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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission file number 1-13953
W. R. GRACE & CO.
Incorporated under the Laws of the I.R.S. Employer Identification No.
State of Delaware 65-0773649
7500 GRACE DRIVE, COLUMBIA, MARYLAND 21044-4098
410/531-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.01 par value } New York Stock Exchange, Inc.
Preferred Stock Purchase Rights }
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of W. R. Grace & Co. voting stock held by
nonaffiliates (consisting of all voting stock other than stock held by directors
and executive officers) was approximately $150,000,000 at March 1, 2002.
At March 1, 2002, 65,478,959 shares of W. R. Grace & Co. Common Stock, $.01 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I............................................................................................................1
Item 1. Business....................................................................................1
Chapter 11 Filing......................................................................1
Business Overview......................................................................2
Products and Markets...................................................................3
Discontinued Operations................................................................8
Research Activities....................................................................8
Patents and Other Intellectual Property Matters........................................9
Environmental, Health and Safety Matters...............................................9
Item 2. Properties.................................................................................10
Item 3. Legal Proceedings..........................................................................10
Item 4. Submission of Matters to a Vote of Security Holders........................................14
PART II..........................................................................................................14
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................14
Item 6. Selected Financial Data....................................................................16
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition......16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................16
Item 8. Financial Statements and Supplementary Data................................................16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......16
PART III.........................................................................................................17
Item 10. Directors and Executive Officers of the Registrant.........................................17
Item 11. Executive Compensation.....................................................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................28
Item 13. Certain Relationships and Related Transactions.............................................30
PART IV..........................................................................................................30
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................30
SIGNATURES.......................................................................................................35
FINANCIAL SUPPLEMENT............................................................................................F-1
PART I
ITEM 1. BUSINESS
CHAPTER 11 FILING
On April 2, 2001, W. R. Grace & Co. and 61 of its United States
subsidiaries and affiliates filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United
States Bankruptcy Court for the District of Delaware. The cases were
consolidated for the purpose of joint administration and were assigned case
numbers 01-01139 through 01-01200. Grace's non-U.S. subsidiaries and certain of
its U.S. subsidiaries were not included in the filing.
The filing was made in response to a sharply increasing number of
asbestos-related bodily injury claims. Under Chapter 11, Grace is operating its
businesses as debtor-in-possession under court protection from its creditors and
claimants, while using the Chapter 11 process to develop and implement a plan
for addressing the asbestos-related claims against it.
Prior to 2000, Grace was able to settle asbestos-related claims through
direct negotiations. The filing of claims had stabilized, and annual cash flows
were manageable and fairly predictable. In 2000, the litigation environment
changed with an unexpected 81% increase in bodily injury claims, which Grace
believes was due to a surge in unmeritorious claims. Trends in claims filing and
settlement demands showed no signs of returning to historic levels and were
exacerbated by the Chapter 11 filings of several co-defendants in asbestos
bodily injury litigation. These trends greatly increased the risk that Grace
would not be able to resolve its pending and future asbestos claims under the
state court system.
Grace concluded that a federal court-supervised Chapter 11 filing provides
the best forum available to achieve predictability and fairness in the claims
settlement process. By filing under Chapter 11, Grace expects to be able both to
obtain a comprehensive resolution of the claims against it and preserve the
inherent value of its businesses.
As a consequence of the filing, pending litigation against Grace is
generally stayed (subject to certain exceptions in the case of governmental
authorities), and no party may take any action to realize its pre-petition
claims except pursuant to order of the Bankruptcy Court. Grace intends to
address all of its pending and future asbestos-related claims and all other
pre-petition claims in a plan of reorganization. The formulation and
implementation of a plan of reorganization could take a significant period of
time. Since the filing, all motions necessary to conduct normal business
activities have been approved by the Bankruptcy Court.
Grace's asbestos-related litigation and Chapter 11 filing are further
discussed in Item 3 of this Report, and in Notes 1, 2 and 3 to Grace's
Consolidated Financial Statements as of December 31, 2001 and December 31, 2000
and for the three years in the period ended December 31, 2001 ("Consolidated
Financial Statements") and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Financial Supplement to this Report.
As used in this Report, the term "Grace" or the "Company" refers to W. R.
Grace & Co., a Delaware corporation and, in certain cases, one or more of its
subsidiaries and/or their respective predecessors.
BUSINESS OVERVIEW
Grace, through its subsidiaries, is one of the world's leading
specialty chemicals and materials companies. Grace entered the specialty
chemicals industry in 1954, when it acquired both the Dewey and Almy Chemical
Company and the Davison Chemical Company. Grace operates in the following two
business segments:
o Davison Chemicals manufactures catalysts and silica-based products. Davison
Chemicals' catalysts include (1) fluid cracking catalysts and additives
used by petroleum refineries to convert distilled crude oil into
transportation fuels and other petroleum-based products; (2)
hydroprocessing catalysts that upgrade heavy oils and remove certain
impurities; and (3) polyolefin catalysts and catalyst supports that are
essential components in the manufacture of high density and linear low
density polyethylene resins used in products such as plastic film,
high-performance plastic pipe and plastic household containers. Davison
Chemicals' silica gels, colloidal silicas, precipitated silicas, and
zeolite adsorbents are used in a wide variety of industrial and consumer
applications, such as ink jet paper, separations/chromatography, plastics,
toothpastes, paints, precision investment casting, rubber compounds and
insulated glass, as well as in the refining of edible oils and for
purification in petrochemical processes. Davison Chemicals accounted for
approximately 51% of Grace's 2001 sales.
o Performance Chemicals produces (1) specialty construction chemicals,
including performance-enhancing concrete admixtures, cement additives and
masonry products; (2) specialty building materials, including fireproofing
and waterproofing materials and systems; and (3) sealants and coatings for
packaging that protect food and beverages from bacteria and other
contaminants, extend shelf life and preserve flavor. Performance Chemicals
accounted for approximately 49% of Grace's 2001 sales.
Grace's principal executive offices are located at 7500 Grace Drive,
Columbia, Maryland 21044, telephone 410/531-4000. As of year-end 2001, Grace had
approximately 6,400 full-time employees worldwide in its continuing operations.
Information concerning the net sales, pretax operating income and total
assets of Grace's continuing operations by business segment and information by
geographic area for 2001, 2000 and 1999 is contained in Note 20 to the
Consolidated Financial Statements in the Financial Supplement to this Report.
Strategic Objectives and Actions. Grace's strategy has been, and will
continue to be, to seek to enhance enterprise value by profitably growing its
specialty chemicals businesses globally and achieving high levels of financial
performance. To achieve these objectives, Grace plans to (i) invest in research
and development activities, with the goals of introducing new high-performance
products and services and enhancing manufacturing processes; (ii) implement
process and productivity improvements and cost-management initiatives (including
the use of Six Sigma processes) such as rigorous controls on working capital and
capital spending; and (iii) pursue selected acquisitions and alliances. These
plans are designed to make Grace a high-performance company focused on the
strengths of its global specialty chemicals businesses.
Projections and Other Forward-Looking Information. This Report
contains, and other communications by Grace may contain, projections or other
"forward-looking" information. Forward-looking information includes all
statements regarding Grace's expected financial position, results of operations,
cash flows, dividends, financing plans, business strategy, budgets, capital and
other expenditures, competitive positions, growth opportunities for existing
products, benefits from new technology, plans and objectives of management, and
markets for stock. Like any other business, Grace
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is subject to risks and other uncertainties that could cause its actual results
to differ materially from any projections or that could cause other
forward-looking information to prove incorrect.
Most significantly, Grace filed for protection under Chapter 11 on April 2,
2001 as a result of a sharply increasing number of asbestos bodily injury
claims. See Item 3 of this Report, and Notes 1, 2 and 3 to Grace's Consolidated
Financial Statements and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Financial Supplement to this Report,
for a more detailed discussion of risks related to Grace's asbestos liabilities.
In addition to general economic, business and market conditions, Grace is
also subject to other risks and uncertainties, including the following:
o developments in and the outcome of the Chapter 11 proceedings, including
but not limited to the determination of the allowed number and cost of
resolution of pending and future asbestos-related claims and the time
required to confirm and implement a plan of reorganization;
o the loss of flexibility in operating its businesses and the higher costs of
doing business under Chapter 11;
o greater than expected liabilities with respect to environmental
remediation;
o an inability to obtain committed credit facilities or alternative sources
of liquidity in amounts sufficient to fund operations, growth initiatives
and non-core obligations;
o a decline in worldwide oil consumption or the development of new methods of
oil refining;
o increases in prices of raw materials and energy costs;
o the consolidation of major customers, which could increase customer
purchasing power, thereby putting pressure on operating profits;
o an inability to gain customer acceptance, or slower than anticipated
acceptance, of new products or product enhancements (particularly in the
construction industry);
o changes in environmental regulations or societal pressures that make
Grace's business operations more costly or that change the types of
products used, especially petroleum-based products;
o slower than anticipated economic advances in less developed countries;
o foreign currency devaluations in developing countries or other adverse
changes in currency exchange rates;
o technological breakthroughs rendering a product, a class of products or a
line of business obsolete;
o an inability to adapt to continuing technological improvements by
competitors or customers; and
o the acquisition (through theft or other means) and use by others of Grace's
proprietary formulas and other know-how (particularly in the sealants and
coatings business).
See Notes 1, 2, 3, 4, 5, 10, 13 and 15 to the Consolidated Financial Statements
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Financial Supplement for additional information concerning
risks and uncertainties.
PRODUCTS AND MARKETS
Specialty Chemicals Industry Overview. Specialty chemicals, such as
those produced by Grace, are high-value-added products used as intermediates,
components or additives in a wide variety of products and processes. They are
produced in relatively small volumes and must satisfy well-defined performance
requirements and specifications. Specialty chemicals are often critical
components of the end products and processes in which they are used;
consequently, they are tailored to meet customer needs, which generally results
in a close relationship between the specialty chemicals producer and the
customer. Rapid response to changing customer needs and reliability of product
and supply are important competitive factors in specialty chemicals businesses.
Grace's management believes that in specialty chemicals businesses
technological leadership (resulting from continuous innovation through research
and development), combined with product
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differentiation and superior customer service, lead to high operating margins.
Grace believes that these factors reward the research and development and
customer service costs associated with its strategy.
Davison Chemicals Business Segment (Catalysts and Silica-Based
Products). Davison, founded in 1832, is composed of two primary product groups:
(i) catalysts and (ii) silica products and adsorbents. These product groups
principally apply silica, alumina and zeolite technology in the design and
manufacture of products to meet the varying specifications of such diverse
customers as major oil refiners, plastics and chemical manufacturers, and
consumer products and pharmaceutical/nutraceutical companies. Davison believes
that its technological expertise provides a competitive edge, allowing it to
quickly design products and materials that meet changing customer specifications
and to develop new products and materials that expand its existing technology.
Davison produces refinery catalysts, including (i) fluid cracking
catalysts ("FCC") used by petroleum refiners to convert distilled crude oil into
more valuable transportation fuels (such as gasoline and diesel fuels) and other
petroleum-based products, and (ii) hydroprocessing catalysts that upgrade heavy
oils and remove certain impurities (such as nitrogen, sulfur and heavy metals).
Davison also develops and manufactures FCC additives used for octane enhancement
and to reduce emissions of sulfur oxides, nitrogen oxides and carbon monoxide
from the FCC unit. Davison has recently introduced new catalyst/additive
technologies for sulfur reduction in gasoline. Oil refining is a highly
specialized discipline, demanding that products be tailored to meet local
variations in crude oil and the refinery's product mix. Davison works regularly
with most of the approximately 360 refineries in the world, helping to find the
most appropriate catalyst formulations for refiners' changing needs. To better
serve its customers, Davison recently introduced e-Catalysts.com, a
user-specific web site.
Davison's catalyst business has benefited from the increased use of FCC
units to produce selected petrochemical feedstocks. It has also benefited from
the passage of more stringent environmental regulations, which has increased
demand for FCC additives that reduce emissions. Davison's business is affected
by the capacity utilization of refiners' cracking units - as capacity
utilization increases, the refiner uses a disproportionately greater amount of
FCCs. Consolidation in the refining industry may affect Davison's sales and
margins, as the purchasing power of its customers may increase, and the gain or
loss of a customer may have a greater impact on Davison's sales.
Increased demand for hydroprocessing catalysts has recently been driven
by the demand for lower sulfur content in transportation fuels. Davison has
recently introduced new catalyst technologies for sulfur reduction in gasoline
and diesel fuels. Davison also has expanded its hydroprocessing catalyst
offerings through two recent transactions. In 2000, Davison acquired the
distillate catalyst business of the Crosfield Group. In March 2001, Grace and
Chevron U.S.A. Inc. formed Advanced Refining Technologies ("ART") , a joint
venture combining Chevron's fixed bed residuum catalyst business with Davison's
ebullating bed residuum catalyst and distillate catalyst business.
Davison believes it is one of the world leaders in refinery catalysts
and the largest supplier of FCCs in the world. Competition in the refinery
catalyst business is based on technology, product performance, customer service
and price. Davison's two principal global competitors in FCCs are Engelhard
Corporation and Akzo Nobel. Davison has several competitors for FCC additives
and hydroprocessing catalysts.
Davison is also a major producer of polyolefin catalysts and catalyst
supports, essential components in the manufacture of high density and linear low
density polyethylene resins that are in turn used in products such as plastic
film, high-performance plastic pipe and plastic household containers. Davison
catalysts and catalyst supports are used in manufacturing nearly half of all
such resins produced worldwide. The polyolefin catalyst business is
technology-intensive and focused on providing products formulated to meet
customer specifications. There are many manufacturers of polyolefin catalysts,
and most compete on a worldwide basis. Competition has recently intensified
because of evolving
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technologies, particularly the use of metallocene catalysts, which allow
manufacturers to design polymers with exact performance characteristics. In
January 2002, Davison acquired the polyolefin catalyst manufacturing assets of
Borealis AB, giving Davison access to polyolefin catalyst and catalyst carrier
segments and technologies new to Davison.
Silica products and zeolite adsorbents produced by Davison are used in
a wide variety of industrial and consumer applications. Davison manufactures
silica gels, colloidal silicas and precipitated silicas. These silicas have
different physical properties, such as particle size, surface area, porosity and
surface chemistry, which give each type of silica unique features, that make it
appropriate for specific applications. Davison has multiple competitors in each
silicas/adsorbents segment in which it participates. Competition is based on
product performance, customer service and price.
Silica gels are used in coatings as matting agents (i.e., to reduce
gloss), in plastics to improve handling, in toothpastes as abrasives and
whiteners, in foods to carry flavors and prevent caking, and in the purification
of edible oils and beer stabilization. Davison is using its expertise in silica
gels technology to develop new products for existing markets, such as coatings.
Recently, Davison also has introduced new products for the high-growth ink
receptive paper segment, including improved gels for ink absorption on glossy
media and new paper coating formulas.
Colloidal silicas are used primarily as binders in precision investment
casting and refractory applications. Davison acquired this product line in 2000
from E.I. DuPont de Nemours. Precipitated silicas are used predominantly in the
manufacture of tires and other industrial rubber goods such as belts, hoses and
footwear. Davison acquired this product line in March 2001 from Akzo-PQ Silicas.
Zeolites, while not silica-based products, are based on silica/alumina
technology. Zeolites adsorbents are used between the two panes of insulating
glass to adsorb moisture and are also used in process applications to adsorb
water and separate certain chemical components from mixtures.
In March 2001, Davison acquired The Separations Group, a manufacturer
of chromatography columns and separations media. This acquisition is expected to
provide Davison with opportunities to use its materials sciences expertise to
accelerate growth into biotechnology separations applications.
The silicas and adsorbents business has a large, fragmented customer
base, reflecting the diverse markets served by its products. To better serve
these customers, Davison has introduced web-based initiatives, starting with
online ordering of packaged desiccants and offering process design formulas
online to assist customers in quickly and efficiently determining their needs.
Approximately half of Davison's silica and adsorbent sales are in Europe.
Davison's net sales were $874 million in 2001, $784 million in 2000 and
$751 million in 1999; 42% of Davison's 2001 net sales were generated in North
America, 35% in Europe, 17% in Asia Pacific, and 6% in Latin America. Sales of
catalysts accounted for 36% of total net sales of Grace in 2001, 35% in 2000,
and 34% in 1999. Sales of silica products and zeolite adsorbents accounted for
15% of Grace's total net sales in 2001 and 14% in 2000 and 1999. At year-end
2001, Davison employed approximately 3,100 people worldwide in 15 facilities (10
in the U.S., two in Germany, and one each in Canada, Brazil and Malaysia).
Davison's principal U.S. manufacturing facilities are located in Baltimore,
Maryland and Lake Charles, Louisiana. Davison has a direct selling force and
distributes its products directly to approximately 9,000 customers (500 for
catalysts and more than 8,500 for silicas/adsorbents), the largest of which
accounted for approximately 2% of Davison's 2001 sales.
Most raw materials used in the manufacture of Davison products are
available from multiple sources. In some instances, Davison produces its own raw
materials and intermediates. During the second half of 2000 and the first half
of 2001, because of worldwide supply/demand imbalances, Davison experienced
significantly higher natural gas and petroleum-based raw material price
increases, which had a negative impact on its operating margins. Seasonality
does not have a significant overall effect on
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Davison's business. However, sales of FCC catalysts tend to be lower in the
first quarter prior to the shift in production by refineries from home heating
oil for the winter season to gasoline production for the summer season. Silica
products and polyolefin catalysts are the product lines most sensitive to
general downturns in economic activity.
Performance Chemicals Business Segment (Specialty Construction
Chemicals, Specialty Building Materials, and Sealants and Coatings). Performance
Chemicals was formed in July 1999 by integrating Grace's construction products
businesses with its Darex(R) sealants and coatings businesses. Grace integrated
these businesses, which share many facilities around the world and are
headquartered in the Cambridge, Massachusetts area, in order to realize
efficiencies in supply chain management, process improvement, commercialization
of new products and marketing.
Performance Chemicals is a leading supplier of specialty construction
chemicals and building materials to the nonresidential (commercial and
infrastructure) construction industry, and to a lesser extent, the residential
construction industry. Specialty construction chemicals (principally concrete
admixtures, cement additives and masonry products) add strength, control
corrosion and enhance the handling and application of concrete, improve the
manufacturing efficiency and performance of cement, and improve the water
resistance and other qualities of masonry wall systems. A number of new
construction chemicals products and product enhancements have been introduced in
recent years. These include an admixture that reduces concrete shrinkage and
helps prevent cracking; a product that enables contractors to obtain acceptable
concrete set times in colder temperatures; an admixture that inhibits corrosion
and prolongs the life of concrete structures; and an additive that improves
cement processing efficiency and product quality. Grace seeks to continuously
improve and adapt these products for different applications.
In 1999, Performance Chemicals introduced a new masonry admixture for
improving the freeze/thaw durability of segmental retaining wall units and
pavers, and new structural fiber reinforcements for concrete that provide a
corrosion-free alternative to steel fibers and welded wire mesh. In 2001, new
fiber reinforcements and a system for producing self-consolidating concrete
(which improves how the concrete conforms to the shape of a structure) were
introduced. Also in 2001, Performance Chemicals expanded the geographic scope
and product offerings of its specialty construction chemicals business through
the acquisition of Pieri S.A., based in France.
Specialty building materials prevent water damage to structures (such
as water- and ice-barrier products for residential use and waterproofing systems
for commercial structures) and protect structural steel against collapse caused
by fire. In North America, the specialty building materials product line also
manufactures and distributes vermiculite products used in insulation and other
applications. Recent product developments include liquid-applied waterproofing
products and new roof underlayments that provide protection from ice and
wind-driven rain; enhancements to fireproofing products that improve applicator
productivity; and fireproofing products for industrial, petrochemical and
acoustical applications. In addition, through the acquisition of International
Protective Coatings Corporation in 2000, firestops were added to Performance
Chemicals' product offerings. Firestops are caulk and sealant systems that
retard the spread of heat, flame and smoke through walls and ceiling joints, as
well as openings in buildings for wiring and piping through which heat, flame or
smoke can penetrate.
In addition to new product introductions, product enhancements and
acquisitions, Performance Chemicals looks for growth opportunities in developing
economies, where increases in construction activity and sophistication of
construction practices can increase demand for Performance Chemicals'
construction chemicals and building materials products.
The construction chemicals and building materials produced by
Performance Chemicals are marketed to an extremely broad range of customers,
including cement manufacturers, ready-mix and precast concrete producers, local
contractors, specialty subcontractors and applicators, masonry block
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manufacturers, building materials distributors and other industrial
manufacturers, as well as construction specifiers, such as architects and
structural engineers. For some of these customer groups (such as contractors),
cost and ease of application are key factors in making purchasing decisions; for
others (such as architects and structural engineers), product performance and
design versatility are the critical factors. In view of this diversity, and
because the construction chemicals and building materials businesses require
intensive sales and customer service efforts, Performance Chemicals maintains a
separate sales and technical support team for each of its product groups. These
sales and support teams sell products under global contracts, under U.S. or
regional contracts and on a job-by-job basis. Consequently, Performance
Chemicals competes globally with several large construction materials suppliers
and regionally and locally with numerous smaller competitors. In recent years,
the cement and concrete industry has experienced some consolidation,
particularly in markets outside of the U.S. Competition is based largely on
technical support and service, product performance, adaptability of the product
and price.
The construction business is cyclical in response to economic
conditions and construction demand. The construction business is also seasonal
due to weather conditions. Performance Chemicals seeks to increase profitability
and minimize the impact of cyclical downturns in regional economies by
introducing technically advanced higher-performance products, expanding
geographically, and developing business opportunities in renovation construction
markets. Although in recent years these strategies have been successful in
minimizing the impact of cyclicality on Performance Chemicals' construction
business, the continued success of these strategies cannot be assured, and such
cyclicality could adversely affect its business and results of operations in the
future.
The raw materials used by the construction chemicals and building
materials product lines can be obtained from multiple sources, including
commodity chemical producers, petroleum companies and paper manufacturers. In
most instances, there are at least two alternative suppliers for each of the
principal raw materials used by these businesses.
The Darex(R) sealants and coatings business consists primarily of four
product lines: can sealants and closure sealants for rigid containers, coatings
for metal packaging, and specialty barrier coatings for flexible packaging.
These products are used to assure the quality of packaging and to preserve
container contents. Can sealants ensure a hermetic seal between the lid and the
body of beverage, food, aerosol and other cans. Closure sealants are used to
seal pry-off and twist-off metal crowns, as well as roll-on pilfer-proof and
plastic closures for glass and plastic bottles and jars used in beverage and
food applications. Coatings are used in the manufacture of cans and closures to
protect the metal against corrosion, to protect the contents against the
influences of metal, to ensure proper adhesion of sealing compounds to metal
surfaces, and to provide base coats for inks and for decorative purposes. These
products are principally sold to companies that manufacture containers.
Specialty barrier coatings are used to improve the gas and/or vapor barrier
performance of various packaging materials. They are principally sold to
manufacturers of oriented polypropylene films for food packaging.
Performance Chemicals is seeking to expand its Darex(R) product
offerings and improve sales growth througH developing technologies, such as its
oxygen-scavenging compounds (which absorb oxygen resulting in extended shelf
life) and high barrier materials that limit gas transmission into plastic
packaging. Performance Chemicals is also looking to improve sales of sealants
and coatings through continued growth in developing regions. However, sales
growth has been impacted and will likely be impacted in the future by the trend
toward increasing use of plastic packaging. Therefore, Performance Chemicals has
also been focusing on improving the profitability and cash flows of this
business through productivity initiatives and a worldwide program to rationalize
facilities.
Competition is based on providing high-quality customer service at
customer sites, as well as on uniform product quality and reliability, the
ability to offer environmentally-friendly products and price. In addition,
because of the relative concentration of the canning and bottling market,
maintaining
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relationships with leading container manufacturers, canners and bottlers, and
assisting them as they reengineer processes are key elements for success. In
2001, approximately 35% of sealants and coatings sales were derived from its top
ten customers.
Although raw materials used in the sealants and coatings business,
including resins, rubber and latices, are generally available from multiple
sources, certain raw materials are purchased from single source suppliers. Some
raw materials are also subject to pricing pressures from time to time,
particularly certain specialty resins. Also, currency devaluations in developing
countries may adversely affect raw material costs and the prices the business
may charge for its products. Performance Chemicals has been successful in
establishing a supply chain organization focused on managing raw material costs
and flow to alleviate some of these pressures. The impact of seasonality is not
significant to the sealants and coatings business.
Performance Chemicals' 2001 net sales totaled $849 million (60% in
North America, 20% in Europe, 14% in Asia Pacific, and 6% in Latin America),
versus $814 million in 2000 and $800 million in 1999. Sales of specialty
construction chemicals accounted for 21% of Grace's total net sales in 2001, 22%
in 2000 and 22% in 1999; sales of specialty building materials accounted for 14%
of Grace's total net sales in 2001, 2000 and 1999; and sales of Darex products
accounted for 14% of Grace's total net sales in 2001, 15% in 2000 and 16% in
1999. At year-end 2001, Performance Chemicals employed approximately 3,000
people at 65 production facilities (25 in North America, 19 in Asia Pacific, 14
in Europe, and 6 in Latin America) and approximately 70 sales offices worldwide.
Performance Chemicals' capital expenditures tend to be relatively lower, and
sales and marketing expenditures tend to be relatively higher, than those of
Davison Chemicals.
DISCONTINUED OPERATIONS
In July 1999, Grace sold substantially all of its interest in Cross
Country Staffing, a provider of temporary nurses and other health care related
services, to an affiliate of Charterhouse Group International, Inc., a private
equity firm, and the management of Cross Country Staffing. The transaction was
preceded by Grace's purchase of a minority interest in Cross Country Staffing
held by Nestor Healthcare Group plc. Grace received pretax net cash proceeds of
approximately $103 million as a result of these two transactions.
RESEARCH ACTIVITIES
Grace's research and development programs are directed toward the
development of new products and processes and the improvement of, and
development of new uses for, existing products and processes. Research is
conducted in all regions, with North America and Europe accounting for the most
activity. Grace's research and development strategy is to develop technology
platforms on which new products will be based, while focusing development
efforts in each business unit on the improvement of existing products and/or the
adaptation of existing products to customer needs.
Research and development expenses relating to continuing operations
amounted to $50 million in 2001 (including $5.8 million incurred on behalf of
the ART joint venture), $46 million in 2000 and $42 million in 1999. These
amounts include expenses incurred in funding external research projects. The
amount of research and development expenses relating to government- and
customer-sponsored projects (rather than projects sponsored by Grace) was not
material.
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PATENTS AND OTHER INTELLECTUAL PROPERTY MATTERS
Grace's products, processes and manufacturing equipment are protected
by numerous patents and patent applications, and include legally protectable
know-how and other proprietary information. As competition in the markets in
which Grace does business is often based on technological superiority and
innovation, with new products being introduced frequently, the ability to
achieve technological innovations and to obtain patent or other intellectual
property protection is important. There can be no assurance that Grace's
patents, patent applications or other intellectual property will provide
sufficient proprietary protection. In addition, other companies may
independently develop similar systems or processes that circumvent patents
issued to Grace, or may acquire patent rights within the fields of Grace's
businesses.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Manufacturers of specialty chemicals products, including Grace, are
subject to stringent regulations under numerous U.S. federal, state and local
and foreign environmental, health and safety laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace has expended substantial funds to comply with such
laws and regulations and expects to continue to do so in the future. The
following table sets forth Grace's expenditures in the past three years, and its
estimated expenditures in 2002 and 2003, for (i) the operation and maintenance
of environmental facilities and the disposal of wastes with respect to
continuing operations; (ii) capital expenditures for environmental control
facilities relating to continuing operations; and (iii) site remediation:
(i) (ii) (iii)
Operation of
Facilities and Capital Site
Waste Disposal Expenditures Remediation
-------------- ------------ -----------
(in $ millions)
1999 $31 $6 $25
2000 26 4 47
2001 32 4 29
2002 (est.) 34 7 27
2003 (est.) 36 6 25 - 40
Additional material environmental costs may arise as a result of
matters related to Grace's former vermiculite mining activities in the Libby,
Montana area. For additional information, see Item 3 of this Report and Note 15
to the Consolidated Financial Statements and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Financial
Supplement to this Report.
Grace seeks continuously to improve its environmental, health and
safety performance. To the extent applicable, Grace extends the basic elements
of the American Chemistry Council's Responsible Care(R) program to all Grace
locations worldwide, embracing specific performance objectives in the key areas
of product stewardship, employee health and safety, community awareness and
emergency response, distribution, process safety and pollution prevention.
See Item 3 below for information concerning environmental proceedings
to which Grace is a party.
9
ITEM 2. PROPERTIES
Grace operates manufacturing and other types of plants and facilities
(including office and other service facilities) throughout the world. Some of
these plants and facilities are shared by more than one Grace business unit, and
since the disposition of its packaging business in 1998, some plants and
facilities are shared with Sealed Air Corporation. Grace considers its major
operating properties to be in good operating condition and suitable for their
current use. Grace believes that, after taking planned expansion into account,
the productive capacity of its plants and other facilities is generally adequate
for current operations and foreseeable growth. See Note 20 to the Consolidated
Financial Statements and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Financial Supplement for information
regarding Grace's capital expenditures.
Specific information regarding Grace's properties is set forth in Item
1 above.
ITEM 3. LEGAL PROCEEDINGS
Asbestos Litigation. Grace is a defendant in property damage and bodily
injury lawsuits relating to previously sold asbestos-containing products. In
most of these lawsuits, Grace is one of many defendants. As a result of the
Chapter 11 filing, all asbestos-related litigation has been stayed and no party
may commence any new proceedings against Grace. However, Grace expects that it
will receive additional asbestos-related claims during the Chapter 11 process.
Grace was a defendant in 65,656 asbestos-related lawsuits on April 2,
2001, the date of Grace's Chapter 11 filing. Sixteen of such lawsuits involve
claims for property damage, eight relating to Grace's former attic insulation
product (one of which has since been dismissed) and eight relating to a number
of former asbestos-containing products (two of which also involve the attic
insulation product). The remainder of such lawsuits involve 129,191 claims for
bodily injury. At year-end 2000, Grace was a defendant in 61,395 lawsuits, 15
involving claims for property damage, and the remainder involving 124,907 claims
for bodily injury.
The plaintiffs in property damage lawsuits generally seek to have the
defendants absorb the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Through December 31,
2001, 141 asbestos property damage cases were dismissed without payment of any
damages or settlement amounts; judgments were entered in favor of Grace in nine
cases (excluding cases settled following appeals of judgments in favor of
Grace); judgments were entered in favor of the plaintiffs in seven cases for a
total of $60.3 million (none of which is on appeal); and 207 property damage
cases were settled for a total of $696.8 million.
In February 2000 a purported class action lawsuit was filed in the U.S.
District Court for the Eastern District of Massachusetts against the Company
(Lindholm v. W. R. Grace & Co.) on behalf of all owners of homes containing
Zonolite(R) attic insulation, a product previously sold by Grace that may
contain trace amounts of asbestos. The action seeks damages and equitable
relief, including the removal, replacement and/or disposal of all such
insulation. Since Lindholm was filed, nine additional purported class action
lawsuits have been filed against Grace in various state and federal courts
asserting similar claims and seeking damages similar to those in Lindholm. One
of the purported federal class actions has been consolidated with Lindholm. As a
result of the Chapter 11 filing, all of these cases have been transferred to the
U.S. Bankruptcy Court for the District of Delaware. While Grace has not
completed its investigation of the claims described in these lawsuits, Grace
believes that this product was and continues to be safe for its intended purpose
and poses little or no threat to human health. At this time, Grace is not able
to assess the extent of any possible liability related to this matter.
10
Cumulatively through April 2, 2001, 16,354 bodily injury lawsuits
involving 35,720 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and 55,489 lawsuits involving 163,698 claims were disposed of for a
total of $645.6 million.
Based on Grace's experience and trends in asbestos bodily injury
litigation, Grace has endeavored to reasonably forecast the number and ultimate
cost of all present and future bodily injury claims expected to be asserted,
based on measures governed by generally accepted accounting principles relating
to probable and estimable liabilities. Grace has accrued $996.3 million at
December 31, 2001 as its estimate of the cost to resolve all asbestos-related
bodily injury cases and claims pending as well as those expected to be filed in
the future, and all property damage cases for which sufficient information is
available to form a reasonable estimate of the cost to resolve. This estimate
has been made based on historical facts and circumstances prior to April 2,
2001. However, due to the Chapter 11 filing and the uncertainties of
asbestos-related litigation, Grace's ultimate liability for asbestos-related
litigation could differ materially from the recorded liability.
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace has settled with and has been paid
by all of its primary insurance carriers with respect to both property damage
and bodily injury cases and claims. Grace has also settled with its excess
insurance carriers that wrote policies available for property damage cases;
those settlements involve amounts paid and to be paid to Grace. Grace believes
that certain of these settlements may cover attic insulation claims as well as
other property damage claims. In addition, Grace believes that additional
coverage for attic insulation claims may exist under excess insurance policies
not subject to settlement agreements. Grace has settled with excess insurance
carriers that wrote policies available for bodily injury claims in layers of
insurance that Grace believes may be reached based on its current estimates.
