grace Chemicals' opinion, it is probable that recoveries from its insurance
carriers, along with other funds, will be available to satisfy the pending
property damage and personal injury claims, and personal injury claims expected
to be filed through year-end 1998. Consequently, Grace Chemicals believes that
the resolution of its asbestos-related litigation will not have a material
adverse effect on its consolidated results of operations or financial position.
In addition to the discussion below, see Note 2 to the historical consolidated
financial statements of Grace New York and the notes thereto for the year ended
December 31, 1995, attached hereto as Annex F (the "Consolidated Financial
Statements"), and Note (b) to the unaudited historical consolidated financial
statements of Grace New York and the notes thereto for the three-month period
ended March 31, 1996, attached hereto as Annex G (the "First Quarter Financial
Statements"), for a more comprehensive discussion of these matters, including
tabular presentations of accrued liabilities and asbestos-related receivables.
Grace Chemicals was a defendant in approximately 40,800 asbestos-related
lawsuits at year-end 1995 (47 involving claims for property damage and the
remainder involving approximately 92,400 claims for personal injury), as
compared to approximately 38,700 lawsuits at year-end 1994 (65 involving claims
for property damage and the remainder involving approximately 67,900 claims for
personal injury). In most of these lawsuits, Grace Chemicals is one of many
defendants.
The plaintiffs in property damage lawsuits generally seek, among other
things, to have the defendants absorb the cost of removing, containing or
repairing the asbestos-containing materials in the affected buildings. Through
1995, 129 asbestos property damage cases were dismissed with respect to Grace
Chemicals without payment of any damages or settlement amounts; judgments were
entered in favor of Grace Chemicals in 10 cases (excluding cases settled
following appeals of judgments in favor of Grace Chemicals and a case in which
the plaintiff was granted a new trial on appeal); Grace Chemicals was held
liable for a total of $74.7 million in seven cases (two of which are on appeal);
and 177 property damage suits and claims were settled for a total of $421.8
million.
Included in the asbestos property damage lawsuits pending against Grace
Chemicals and others at year-end 1995 were the following class actions: (i) a
Pennsylvania state court action (Prince George Center, Inc. v. U.S. Gypsum
Company, et al., Court of Common Pleas of Philadelphia County), certified in
1992, covering all commercial buildings in the U.S. leased, in whole or in part,
to the U.S. government on or after May 30, 1986; (ii) an action, conditionally
certified by the U.S. Court of Appeals for the Fourth Circuit in 1993 and
pending in the U.S. District Court for the District of South Carolina, covering
all public and private colleges and universities in the U.S. whose buildings
contain asbestos materials (Central Wesleyan College, et al. v. W. R. Grace, et
al.); and (iii) a purported class action (Anderson Memorial Hospital, et al. v.
W. R. Grace & Co., et al.), filed in 1992, in the Court of Common Pleas for
Hampton County, South Carolina, on behalf of all entities that own, in whole or
in part, any building containing asbestos materials manufactured by Grace
Chemicals or one of the other named defendants, other than buildings subject to
the class action lawsuits described above and any building owned by the federal
or any state government. In December 1995, Grace Chemicals entered into an
agreement to settle the claims under Prince George Center, Inc. v. U.S. Gypsum
Company, et al. The terms of the settlement agreement (which is subject to
judicial review and approval after class members have an opportunity to be
heard) are not expected to have a significant effect on Grace Chemicals'
consolidated results of operations or financial position. In July 1994, the
claims of most class members in Anderson Memorial Hospital, et al., v. W. R.
Grace & Co., et al. were dismissed due to a ruling that a South Carolina statute
prohibits nonresidents from pursuing claims in the South Carolina state courts
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with respect to buildings located outside the state. The plaintiffs have
requested that the court reconsider its decision. In August 1994, Grace
Chemicals entered into an agreement to settle In re: Asbestos School Litigation,
a nationwide class action brought in 1983 in the U.S. District Court for the
Eastern District of Pennsylvania on behalf of all public and private elementary
and secondary schools in the U.S. that contain friable asbestos materials (other
than schools that "opted out" of the class). The terms of the settlement
agreement (which were approved by the U.S. District Court for the Eastern
District of Pennsylvania in September 1995) are not expected to have a
significant effect on Grace Chemicals' consolidated results of operations or
financial position.
The remaining asbestos lawsuits pending at year-end 1995 involved claims
for personal injury. Through year-end 1995, approximately 10,100 personal injury
lawsuits involving 24,500 claims were dismissed with respect to Grace Chemicals
without payment of any damages or settlement amounts (primarily on the basis
that Grace Chemicals products were not involved), and approximately 23,700 such
suits involving 29,600 claims were disposed of for a total of $109 million (see
"-- Insurance Litigation" below). However, as a result of various trends
(including the insolvency of other former asbestos producers and cross-claims by
co-defendants in asbestos personal injury lawsuits), the costs incurred in
disposing of such lawsuits in the past may not be indicative of the costs of
disposing of such lawsuits in the future.
In 1991, the Judicial Panel on Multi-District Litigation consolidated in
the U.S. District Court for the Eastern District of Pennsylvania, for pre-trial
purposes, all asbestos personal injury cases pending in the U.S. federal courts,
including approximately 7,000 cases then pending against Grace Chemicals; 3,600
new cases involving 7,200 claims against Grace Chemicals have subsequently been
added to the consolidated cases. To date, no action has been taken by the court
handling the consolidated cases that would indicate whether the consolidation
will affect Grace's cost of disposing of these cases or its defense costs.
Grace Chemicals' ultimate exposure with respect to its asbestos-related
lawsuits and claims will depend on the extent to which its insurance will cover
damages for which it may be held liable, amounts paid in settlement and
litigation costs. A May 1994 decision of the U.S. Court of Appeals for the
Second Circuit limited the amount of insurance coverage available with respect
to property damage lawsuits and claims. Because Grace Chemicals' insurance
covers both property damage and personal injury lawsuits and claims, the May
1994 decision has had the concomitant effect of reducing the insurance coverage
available with respect to Grace Chemicals' asbestos personal injury lawsuits and
claims. However, in Grace Chemicals' opinion (which is not based on a formal
opinion of counsel), it is probable that recoveries from its insurance carriers,
along with other funds, will be available to satisfy the property damage and
personal injury lawsuits and claims pending at year-end 1995, as well as
personal injury lawsuits and claims expected to be filed in the future.
Consequently, Grace Chemicals believes that the resolution of its
asbestos-related litigation will not have a material adverse effect on its
consolidated results of operations or financial position. See "-- Insurance
Litigation" below and Note 2 to the Consolidated Financial Statements attached
hereto for additional information.
Environmental Proceedings. Manufacturers of specialty chemical products,
including Grace Chemicals, are subject to stringent regulations under numerous
federal, state and local environmental, health and safety laws and regulations
relating to the generation, storage, handling, discharge and disposition of
hazardous wastes and other materials. Grace Chemicals has expended substantial
funds in order to comply with such laws and regulations and expects to continue
to do so in the future. See "-- Environmental, Health and Safety Matters." There
can be no assurance that additional material environmental costs will not arise
as a result of future legislation or other developments. Grace Chemicals
believes that neither its operations, its financial condition nor its
competitive position will be materially adversely affected by compliance with
environmental requirements or by the impact of environmental considerations on
the marketability of its products. However, there can be no assurance that Grace
Chemicals will not incur material liability in connection with future actions of
governmental agencies and/or private parties relating to past or future
practices of Grace Chemicals with respect to the generation, storage, handling,
discharge or disposition of hazardous wastes and other materials.
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<PAGE> 4
The following is a description of the material environmental proceedings in
which Grace Chemicals is involved:
Grace Chemicals (together with certain other companies) has been designated
a "potentially responsible party" ("PRP") by the U.S. Environmental Protection
Agency ("EPA") with respect to absorbing the costs of investigating and
remediating pollution at various sites. At year-end 1995, proceedings were
pending with respect to approximately 30 sites as to which Grace has been
designated a PRP. Federal law provides that all PRPs may be held jointly and
severally liable for the costs of investigating and remediating a site. Grace
Chemicals is also conducting investigatory and remediation activities at sites
under the jurisdiction of state and/or local authorities.
