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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 EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number 1-3720
W. R. GRACE & CO.
Incorporated under the Laws of the I.R.S. Employer Identification No.
State of New York 13-3461988
ONE TOWN CENTER ROAD, BOCA RATON, FLORIDA 33486-1010
407/362-2000
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, $1 par value } New York Stock Exchange, Inc.
Common Stock Purchase Rights } Chicago Stock Exchange, Incorporated
7-3/4% Notes Due 2002 }
(issued by W. R. Grace & Co.-Conn., } New York Stock Exchange, Inc.
a wholly owned subsidiary) and }
related Guarantees }
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in the Proxy Statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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The aggregate market value of W. R. Grace & Co. voting stock held by
nonaffiliates was approximately $6.0 billion at February 1, 1996.
At March 1, 1996, 98,038,423 shares of W. R. Grace & Co. Common Stock, $1
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
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Proxy Statement for Annual Meeting to be
held May 10, 1996 (specified portions) Part III
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business ........................................................... 1
Introduction ..................................................... 1
Strategic Restructuring and Other Growth
Initiatives .................................................... 1
Description of Business .......................................... 5
Discontinued Operations .......................................... 13
Research Activities .............................................. 16
Environmental, Health and Safety Matters ......................... 17
Item 2. Properties ......................................................... 18
Item 3. Legal Proceedings .................................................. 18
Item 4. Submission of Matters to a Vote of Security
Holders .......................................................... 32
Executive Officers .......................................................... 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 33
Item 6. Selected Financial Data ............................................ 35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 35
Item 8. Financial Statements and Supplementary Data ........................ 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 35
PART III
Item 10. Directors and Executive Officers of the
Registrant ....................................................... 35
Item 11. Executive Compensation ............................................. 36
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................................ 36
Item 13. Certain Relationships and Related
Transactions ..................................................... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................. 36
Signatures .................................................................. 43
Financial Supplement ........................................................ F-1
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
W. R. Grace & Co., through its subsidiaries, is primarily engaged in the
packaging and specialty chemicals businesses on a worldwide basis. It has
classified its other businesses as discontinued operations, the most
significant of which are its health care and cocoa businesses.
As used in this Report, the term "Company" refers to W. R. Grace & Co., a
New York corporation, and the term "Grace" refers to the Company and/or one or
more of its subsidiaries. Grace's principal executive offices are located at
One Town Center Road, Boca Raton, Florida 33486-1010, and its telephone number
is 407/362-2000. At year-end 1995, Grace had approximately 21,200 full-time
employees worldwide in its continuing operations (approximately 21,100 in
discontinued operations).
Grace's Consolidated Financial Statements for the three years in the
period ended December 31, 1995 ("Consolidated Financial Statements"), and
certain other financial information included in the Company's 1995 Annual
Report to Shareholders, are set forth in the Financial Supplement to this
Report and incorporated by reference herein.
Information concerning the sales and revenues, pretax operating income and
identifiable assets of Grace's continuing operations by geographic area for
1995, 1994 and 1993 is contained in Note 18 to the Consolidated Financial
Statements in the Financial Supplement.
STRATEGIC RESTRUCTURING AND OTHER GROWTH INITIATIVES
Recent Strategic Initiatives. In mid-1995, Grace announced and began
implementing plans to enhance shareholder value by strengthening its balance
sheet and reducing costs. These objectives are being achieved through (a) the
pending dispositions of Grace's health care business and water treatment and
process chemicals business (discussed below); (b) the anticipated use of the
proceeds from these transactions to substantially reduce indebtedness, to
repurchase up to 20% of the Company's Common Stock, and to invest in Grace's
core businesses; (c) a worldwide restructuring program to streamline processes
and thereby reduce expenses by $100 million annually (with further actions
being taken
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to improve margins); and (d) the implementation of rigorous controls on working
capital and capital spending. These plans are designed to make Grace a
high-performance, high-value company focused on the strengths of its packaging
and specialty chemicals businesses.
Grace's core businesses are now packaging, catalysts and other
silica-based products, construction products, and container and specialty
polymer products. Each of these businesses is a market leader, offers high
value-added products, employs leading technology and has global reach. In
these businesses, Grace provides highly differentiated and superior products
and services through investments in research and development, facilities that
enable Grace to take advantage of expanding global market opportunities, and
technology platforms capable of providing multiple products to satisfy
customers' specific needs. Moreover, Grace has focused research and
development spending on core businesses, fostered an exchange of technology
among its product lines, and increased the level of process development
directed at streamlining operations.
In June 1995, the Company announced that its Board of Directors had
approved a plan to spin off National Medical Care, Inc., Grace's principal
health care subsidiary ("NMC"); as a result, Grace classified its health care
business as a discontinued operation in the second quarter of 1995. Following
NMC's receipt in October 1995 of five investigative subpoenas from the Office
of the Inspector General of the United States Department of Health and Human
Services (see "Legal Proceedings" below), the completion of the spin-off of
NMC, originally expected in the 1995 fourth quarter, was delayed.