Insurance coverage for asbestos-related liabilities has not been commercially
available since 1985.
Pursuant to settlements with primary-level and excess-level insurance
carriers with respect to asbestos-related claims, Grace received payments
totaling $895.4 million prior to 1999, as well as payments totaling $73.1
million in 1999, $85.6 million in 2000, and $78.8 million in 2001. Under certain
settlements, Grace expects to receive additional amounts from insurance carriers
in the future and has recorded a receivable of $293.4 million to reflect the
amounts expected to be recovered in the future, based on projected payments
equal to the amount of the recorded asbestos-related liability.
During 2000, the number of bodily injury claims made against Grace
increased significantly compared with 1999 and prior year claim levels, with a
total of 48,786 bodily injury claims being received in 2000, versus 26,941
claims in 1999. This trend continued in the first quarter of 2001, when Grace
received 16,411 bodily injury claims. Also, costs to resolve asbestos litigation
were higher than expected for bodily injury and certain property damage claims.
In addition, five significant codefendant companies in bodily injury litigation
had petitioned for reorganization under Chapter 11. These developments and
events caused an environment that increased the risk of more claims being filed
against Grace than previously projected, with higher settlement demands and
trial risks. These developments and events also raised substantial doubt whether
Grace would be able to manage its asbestos liabilities over the long term under
the existing state court system. As a result, following a thorough review of the
strategic and operating issues associated with continuing to defend asbestos
litigation through the court system versus voluntarily seeking a resolution of
such litigation through reorganization under Chapter 11, Grace filed for
protection under Chapter 11 on April 2, 2001.
See Item 1 of this Report and Notes 1, 2 and 3 to the Consolidated
Financial Statements and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Financial Supplement for additional
information.
11
Environmental Proceedings. The following is a description of the
material environmental proceedings in which Grace is involved:
Grace (together, in most cases, with many 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 2001, proceedings were
pending with respect to approximately 30 sites as to which Grace has been
designated a PRP by the EPA. U.S. federal law provides that all PRPs may be held
jointly and severally liable for the costs of investigating and remediating a
site. Grace is also conducting investigatory and remediation activities at sites
under the jurisdiction of state and/or local authorities. During the Chapter 11
proceeding, Grace does not expect to participate in the joint funding of
investigation and remediation, or other settlements, at non-owned sites where it
is a PRP, except in a limited number of special cases. Grace's ultimate
liability with respect to such sites will be determined as part of its Chapter
11 proceeding.
In November 1999, the EPA began an investigation into alleged excessive
levels of asbestos-related disease related to Grace's former vermiculite mining
activities in the Libby, Montana area. This investigation led the EPA to
undertake additional investigative activity and to carry out remedial actions in
and around Libby. On March 30, 2001, the EPA filed a lawsuit in U.S. District
Court for the District of Montana, Missoula Division (United States v. W. R.
Grace & Company et al.) under the Comprehensive Environmental Response,
Compensation and Liability Act for the recovery of costs allegedly incurred by
the United States in response to the release or threatened release of asbestos
in the Libby area relating to such former mining activities. These costs include
cleaning and/or demolition of contaminated buildings, the excavation and removal
of contaminated soil, health screening of Libby residents and former mine
workers, and investigation and monitoring costs. In this action, the United
States is also seeking a declaration of Grace's liability that would be binding
in future actions to recover further response costs. The EPA has reported that
it has spent approximately $25 million in response costs in and around Libby
through June 30, 2001. Grace expects that the EPA may incur significant
additional response costs, as Libby is expected to be added to the EPA's
National Priorities List of Superfund sites, but is unable to estimate the cost
at this time. Grace intends to review the EPA's actions and cost claims to
determine whether they are justified and reasonable. This case is not subject to
the automatic stay provided under Section 362 of the U.S. Bankruptcy Code and is
scheduled for trial in January 2003.
In February 2000, a purported class action lawsuit was filed in the
U.S. District Court for Montana, Missoula Division (Tennison, et al. v. W. R.
Grace & Co., et al.) against Grace on behalf of all owners of improved, private
real property situated within 12 miles of Libby, Montana. The action alleges
that the class members have suffered harm in the form of environmental
contamination and loss of property rights resulting from Grace's former
vermiculite mining and processing operations. The complaint seeks remediation,
property damages and punitive damages. While Grace has not completed its
investigation of the claims, and, therefore, is not able to assess the extent of
any possible liability related to this lawsuit, Grace has no reason to believe
that its former activities caused damage to the environment or property. This
case has been stayed as a result of Grace's Chapter 11 filing.
In October 2000, a purported class action lawsuit was filed in the U.S.
District Court for Minnesota, 4th Division (Chase v. W. R. Grace & Co.-Conn.)
alleging loss of property values of residents in the vicinity of a former
vermiculite expanding plant in Minneapolis. This case has also been stayed as a
result of Grace's Chapter 11 filing. The EPA has remediated industrial property
in the area, including the former vermiculite expanding plant. The EPA has also
commenced and is continuing a program for removing suspected vermiculite
processing by-products from the yards and driveways of houses near the plant.
The EPA has reviewed approximately 800 to 900 properties in the area. In 2001,
the EPA took action at 77 properties and intends to take action at an additional
48 properties when weather permits. An
12
additional 68 properties are scheduled for investigation. These activities are
not expected to result in material liability to Grace.
The EPA has compiled for investigation a list of 244 facilities that at
one time used, stored, or processed concentrate that originated from Grace's
former vermiculite mine at Libby, Montana. Included in this list are 50
vermiculite expansion plants currently or formerly operated by Grace. To date,
the EPA has listed 15 of these 50 sites as requiring additional action.
Corrective actions or investigations have been conducted by Grace at six of
these sites. The EPA has investigated another eight of these sites but has
neither provided Grace with notice of the investigation results nor advised
Grace that further action is necessary. Grace does not have sufficient
information at this time to determine the extent of any possible liability
related to this investigation.
Grace is a party to additional proceedings involving U.S. federal,
state and/or local government agencies and private parties regarding Grace's
compliance with environmental laws and regulations. These proceedings are not
expected to result in significant sanctions or in any material liability.
However, Grace may incur material liability in connection with future actions of
governmental agencies or private parties relating to past or future practices of
Grace with respect to the generation, storage, handling, discharge or
disposition of hazardous wastes and other materials.
Grace is a party to three environmental insurance coverage actions
pending in the U.S. District Court for the Southern District of New York. The
first is styled Maryland Casualty Co. v. W. R. Grace & Co. (filed in 1988). This
litigation, involving Grace's coverage claims against a primary-level carrier
for environmental property damage, is currently the subject of an appeal. The
second case, entitled Uniguard v. W. R. Grace, was filed in 1997. This
declaratory judgment action seeks a determination concerning the liability of
one excess carrier for bodily injury claims as a result of environmental
contamination. This case has been stayed as a result of Grace's Chapter 11
filing. In June 2000, a separate lawsuit was filed against Grace by one of its
former primary insurance carriers seeking coverage determinations regarding 45
claims (Continental Casualty Company v. W. R. Grace & Co. and W. R. Grace &
Co.-Conn.). Most of these claims involve alleged environmental property damage
at sites once owned and operated by Grace or at waste sites that allegedly
received waste materials from plants operated by Grace, including Grace's claims
for coverage regarding certain claims involving its former vermiculite mining
operation in Libby, Montana. This case has been stayed as a result of Grace's
Chapter 11 filing. The outcome of these cases, as well as the amounts of any
recoveries that Grace may receive in connection therewith, is presently
uncertain.
Grace's environmental liabilities are reassessed whenever circumstances
become better defined or remediation efforts and their costs can be better
estimated. These liabilities are evaluated quarterly, based on currently
available information, including the progress of remedial investigation at each
site, the current status of discussions with regulatory authorities regarding
the method and extent of remediation at each site, existing technology, prior
experience in contaminated site remediation and the apportionment of costs among
potentially responsible parties. In addition, environmental liabilities related
to Libby, Montana could be material, though not currently estimable, if the
proceedings described above are adversely determined. Grace does not have
sufficient information to determine how the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings. For further
information, see "Environmental, Health and Safety Matters" under Item 1 above
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Financial Supplement.
Fraudulent Transfer Litigation. Grace has been named in a purported
class action suit filed in September 2000 in California Superior Court for the
County of San Francisco alleging that the 1996 reorganization involving a
predecessor of Grace and Fresenius A.G. and the 1998 reorganization involving a
predecessor of Grace and Sealed Air Corporation (the "1996 and 1998
transactions") were fraudulent transfers (Abner, et al., v. W. R. Grace & Co.,
et al.). The suit is alleged to have been brought on behalf of all individuals
who then had lawsuits on file asserting personal injury or wrongful death
13
claims against any of the defendants. The other defendants in the suit have all
asserted claims against Grace for indemnification. The amended complaint also
names "Does 1-100" as defendants and alleges that those unidentified individuals
are responsible "in some manner" for the wrongs alleged. Since Abner, and prior
to the Chapter 11 filing, two other similar class actions were filed. These
lawsuits have been stayed as a result of Grace's Chapter 11 filing. However,
fraudulent transfer claims related to the 1996 and 1998 transactions are
expected to be heard by the Bankruptcy Court during the fourth quarter of 2002.
Tax Claims. In 1988 and 1990, Grace acquired whole life insurance
policies ("COLI") on the lives of certain of its employees as part of a strategy
to fund the cost of post-retirement employee health care benefits and other
long-term liabilities. COLI premiums have been funded in part by loans issued
against the cash surrender value of the COLI policies. The Internal Revenue
Service ("IRS") is challenging the deductions for interest on such loans claimed
by Grace and similarly situated companies. In 2000, Grace paid approximately
$21.2 million of tax and interest related to COLI deductions taken in 1990
through 1992. Grace is currently under audit for the 1993-96 tax years. During
those years Grace deducted approximately $122.1 million in interest attributable
to the COLI policies. In 1996, legislation was enacted that phased out the tax
benefits for COLI-related interest deductions over a three-year period ending in
1998. During those years, Grace deducted approximately $41.1 million in
COLI-related interest. Grace is contesting the IRS's position on the grounds
that Grace had and continues to have a valid business purpose for acquiring the
COLI policies, that the COLI policies have economic substance and that the
interest deductions claimed were in compliance with tax laws in effect at the
time.
The IRS also has assessed additional federal income tax withholding and
Federal Insurance Contributions Act taxes plus interest and related penalties
for calendar years 1993 through 1995 against CCHP, Inc., a Grace subsidiary that
formerly operated a temporary staffing business for nurses and other healthcare
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling healthcare
personnel that was in effect through 1999. Grace expects that the IRS will make
additional assessments for the 1996 through 1999 period. The IRS contends that
certain per diem meals and incidental expenses and lodging benefits provided to
traveling healthcare personnel to defray the expenses they incurred while
traveling on business should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS, for per diem and
expense allowance plans. Grace expects that the IRS will make additional
assessments for the 1996 through 1999 periods as well. The matter is currently
pending in the U.S. Court of Claims.
For further information, see Note 15 to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Results of Operations
under Financial Condition" in the Financial Supplement to this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This Item is inapplicable, as no matters were submitted to a vote of
the Company's security holders during the fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Except as provided below, the information called for by this Item
appears in the Financial Supplement under the heading "Financial Summary"
opposite the caption "Other Statistics - Common shareholders of record" (page
F-34); under the heading "Quarterly Summary and Statistical Information -
14
Unaudited" opposite the caption "Market price of common stock" (page F-33); and
in Note 16 to the Consolidated Financial Statements (page F-27).
On March 31, 1998, the Company paid a dividend, in respect of each
share of the Company's Common Stock, par value $.01 per share ("Common Stock"),
of one Preferred Stock Purchase Right ("Right"). The Rights are not and will not
become exercisable unless and until certain events occur (as described below).
Until such events occur, the Rights will automatically trade with the Common
Stock, and separate certificates for the Rights will not be distributed. The
Rights will become exercisable on the earlier to occur of (a) 10 days after a
person or group ("Acquiring Person") has acquired beneficial ownership of 20% or
more of the then outstanding shares of Common Stock or (b) 10 business days (or
such later date as may be fixed by the Company's Board of Directors) after an
Acquiring Person commences (or announces the intention to commence) a tender
offer or exchange offer that would result in such Acquiring Person becoming the
beneficial owner or 20% or more of the then outstanding shares of Common Stock.
Holders of Rights, as such, have no rights as shareholders of the Company;
consequently, such holders have no rights to vote or receive dividends, among
other things.
When the Rights become exercisable, each Right will initially entitle
the holder to buy from the Company one hundredth of a share of the Company's
Junior Participating Preferred Stock, par value $.01 per share ("Junior
Preferred Stock"), for $100, subject to adjustment ("exercise price"). If a
person or group becomes an Acquiring Person, each Right will entitle the holder
to receive upon exercise, in lieu of shares of Junior Preferred Stock, that
number of shares of Common Stock having a market value of two times the exercise
price of the Right. If, at any time after a person or group becomes an Acquiring
Person, the Company is acquired in a merger or other business combination of 50%
or more of the Company's consolidated assets or earning power is sold, each
Right not owned by an Acquiring Person will entitle the holder to buy a number
of shares of common stock of the acquiring company having a market value equal
to twice the exercise price.
Shares of Junior Preferred Stock that may be purchased upon exercise of
the Rights will not be redeemable. Each share of Junior Preferred Stock will be
entitled to a minimum preferential quarterly dividend payment of $1.00 per share
but will be entitled to an aggregate dividend equal to 100 times the dividend
declared per share of Common Stock whenever such dividend is declared. In the
event of liquidation, holders of Junior Preferred Stock will be entitled to a
minimum preferential liquidation payment of $100 per share but will be entitled
to an aggregate payment equal to 100 times the payment made per share of Common
Stock. Each share of Junior Preferred Stock will have 100 votes, voting together
with the Common Stock. Finally, in the event of any merger, consolidation or
other transaction in which the Common Stock is exchanged, each share of Junior
Preferred Stock will be entitled to receive an amount equal to 100 times the
amount received per share of Common Stock. These rights are protected by
customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights of
the Junior Preferred Stock, the value of the one-hundredth interest in a share
of Junior Preferred Stock that may be purchased upon exercise of each Right
should approximate the value of one share of Common Stock.
At any time after any person or group becomes and Acquiring Person, and
prior to the acquisition by such Acquiring Person of 50% or more of the
outstanding shares of Common Stock, the Company's Board of Directors may
exchange the Rights (other than Rights owned by such person or group, which will
become void after such person becomes an Acquiring Person) for Common Stock or
Junior Preferred Stock, in whole or in part, at an exchange ratio of one share
of Common Stock, or one hundredth of a share of Junior Preferred Stock (or of a
share of another series of the Company's Preferred Stock having equivalent
rights, preferences and privileges), per Right (subject to adjustment).
15
At any time prior to the acquisition by a person or group of beneficial
ownership of 20% or more of the outstanding shares of Common Stock, the
Company's Board of Directors may redeem the Rights in whole, but not in part, at
a price of $.01 per Right.
The terms of the Rights may be amended by the Company's Board of
Directors without the consent of the holders of the Rights, including an
amendment to lower (a) the threshold at which a person becomes an Acquiring
Person and (b) the percentage of Common Stock proposed to be acquired in a
tender or exchange offer that would cause the Rights to become exercisable, to
not less than the greater of (a) the sum of .001% plus the largest percentage of
the Company's outstanding Common Stock then known to the Company to be
beneficially owned by any person or group and (b) 10%, except that, from and
after such time as any person or group becomes an Acquiring Person, no such
amendment may adversely affect the interests of the holders of the Rights.
The Rights are currently scheduled to expire on March 31, 2008 (subject
to extension or the earlier redemption or exchange of the Rights). As a result
of Grace's Chapter 11 filing, the rights could be modified in a plan of
reorganization.
The foregoing summary of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Rights Agreement, which was
filed as an Exhibit 4.1 to the Company's Form 8-K filed on April 9, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item appears under the heading
"Financial Summary" (page F-34 of the Financial Supplement) and in Notes 1, 2,
3, 4, 10, 13 and 15 to the Consolidated Financial Statements (pages F-10 through
F-18, and F-22 through F-27 of the Financial Supplement), which is incorporated
herein by reference. In addition, Exhibit 12 to this Report (page F-51) of the
Financial Supplement) contains the ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends for Grace for the years
1997-2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The information called for by this Item appears on pages F-35 to F-49
of the Financial Supplement, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item appears in Notes 12 and 13 to
the Consolidated Financial Statements (pages F-23 and F-24 of the Financial
Supplement), which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements and Financial
Statement Schedule and Exhibit on page F-2 of the Financial Supplement, which is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
This Item is inapplicable, as no such changes or disagreements have
occurred.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's current directors and executive officers are listed below.
The Company's Certificate of Incorporation provides for the division of the
Board of Directors into three classes, each to serve for a three-year term or
until their respective successors are elected. In view of the Chapter 11 filing,
the directors are expected to continue to serve beyond the expiration of their
respective current terms. Executive officers are elected to serve until the
following annual meeting of the Company's Board of Directors or until their
respective successors are elected.
Name and Age Office First Elected
------------ ------ -------------
John F. Akers (67) Class II Director - term expiring in 2003 05/09/97
H. Furlong Baldwin (70) Class I Director - term expiring at next meeting
of shareholders 01/16/02
Ronald C. Cambre (63) Class III Director - term expired in 2001 09/01/98
Marye Anne Fox (54) Class I Director - term expiring in 2002 05/10/96
John J. Murphy (70) Class II Director - term expiring in 2003 05/09/97
Paul J. Norris (54) Class III Director (Chairman) - term
expired in 2001, 01/01/99
President and Chief Executive Officer 11/01/98
Thomas A. Vanderslice (70) Class I Director - term expiring in 2002 05/10/96
Robert J. Bettacchi (59) Senior Vice President 04/01/97
William M. Corcoran (52) Vice President 05/11/99
W. Brian McGowan (52) Senior Vice President 12/06/90*
David B. Siegel (53) Senior Vice President, General Counsel 09/01/98*
and Chief Restructuring Officer
Robert M. Tarola (51) Senior Vice President and 05/11/99
Chief Financial Officer
* Designated an Executive Officer on July 9, 1998
Mr. Akers served as Chairman of the Board and Chief Executive Officer of
International Business Machines Corporation from 1985 until his retirement in
1993. He is a director of Hallmark Cards, Inc., Lehman Brothers Holdings, Inc.,
The New York Times Company, PepsiCo, Inc. and Springs Industries, Inc.
Mr. Baldwin is Chairman of the Board of Mercantile Bankshares Corporation
and has served in such capacity since 1984, and as a director since 1970. From
1977 to 2001 he served as Chief Executive Officer. Mr. Baldwin is also a
director of Constellation Energy Group, Inc., CSX Corp., and The St. Paul
Companies.
17
Mr. Cambre is Chairman of the Board of Newmont Mining Corporation. He
joined Newmont as Vice Chairman and CEO in 1993 and has served as Chairman since
1995. He is also a director of Cleveland-Cliffs Inc. and McDermott
International, Inc.
Dr. Fox is Chancellor of North Carolina State University and Professor of
Chemistry at that institution. Previously she was Vice President for Research
and the Waggoner Regents Chair in Chemistry of the University of Texas,
positions she held from 1994 and 1992, respectively, until 1998.
Mr. Murphy served as Chairman of the Board of Dresser Industries, Inc., a
supplier of products and technical services to the energy industry, until 1996.
From 1997 to 2000, he was a Managing Director of SMG Management L.L.C., a
privately owned investment group. Mr. Murphy is a director of CARBO Ceramics,
Inc., Kerr-McGee Corporation, PepsiCo, Inc. and Shaw Industries Ltd.
Mr. Norris was Senior Vice President of AlliedSignal Incorporated and
President of its specialty chemicals business from January 1997 until joining
Grace. He joined AlliedSignal in 1989 as President of its fluorine
products/chemicals and catalysts businesses. Mr. Norris is a director of Borden
Chemical, Inc. He also performs advisory services for Kolberg, Kravis Roberts &
Co. in its capacity as the principal shareholder of Borden.
Mr. Vanderslice served as Chairman and Chief Executive Officer of M/A-COM,
Inc., a designer and manufacturer of radio frequency and microwave components,
devices and subsystems for commercial and defense applications, from 1989 until
his retirement in 1995. He is a director of ChevronTexaco Inc.
Messrs. Bettacchi, McGowan and Siegel have been actively engaged in Grace's
business for the past five years.
Mr. Corcoran previously served as Vice President of Business and Regulatory
Affairs for AlliedSignal Incorporated's specialty chemicals business from 1997.
For nine years prior to that, he served as Vice President of Public Affairs in
AlliedSignal's engineered materials sector.
Mr. Tarola joined Grace from MedStar Health, Inc., where he had served as
Senior Vice President and Chief Financial Officer from July 1998. He previously
served in a similar capacity with Helix Health, Inc. for two years. From 1974
through 1996, Mr. Tarola was an employee and partner of Price Waterhouse LLP.
18
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following Summary Compensation
Table contains information concerning the compensation of (a) Paul J. Norris,
Chief Executive Officer; and (b) the other four most highly compensated
executive officers of Grace who were serving as such at year-end 2001. Certain
information has been omitted from the Summary Compensation Table because it is
not applicable or because it is not required under the rules of the Securities
and Exchange Commission ("SEC").
Annual Compensation Long-Term Compensation
----------------------------------------- -------------------------------------------------
Awards Payouts
------------------------------- --------------
No. of Shares
Other Restricted Underlying
Name and Principal Annual Stock Options LTIP All Other
Position Year Salary Bonus Compensation Award(a) Granted Payouts(b) Compensation(c)
-------- ---- ------ ----- ------------ ----- ------- -------- ------------
P. J. Norris 2001 $887,500 $936,250 --- --- 121,000 N/A $1,457,298
Chairman, President and 2000 812,500 526,800 --- 315,000 N/A 90,766
Chief Executive Officer 1999 737,500 942,500 $272,486(d) --- 290,000 N/A 33,353
R. J. Bettacchi 2001 345,340 275,000 --- 35,000 N/A 366,346
Senior Vice President 2000 332,344 125,000 --- 85,000 $102,670 42,171
1999 297,500 300,000 --- --- 45,508 41,733
W. M. Corcoran 2001 267,333 150,000 --- 12,300 N/A 270,928
Vice President (e) 2000 256,667 100,000 --- 40,000 N/A 7,157
1999 145,833 125,000 $178,750 32,500 N/A 306
D. B. Siegel 2001 370,000 240,000 --- 21,800 N/A 627,915
Senior Vice President 2000 306,667 125,000 --- 60,000 75,832 22,205
and General Counsel 1999 275,000 225,000 --- --- 35,822 16,561
R. M. Tarola 2001 374,500 250,000 --- 27,900 N/A 374,277
Senior Vice President 2000 359,000 155,000 --- 75,000 N/A 12,322
and Chief Financial 1999 224,130 155,000 --- 100,000 N/A 621
Officer (f)
(Footnotes appear on following page)
19
(a) Represents the dollar value of 10,000 shares of restricted stock issued to
Mr. Corcoran on June 1, 1999, the date of issuance of such shares. At
December 31, 2001, the dollar value of such shares was $15,500. The
restrictions on such shares expire on May 31, 2002.
(b) The amounts in this column represent payments under the Long-Term Incentive
Plan ("LTIP") made in each year, as follows: 2000 - amounts paid for the
1997-1999 Performance Period; and 1999 - amounts paid for the 1996-1998
Performance Period (to the extent not previously paid in 1998). See "LTIP"
below for additional information.
(c) The amounts in this column for 2001 consist of the following:
(i) retention payments made as follows: Mr. Norris -- $1,375,000; Mr.
Bettacchi -- $336,000; Mr. Corcoran -- $260,000; Mr. Siegel --
$600,000; and Mr. Tarola -- $363,500;
(ii) the actuarially determined value of Company-paid premiums on
"split-dollar" life insurance, as follows: Mr. Norris -- $19,912;
Mr. Bettacchi -- $4,139; and Mr. Siegel -- $4,826;
(iii) payments made to persons whose personal and/or Company contributions
to Grace's Salaried Employees Savings and Investment Plan ("Savings
Plan") would be subject to limitations under federal income tax law,
as follows: Mr. Norris -- $50,736; Mr. Bettacchi -- $15,130; and Mr.
Siegel -- $12,012;
(iv) Company contributions to the Savings Plan, as follows: Mr. Norris --
$10,500; Mr. Bettacchi -- $10,500; Mr. Corcoran -- $10,500; Mr.
Siegel -- $10,500; and Mr. Tarola -- $10,200; and
(v) the value of Company-provided personal liability insurance, as
follows: Mr. Norris -- $1,150; Mr. Bettacchi -- $577; Mr. Corcoran
-- $428; Mr. Siegel -- $577; and Mr. Tarola -- $577.
(d) This amount includes $238,996 of payments made to Mr. Norris under Grace's
relocation program.
(e) Mr. Corcoran was elected Vice President on May 11, 1999.
(f) Mr. Tarola was elected Senior Vice President and Chief Financial Officer on
May 11, 1999.
(Remainder of page intentionally left blank.)
20
Stock Options. The following table contains information
concerning stock options granted in 2001, including the potential realizable
value of each grant assuming that the market value of the Common Stock were to
appreciate from the date of grant to the expiration of the option at annualized
rates of (a) 5% and (b) 10%, in each case compounded annually over the term of
the option. For example, the options granted to Mr. Norris in 2001 would produce
a pretax gain of $461,736 shown in the table if the market price of the Common
Stock rises at an annual rate of 10% to $6.216 per share by the time the options
are exercised; based on the number and market price of the shares outstanding at
year-end 2001, such an increase in the price of the Common Stock would produce a
corresponding aggregate pretax gain of approximately $158,578,000 for the
Company's shareholders. The assumed rates of appreciation shown in the table
have been specified by the SEC for illustrative purposes only and are not
intended to predict future stock prices, which will depend upon various factors,
including market conditions and future performance and prospects. In view of
recent developments, Grace believes it is highly unlikely that its Common Stock
will achieve the indicated levels of appreciation in the foreseeable future, if
ever (see "Chapter 11 Filing" in Item 1).
Options become exercisable at the time or times determined by
the Compensation Committee of the Board of Directors; the options shown below
become exercisable in three approximately equal annual installments beginning
one year after the date of grant or upon the earlier occurrence of a "change in
control" (see "Employment Agreements" and "Severance Agreements"). All of the
options shown below have purchase prices equal to the fair market value of the
Common Stock at the date of grant.
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
2001 Grants Term
---------------------------------------------------------- --------------------------------
% of Total
No. of Shares Options
NAME Underlying Granted to Purchase
- ---- Options Employees in Price Expiration
Granted 2001 ($/Share) Date 5% 10%
------------- ---------------- ------------ ----------- -------------- -----------
P. J. Norris. . . . . 121,000 9.03% $2.40 3/7/11 $182,952 $461,736
R. J. Bettacchi . . . 35,000 2.61% $2.40 3/7/11 52,920 133,560
W. M. Corcoran. . . . 12,300 0.92% $2.40 3/7/11 18,598 46,937
D. B. Siegel . . . . . 21,800 1.63% $2.40 3/7/11 32,962 83,189
R. M. Tarola . . . . . 27,900 2.08% $2.40 3/7/11 42,185 106,466
All Shareholders . . . - - - - $62,832,660 $158,577,666
Named Executive
Officers' Percentage
of Realizable Value
Gained by All - - - - < 1.0% < 1.0%
Shareholders. . . .
The following table contains information concerning
unexercised options held at December 31, 2001. No options were exercised by the
named individuals during 2001, and none of the options held by them at year-end
2001 were "in the money" (i.e., the exercise price of all options held by the
individuals was above the market value of the Common Stock at year-end 2001).
21
No. of Shares Underlying Unexercised Options
at 12/31/01 Exercisable/Unexercisable
Name
P. J. Norris . . . . . . . . 737,359 / 427,667
R. J. Bettacchi . . . . . 656,322 / 91,667
W. M. Corcoran. . . . 34,999 / 49,801
D. B. Siegel . . . . . . . 318,195 / 61,800
R. M. Tarola . . . . . . 91,666 / 111,234
Long-Term Incentive Program. In connection with the March 31, 1998
transaction with Sealed Air Corporation that separated Grace's chemicals
businesses from its former packaging business (the "Packaging Transaction"), the
Compensation Committee determined to make the following changes in the LTIP: (a)
Performance Units granted for the 1996-1998 and 1997-1999 Performance Periods
vested on a pro rata basis on March 31, 1998, the completion date of the
Packaging Transaction; (b) the amounts earned under those Units were calculated
based on results achieved through March 31, 1998; (c) 75% of the estimated value
of such vested portions was paid in cash prior to completion of the Packaging
Transaction; (d) the balance of such vested portions was paid in cash following
completion of the Packaging Transaction; and (e) the value of the unvested
portions, based on targeted Performance Units and on the final average price of
the Common Stock immediately prior to completion of the Packaging Transaction,
was paid in cash following the end of the respective Performance Periods
(subject to continued service).
The Board approved a new LTIP for key employees for 2001 ("2001 LTIP").
The 2001 LTIP is generally designed to provide key employees with long-term
incentives having a value at the 60th percentile of long-term incentives offered
by specialty chemical companies of comparable size to Grace. For each key
employee, the targeted value of the 2001 LTIP award has been split so that 50%
of the value of the award was provided in the form of a stock option grant, and
50% was in the form of cash compensation, payable if the Company achieves
certain pretax earnings targets over a three calendar year period. Depending on
the pretax earnings performance of the Company during the applicable three-year
period, the employee may be paid a total amount ranging from zero to two times
the targeted cash compensation applicable to the employee.
If a key employee becomes entitled to a cash compensation under the
2001 LTIP, then such compensation will generally be paid in two installments;
one in early 2003 (which will be a partial payment based on performance for the
first two years of the applicable three-year period), and the other installment
will be paid to the employee in early 2004 (which will consider performance for
the complete three-year period and will be offset by the amount of the prior
installment). Generally, under the 2001 LTIP, a key employee will forfeit his or
her rights to receive an installment of cash compensation if, prior to the
payment of the installment, the employee either voluntarily resigns from the
Company or is terminated by the Company for cause.
Pension Arrangements. Salaried employees of designated units who are
21 or older and who have one or more years of service are eligible to
participate in the Retirement Plan for Salaried Employees. Under this basic
retirement plan, pension benefits are based upon (a) the employee's average
annual compensation for the 60 consecutive months in which his or her
compensation is highest during the last 180 months of continuous participation,
and (b) the number of years of the employee's credited service. For purposes of
this basic retirement plan, compensation generally includes nondeferred base
22
salary and nondeferred annual incentive compensation (bonus) awards; however,
for 2001, federal income tax law limited to $170,000 the annual compensation on
which benefits under this plan may be based.
Grace also has a Supplemental Executive Retirement Plan under which a
covered employee will receive the full pension to which he or she would be
entitled in the absence of the limitations described above and other limitations
imposed under federal income tax law. In addition, this supplemental plan
recognizes deferred base salary, deferred annual incentive compensation awards
and, in some cases, periods of employment during which an employee was
ineligible to participate in the basic retirement plan. (Commencing in 2001,
Grace's deferred compensation plan no longer permits deferrals of base salary or
incentive compensation.)
The following table shows the annual pensions payable under the basic and
supplemental plans for different levels of compensation and years of credited
service. The amounts shown have been computed on the assumption that the
employee retired at age 65 on January 1, 2001, with benefits payable on a
straight life annuity basis. Such amounts are subject to (but do not reflect) an
offset of 1.25% of an estimate of the employee's primary Social Security benefit
at retirement age for each year of credited service under the basic and
supplemental plans.
Highest Average Years of Credited Service
Annual ---------------------------------------------------------------------------------------------
Compensation 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
- ------------------- ---------- ------------- ------------- -------------- ------------- --------------
$100,000 $15,000 $22,500 $30,000 $37,500 $45,000 $52,500
200,000 30,000 45,000 60,000 75,000 90,000 105,000
300,000 45,000 67,500 90,000 112,500 135,000 157,500
400,000 60,000 90,000 120,000 150,000 180,000 210,000
500,000 75,000 112,500 150,000 187,500 225,000 262,500
600,000 90,000 135,000 180,000 225,000 270,000 315,000
700,000 105,000 157,500 210,000 262,500 315,000 367,500
800,000 120,000 180,000 240,000 300,000 360,000 420,000
900,000 135,000 202,500 270,000 337,500 405,000 472,500
1,000,000 150,000 225,000 300,000 375,000 450,000 525,000
1,100,000 165,000 247,500 330,000 412,500 495,000 577,500
1,200,000 180,000 270,000 360,000 450,000 540,000 630,000
1,300,000 195,000 292,500 390,000 487,500 585,000 682,500
1,400,000 210,000 315,000 420,000 525,000 630,000 735,000
1,500,000 225,000 337,500 450,000 562,500 675,000 787,500
1,600,000 240,000 360,000 480,000 600,000 720,000 840,000
1,700,000 255,000 382,500 510,000 637,500 765,000 892,500
1,800,000 270,000 405,000 540,000 675,000 810,000 945,000
1,900,000 285,000 427,500 570,000 712,500 855,000 997,500
2,000,000 300,000 450,000 600,000 750,000 900,000 1,050,000
2,100,000 315,000 472,500 630,000 787,500 945,000 1,102,500
2,200,000 330,000 495,000 660,000 825,000 990,000 1,155,000
At December 31, 2001, Messrs. Norris, Bettacchi, Corcoran, Siegel and
Tarola had 9.83, 30, 2.56, 24.75 and 2.56 years of credited service,
respectively, under the basic and supplemental retirement plans. (Mr. Norris'
years of credited service include his eligible service with Grace from 1975 to
1981.) For purposes of those plans, the 2001 compensation of such executive
officers was as follows: Mr. Norris -- $1,414,300; Mr. Bettacchi -- $470,340;
Mr. Corcoran -- $367,333; Mr. Siegel -- $495,000; and Mr.