In addition, in 1989, Hatco Corporation ("Hatco"), which purchased the
assets of a Grace Chemicals business in 1978, instituted a lawsuit against Grace
Chemicals in the U.S. District Court for the District of New Jersey (Hatco
Corporation v. W. R. Grace & Co.-Conn.) seeking recovery of cleanup costs for
waste allegedly generated at a New Jersey facility during the period of Grace
Chemicals' ownership. Grace Chemicals subsequently filed a lawsuit against its
insurance carriers seeking indemnity against any damages assessed against Grace
Chemicals in the underlying lawsuit, as well as defense costs. In decisions
rendered during 1993, the U.S. District Court for the District of New Jersey
ruled that Grace Chemicals is responsible for a substantial portion of Hatco's
costs. In July 1995, the U.S. Court of Appeals for the Third Circuit reversed
the decisions of the U.S. District Court for the District of New Jersey and
remanded the lawsuit to the U.S. District Court for the District of New Jersey
for further proceedings. Specifically, the Court of Appeals (i) reversed the
U.S. District Court for the District of New Jersey ruling that Grace Chemicals
is responsible for a substantial portion of Hatco's costs and (ii) ruled that in
the remand proceeding the burden of proof would be on Hatco to establish that it
had not released Grace Chemicals from the asserted liabilities. In an earlier
decision, the U.S. District Court for the District of New Jersey had resolved,
in a manner favorable to Grace Chemicals, certain legal issues regarding Grace
Chemicals' right to insurance coverage; however, the ultimate liability of Grace
Chemicals' insurance carriers will be determined at trial, should a trial be
necessary after the remand proceedings described above. Remediation costs, and
Grace Chemicals' share, if any, of such costs, will be determined once ongoing
site investigations are completed, a remediation plan is approved by the State
of New Jersey (which is expected by year-end 1997) and the litigation is fully
resolved. Grace Chemicals estimates that any amounts that it may be required to
pay in connection with this litigation (which amounts are expected to be
partially offset by recoveries from insurance carriers) will not exceed its
established reserves. See "-- Insurance Litigation" below.
In November 1995, Grace Chemicals received a letter from the U.S.
Department of Energy ("DOE") inquiring as to Grace Chemicals' willingness to
contribute to the continued cleanup of a former Grace Chemicals property located
in Wayne, New Jersey. The letter asserted that Grace Chemicals has a legal duty
to pay for the site's cleanup and that the total cost of cleanup may exceed $100
million. The operations conducted by Grace Chemicals at the Wayne site (from
1955 to 1970) included work done on radioactive materials under contract with
the U.S. government for the "Manhattan Project" and with the U.S. Atomic Energy
Commission. In 1975, the U.S. Nuclear Regulatory Commission inspected the site,
concluded that it was decontaminated in accordance with applicable regulations
and released it for unrestricted use. In 1984, pursuant to a request from the
DOE, Grace Chemicals transferred the Wayne property to the DOE and made a cash
payment as a contribution towards the DOE's cleanup efforts at the site, which
was acknowledged by the DOE as fulfilling any obligation Grace Chemicals had to
contribute to DOE's cleanup effort. As a result of these transactions, Grace
Chemicals believes it has no further obligation to contribute to the DOE's
cleanup activities.
In March 1993, an action was filed in the U.S. District Court for the
Southern District of Texas against Grace Drilling Company, a subsidiary of Grace
Chemicals, the business and assets of which have since been sold, and several
other defendants, for alleged violations of the Clean Water Act and the Rivers
and Harbors Act (U.S. v. Fina Oil and Chemical Co., et al.). The government
alleges that seagrasses and seabeds around a drilling rig operated by Fina Oil
and Chemical Co. were damaged in connection with the placing, servicing and
removal of the rig. The government is seeking injunctive relief requiring the
defendants to restore the damaged areas and to compensate for temporary loss of
the seagrass habitat, as well as civil penalties of up to $25,000
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<PAGE> 5
per day of violation and attorneys' fees. The parties to such action are
currently participating in a court-ordered mediation process.
Grace Chemicals is also a party to other proceedings involving federal,
state and/or local government agencies and private parties regarding Grace
Chemicals' compliance with environmental laws and regulations. These proceedings
are not expected to result in significant sanctions or in any material
liability. As a voluntary participant in the EPA Toxic Substances Control Act
("TSCA") Compliance Audit Program, Grace Chemicals agreed to undertake a
corporate-wide audit of compliance with Section 8 of TSCA, and agreed to pay a
stipulated civil penalty for each study or report that the EPA alleges should
have been, but was not, submitted to the EPA as required under Section 8 of
TSCA. Grace Chemicals has been advised that it will be required to pay the EPA a
penalty of $255,000 for information discovered in the course of the audit. In
addition, Grace Chemicals has voluntarily reported to the EPA violations of
certain notification and related requirements under TSCA, and penalties may be
assessed against Grace Chemicals in connection therewith; however, the amount of
such penalties cannot be determined at this time.
Grace Chemicals believes that the liabilities for environmental remediation
costs that have been recorded in Grace New York's historical financial
statements are adequate. In addition, Grace Chemicals is presently involved in
litigation with its insurance carriers seeking to hold them responsible for
certain amounts for which Grace Chemicals may be held liable with respect to
such costs. The outcome of such litigation, as well as the amounts of any
recoveries that Grace Chemicals may receive in connection therewith, is
presently uncertain. However, Grace Chemicals believes that the resolution of
pending environmental proceedings will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of New
Grace. For further information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION."
Insurance Litigation. Grace Chemicals is involved in litigation with
certain of its insurance carriers with respect to asbestos-related insurance
claims and environmental liabilities. It has settled all of its asbestos-related
insurance coverage actions, with the exception of Maryland Casualty Co. v. W. R.
Grace & Co., pending in the U.S. District Court for the Southern District of New
York. Grace Chemicals' two environmental insurance coverage actions consist of
an action pending in the U.S. District Court for the Southern District of New
York, also styled Maryland Casualty Co. v. W. R. Grace & Co., and an action
pending in the U.S. District Court for the District of New Jersey, Hatco Corp.
v. W. R. Grace & Co.-Conn. The relief sought by Grace Chemicals in these three
actions would provide insurance that would partially offset Grace Chemicals'
estimated exposure with respect to amounts already expended, and that may be
expended in the future, by Grace Chemicals to defend claims, satisfy judgments
and fund settlements. See Note 2 to the Consolidated Financial Statements and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" for additional information.
Prior to 1993, Grace Chemicals received payments totaling $97.7 million
from insurance carriers, the majority of which represented the aggregate
remaining obligations owed to Grace Chemicals by those carriers for
primary-level insurance coverage written for the period June 30, 1962 through
June 30, 1987. In 1993 and 1994, Grace Chemicals settled with insurance carriers
for a total of $300.2 million (portions of which were paid or will be paid in
subsequent years), in reimbursement for amounts expended by Grace Chemicals in
connection with asbestos-related litigation. In 1995, Grace Chemicals settled
with a primary-level insurer for $100 million, and with other insurers for a
total of $200.3 million, including future payments of approximately $70 million.
In 1996, Grace Chemicals has settled with additional excess-level insurers for a
total of $59.9 million (including $19.2 million to be received over the next
five years) with respect to both products liability and other coverage. As a
result of these settlements, Grace Chemicals' asbestos-related insurance claims
have been dismissed as to the primary-level product liability insurance coverage
previously sold by the relevant insurers to Grace Chemicals, as well as to many
of Grace Chemical's excess-level liability insurers. However, ligation continues
in New York federal court as to certain excess-level carriers which have not
settled.
In April 1996, as a result of rulings in the New York federal court action
favorable to Grace Chemicals with respect to its asbestos-related property
damage liabilities, the insurers agreed to the entry of summary
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<PAGE> 6
judgment in favor of Grace Chemicals. These insurers have stated that they
intend to appeal the trial court's rulings. The New York court has not yet
addressed Grace Chemicals' claims for insurance coverage for its
asbestos-related bodily injury liabilities.