In February 1996, Grace and Fresenius AG ("Fresenius") entered into a
definitive agreement to combine NMC with Fresenius' worldwide dialysis business
("FWD") to create Fresenius Medical Care ("FMC"). As a result of the
combination, FMC would acquire NMC, which would remain responsible for all
liabilities arising out of the investigations of NMC, discussed below.
However, Grace would retain certain health care assets, primarily a
bioseparation sciences business and a health care services company (classified
as discontinued operations), as well as other assets (including cash and
marketable securities).
The combination would follow a borrowing of approximately $2.3 billion by
NMC, a tax-free distribution of the proceeds by NMC to Grace, and a tax-free
distribution by the Company, with respect to each share of its Common Stock, of
one share of a newly formed corporation holding all of Grace's businesses
(principally its specialty chemicals businesses) other than NMC. As a result
of the separation of Grace's specialty chemicals businesses from NMC and
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the subsequent combination of NMC and FWD, the holders of the Company's Common
Stock would own 100% of the specialty chemicals company and 44.8% of FMC, and
Fresenius and other shareholders would own 55.2% of FMC. The holders of the
Company's Common Stock would also own preferred stock, the value of which would
be linked to the performance of FMC. Completion of the various transactions is
subject to customary conditions, including the approval of the shareholders of
the Company and Fresenius; United States, German and European regulatory
actions; and obtaining financing on satisfactory terms. Commitments for
financing have been received (which commitments are subject to various
conditions and have not been entered into), and it is expected that the various
transactions will be completed by the third quarter of 1996.
In March 1996, Grace announced that it had entered into a definitive
agreement to sell its Dearborn water treatment and process chemicals business
to Betz Laboratories, Inc. for $632 million. The transaction is expected to
close in the second quarter of 1996.
1991 Strategy; Sale and Monetization of Noncore Businesses; Other Actions.
The strategic initiatives described above reflect the further development of a
corporate strategy announced in 1991. The major components of the strategy
were to (a) focus on core businesses to accelerate profitable growth; (b)
upgrade financial performance, principally by selling or monetizing noncore
businesses, managing debt levels consistent with profitable growth
opportunities, and reducing overhead; and (c) integrate corporate and operating
unit functions through global product line management.
Pursuant to this strategy, during the 1991-1995 period Grace disposed of
most of its noncore businesses and investments, including its oil and gas, coal
and energy services businesses; its printing products business; its specialty
textiles business; its book, video and software distribution businesses; its
remaining agricultural businesses; and various chemical businesses, including
its organic chemicals and automotive materials businesses. Gross proceeds from
these and other divestments totaled $2.15 billion in the 1991-1995 period. In
1992, Grace also monetized a portion of its cocoa and chocolate business by
selling a 21% limited partnership interest in Grace Cocoa Associates, L.P.,
which owns this business and other assets, resulting in Grace's receipt of
approximately $300 million in cash. Grace is actively pursuing the disposition
of its cocoa business; during the fourth quarter of 1995, Grace revised the
divestment plan for this business, focusing on the improvement of operating
cash flow through the adoption of new strategies and a new global
organizational structure, while simultaneously positioning the business for
sale. As a result of
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these actions, Grace expects to complete the disposition of this business
during 1996.
As part of its 1991 corporate strategy, Grace also reorganized the
management of its core businesses on the basis of global product lines. As a
result of this reorganization, Grace is able to serve its multinational
customers in all global regions, as well as tailor its product offerings to
meet local preferences.
Strategic Acquisitions and Other Growth Initiatives. To focus on core
business growth, Grace has made strategic acquisitions directly related to its
core businesses, totaling $190.4 million in the 1991-1995 period, including
acquisitions intended to expand those businesses outside the United States. In
1992, Grace acquired the North American food service packaging business of Du
Pont Canada. In 1993, Grace acquired the Katalistics fluid cracking catalyst
additive business previously owned by a joint venture between Union Carbide
Corporation and AlliedSignal Inc. In 1993, Grace also formed a 51%-owned joint
venture with a large chemical and industrial concern headquartered in
Volgograd, Russia, to produce flexible packaging for sale throughout the
Commonwealth of Independent States; the joint venture began production in the
third quarter of 1994.
In 1994, Grace acquired the Schur Multiflex group of European flexible
packaging businesses; construction chemicals businesses; and a small pollution
control equipment producer. In addition, during 1994 Grace formed a 51%-owned
joint venture with an Indian company to supply water treatment products and
services in India.