23
Tarola -- $529,500. Messrs. Norris, Corcoran and Tarola are entitled to
additional pension benefits under their employment agreements (see "Employment
Agreements").
Employment Agreements. Effective January 1, 2001, Mr. Norris entered
into a new employment agreement with Grace, which supercedes the letter
agreement between Mr. Norris and Grace dated October 26, 1998. This agreement
expires December 31, 2002, subject to automatic one-year renewals unless Mr.
Norris or Grace notifies the other that it wishes to terminate the agreement.
Under the agreement, Mr. Norris' annual base salary will not be less than
$875,000. He will continue to participate in Grace's annual incentive
compensation program, under which his targeted award will be at least 75% of his
annual base salary.
Under Mr. Norris' prior letter agreement, he received a restricted
stock award on November 1, 1998 covering 170,733 shares of Grace Common Stock.
The restrictions on the final installment of the award (covering 56,911 shares
of Grace Common Stock) lapsed on November 1, 2001. Under his employment
agreement, Mr. Norris had the option to receive this installment of the award in
the form of unrestricted shares or convert the award to cash in the amount of
$10.25 for each share. On November 1, 2001, Mr. Norris elected to receive
$583,338 in cash in lieu of unrestricted shares.
Also under the prior agreement, Mr. Norris received upon his
commencement of employment on November 1, 1998 a non-statutory stock option
grant covering 439,026 shares of Common Stock pursuant to Grace's 1998 Stock
Incentive Plan. His employment agreement provides that Grace will make a stock
appreciation payment to Mr. Norris, at the time he elects to exercise any vested
options under that stock option grant or at the time he elects to cancel such
options, provided that the price of a share of Common Stock is above $10.25 at
the time. The payment will be equal to the product of the number of shares
exercised (or cancelled), multiplied by the difference between (a) the purchase
price per share ($16.75), or the price of a share of Common Stock on the date of
such exercise, if less than the purchase price per share, and (b) $10.25.
Under his employment agreement, Mr. Norris received an $875,000
retention bonus in January 2001 and a $500,000 retention bonus in December 2001.
If he remains employed by Grace (or is terminated without cause or on the basis
of constructive discharge, death or disability) through December 2002, he will
receive a retention bonus of $500,000.
Under the employment agreement, if Mr. Norris' employment is terminated
by Grace without cause or by Mr. Norris on the basis of constructive discharge
at any time, then he will be entitled to receive a severance payment equal to
two times the dollar amount that equals 175% of his annual base salary at the
time of such termination. Such payment will be made in a lump sum immediately
after Mr. Norris' date of termination.
Mr. Norris' employment agreement also continues the same retirement
benefits provisions as under his prior agreement, which provided that, in
determining the benefits payable to Mr. Norris under Grace's basic and
supplemental retirement plans, his years of service with Grace and his prior
employer will be recognized as if those years were continuous service with
Grace, with an offset for any retirement benefits payable from his prior
employers' retirement plans. In addition, the "final average compensation" used
to determine his retirement benefits payable under Grace's basic and
supplemental retirement plans will only consider compensation earned by Mr.
Norris from and after the commencement of his current term of employment with
Grace on November 1, 1998.
Also, the employment agreement provides that, if Mr. Norris does not
receive supplemental retirement benefits under any Grace plan, then such
supplemental benefits will become payable to
24
Mr. Norris under his employment agreement. In addition, in the event of Mr.
Norris' termination on or after November 1, 2001 (or if he terminates his
employment with Grace at any time based on constructive discharge), Grace will
immediately pay Mr. Norris a lump sum cash payment equal in value to all
supplemental retirement benefits payable to Mr. Norris under his employment
agreement or any plan or program of Grace.
The agreement further provides that, upon Mr. Norris' termination of
employment, Grace will provide Mr. Norris with relocation assistance to any
location within the continental United States selected by Mr. Norris, including
certain cash payments and relocation assistance, as well as compensation for any
loss incurred on the sale of his Maryland home. The agreement also provides for
Mr. Norris' participation in other benefits and compensation programs, including
benefits and programs generally available to other senior executives of Grace.
The foregoing description of Mr. Norris' employment agreement does not purport
to be complete and is qualified in its entirety by reference to such agreement,
which has been filed with the SEC as Exhibit 10.20 to Grace's 2000 Annual Report
on Form 10-K.
Mr. Corcoran has an employment agreement with Grace that expires on May
31, 2002. Under the agreement, Mr. Corcoran's initial base salary is $250,000,
subject to annual review and approval of the Compensation Committee. In
addition, Mr. Corcoran is eligible to participate in Grace's annual incentive
compensation program, with a target award equal to no less than 37% of his
annual base salary (except that his incentive award for 1999 was set at an
amount between $92,000 and $182,000). Under the agreement, Mr. Corcoran also
received a stock option grant covering 32,500 shares of Common Stock, and a
grant of 10,000 shares of restricted Common Stock.
In the event that Mr. Corcoran's employment is terminated by Grace
without cause on or before May 31, 2002, he will generally be entitled to a
severance payment equal to two times the amount that is 137% of his annual base
salary at the time of his termination. If he is terminated by Grace without
cause after that date, Mr. Corcoran will generally be entitled to a severance
payment equal to one times such amount. (However, along with other executive
officers and certain key employees of Grace, Mr. Corcoran has entered into a
retention agreement with Grace, described below, under which, in certain
circumstances, he may be entitled to enhanced severance pay in lieu of, but not
in addition to, the severance pay provided under his employment agreement.)
If Mr. Corcoran's employment does not cease prior to May 22, 2002 (or
his employment is terminated without cause prior to that date), the benefits
payable to Mr. Corcoran under Grace's basic and supplemental retirement plans
will be determined by adding additional years of credited service under those
plans. Generally, for each year of credited service under those plans that he
actually earns during his period of employment with Grace, he will receive
credit for an additional one-half year of credited service (up to a maximum of 5
additional years of credited service), except that in no event will he receive
less than 5 years of credited service, regardless of the date his employment
with Grace actually terminates. The foregoing description of Mr. Corcoran's
employment agreement does not purport to be complete and is qualified in its
entirety by reference to such agreement, which has been filed with the SEC as
Exhibit 10.24 to Grace's 2000 Annual Report on Form 10-K.
On January 30, 2001, Mr. Siegel entered into a new agreement with Grace
that specifies certain terms and conditions of his employment (the "2001
Agreement"). Under the 2001 Agreement, which supercedes his prior agreement, Mr.
Siegel received a retention payment and became covered by an enhanced severance
arrangement, each of which is described below. In exchange, Mr. Siegel agreed
that he would have no right to severance pay under the Grace 1999 Productivity
and Effectiveness Program (the "PEP Program") and that he would give Grace at
least 90 days' prior notice if he voluntarily resigns or retires on or prior to
December 31, 2002.
25
Under the 2001 Agreement, Mr. Siegel received a retention payment in
the amount of $600,000. Mr. Siegel is required to repay a pro rata portion of
one-half of the retention payment if he voluntarily terminates his employment
with Grace (other than as a result of a constructive termination), or his
employment is terminated for cause, prior to December 31, 2002. The 2001
Agreement also specifies that Mr. Siegel would be entitled to an enhanced
severance payment equal to two times his annual base salary if his employment is
involuntarily terminated without cause under circumstances which would qualify
him for severance pay under Grace's severance plan that generally covers
salaried employees.
The 2001 Agreement also provides that Mr. Siegel will relocate full
time to Columbia, Maryland on or before January 1, 2003, unless he gives Grace
90 days' notice of his election to resign prior to September 30, 2002. If Mr.
Siegel relocates to Maryland, he will be entitled to the relocation benefits
generally available to other Grace employees who relocated to Maryland during
1999 in conjunction with the relocation of Grace's headquarters from Boca Raton,
Florida. If Mr. Siegel elects to resign prior to September 30, 2002, then he
will be eligible for all separation arrangements under the PEP Program (except
severance pay under the PEP Program). The foregoing description of the 2001
Agreement does not purport to be complete and is qualified in its entirety by
reference to such agreement, which has been filed with the SEC as Exhibit 10.22
to Grace's 2000 Annual Report on Form 10-K.
Mr. Tarola has an employment agreement providing for his service as
Senior Vice President and Chief Financial Officer of Grace through November 10,
2002. Under this agreement, Mr. Tarola is entitled to an annual base salary of
$350,000, and an annual incentive award (bonus) for each calendar year during
his term of employment. That bonus will be targeted to be no less than 45% of
his annual base salary (with a maximum bonus equal to double the targeted bonus
for any calendar year); except that his incentive award for 1999 was set at an
amount no less than $129,000. The agreement also provides that Mr. Tarola's
annual base salary and incentive award is generally subject to annual review and
approval of the Compensation Committee. Under the agreement, Mr. Tarola received
a stock option grant covering 100,000 shares of Common Stock.
In the event that Mr. Tarola's employment is terminated by Grace
without cause on or before November 10, 2002, he will generally be entitled to a
severance payment equal to two times the amount that is 145% of his annual base
salary at the time of termination. If his employment is terminated by Grace
without cause after that date, Mr. Tarola will generally be entitled to a
severance payment equal to one times such amount. (However, along with other
officers and certain key employees of Grace, Mr. Tarola entered into a retention
agreement with Grace, described below, under which, in certain circumstances, he
may be entitled to enhanced severance pay in lieu of, but not in addition to,
the severance pay provided under his employment agreement.)
If Mr. Tarola's employment does not cease prior to November 10, 2002
(or if his employment is terminated without cause prior to that date), the
benefits payable to Mr. Tarola under Grace's basic and supplemental retirement
plans will be determined by adding additional years of credited service under
those plans. Generally, for each year of credited service under those plans that
he actually earns during his period of employment with Grace, he will receive
credit for one additional year of credited service (up to a maximum of 10
additional years of credited service), except that in no event will he receive
less than 5 years of credited service, regardless of the date his employment
with Grace actually terminates. The foregoing description of Mr. Tarola's
employment agreement does not purport to be complete and is qualified in its
entirety by reference to such agreement, which has been filed with the SEC as
Exhibit 10.1 to Grace's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.
Change-in-Control Severance Agreements. In addition to the
severance provisions described under "Retention Agreements" below, Grace has
severance agreements with all of its executive officers. These agreements
generally provide that in the event of the involuntary termination of the
individual's
26
employment without cause (including constructive termination caused by a
material reduction in his or her authority or responsibility or by certain other
circumstances) following a "change in control" of Grace, he or she will
generally receive a severance payment equal to three times the sum of his or her
annual base salary plus target annual incentive compensation (bonus), subject to
pro rata reduction in the case of an officer who is within 36 months of normal
retirement age (65). For purposes of the severance agreements, "change in
control" means the acquisition of 20% or more of the Common Stock (but not if
such acquisition is the result of the sale of Common Stock by Grace that has
been approved by the Board), the failure of Board-nominated directors to
constitute a majority of any class of the Board of Directors, the occurrence of
a transaction in which the shareholders of Grace immediately preceding such
transaction do not own more than 50% of the combined voting power of the company
resulting from such transaction, or the liquidation or dissolution of Grace.
This description of the severance agreements does not purport to be complete and
is qualified in its entirety by reference to the form of such agreement, which
was filed as an exhibit to the Registration Statement on Form 10 filed with the
SEC by Grace (named Grace Specialty Chemicals, Inc. at the time of filing) on
March 13, 1998. As a result of Grace's Chapter 11 filing, the following events
will not constitute a "change in control": (i) the acquisition by a trust of
Common Stock, established for purposes of administering asbestos-related claims
pursuant to a plan of reorganization, and (ii) a corporate transaction pursuant
to Section 363 of the U.S. Bankruptcy Code or a plan of reorganization.
Retention Agreements. Effective January 1, 2001, Grace entered into
retention agreements with each of the executive officers other than Messrs.
Norris and Siegel, whose retention arrangements are covered by their respective
employment agreements. These agreements were approved by the Compensation
Committee in recognition of the adverse effect that the market performance of
the Common Stock has had and is expected to continue to have on Grace's ability
to attract and retain key employees. Under the terms of these agreements, each
such executive officer received a payment in January 2001 equal to his annual
base salary, subject to remaining employed with Grace for a two-year period. In
the event of the voluntary termination of such officer's employment (other than
a constructive termination caused by a reduction in salary, a permanent change
in job location or a change in job duties inappropriate to such officer's
position) or a termination of such officer's employment for cause, then such
officer would be required to reimburse Grace for a pro rata portion of such
payment based on the number of days remaining in such two-year period. The
retention payments are not considered compensation for purposes of any Grace
benefit or compensation plans or programs. In addition to the retention payment,
the retention agreements provide that in the event of the involuntary
termination of such officer's employment under circumstances that would qualify
such officer for severance pay under Grace's severance plan that generally
covers salaried employees, then the officer would be entitled to severance pay
equal to two times his or her annual base salary. With respect to any such
officer who has any other agreement with Grace regarding the payment of
severance upon termination of employment, if such officer becomes entitled to
severance under both the terms of the retention agreement and such other
agreement, then the officer would only receive severance pay under the retention
agreement, unless the other agreement provides for a greater amount of severance
pay (in which case, the officer would only receive severance pay under such
other agreement).
Executive Salary Protection Plan. All executive officers participate in
the Executive Salary Protection Plan ("ESPP"), which provides that, in the event
of a participant's disability or death prior to age 70, Grace will continue to
pay all or a portion of base salary to the participant or a beneficiary for a
period based on the participant's age at the time of disability or death.
Payments under the ESPP may not exceed 100% of base salary for the first year
and 60% thereafter in the case of disability (50% in the case of death). This
description of the ESPP does not purport to be complete and is qualified in its
entirety by reference to the text of the ESPP, as amended, which is filed as
Exhibit 10.8 to this Annual Report on Form 10-K.
27
Effect of Chapter 11 Filing. The U.S. Bankruptcy Court has approved the
employment agreements and the continuation of the executive compensation and
benefit agreements and programs described above. The continuation of these
agreements and programs, and the establishment of new programs may be affected
by the Chapter 11 proceedings.
Directors' Compensation and Consulting Arrangements. Under the
compensation program for nonemployee directors in effect for 2001, each
nonemployee director received an annual retainer of $50,000, 50% of which was
paid in cash and 50% of which was paid in the form of Common Stock. In addition,
directors received $4,000 ($5,000 for directors holding a committee chair) in
cash for each meeting date in respect of the Board meeting and all committee
meetings held on such date. A director may elect to defer all or part of each
payment made in Common Stock. The deferred payment will be held in a deferred
compensation trust established by Grace. Common Stock held in the trust will be
delivered to the director following his or her termination from service (or a
subsequent date specified by the director).
Grace reimburses nonemployee directors for expenses they incur in
attending Board and committee meetings. Grace also maintains business travel
accident insurance coverage for them. In addition, nonemployee directors may
occasionally perform additional services at the request of management or the
Board for which additional compensation may be paid. No additional compensation
was paid to any nonemployee director in 2001.
Compensation Committee Interlocks and Insider Participation. During
2001, the Compensation Committee of the Board was comprised of Messrs. Akers
(Chair), Cambre, Murphy and Vanderslice, and Dr. Fox. None of such persons is a
current or former officer or employee of Grace or any of its subsidiaries, nor
did any of such persons have any reportable transactions with Grace or any of
its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the Common Stock beneficially owned,
directly or indirectly, as of January 31, 2002 by (1) each person known to Grace
to be the beneficial owner of more than 5% of the outstanding shares of Common
Stock, and (2) each current director and nominee, each of the executive officers
named in the Summary Compensation Table set forth under "Election of Directors
- -- Compensation," and such directors and all executive officers as a group.
Shares of Common Stock
Beneficial Owner Beneficially Owned Percent
- ------------------------------------------- -------------------- -------
Peninsula Partners, L.P. (1) ............. 10,765,600 16.44%
404B East Main Street, 2nd Floor
Charlottesville, VA 22902
The Baupost Group, L.L.C (2) ............. 3,607,600 5.51%
10 St. James Avenue, Suite 2000
Boston, MA 02116
J. F. Akers .............................. 17,078 *
74,535 (O)
11,287 (T)
28
Shares of Common Stock
Beneficial Owner Beneficially Owned Percent
- ------------------------------------------- -------------------- -------
H. F. Baldwin. . . . . . . . . . . . . . . . . 0 0
R. J. Bettacchi . . . . . . . . . . . . . . . *
656,322 (O)
7,063 (T)
R. C. Cambre . . . . . . . . . . . . . . . . . 42,217 *
W. M. Corcoran. . . . . . . . . . . . . . . . 10,000
52,434 (O)
1,240 (T)
M. A. Fox . . . . . . . . . . . . . . . . . . 3,455 *
59,007 (O)
2,834 (T)
J. J. Murphy . . . . . . . . . . . . . . . . . 17,012 *
15,528 (O)
15,913 (T)
P. J. Norris . . . . . . . . . . . . . . . . . 138,822 1.99%
1,216,718 (O)
1,049 (T)
D. B. Siegel . . . . . . . . . . . . . . . . . 15,100 *
324,922 (O)
20,459 (T)
R. M. Tarola . . . . . . . . . . . . . . . . 15,000 *
40,967 (O)
49 (T)
T. A. Vanderslice . . . . . . . . . . . . . . 17,604 *
69,876 (O)
9,060 (T)
Directors and executive officers as a group . 302,161 4.65%
2,782,949 (O)
90,172 (T)
* Indicates less than 1%
(O) Shares covered by stock options exercisable on or within 60 days after
January 31, 2002.
(T) Shares owned by trusts and other entities as to which the person has the
power to direct voting and/or investment.
(1) The ownership information set forth is based in its entirety on material
contained in a Form 4 report dated September 10, 2001 filed with the SEC.
(2) The ownership information set forth is based in its entirety on material
contained in a Schedule 13G dated February 12, 2002 filed with the SEC,
which stated that the securities were not acquired for the purpose of
changing or influencing the control of Grace.
29
Ownership and Transactions Reports
Under Section 16 of the Securities Exchange Act of 1934, the Company's
directors, certain of its officers, and beneficial owners of more than 10% of
the outstanding Common Stock are required to file reports with the SEC and the
New York Stock Exchange concerning their ownership of and transactions in Common
Stock; such persons are also required to furnish the Company with copies of such
reports. Based solely upon the reports and related information furnished to the
Company, the Company believes that all such filing requirements were complied
with in a timely manner during and with respect to 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Commercial Transactions. During 2001, no director, executive officer (or
any member of any of their respective immediate families) or, to the Company's
knowledge, any holder of more than 5% of the Common Stock, had a direct or
indirect material interest in any transaction (or any proposed transaction) to
which the Company was a party.
Legal Proceedings; Indemnification. During 2001 there were no legal
proceedings pending in which any current officers or directors of the Company
were parties or had a material interest adverse to the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules. See the Index to Consolidated Financial
Statements and Financial Statement Schedule and Exhibit on page F-2 of the
Financial Supplement.
Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the fourth quarter of 2001.
Exhibits. The exhibits to this Report are listed below. Other than exhibits
that are filed herewith, all exhibits listed below are incorporated by
reference. Exhibits indicated by an asterisk (*) are the management contracts
and compensatory plans, contracts or arrangements required to be filed as
exhibits to this Report.
For purposes of describing these exhibits, "Old Grace" means W. R. Grace &
Co., a Delaware corporation (subsequently renamed Sealed Air Corporation), a
predecessor to the Company, and "Grace New York" means W. R. Grace & Co., a New
York corporation (subsequently renamed Fresenius Medical Care Holdings, Inc.), a
predecessor to Old Grace.
EXHIBIT
NO. EXHIBIT WHERE LOCATED
--- ------- -------------
2.1 Form of Distribution Agreement, by and among Old Annex B to the Joint Proxy
Grace, W. R. Grace & Co.-Conn. and Grace Specialty Statement/Prospectus dated February 13,
Chemicals, Inc. (now named W. R. Grace & Co.) 1998 of Old Grace and Sealed Air
Corporation included in Form S-4 (filed
2/13/98)
30
3.1 Restated Certificate of Incorporation of Exhibit 3.1 to Form 8-K (filed 4/9/98)
W. R. Grace & Co.
3.2 Amended and Restated By-laws of W. R. Grace & Co. Filed herewith
4.1 Rights Agreement dated as of March 31, 1998 between W. Exhibit 4.1 to Form 8-K (filed 4/9/98)
R. Grace & Co. and The Chase Manhattan Bank, as Rights
Agent
4.2 Credit Agreement dated as of May 14, 1998, among W. R. Exhibit 4.1 to Form 10-Q (filed 8/14/98)
Grace & Co.-Conn., W. R. Grace & Co., the several
banks parties thereto; the co-agents signatories
thereto; The Chase Manhattan Bank, as administrative
agent for such banks; and Chase Securities Inc., as
arranger
4.3 364-Day Credit Agreement, dated as of May 5, 1999, Exhibit 4.1 to Form 10-Q (filed 8/3/99)
among W. R. Grace & Co.-Conn.; W. R. Grace & Co.; the
several banks parties thereto; the co-agents
signatories thereto; Bank of America National Trust
and Savings Association, as documentation agent; The
Chase Manhattan Bank, as administrative agent for such
banks; and Chase Securities Inc., as book manager
4.4 First Amendment to 364-Day Credit Agreement dated as Exhibit 4 to Form 10-Q (filed 8/15/00)
of May 5, 1999 among W. R. Grace & Co.-Conn.; W. R.
Grace & Co.; the several banks parties thereto; Bank
of America National Trust and Savings Association, as
document agent; The Chase Manhattan Bank, as
administrative agent for such banks; and Chase
Securities, Inc., as bank manager
4.5 Post-Petition Loan and Security Agreement dated as of Exhibit 4 to Form 10-Q (filed 8/14/01)
April 1, 2001 among the financial institutions named
therein, as Lenders, Bank of America, N.A. as Agent,
and W. R. Grace & Co. and its subsidiaries named
therein as Debtors and Debtors-in-Possession, as
Borrowers
10.1 Form of Employee Benefits Allocation Agreement, by and Exhibit 10.1 to Form 10 (filed 3/13/98)
among Old Grace, W. R. Grace & Co.-Conn. and Grace
Specialty Chemicals, Inc. (now named W. R. Grace & Co.)
10.2 Form of Tax Sharing Agreement, by and among Old Grace, Exhibit 10.2 to Form 10 (filed 3/13/98)
W. R. Grace & Co.-Conn. and Grace Specialty Chemicals,
Inc. (now named W. R. Grace & Co.)
31
10.3 W. R. Grace & Co. 2000 Stock Incentive Plan, as amended Exhibit 10 for Form 10-Q (filed 8/15/00)*
10.4 W. R. Grace & Co. 1998 Stock Incentive Plan Annex C to the Information Statement of
Grace Specialty Chemicals, Inc. (now
named W. R. Grace & Co.) dated February
13, 1998 including the Form 10 of Grace
filed 3/13/98 ("Information Statement")*
10.5 W. R. Grace & Co. 1998 Stock Plan for Nonemployee Annex D to Information Statement*
Directors
10.6 W. R. Grace & Co. 1996 Stock Incentive Plan, as amended Exhibit 10.4 to Form 10-Q (filed
5/15/98)*
10.7 W. R. Grace & Co. Supplemental Executive Retirement Filed herewith*
Plan, as amended
10.8 W. R. Grace & Co. Executive Salary Protection Plan, as Filed herewith*
amended
10.9 W. R. Grace & Co. 1986 Stock Incentive Plan, as amended Filed herewith*
10.10 W. R. Grace & Co. 1989 Stock Incentive Plan, as amended Filed herewith*
10.11 W. R. Grace & Co. 1994 Stock Incentive Plan, as amended Filed herewith*
10.12 Information concerning W. R. Grace & Co. Incentive Pages 7-12 and 26-36 of Proxy Statement
Compensation Program, Deferred Compensation Program of Old Grace (filed 4/7/97)*
and Long-Term Incentive Program
10.13 Form of Long-Term Incentive Program Award Exhibit 10.13 to Registration Statement
on Form S-1 of Old Grace (filed 8/2/96)*
10.14 Forms of Stock Option Agreements Exhibit 10.15 to Form 10-K (filed
3/29/99)*
32
10.15 Form of Stock Option Agreements Exhibit 10.14 to Registration Statement
on Form S-1 of Old Grace (filed 8/2/96)*
10.16 Form of Stock Option Agreements Exhibit 10.5 to Form 10-Q (filed
5/15/98)*
10.17 Form of Executive Severance Agreement between W. R. Exhibit 10.20 to Form 10 of Grace
Grace & Co. and officers Specialty Chemicals, Inc. (now W. R.
Grace & Co.) (filed 3/13/98)*
10.18 Form of Restricted Share Award Agreements dated April Exhibit 10.1 to Form 10-Q (filed
7, 1998 5/15/98)*
10.19 Employment Agreement, dated January 1, 2001, by and Exhibit 10.20 to Form 10-K (filed
between W. R. Grace & Co. and Paul J. Norris 4/16/01)*
10.20 Employment Agreement dated May 11, 1999 between W. R. Exhibit 10.1 to Form 10-Q (filed
Grace & Co.-Conn. and Robert M. Tarola 8/13/99)*
10.21 Letter Agreement dated January 30, 2001 between Paul Exhibit 10.22 to Form 10-K (filed
J. Norris, on behalf of W. R. Grace & Co., and David 4/16/01)*
B. Siegel
10.22 Form of Long-Term Incentive Program Award Exhibit 10.23 to Form 10-K (filed
4/16/01)*
10.23 Letter Agreement dated May 7, 1999 between Paul J. Exhibit 10.24 to Form 10-K (filed
Norris, on behalf of W. R. Grace & Co., and William M. 4/16/01)*
Corcoran
10.24 Distribution Agreement by and among Grace New York, W. Exhibit 2 to Form 8-K of Grace New York
R. Grace & Co.-Conn. and Fresenius AG dated February (filed 2/6/96)
4, 1996
10.25 Form of Indemnification Agreement between W. R. Grace Exhibit 10.39 to Registration Statement
& Co. and certain Directors on Form S-1 of Old Grace (filed 8/2/96)*
10.26 Form of Indemnification Agreement between W. R. Grace Exhibit 10.27 to Form 10-K (filed
& Co. and certain Officers and Directors 4/16/01)*
10.27 Form of Retention Agreement Exhibit 10.28 to Form 10-K (filed
4/16/01)*
12 Computation of Ratio of Earnings and Fixed Charges and Filed herewith in Financial Supplement
Combined Fixed Charges and Preferred Stock Dividends to Grace's 2001 Form 10-K
33
21 List of Subsidiaries of W. R. Grace & Co. Filed herewith
23 Consent of Independent Accountants Filed herewith in Financial Supplement
to Grace's 2001 Form 10-K
24 Powers of Attorney Filed herewith
99 Audit Committee Report Filed herewith
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereto duly authorized.
W. R. GRACE & CO.
By: /s/ Robert M. Tarola
--------------------
Robert M. Tarola
(Senior Vice President and
Chief Financial Officer)
Dated: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 2002.
Signature Title
--------- -----
P. J. Norris* President and Director
(Principal Executive Officer)
J. F. Akers* }
H. F. Baldwin* }
R. C. Cambre* }
M. A. Fox* } Directors
J. J. Murphy* }
T. A. Vanderslice* }
/s/ Robert M. Tarola Senior Vice President and Chief
- -------------------------------------- Financial Officer (Principal
(Robert M. Tarola) Financial Officer and Principal
Accounting Officer)
- --------------------------------------
* By signing his name hereto, Mark A. Shelnitz is signing this document on
behalf of each of the persons indicated above pursuant to powers of
attorney duly executed by such persons and filed with the Securities and
Exchange Commission.
By: /s/ Mark A. Shelnitz
-------------------------
Mark A. Shelnitz
(Attorney-in-Fact)
35
FINANCIAL SUPPLEMENT
W. R. GRACE & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
F-1
FINANCIAL SUPPLEMENT
TO
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
W. R. GRACE & CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements
and Financial Statement Schedule and Exhibit
Management's Responsibility for Financial Reporting.............................. F-3
Report of Independent Accountants................................................ F-4
Report of Independent Accountants on Financial Statement Schedule................ F-5
Consent of Independent Accountants............................................... F-5
Consolidated Statement of Operations for the three years in the
period ended December 31, 2001.............................................. F-6
Consolidated Statement of Cash Flows for the three years in the
period ended December 31, 2001.............................................. F-7
Consolidated Balance Sheet at December 31, 2001 and 2000......................... F-8
Consolidated Statement of Shareholders' Equity (Deficit) for the three
years in the period ended December 31, 2001................................. F-9
Consolidated Statement of Comprehensive (Loss) Income for the three
years in the period ended December 31, 2001................................. F-9
Notes to Consolidated Financial Statements....................................... F-10 - F-33
Financial Summary................................................................ F-34
Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................................... F-35 - F-49
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves.............. F-50
: Computation of Ratio of Earnings to Fixed Charges and
Combined Fixed Charges and Preferred Stock Dividends........................ F-51
The financial data listed above appearing in this Financial Supplement are
incorporated by reference herein. The Financial Statement Schedule should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto. Financial statements of less than majority-owned persons and other
persons accounted for by the equity method have been omitted as provided in Rule
3-09 of Securities and Exchange Commission Regulation S-X. Financial Statement
Schedules not included have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or Notes
thereto.
F-2
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of
the Consolidated Financial Statements and the other financial information
included in this report. Such financial information has been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly includes certain amounts that represent management's
best estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal control systems to assist it in fulfilling
its responsibility for financial reporting. These systems include business,
accounting and reporting policies and procedures, selection of personnel,
segregation of duties and an internal audit function. While no system can ensure
elimination of all errors and irregularities, Grace's systems, which are
reviewed and modified in response to changing conditions, have been designed to
provide reasonable assurance that assets are safeguarded, policies and
procedures are followed and transactions are properly executed and reported. The
concept of reasonable assurance is based on the recognition that there are
limitations in all systems of internal control and that the costs of such
systems should not exceed their benefits.
The Audit Committee of the Board of Directors, which is comprised solely of
independent directors, meets regularly with Grace's senior financial personnel,
internal auditors and independent accountants to review audit plans and results,
as well as the actions taken by management in discharging its responsibilities
for accounting, financial reporting and internal control systems. The Audit
Committee reports its findings and recommends the selection of independent
accountants to the Board of Directors. Grace's financial management, internal
auditors and independent accountants have direct and confidential access to the
Audit Committee at all times.
The independent accountants are engaged to conduct the audits of and report
on the Consolidated Financial Statements in accordance with auditing standards
generally accepted in the United States of America. These standards require an
assessment of the systems of internal controls and tests of transactions to the
extent considered necessary by the independent accountants for purposes of
supporting their opinion as set forth in their report.
/s/ Paul J. Norris /s/ Robert M. Tarola
Paul J. Norris Robert M. Tarola
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
F-3
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
W. R. GRACE & CO.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows, of shareholders' equity
(deficit) and of comprehensive (loss) income, present fairly, in all material
respects, the financial position of W. R. Grace & Co. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, on April 2, 2001, the Company and
substantially all of its domestic subsidiaries voluntarily filed for protection
under Chapter 11 of the United States Bankruptcy Code, which raises substantial
doubt about the Company's ability to continue as a going concern in its present
form. Management's intentions with respect to this matter are also described in
Note 1. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 29, 2002
F-4
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF W. R. GRACE & CO.
Our audits of the consolidated financial statements referred to in our report
dated January 29, 2002, which was modified as to a matter raising substantial
doubt about the Company's ability to continue as a going concern, appearing on
page F-4 of this 2001 Annual Report on Form 10-K of W. R. Grace & Co. also
included an audit of the Financial Statement Schedule listed on page F-2 in the
Index to Consolidated Financial Statements and Financial Statement Schedule and
Exhibit of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 29, 2002
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-37024, 333-49083, 333-49507, 333-49509,
333-49511, 333-49513, 333-49515, 333-49517, 333-49703, and 333-49705) of W. R.