The Hatco environmental coverage action, involving a single environmental
site, is set for trial in September 1996, with its discovery phase substantially
complete. The comprehensive environmental coverage action in New York federal
court, potentially involving several hundred sites, is just entering its
discovery phase, focusing on eight representative or "test" environmental sites.
No trial date has been set, but the test sites will probably be tried next year.
Fumed Silica Plant Litigation. In 1993, Grace Chemicals initiated legal
action in the Belgian courts against the Flemish government to recover losses
resulting from the closing of Grace Chemicals' fumed silica plant in Puurs,
Belgium. Grace Chemicals is seeking damages in excess of four billion Belgian
francs (approximately $135.5 million at the December 29, 1995 exchange rate),
plus interest and lost profits. This claim was dismissed at the trial court
level and is now being appealed by Grace Chemicals. The trial court also
determined that Grace Chemicals should repay approximately 239 million Belgian
francs (approximately $8.1 million at the December 29, 1995 exchange rate), plus
interest to the Flemish government for previously received investment grants;
this decision is also being appealed by Grace Chemicals. Also pending is an
arbitration involving the engineering company that was responsible for the
design and construction of the fumed silica plant. The outcome of this
proceeding may affect the action filed against the Flemish government.
Shareholder Litigation. Commencing in March 1995, five lawsuits were
brought against Grace New York and members of the Grace New York Board (as well
as against J. P. Bolduc, who resigned as President and Chief Executive Officer
and a director of Grace New York in March 1995) in New York State Supreme Court,
New York County. These lawsuits were consolidated in the case entitled Weiser,
et al. v. Grace, et al. The consolidated amended complaint in this lawsuit,
which purports to be a derivative action (i.e., an action brought on behalf of
Grace New York), alleges, among other things, that the individual defendants
breached their fiduciary duties to Grace New York (i) by providing J. Peter
Grace, Jr. (the Chairman and a director of Grace New York until his death in
April 1995) with certain compensation arrangements upon his voluntary retirement
as Grace New York's Chief Executive Officer in 1992 and (ii) by approving Mr.
Bolduc's severance arrangements, and that Messrs. Grace and Bolduc breached
their fiduciary duties by accepting such benefits and payments. The lawsuit
seeks unspecified damages, the cancellation of all allegedly improper
agreements, the cancellation of the non-employee director retirement plan, the
return of all remuneration paid to the present and former directors who are
defendants while they were in breach of their fiduciary duties to Grace New
York, an award of attorneys' and experts' fees and costs, and such other relief
as the Court may deem appropriate.
In March 1996, two purported shareholder derivative class actions were
filed in New York State Supreme Court, New York County, against Grace New York
and Albert J. Costello, Grace New York's Chairman, President and Chief Executive
Officer, alleging that the defendants breached their fiduciary duties to Grace
New York's shareholders by failing to investigate and consider fully a proposal
by Hercules, Incorporated to acquire or merge with Grace New York (Izes, etc. v.
W. R. Grace & Company, et al. and Polikoff, etc. v. W. R. Grace & Company, et
al.). The lawsuits seek injunctive relief ordering defendants to carry out their
fiduciary duties by considering and evaluating such proposal, unspecified
monetary damages, costs and counsel fees and such other relief as the Court
deems proper.
Securities and Exchange Commission Investigations. Grace New York has been
notified that the Securities and Exchange Commission (the "Commission") has
issued a formal order of investigation with respect to Grace New York's prior
disclosures regarding benefits and retirement arrangements provided to J. Peter
Grace, Jr. (the Chairman and a director of Grace New York until his death in
April 1995) and certain matters relating to J. Peter Grace III, a son of J.
Peter Grace, Jr. Grace New York is cooperating with the investigation.
In April 1996, Grace New York received a formal order of investigation
issued by the Commission directing an investigation into, among other things,
whether Grace New York violated the federal securities
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<PAGE> 7
laws by filing periodic reports with the Commission that contained false and
misleading financial information. Pursuant to this formal order of
investigation, Grace New York has received a subpoena from the Southeast
Regional Office of the Commission requiring the Company to produce documents
relating to reserves (net of applicable taxes) established by Grace New York and
NMC during the period from January 1, 1990 to the date of the subpoena (the
"Covered Period"). New Grace believes that all financial statements filed by
Grace New York with the Commission during the Covered Period, the financial
statements of NMC included in the NMC Form 10 filed with the Commission on
September 25, 1995, and the Consolidated Financial Statements (all of which
financial statements, other than unaudited quarterly financial statements, were
covered by unqualified opinions issued by Price Waterhouse LLP, independent
certified public accountants), have been fairly stated, in all material
respects, in conformity with generally accepted accounting principles. Grace New
York is cooperating with the investigation. The outcome of this investigation
and its impact, if any, on Grace New York, New Grace or NMC cannot be predicted
at this time.
Shareholder Actions Relating to NMC. In 1995, nine purported class action
lawsuits were brought against Grace New York and certain of its officers and
directors in various federal courts. These lawsuits have been consolidated in
the case entitled Murphy, et al. v. W. R. Grace & Co., et al., which is pending
in the U.S. District Court for the Southern District of New York. The first
amended class action complaint in this lawsuit, which purports to be a class
action on behalf of all persons and entities who purchased Grace New York's
publicly traded securities during the period from March 13, 1995 through October
17, 1995, generally alleges that the defendants concealed information, and
issued misleading public statements and reports, concerning NMC's financial
position and business prospects, a proposed spin-off of NMC and the matters that
are the subject of the investigations of NMC by the Office of the Inspector
General of the U.S. Department of Health and Human Services (the "OIG"), in
violation of federal securities laws. The lawsuit seeks unspecified damages,
attorneys' and experts' fees and costs and such other relief as the Court deems
proper.
In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division, against
Grace New York, certain of its directors and its former President and Chief
Executive Officer, alleging that such individuals breached their fiduciary
duties by failing to properly supervise the activities of NMC in the conduct of
its business (Bennett v. Bolduc, et al.). In December 1995, the plaintiff in
this action filed a new action, based on similar allegations, in the U.S.
District Court for the Southern District of New York (Bennett v. Bolduc, et
al.). The Florida action has been dismissed in favor of the action filed in the
U.S. District Court for the Southern District of New York. A second action
making similar allegations was filed in October 1995 in New York State Supreme
Court, New York County (Bauer v. Bolduc, et al.). Grace New York has been
advised that this action will be dismissed or stayed in favor of the Bennett
action, which has been consolidated, for discovery purposes only, with the
Murphy action described above. The complaint in the Bennett action seeks
unspecified damages, attorneys' and experts' fees and costs and such other
relief as the Court deems proper.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against Grace New York and certain of its
current and former directors, alleging that the defendants breached their
fiduciary duties, principally by failing to provide internal financial data
concerning NMC to Vivra Incorporated and by failing to negotiate with Baxter
International, Inc. in connection with a business combination involving NMC
(Rosman v. W. R. Grace, et al. 96-102347). The lawsuit seeks injunctive relief
ordering the defendants to carry out their fiduciary duties and preventing or
rescinding the Reorganization or any related transactions with Fresenius AG,
unspecified monetary damages, an award of plaintiff's attorneys' and experts'
fees and costs and such other relief as the court may deem just and proper. The
plaintiff has not taken any steps to prosecute this lawsuit since it was filed,
and the defendants believe this lawsuit is without merit.
OIG Investigation. As discussed in the Joint Proxy Statement-Prospectus
mailed herewith, NMC is the subject of an investigation (the "OIG
Investigation") by the OIG, among others. One of the subpoenas received in
connection with the OIG Investigation requests documents from NMC relating to
the relationship of NMC with Grace New York and Grace Chemicals and Grace
Chemicals' and Grace New York's knowledge of NMC's activities. Such request may
indicate that investigators are looking into Grace Chemicals' potential
liability in respect of NMC's activities. Under the Distribution Agreement,
Grace New
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York will indemnify Grace Chemicals with respect to all liabilities arising from
or relating to the OIG Investigation and may not settle or compromise the OIG
Investigation unless, as part of such settlement or compromise, Grace Chemicals
is granted an unconditional release in respect thereof. However, no assurance
can be given that Grace Chemicals will not have liability in this regard. See
"THE DISTRIBUTION -- Fraudulent Transfer and Related Considerations." In
addition, under the OIG Agreement, Grace Chemicals has given certain guarantees
in connection with the OIG Investigation. See "THE DISTRIBUTION -- Other
Arrangements."