In 1995, Grace formed a 51%-owned joint venture in Malaysia to produce
rigid plastic packaging products for sale throughout Southeast Asia; a
68%-owned joint venture with a Chinese packaging company to manufacture shrink
films for sausage casings and to market Grace's packaging products and systems
in China; a 51%-owned joint venture with a Russian company to produce container
and closure sealants for sale throughout the Commonwealth of Independent
States; and a 50%-owned joint venture with Engelhard Corporation to manufacture
and market metal-based catalytic converters to the automotive industry. In
early 1996, Grace agreed to form a joint venture to produce and market
coatings, closures and can-sealing compounds in India.
Although Grace intends to emphasize internal growth, it may also effect
acquisitions, joint ventures and strategic alliances that afford synergies or
other benefits necessary to fulfill strategic objectives of a core business
(such as a key technology or opportunities for geographic expansion) or that
provide a
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combination of a close fit with a core business with the potential for
exceptional returns.
See Notes 3, 5, 7, 12, 13 and 19 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.
DESCRIPTION OF BUSINESS
Grace's continuing operations consist principally of the development,
manufacture and sale of packaging and specialty chemical products and systems.
These products and systems serve highly specialized markets and represent an
important or critical component (but a relatively small portion of the cost) of
the end products in which they are used. Accordingly, competition tends to be
based primarily on technological capability, customer service, product quality
and, to a lesser extent, price.
Grace's products and systems are marketed primarily through direct sales
organizations. Through direct regular contact with its customers, Grace gains
an in-depth knowledge of their businesses and anticipates and caters to their
needs. Grace is often involved in the design of customers' production
processes and thereafter serves as a supplier for such processes.
The following is a description of the products and services provided by
each of Grace's businesses.
Packaging. Grace's packaging business ("Grace Packaging") provides
high-performance total packaging systems on a worldwide basis, competing
principally by providing superior quality products and services for specialized
customer needs. The principal products and services provided by Grace
Packaging are (a) flexible plastic packaging systems (including material,
equipment and services) for a broad range of perishable foods such as fresh,
smoked and processed meat products, cheese, poultry, prepared foods (including
soups and sauces for restaurants and institutions), baked goods and produce;
(b) shrink films used in packaging a variety of nonfood consumer and industrial
products; (c) foam trays for supermarkets and poultry and other food
processors; and (d) rigid plastic containers for dairy and other food and
nonfood products. Grace Packaging competes through three product groups:
flexible packaging (marketed extensively under the Cryovac(R) registered
trademark), Formpac(TM) foam trays and Omicron(TM) rigid plastic containers.
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The Cryovac packaging products group developed and introduced flexible
plastic vacuum shrink packaging to the food processing industry in the late
1940s, contributing to expanded food distribution and marketing by providing
superior protection against decay-inducing bacteria and moisture loss. The
market for Cryovac products has since expanded into the retail food market, and
Cryovac packaging technology has also been introduced in nonfood applications
for consumer merchandising of housewares, toys and compact discs, as well as
for electronic and medical products.
Cryovac flexible packaging products include shrink bags, shrink films,
laminated films and films for medical bags and equipment. Shrink bags are
multi-layered plastic bags that mold themselves to the exact shape of the
product, forming a clear "second skin." Using sophisticated coextrusion
technology, Cryovac shrink bags maximize barrier properties, optics, abuse
resistance, shrinkability and seal strength. Cryovac shrink films are
multi-layered shrinkable plastic films used to package a variety of food and
nonfood consumer goods to protect against damage, preserve freshness and
enhance marketability. Cryovac laminates are multi-layered, nonshrinkable and
normally high-barrier flexible materials used for packaging perishable foods,
shelf-stable products (nonrefrigerated foods, such as syrups, toppings and
tomato paste) and various nonfood products.
Grace's flexible packaging products differentiate themselves from
competitive products by offering a combination of the following core
competencies: (a) proprietary film processing technology; (b) resin technology,
permitting the production of materials suited to specific customer needs; (c)
packaging and food science expertise, providing better understanding of the
interaction between packaging materials and packaged products; (d) complete
systems support capability, providing a single source for customer needs; (e) a
talented employee base that strives to anticipate, meet and exceed customer
expectations; and (f) an effective sales and distribution network.
Today, Grace Packaging is recognized as a worldwide leader in flexible
packaging technology. Grace's technological leadership has spurred Grace
Packaging's growth in several markets: in the rapidly expanding packaged
fresh-cut produce market, Grace produces films that permit oxygen to pass
through at various rates, thereby matching the varying respiration rates of
different vegetables and permitting longer shelf life; in the fresh meat
market, Grace's case-ready program reduces supermarkets' in-store production
costs by allowing meat processors to centrally package meat products suitable
for display; in the bone-in pork market, Grace's TBG(TM) packaging products
have revolutionized the distribution of large subprimal cuts of pork by adding
a film patch to certain sections
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of a high-abuse barrier bag to prevent bone punctures; and in the processed
meats and poultry markets, Cryovac cook-in bags and laminates withstand high
cooking temperatures, reducing the potential for contamination and retaining
product shape, clarity and weight.