Grace & Co. of our report dated January 29, 2002 appearing on page F-4 of this
2001 Annual Report on Form 10-K of W. R. Grace & Co. We also consent to the
incorporation by reference of our report dated January 29, 2002 relating to the
Financial Statement Schedule, which appears above in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 28, 2002
F-5
CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31,
===========================================================================================================================
Amounts in millions, except per share amounts 2001 2000 1999
-------------------------------------------------==
Net sales............................................................. $ 1,723.2 $ 1,597.4 $ 1,550.9
Other income.......................................................... 34.0 49.5 56.7
-------------------------------------------------==
1,757.2 1,646.9 1,607.6
-------------------------------------------------==
Cost of goods sold, exclusive of depreciation and amortization shown
separately below.................................................. 1,092.9 973.9 929.3
Selling, general and administrative expenses.......................... 336.1 323.1 327.2
Research and development expenses .................................... 44.1 45.7 42.4
Depreciation and amortization ........................................ 89.0 87.8 89.2
Interest expense and related financing costs ......................... 37.1 28.1 16.1
Provision for asbestos-related litigation, net of insurance .......... -- 208.0 --
-------------------------------------------------==
1,599.2 1,666.6 1,404.2
-------------------------------------------------==
Income (loss) from continuing operations before Chapter 11
reorganization expenses and income taxes ......................... 158.0 (19.7) 203.4
Chapter 11 reorganization expenses, net .............................. (15.7) -- --
Provision for income taxes ........................................... (63.7) (70.0) (73.2)
-------------------------------------------------==
INCOME (LOSS) FROM CONTINUING OPERATIONS.......................... 78.6 (89.7) 130.2
Income from discontinued operations, net of tax ...................... -- -- 5.7
===================================================
NET INCOME (LOSS)................................................. $ 78.6 $ (89.7) $ 135.9
===========================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations ............................................ $ 1.20 $ (1.34) $ 1.84
Net income (loss)................................................. $ 1.20 $ (1.34) $ 1.92
Weighted average number of basic shares .............................. 65.3 66.8 70.7
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations ............................................ $ 1.20 $ (1.34) $ 1.76
Net income (loss)................................................. $ 1.20 $ (1.34) $ 1.84
Weighted average number of diluted shares ............................ 65.4 66.8 73.8
===========================================================================================================================
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-6
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31,
====================================================================================================================================
Dollars in millions 2001 2000 1999
-----------------------------------------------
OPERATING ACTIVITIES
Income before Chapter 11 reorganization expenses and income taxes .............. $ 158.0 $ (19.7) $ 203.4
Reconciliation to cash provided by (used for) operating activities:
Depreciation and amortization ............................................. 89.0 87.8 89.2
Interest accrued on pre-petition debt subject to compromise ............... 23.2 -- --
Gain on sales of investments .............................................. (7.9) (19.0) (9.3)
Gain on disposals of assets ............................................... (1.8) (5.5) (13.6)
Provision for environmental remediation ................................... 5.8 10.4 --
Provision for asbestos-related litigation, net of insurance................ -- 208.0 --
Net income from life insurance policies.................................... (5.4) (6.4) (2.1)
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign currency translation:
(Increase) decrease in notes and accounts receivable, net................. (9.7) (10.6) 0.5
Increase in accounts receivable due to termination of securitization
program................................................................. (98.4) -- --
Decrease (increase) in subordinated interest of accounts receivable sold . 33.1 (4.9) 37.0
Increase in inventories .................................................. (31.2) (8.0) (5.7)
Increase (decrease) in accounts payable and accrued liabilities........... 0.9 (10.1) 12.3
Increase in net pension assets ........................................... (21.3) (33.6) (10.6)
Expenditures for asbestos-related litigation ............................. (109.6) (281.8) (115.9)
Proceeds from asbestos-related insurance ................................. 78.8 85.6 73.1
Expenditures for environmental remediation................................ (24.9) (36.8) (17.8)
Expenditures for postretirement benefits ................................. (22.3) (23.0) (19.6)
Expenditures for retained obligations of discontinued operations ......... (13.1) (34.9) (42.9)
Other .................................................................... 2.9 (9.3) 6.9
-----------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES
AND CHAPTER 11 REORGANIZATION EXPENSES..................................... 46.1 (111.8) 184.9
Chapter 11 reorganization expenses paid, net ................................... (11.8) -- --
Income taxes paid, net of refunds .............................................. (27.9) (28.3) (54.4)
-----------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ...................... 6.4 (140.1) 130.5
-----------------------------------------------
INVESTING ACTIVITIES
Capital expenditures ........................................................... (62.9) (64.8) (82.5)
Businesses acquired in purchase transactions, net of cash acquired ............. (84.4) (49.0) (9.4)
Investments in unconsolidated affiliates ....................................... (1.9) (3.6) --
Net proceeds from (investments in) life insurance policies ..................... 0.4 (11.1) 0.9
Proceeds from sales of investments.............................................. 7.9 19.0 9.3
Proceeds from disposals of assets .............................................. 7.6 11.9 40.6
Net investing activities of discontinued operations............................. -- -- (54.1)
Net proceeds from divestments of businesses..................................... -- -- 184.6
-----------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES ...................... (133.3) (97.6) 89.4
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from loans secured by cash value of life insurance, net of repayments.. 33.7 (5.2) (3.4)
Borrowings under pre-petition credit facilities, net of repayments ............. 93.6 311.3 18.7
Borrowings under debtor-in-possession facility, net of fees .................... 71.5 -- --
Repayments of term debt ........................................................ -- (24.7) --
Repayments of borrowings under debtor-in-possession facility.................... (75.0) -- --
Exercise of stock options ...................................................... -- 5.8 26.6
Purchase of treasury stock ..................................................... (0.6) (47.3) (95.3)
Net financing activity of discontinued operations .............................. -- -- (27.5)
-----------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ...................... 123.2 239.9 (80.9)
-----------------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents .......... (6.9) (10.1) (4.5)
-----------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......................... (10.6) (7.9) 134.5
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 191.9 199.8 65.3
-----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 181.3 $ 191.9 $ 199.8
====================================================================================================================================
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-7
==================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET DECEMBER 31,
==================================================================================================================================
Amounts in millions, except par value and shares 2001 2000
------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................................................... $ 181.3 $ 191.9
Notes and accounts receivable, net ................................................. 302.1 197.2
Inventories ........................................................................ 174.8 144.2
Deferred income taxes .............................................................. 22.5 98.8
Asbestos-related insurance expected to be realized within one year ................. 9.7 83.8
Other current assets................................................................ 57.7 58.0
------------------------------------------
TOTAL CURRENT ASSETS .......................................................... 748.1 773.9
Properties and equipment, net of accumulated depreciation and
amortization of $995.3 (2000 - $935.4) ........................................ 589.0 601.7
Goodwill, less accumulated amortization of $7.4 (2000 - $7.2) ...................... 55.8 34.1
Cash value of life insurance policies, net of policy loans.......................... 75.6 104.3
Deferred income taxes .............................................................. 502.9 388.4
Asbestos-related insurance expected to be realized after one year................... 283.7 288.2
Other assets ....................................................................... 461.9 394.3
------------------------------------------
TOTAL ASSETS .................................................................. $ 2,717.0 $ 2,584.9
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ....................................................... $ 7.8 $ 418.3
Accounts payable ................................................................... 99.0 117.5
Income taxes payable ............................................................... 14.4 123.1
Asbestos-related liability expected to be satisfied within one year................. -- 178.4
Other current liabilities .......................................................... 127.9 255.6
------------------------------------------
TOTAL CURRENT LIABILITIES ..................................................... 249.1 1,092.9
Deferred income taxes .............................................................. 20.8 20.2
Asbestos-related liability expected to be satisfied after one year ................. -- 927.5
Other liabilities .................................................................. 275.2 615.6
------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ................................... 545.1 2,656.2
LIABILITIES SUBJECT TO COMPROMISE - NOTE 2 ......................................... 2,313.6 --
------------------------------------------
TOTAL LIABILITIES.............................................................. 2,858.7 2,656.2
------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $.01; 300,000,000 shares authorized;
outstanding: 2001 - 65,399,600 (2000 - 65,418,000) .......................... 0.8 0.8
Paid-in capital .................................................................... 433.0 432.2
Retained earnings (accumulated deficit)............................................. (137.8) (216.4)
Treasury stock, at cost: shares: 2001 - 11,500,800; (2000 - 11,443,900)............. (137.0) (136.4)
Accumulated other comprehensive loss ............................................... (300.7) (151.5)
------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ......................................... (141.7) (71.3)
------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........................... $ 2,717.0 $ 2,584.9
==================================================================================================================================
The Notes to Consolidated Financial Statements are
an integral part of these statements
F-8
====================================================================================================================================
W.R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
====================================================================================================================================
Common Stock Retained Accumulated
and Earnings Deferred Other TOTAL
Paid-in (Accumulated Compensation Treasury Comprehensive SHAREHOLDERS'
Dollars in millions Capital Deficit) Trust Stock Loss EQUITY (DEFICIT)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 410.0 $ (203.1) $ (0.8) $ (83.1) $ (80.9) $ 42.1
Net income ..................... -- 135.9 -- -- -- 135.9
Purchase of common stock ....... -- -- -- (94.4) -- (94.4)
Shares issued under stock plans. 42.3 -- 0.2 -- -- 42.5
Retirement of treasury stock.... (28.9) (59.5) -- 88.4 -- --
Other comprehensive (loss)...... -- -- -- -- (15.0) (15.0)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999...... $ 423.4 $ (126.7) $ (0.6) $ (89.1) $ (95.9) $ 111.1
===============================================================================================
Net (loss) ..................... $ -- $ (89.7) $ -- $ -- $ -- $ (89.7)
Purchase of common stock........ -- -- -- (47.3) -- (47.3)
Shares issued under stock plans. 9.4 -- -- -- -- 9.4
Rabbi trust activity ........... 0.2 -- (0.8) -- -- (0.6)
Rabbi trust obligations......... -- -- 1.4 -- -- 1.4
Other comprehensive (loss) ..... -- -- -- -- (55.6) (55.6)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000...... $ 433.0 $ (216.4) $ -- $ (136.4) $ (151.5) $ (71.3)
===============================================================================================
Net income ..................... $ -- $ 78.6 $ -- $ -- $ -- $ 78.6
Purchase of common stock ....... -- -- -- (0.6) -- (0.6)
Shares issued under stock plans. 0.8 -- -- -- -- 0.8
Other comprehensive (loss)...... -- -- -- -- (149.2) (149.2)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001...... $ 433.8 $ (137.8) $ -- $ (137.0) $ (300.7) $ (141.7)
====================================================================================================================================
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME YEAR ENDED DECEMBER 31,
====================================================================================================================================
Dollars in millions
2001 2000 1999
------------------- ---------------- ------------------
NET INCOME (LOSS)....................................................... $ 78.6 $ (89.7) $ 135.9
------------------- ---------------- ------------------
OTHER COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation adjustments............................. (24.6) (34.1) (19.3)
Net unrealized (losses) gains on investments, net of income taxes.... (0.2) (17.7) 1.5
Minimum pension liability adjustments, net of income taxes........... (124.4) (3.8) 2.8
------------------- ---------------- ------------------
Total other comprehensive (loss)........................................ (149.2) (55.6) (15.0)
------------------- ---------------- ------------------
COMPREHENSIVE (LOSS) INCOME............................................. $ (70.6) $ (145.3) $ 120.9
- -----------------------------------------------------------------------------=================== ================ ==================
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions unless otherwise stated)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING AND FINANCIAL
REPORTING POLICIES
- --------------------------------------------------------------------------------
W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals
and specialty materials businesses on a worldwide basis. These businesses
consist of catalysts and silica products ("Davison Chemicals") and construction
chemicals, building materials and sealants and coatings ("Performance
Chemicals").
W. R. Grace & Co. conducts substantially all of its business through a direct,
wholly owned subsidiary, W. R. Grace & Co.-Conn. ("Grace-Conn"). Grace-Conn.
owns substantially all of the assets, properties and rights of W. R. Grace &
Co., either directly or through subsidiaries.
As used in these notes, the term "Company" refers to W. R. Grace & Co. The term
"Grace" refers to the Company and/or one or more of its subsidiaries and, in
certain cases, their respective predecessors.
VOLUNTARY BANKRUPTCY FILING: In response to a sharply increasing number of
asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), W.
R. Grace & Co. and 61 of its United States subsidiaries and affiliates,
including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions
for reorganization (the "Filing") under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
cases were consolidated and are being jointly administered under case number
01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of
its U.S. subsidiaries were not included in the Filing.
During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 filing provides the
best forum available to achieve predictability and fairness in the claims
settlement process. By filing under Chapter 11, Grace expects to be able to both
obtain a comprehensive resolution of the claims against it and preserve the
inherent value of its businesses. Under Chapter 11, the Debtors expect to
continue to operate their businesses as debtors-in-possession under court
protection from their creditors and claimants, while using the Chapter 11
process to develop and implement a plan for addressing the asbestos-related
claims against them.
Consequence of Filing - As a consequence of the Filing, pending litigation
against the Debtors is generally stayed (subject to certain exceptions in the
case of governmental authorities), and no party may take any action to realize
its pre-petition claims except pursuant to an order of the Bankruptcy Court.
The Debtors intend to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. Such plan
of reorganization may include the establishment of a trust through which all
pending and future asbestos-related claims would be channeled for resolution.
However, it is currently impossible to predict with any degree of certainty the
amount that would be required to be contributed to the trust, how the trust
would be funded, how other pre-petition claims would be treated or what impact
any reorganization plan may have on the shares of common stock of Grace. The
interests of Debtors' equity security holders could be substantially diluted or
cancelled under a plan of reorganization. The formulation and implementation of
the plan of reorganization is expected to take a significant period of time.
Since the Filing, all motions necessary to conduct normal business activities
have been approved by the Bankruptcy Court. In addition, the Debtors have
received approval from the Bankruptcy Court to pay or otherwise honor certain of
its pre-petition obligations in the ordinary course of business, including
employee wages and benefits, customer programs, shipping charges and a limited
amount of claims of essential trade creditors.
As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received an extension of their exclusive period during which to
file a plan of reorganization through August 1, 2002, and an extension of the
Debtors' exclusive rights to solicit acceptances of a
F-10
reorganization plan through October 1, 2002. No dates have yet been set for the
filing of proofs of claims by claimants.
Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These committees will
have the right to be heard on all matters that come before the Bankruptcy Court,
and, together with a legal representative of future asbestos claimants (who
Grace expects to be appointed by the Bankruptcy Court in the near future), are
likely to play important roles in the Chapter 11 Cases. The Debtors are required
to bear certain of the committees' and the future asbestos claimants
representative's costs and expenses, including those of their counsel and
financial advisors.
All of the Debtor's pre-petition debt is now in default due to the Filing. The
accompanying Consolidated Balance Sheet as of December 31, 2001 reflects the
classification of the Debtors' pre-petition debt within "Liabilities subject to
compromise".
The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring in April
2003 and bears interest under a formula based on the London Inter-Bank Offered
Rate ("LIBOR") rate plus 2.00 to 2.25 percentage points depending on the level
of loans outstanding.
In November 2001, the Debtors' Chapter 11 Cases, as well as the Chapter 11 Cases
of four unrelated companies with asbestos-related claims, was assigned to Judge
Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. Judge
Wolin will preside over the asbestos bodily injury matters affecting all five
companies and, at his choosing, certain other asbestos-related lawsuits
particular to Grace. Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the
Western District of Pennsylvania, sitting in Wilmington, Delaware, will preside
over the Debtors' other bankruptcy matters.
Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of Debtors'
assets and liquidation of certain of Debtors' liabilities are subject to
significant uncertainty. While operating as debtors-in-possession, the Debtors
may sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the Consolidated Financial Statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the Consolidated Financial Statements, which do not
currently give effect to any adjustments to the carrying value or classification
of assets or liabilities that might be necessary as a consequence of a plan of
reorganization.
Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of December 31, 2001, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments) as well as estimates of costs related
to contingent liabilities (such as asbestos-related litigation and other
claims). The recorded amounts of such liabilities generally reflect accounting
measurements as of the Filing Date adjusted, as warranted, for changes in facts
and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent
to the Filing. (See Note 2 to the Consolidated Financial Statements for detail
of the "Liabilities subject to compromise" as of December 31, 2001, and as of
the Filing Date.) Obligations of Grace subsidiaries not covered by the Filing
continue to be classified on the Consolidated Balance Sheet based upon maturity
dates or the expected dates of payment. SOP 90-7 also requires separate
reporting of certain expenses, realized gains and losses, and provisions for
losses related to the Filing as reorganization items.
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of the Company and majority-owned companies as to which the Company
exercises control over operating and financial policies. Intercompany
transactions and balances are eliminated in consolidation. Investments in
affiliated companies as to which the Company does not exercise control over
operating and financial policies are accounted for under the equity method,
unless the Company's ability to influence a company is determined to be
temporary, in which case the investment is accounted for under the cost method.
F-11
RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2001 presentation.
EFFECT OF NEW ACCOUNTING STANDARDS: In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board Opinion
("APB") No. 16, "Business Combinations". The provisions of SFAS No. 141: (1)
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) provide specific criteria for
the initial recognition and measurement of intangible assets apart from
goodwill, and (3) require that unamortized negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
Grace adopted SFAS No. 141 in July 2001.
SFAS No. 142 supersedes APB 17, "Intangible Assets," and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142: (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment, (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the 40 year limitation
on the amortization period of intangible assets that have finite lives.
Grace will adopt the provisions of SFAS No. 142 in its first quarter ending
March 31, 2002. Grace has identified its reporting units as catalyst products,
silica products, specialty construction chemicals, specialty building materials
and specialty sealants and coatings for purposes of measuring impairment under
the provisions of SFAS No. 142. All amounts of goodwill, intangible assets,
other assets, and liabilities have been appropriately classified and allocated
to these reporting units. Amortization expense on goodwill for the year ended
December 31, 2001 was $0.5 million. In connection with the adoption of SFAS No.
142, Grace is in the process of evaluating the useful lives of its existing
intangible assets and anticipates that any changes in the useful lives will not
have a material impact on the results of its operations.
SFAS No. 142 requires that goodwill and certain intangible assets be tested
annually for impairment. An impairment test must be performed at the beginning
of the period of adoption. Grace expects that its goodwill and other intangible
assets will not be impaired.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," and issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" in October 2001. SFAS No. 143 requires the
accrual of asset retirement obligations by increasing the initial carrying
amount of the related long-lived asset, and systematically expensing such costs
over the asset's useful life. The standard is effective for fiscal years
beginning after June 15, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of," and expands the
scope of discontinued operations. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. Grace does
not expect SFAS No. 143 or 144 to have a material effect on its financial
statements.
Grace adopted Emerging Issues Task Force ("EITF") 00-10, "Accounting for
Shipping and Handling Fees and Costs," in the fourth quarter of 2000. The
adoption of this standard did not affect pre-tax or net loss; however, freight
costs and sales commissions (previously shown as a reduction of net sales) are
now included in "Cost of goods sold" and "Selling, general and administrative
expenses," respectively, in the Consolidated Statement of Operations.
USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires that management make
estimates and assumptions affecting the assets and liabilities (including
contingent assets and liabilities) reported at the date of the Consolidated
Financial Statements and the revenues and expenses reported for the periods
presented. Actual amounts could differ from those estimates. Grace's accounting
measurements that are most affected by management's estimates of future events
are:
o Contingent liabilities such as asbestos-related matters, environmental
remediation, tax exposures and retained obligations of divested businesses.
o Pension and post-retirement liabilities that depend on assumptions
regarding discount rates and total returns on invested funds.
o Depreciation and amortization periods for long-lived assets, including
property and equipment, intangibles and goodwill.
F-12
o Realization values of various assets such as receivables, inventories,
insurance and tax attributes.
The accuracy of these and other estimates may also be materially affected by the
uncertainties arising under the Chapter 11 Cases.
CASH EQUIVALENTS: Cash equivalents consist of liquid instruments with maturities
of three months or less when purchased. The recorded amounts approximate fair
value because of the short maturities of these investments.
SALE OF ACCOUNTS RECEIVABLE: Prior to the Filing, Grace entered into a program
to sell certain of its trade accounts receivable and retained a subordinated
interest and servicing rights. Net losses on the sale of receivables were based
on the carrying value of the assets sold, allocated in proportion to their fair
value. Retained interests were carried at fair value and were included in "Other
current assets" in the Consolidated Balance Sheet. Grace generally estimated
fair value based on the present value of expected future cash flows less
management's best estimate of uncollectible accounts receivable. Grace
maintained an allowance for doubtful accounts receivable based upon the expected
collectibility of all trade receivables, including receivables sold. The
allowance was reviewed regularly and adjusted for accounts deemed uncollectible
by management. Expenses and losses associated with the program were recognized
as a component of interest expense and related financing costs. As a result of
the Filing, which constituted an event of default under the program, outstanding
balances were satisfied through the use of pre-petition trade receivables
collected during the period from the Filing Date to early May 2001. The program
was terminated effective May 14, 2001.
INVENTORIES: Inventories are stated at the lower of cost or market. The methods
used to determine cost include first-in/first-out and, for substantially all
U.S. inventories, last-in/first-out. Market values for raw materials are based
on current cost and, for other inventory classifications, net realizable value.
PROPERTIES AND EQUIPMENT: Properties and equipment are stated at cost.
Depreciation of properties and equipment is generally computed using the
straight-line method over the estimated useful life of the asset. Estimated
useful lives range from 20 to 40 years for buildings, 3 to 7 years for
information technology equipment, 3 to 10 years for machinery and equipment and
5 to 10 years for furniture and fixtures. Interest is capitalized in connection
with major project expenditures. Fully depreciated assets are retained in
properties and equipment and related accumulated depreciation accounts until
they are removed from service. In the case of disposals, assets and related
accumulated depreciation are removed from the accounts and the net amount, less
any proceeds from disposal, is charged or credited to operations. Grace reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
GOODWILL: Goodwill arises from certain purchase business combinations and with
respect to business combinations completed prior to June 30, 2001 is being
amortized using the straight-line method over appropriate periods not exceeding
40 years. Grace reviews its goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be fully recoverable.
The provisions of SFAS No. 141 were applied to goodwill and intangible assets
acquired after June 30, 2001.
REVENUE RECOGNITION: Grace recognizes revenue when risk of loss and title to the
product transfer to the customer, which usually occurs upon shipment of goods to
customers or upon performance of services. In December 1999, the SEC issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," subsequently updated by SAB 101A and SAB 101B (collectively, "SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
Grace adopted SAB 101 in the fourth quarter of 2000 with no material impact on
Grace's results of operations or financial position.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to
expense as incurred.
INCOME TAXES: Grace recognizes deferred tax assets and liabilities with respect
to the expected future tax consequences of events that have been recorded in the
Consolidated Financial Statements and tax returns. If it is more likely than not
that all or a portion of deferred tax assets will not be realized, a valuation
allowance is provided against such deferred tax assets.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign subsidiaries
(other than those located in countries with highly inflationary economies) are
translated into U.S. dollars at current exchange rates, while their revenues,
costs and expenses are translated at average exchange rates during each
reporting period.
F-13
The resulting translation adjustments are included in the "Accumulated other
comprehensive loss" section of the Consolidated Balance Sheet. The financial
statements of subsidiaries located in countries with highly inflationary
economies, if any, are remeasured as if the functional currency were the U.S.
dollar; the remeasurement creates translation adjustments that are reflected in
"Net income (loss)" in the Consolidated Statement of Operations.
FINANCIAL INSTRUMENTS: From time to time Grace enters into interest rate swap
agreements and foreign exchange forward and option contracts to manage exposure
to fluctuations in interest and foreign currency exchange rates. Grace does not
hold or issue derivative financial instruments for trading purposes. At December
31, 2001, Grace did not hold and had not issued any derivative financial
instruments.
Grace adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (as amended) for 2001. SFAS No. 133 requires, among other things,
that all derivative instruments be recognized at fair value as assets or
liabilities in the Consolidated Balance Sheet with changes in fair value
recognized currently in earnings unless specific hedge accounting criteria are
met.
- --------------------------------------------------------------------------------
2. CHAPTER 11 RELATED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
As a result of the Filing, Grace's Consolidated Balance Sheet as of December 31,
2001 separately identifies the liabilities that are "subject to compromise" as a
result of the Chapter 11 proceedings. In Grace's case, "Liabilities subject to
compromise" represent pre-petition liabilities as determined under U.S.
generally accepted accounting principles. Changes to the recorded amount of such
liabilities will be based on developments in the Chapter 11 Cases and
management's assessment of the claim amounts that will ultimately be allowed by
the Bankruptcy Court. Changes to pre-petition liabilities subsequent to the
Filing Date reflect: 1) cash payments under approved court orders; 2) the
accrual of interest on pre-petition debt at the pre-petition contractual rate;
3) accruals for employee-related programs; and 4) changes in estimates related
to pre-petition contingent liabilities and assets.
Components of Liabilities subject to compromise are as follows:
============================================================================
DECEMBER 31, Filing Date
(Dollars in millions) 2001 (Unaudited)
============================================================================
Debt, pre-petition plus
accrued interest...................... $ 524.5 $ 511.5
Accounts payable........................ 31.7 43.0
Income taxes payable.................... 216.6 210.1
Asbestos-related liability.............. 996.3 1,002.8
Other postretirement benefits .......... 169.1 185.4
Environmental
remediation ........................... 153.1 164.8
Retained obligations of
divested businesses .................. 80.5 75.5
Pension related ........................ 74.6 70.8
Other accrued liabilities .............. 67.2 102.1
---------------------------------
$ 2,313.6 $ 2,366.0
============================================================================
Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through December 31, 2001.
============================================================================
Cumulative
(Dollars in millions) (Unaudited) Since Filing
============================================================================
Balance, Filing Date................................. $ 2,366.0
Cash disbursements and/or reclassifications
under Bankruptcy Court orders:
Freight and distribution order.................... (5.6)
Trade accounts payable order...................... (8.4)
Other court orders including employee wages
and benefits, sales and use tax and
customer programs.................................. (68.2)
Expense/(income) items:
Interest on pre-petition debt..................... 20.9
Current period employment-related
accruals........................................ 9.4
Environmental accruals............................ 5.8
Interest on income tax contingencies.............. 7.7
Balance sheet reclassifications...................... (4.9)
-----------------
Balance, end of period............................... $ 2,322.7
============================================================================
Pre-Filing Date liabilities allowable under
court orders....................................... $ 9.1
Pre-Filing Date liabilities subject to
compromise......................................... $ 2,313.6
============================================================================
Pre-Filing Date obligations allowable under current court orders and expected to
be paid prior to an adopted plan of reorganization are classified as
"Liabilities not subject to compromise." Additional liabilities subject to
compromise may arise due to the rejection of executory contracts or unexpired
leases, or as a result of the allowance of contingent or disputed claims.
The Debtors recorded Chapter 11 reorganization expenses for 2001 consisting of:
F-14
================================================================
(Dollars in millions) 2001
================================================================
Legal and financial advisory fees........... $ 16.6
Interest income............................. (0.9)
---------------
Chapter 11 reorganization expenses, net..... $ 15.7
================================================================
Pursuant to SOP 90-7, interest income earned on Grace's cash balances must be
offset against reorganization expenses. Condensed financial information of the
Debtors subsequent to the Filing Date is presented below:
===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING APRIL 2, 2001
ENTITIES TO
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS DECEMBER 31,
(UNAUDITED) DOLLARS IN MILLIONS 2001
===============================================================
Net sales, including intercompany........... $ 768.7
Other income................................ 42.2
----------------
810.9
----------------
Cost of goods, including intercompany,
exclusive of depreciation and
amortization shown separately below...... 479.4
Selling, general and administrative expenses 158.5
Research and development expenses........... 28.5
Depreciation and amortization .............. 44.0
Interest expense and related financing costs 26.9
----------------
737.3
----------------
Income before Chapter 11 reorganization
expenses, income taxes, and equity in net
income of non-filing entities............ 73.6
Chapter 11 reorganization expenses, net .... (12.7)
(Provision for) income taxes ............... (34.3)
Equity in net income of non-filing entities 37.3
----------------
NET INCOME .............................. $ 63.9
===============================================================
===============================================================
APRIL 2, 2001
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES TO
DEBTOR-IN-POSSESSION CONDENSED STATEMENT OF DECEMBER 31,
CASH FLOWS (UNAUDITED) DOLLARS IN MILLIONS 2001
===============================================================
OPERATING ACTIVITIES
Net income................................... $ 63.9
Reconciliation to net cash provided by (used
for) operating activities:
Non-cash items, net........................ 67.1
Increase in accounts receivable due to
termination of securitization program... (99.7)
Decrease in subordinated interest of
accounts receivable sold................ 34.9
Changes in other assets and liabilities,
excluding the effect of businesses
acquired/divested....................... (0.5)
----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. 65.7
NET CASH USED FOR INVESTING ACTIVITIES..... (20.0)
NET CASH USED FOR FINANCING ACTIVITIES..... (16.3)
----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.. 29.4
Cash and cash equivalents, Filing Date....... 8.6
----------------
Cash and cash equivalents, end of period..... $ 38.0
===============================================================
===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEET DECEMBER 31,
(UNAUDITED) DOLLARS IN MILLIONS 2001
===============================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................. $ 38.0
Notes and accounts receivable, net ......... 128.2
Receivables from non-filing entities, net .. 33.8
Inventories ................................ 89.5
Other current assets........................ 78.6
----------------
TOTAL CURRENT ASSETS .................... 368.1
Properties and equipment, net............... 384.9
Cash value of life insurance policies,
net of policy loans...................... 75.6
Deferred income taxes ...................... 502.6
Asbestos-related insurance expected to be
realized after one year.................. 283.7
Loans receivable from non-filing entities, 388.0
net .....................................
Investment in non-filing entities .......... 153.5
Other assets ............................... 339.6
----------------
TOTAL ASSETS ............................ $ 2,496.0
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities ........................ $ 94.5
Debt payable after one year ................ 1.6
Other liabilities .......................... 228.0
----------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE............................... 324.1
LIABILITIES SUBJECT TO COMPROMISE .......... 2,313.6
----------------
TOTAL LIABILITIES........................ 2,637.7
SHAREHOLDERS' EQUITY (DEFICIT) .......... (141.7)
----------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) ...................... $ 2,496.0
===============================================================
In addition to Grace's financial reporting obligations as prescribed by the U.S.
Securities and Exchange Commission ("SEC"), the Debtors are also required, under
the rules and regulations under the Bankruptcy Code, to periodically file
certain statements and schedules and a monthly operating report with the
Bankruptcy Court. This information is available to the public through the
Bankruptcy Court. This information is prepared in a format that may not be
comparable to information in Grace's quarterly and annual financial statements
as filed with the SEC. The monthly operating reports are not audited, do not
purport to represent the financial position or results of operations of Grace on
a consolidated basis and should not be relied on for such purposes.
F-15
- --------------------------------------------------------------------------------
3. ASBESTOS-RELATED LITIGATION
- --------------------------------------------------------------------------------
Grace is a defendant in property damage and bodily injury lawsuits relating to
previously sold asbestos-containing products. On April 2, 2001, Grace filed
voluntary petitions for reorganization under Chapter 11 to use the
court-supervised reorganization process to achieve predictability and fairness
in the claims settlement process. See Note 1 for further discussion.
As of the Filing Date, Grace was a defendant in 65,656 asbestos-related
lawsuits, 16 involving claims for property damage (one of which has since been
dismissed), and the remainder involving 129,191 claims for bodily injury. Due to
the Filing, holders of asbestos-related claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. Additional asbestos-related claims are expected to be filed as part of
the Chapter 11 claims process. Separate creditors' committees representing the
interests of property damage and bodily injury claimants have been appointed in
the Chapter 11 Cases. Grace's obligations with respect to present and future
claims will be determined through proceedings in Delaware bankruptcy court and
negotiations with each of the official committees appointed in the Chapter 11
Cases, which is expected to provide the basis for a plan of reorganization.
PROPERTY DAMAGE LITIGATION
The plaintiffs in property damage lawsuits generally seek to have the defendants
absorb the cost of removing, containing or repairing the asbestos-containing
materials in the affected buildings. Each property damage case is unique in that
the age, type, size and use of the building, and the difficulty of asbestos
abatement, if necessary, vary from structure to structure. Information regarding
product identification, the amount of product in the building, the age, type,
size and use of the building, the jurisdictional history of prior cases and the
court in which the case is pending has provided meaningful guidance as to the
range of potential costs. Grace has recorded an accrual for all outstanding
property damage cases for which sufficient information is available to form a
reasonable estimate of such exposure.
Through December 31, 2001, out of 379 asbestos property damage cases filed, 141
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in seven cases for a total of $60.3 million; 207 property damage
cases were settled for a total of $696.8 million; and 15 cases remain
outstanding. Grace may receive additional asbestos property damage claims as
part of its Chapter 11 proceeding.
Property Damage case activity for 2001 and 2000 was as follows:
==============================================================
PROPERTY DAMAGE CASE ACTIVITY 2001 2000
==============================================================
Cases outstanding, beginning of year 15 11
New cases filed ................. 1 8
Settlements ..................... -- (4)
Dismissals ...................... (1) --
Judgments ....................... -- --
----------- ------------
Cases outstanding, end of year... 15 15
==============================================================
Of the 15 remaining cases, seven relate to a former attic insulation product and
eight relate to a number of former asbestos-containing products (two of which
also involve such attic insulation product). The attic insulation cases were
filed as class action lawsuits in 2000 and 2001 on behalf of owners of homes
containing Zonolite attic insulation. These cases seek damages and equitable
relief, including the removal, replacement and/or disposal of all such
insulation. The plaintiffs assert that this product is in millions of homes
throughout the U.S. and that the cost of removal could be several thousand
dollars per home. These cases are expected to be heard by the Bankruptcy Court
within the next year. While Grace has not completed its investigation of the
claims described in these cases, Grace believes that this product was and
continues to be safe for its intended purpose and poses little or no threat to
human health. At this time, Grace is not able to assess the extent of any
possible liability related to this matter.