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EXHIBIT 99.4
LEGAL AND REGULATORY PROCEEDINGS
As discussed in greater detail below, NMC is the subject of investigations
by several federal agencies and authorities, the outcome of which cannot be
predicted. If the government were successfully to pursue claims arising from any
of these investigations, NMC or one or more of its subsidiaries could be subject
to civil or criminal penalties, including substantial fines, suspension of
payments or exclusion from the Medicare program. Any such result could have a
material adverse effect on NMC's business, financial condition and results of
operation. In addition, as discussed below, NMC has become aware that it is the
subject of a qui tam or "whistleblower" action with respect to some or all of
the issues raised by the government investigations; and NMC may be the subject
of other "whistleblower" actions.
OIG INVESTIGATION
On October 17, 1995, NMC received five investigative subpoenas from the
OIG. The subpoenas were issued in connection with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts and
others concerning possible violations of federal laws, including the
anti-kickback statute and the False Claims Act. The subpoenas call for extensive
document production relating to various aspects of NMC's business.
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services business,
principally relating to its Medical Director contracts and compensation; (c)
NMC's treatment of credit balances resulting from overpayments received under
the Medicare ESRD program, its billing for home dialysis services, and its
payment of supplemental medical insurance premiums on behalf of indigent
patients; (d) LifeChem's laboratory business, including documents relating to
testing procedures, marketing, customers, competition and certain over-payments
totaling approximately $4.9 million that were received by LifeChem from the
Medicare program with respect to laboratory services rendered between 1989 and
1993; and (e) NMC Homecare and, in particular, information concerning IDPN
billing practices related to various services, equipment and supplies and
payments made to third parties as compensation for administering IDPN therapy.
NMC is cooperating with the OIG investigation and has made, and is expected
to continue to make, extensive document production in response to the subpoenas.
Because of the breadth of the subpoenas, the government has identified and is
continuing to identify specific categories of documents that it is requiring NMC
to produce and has deferred compliance with substantial portions of the
subpoenas at this time. NMC has received another OIG subpoena requiring the
production of limited categories of additional documents relating to subject
matters covered by the original subpoenas and may receive additional such
subpoenas from time to time.
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The government has identified a number of particular areas of its inquiry.
The government has indicated that the areas identified are not exclusive, and
that it may pursue additional areas. As noted, the penalties applicable under
the anti-kickback statute, the False Claims Act and other federal and state
statutes and regulations applicable to NMC's business can be substantial. See
"-- Anti-Kickback Statute, False Claims Act, Stark Law and Fraud and Abuse
Laws." While NMC asserts that it is able to offer legal and/or factual defenses
with respect to the areas the government has identified, there can be no
assurance that the federal government and/or one or more state agencies will not
claim that NMC has violated statutory or regulatory provisions. Additionally, it
is possible that one or more qui tam actions alleging that NMC submitted false
claims to the government may have been filed under seal by former or current NMC
employees or other individuals who may have familiarity with one or more of the
issues under investigation. As noted, under the False Claims Act, any such
private plaintiff could pursue an action against NMC in the name of the U.S. at
his or her own expense if the government declines to do so. It is also possible
that one or more private payors will claim that NMC received excess payments and
will seek reimbursement and other damages from NMC.
An adverse determination with respect to any of the issues addressed by the
subpoenas, or any of the other issues that have been or may be identified by the
government, could have a material adverse impact on NMC and could result in the
payment of substantial fines, penalties and reimbursements or the suspension of
payments or exclusion of NMC or one or more of its subsidiaries from the
Medicare program. Under the terms of the Reorganization, any potential resulting
liability will be retained by NMC, and New Grace will be indemnified by FNMC
against all potential liability arising from or relating to the OIG
Investigation. See "THE REORGANIZATION -- The Distribution Agreement." The
particular areas identified by the government to date are as follows.
Medical Director Compensation
The government is investigating whether DSD's compensation arrangements
with its Medical Directors constitute payments to induce referrals, which would
be illegal under the anti-kickback statute, rather than payment for services
rendered. DSD compensated the substantial majority of its Medical Directors on
the basis of a percentage of the earnings of the dialysis center for which the
Medical Director was responsible from the inception of NMC's predecessor in 1972
until January 1, 1995, the effective date of Stark II. Under the arrangements in
effect prior to January 1, 1995, the compensation paid to Medical Directors was
adjusted to include "add backs," which represented a portion of the profit
earned by MPG on products purchased by the Medical Director's facility from MPG
and (until January 1, 1992) a portion of the profit earned by LifeChem on
laboratory services provided to patients at the Medical Director's facility.
These adjustments were designed to allocate a profit factor to each dialysis
center relating to the profits that could have been realized by the center if it
had provided the items and services directly rather than through a subsidiary of
NMC. The percentage of profits paid to any specific Medical Director was reached
through negotiation, and was typically a provision of a multi-year consulting
agreement.
Since January 1, 1995, DSD has compensated its Medical Directors on a fixed
fee arrangement to comply with the requirements of Stark II. As part of the
arrangement, approximately 25% of the Medical Director's compensation is held
back and earned by the Medical Director on the basis of the Medical Director's
achievement of quality and cost containment goals. In renegotiating its Medical
Director compensation arrangements in connection with Stark II, DSD took account
of the compensation levels paid to its Medical Directors in prior years.
Certain government representatives have expressed the view in meetings with
counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. DSD
does not compensate its Medical Directors on an hourly basis and has asserted to
the government that hourly compensation and "fair market value" are not relevant
factors in determining whether the anti-kickback statute has been violated.
Because of the wide variation in the profitability of its facilities, and the
variation in the profit percentage contractually negotiated between DSD and its
Medical Directors, there is a wide variation in the amounts that have been
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paid to Medical Directors. The Medical Director contracts negotiated in
connection with the requirements of Stark II also have a wide variation in
Medical Director compensation.
The compensation that DSD has paid and is continuing to pay to a material
number of its Medical Directors could be viewed as being in excess of "fair
market value," both in absolute terms and in terms of hourly compensation. NMC
has asserted to the government that its compensation arrangements do not
constitute illegal payments to induce referrals. NMC has also asserted to the
government that OIG auditors repeatedly reviewed NMC's compensation arrangements
with its Medical Directors in connection with their audits of the costs claimed
by DSD; that the OIG stated in its audit reports that, with the exception of
certain technical issues, NMC had complied with applicable Medicare laws and
regulations pertaining to the ESRD program; and that NMC reasonably relied on
these audit reports in concluding that its program for compensating Medical
Directors was lawful. There has been no indication that the government will
accept NMC's assertions concerning the legality of its arrangements generally or
NMC's assertion that it reasonably relied on OIG audits, or that the government
will not focus on specific arrangements that DSD has made with one or more
Medical Directors and claim that those specific arrangements were or are
unlawful.
The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.
Credit Balances
In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, HCFA adopted
a regulation requiring certain Medicare providers, including dialysis centers,
to file a quarterly form listing unrecouped overpayments with the Medicare
intermediary responsible for reimbursing the provider. The first such filing was
required to be made as of June 30, 1992 for the period beginning with the
initial date that the provider participated in the Medicare program and ending
on June 30, 1992.
The government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period ending
June 30, 1992 by reversing entries out of its credit balance account and taking
overpayments into income in anticipation of the institution of the new filing
requirement. DSD's policy was to notify Medicare intermediaries in writing of
overpayments upon receipt and to maintain unrecouped Medicare overpayments as
credit balances on the books and records of DSD for four years; overpayments not
recouped by Medicare within four years would be reversed from the credit balance
account and would be available to be taken into income. NMC asserts that
Medicare overpayments that have not been recouped by Medicare within four years
are not subject to recovery under applicable regulations. NMC also asserts that
its initial filing with the intermediaries disclosed the credit balance on the
books and records of DSD as shown in accordance with its policy.