BODILY INJURY LITIGATION
Bodily injury claims are generally similar to each other (differing primarily in
the type of asbestos-related illness allegedly suffered by the plaintiff).
However, Grace's estimated liability for such claims has been influenced by
numerous variables, including the solvency of other former asbestos producers,
cross-claims by co-defendants, the rate at which new claims are filed, the
jurisdiction in which the claims are filed, and the defense and disposition
costs associated with these claims. Grace's bodily injury liability reflects
management's estimate, as of the Filing Date, of the number and ultimate cost of
present and future bodily injury claims expected to be asserted against Grace
given demographic assumptions of possible exposure
F-16
to asbestos containing products previously manufactured by Grace.
Through the Filing Date, 16,354 asbestos bodily injury lawsuits involving
approximately 35,720 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 55,489 lawsuits involving approximately 163,698
claims were disposed of (through settlement and judgments) for a total of $645.6
million.
Bodily injury claim activity for 2001 (through the Filing Date) and 2000 was as
follows:
=============================================================
APRIL 2, December 31,
BODILY INJURY CLAIM ACTIVITY 2001 2000
=============================================================
Claims outstanding,
beginning of year .......... 124,907 105,670
New claims ................... 16,411 48,786
Settlements .................. (11,841) (26,950)
Dismissals ................... (286) (2,598)
Judgments .................... -- (1)
------------ --------------
Claims outstanding, end of
period...................... 129,191 124,907
=============================================================
The table above reflects 2001 claims activity through the Filing Date. As a
result of the Filing, no additional lawsuits can be filed.
ASBESTOS-RELATED LIABILITY
Since litigation is stayed by the Chapter 11 Cases, ongoing costs are generally
limited to claims administration costs and to defense costs incurred in
connection with litigation permitted by the Bankruptcy Court. Any other
adjustments to the recorded liability will be based on developments in the
Chapter 11 Cases. For periods prior to and as of the Filing Date, Grace's
estimated property damage and bodily injury liabilities were based on its
experience with, and recent trends in, asbestos litigation. Its recorded
liabilities covered indemnity and defense costs for pending property damage
cases and for pending and projected future bodily injury claims. No change has
been made to the pre-filing asbestos-related liability except to record the
payment of normal post-filing administrative costs primarily related to claims
processing. However, due to the Filing and the uncertainties of asbestos-related
litigation, actual amounts could differ materially from the recorded liability.
The total asbestos-related liability balances as of December 31, 2001 and 2000
were $996.3 million and $1,105.9 million, respectively. As of December 31, 2001,
the asbestos-related liability was included in liabilities subject to
compromise.
As a result of the developments discussed in Note 1, Grace's evaluation of its
recorded liability for asbestos-related litigation as of December 31, 2000 led
to a fourth quarter adjustment of $293.6 million to account for an unexpected
increase in the number of claims filed, new risk factors and recent cost
experience. Grace adjusted its recorded insurance receivable in the fourth
quarter of 2000 by $85.6 million to reflect the additional amounts expected to
be recovered in respect of the adjusted asbestos-related liability. The net
amount of the adjustments recorded during the fourth quarter of 2000 ($208.0
million after insurance recovery) reflects adverse experience in the latter part
of 2000 versus certain underlying assumptions used to estimate Grace's liability
for asbestos-related litigation. After the 2000 adjustment, Grace's recorded
liability for asbestos-related litigation was $1,105.9 million gross and $733.9
million net of insurance recovery.
=============================================================
ESTIMATED LIABILITY FOR
ASBESTOS-RELATED LITIGATION
(Dollars in millions) 2001 2000
=============================================================
Asbestos-related liability
expected to be satisfied
within one year............. $ 5.1 $ 178.4
Asbestos-related liability
expected to be satisfied
after one year.............. 991.2 927.5
------------ --------------
Total asbestos-related
liability .................. $ 996.3 $ 1,105.9
=============================================================
The current portion of Grace's asbestos-related liability is based on
management's estimate as of the respective balance sheet dates of costs expected
to be paid within one year.
ASBESTOS INSURANCE
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace has settled with and has been paid
by all of its primary insurance carriers with respect to both property damage
and bodily injury cases and claims. Grace has also settled with its excess
insurance carriers that wrote policies available for property damage cases;
those settlements involve amounts paid and to be paid to Grace. Grace believes
that certain of these settlements may cover attic insulation claims as well as
other property damage claims. In addition, Grace believes that additional
coverage for attic insulation claims may exist under excess insurance policies
not subject to settlement agreements. Grace has settled with excess insurance
carriers that wrote policies available for bodily injury claims in layers of
insurance that Grace believes may be reached based on its current estimates.
Insurance coverage for asbestos-related liabilities has not been commercially
available since 1985.
F-17
The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements are based on the recorded
amount of the liability and are considered by management to be collectible.
Activity in Grace's notes receivable from insurance carriers and
asbestos-related insurance receivable during 2001 and 2000 was as follows:
==============================================================
ESTIMATED INSURANCE RECOVERY ON
ASBESTOS-RELATED LIABILITIES
(Dollars in millions) 2001 2000
==============================================================
NOTES RECEIVABLE
Notes receivable from insurance
carriers, beginning of year, net of
discount of $0.2 (2000 - $0.8) ..... $ 2.7 $ 5.3
Proceeds received under
asbestos-related insurance (2.9) (3.2)
settlements ........................
Current year amortization of discount. 0.2 0.6
- --------------------------------------------------------------
Notes receivable from insurance
carriers, end of year, (2000 - net -- 2.7
of discount of $0.2)................
- --------------------------------------------------------------
INSURANCE RECEIVABLE
Asbestos-related insurance
receivable, beginning of year ...... 369.3 366.1
Proceeds received under
asbestos-related insurance (75.9) (82.4)
settlements ........................
Increase in asbestos-related
insurance receivable ............... -- 85.6
- --------------------------------------------------------------
Asbestos-related insurance
receivable, end of year ............ 293.4 369.3
- --------------------------------------------------------------
Total amounts due from insurance
carriers............................ 293.4 372.0
Expected to be realized within one
year ............................... (9.7) (83.8)
- --------------------------------------------------------------
Expected to be realized after one
year ............................... $ 283.7 $ 288.2
==============================================================
- --------------------------------------------------------------------------------
4. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
CROSS COUNTRY STAFFING
In July 1999, Grace completed the sale of substantially all of its interest in
Cross Country Staffing ("CCS"), a provider of temporary nursing and other
healthcare services, for total cash proceeds of $184.6 million. Grace's
investment in CCS had been accounted for under the equity method. The sale
resulted in a net pre-tax gain of $76.3 million ($32.1 million after tax),
including the cost of Grace's purchase of interests held by third parties in CCS
and the amount payable under CCS's phantom equity plan prior to the sale. The
gain and the operations of CCS prior to the sale are included in "Income from
discontinued operations, net of tax" in the Consolidated Statement of
Operations. Certain contingent liabilities, primarily related to tax matters of
CCS, have been retained by the Company and are included in "Liabilities subject
to compromise" in the Consolidated Balance Sheet. In February 2001, Grace sold
its remaining interest in CCS, recognizing a $7.7 gain that is included in
"Other income" in the Consolidated Statement of Operations.
RETAINED OBLIGATIONS
Under certain divestiture agreements, Grace has retained contingent obligations
that could develop into situations where accruals for estimated costs of defense
or loss would be recorded in a period subsequent to divestiture under U.S.
generally accepted accounting principles. Grace assesses its retained risks
quarterly and accrues amounts estimated to be payable with respect to these
obligations when probable and estimable.
The nature of these obligations includes: (1) future lease payments and other
retained contractual commitments; (2) net asset settlements; (3) indemnities and
other guarantees; and (4) contingent risks under pending or possible litigation.
During the year ended December 31, 2000, Grace revised its estimate of the
outcome of certain retained obligations of discontinued operations based on then
current circumstances, and Grace recorded a net charge of $6.2 million ($4.1
million after tax). This charge was fully offset by a foreign pension premium
refund and the reduction of previously established accruals for environmental
remediation.
=============================================================
RESULTS OF DISCONTINUED
OPERATIONS (Dollars in 2001 2000 1999
millions)
=============================================================
Loss from operations before $ -- $ -- $ (17.7)
taxes......................
Income tax provision ........ -- -- 8.0
------------------------------
Loss from discontinued -- -- (9.7)
operations.................
Net gain on disposition of
business ................. -- -- 76.3
Provision for income taxes on
dispositions of businesses. -- -- (44.2)
Other charges, net of tax.... -- -- (16.7)
------------------------------
TOTAL INCOME FROM
DISCONTINUED OPERATIONS.... $ -- $ -- $ 5.7
==============================
BASIC EARNINGS PER SHARE FROM
DISCONTINUED OPERATIONS.... $ -- $ -- $ 0.08
DILUTED EARNINGS PER SHARE
FROM DISCONTINUED OPERATIONS $ -- $ -- $ 0.08
=============================================================
- --------------------------------------------------------------------------------
5. INCOME TAXES
- --------------------------------------------------------------------------------
The components of income (loss) from continuing operations before income taxes
and the related provision for income taxes are as follows:
F-18
==============================================================
INCOME TAXES - CONTINUING
OPERATIONS
(Dollars in millions) 2001 2000 1999
==============================================================
Income (loss) from
continuing operations
before income taxes:
Domestic.............. $ 67.1 $ (94.7) $ 135.9
Foreign............... 75.2 75.0 67.5
---------------------------------
$ 142.3 $ (19.7) $ 203.4
=================================
Provision for income taxes:
Federal - current..... $ (7.7) $ (66.2) $ (21.2)
Federal - deferred.... (27.5) 39.4 (26.4)
State and local - current (3.2) (20.0) (3.5)
Foreign - current..... (22.2) (21.8) (23.1)
Foreign - deferred.... (3.1) (1.4) 1.0
---------------------------------
$ (63.7) $ (70.0) $ (73.2)
==============================================================
The components of income (loss) from consolidated operations before income taxes
and the related provision for income taxes are as follows:
==============================================================
INCOME TAXES -
CONSOLIDATED OPERATIONS
(Dollars in millions) 2001 2000 1999
==============================================================
Income (loss) from
consolidated operations
before income taxes:
Domestic.............. $ 67.1 $ (94.7) $ 168.9
Foreign............... 75.2 75.0 67.5
---------------------------------
$ 142.3 $ (19.7) $ 236.4
=================================
Provision for income taxes:
Federal - current..... $ (7.7) $ (66.2) $ (40.7)
Federal - deferred.... (27.5) 39.4 (29.9)
State and local - current (3.2) (20.0) (7.8)
Foreign - current..... (22.2) (21.8) (23.1)
Foreign - deferred.... (3.1) (1.4) 1.0
---------------------------------
$ (63.7) $ (70.0) $ (100.5)
==============================================================
At December 31, 2001 and 2000, the tax attributes giving rise to deferred tax
assets and liabilities consisted of the following items:
==============================================================
DEFERRED TAX ANALYSIS
(Dollars in millions) 2001 2000
==============================================================
Liability for asbestos-related $ 348.7 $ 387.1
litigation......................
Net operating loss/tax credit
carryforwards................... 155.9 178.6
Deferred state taxes.............. 105.3 99.7
Liability for environmental 53.6 61.2
remediation.....................
Other post-retirement benefits.... 59.2 66.1
Deferred charges.................. 50.2 54.4
Reserves and allowances........... 38.2 43.3
Research and development.......... 40.0 32.6
Pension liabilities............... 84.8 15.9
Foreign loss/credit carryforwards. 23.3 10.0
Other............................. 9.9 13.6
- --------------------------------------------------------------
Total deferred tax assets......... 969.1 962.5
- --------------------------------------------------------------
Asbestos-related insurance receivable (106.9) (123.1)
Pension assets.................... (85.8) (79.8)
Properties and equipment.......... (56.3) (52.1)
Other............................. (58.3) (62.3)
- --------------------------------------------------------------
Total deferred tax liabilities.... (307.3) (317.3)
- --------------------------------------------------------------
Valuation allowance .............. (158.0) (179.1)
- --------------------------------------------------------------
Net deferred tax assets........... $ 503.8 $ 466.1
==============================================================
The valuation allowance shown above arises from uncertainty as to the
realization of certain deferred tax assets, primarily foreign tax credit
carryforwards and state and local net operating loss carryforwards. Based upon
anticipated future results, Grace has concluded that it is more likely than not
that the balance of the net deferred tax assets, after consideration of the
valuation allowance, will be realized. Grace expects to generate U.S. taxable
income while in Chapter 11 that will enable it to utilize a portion of its net
operating loss carryforwards.
At December 31, 2001, there were $284.8 million of net operating loss
carryforwards, representing deferred tax assets of $99.7 million, with
expiration dates through 2021; $15.0 million of foreign tax credit carryforwards
with expiration dates through 2006; $6.6 million of general business credit
carryforwards with expiration dates through 2011; and $34.6 million of
alternative minimum tax credit carryforwards. At December 31, 2001, the
aggregate tax effect of these net operating losses and credit carryforwards was
$155.9 million.
The differences between the benefit (provision) for income taxes at the federal
income tax rate of 35% and the Company's overall income tax (provision) benefit
for continuing operations are summarized as follows:
=======================================================================
INCOME TAX (PROVISION)
BENEFIT ANALYSIS
(Dollars in millions) 2001 2000 1999
=======================================================================
Tax (provision) benefit
at federal corporate rate......... $ (49.8) $ 6.9 $ (71.2)
Change in provision
resulting from: ..................
Nontaxable
income/non-deductible expenses.... (1.6) (1.6) (0.6)
State and local income
taxes, net of federal
income tax benefit................ (1.7) (1.8) (1.9)
Federal and foreign taxes
on foreign operations............. 1.3 1.5 0.5
Chapter 11 reorganization
expenses.......................... (5.5) -- --
Tax and interest relating
to tax deductibility of
interest on COLI policy
loans (See note 15)............... (6.4) (75.0) --
----------------------------------
Income tax provision from
continuing operations ............ $ (63.7) $ (70.0) $ (73.2)
=======================================================================
Federal, state, local and foreign taxes have not been provided on approximately
$186.7 million of undistributed earnings of certain foreign subsidiaries, as
such earnings are expected to be retained indefinitely by such subsidiaries for
reinvestment. The distribution of these earnings would result in additional
foreign withholding taxes of approximately $14.8 million and additional federal
income taxes to the extent they are not offset by foreign tax credits. It is not
practicable to estimate the total tax liability that would be incurred upon such
a distribution.
F-19
- --------------------------------------------------------------------------------
6. ACQUISITIONS AND JOINT VENTURES
- --------------------------------------------------------------------------------
In 2001, Grace acquired three entities for a total cost of $84.4 million, which
was paid in cash, as follows:
o In March 2001, Grace acquired The Separations Group, a manufacturer of
chromatography columns and separations media.
o In March 2001, Grace's German subsidiary acquired the precipitated silicas
business of Akzo-PQ Silicas.
o In July 2001, Grace's French subsidiary acquired Pieri S.A., a leading
supplier of specialty construction chemicals in Europe.
These acquisitions were accounted for under the purchase method of accounting.
Goodwill recognized in those transactions amounted to $23.6 million, which was
assigned to the Davison Chemicals and Performance Chemicals segments in the
amounts of $10.8 million and $12.8 million, respectively.
On March 1, 2001, Grace and Chevron Products Company ("Chevron"- a unit of
ChevronTexaco, Inc.) formed Advanced Refining Technologies LLC ("ART") to
develop and market hydroprocessing catalysts globally. ART conducts business
through two distribution companies and one operating company. Grace has majority
ownership interests in and controls both distribution companies; therefore, for
financial reporting purposes, the assets, liabilities and results of operations
of these entities are included in Grace's Consolidated Financial Statements.
Grace does not exercise governance control over the operating company;
therefore, it accounts for its interest under the equity method. Grace's equity
in the net income or loss of the operating company is reported in "Other income"
in Grace's Consolidated Statement of Operations. As of December 31, 2001, the
accompanying Consolidated Balance Sheet includes a receivable from the operating
company of $25.6 million, included in "Other current assets", and a payable to
the operating company of $4.9 million, included in "Other current liabilities."
As of December 31, 2001, the operating company had no third-party debt, and its
liabilities are all working capital items. Its net assets equaled $6.5 million,
and its cash balance was $10.1 million. ART has agreements with both Grace and
Chevron under which each provides certain administrative and research and
development services to ART. Administrative costs of $1.5 million and research
and development expenses of $5.8 million are reflected in the unconsolidated
financial statements of ART.
During 2000, Grace completed six acquisitions for cash consideration of $49.0
million and an obligation to pay future royalties of $19.6 million. All
acquisitions were accounted for under the purchase method of accounting. The
results of the operations of the acquisitions are included in the Consolidated
Financial Statements from the respective date of acquisition.
In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst
manufacturing assets of Borealis A/S. This acquisition will be accounted for
under the purchase method of accounting.
Pro-forma results of operations have not been presented because the effects of
these acquisitions were not material on either an individual or aggregate basis.
- --------------------------------------------------------------------------------
7. OTHER INCOME
- --------------------------------------------------------------------------------
Components of other income are as follows:
=============================================================================
OTHER INCOME
(Dollars in millions) 2001 2000 1999
=============================================================================
Net gain on settlement
of notes receivable $ -- $ -- $ 18.5
Investment income.... 5.4 6.4 2.1
Gain on sale of
investments........ 7.9 19.0 9.3
Net gain on
dispositions of assets 1.8 5.5 13.6
Tolling revenue...... 3.1 1.2 --
Interest income...... 4.6 9.7 4.2
Equity in net income of
affiliates......... 4.0 0.6 --
Other miscellaneous
income ............ 7.2 7.1 9.0
- -----------------------------------------------------------------------------
Total other income... $ 34.0 $ 49.5 $ 56.7
=============================================================================
- --------------------------------------------------------------------------------
8. COMPREHENSIVE (LOSS) INCOME
- --------------------------------------------------------------------------------
The tables below present the pre-tax, tax and after tax components of Grace's
other comprehensive (loss) income for the years ended December 31, 2001, 2000
and 1999:
F-20
==============================================================
YEAR ENDED AFTER
DECEMBER 31, 2001 Pre-tax Tax TAX
(Dollars in millions) Amount Benefit AMOUNT
==============================================================
Unrealized (losses) gains on
securities:
Change in unrealized
appreciation during the
year................... $ (0.2) $ 0.1 $ (0.1)
Reclassification adjustment
for gains realized in net
income................. (0.2) 0.1 (0.1)
--------------------------------
Net unrealized (losses) gain (0.4) 0.2 (0.2)
Minimum pension liability
adjustments............ (191.4) 67.0 (124.4)
Foreign currency
translation adjustments (24.6) -- (24.6)
--------------------------------
Other comprehensive (loss)
income................. $ (216.4) $ 67.2 $ (149.2)
==============================================================
==============================================================
YEAR ENDED Tax After
DECEMBER 31, 2000 Pre-tax (Expense) Tax
(Dollars in millions) Amount Benefit Amount
==============================================================
Unrealized (losses) gains on
securities:
Change in unrealized
appreciation during the
year................... $ (8.0) $ 2.7 $ (5.3)
Reclassification adjustment
for gains realized in net
income................. (19.0) 6.6 (12.4)
--------------------------------
Net unrealized (losses) gain (27.0) 9.3 (17.7)
Minimum pension liability
adjustments............ (2.2) (1.6) (3.8)
Foreign currency
translation adjustments (34.1) -- (34.1)
--------------------------------
Other comprehensive (loss)
income................. $ (63.3) $ 7.7 $ (55.6)
==============================================================
==============================================================
YEAR ENDED Tax After
DECEMBER 31, 1999 Pre-tax (Expense) Tax
(Dollars in millions) Amount Benefit Amount
==============================================================
Unrealized gains (losses) on
securities:
Change in unrealized
appreciation during the
year................... $ 11.5 $ (4.0) $ 7.5
Reclassification adjustment
for gains realized in net
income................. (9.3) 3.3 (6.0)
--------------------------------
Net unrealized gains
(losses)............... 2.2 (0.7) 1.5
Minimum pension liability
adjustments............ 4.4 (1.6) 2.8
Foreign currency
translation adjustments (19.3) -- (19.3)
--------------------------------
Other comprehensive loss. $ (12.7) $ (2.3) $ (15.0)
==============================================================
The decline in value of the U.S. and global equity markets coupled with a
decline in interest rates, primarily in the second half of 2001, created a
shortfall between the accounting measurement of Grace's obligations under its
qualified pension plan for U.S. salaried employees and the market value of
dedicated pension assets. This condition required Grace to record a minimum
pension liability for this plan and to offset related deferred costs against
shareholders' equity (deficit) at December 31, 2001 (see Note 19.)
==============================================================
COMPOSITION OF ACCUMULATED OTHER
COMPREHENSIVE LOSS
(Dollars in millions) 2001 2000
==============================================================
Foreign currency translation....... $ (164.8) $ (140.2)
Minimum pension liability.......... (136.0) (11.6)
Securities available for sale...... 0.1 0.3
----------------------
Accumulated other comprehensive loss $ (300.7) $(151.5)
==============================================================
- --------------------------------------------------------------------------------
9. OTHER BALANCE SHEET ACCOUNTS
- --------------------------------------------------------------------------------
==============================================================
(Dollars in millions) 2001 2000
==============================================================
NOTES AND ACCOUNTS RECEIVABLE, NET
Trade receivables, less allowance of
$5.7 (2000 - $3.9).............. $ 276.4 $ 172.2
Other receivables, less allowances of
$1.9 (2000 - $0.5).............. 25.7 25.0
----------------------
$ 302.1 $ 197.2
==============================================================
INVENTORIES (1)
Raw materials .................... $ 39.2 $ 32.7
In process ....................... 27.6 22.4
Finished products ................ 108.1 96.4
General merchandise .............. 25.8 22.0
Less: Adjustment of certain
inventories to a last-in/first-out
(LIFO) basis ................... (25.9) (29.3)
----------------------
$ 174.8 $ 144.2
==============================================================
(1) Inventories valued at LIFO cost comprised 50.7% of total
inventories at December 31, 2001 and 50.1% at
December 31, 2000.
==============================================================
OTHER ASSETS
Deferred pension costs............ $ 326.1 $ 304.8
Deferred charges ................. 44.9 44.3
Long-term receivables, less
allowances of $0.6 (2000 - $0.8) 2.8 2.4
Investments in unconsolidated 3.0 3.6
affiliates......................
Patents, licenses and other
intangible assets, net ......... 85.1 39.2
----------------------
$ 461.9 $ 394.3
==============================================================
OTHER CURRENT LIABILITIES
Retained obligations of divested
businesses ..................... $ -- $ 67.2
Accrued compensation ............. 39.4 32.6
Environmental remediation ........ -- 36.2
Deferred compensation ............ -- 10.5
Accrued interest ................. 4.8 6.3
Deferred tax liability ........... 0.8 0.9
Customer volume rebates .......... 19.2 17.3
Accrued commissions .............. 6.1 4.3
Accrued reorganization fees ...... 6.4 --
Other accrued liabilities ........ 51.2 80.3
----------------------
$ 127.9 $ 255.6
==============================================================
OTHER LIABILITIES
Other postretirement benefits .... $ -- $ 189.1
Environmental remediation ........ -- 138.7
Pension related .................. 266.5 131.8
Deferred compensation ............ -- 9.5
Long-term self insurance reserve . -- 5.6
Retained obligations of divested
businesses ..................... -- 10.9
Taxes payable, including interest -- 103.0
Other accrued liabilities ........ 8.7 27.0
----------------------
$ 275.2 $ 615.6
==============================================================
F-21
- --------------------------------------------------------------------------------
10. PROPERTIES AND EQUIPMENT
- --------------------------------------------------------------------------------
==============================================================
PROPERTIES AND EQUIPMENT
(Dollars in millions) 2001 2000
==============================================================
Land.............................. $ 17.7 $ 16.3
Buildings......................... 339.7 329.6
Information technology and equipment 104.4 67.5
Machinery, equipment and other... 1,113.5 1,076.5
Projects under construction....... 9.0 47.2
-----------------------
Properties and equipment, gross... 1,584.3 1,537.1
Accumulated depreciation and
amortization.................... (995.3) (935.4)
-----------------------
Properties and equipment, net..... $ 589.0 $ 601.7
==============================================================
Interest costs are incurred in connection with the financing of certain assets
prior to placing them in service. Grace capitalized interest costs for
continuing operations of $0.5 million in 2001, $1.0 million in 2000, and $0.8
million in 1999. Depreciation and lease amortization expense relating to
properties and equipment amounted to $79.6 in 2001, $84.6 million in 2000 and
$86.6 million in 1999. Grace's rental expense for operating leases amounted to
$19.8 million in 2001, $18.0 million in 2000 and $15.6 million in 1999. See Note
15 for information regarding contingent rentals.
At December 31, 2001, minimum future payments for operating leases were (dollars
in millions):
=============================================================
MINIMUM FUTURE PAYMENTS UNDER OPERATING LEASES
=============================================================
2002..................................... $ 7.8
2003..................................... 11.6
2004..................................... 14.5
2005..................................... 13.8
2006..................................... 5.0
Thereafter............................... 9.6
=============================================================
Total minimum lease payments............. $ 62.3
=============================================================
The above minimum lease payments are net of anticipated sublease income of $39.5
million in 2002, $25.3 million in 2003, $16.4 million in 2004, $12.0 million in
2005 and $9.5 million in 2006.
- --------------------------------------------------------------------------------
11. LIFE INSURANCE
- --------------------------------------------------------------------------------
Grace is the beneficiary of life insurance policies on certain current and
former employees with benefits in force of approximately $2,291.0 million and a
net cash surrender value of $75.6 million at December 31, 2001. The policies
were acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an
extended number of years. The following table summarizes activity in these
policies for 2001, 2000 and 1999:
==============================================================
LIFE INSURANCE - ACTIVITY
SUMMARY
(Dollars in millions) 2001 2000 1999
==============================================================
Earnings on policy assets $ 40.3 $ 36.8 $ 31.6
Interest on policy loans. (34.9) (30.4) (29.5)
Premiums................. 2.5 2.5 2.4
Proceeds from policy loans (48.7) -- --
Policy loan repayments... 15.0 5.2 3.4
Net investing activity... (2.9) 8.6 (3.3)
---------------------------------
Change in net cash value. $ (28.7) $ 22.7 $ 4.6
===================================
Gross cash value......... $ 477.5 $ 452.4 $ 432.4
Principal - policy loans. (377.6) (325.8) (331.0)
Accrued interest - policy
loans .................. (24.3) (22.3) (19.8)
---------------------------------
Net cash value........... $ 75.6 $ 104.3 $ 81.6
==============================================================
Insurance benefits in force $ 2,291.0 $ 2,286.0 $2,309.0
==============================================================
Tax-free proceeds received $ 18.0 $ 18.7 $ 15.3
==============================================================
The Company's financial statements display income statement activity and balance
sheet amounts on a net basis, reflecting the contractual interdependency of
policy assets and liabilities.
F-22
- --------------------------------------------------------------------------------
12. DEBT
- --------------------------------------------------------------------------------
=============================================================
COMPONENTS OF DEBT
(Dollars in millions) 2001 2000
=============================================================
DEBT PAYABLE WITHIN ONE YEAR
Bank borrowings (6.9% weighted
average interest rate at December
31, 2000) (1).................. $ -- $ 400.0
8.0% Notes Due 2004 (2).......... -- 5.7
7.75% Notes Due 2002 (2)......... -- 2.0
Other short-term borrowings (3).. 7.8 10.6
-----------------------
$ 7.8 $ 418.3
=======================
DEBT PAYABLE AFTER ONE YEAR
DIP facility (4)................. $ -- $ --
DEBT SUBJECT TO COMPROMISE
Bank borrowings (1).............. 500.0 --
Other borrowings (5)............. 1.3 --
Accrued Interest (6)............. 23.2 --
-----------------------
$ 524.5 $ --
=======================
Full-year weighed average interest
rates on total debt (7)........ 5.8% 7.1%
=============================================================
(1) Under bank revolving credit agreements in effect at December 31, 2000,
Grace could borrow up to $500.0 million at interest rates based upon the
prevailing prime, federal funds and/or Eurodollar rates. Of that amount,
$250.0 million was available under short-term facilities expiring in May
2001, and $250.0 million was available under a long-term facility expiring
in May 2003. As a result of the Filing, Grace was in default under the bank
revolving credit agreements, and accordingly, the balance has been reported
as short-term debt as of December 31, 2000. The balance as of the Filing
Date was reclassified to debt subject to compromise in the Consolidated
Balance Sheet.
(2) During 1994, Grace sold $300.0 million of 8.0% Notes Due 2004 at an initial
public offering price of 99.794% of par, to yield 8.0%; and during 1992,
Grace sold at par $150.0 million of 7.75% Notes Due 2002. Interest on these
notes was payable semiannually. As a result of the Filing, Grace was in
default under the Notes. The 7.75% Notes were repaid on June 11, 2001 and
the 8.0% Notes were repaid on August 15, 2001 by the unaffiliated guarantor
of the Notes. Grace's liability to reimburse the unaffiliated guarantor
with respect to these notes is included in "Liabilities subject to
compromise" as of December 31, 2001.
(3) Represents borrowings under various lines of credit and other miscellaneous
borrowings, primarily of non-U.S. subsidiaries. Under a maintenance capital
promissory note in effect at December 31, 2001, with ART, an affiliate,
Grace could borrow up to $5.0 million ($1.5 million outstanding at December
31, 2001) at interest rates equal to 125 basis points plus LIBOR.
(4) In 2001, the Debtors entered into a debtor-in-possession post-petition loan
and security agreement with Bank of America, N.A. (the "DIP facility") in
the aggregate amount of $250 million. The DIP facility has a term of two
years, is secured by priority liens on substantially all assets of the
Debtors, and bears interest based on LIBOR plus 2.00 to 2.25 percentage
points. As of December 31, 2001, the Debtors had no outstanding borrowings
under the DIP facility. However, $10.7 million of standby letters of credit
were issued and outstanding under the facility as of December 31, 2001,
which were issued mainly for trade-related matters such as performance
bonds, as well as certain insurance and environmental matters. The
outstanding amount of standby letters of credit issued under the DIP
facility reduces the borrowing availability by a corresponding amount.
Under the DIP facility, the Debtors are required to maintain $50 million of
liquidity, a combination of cash, cash equivalents and the cash value of
life insurance policies.
(5) Miscellaneous borrowings primarily consisting of U.S. mortgages.
(6) Grace is continuing to accrue interest expense on its pre-petition debt at
the pre-petition contractual rate of LIBOR plus 100 basis points.
(7) Computation excludes interest expense and financing costs related to the
Company's receivables securitization program which was terminated in May
2001.
Interest payments amounted to $9.5 million in 2001, $23.7 million in 2000 and
$8.2 million in 1999.
- --------------------------------------------------------------------------------
13. FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
DEBT AND INTEREST RATE SWAP AGREEMENTS
Grace had no outstanding financial derivative instruments at December 31, 2001
and December 31, 2000.
FAIR VALUE OF DEBT AND OTHER FINANCIAL INSTRUMENTS
At December 31, 2001, the fair value of Grace's debt payable within one year not
subject to compromise approximated the recorded value of $7.8 million. Fair
value is determined based on expected future cash flows (discounted at market
interest rates), quotes from financial institutions and other appropriate
valuation methodologies. At December 31, 2001, the recorded values of other
financial instruments such as cash, short-term investments, trade receivables
and payables and short-term debt approximated their fair values, based on the
short-term maturities and floating rate characteristics of these instruments.
The fair value of debt subject to compromise is undeterminable due to the
Company's bankruptcy filing; the ultimate value of such debt will be determined
by the outcome of the Chapter 11 proceedings.
SALE OF ACCOUNTS RECEIVABLE
Prior to the Filing, Grace sold, on an ongoing basis, approximately a $100
million pool of its eligible trade accounts receivable to a multi-seller
receivables company (the "conduit") through a wholly owned special purpose
subsidiary (the "SPS"). Upon sale of the receivables, the SPS held a
subordinated retained interest in the receivables. The estimated fair value of
the subordinated interest, excluding allowance for doubtful accounts, was $33.2
million at December 31, 2000 and was included in "Other current assets" in the
Consolidated Balance Sheet. Under the terms of the agreement, new receivables
were added to the pool as collections reduced previously sold receivables. Grace
serviced, administered and collected the receivables on behalf of the SPS and
the conduit. The proceeds were used for the reduction of other short-term
obligations and are reflected as operating cash flows in the Consolidated
Statement of Cash Flows. Grace has recorded net losses of $1.2, $5.0 and $3.9
million in 2001, 2000 and 1999, respectively, from the corresponding sales to
the conduit. As a result of the
F-23
Filing, which constituted an event of default under the program, the amount
outstanding under the program, approximating $65.3 million, was satisfied
through the use of pre-petition trade receivables collected by the SPS during
the period from the Filing Date to early May 2001. The program was terminated
effective May 14, 2001.