The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's obligation to rebill commercial
payors for amounts originally billed to Medicare under HCFA's initial
implementation of the OBRA 93 amendments to the secondary payor provisions of
the Medicare Act. See "-- OBRA 93." DSD experienced delays in reporting a
material amount of overpayments after the implementation of the OBRA 93
amendments. NMC asserts that most of these delays were the result of the
substantial administrative burdens placed on DSD as a consequence of the
changing and inconsistent instructions issued by HCFA with respect to the OBRA
93 amendments and were not intentional. Substantially all overpayments resulting
from the rebilling effort associated with the OBRA 93 amendments have now been
reported. Procedures are in place that are designed to ensure that subsequent
overpayments resulting from the OBRA 93 amendments will be reported on a timely
basis.
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Supplemental Medical Insurance
DSD provides grants or loans for the payment of premiums for supplemental
medical insurance (under which Medicare Part B coverage is provided) on behalf
of a small percentage of its patients who are financially needy. The government
is investigating this practice. NMC asserts that the practice is lawful.
Overpayments for Home Dialysis Services
NMC acquired HIC, an in-center and home dialysis service provider, in 1993.
At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC
had received payments for home dialysis services in excess of the Medicare
reasonable charge for services rendered prior to February 1, 1990. NMC settled
the HCFA claim against HIC in 1994. The government is investigating whether the
settlement concerning the alleged overpayments made to HIC resolved all issues
relating to such alleged overpayments. The government is also investigating
whether an NMC subsidiary, Home Dialysis Services, Inc. ("HDS"), received
payments similar to the payments that HIC received, and whether HDS improperly
billed for home dialysis services in excess of the monthly cost cap for services
rendered on or after February 1, 1990. The government is investigating whether
NMC was overpaid for services rendered. NMC asserts that the billings by HDS
were proper.
LifeChem
Overpayments. On September 22, 1995, LifeChem voluntarily disclosed
certain billing problems to the government that had resulted in LifeChem's
receipt of approximately $4.9 million in overpayments from the Medicare program
for laboratory services rendered between 1989 and 1993. LifeChem asserts that
most of these overpayments relate to errors caused by a change in LifeChem's
computer systems and that the remainder of the overpayments were the result of
the incorrect practice of billing for a complete blood count with differential
when only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a complete blood count when only a hemoglobin or
hematocrit test was ordered. LifeChem asserts that the overpayments it received
were not caused by fraudulent activity.
LifeChem made these disclosures to the government as part of an application
to be admitted to a voluntary disclosure program begun by the government in
mid-1995. At the time of the disclosures, LifeChem tendered repayment to the
government of the $4.9 million in overpayments. After the OIG investigation was
announced, the government indicated that LifeChem had not been accepted into its
voluntary disclosure program. The government has deposited the $4.9 million
check with NMC's approval. The matters disclosed in LifeChem's September 22,
1995 voluntary disclosure are a subject of the OIG Investigation.
On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the composite rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggest instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. LifeChem is continuing its effort to determine whether
any other overpayments occurred.
Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
Composite Rate at a price below fair market value, coupled with an agreement by
a dialysis center to refer all or most of its non-Composite Rate tests to the
laboratory, violates the anti-kickback statute. See "-- Reimbursement." In
response to this alert, LifeChem changed its practices with respect to testing
covered
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by the Composite Rate to increase the amount charged to both DSD and third-party
dialysis centers and reduce the number of tests provided for the fixed rate. The
government is investigating LifeChem's practices with respect to these tests.
Benefits provided to dialysis centers and persons associated with dialysis
centers. The government is investigating whether any DSD or third-party
dialysis center or any person associated with any such center was provided with
benefits in order to induce them to use LifeChem services. Such benefits could
include, for example, discounts on RPD supplies, the provision of computer
equipment, the provision of money for the purchase of computer equipment, and
the provision of research grants. NMC has identified certain instances in which
benefits were provided to MPG customers who purchased medical products from RPD
and used LifeChem's laboratory services. The government may claim that the
provision of such benefits violates, among other things, the anti-kickback
statute.
Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring NMC
to produce at this time. In addition to documents relating to the areas
discussed above, the government has also required LifeChem to produce at this
time documents relating to the equipment and systems used by LifeChem in
performing and billing for clinical laboratory blood tests, the design of the
test panels offered and requisition forms used by LifeChem, the utilization rate
for certain tests performed by LifeChem, recommendations concerning diagnostic
codes to be used in ordering tests for patients with given illnesses or
conditions, and internal and external audits and investigations relating to
LifeChem's billing and testing. These areas of inquiry are similar to inquiries
that the OIG has made to other Medicare and Medicaid providers in the clinical
laboratory industry within the past several years.
IDPN
Administration kits. As discussed above, one of the principal activities
of NMC Homecare is to provide IDPN therapy to dialysis patients at both
NMC-owned facilities and at facilities owned by other providers. See
"-- Business of NMC -- NMC Homecare." IDPN therapy is typically provided to the
patient 12-13 times per month during dialysis treatment. Bills are submitted to
Medicare on a monthly basis and include separate claims for reimbursement for
supplies, including, among other things, nutritional solutions, administration
kits and infusion pumps. In February 1991, the Medicare carrier responsible for
processing NMC Homecare's IDPN claims issued a Medicare advisory to all
parenteral and enteral nutrition suppliers announcing a coding change for
reimbursement of administration kits provided in connection with IDPN therapy
for claims filed for items provided on or after April 1, 1991. The Medicare
allowance for administration kits during this period was approximately $625 per
month per patient. The advisory stated that IDPN providers were to indicate the
"total number of actual days" when administration kits were "used," instead of
indicating that a one-month supply of administration kits had been provided. In
response, NMC Homecare billed for administration kits on the basis of the number
of days that the patient was on an IDPN treatment program during the billing
period, which typically represented the entire month, as opposed to the number
of days the treatment was actually administered. During the period from April
1991 to June 1992, NMC Homecare had an average of approximately 1,200 IDPN
patients on service.
In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "[i]f overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." NMC Homecare revised its billing practices in
response to this advisory for claims filed for items provided on or after July
1, 1992. NMC Homecare was not asked to refund any amounts relating to its
billings for administration kits following the issuance of the second advisory.
The government is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing
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for administration kits were proper. The government may claim that NMC
Homecare's billing for administration kits during this period violates, among
other things, the False Claims Act.
Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
the infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted NMC Homecare to bill
Medicare for an infusion pump and IV pole so long as the patient was infused
using a pump and IV pole. Despite the absence of an express regulatory
specification, NMC Homecare developed a policy to deliver to a dialysis center a
dedicated infusion pump and IV pole for each patient, although NMC cannot
represent that it followed this policy in every instance. The government is
investigating the propriety of NMC Homecare's billings for infusion pumps and IV
poles.
As noted above, under the new policies published by HCFA with respect to
IDPN therapy, NMC will not be able to bill for infusion pumps after July 1,
1996. The government discontinued reimbursement for IV poles in 1992.
"Hang fees" and other payments. IDPN therapy is typically provided to the
patient during dialysis by personnel employed by the dialysis center treating
the patient with supplies provided and billed to Medicare by NMC Homecare in
accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, NMC Homecare followed the
industry-wide practice of paying a "hang fee" to the center. Dialysis centers
are responsible for reporting such fees to HCFA on their cost reports. For DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
cost calculations. For third-party dialysis centers, the fee was negotiated with
each center, typically pursuant to a written contract, and ranged from $15 to
$65 per administration. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers.
In July 1993, the OIG issued a management advisory alert to HCFA in which
it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
government is investigating the nature and extent of the "hang fees" and other
payments made by NMC Homecare as well as payments by NMC Homecare to physicians
whose patients have received IDPN therapy. The government may claim that the
payments by NMC Homecare to dialysis centers violate, among other things, the
anti-kickback statute.
Utilization of IDPN. Since 1984, when HCFA determined that Medicare should
cover IDPN and other parenteral nutrition therapies, NMC has been an industry
leader in identifying situations in which IDPN therapy is beneficial to ESRD
patients. It is the policy of NMC Homecare to seek Medicare reimbursement for
IDPN therapy only when it is prescribed by a patient's treating physician and
when it believes that the circumstances satisfy the requirements published by
HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for
payment more than 90% of the IDPN claims submitted by NMC Homecare. Since 1994,
the rate of approval for Medicare reimbursement for IDPN claims submitted by NMC
Homecare for new patients, and by the infusion industry in general, has fallen
to approximately 9%. NMC contends that the reduction in rates of approval has
occurred because HCFA and its carriers have implemented an unauthorized change
in coverage policy without giving notice to providers. See "-- IDPN Coverage
Issues." While NMC Homecare has continued to offer IDPN to patients pursuant to
the prescription of the patients' treating physicians and to submit claims for
Medicare reimbursement when it believes the requirements stated in HCFA's
published regulations are satisfied, other providers have responded to the drop
in the approval rate for new Medicare IDPN patients by abandoning the Medicare
IDPN business, cutting back on the number of Medicare patients to whom they
provide IDPN, or declining to add new Medicare patients. The number of patients
to whom NMC Homecare provides IDPN has thus increased.
The government is investigating the utilization rate of IDPN therapy among
NMC patients and whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage or with inadequate documentation of eligibility.
NMC asserts that the utilization rate of IDPN therapy among its dialysis
patients, which, in 1995, averaged less than 3.5%, is the result of the factors
discussed above and that it is the policy of NMC Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patient's
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treating physician in accordance with the requirements published by HCFA and its
carrier agents. There can be no assurance that the government will accept NMC's
view or that the government will not claim that NMC Homecare submitted IDPN
claims for individuals who were not eligible for coverage or with inadequate
documentation of eligibility.
QUI TAM ACTION
Grace and NMC have recently become aware that a qui tam action has been
filed in the United States District Court for the Southern District of Florida,
Southern Division (the "Florida Action"). The original complaint in the Florida
Action was filed under seal in 1994. The Relator filed an Amended Complaint
under seal on July 8, 1996. The seal with respect to the Amended Complaint was
partially lifted pursuant to court order to permit the government to provide
Grace and NMC with a copy of the Amended Complaint. Grace and NMC received
copies of the Amended Complaint on July 10, 1996. Pursuant to a court order
dated July 26, 1996, the seal was further modified to permit Grace to provide
copies of the Amended Complaint to Fresenius AG, lenders involved in the NMC
credit facility and their respective counsel and to permit Grace and NMC to
describe the allegations of the Amended Complaint in its securities filings with
respect to the Reorganization.
The Amended Complaint alleges, among other things, that Grace, Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO. The Amended
Complaint alleges that as a result of this allegedly wrongful conduct, the
United States suffered actual damages in excess of $200 million and alleges that
the defendants are liable to the United States for three times the amount of the
alleged damages plus fines of up to $10,000 per false claim. The Amended
Complaint also seeks the imposition of a constructive trust on the proceeds of
the NMC dividend to Grace Chemicals for the benefit of the United States on the
ground that the Reorganization constitutes a fraudulent conveyance that will
render NMC unable to satisfy the claims asserted in the Amended Complaint. As
noted under "-- OIG Agreements," the United States has agreed to release any
such claim.
OIG AGREEMENTS
As a result of discussions with representatives of the United States in
connection with the OIG investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States relating to or arising out of the OIG investigation and the
Florida Action (the "Government Claims"). For the purposes of the OIG
Agreements, an Obligation is (a) a liability or obligation of NMC to the United
States in respect of a Government Claim pursuant to a court order (i) which is
final and nonappealable or (ii) the enforcement of which has not been stayed
pending appeal or (b) a liability or obligation agreed to be an Obligation in a
settlement agreement executed by Fresenius Medical Care, Grace or NMC, on the
one hand, and the United States, on the other hand. As stated elsewhere herein,
the outcome of the OIG investigation cannot be predicted. The entering into of
the OIG Agreements is not an admission of liability by any party with respect to
the OIG investigation, nor does it indicate the liability, if any, which may
result therefrom.
Under the OIG Agreements, effective upon consummation of the
Reorganization, the United States will be provided by Fresenius Medical Care and
Grace with a joint and several guarantee of payment when due of all Obligations
(the "Primary Guarantee"). As credit support for this guarantee, NMC will
deliver, on or prior to the Effective Date, an irrevocable standby letter of
credit in the amount of $150 million. The United States will return such letter
of credit (or any renewal or replacement) for cancellation when all Obligations
have been paid in full or it is determined that NMC has no liability in respect
of the Government Claims. In addition, under the OIG Agreements, effective upon
consummation of the Reorganization, the United States will be provided with a
guarantee by Grace Chemicals of the obligations of Fresenius Medical Care under
the Primary Guarantee in respect of Government Claims for acts and transactions
that took place at any time up to the consummation of the Reorganization (the
"Secondary Guarantee"). Under the Secondary Guarantee, payment will be required
only if, and to the extent that, Obligations have become due and payable and
remain uncollected for 120 days. Grace Chemicals is a third party beneficiary of
the Primary Guarantee and may institute suit to enforce its terms.
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Under the OIG Agreements, the United States has agreed, solely in its
capacity as holder of the Government Claims: (a) to not take any action
whatsoever to impede, prohibit, enjoin, delay or otherwise interfere with
consummation of the Reorganization on grounds that the Reorganization
constitutes a fraudulent conveyance or other similarly avoidable transfer as to
the United States; (b) to represent to the court in the Florida Action or any
other court presented with an attempt by a relator in any qui tam action
relating in substantial part to matters that are the subject of the Florida
Action or the OIG investigation to impede, prohibit, enjoin, delay or otherwise
interfere with consummation of the Reorganization that the OIG Agreements
satisfy the concerns of the United States with respect to the Reorganization
and; (c) effective upon consummation of the Reorganization, to release and
discharge Grace Chemicals, Grace, NMC, Fresenius Medical Care, and certain other
parties (collectively, the "Releasees") from claims to the effect that the
Reorganization (or any transaction comprising a part thereof) constitutes a
fraudulent conveyance or other similarly avoidable transfer as to the United
States.
Fresenius Medical Care and the United States state in the OIG Agreements
that they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any obligations arising under such resolution, taking into account the
ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements
state that the foregoing statements shall not be construed to obligate any
person to enter into any settlement of the Government Claims or to agree to a
structured settlement. Moreover, the OIG Agreements state that the statements
described in the first sentence of this paragraph are precatory and statements
of intent only and that (a) compliance by the United States with such
provisions is not a condition or defense to the obligations of Fresenius
Medical Care, Grace or Grace Chemicals under the OIG Agreements and (b) breach
of such provisions by the United States cannot and will not be raised by
Fresenius Medical Care, Grace New York or Grace Chemicals to excuse performance
of their respective obligations under the OIG Agreements.
If the Reorganization in not consummated on or before October 1, 1996, the
OIG Agreements will terminate and be of no further force and effect unless all
parties thereto agree otherwise in writing. If the Reorganization Agreement is
amended, modified or supplemented after the date of this Joint Proxy
Statement-Prospectus, Fresenius Medical Care will provide the United States with
written notice describing the nature of such amendment, modification or
supplement. If the United States determines that such amendment, modification or
supplement is adverse to its interests, the United States will have the right to
terminate the OIG Agreements by delivering written notice of such termination
within 10 business days of its actual receipt of notice of such amendment,
modification or supplement.
The foregoing describes the material terms of the OIG Agreements, copies of
which have been filed as exhibits to the Registration Statements. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such exhibits.