CREDIT RISK
Trade receivables potentially subject Grace to credit risk, given concentrations
in the petroleum and construction industries. Grace's credit evaluation
policies, relatively short collection terms and minimal credit losses mitigate
credit risk exposures. Grace does not generally require collateral for its trade
accounts receivable.
- --------------------------------------------------------------------------------
14. RESTRUCTURING COSTS AND ASSET IMPAIRMENTS
- --------------------------------------------------------------------------------
RESTRUCTURING COSTS
In 2001, the restructuring reserves for employee termination costs were reduced
to zero by cash payments of $1.6 million and the reversal of prior period
restructuring reserves of $0.8 million. Restructuring reserves for plant/office
closures were reduced by cash payments of $0.4 million; the remaining reserve of
$0.7 million principally relates to long-term lease obligations in the United
Kingdom.
During 2000, Grace recorded a net reduction of $3.9 million in previous
restructuring charges to account for new sublease agreements that lowered
previously reserved lease termination costs. This amount is reported in
"Selling, general and administrative expenses" in the Consolidated Statement of
Operations.
During 1999, Grace recorded a net restructuring charge of $2.6 million in
continuing operations. In the first quarter of 1999, a restructuring charge of
$4.3 million was recorded for additional severance costs directly related to the
productivity effectiveness program implemented in the fourth quarter of 1998.
The restructuring charge was offset by the reversal of $1.7 million of prior
period restructuring charges primarily related to the execution of a sublease
agreement which partially offset previously accrued lease termination costs.
Such amounts are reported in "Selling, general and administrative expenses" in
the Consolidated Statement of Operations.
The components of the restructuring charges recorded in 2001, 2000 and 1999,
spending with respect to such charges and other activity during those years, and
the remaining reserve balances included in "Other current liabilities" and
"Other liabilities" at December 31, 2001 and 2000, were as follows:
==============================================================
Employee
Termi- Plant/
RESTRUCTURING CHARGES nation Office Total
(Dollars in millions) Costs Closures
==============================================================
1999
Restructuring reserve at
December 31, 1998.......... $ 23.8 $ 9.5 $ 33.3
Provisions recorded in
continuing operations...... 4.3 -- 4.3
Reversal of prior period
restructuring reserves..... -- (1.7) (1.7)
Cash payments................ (19.0) (2.1) (21.1)
- --------------------------------------------------------------
Restructuring reserve at
December 31, 1999.......... $ 9.1 $ 5.7 $ 14.8
==============================================================
2000
Reversal of prior period
restructuring reserves..... $ (1.1) $ (2.8) $ (3.9)
Cash payments................ (5.6) (1.8) (7.4)
- --------------------------------------------------------------
Restructuring reserve at
December 31, 2000.......... $ 2.4 $ 1.1 $ 3.5
==============================================================
2001
Reversal of prior period
restructuring reserves..... $ (0.8) $ -- $ (0.8)
Cash payments................ (1.6) (0.4) (2.0)
- --------------------------------------------------------------
RESTRUCTURING RESERVE AT
DECEMBER 31, 2001.......... $ -- $ 0.7 $ 0.7
==============================================================
- --------------------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
ASBESTOS-RELATED LITIGATION - SEE NOTE 3
ENVIRONMENTAL REMEDIATION
General Matters and Discussion
Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
investigatory and remediation efforts where an assessment has indicated that a
probable liability has been incurred and the amount of loss can be reasonably
estimated. These accruals do not take into account any discounting for the time
value of money. At December 31, 2001, Grace's liability for environmental
investigatory and remediation costs related to continuing and discontinued
operations totaled $153.1 million, as compared to $174.9 million at December 31,
2000. Grace made cash payments of $28.9 million in 2001, $47.2 million in 2000
and $25.0 million in 1999 to remediate environmentally
F-24
impaired sites. These amounts have been charged against previously established
reserves.
Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings, but cannot predict at
this time if such proceedings will have a favorable or adverse effect; any such
effect could be material. Grace's environmental liabilities are included in
"Liabilities subject to compromise" as of December 31, 2001.
Vermiculite Related Matters
In November 1999, the U.S. Environmental Protection Agency ("EPA") began an
investigation into alleged excessive levels of asbestos-related disease related
to Grace's former vermiculite mining activities in the Libby, Montana area. On
March 30, 2001, the EPA filed a lawsuit in U.S. District Court for the District
of Montana, Missoula Division (United States v. W. R. Grace & Company et al.)
under the Comprehensive Environmental Response, Compensation and Liability Act
for the recovery of costs allegedly incurred by the United States in response to
the release or threatened release of asbestos in the Libby, Montana area
relating to such former mining activities. These costs include cleaning and/or
demolition of contaminated buildings, the evacuation and removal of contaminated
soil, health screening of Libby residents and former mine workers, and
investigation and monitoring costs. In this action, the United States is also
seeking a declaration of Grace's liability that would be binding in future
actions to recover further response costs. The EPA has reported that it has
spent approximately $25.4 million in response costs in and around Libby through
June 2001. Grace expects that the EPA may incur significant additional response
costs, as Libby is expected to be added to EPA's National Priorities List of
Superfund sites, but is unable to estimate the amount at this time. Grace
intends to review the EPA's actions and cost claims to determine whether they
are justified and reasonable. These lawsuits are not subject to the automatic
stay provided under the U.S. Bankruptcy Code. However, recovery of any response
costs would be subject to the Chapter 11 proceedings.
In February 2000, a purported class action lawsuit was filed in the U.S.
District Court in Missoula, Montana against Grace on behalf of all owners of
improved, private real property situated within 12 miles of Libby, Montana. The
action alleges that the class members have suffered harm in the form of
environmental contamination and loss of property rights resulting from Grace's
former vermiculite mining and processing operations. The complaint seeks
remediation, property damages and punitive damages. In October 2000, a purported
class action lawsuit was filed in the U.S. District Court for Minnesota against
Grace on behalf of all owners of real property situated near a former
vermiculite processing plant in northeast Minneapolis. The action alleges that
the class members have suffered harm in the form of environmental contamination
and loss of property rights resulting from the former vermiculite processing
operations. The complaint seeks remediation, property damages, and punitive
damages. Grace has not completed its investigation of these claims, and,
therefore, is not able to assess the extent of any possible liability related to
these lawsuits. These cases have been stayed as a result of the Filing.
In 2001 and 2000, Grace recorded a pre-tax charge of $5.8 million and $10.4
million, respectively, for clean up costs at previously operating vermiculite
mining and processing sites. The environmental risks related to vermiculite
could result in material future charges to Grace's earnings, the amounts of
which are not currently determinable.
Insurance Matters
Grace is a party to three environmental insurance coverage actions involving one
primary and one excess insurance carrier regarding the applicability of the
carriers' policies to Grace's environmental remediation costs. The outcome of
such litigation as well as the amounts of any recoveries that Grace may receive
is presently uncertain. Accordingly, Grace has not recorded a receivable with
respect to such insurance coverage.
CONTINGENT RENTALS
Grace is the named tenant or guarantor with respect to leases entered into by
previously divested businesses. These leases, some of which extend through the
year 2017, have future minimum lease payments aggregating $105.0 million, and
are fully offset by
F-25
anticipated future minimum rental income from existing tenants and subtenants.
In addition, Grace is liable for other expenses (primarily property taxes)
relating to the above leases; these expenses are paid by tenants and subtenants.
Certain of the rental income and other expenses are payable by tenants and
subtenants that have filed for bankruptcy protection or are otherwise
experiencing financial difficulties. Grace believes that the risk of significant
loss from these lease obligations is remote. Grace is also evaluating whether to
reject any of these leases as permitted by the Bankruptcy Code.
TAX MATTERS
The Internal Revenue Service ("IRS") is challenging the deductions taken by a
number of companies throughout the United States related to interest on policy
loans under corporate owned life insurance ("COLI") policies for years prior to
January 1, 1999. In 2000 Grace paid $21.2 million of tax and interest related to
this issue for tax years 1990-1992. Subsequent to 1992, Grace deducted
approximately $163.2 million in interest attributable to COLI policy loans.
Grace filed a claim for refund of the amount paid to date and will contest any
future IRS assessments on the grounds that these insurance policies and related
loans had, and continue to have, a valid business purpose, that the COLI
policies have economic substance and that interest deductions claimed were in
compliance with tax laws in effect at the time.
The IRS also has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against CCHP, Inc. ("CCHP"), a Grace subsidiary
that formerly operated a temporary staffing business for nurses and other
healthcare personnel. The assessments, aggregating $21.8 million, were made in
connection with a meal and incidental expense per diem plan for traveling
healthcare personnel that was in effect through 1999. The IRS contends that
certain per diem meals and incidental expenses and lodging benefits provided to
traveling healthcare personnel to defray the expenses they incurred while
traveling on business should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its for per diem
and expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS, per diem and
expense allowance plans. Grace expects that the IRS will make additional
assessments for the 1996 through 1999 periods as well. The matter is currently
pending in the U.S. Court of Claims.
Grace has received notification from a foreign taxing authority assessing tax
deficiencies plus interest relating to the purchase and sale of foreign bonds in
1989 and 1990. This assessment, totaling $10.5 million, is related to the
Bekaert Group, which Grace sold in 1991 but as to which Grace retained liability
for tax deficiencies attributable to tax periods prior to the sale. The matter
is currently before the foreign tax authorities, but no decision has been
rendered.
As a result of Grace's Chapter 11 filing, certain tax matters related to open
tax years, including COLI interest deductions, could become the direct
obligations of predecessor companies that now own Grace's former healthcare and
packaging businesses. One or both of these companies could be directly liable to
tax authorities for Grace's tax deficiencies. Pursuant to agreements relating to
each transaction, Grace may be required to indemnify both parties for taxes
relating to periods prior to the closing of such transactions. Any
indemnification obligation that arises as a result of these matters would be a
pre-petition liability subject to the Chapter 11 proceedings.
FRAUDULENT TRANSFER CASES
The Company and one of its subsidiaries have been named in purported class
action suits alleging that the 1996 reorganization involving a predecessor of
Grace and Fresenius A.G. and the 1998 reorganization involving a predecessor of
Grace and Sealed Air Corporation (the "1996 and 1998 transactions") were
fraudulent transfers. The suits are alleged to have been brought on behalf of
all individuals who then had lawsuits on file asserting personal injury or
wrongful death claims against any of the defendants. The other defendants in the
suits have all asserted claims against Grace for indemnification. Grace believes
that the suits are without merit. These lawsuits have been stayed as a result of
Grace's Chapter 11 filing. However, fraudulent transfer claims related to the
1996 and 1998 transactions are expected to be heard by the Bankruptcy Court
during the fourth quarter of 2002.
PURCHASE COMMITMENTS
From time to time, Grace engages in purchase commitments in its various business
activities, all of which are expected to be fulfilled with no material
F-26
adverse consequences to Grace's operations or financial condition.
FINANCIAL ASSURANCES
At December 31, 2001, Grace had gross financial assurances issued and
outstanding of $261.2 million, comprised of $149.2 million of gross surety bonds
issued by various insurance companies and $112.0 million of standby letters of
credit issued by various banks. Of the standby letters of credit, $29.4 million
act as collateral for surety bonds, thereby reducing Grace's overall obligations
under its financial assurances to a net amount of $231.8 million. These
financial assurances were established for a variety of purposes, including
insurance and environmental matters, asbestos settlements and appeals, trade-
related commitments and other matters. Of the net amount of $231.8 million of
financial assurances, approximately $10.1 million were issued by non-Debtor and
$221.7 million were issued by the Debtors. Of the amounts issued by the Debtors,
approximately $211.0 million were issued before the Filing Date, with the
remaining $10.7 million being issued under the DIP facility subsequent to the
Filing.
ACCOUNTING FOR CONTINGENCIES
Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to the items discussed above will be addressed as part of
Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have
been included in "Liabilities subject to compromise" on the accompanying
Consolidated Balance Sheet as of December 31, 2001. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at December 31, 2001.
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
Under its Certificate of Incorporation, the Company is authorized to issue
300,000,000 shares of common stock, $.01 par value. Of the common stock unissued
at December 31, 2001, approximately 12,772,400 shares were reserved for issuance
pursuant to stock options and other stock incentives. The Certificate of
Incorporation also authorizes 53,000,000 shares of preferred stock, $.01 par
value, none of which has been issued. 3,000,000 of such shares have been
designated as Series A Junior Participating Preferred Stock and are reserved for
issuance in connection with the Company's Preferred Stock Purchase Rights
("Rights"). A Right trades together with each outstanding share of common stock
and entitles the holder to purchase one hundredth of a share of Series A Junior
Participating Preferred Stock under certain circumstances and subject to certain
conditions. The Rights are not and will not become exercisable unless and until
certain events occur, and at no time will the Rights have any voting power.
The Company's Board of Directors previously approved programs to repurchase
outstanding shares of common stock. During the year ended December 31, 2000, the
Company acquired 4,815,400 shares of common stock for $47.3 million (at an
average price per share of $9.82). During the year ended December 31, 1999, the
Company acquired 6,956,200 shares of common stock for $94.4 million (at an
average price per share of $13.57). In January 1999, Grace retired 5,476,800
shares of treasury stock with a cost basis of $88.4 million.
In November 2001, 56,911 shares of restricted stock were reclassified as
treasury shares to reflect an election made by Paul J. Norris, Grace's Chairman,
President and Chief Executive Officer, under a Bankruptcy Court approved
employment agreement.
- --------------------------------------------------------------------------------
17. EARNINGS (LOSS) PER SHARE
- --------------------------------------------------------------------------------
The following table shows a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings (loss) per share from continuing
operations.
=============================================================
EARNINGS (LOSS) PER SHARE
(Amounts in millions,
except per share amounts) 2001 2000 1999
=============================================================
NUMERATORS
Income (loss) from
continuing operations $ 78.6 $ (89.7) $ 130.2
=================================
DENOMINATORS
Weighted average common
shares - basic
calculation........ 65.3 66.8 70.7
Dilutive effect of
employee stock options
and restricted shares... 0.1 -- 3.1
---------------------------------
Weighted average common
shares - diluted
calculation........ 65.4 66.8 73.8
=================================
BASIC EARNINGS (LOSS) PER
SHARE.............. $ 1.20 $ (1.34) $ 1.84
=================================
DILUTED EARNINGS (LOSS)
PER SHARE.......... $ 1.20 $ (1.34) $ 1.76
=============================================================
F-27
As a result of the 2000 loss from continuing operations, approximately 800,000
of employee compensation-related shares, primarily issuable under stock options,
were excluded from the diluted loss per share calculation in 2000 because their
effect would be antidilutive. Additionally, stock options that could potentially
dilute basic loss per share in the future (that were excluded from the
computation of diluted loss per share because their exercise prices were greater
than the average market price of the common shares) averaged approximately 14.2
million in 2001, 9.4 million in 2000 and 3.1 million in 1999.
- --------------------------------------------------------------------------------
18. STOCK INCENTIVE PLANS
- --------------------------------------------------------------------------------
Each stock option granted under the Company's stock incentive plans has an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. Options become exercisable at the time or times determined by
a committee of the Company's Board of Directors and may have terms of up to ten
years and one month. The following table sets forth information relating to such
options, as so adjusted, during 2001, 2000 and 1999:
=============================================================
STOCK OPTION ACTIVITY 2001
=============================================================
Average
Number Exercise
of Shares Price
-----------------------
Balance at beginning of year..... 14,005,209 $ 12.70
Options granted.................. 1,339,846 2.53
Options exercised................ -- --
Options terminated or cancelled.. (2,572,624) 11.46
------------
Balance at end of year........... 12,772,431 11.88
=============================================================
Exercisable at end of year....... 9,586,993 $ 12.64
=============================================================
2000
=============================================================
Balance at beginning of year..... 12,530,287 $ 12.27
Options granted.................. 2,555,000 13.32
Options exercised................ (779,863) 7.52
Options terminated or cancelled.. (300,215) 13.62
------------
Balance at end of year........... 14,005,209 12.70
=============================================================
Exercisable at end of year....... 9,386,539 $ 11.96
=============================================================
1999
=============================================================
Balance at beginning of year..... 14,289,870 $ 10.87
Options granted.................. 2,332,290 13.21
Options exercised................ (3,811,493) 7.30
Options terminated or cancelled.. (280,380) 16.21
------------
Balance at end of year........... 12,530,287 12.27
=============================================================
Exercisable at end of year....... 9,212,495 $ 9.88
=============================================================
At December 31, 2001, 4,456,038 shares were available for additional grants.
Currently outstanding options expire on various dates through November 2009.
Following is a summary of stock options outstanding at December 31, 2001:
===========================================================================
STOCK OPTIONS OUTSTANDING
===========================================================================
Weighted-
average Weighted- Weighted-
EXERCISE Remaining average average
PRICE Number Contractual Exercise Number Exercise
RANGE Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------
$2 - $8 3,281,071 5.88 $ 4.64 2,176,270 $ 5.76
$8 - $13 4,335,469 6.30 11.82 3,800,298 11.68
$13 - $18 2,841,326 8.63 14.14 1,304,860 14.82
$18 - $21 2,314,565 7.01 19.47 2,305,565 19.47
- ---------------------------------------------------------------------------
12,772,431 6.84 $11.88 9,586,993 $12.64
===========================================================================
In 2000 and 1999, the Company granted a total of 25,000 and 45,000 shares,
respectively, of the Company's Common Stock to certain executives, subject to
various restrictions. No shares were granted in 2001. Such shares are subject to
forfeiture if certain employment conditions are not met. For more information,
see the Form of Restricted Share Award Agreements filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1998. At December 31, 2001,
restrictions on all prior grants of restricted stock, net of forfeitures,
totaled 55,000 shares; these restrictions lapse in 2002. The fair value of the
restricted shares at the date of grant is amortized to expense ratably over the
restriction period.
SFAS No. 123, "Accounting for Stock-Based Compensation," permits the Company to
follow the measurement provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and not recognize compensation expense for its stock-based
incentive plans. Had compensation cost for the Company's stock-based incentive
compensation plans been determined based on the fair value at the grant dates of
awards under those plans, consistent with the methodology prescribed by SFAS No.
123, the Company's net income (loss) and related earnings (loss) per share for
2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated
below:
=============================================================
PRO FORMA EARNINGS
UNDER SFAS NO. 123
(Amounts in millions,
except per share amounts) 2001 2000 1999
=============================================================
Net income (loss):
As reported........... $ 78.6 $ (89.7) $ 135.9
Pro forma (1)......... 71.2 (98.5) 128.0
Basic earnings (loss) per
share:
As reported........... $ 1.20 $ (1.34) $ 1.92
Pro forma (1)......... 1.09 (1.47) 1.81
Diluted earnings (loss) per
share:
As reported........... $ 1.20 $ (1.34) $ 1.84
Pro forma (1)......... 1.09 (1.47) 1.73
(1) These pro forma amounts may not be indicative of future income (loss) and
earnings (loss) per share.
F-28
To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model,
with the following historical weighted average assumptions applied to grants in
2001, 2000 and 1999:
=============================================================
OPTION VALUE ASSUMPTIONS 2001 2000 1999
=============================================================
Dividend yield........ --% -- % -- %
Expected volatility... 61% 59 % 39 %
Risk-free interest rate 5% 7 % 5 %
Expected life (in years) 4 4 4
=============================================================
Based upon the above assumptions, the weighted average fair value of each option
granted was $1.28 per share for 2001, $6.86 per share for 2000 and $5.05 per
share for 1999.
- --------------------------------------------------------------------------------
19. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS PLANS
- --------------------------------------------------------------------------------
Grace maintains defined benefit pension plans covering employees of certain
units who meet age and service requirements. Benefits are generally based on
final average salary and years of service. Grace funds its U.S. pension plans in
accordance with U.S. federal laws and regulations. Non-U.S. pension plans are
funded under a variety of methods, as required under local laws and customs, and
therefore cannot be summarized. Grace's accumulated other comprehensive loss,
reflected as a reduction of shareholders equity (deficit), included additional
minimum pension liabilities as of December 31, 2001 and 2000 of $209.3 million
($136.0 million, net of tax) and $17.9 million ($11.6 million, net of tax),
respectively, for plans where the accumulated benefit obligation exceeded the
fair market value of assets.
Grace provides certain other postretirement health care and life insurance
benefits for retired employees of specified U.S. units. The retiree medical
insurance plans provide various levels of benefits to employees (depending on
their dates of hire) who retire from Grace after age 55 with at least 10 years
of service. These plans are unfunded, and Grace pays the costs of benefits under
these plans as they are incurred. Grace applies SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires that
the future costs of postretirement health care and life insurance benefits be
accrued over the employees' years of service.
An amendment to the structure of the retiree-paid premiums for postretirement
medical benefits was approved by the Company's Board in November 2001. The
amendment became effective January 1, 2002, and requires all retirees and
beneficiaries covered by the postretirement medical plan to contribute a minimum
of 40% of the calculated premium for that coverage.
The following summarizes the changes in benefit obligation and fair value of
plan assets during the period:
F-29
====================================================================================================================================
PENSION
--------------------------------------------------------------
OTHER POST-
CHANGE IN FINANCIAL STATUS OF RETIREMENT PLANS U.S. NON-U.S. TOTAL RETIREMENT PLANS
------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
====================================================================================================================================
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year....... $ 741.0 $ 765.7 $ 199.2 $ 196.9 $ 940.2 $ 962.6 $ 176.7 $ 182.7
Service cost.................................. 7.9 6.3 3.8 3.8 11.7 10.1 0.7 0.6
Interest cost................................. 55.3 54.5 11.2 11.4 66.5 65.9 9.8 14.4
Plan participants' contributions.............. -- -- 0.4 0.5 0.4 0.5 -- --
Amendments.................................... -- 2.4 1.6 0.1 1.6 2.5 -- (20.0)
Acquisitions/(Divestitures)................... -- 8.3 -- -- -- 8.3 -- --
Curtailments/settlements recognized gains..... -- -- -- -- -- -- -- --
Actuarial (gain) loss......................... 42.9 (17.7) 0.6 13.8 43.5 (3.9) (28.9) 22.0
Benefits paid................................. (70.5) (78.5) (11.7) (12.2) (82.2) (90.7) (22.3) (23.0)
Currency exchange translation adjustments..... -- -- (9.0) (15.1) (9.0) (15.1) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year............. $ 776.6 $ 741.0 $ 196.1 $ 199.2 $ 972.7 $ 940.2 $ 136.0 $ 176.7
====================================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 800.2 $ 899.9 $ 198.3 $ 224.1 $ 998.5 $1,124.0 $ -- $ --
Actual return on plan assets.................. (47.0) (28.6) (15.2) (1.6) (62.2) (30.2) -- --
Employer contribution......................... 6.8 7.4 3.8 4.0 10.6 11.4 22.3 23.0
Acquisitions/Spinoff.......................... -- -- -- -- -- -- -- --
Plan participants' contribution............... -- -- 0.4 0.5 0.4 0.5 -- --
Benefits paid................................. (70.5) (78.5) (11.7) (12.2) (82.2) (90.7) (22.3) (23.0)
Currency exchange translation adjustment...... -- -- (8.3) (16.5) (8.3) (16.5) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year...... $ 689.5 $ 800.2 $ 167.3 $ 198.3 $ 856.8 $ 998.5 $ -- $ --
====================================================================================================================================
Funded status................................. $ (87.1) $ 59.2 $ (28.8) $ (0.9) $(115.9) $ 58.3 $(136.0) $(176.7)
Unrecognized transition (asset)/obligation.... 0.7 (9.3) 0.8 0.9 1.5 (8.4) -- --
Unrecognized actuarial loss (gain)............ 25.1 98.9 4.0 14.6 29.1 113.5 23.8 61.9
Unrecognized prior service cost/(benefit)..... 253.7 31.0 45.6 4.6 299.3 35.6 (56.9) (74.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized......................... $ 192.4 $ 179.8 $ 21.6 $ 19.2 $ 214.0 $ 199.0 $(169.1) $(189.1)
====================================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
Deferred pension costs...................... $ 241.0 $ 223.5 $ 85.1 $ 81.3 $ 326.1 $ 304.8 $ -- $ --
Pension related liability................... (276.0) (68.3) (65.1) (63.5) (341.1) (131.8) (169.1) (189.1)
Intangible asset............................ 19.0 6.9 0.7 1.2 19.7 8.1 N/A N/A
Accumulated other comprehensive loss........ 208.4 17.7 0.9 0.2 209.3 17.9 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized......................... $ 192.4 $ 179.8 $ 21.6 $ 19.2 $ 214.0 $ 199.0 $(169.1) $ (189.1)
====================================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate................................. 7.25% 7.50% 2.3-15.0% 2.3-15.0% N/M N/M 7.25% 7.50%
Expected return on plan assets................ 9.0 9.0 5.0-15.0 5.0-15.0 N/M N/M N/M N/M
Rate of compensation increase................. 4.3 4.5 2.0-14.0 2.0-14.0 N/M N/M N/M N/M
====================================================================================================================================
====================================================================================================================================
2001 2000 1999
--------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT (INCOME) COST NON- Non- Non-
(Dollars in millions) U.S. U.S. OTHER U.S. U.S. Other U.S. U.S. Other
====================================================================================================================================
Service cost...................................... $ 7.9 $ 3.8 $ 0.7 $ 6.3 $ 3.8 $ 0.6 $ 7.3 $ 5.2 $ 0.8
Interest cost..................................... 55.3 11.2 9.8 54.5 11.4 14.4 57.7 11.8 12.8
Expected return on plan assets.................... (69.1) (15.9) -- (78.2) (18.2) -- (76.0) (17.1) --
Amortization of transition asset.................. (10.0) -- -- (10.0) (0.2) -- (11.5) (0.2) --
Amortization of prior service cost (benefit)...... 7.6 0.5 (8.3) 7.4 0.6 (6.7) 7.0 0.6 (6.7)
Amortization of unrecognized actuarial loss....... 2.4 0.2 0.1 0.8 (0.4) 2.4 3.9 0.3 2.7
Net curtailment and settlement loss............... -- 0.2 -- -- -- -- 11.0 0.2 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit (income) cost................ $ (5.9) $ -- $ 2.3 $(19.2) $ (3.0) $ 10.7 $ (0.6) $ 0.8 $ 9.6
====================================================================================================================================
====================================================================================================================
OTHER POST-
PENSION PLANS WHERE ACCUMULATED BENEFIT U.S. NON-U.S. RETIREMENT PLANS
OBLIGATIONS EXCEED PLAN ----------------------- ---------------------- ===========================
ASSETS (Dollars in millions) 2001 2000 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Projected benefit obligation............. $ 691.1 $ 68.7 $ 74.1 $ 72.4 N/A N/A
Accumulated benefit obligation........... 676.8 68.2 63.8 62.0 $ 136.0 $ 176.7
Fair value of plan assets................ 583.7 -- 0.9 0.6 -- --
====================================================================================================================
N/M - Not meaningful
N/A - Not applicable
F-30
For measurement purposes, rates of increase of 9.0% and 9.5% in the per capita
cost of covered retiree health care benefits for pre-age 65 and post-age 65,
respectively, were assumed for 2002. The rate is assumed to decrease gradually
to 5.3% through 2007 and remain at that level thereafter. Assumed health care
cost trend rates have a significant effect on the amounts reported for the
postretirement medical plan. A one percentage-point increase (decrease) in
assumed health care medical cost trend rates would increase (decrease) total
service and interest cost components by $0.1 million and ($0.1) million,
respectively, and increase (decrease) postretirement benefit obligations by $1.0
million and ($1.2) million, respectively.
- --------------------------------------------------------------------------------
20. BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Performance Chemicals was formed in 1999 by combining the previously
separate business segments of Grace Construction Products and Darex Container
Products. These businesses were consolidated under one management team to
capitalize on infrastructure synergies from co-location of headquarters and
production facilities around the world. Davison Chemicals produces a variety of
catalysts and silica products. Performance Chemicals produces specialty
construction chemicals, building materials and sealants and coatings.
Intersegment sales, eliminated in consolidation, are not material. The table
below presents information related to Grace's business segments for 2001, 2000
and 1999; in connection with the adoption of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," only those corporate
expenses directly related to the segment are allocated for reporting purposes.
All remaining corporate items are reported separately and labeled as such.
Davison Chemicals pre-tax operating income includes Grace's equity income
related to the unconsolidated operating company of ART (see Note 6).
===============================================================
BUSINESS SEGMENT DATA
(Dollars in millions) 2001 2000 1999
===============================================================
NET SALES
Davison Chemicals..... $ 874.1 $ 783.9 $ 751.1
Performance Chemicals. 849.1 813.5 799.8
------------------------------------
Total................. $ 1,723.2 $ 1,597.4 $1,550.9
====================================
PRE-TAX OPERATING INCOME
Davison Chemicals..... $ 128.7 $ 131.6 $ 124.3
Performance Chemicals. 101.1 95.5 105.8
------------------------------------
Total................. $ 229.8 $ 227.1 $ 230.1
====================================
DEPRECIATION AND
AMORTIZATION
Davison Chemicals..... $ 58.4 $ 57.2 $ 59.2
Performance Chemicals. 29.5 29.3 28.8
------------------------------------
Total................. $ 87.9 $ 86.5 $ 88.0
====================================
CAPITAL EXPENDITURES
Davison Chemicals..... $ 39.3 $ 33.7 $ 48.0
Performance Chemicals. 22.8 28.3 30.7
------------------------------------
Total................. $ 62.1 $ 62.0 $ 78.7
====================================
TOTAL ASSETS
Davison Chemicals..... $ 713.0 $ 632.3 $ 590.3
Performance Chemicals. 497.7 479.1 478.3
------------------------------------
Total................. $ 1,210.7 $ 1,111.4 $1,068.6
===============================================================
The table below presents information related to the geographic areas in which
Grace operated in 2001, 2000 and 1999.
===============================================================
GEOGRAPHIC AREA DATA
(Dollars in millions) 2001 2000 1999
===============================================================
NET SALES
United States............ $ 835.1 $ 825.6 $ 783.5
Canada and Puerto Rico... 40.7 34.4 32.6
Europe................... 472.9 416.8 447.3
Asia Pacific............. 267.5 216.8 205.7
Latin America............ 107.0 103.8 81.8
---------------------------------
Total.................... $ 1,723.2 $ 1,597.4 $1,550.9
===============================================================
PROPERTIES AND EQUIPMENT,
NET
United States............ $ 386.7 $ 408.3 $ 399.0
Canada and Puerto Rico... 20.1 19.9 20.8
Europe................... 118.0 101.1 118.1
Asia Pacific............. 49.1 54.7 61.9
Latin America............ 15.1 17.7 17.5
---------------------------------
Total.................... $ 589.0 $ 601.7 $ 617.3
===============================================================
F-31
Pre-tax operating income, depreciation and amortization, capital expenditures
and total assets for Grace's business segments are reconciled below to amounts
presented in the Consolidated Financial Statements.
================================================================
RECONCILIATION OF BUSINESS
SEGMENT DATA TO FINANCIAL
STATEMENTS
(Dollars in millions) 2001 2000 1999
- ----------------------------------------------------------------
Pre-tax operating income -
business segments....... $ 229.8 $ 227.1 $ 230.1
Gain on note receivable... -- -- 18.5
Gain on disposal of assets 1.8 5.5 13.6
Gain on sale of investments 7.9 19.0 9.3
Provision for environmental
remediation............. (5.8) (10.4) --
Provisions for
asbestos-related
litigation, net of
insurance coverage...... -- (208.0) --
Interest expense and related
financing costs......... (37.1) (28.1) (16.1)
Corporate operating costs. (42.3) (40.0) (52.0)
Other, net................ 3.7 15.2 --
---------------------------------
Income (loss) from
continuing operations
before Chapter 11
reorganization expenses
and income taxes........ $ 158.0 $ (19.7) $ 203.4
================================================================
Depreciation and
amortization - business
segments................ $ 87.9 $ 86.5 $ 88.0
Depreciation and
amortization - corporate 1.1 1.3 1.2
---------------------------------
Total depreciation and
amortization ........... $ 89.0 $ 87.8 $ 89.2
================================================================
Capital expenditures -
business segments....... $ 62.1 $ 62.0 $ 78.7
Capital expenditures -
corporate............... 0.8 2.8 3.8
---------------------------------
Total capital expenditures $ 62.9 $ 64.8 $ 82.5
================================================================
Total assets - business
segments................ $1,210.7 $1,111.4 $ 1,068.6
Total assets - corporate.. 687.5 614.3 595.1
Asbestos-related receivables 293.4 372.0 371.4
Deferred tax assets....... 525.4 487.2 440.0
---------------------------------
Total assets.............. $ 2,717.0 $2,584.9 $ 2,475.1
================================================================
F-32
- --------------------------------------------------------------------------------
21. QUARTERLY SUMMARY AND STATISTICAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
==================================================================================================================================
QUARTERLY SUMMARY AND STATISTICAL INFORMATION (Unaudited)
(Dollars in millions, except per share)
==================================================================================================================================
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
2001
Net sales (1) ..................................... $ 395.7 $ 450.3 $ 448.1 $ 429.1
Cost of goods sold (1)............................. 252.4 283.3 281.9 275.3
Income from continuing operations (2).............. 14.6 23.0 19.8 21.2
Net income......................................... 14.6 23.0 19.8 21.2
Net income per share: (3)
Basic earnings per share:
Continuing operations.......................... $ 0.22 $ 0.35 $ 0.30 $ 0.32
Net income..................................... 0.22 0.35 0.30 0.32
Diluted earnings per share:
Continuing operations.......................... 0.22 0.35 0.30 0.32
Net income..................................... 0.22 0.35 0.30 0.32
Market price of common stock: (4)
High........................................... $ 4.38 $ 2.35 $ 1.87 $ 1.72
Low............................................ 1.63 1.31 1.46 1.35
Close.......................................... 2.30 1.75 1.55 1.55
- -----------------------------------------------------------------------------------------------------------------------------------
2000
Net sales (1)...................................... $ 384.7 $ 405.1 $ 415.7 $ 391.9
Cost of goods sold (1)............................. 231.8 239.8 252.4 249.9
Income (loss) from continuing operations........... 24.2 34.6 34.1 (182.6)
Net income (loss).................................. 24.2 34.6 34.1 (182.6)
Net income per share: (3)
Basic earnings per share:
Continuing operations.......................... $ 0.35 $ 0.51 $ 0.51 $ (2.80)
Net income (loss).............................. 0.35 0.51 0.51 (2.80)
Diluted earnings per share:
Continuing operations.......................... 0.35 0.50 0.51 (2.80)
Net income (loss).............................. 0.35 0.50 0.51 (2.80)
Market price of common stock: (4)
High........................................... $ 14.94 $ 14.63 $ 12.63 $ 7.13
Low............................................ 9.50 11.38 6.56 1.31
Close.......................................... 12.88 12.13 6.88 3.19
==================================================================================================================================
(1) The net sales and cost of goods sold amounts presented above reflect a
reclassification of freight costs and sales commissions (previously shown
as a reduction of sales) to cost of sales and selling expenses, in
accordance with Emerging Issues Task Force Consensus No. 00-10, "Accounting
for Shipping and Handling Revenues and Costs."