EASTERN DISTRICT OF VIRGINIA
In December 1994, a subsidiary of NMC received a subpoena from a federal
grand jury in the Eastern District of Virginia investigating the contractual
relationships between subsidiaries of NMC that provide dialysis services and
third parties that provide medical directorship and related services to those
subsidiaries. NMC cooperated with the grand jury and produced documents in
response to the subpoena, and there has been no further communication from the
government.
DISTRICT OF NEW JERSEY INVESTIGATION
NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
is cooperating with this investigation and has provided the grand jury with
extensive documents. On February 12, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland
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manufacturing facility. In June 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that the U.S. Attorney had
declined to prosecute NMC with respect to a submission related to NMC's effort
to lift the import hold. The letter added that NMC remains a subject of a
federal grand jury's investigation into other matters. NMC also received a
subpoena in June 1996 from the federal grand jury requesting certain documents
in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to
November 1995. The outcome of this investigation and its impact, if any, on
NMC's business or results of operations cannot be predicted at this time.
FDA MATTERS
Since 1993, NMC has engaged in a number of voluntary recalls of products
that it manufactured or that were manufactured by third parties and distributed
by NMC. None of these product recalls has resulted in fines or penalties for
NMC. In 1995, Fresenius USA completed a voluntary action with respect to the
Optum(R) exchange device that Fresenius USA acquired from Abbott, which was
classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with
respect to this device and determined that they were adequate.
During the period from 1991 through 1993, the FDA issued warning letters
concerning four of the six RPD facilities in the U.S., as well as import alerts
concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico
facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland
facility. As a result of the import alerts, NMC was prohibited from importing
the products covered by the alerts into the U.S. until the FDA confirmed
compliance with GMP requirements at the facilities where such products were
manufactured.
In January 1994, NMC and certain members of its senior management entered
into the Consent Decree providing that the importation of bloodlines and
hemodialyzers could resume upon certification by NMC that the relevant
manufacturing facility complied with GMP requirements and successful completion
of an FDA inspection at the relevant facility to confirm compliance. The Consent
Decree also required NMC to certify, and be inspected for, GMP compliance at all
of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD
committed to maintaining ongoing compliance with GMP and related requirements at
both U.S. and non-U.S. manufacturing facilities. As a result of the Consent
Decree, NMC's U.S. facilities were required to undertake significant GMP
improvements.
NMC submitted all required certifications for its U.S. and non-U.S.
facilities in accordance with timetables specified in the Consent Decree, and
the bloodline import alert was lifted in March 1994. During the course of 1994
and 1995, NMC also worked with the FDA and demonstrated that its other
manufacturing facilities in the U.S. were in compliance with GMP requirements.
The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the
FDA in April and December 1994 but did not pass inspection. NMC completed all
remaining corrective actions, and in December 1995 the FDA determined that the
Dublin facility was in compliance with GMP requirements and lifted the import
alert. No fines or penalties have been imposed on NMC as a result of the FDA's
actions or in connection with the Consent Decree. By policy, however, the FDA
generally will undertake more frequent and more rigorous inspections of
facilities that have been subject to consent decrees. For a discussion of the
effects of the warning letters and import alerts issued by the FDA on NMC's
business, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- NMC."
On January 24, 1995, the FDA issued a warning letter and import alert
relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland
facility. That facility was not expressly named in the Consent Decree described
above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in
December 1994, and, for business reasons, decided to shut down the Diafilter(R)
business at the Limerick facility on January 23, 1995, no subsequent compliance
review was deemed necessary by the FDA. NMC was not restricted from importing
into the U.S. the other products manufactured at the Limerick facility.
In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing
facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each
location, violations of certain GMP were found. At the Walnut Creek facility,
violations of pre-market notification filing requirements were also found,
although these findings were subsequently reversed when the devices in question
were determined to be covered by
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appropriate filings. The FDA issued warning letters with respect to each
facility, as a result of which the issuance of new 510(k) notices and new export
clearances was placed on administrative hold. Fresenius USA responded to the
inspection findings at Maumee in a manner it believes addresses the FDA's
findings. Fresenius USA subsequently closed the Maumee facility in connection
with the relocation of production from that facility to a facility in
Lewisberry, Pennsylvania. Fresenius USA undertook an exhaustive review of the
FDA's findings relating to Walnut Creek and submitted a detailed response to
those findings. The Ogden plant was reinspected in 1995 and the administrative
holds have been lifted from both Ogden and Walnut Creek. The Walnut Creek
facility was inspected again in January and February of 1996 and Fresenius USA
was advised that all GMP issues raised by the FDA have been resolved. Fresenius
USA believes that its facilities are currently in compliance in all material
respects with applicable state, local and federal requirements.
In addition, the FDA may inspect facilities in the ordinary course of
business to ensure compliance with GMP and other applicable regulations.
INTERNATIONAL REGULATORY CLAIMS
As discussed above, as a general matter, licenses and certifications are
required in connection with the operation of dialysis clinics outside the United
States, and NMC is dependent upon its ability to obtain and maintain such
licenses and certifications. NMC lacks certain licenses and certifications
technically required to operate its facilities in Portugal. However, based on
discussions with regulatory officials in Portugal, NMC management does not
believe that the absence of such licenses will have a material adverse effect on
NMC or materially affect its ability to operate such facilities.
MEDICARE CERTIFICATION ISSUES
As discussed above, licenses and certification for participation in the
Medicare and Medicaid programs are regulated at the federal, state and local
levels. The Medicare carriers serving Florida, New Jersey and Pennsylvania have
implemented coverage policies that may restrict the ability of nuclear-imaging
providers, such as DSI, to qualify as a provider for this service. If DSI is not
permitted to bill for these services as a Medicare provider, it may be able to
bill physicians for the services DSI provides.
DSI participates as a provider under the Medicare Part B program in all
states where applicable, primarily as an independent physiological laboratory.
DSI's Medicare provider number is currently administratively suspended or
temporarily revoked in Rhode Island, Connecticut, and Colorado, due largely to
transitional issues related to the timely completion of applications in
connection with recent acquisitions. The Medicare carrier in Connecticut has
verbally advised DSI that the provider number will be reinstated and
applications are pending in Rhode Island and Colorado. If the provider numbers
are not reinstated retroactively, DSI may not be able to bill for services
rendered during the periods in which the numbers were administratively suspended
or temporarily revoked.
IDPN
In November 1995, NMC filed a complaint in the United States District Court
for the Middle District of Pennsylvania (NMC Homecare, Inc. v. Shalala) seeking
declaratory judgment and injunctive relief to prevent application of a 1993
interpretation of Medicare's coverage guidelines that results in a sharp
reduction in the reimbursement rate for IDPN services provided by NMC. On May
17, 1996, the Magistrate Judge assigned to the case issued a Report to the
District Court Judge recommending grant of the government's motion and dismissal
of the action. NMC has filed objections to the Report, and the government is
expected to respond to those objections in July 1996. The District Court Judge
will issue an order granting or denying the government's motion to dismiss
following completion of the briefing. See "-- Reimbursement -- U.S. -- IDPN."
NMC Homecare's unpaid IDPN claims represent substantial accounts receivable of
NMC Homecare (approximately $103 million as of March 31, 1996, currently
increasing at a rate of approximately $6 million per month). NMC believes that
the reduction in IDPN coverage by Medicare is an unauthorized policy coverage
change. The outcome of this proceeding cannot be predicted. If NMC is not
successful in its effort to obtain payment for its IDPN accounts receivable,
NMC's business, financial position and results of operations could be adversely
affected.
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OBRA 93
OBRA 93 affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July 1994, HCFA issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by OBRA 93 would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than that provided under Medicare.
In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. Under the new instruction,
no 18-month coordination of benefits period would arise, and Medicare would
remain the primary payor. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.