(2) Fourth quarter results include the effects of changes in estimates related
to other postretirement plan benefits, which reduced expense by $6.0
million.
(3) Per share results for the four quarters may differ from full-year per share
results, as a separate computation of the weighted average number of shares
outstanding is made for each quarter presented.
(4) Principal market: New York Stock Exchange.
F-33
===================================================================================================================================
FINANCIAL SUMMARY (1) (Dollars in millions, except per share amounts)
===================================================================================================================================
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Net sales ................................................ $ 1,723.2 $ 1,597.4 $ 1,550.9 $ 1,546.2 $ 1,558.9
Cost of goods sold........................................ 1,092.9 973.9 929.3 961.7 969.0
Depreciation and amortization............................. 89.0 87.8 89.2 92.1 94.8
Interest expense and related financing costs.............. 37.1 28.1 16.1 19.8 21.2
Research and development expenses......................... 44.1 45.7 42.4 47.4 42.4
Income (loss) from continuing operations before Chapter 11
reorganization expenses and income taxes............. 158.0 (19.7) 203.4 (223.2) 137.4
Income (loss) from continuing operations.................. 78.6 (89.7) 130.2 (194.7) 85.9
Income from discontinued operations (2)................... -- -- 5.7 0.9 175.1
Net income (loss)......................................... 78.6 (89.7) 135.9 (229.1) 261.0
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Current assets............................................ $ 748.1 $ 773.9 $ 779.8 $ 625.6 $ 2,175.5
Current liabilities....................................... 249.1 1,092.9 769.4 669.8 1,357.7
Properties and equipment, net............................. 589.0 601.7 617.3 661.4 663.3
Total assets.............................................. 2,717.0 2,584.9 2,475.1 2,556.3 3,769.4
Total debt not subject to compromise...................... 10.0 421.9 136.2 113.4 1,072.3
Liabilities subject to compromise......................... 2,313.6 -- -- -- --
Shareholders' equity (deficit)............................ (141.7) (71.3) 111.1 42.1 467.9
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW
Operating activities...................................... $ 6.4 $ (140.1) $ 130.5 $ (66.9) $ 236.4
Investing activities...................................... (133.3) (97.6) 89.4 (114.0) 370.1
Financing activities...................................... 123.2 239.9 (80.9) 196.6 (621.3)
Net cash flow............................................. (10.6) (7.9) 134.5 17.7 (20.7)
- -----------------------------------------------------------------------------------------------------------------------------------
DATA PER COMMON SHARE (DILUTED)
Income (loss) from continuing operations.................. $ 1.20 $ (1.34) $ 1.76 $ (2.61) $ 1.13
Net income (loss)......................................... 1.20 (1.34) 1.84 (3.07) 3.45
Dividends................................................. -- -- -- -- .56
Average common diluted shares outstanding (thousands)..... 65,400 66,800 73,800 74,600 75,700
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Dividends paid on common stock............................ $ -- $ -- $ -- $ -- $ 41.2
Capital expenditures...................................... 62.9 64.8 82.5 100.9 258.7
Common stock price range (3).............................. 1.31 - 4.38 14 15/16 - 21 - 21 11/16 - 18 1/16 -
1 5/16 11 13/16 10 9 7/8
Common shareholders of record............................. 11,643 12,240 13,215 14,438 15,945
Number of employees - continuing operations............... 6,400 6,300 6,300 6,600 6,700
===================================================================================================================================
(1) Certain prior-year amounts have been reclassified to conform to the 2001
presentation and to reflect a reclassification of freight costs and sales
commissions (previously shown as a reduction of sales) to cost of sales and
selling expenses in accordance with Emerging Issues Task Force Consensus
No. 00-10, "Accounting for Shipping and Handling Revenues and Costs."
(2) See Note 4 to the Consolidated Financial Statements for additional
information.
(3) On March 31, 1998, a predecessor of the Company ("Old Grace") completed a
transaction in which its flexible packaging business ("Packaging Business')
was combined with Sealed Air Corporation ("Sealed Air"). Old Grace effected
this transaction by transferring its specialty chemicals businesses along
with certain other businesses and assets to the Company (then named Grace
Specialty Chemicals, Inc.), distributing the shares of the Company's common
stock to Old Grace's shareholders on a one-for-one basis ("Spin-off") and
merging a subsidiary of Old Grace with Sealed Air ("Merger"). Immediately
following the Spin-off and Merger, the Company changed its name to "W. R.
Grace & Co." and Old Grace changed its name to "Sealed Air Corporation"
("New Sealed Air"). As a result of the transaction, the Packaging Business
was classified as a discontinued operation as of December 31, 1997. For
further information, see Old Grace's Joint Proxy Statement/Prospectus dated
February 13, 1998 and the Company's Information Statement dated February
13, 1998. Stock prices in 1997 and 1998 have been adjusted so that they are
on a basis comparable to the stock prices following the disposition of the
Packaging Business.
F-34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
Grace is engaged in specialty chemicals and specialty materials businesses on a
global basis. Its business segments are Davison Chemicals, which produces
catalysts and silica products, and Performance Chemicals, which produces
construction chemicals, building materials and sealants and coatings.
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VOLUNTARY BANKRUPTCY FILING
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In response to a sharply increasing number of asbestos-related bodily injury
claims, on April 2, 2001 (the "Filing Date"), W. R. Grace & Co. ("the Company")
and 61 of its United States subsidiaries and affiliates, including W. R. Grace &
Co.-Conn. (collectively, the "Debtors"), filed voluntary petitions for
reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11" or the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). The cases were
consolidated and are being jointly administered under case number 01-01139 (the
"Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S.
subsidiaries were not included in the Filing.
During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 filing provides the
best forum available to achieve predictability and fairness in the claims
settlement process. By filing under Chapter 11, Grace expects to be able to both
obtain a comprehensive resolution of the claims against it and preserve the
inherent value of its businesses. Under Chapter 11, the Debtors expect to
continue to operate their businesses as debtors-in-possession under court
protection from their creditors and claimants, while using the Chapter 11
process to develop and implement a plan for addressing the asbestos-related
claims against them.
Consequence of Filing - As a consequence of the Filing, pending litigation
against the Debtors is generally stayed (subject to certain exceptions in the
case of governmental authorities), and no party may take any action to realize
its pre-petition claims except pursuant to an order of the Bankruptcy Court.
The Debtors intend to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. Such plan
of reorganization will include the establishment of a trust, through which all
pending and future asbestos-related claims would be channeled for resolution.
However, it is currently impossible to predict with any degree of certainty the
amount that would be required to be contributed to the trust, how the trust
would be funded, how other pre-petition claims would be treated or what impact
any reorganization plan may have on the shares of common stock of Grace. The
interests of Debtors' equity security holders could be substantially diluted or
cancelled under a plan of reorganization. The formulation and implementation of
the plan of reorganization is expected to take a significant period of time.
Since the Filing, all motions necessary to conduct normal business activities
have been approved by the Bankruptcy Court. In addition, the Debtors have
received approval from the Bankruptcy Court to pay or otherwise honor certain of
its pre-petition obligations in the ordinary course of business, including
employee wages and benefits, customer programs, shipping charges and a limited
amount of claims of essential trade creditors.
As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received an extension of their exclusive period during which to
file a plan of reorganization through August 1, 2002, and an extension of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through October 1, 2002. No bar dates have yet been set for the filing of proofs
of claims by claimants.
Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These committees will
have the right to be heard on all matters that come before the Bankruptcy Court,
and, together with a legal representative of
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future asbestos claimants (who Grace expects to be appointed by the Bankruptcy
Court in the near future), are likely to play important roles in the Chapter 11
Cases. The Debtors are required to bear certain of the committees' and the
future asbestos claimants representative's costs and expenses, including those
of their counsel and financial advisors.
All of the Debtor's pre-petition debt is now in default due to the Filing. The
accompanying Consolidated Balance Sheet as of December 31, 2001 reflects the
classification of the Debtors' pre-petition debt within "Liabilities subject to
compromise."
The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring in April
2003 and bears interest under a formula based on the London Inter-Bank Offered
Rate ("LIBOR") rate plus 2.00 to 2.25 percentage points depending on the level
of loans outstanding.
In November 2001, the Debtors' Chapter 11 Cases, as well as the Chapter 11 Cases
of four unrelated companies with asbestos-related claims, was assigned to Judge
Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. Judge
Wolin will preside over the asbestos bodily injury matters affecting all five
companies and, at his choosing, certain other asbestos-related lawsuits
particular to Grace. Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the
Western District of Pennsylvania, sitting in Wilmington, Delaware, will preside
over the Debtors' other bankruptcy matters.
Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of Debtors'
assets and liquidation of certain of Debtors' liabilities are subject to
significant uncertainty. While operating as debtors-in-possession, the Debtors
may sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the Consolidated Financial Statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements, which do not
currently give effect to any adjustments to the carrying value or classification
of assets or liabilities that might be necessary as a consequence of a plan of
reorganization.
Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of December 31, 2001, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments) as well as estimates of costs related
to contingent liabilities (such as asbestos-related litigation and other
claims). The recorded amounts of such liabilities generally reflect accounting
measurements as of the Filing Date adjusted, as warranted, for changes in facts
and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent
to the Filing. (See Note 2 to the Consolidated Financial Statements for detail
of the "Liabilities subject to compromise" as of December 31, 2001, and as of
the Filing Date.) Obligations of Grace subsidiaries not covered by the Filing
continue to be classified on the Consolidated Balance Sheet based upon maturity
dates or the expected dates of payment. SOP 90-7 also requires separate
reporting of certain expenses, realized gains and losses, and provisions for
losses related to the Filing as reorganization items. During 2001, the Debtors
recorded Chapter 11 reorganization expenses of $15.7 million. See Note 1 to the
consolidated Financial Statements for further information concerning the Chapter
11 filing.
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CRITICAL ACCOUNTING ESTIMATES
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The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that management make estimates and
assumptions affecting the assets and liabilities (including contingent assets
and liabilities) reported at the date of the Consolidated Financial Statements
and the revenues and expenses reported for the periods presented. Actual amounts
could differ from those estimates. Grace's accounting measurements that are most
affected by management's estimates of future events are:
o Contingent liabilities such as asbestos-related matters, environmental
remediation, tax exposures and retained obligations of divested businesses.
F-36
o Pension and postretirement liabilities that depend on assumptions regarding
discount rates and total returns on invested funds.
o Depreciation and amortization periods for long-lived assets, including
property and equipment, intangibles and goodwill.
o Realization values of various assets such as receivables, inventories,
insurance and tax attributes.
The accuracy of these and other estimates may also be materially affected by the
uncertainties arising under the Chapter 11 Cases.
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CONTINUING OPERATIONS
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Set forth below is a chart that lists key operating statistics and percentage
changes for the years ended December 31, 2001, 2000 and 1999. Immediately
following the chart is an overview of the matters affecting the comparison of
2001 and 2000 as well as the comparison of 2000 and 1999. Each of these items
should be referenced when reading management's discussion and analysis of the
results of continuing operations. The chart below, as well as the financial
information presented throughout this discussion, divides Grace's financial
results between "core operations" and "noncore activities." Core operations
comprise the financial results of Davison Chemicals, Performance Chemicals and
the costs of corporate activities that directly or indirectly support business
operations. In contrast, noncore activities comprise all other events and
transactions not directly related to the generation of operating revenue or the
support of core operations.
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ANALYSIS OF CONTINUING OPERATIONS % Change % Change
(Dollars in millions) 2001 2000 (a) Fav(Unfav) 1999 (a) Fav(Unfav)
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NET SALES:
Davison Chemicals.................................... $ 874.1 $ 783.9 11.5% $ 751.1 4.4%
Performance Chemicals................................ 849.1 813.5 4.4% 799.8 1.7%
============== ============ ============== ============= ==============
TOTAL GRACE SALES - CORE OPERATIONS...................... $ 1,723.2 $ 1,597.4 7.9% $ 1,550.9 3.0%
============== ============ ============== ============= ==============
PRE-TAX OPERATING INCOME:
Davison Chemicals.................................... $ 128.7 $ 131.6 (2.2%) $ 124.3 5.9%
Performance Chemicals................................ 101.1 95.5 5.9% 105.8 (9.7%)
Corporate operating costs............................ (42.3) (40.0) (5.8%) (52.0) 23.1%
-------------- ------------ -------------- ------------- --------------
PRE-TAX INCOME FROM CORE OPERATIONS...................... 187.5 187.1 0.2% 178.1 5.0%
-------------- ------------ -------------- ------------- --------------
PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES........... 3.0 (188.4) NM 37.2 NM
Interest expense......................................... (37.1) (28.1) (32.0%) (16.1) (74.5%)
Interest income.......................................... 4.6 9.7 (52.6%) 4.2 131.0%
-------------- ------------ -------------- ------------- --------------
INCOME (LOSS) BEFORE CHAPTER 11 REORGANIZATION EXPENSE AND
INCOME TAXES............................................. 158.0 (19.7) NM 203.4 NM
Chapter 11 reorganization expenses, net.................. (15.7) -- NM -- NM
Provision for income taxes............................... (63.7) (70.0) 9.0% (73.2) NM
============== ============ ============== ============= ==============
INCOME (LOSS) FROM CONTINUING OPERATIONS (b)............. $ 78.6 $ (89.7) 187.6% $ 130.2 NM
============== ============ ============== ============= ==============
KEY FINANCIAL MEASURES:
Pre-tax income from core operations as a
percentage of sales.................................. 10.9% 11.7% (0.8)pts 11.5% 0.2pts
Pre-tax income from core operations before
depreciation and amortization........................ $ 276.5 $ 274.9 0.6% $ 267.3 2.8%
As a percentage of sales............................... 16.0% 17.2% (1.2)pts 17.2% --
============== ============ ============== ============= ==============
NET SALES BY REGION:
North America........................................... $ 875.8 $ 860.0 1.8% $ 816.1 5.4%
Europe.................................................. 472.9 416.8 13.5% 447.3 (6.8%)
Asia Pacific............................................ 267.5 216.8 23.4% 205.7 5.4%
Latin America........................................... 107.0 103.8 3.1% 81.8 26.9%
-------------- ------------ -------------- ------------- --------------
TOTAL................................................... $ 1,723.2 $ 1,597.4 7.9% $ 1,550.9 3.0%
============================================================ ============== ============ ============== ============= ==============
NM = Not meaningful a = Net sales amounts presented
herein reflect a reclassification of freight
costs and sales commissions (previously
shown as a reduction of sales)
b = Also net income (loss) for 2001 and 2000.
F-37
MATTERS AFFECTING COMPARISON - 2001 VS. 2000
Several major factors affect the comparison of sales and pre-tax earnings from
continuing operations between 2001 and 2000. The principal factors affecting
core operations are sales and earnings from three acquisitions, the formation of
a joint venture, a downturn in world economic activity beginning in late 2000
(exacerbated by the events of September 11, 2001), the continued contributions
from Grace's productivity initiatives, the continued strength of the U.S. dollar
compared to most foreign currencies, and increased energy costs. (Energy costs
were high in the first half of 2001, declining during the second half, but
overall were higher year-over-year.) The primary factors affecting pre-tax
income from noncore activities were the sale of Grace's remaining interest in
Cross Country Staffing, offset by accruals for legal and environmental matters.
The effects of each of these factors are quantified throughout management's
discussion and analysis.
MATTERS AFFECTING COMPARISON - 2000 VS. 1999
Several major factors affect the comparison of sales and pre-tax earnings from
continuing operations between 2000 and 1999. The principal factors affecting
core operations are sales and earnings from six acquisitions, contributions from
Grace's productivity initiatives, a downturn in the U.S. economy in late 2000,
increasing energy prices in the second half of 2000 compared to the first half
and to 1999, and a stronger U.S. dollar compared to most foreign currencies. The
primary factors affecting pre-tax loss from noncore activities were: 1) the need
to increase Grace's estimate of asbestos-related liability to account for
adverse developments in claims activity in the latter part of 2000; and 2)
new environmental risks related to Grace's former mining operations.
NET SALES
The following table identifies the year-over-year increase or decrease in sales
attributable to changes in product volumes, product prices and/or mix, and the
impact of foreign currency translation.
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NET SALES 2001 AS A PERCENTAGE
VARIANCE ANALYSIS INCREASE (DECREASE) FROM 2000
===============================================================
VOLUME PRICE/MIX TRANSLATION TOTAL
--------- ---------- ------------ ========
Davison Chemicals 9.1% 4.5% (2.1%) 11.5%
Performance
Chemicals ..... 6.6% 0.5% (2.7%) 4.4%
Net sales........ 7.8% 2.6% (2.5%) 7.9%
- -------------------- --------- ---------- ------------ --------
BY REGION:
North America.. 0.5% 1.6% (0.3%) 1.8%
Europe......... 14.4% 2.9% (3.8%) 13.5%
Latin America.. (1.3%) 9.7% (5.3%) 3.1%
Asia Pacific... 28.5% 2.1% (7.2%) 23.4%
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2000 AS A PERCENTAGE
INCREASE (DECREASE) FROM 1999
===============================================================
Davison Chemicals 5.2% 4.4% (5.2%) 4.4%
Performance
Chemicals...... 3.8% 0.4% (2.5%) 1.7%
Net sales........ 4.5% 2.3% (3.8%) 3.0%
- -------------------- --------- ---------- ------------ --------
BY REGION:
North America.. 3.2% 2.2% -- 5.4%
Europe......... 3.1% 2.6% (12.5%) (6.8%)
Latin America.. 26.8% 2.9% (2.8%) 26.9%
Asia Pacific... 3.6% 2.3% (0.5%) 5.4%
- -------------------- --------- ---------- ------------ --------
In 2001 and 2000, volume was the primary factor affecting the change in net
sales, most of which is attributable to three acquired businesses in 2001 and
six acquired businesses in 1999 and 2000. These acquired businesses added $71.9
million in sales in 2001 (4.5 percentage points of the year-over-year volume
increase), and $49.6 million in 2000 (4.0 percentage points of the
year-over-year volume increase). Increases in the price/mix profile in both
years were offset by the negative impact of foreign currency translation.
In 2001 and 2000, each business segment experienced volume growth. The most
significant volume increases in 2001 were experienced in catalyst products and
silica products (9.3% and 8.4%, respectively) primarily attributable to new
product penetration, acquisitions and the Advanced Refining Technologies ("ART")
joint venture. In 2000, the silica products and construction chemicals groups
experienced significant volume increases, primarily attributable to acquisitions
of 6.3% and 6.2%, respectively.
In 2001, the most significant volume increases were experienced in Asia Pacific
and Europe, attributable to acquisitions and the ART joint venture. In 2000, the
volume increases were greatest in Latin America, reflecting the acquisition of
an admixtures business in Chile in late 1999. Reported net sales for Grace's
international operations were negatively impacted from the translation of
foreign currencies in relation to the U.S. dollar. Approximately 45% of Grace's
reported net sales were generated by its international operations. The 2001
impact related to an approximate 5% devaluation in foreign currency exchange
rates.
F-38
PRE-TAX INCOME FROM CORE OPERATIONS
Pre-tax income from core operations was $187.5 million for the year ended
December 31, 2001, compared to $187.1 million for the year ended December 31,
2000, an increase of 0.2%. Pre-tax income from core operations in 2000 was $9.0
million or 5.0% higher than 1999.
Operating income of the Davison Chemicals segment for 2001 was $128.7 million,
down 2.2% versus 2000. Davison's operating margin of 14.7% was down 2.1 points
compared to the prior year. Operating income of the Performance Chemicals
segment for 2001 was $101.1 million, up 5.9% from 2000, with an operating margin
of 11.9%, up 0.2 points compared to the prior year. Operating income of the
Davison Chemicals segment for 2000 was $131.6 million, up 5.9% from 1999.
Davison's operating margin was 16.8% compared to 16.5% in 1999. Operating income
of the Performance Chemicals segment for 2000 was $95.5 million, down 9.7% from
1999, with an operating margin of 11.7% in 2000 versus 13.2% in 1999.
Higher energy costs and the negative effects of currency translation served to
dampen the year-over-year performances in both 2001 and 2000. In the first half
of 2001 and the last half of 2000, the rise in natural gas prices (used by
Davison Chemicals as part of its manufacturing process) and transportation fuel
prices (impacting distribution costs for Performance Chemicals) had an adverse
affect on profit margins. These energy sources are also a significant factor in
the cost of many raw materials used by both business segments. Selling price
increases did not keep pace with the rapid rise in these energy related costs.
Corporate operating costs primarily reflect corporate headquarters functions
that support core operations. Corporate operating costs for the year ended
December 31, 2001 totaled $42.3 million, compared to $40.0 million for the prior
period, a 5.8% increase. Corporate operating costs were $52.0 million in 1999.
The improvement in corporate operating costs since 1999 is primarily
attributable to the relocation of Grace's headquarters from Florida to Maryland
in 1999, which reduced occupancy costs and facilitated the consolidation of
corporate support functions.
During 2001 and 2000, Grace continued to focus on productivity improvements. The
results of its productivity initiatives are reflected in: 1) sales - through
added plant capacity by improving production processes; 2) costs through
efficiency gains and purchasing synergies; 3) working capital - by improving
collection process and inventory management; and 4) capital avoidance - by
maximizing asset utilization. Grace's goal is to offset annual base inflationary
increases in personnel, purchased materials and process costs through
productivity improvements. This goal was achieved in both 2001 and 2000.
PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES
The net income from noncore activities totaled $3.0 million for 2001 compared to
a net loss from noncore activities of $188.4 million for 2000. Income from
noncore activities for 2001 includes $7.7 million from the sales of Grace's
remaining cost-based investment in Cross Country Staffing, offset by accruals
for legal and environmental matters primarily related to Grace's former mining
operations. The loss for 2000 included the provision of $208.0 million for
asbestos-related litigation, net of insurance, as well as accruals for legal and
environmental matters related to Grace's former mining operations. These items
were offset by a $19.0 million gain on the sale of marketable securities, and a
$5.5 million gain on the sale of noncore assets.
REORGANIZATION EXPENSES
Net reorganization expenses for the year ended December 31, 2001 of $15.7
million consist primarily of legal and consulting fees incurred by Grace and
three creditors' committees related to the Chapter 11 Filing.
INTEREST AND INCOME TAXES
Net interest expense for 2001 was $32.5 million, an increase of 76.6% from net
interest expense of $18.4 million in 2000. This increase was attributable to the
continued accrual of pre-petition contractual interest on debt subject to
compromise as well as the interest expense on the DIP facility. Net interest
expense increased 54.6% in 2000 over the 1999 amount of $11.9 million. Average
debt levels were $205.0 million higher in 2001 compared to 2000; and $149.5
million higher in 2000 compared to 1999.
The Company's provision for income taxes at the federal corporate rate of 35%
was $49.8 million for the year ended December 31, 2001. The primary difference
between this amount and the overall provision for income taxes of $63.7 million
is attributable to current period interest on tax contingencies and the
non-deductibility of certain Chapter 11 reorganization expenses. In 2000, the
Company's benefit from income taxes at the federal corporate rate was $6.9
million. The primary difference between this amount and the overall
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provision for income taxes of $70.0 million is attributable to an accrual for
potential additional taxes and interest relating to the tax deductibility of
interest on life insurance policy loans. In 1999, the Company's provision for
income taxes at the federal corporate rate was $71.2 million. The primary
difference between this amount and the provision for income taxes at the
effective rate of $73.2 million were state and local income taxes.
DAVISON CHEMICALS
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% Change
NET SALES 2001 2000 Fav(Unfav)
- ------------------------- ------------ ---------- ------------
Catalyst products ... $ 624.8 $ 562.7 11.0%
Silica products...... 249.3 221.2 12.7%
========================= ============ ========== ============
TOTAL DAVISON CHEMICALS $ 874.1 $ 783.9 11.5%
========================= ============ ========== ============
% Change
2000 1999 Fav(Unfav)
- ------------------------- ------------ ---------- ------------
Catalyst products ... $ 562.7 $ 538.2 4.6%
Silica products...... 221.2 212.9 3.9%
========================= ============ ========== ============
TOTAL DAVISON CHEMICALS $ 783.9 $ 751.1 4.4%
========================= ============ ========== ============
Recent Acquisitions and Joint Ventures
On March 2, 2001, Grace acquired The Separations Group, a manufacturer of
chromatography columns and separations media, with sales of approximately $6
million in 2001. On March 28, 2001, a German subsidiary of Grace acquired the
precipitated silicas business of Akzo-PQ Silicas, with sales of approximately
$21 million in 2001.
On March 1, 2001, Grace and Chevron Products Company ("Chevron") formed ART, a
joint venture to develop and market hydroprocessing catalysts globally. ART
conducts business through two distribution companies and one operating company.
Grace has a majority ownership interest in and controls both distribution
companies; therefore, for financial reporting purposes the assets, liabilities
and results of operations of these entities are included in Grace's Consolidated
Financial Statements. Grace does not exercise governance control over the
operating company; therefore, the assets, liabilities and results of operations
of this company are not consolidated in Grace's financial statements. The equity
income or loss related to the operating company is reported in "Other Income" in
Grace's Consolidated Statement of Operations. As of December 31, 2001, the
operating company had no debt, and its liabilities included only working capital
items. ART has agreements with both Grace and Chevron under which each provides
certain administrative and research and development services to ART.
Administrative costs of $1.5 million and research and development expenses of
$5.8 million are reflected in the unconsolidated financial statements of ART.
On January 31, 2000 Grace acquired Crosfield Group's hydroprocessing catalysts
business from Imperial Chemical Industries. This business had approximately $14
million of sales in 2000. On June 28, 2000, Grace acquired the Ludox colloidal
silica business from the DuPont Company, which had sales of approximately $13
million in 2000.
Sales
The Davison Chemicals segment is a leading global supplier of catalysts and
silica products. Catalyst products represented approximately 36%, 35% and 34% of
2001, 2000 and 1999 total Grace sales, respectively. This segment includes fluid
cracking catalysts ("FCC") and additives used in petroleum refineries to convert
distilled crude oil into transportation fuels and other petroleum-based
products, hydroprocessing catalysts which upgrade heavy oils and remove certain
impurities, polyolefin catalysts, which are essential components in the
manufacture of polyethylene used in products such as high-performance plastic
pipe and other plastic parts, and chemical catalysts, which are used in a
variety of chemical processes. Silica products, which represented 15% of 2001
total Grace sales (14% in 2000 and 1999), are used in a wide range of
biotechnology, industrial and consumer applications such as seperations,
coatings, food processing, plastics, adsorbents and personal care products.
Net sales of Davison Chemicals increased by 11.5% in 2001, despite the effect of
the currency weakness in Europe, Asia Pacific and Latin America compared with
the U.S. dollar, which adversely impacted 2001 sales by $16.6 million.
Excluding the impact of currency translation, sales increased by 13.6%.
In 2001, catalyst products sales were $624.8 million, an increase of 11.0% over
2000. Excluding the ART joint venture and hydroprocessing catalysts, which are
now part of the joint venture (as discussed above) catalyst products sales for
the year 2001 were $531.9 million, or a 12.3% increase over 2000. Excluding
ART/hydroprocessing and the negative impact of currency translation, 2001 sales
were up 14.1%. This increase mainly reflected sales of new FCC's and additives
for value-added refinery applications.
F-40
Silica products sales in 2001 were up 12.7% to $249.3 million compared with
2000. Excluding The Separations Group, Akzo-PQ Silicas and the collodial silica
acquisitions discussed above, silica products sales decreased 5.8% to $208.4
million. Excluding acquisitions and the negative impact of currency translation,
2001 sales decreased 2.5%, mainly reflecting recessionary pressures on end-use
segments such as plastics and coatings, which are most affected by the general
level of economic activity.
In 2000, catalyst products sales increased 4.6% compared to 1999, which was as a
result of volume gains in Latin America, Asia Pacific and Europe partially
offset by volume declines in North America. Silica products sales were up 3.9%
in 2000 versus 1999, as volume gains in coatings and adsorbents were offset by
unfavorable currency translation, mainly for Europe.
Operating Earnings
Pre-tax operating income of $128.7 million reflected a 2.2% decrease compared
with 2000. The decrease in operating income was primarily attributable to higher
energy and raw material costs, offset by productivity initiatives.
Pre-tax operating income of $131.6 million in 2000 improved by 5.9% over $124.3
million in 1999. The improvement in operating income was primarily attributable
to cost savings generated from productivity initiatives, which served to fully
offset increased energy costs and the negative impact of foreign currency
translation. Operating margins improved 0.3 percentage points to 16.8%.
PERFORMANCE CHEMICALS
==============================================================
% Change
NET SALES 2001 2000 Fav(Unfav)
- ------------------------- ------------ ---------- ------------
Construction chemicals $ 365.1 $ 348.7 4.7%
Building materials... 239.9 228.0 5.2%
Sealants and coatings 244.1 236.8 3.1%
- ------------------------- ------------ ---------- ------------
TOTAL PERFORMANCE
CHEMICALS........... $ 849.1 $ 813.5 4.4%
========================= ============ ========== ============
% Change
2000 1999 Fav(Unfav)
- ------------------------- ------------ ---------- ------------
Construction chemicals $ 348.7 $ 334.3 4.3%
Building materials... 228.0 224.3 1.6%
Sealants and coatings 236.8 241.2 (1.8%)
- ------------------------- ------------ ---------- ------------
TOTAL PERFORMANCE
CHEMICALS........... $ 813.5 $ 799.8 1.7%
========================= ============ ========== ============
Recent Acquisitions and Joint Ventures
On July 31, 2001, a French subsidiary of Grace acquired Pieri S.A., a leading
supplier of specialty chemicals to the European construction industry. This
business had sales of approximately $10 million for 2001.
On December 22, 1999, Grace acquired Sociedad Petreos S.A.'s "Polchem" concrete
admixture and construction chemicals business from Cemento Polpaico S.A. Chile,
an affiliate of Holderbank of Switzerland. For 2000, this business had sales of
approximately $6 million. On March 24, 2000, Grace acquired International
Protective Coatings Corp. ("IPC"), which contributed approximately $5 million in
sales of fire protection products for the year 2000. On July 20, 2000, Grace
acquired the Hampshire Polymers business from the Dow Chemical Company. This
business had sales of approximately $12 million for 2000.
Sales
The Performance Chemicals segment was formed in 1999 by combining the previously
separate business segments of Grace Construction Products and Darex Container
Products. These businesses were consolidated under one management team to
capitalize on infrastructure synergies from co-location of headquarters and
production facilities around the world. The major product groups of this
business segment include specialty construction chemicals and specialty building
materials used primarily by the nonresidential construction industry; and
container sealants and coatings for food and beverage packaging, and other
related products. Construction chemicals, which represented 21% of 2001 total
Grace sales (22% in 2000 and 1999) add strength, control corrosion, and enhance
the handling and application of concrete, and reduce the manufacturing cost and
improve the quality of cement. Building materials, which represented 14% of
2001, 2000 and 1999 total Grace sales, prevent water damage to structures and
protect structural steel against collapse due to fire. Sealants and coatings,
which represented 14% of 2001 total Grace sales (15% in 2000 and 16% in 1999)
seal beverage and food cans, and glass and plastic bottles, and protect metal
packaging from corrosion and the contents from the influences of metal.