If HCFA's reversal of its original implementation of the provisions of OBRA
93 that relate to ESRD patients for whom Medicare is the secondary payor (see
"-- Reimbursement -- U.S. -- Coordination of Benefits") is upheld, NMC may be
required to refund the payments received from employer health plans for services
provided after August 10, 1993 under HCFA's original implementation, and to
re-bill Medicare for the same services, which would result in a net loss to DSD
of approximately $120 million as of June 30, 1995. NMC ceased to recognize the
incremental revenue realized under the original Program Memorandum as of July 1,
1995, but it continued to bill employer health plans as primary payors for
patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996,
NMC commenced billing Medicare as primary payor for dual eligible ESRD patients
effected by OBRA 93, and has recently begun to rebill in compliance with the
revised policy for services rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April
24, 1995 implementation of the OBRA 93 provisions relating to the coordination
of benefits for dual eligible ESRD patients. See "-- Reimbursement -- U.S. --
Coordination of Benefits." On May 9, 1995, NMC moved for a preliminary
injunction to preclude HCFA from enforcing its new policy retroactively, that
is, to billings for services provided between August 10, 1993 and April 23,
1995. On June 6, 1995, the court granted NMC's request for a preliminary
injunction. The litigation is continuing with respect to NMC's request to enjoin
HCFA's new policy, both retroactively and prospectively, on a permanent basis.
While there can be no assurance that a permanent injunction will be issued, NMC
believes that it will ultimately prevail in its claim that the retroactive
reversal by HCFA of its original implementation of OBRA 93 was impermissible
under applicable law. Pending the outcome of the litigation, HCFA's new policy
remains effective for services provided after April 23, 1995. If HCFA's revised
interpretation is upheld, NMC's business, financial position and results of
operations would be materially adversely affected, particularly if the revised
interpretation is applied retroactively. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC."
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In April 1996, Grace received a formal order of investigation issued by the
Commission directing an investigation into, among other things, whether Grace
violated the federal securities laws by filing periodic reports with the
Commission that contained false and misleading financial information. Pursuant
to this formal order of investigation, Grace received a subpoena from the
Southeast Regional Office of the Commission requiring Grace to produce documents
relating to reserves (net of applicable taxes) established by Grace and NMC
during the period from January 1, 1990 to the date of the subpoena (the "Covered
Period"). Grace believes that all financial statements filed by Grace with the
Commission during the Covered Period, including the financial statements of NMC
included in the NMC Form 10 filed with the Commission on September 25, 1995, and
the consolidated financial statements of Grace filed in Grace's Annual Report on
Form 10-K for the year ended December 31, 1995 (all of which financial
statements, other than unaudited quarterly financial statements, were covered by
unqualified opinions issued by Price Waterhouse LLP,
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independent certified public accountants), have been fairly stated, in all
material respects, in conformity with US GAAP. Grace is cooperating with the
Commission. The outcome of this investigation and its impact, if any, on Grace
or NMC cannot be predicted at this time.
IDPN COVERAGE ISSUES
NMC Homecare administers IDPN therapy to chronic dialysis patients who
suffer from severe gastrointestinal malfunctions. Since late 1993, Medicare
claims processors have sharply reduced the number of IDPN claims approved for
payment as compared to prior periods. NMC believes that the reduction in IDPN
claims currently being paid by Medicare represents an unauthorized policy
coverage change. Accordingly, NMC and other IDPN providers are pursuing various
administrative and legal remedies, including administrative appeals, to address
this reduction.
In November 1995, NMC filed a complaint in the U.S. District Court for the
Middle District of Pennsylvania seeking a declaratory judgment and injunctive
relief to prevent the implementation of this policy coverage change. (National
Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). The government has filed a
motion to dismiss on grounds of failure to exhaust administrative remedies. NMC
has filed a cross-motion for summary judgment. The motions are pending. On May
17, 1996, the Magistrate Judge assigned to the case issued a Report to the
District Court Judge recommending grant of the government's motion and dismissal
of the action. NMC has filed objections to the Report, and the government is
expected to respond to those objections in July 1996. The District Court Judge
will issue an order granting or denying the government's motion to dismiss
following completion of the briefing.
NMC management believes that its IDPN claims are consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $103 million as of March 31, 1996, respectively, and currently
increasing at the rate of approximately $6 million per month. If NMC is unable
to collect its IDPN receivable or if IDPN coverage is reduced or eliminated,
depending on the amount of the receivable that is not collected and/or the
nature of the coverage change, NMC's business, financial position and results of
operations could be materially adversely affected.
SHAREHOLDER LITIGATION
In 1995, nine purported class action lawsuits were brought against Grace
and certain of its officers and directors in various federal courts. These
lawsuits have been consolidated in a case entitled Murphy, et al. v. W. R. Grace
& Co., et al. No. 95-CV-9003(JFK) (the "Murphy Action"), which is pending in the
U.S. District Court for the Southern District of New York. The first amended
class action complaint in this lawsuit, which purports to be a class action on
behalf of all persons and entities who purchased publicly traded securities of
Grace during the period from March 13, 1995 through October 17, 1995, generally
alleges that the defendants violated federal securities laws by concealing
information and issuing misleading public statements and reports concerning
NMC's financial position and business prospects, a proposed spin-off of NMC, and
the matters that are the subject of the OIG Investigation and the investigation
by the federal grand jury in the District of New Jersey. See "-- OIG
Investigation" and "-- District of New Jersey Investigation." The Murphy Action
seeks unspecified damages, attorneys' and experts' fees and costs and such other
relief as the court deems proper.
In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division against
Grace, certain of its directors and its former President and Chief Executive
Officer, alleging that such individuals breached their fiduciary duties by
failing to properly supervise the activities of NMC in the conduct of its
business (Bennett v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the
plaintiff in this action filed a new action, based on similar allegations, in
the U.S. District Court for the Southern District of New York (Bennett v.
Bolduc, et al. 95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida
has been dismissed in favor of the Bennett Action. A second action making
similar allegations was filed in October 1995 in New York State Supreme Court,
New York County (Bauer v. Bolduc, et al. 95-125751). This action has been stayed
in favor of the Bennett Action, which has been
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consolidated, for discovery purposes only, with the Murphy Action described
above. The complaint in the Bennett Action seeks unspecified damages, attorneys'
and experts' fees and costs and such other relief as the court deems proper.
These actions are at early stages and their outcomes cannot be predicted,
although Grace, NMC and the individual defendants believe that they have
substantial defenses to the claims asserted.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against Grace and certain of its current and
former directors, alleging that the defendants breached their fiduciary duties,
principally by failing to provide internal financial data concerning NMC to
Vivra and by failing to negotiate with Baxter in connection with a business
combination involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The lawsuit
seeks injunctive relief ordering defendants to carry out their fiduciary duties
and preventing or rescinding the Reorganization or any related transactions with
Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys'
and experts' fees and costs, and such other relief as the court may deem just
and proper. The plaintiff has not taken any steps to prosecute the action since
it was filed. The defendants believe this lawsuit is without merit.
OTHER LITIGATION AND EXPOSURES
In recent years, physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
professional negligence, malpractice, product liability, workers' compensation
or related claims, many of which involve large claims and significant defense
costs. Fresenius USA and NMC have been, and can be expected to continue from
time to time to be, subject to such suits due to the nature of their business.
Additionally, NMC, in connection with its diagnostics business, has been the
subject of a "wrongful life" lawsuit. Although Fresenius USA and NMC maintain
insurance at a level which they believe to be prudent, there can be no assurance
that the coverage limits will be adequate or that all asserted claims will be
covered by insurance. In addition, there can be no assurance that liability
insurance will continue to be available at acceptable costs. A successful claim
against Fresenius USA or NMC in excess of insurance coverage could have a
material adverse effect upon Fresenius Medical Care, Fresenius USA or NMC and
the results of their operations. Any claims, regardless of their merit or
eventual outcome, also may have a material adverse effect on the reputation and
business of Fresenius Medical Care, Fresenius USA or NMC. NMC has identified two
instances in which a low level employee and/or an agent engaged in illegal
billing practices. In such instances, NMC has terminated its affiliation with
such persons and advised the appropriate law enforcement authority. The illegal
actions of such persons may subject NMC to liability under the False Claims Act,
among other laws. In addition, Fresenius USA and NMC assert claims and suits
arising in the ordinary course of business, the ultimate resolution of which
would not, in the opinion of Fresenius Medical Care and NMC, have a material
adverse effect on their financial condition.
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