Net sales of Performance Chemicals products increased 4.4% in 2001 compared with
2000. The effect of currency weakness in Europe, Asia Pacific and Latin America
compared with the U.S. dollar
F-41
adversely impacted sales by $20.3 million for 2001. Excluding the impact of
currency translation, sales increased 7.0%.
In 2001, sales of construction chemicals were $365.1 million, an increase of
4.7% over 2000. Excluding the Pieri S.A. acquisition discussed above, 2001
sales for construction chemicals were $355.0 million, up 1.8%. Excluding Pieri
and unfavorable currency translation, the year-over-year increase was 4.3%.
This increase was achieved in all major regions and was driven by penetration
of high-performance products for concrete and cement, especially in value
added water reducers, grinding aids and quality improvers.
Sales of building materials increased 5.2% to $239.9 million in 2001 compared
with 2000. Excluding the impact of the IPC acquisition, discussed above, and
unfavorable currency translation, sales were up 5.8%. This growth was
attributable to increased sales in North America, primarily roofing
underlayments and specialty structural waterproofing.
Sales of sealants and coatings increased 3.1% to $244.1 million in 2001.
Excluding the Hampshire Polymers acquisition, discussed above, and unfavorable
currency translation, sales were up 0.2%, primarily from volume gains in
closure sealants and coatings.
In 2000, Performance Chemicals sales increased 1.7% compared to 1999, as sales
increases in construction chemicals and building materials were partially offset
by a sales decrease in sealants and coatings. Sales of construction chemicals
were up 4.3% in 2000, driven by penetration of high-performance products. Sales
of building materials were up 1.6% in 2000, reflecting new product sales in fire
protection and volume gains in roofing underlayments. Sealants and coatings
sales decreased 1.8% in 2000 versus 1999. Unfavorable foreign exchange more than
offset volume gains in can sealants and coatings.
Operating Earnings
Pre-tax operating income increased 5.9% from $95.5 million in 2000 to $101.1
million in 2001. This increase was attributable to higher sales and savings
generated from productivity programs, more than offsetting higher energy and raw
material costs.
Pre-tax operating income of $95.5 million in 2000 was down 9.7% compared to
pre-tax operating income of $105.8 million in 1999. This decrease in pre-tax
operating income was caused by increased transportation costs in construction
chemicals and higher petroleum-based raw materials costs in both building
materials and container products, offset by productivity gains.
- --------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
CROSS COUNTRY STAFFING
In July 1999, Grace completed the sale of substantially all of its interest in
Cross Country Staffing ("CCS"), a provider of temporary nursing and other
healthcare services, for total cash proceeds of $184.6 million. The Company's
investment in CCS had been accounted for under the equity method. The sale
resulted in a net pre-tax gain of $76.3 million ($32.1 million after tax),
including the cost of the Company's purchase of interests held by third
parties in CCS and the amount payable under CCS's phantom equity plan prior to
closing under the sale transaction. The gain and operations of CCS prior to
the sale are included in "Income from discontinued operations, net of tax" in
the Consolidated Statement of Operations. Certain contingent liabilities,
primarily related to tax matters of CCS, have been retained by the Company and
are included in "Liabilities subject to compromise" in the Consolidated
Balance Sheet. In February 2001, Grace sold its remaining interest in CCS,
recognizing a $7.7 million gain which is included in "Other income" on the
Consolidated Statement of Operations.
RETAINED OBLIGATIONS
Under certain divestiture agreements, Grace has retained contingent
obligations that could require Grace in the future to accrue for estimated
costs of defense or loss under generally accepted accounting principles.
These obligations primarily consist of: (1) future lease payments and other
retained contractual commitments, (2) net asset settlements, (3) indemnities
and other guarantees, and (4) contingent risks under pending or possible
litigation.
Grace's recorded liability for such matters was $80.5 million at December 31,
2001. Grace's Chapter 11 proceedings could impact the amount and timing of
resolution of these retained obligations. Grace is unable to predict whether
or to what extent the ultimate resolution of these matters will differ from
recorded amounts.
F-42
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
The charts below are intended to enhance understanding of Grace's overall
financial position by separately displaying assets, liabilities and cash flows
related to core operations from those related to noncore activities. The
Company's management structure and activities are tailored to the separate
focus and accountability of core operations and noncore activities.
CORE OPERATIONS
The Company had a net asset position supporting its core operations of
$1,299.6 million at December 31, 2001, compared to $1,053.6 million at
December 31, 2000 (including the cumulative translation account reflected in
Shareholders' Equity (Deficit) of $164.8 million for 2001 and $140.2 million
for 2000). After-tax return on capital invested in core operations decreased
by 2.4 percentage points in 2001, due to a combination of higher investment
and only a small improvement in earnings. Net cash flows from core operations
decreased primarily due to investment in new businesses.
============================================================
CORE OPERATIONS
(Dollars in millions) 2001 2000
============================================================
BOOK VALUE OF INVESTED CAPITAL
Receivables ..................... $ 296.3 $ 187.4
Inventory ....................... 174.8 144.2
Properties and equipment, net ... 582.9 596.2
Intangible assets and other...... 616.8 455.7
------------------------
ASSETS SUPPORTING CORE OPERATIONS 1,670.8 1,383.5
Accounts payable and accruals.... (371.2) (329.9)
------------------------
CAPITAL INVESTED IN CORE OPERATIONS $ 1,299.6 $ 1,053.6
After-tax return on average
invested capital................. 9.6% 12.0%
------------------------
CASH FLOWS:
Pre-tax operating income ........ $ 187.5 $ 187.1
Depreciation and amortization ... 89.0 87.8
------------------------
PRE-TAX EARNINGS BEFORE
DEPRECIATION AND AMORTIZATION .. 276.5 274.9
Working capital and other changes (60.3) (63.0)
-------------------------
CASH FLOW BEFORE INVESTING....... 216.2 211.9
Capital expenditures ............ (62.9) (64.8)
Businesses acquired ............. (86.3) (52.6)
-------------------------
NET CASH FLOW FROM CORE OPERATIONS $ 67.0 $ 94.5
=============================================================
NONCORE ACTIVITIES
The Company has a number of financial exposures originating from past
businesses, products and events. These obligations arose from transactions
and/or business practices that date back to when Grace was a much larger
company, when it produced products or operated businesses that are no longer
part of its revenue base, and when government regulations and scientific
knowledge were much less advanced than today. The table below summarizes the net
noncore liability at December 31, 2001 and 2000 and the net cash flow from
noncore activities for the years then ended:
=============================================================
NONCORE ACTIVITIES
(Dollars in millions) 2001 2000
- -------------------------------------------------------------
NONCORE LIABILITIES:
Asbestos-related liabilities.. $ (996.3) $ (1,105.9)
Asbestos-related insurance
receivable.................. 293.4 372.0
---------------------------
Asbestos-related liability, (702.9) (733.9)
net .......................
Environmental remediation..... (153.1) (174.9)
Postretirement benefits....... (169.1) (189.1)
Retained obligations and other (80.6) (78.1)
---------------------------
NET NONCORE LIABILITY......... $ (1,105.7) $ (1,176.0)
=============================================================
CASH FLOWS:
Pre-tax income (loss) from
noncore activities.......... $ 3.0 $ (188.4)
Provision for
asbestos-related
litigation, net of
insurance recovery.......... -- 208.0
Other changes................. 0.5 (10.7)
Cash spending for:
Asbestos-related
litigation, net of
insurance recovery......... (30.8) (196.2)
Environmental remediation... (28.9) (47.2)
Postretirement benefits..... (22.3) (23.0)
Retained obligations and
other...................... (9.1) (24.5)
---------------------------
NET CASH FLOW FROM NONCORE
ACTIVITIES ................ $ (87.6) $ (282.0)
=============================================================
As described under "Voluntary Bankruptcy Filing," the resolution of most of
these noncore recorded and contingent liabilities will be determined through the
Chapter 11 proceedings. Grace cannot predict with any certainty how, and for
what amounts, any of such estimates will be resolved. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at December 31, 2001.
ASBESTOS-RELATED MATTERS
Grace is a defendant in lawsuits relating to previously sold
asbestos-containing products. In 2001, Grace paid $30.8 million for the
defense and disposition of asbestos-related property damage and bodily injury
litigation, net of amounts received under settlements with insurance carriers,
compared to net expenditures in 2000 of $196.2 million. At December 31, 2001,
Grace's balance sheet reflects a gross liability of $996.3 million, ($702.9
million net of insurance). This liability represents management's estimate of
the undiscounted net cash outflows in satisfaction of
F-43
Grace's current and expected asbestos-related claims, based on facts and
circumstances existing prior to the Filing. Changes to the recorded amount of
such liability will be based on Chapter 11 developments and management's
assessment of the claim amounts that will ultimately be allowed by the
Bankruptcy Court.
In the fourth quarter of 2000, Grace recorded a charge of $208.0 million (net of
expected insurance recovery) to account for several adverse developments in its
asbestos-related litigation, including: a significant increase in bodily injury
claims; higher than expected costs to resolve certain property damage and bodily
injury claims; and defense costs related to new class-action lawsuits alleging
damages from a former attic insulation product not previously subject to
property damage litigation. In addition, during 2000, five co-defendant
companies in asbestos bodily injury litigation petitioned for bankruptcy court
protection. These developments contributed to the risk that Grace would be
subject to more claims than previously projected, with higher settlement
demands. See Notes 1 and 3 to the Consolidated Financial Statements for further
information concerning asbestos-related lawsuits and claims.
The Consolidated Balance Sheet at December 31, 2001 includes total amounts due
from insurance carriers of $293.4 million pursuant to settlement agreements with
insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 bankruptcy proceedings could also affect recovery
timing and amounts.
Grace intends to address all of its pending and future asbestos-related claims
as part of a plan of reorganization under Chapter 11. Grace will seek to have
the Bankruptcy Court establish a process to assess and appropriately quantify
the numerous property damage and bodily injury claims against it. Measurement of
Grace's asbestos-related liabilities will be materially affected by Bankruptcy
Court rulings, the outcome of litigation and negotiations among interested
parties.
ENVIRONMENTAL MATTERS
Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations. Expenses
of continuing operations related to the operation and maintenance of
environmental facilities and the disposal of hazardous and nonhazardous wastes
totaled $31.7 million in 2001, $26.4 million in 2000 and $31.1 million in 1999.
Such costs are estimated to be between $32.0 and $37.0 million in each of 2002
and 2003. In addition, capital expenditures for continuing operations relating
to environmental protection totaled $3.8 million in 2001, $4.0 million in 2000
and $5.7 million in 1999. Capital expenditures to comply with environmental
initiatives in future years are estimated to be between $5.0 and $7.0 million in
each of 2002 and 2003. Grace also has incurred costs to remediate
environmentally impaired sites. These costs were $28.9 million in 2001, $47.2
million in 2000 and $25.0 million in 1999. These amounts have been charged
against previously established reserves. At December 31, 2001, Grace's liability
for environmental investigatory and remediation costs related to continuing and
discontinued operations totaled $153.1 million, as compared to $174.9 million at
December 31, 2000. Future pre-tax cash outlays for remediation costs are
expected to average between $25.0 and $40.0 million over the next few years.
In addition, Grace is facing environmental lawsuits related to previously
operated vermiculite mining and processing sites that could result in a material
future charge to Grace's earnings, the amount of which is not currently
determinable. The EPA reported that it had expended approximately $25.4 million
in response costs in and around Libby, Montana (the site of a former Grace
vermiculite mine) through June 2001. Grace expects that the EPA may incur
significant additional response costs, as Libby is expected to be added to the
EPA's National Priorities List of Superfund sites. The EPA is also evaluating
environmental risks at several vermiculite processing sites throughout the U.S.
which processed vermiculite from Libby, Montana, and has made claims against
Grace to fund clean-up activities. Grace intends to review the EPA's actions and
cost claims to determine whether they are justified and reasonable. These
lawsuits are not subject to the automatic stay provided under Section 362 of the
U.S. Bankruptcy Code.
PENSION BENEFITS
The decline in value of the U.S. and global equity markets, coupled with a
decline in interest rates, primarily in the second half of 2001, created a
shortfall between the accounting measurement of Grace's U.S. salaried qualified
pension obligations and the market value of dedicated pension assets. This
condition required a balance sheet adjustment in shareholders' equity (deficit)
at December 31, 2001 of $124.4 million, and will increase Grace's pension
F-44
expense by approximately $16 million in 2002. No funding is required in 2002,
and no additional pension charge with respect to such obligations was required
in 2001.
POSTRETIREMENT BENEFITS
Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertain to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred. Effective January 1,
2002, Grace's postretirement medical plan was amended to increase the
contribution required to be paid by the retirees to a minimum of 40% of the
calculated premium.
RETAINED OBLIGATIONS OF DIVESTED BUSINESSES
The principal retained obligations of divested businesses relate to contractual
indemnification and to contingent liabilities not passed on to the new owner. At
December 31, 2001, Grace had recorded $80.5 million to satisfy such obligations.
Prior to Grace's Chapter 11 filing, $43.5 million of this total was expected to
be paid over periods ranging from 2 to 10 years. The remainder represents
estimates of probable cost to satisfy specific contingencies that were expected
to be resolved over the next few years. However, most of these matters are now
subject to the automatic stay of the Bankruptcy Court and will be resolved as
part of Grace's Chapter 11 proceedings.
TAX MATTERS
The Internal Revenue Service ("IRS") is challenging the deductions taken by a
number of companies throughout the United States related to interest on policy
loans under corporate owned life insurance ("COLI") policies for years prior to
January 1, 1999. In 2000 Grace paid $21.2 million of tax and interest related to
this issue for tax years 1990-1992. Subsequent to 1992, Grace deducted
approximately $163.2 million in interest attributable to COLI policy loans.
Grace filed a claim for refund of the amount paid to date and will contest any
future IRS assessments on the grounds that these insurance policies and related
loans had, and continue to have, a valid business purpose, that the COLI
policies have economic substance and that interest deductions claimed were in
compliance with tax laws in effect at the time.
During the first quarter of 2001, a U.S. District Court ruling, American
Electric Power, Inc. vs. United States, denied interest deductions of a
taxpayer in a similar situation. American Electric Power, Inc. is currently
appealing this ruling. However, in light of the ruling, Grace recorded an
additional accrual in 2000 for tax exposure and related interest, and
continues to accrue interest on estimated amounts that may be due. There are
two additional COLI cases decided against the taxpayer currently on appeal.
The taxpayer in Winn-Dixie Stores, Inc. v. Commisioner of Internal Revenue has
petitioned for a rehearing in the United States Court of Appeals and is
seeking appeal in the United States Supreme Court. CM Holdings, Inc. v.
Internal Revenue Service is currently on appeal to the United States Court of
Appeals. Finally, Dow Chemical Company has filed an action to recover income
taxes and interest paid in connection with its COLI policies, and that case is
currently pending in the United States District Court. Grace is monitoring
these cases and will continue to reassess its legal posture as the cases
evolve.
The IRS also has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against CCHP, Inc. ("CCHP"), a Grace subsidiary
that formerly operated a temporary staffing business for nurses and other
healthcare personnel. The assessments, aggregating $21.8 million, were made in
connection with a meal and incidental expense per diem plan for traveling
healthcare personnel that was in effect through 1999. The IRS contends that
certain per diem meals and incidental expenses and lodging benefits provided to
traveling healthcare personnel to defray the expenses they incurred while
traveling on business should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS, per diem and
expense allowance plans. Grace expects that the IRS will make additional
assessments for the 1996 through 1999 periods as well. The matter is currently
pending in the U.S. Court of Claims.
Grace has received notification from a foreign taxing authority assessing tax
deficiencies plus interest relating to the purchase and sale of foreign bonds in
1989 and 1990. This assessment, totaling $10.5 million, is related to the
Bekaert Group, which Grace sold in 1991 but as to which Grace retained liability
for tax deficiencies attributable to tax periods prior to the sale. The matter
is currently before the foreign tax authorities, but no decision has been
rendered.
F-45
As a result of Grace's Chapter 11 filing, certain tax matters related to open
tax years, including COLI interest deductions, could become the direct
obligations of predecessor companies that now own Grace's former healthcare
and packaging businesses. One or both of these companies could be directly
liable to tax authorities for Grace's tax deficiencies. Pursuant to agreements
relating to each transaction, Grace may be required to indemnify both parties
for taxes relating to periods prior to the closing of such transactions. Any
indemnification obligation that arises as a result of these matters would be a
pre-petition liability subject to the Chapter 11 proceedings.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
CASH FLOW
Grace's net cash flow from core operations before investing was $216.2 million
in 2001 compared to $211.9 million in 2000. Acquisition investments aggregated
$86.3 million in 2001 compared to $49.0 million in 2000. Total Grace capital
expenditures for 2001 and 2000 were $62.9 million and $64.8 million,
respectively, substantially all of which was directed toward its business
segments and of a routine nature. In 1999, Grace made capital expenditures of
$82.5 million. Grace's cash flow from core operations in 2002 is expected to be
relatively stable and consistent with recent years. Grace expects to continue to
invest excess cash flow and/or other available capital resources in its core
business base. These investments are likely to be in the form of added plant
capacity, product line extensions and geographic market expansions. Such
investments may be subject to Bankruptcy Court approval and Chapter 11 creditor
committee review. Grace projects that 2002 will be another challenging year with
the first half continuing to be affected by the weak global economy, improving
somewhat in the second half. Grace has taken steps to improve productivity and
manage costs and, at this time, projects 2002 cash flow from core operations
comparable to 2001.
The pre-tax cash outflow of noncore activities was $80.0 million in 2001
compared to an outflow of $270.1 million in 2000. The decreased cash outflow was
primarily due to lower asbestos-related payments in 2001 as compared to 2000,
resulting from the stay on payments for asbestos-related claims after the Filing
Date. Expenditures for environmental remediation were lower in 2001 due partly
to Grace's Chapter 11 proceedings and partly to the completion of remediation
work on certain sites. Postretirement benefit payments, which are allowed to be
paid under Grace's Chapter 11 proceedings, were consistent with the prior year.
The payments for retained obligations of divested businesses and other
contingencies were lower in 2001 due to the stay of litigation and to the
one-time nature of these matters.
Cash flows used for investing activities in 2001 were $133.3 million, compared
to cash used of $97.6 million in 2000, and cash provided of $89.4 million in
1999. Net cash outflows in 2001 were primarily impacted by businesses acquired
in 2001 of $84.4 million and by capital expenditures as discussed below. Net
cash outflows of 2000 consisted of $49.0 million in businesses acquired, capital
expenditures and net investment in life insurance policies of $11.1 million. In
1999, the sale of Cross Country Staffing generated net cash of $184.6 million.
Proceeds from disposals of assets in 2001 were also lower than 2000, with $7.6
million in 2001, $11.9 million in 2000 and $40.6 million in 1999. Included in
the 1999 amount was the sale of the corporate aircraft for $20.4 million and the
sale of certain real properties for a total of $17.1 million.
Net cash provided by financing activities in 2001 was $123.2 million as compared
to $239.9 million provided in 2000. This principally represents borrowings under
credit facilities of $93.6 million, net of repayments, to fund investments in
acquired businesses, capital expenditures and noncore obligations. In 2000,
$47.3 million used to purchase 4.8 million of the Company's shares as part of
share repurchase programs, was partially offset by proceeds from the exercise of
stock options of $5.8 million. Net cash used for financing activities of $80.9
million in 1999 primarily related to the purchase of treasury stock ($95.3
million) and the net financing activity of discontinued operations ($27.5
million), offset by borrowings under credit facilities, net of payments and the
exercise of stock options, $18.7 and $26.6 million respectively.
LIFE INSURANCE
Grace is the beneficiary of life insurance policies on certain current and
former employees with benefits in force of approximately $2,291.0 million and a
net cash surrender value of $75.6 million at December 31, 2001. This net cash
surrender value is comprised of $477.5 million in policy gross cash value offset
by $401.9 million of policy loans. The policies were acquired to fund various
employee benefit programs and other
F-46
long-term liabilities and are structured to provide cash flows (primarily
tax-free) over an extended period. The Company intends to use policy cash
flows, which are actuarially projected to range from $15 million to $45
million annually over the policy terms, to fund (partially or fully) noncore
liabilities and to earmark gross policy cash value as a source of funding for
noncore obligations.
DEBT AND OTHER CONTRACTUAL OBLIGATIONS
Total debt outstanding at December 31, 2001 was $532.3 million. As a result of
the Filing, Grace is now in default on $501.3 million of such debt, which has
been included in "Liabilities subject to compromise" as of December 31, 2001.
The automatic stay provided under the Bankruptcy Code prevents the Company's
lenders from taking any action to collect the principal amounts as well as
related accrued interest. However, Grace will continue to accrue and report
interest on such debt during the Chapter 11 proceedings (unless further
developments lead management to conclude that it is probable that such interest
will be compromised).
In addition, Grace's accounts receivable securitization program was terminated
effective May 14, 2001. As a result of the Filing, outstanding balances of
approximately $65.3 million were satisfied under the terms of the program
through the use of pre-petition trade receivables collected during the period
from the Filing Date to early May 2001. During the period from the Filing Date
to the termination of the program, Grace compensated for the lack of access to
trade receivables collections by borrowing under the DIP facility.
At December 31, 2001, Grace had gross financial assurances outstanding of $261.2
million, comprised of $149.2 million of gross surety bonds issued by various
insurance companies and $112.0 million of standby letters of credit issued by
various banks. Of the standby letters of credit, $29.4 million act as collateral
for surety bonds, thereby reducing Grace's overall obligations under its
financial assurances to a net amount of $231.8 million. These financial
assurances were established for a variety of purposes, including insurance and
environmental matters, asbestos settlements and appeals, trade-related
commitments and other matters. Of the net amount of $231.8 million of financial
assurances, approximately $10.1 million were issued by non-Debtor and $221.7
million were issued by the Debtors. Of the amounts issued by the Debtors,
approximately $211.0 million were issued before the Filing Date, with the
remaining $10.7 million being issued under the DIP facility subsequent to the
Filing.
===============================================================
CONTRACTUAL OBLIGATIONS NOT SUBJECT TO COMPROMISE
- ---------------------------------------------------------------
Payments due by Period
-------------------------------------
Less
than 1-3
(Dollars in millions) Total 1 Year Years Thereafter
- ------------------------- ------- -------- -------- ----------
Debt................ $ 7.8 $ 7.8 $ -- $ --
Operating leases.... 62.3 7.8 26.1 28.4
------- -------- -------- ----------
TOTAL CONTRACTUAL CASH
OBLIGATIONS......... $ 70.1 $ 15.6 $ 26.1 $ 28.4
========================= ======= ======== ======== ===========
SOURCES OF LIQUIDITY
To meet its liquidity needs in 2002 and 2003, Grace entered into a
debtor-in-possession loan facility (see "DIP facility" under Note 12 to Grace's
Consolidated Financial Statements) in the aggregate amount of $250 million,
under which Grace had no borrowings as of December 31, 2001. In addition, Grace
had cash and cash equivalents of $181.3 million and cash value of life insurance
(net) of $75.6 million at December 31, 2001. Management believes that Grace's
core operating cash flow together with the DIP facility and the existing liquid
assets will be sufficient to meet the operating needs of Grace over the next
year.
SHARE ACTIVITY
Grace employees currently receive salaries, incentive bonuses, other benefits,
and stock options. Each stock option granted under the Company's stock incentive
plan has an exercise price equal to the fair market value of the Company's
common stock on the date of grant. In 2001, the Company granted a total of
1,339,846 options with an average exercise price of $2.53.
Poor stock price performance in the period leading up to and after the Filing
have diminished the value of the option program to current and prospective
employees, which caused Grace to change its long-term incentive compensation
program into more of a cash-based program. Grace has also sought to address
employee retention issues by providing added compensation to certain employees
and increasing Grace's contribution to its savings and investment plan. For
2001, Grace's pre-tax income from core operations includes an expense of $10.0
million for the Chapter 11 related compensation charges.
In May 2000, the Company's Board of Directors approved a program to repurchase
up to 12,000,000 of the Company's outstanding shares in the open market. Through
December 31, 2000, the Company had acquired 1,753,600 shares of common stock for
$12.2 million under this program (an average price per share of $6.98).
F-47
- --------------------------------------------------------------------------------
INFLATION
- --------------------------------------------------------------------------------
The financial statements are presented on a historical cost basis and do not
fully reflect the impact of prior years' inflation. While the U.S. inflation
rate has been modest for several years, the Company operates in international
economies with both inflation and currency risks. The ability to pass on
inflation costs is an uncertainty due to general economic conditions and
competitive situations. The cost of replacing Grace's property and equipment
today is estimated to be greater than its historical cost. Accordingly,
depreciation expense would be greater if the expense were stated on a current
cost basis.
- --------------------------------------------------------------------------------
THE EURO
- --------------------------------------------------------------------------------
As of January 1, 2001 twelve of the fifteen countries of the European Union had
adopted one common currency, known as the Euro. Grace has operations in ten of
the Euro countries and has complied with the legislation applicable to its
introduction. The Euro conversion has not had and is not expected to have a
material adverse impact on Grace's financial condition or results of operations.
- --------------------------------------------------------------------------------
ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS"), No. 141 "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 supersedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations." The provisions of SFAS No. 141: (1) require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, (2) provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. Grace adopted SFAS No. 141 in
July 2001.
SFAS No. 142 supersedes APB 17, "Intangible Assets," and is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142: (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment, (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the 40 year limitation
on the amortization period of intangible assets that have finite lives.
Grace will adopt the provisions of SFAS No. 142 in its first quarter ending
March 31, 2002. Grace has identified its reporting units as catalyst products,
silica products, specialty construction chemicals, specialty building materials
and specialty sealants and coatings for purposes of measuring impairment under
the provisions of SFAS No. 142. All amounts of goodwill, intangible assets,
other assets, and liabilities have been appropriately classified and allocated
to these reporting units. Amortization expense on goodwill for the year ended
December 31, 2001 was $0.5 million. In connection with the adoption of SFAS No.
142, Grace is in the process of evaluating the useful lives of its existing
intangible assets and anticipates that any changes in the useful lives will not
have a material impact on the results of its operations.
SFAS No. 142 requires that goodwill and certain intangible assets be tested
annually for impairment. An impairment test must be performed at the beginning
of the period of adoption. Grace expects that its goodwill and other intangible
assets will not be impaired.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Assets Retirement
Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 143 requires the accrual of asset retirement
obligations by increasing the initial carrying amount of the related long-lived
asset, and systematically expensing such costs over the asset's useful life. The
standard is effective for fiscal years beginning after June 15, 2002. SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of," and expands the scope of discontinued operations.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. Grace does not expect SFAS No. 143 or 144 to
have material effect on its financial statements.
Grace adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (as amended) for 2001. SFAS No. 133 requires, among
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other things, that all derivative instruments be recognized at fair value as
assets or liabilities in the consolidated balance sheet with changes in fair
value recognized currently in earnings unless specific hedge accounting
criteria are met. At December 31, 2001, the Company did not hold or issue any
derivative financial instruments.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. In addition to the uncertainties referred to in
Management's Discussion and Analysis of Results of Operations and Financial
Condition, other uncertainties include the impact of worldwide economic
conditions; pricing of both the Company's products and raw materials; customer
outages and customer demand; factors resulting from fluctuations in interest
rates and foreign currencies; the impact of competitive products and pricing;
the continued success of Grace's process improvement initiatives; the impact of
tax and legislation and other regulations in the jurisdictions in which the
Company operates; and development in and the outcome of the Chapter 11
proceedings discussed above. Also, see "Introduction and Overview - Projections
and Other Forward-Looking Information" in Item 1 of Grace's current Annual
Report on Form 10-K.
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W. R. GRACE & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in millions)
FOR THE YEAR 2001
========================================================================================================================
Additions/(deductions)
========================================================
Charged/
Balance at (credited) Balance
beginning to costs and Other at end
Description of period expenses net * of period
- --------------------------------------------------------------- -------------- ------------- ------------- ------------
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
Allowances for notes and accounts receivable........... $ 4.4 $ 3.2 $ -- $ 7.6
Allowances for long-term receivables................... 0.8 (0.2) -- 0.6
Valuation allowance for deferred tax assets............ 179.1 (21.1) -- 158.0
RESERVES:
Reserves for divested businesses....................... $ 78.1 $ -- $ 2.4 $ 80.5
=============================================================== ============== ============= ============= =============
FOR THE YEAR 2000
=============================================================== ========================================================
Additions/(deductions)
========================================================
Charged/
Balance at (credited) Balance
beginning to costs and Other at end
Description of period expenses net * of period
- --------------------------------------------------------------- -------------- ------------- ------------- ------------
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
Allowances for notes and accounts receivable........... $ 4.1 $ 0.3 $ -- $ 4.4
Allowances for long-term receivables................... 0.8 -- -- 0.8
Valuation allowance for deferred tax assets............ 153.2 16.4 9.5 179.1
RESERVES:
Reserves for divested businesses....................... $ 99.1 $ 6.2 $ (27.2) $ 78.1
=============================================================== ============== ============= ============= =============
FOR THE YEAR 1999
=============================================================== ========================================================
Additions/(deductions)
========================================================
Charged/
Balance at (credited) Balance
beginning to costs and Other at end
Description of period expenses net * of period
- --------------------------------------------------------------- -------------- ------------- ------------- ------------
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
Allowances for notes and accounts receivable........... $ 5.5 $ (1.4) $ -- $ 4.1
Allowances for long-term receivables................... 17.1 (16.3) -- 0.8
Valuation allowance for deferred tax assets............ 154.7 (1.5) -- 153.2
RESERVES:
Reserves for divested businesses....................... $ 76.4 $ 59.8 $ (37.1) $ 99.1
=============================================================== ============== ============= ============= =============
* Consists of additions and deductions applicable to businesses acquired,
disposals of businesses, bad debt write-offs, foreign currency
translation, reclassifications (including the deconsolidation of amounts
relating to discontinued operations), cash payments for previously
established reserves for divested businesses and miscellaneous other
adjustments.
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EXHIBIT 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a)
(Dollars in millions, except ratios)
(Unaudited)
============================================================================================================================
Years Ended December 31, (b)
==================================================================
2001 2000 (c) 1999 1998 (d) 1997 (e)
- --------------------------------------------------------- ------------- ------------ ------------ ------------ -------------
Net income (loss) from continuing operations......... $ 78.6 $ (89.7) $ 130.2 $ (194.7) $ 85.9
Add (deduct):
Provision for (benefit from) income taxes............ 63.7 70.0 73.2 (28.5) 51.5
Minority interest in income (loss) of majority owned
subsidiaries......................................... 0.6 -- -- -- --
Equity in unremitted losses (earnings) of less than
50%-owned companies.................................. (4.0) (0.5) (0.2) (1.2) (1.0)
Interest expense and related financing costs, including
amortization of capitalized interest................. 39.5 30.6 18.8 37.5 89.6
Estimated amount of rental expense deemed to represent
the interest factor.................................. 2.9 2.9 5.2 5.2 6.9
------------- ------------ ------------ ------------ -------------
Income (loss) as adjusted............................ $ 181.3 $ 13.3 $ 227.2 $ (181.7) $ 232.9
============= ============ ============ ============ =============
Combined fixed charges and preferred stock dividends:
Interest expense and related financing costs, including
capitalized interest................................. $ 37.6 $ 29.1 $ 17.0 $ 37.4 $ 94.4
Estimated amount of rental expense deemed to represent
the interest factor.................................. 2.9 2.9 5.2 5.2 6.9
------------- ------------ ------------ ------------ -------------
Fixed charges........................................ 40.5 32.0 22.2 42.6 101.3
Preferred stock dividend requirements (a)............ -- -- -- -- --
------------- ------------ ------------ ------------ -------------
Combined fixed charges and preferred stock dividends. $ 40.5 $ 32.0 $ 22.2 $ 42.6 $ 101.3
============= ============ ============ ============ =============
Ratio of earnings to fixed charges................... 4.48 (f) 10.23 (f) 2.30
============= ============ ============ ============ =============
Ratio of earnings to combined fixed charges and
preferred stock dividends............................ 4.48 (f) 10.23 (f) 2.30
========================================================= ============= ============ ============ ============ =============
(a) Grace's preferred stocks were retired in 1996.
(b) Certain amounts have been restated to conform to the 2001 presentation.
(c) Includes a pre-tax provision of $208.0 million for asbestos-related
liabilities and insurance coverage. The provision for income taxes
includes a $75.0 million charge for tax and interest relating to tax
deductibility of interest on corporate-owned life insurance policy
loans.
(d) Includes a pre-tax provision of $376.1 for asbestos-related liabilities
and insurance coverage; $21.0 relating to restructuring costs and asset
impairments, offset by a pre-tax gain of $38.2 for the receipt of
insurance proceeds related to environmental matters, partially offset
by a charge to reflect a change in the environmental remediation
strategy for a particular site.
(e) Includes a pre-tax gain of $103.1 on sales of businesses, offset by a
pre-tax provision of $47.8 for restructuring costs and asset
impairments.
(f) As a result of the losses incurred for the years ended December 31,
2000 and 1998, Grace was unable to fully cover the indicated fixed
charges.
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