Formpac manufactures and sells polystyrene foam prepackaging trays used by
supermarkets and grocery stores to protect and display fresh meat, poultry and
produce, as well as foam food service items such as hinged-lid containers used
in institutional environments, by carry-out restaurants and by supermarkets for
sale to retail customers. Formpac manufactures foam trays in a two-stage
process consisting of the extrusion and thermoforming of polystyrene foam
sheets. Although the majority of Formpac's customers are located in the
eastern two-thirds of the United States, Formpac's proprietary technology has
also been successfully used in certain packaging applications outside of the
United States. Competition is based on service, price and product quality.
Grace Packaging's Omicron business group produces rigid plastic packaging
applications (primarily tubs for dairy products such as margarine and yogurt)
in Australia. Omicron products use proprietary thermoforming technology,
involving the controlled thinning and shaping of hot plastic sheets to increase
strength and rigidity while minimizing weight. Grace is expanding the Omicron
business into Southeast Asia through a 51%-owned joint venture formed in 1995
to produce rigid plastic packaging products in Malaysia.
Grace Packaging's sales and revenues were $1.7 billion in 1995, $1.4
billion in 1994 and $1.3 billion in 1993. Approximately 51% of Grace
Packaging's 1995 sales and revenues were generated in North America, 30% in
Europe, 11% in Asia Pacific and the remainder in Latin America. At year-end
1995, Grace Packaging employed approximately 9,900 people in 28 production
facilities (9 in North America, 8 in Europe, 6 in Asia Pacific and 5 in Latin
America) and 79 sales offices, serving approximately 24,000 customers.
Resins are the principal raw materials used by Grace Packaging. Although
prices for ethylene-based resins can be volatile, there is currently an
adequate worldwide supply of resins at generally stable prices. Further, Grace
Packaging has typically been able to increase the sales prices of its products
in response to increases in the prices of resins and other raw materials. In
most cases, multiple sources of resins and other raw materials exist, with at
least one source located in most global regions.
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Although sales and revenues tend to be slightly higher in the fourth
quarter, seasonality is generally not significant to Grace Packaging. As a
result of product introductions, marketing programs and improvements in global
economic conditions, worldwide demand for Grace Packaging products grew at a
rapid pace in 1994 and 1995, placing pressure on existing capacity. To address
this matter, Grace Packaging has added capacity in all regions (including a
shrink films manufacturing plant in Kuantan, Malaysia, that is expected to
become operational in 1996).
Catalysts and Other Silica-Based Products. This business ("Grace
Davison") is composed of three principal product groups: refinery catalysts,
polyolefin catalysts, and silica and zeolite adsorbents. These products apply
silica, alumina and zeolite technology and are designed and manufactured to
meet the varying specifications of such diverse customers as major oil
refiners, plastics and chemical manufacturers and consumer products companies.
Grace Davison's technological expertise provides a competitive edge, allowing
Grace Davison to quickly design products that meet customer specifications, as
well as to develop new products that expand its existing technology. For
example, Grace estimates that 95% of its 1995 fluid cracking catalyst sales
were attributable to products introduced in the last five years.
Refinery catalysts include (a) fluid cracking catalysts used by petroleum
refiners to convert crude oil into more valuable transportation fuels, such as
gasoline and jet and diesel fuel, as well as other petroleum-based products,
and (b) hydroprocessing catalysts that remove certain impurities (such as
nitrogen, sulfur and heavy metals) from crude oil prior to the use of fluid
cracking catalysts. Oil refining is a highly specialized discipline, demanding
that products be tailored to meet local variations in crude oil and the
refinery's changing operational needs. Grace Davison regularly works with most
of the approximately 360 refineries in the world, helping to find the most
appropriate catalyst formulations for the refiners' changing needs.
Competition is based on technology, product performance, customer service and
price. Grace believes it is one of the world leaders in refinery catalysts and
the largest supplier of fluid cracking catalysts in North America and Europe.
Grace Davison polyolefin catalysts and catalyst supports are essential
components used in manufacturing nearly half of all high density and linear low
density polyethylene resins, which are used in products such as plastic film,
high-performance pipe and household containers. The polyolefin catalyst
business is technology-intensive and focused on providing products specifically
formulated to meet end-user applications. Manufacturers generally compete on a
worldwide basis, and competition has intensified
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recently due to evolving technologies, particularly the use of metallocenes.
Silica and zeolite adsorbents are used in a wide variety of industrial and
consumer applications. Silicas are used in coatings as flatting agents (i.e.,
to reduce gloss), in plastics to improve handling, in toothpastes as thickeners
and cleaners, in food to carry flavors and prevent caking, and in the
purification of edible oils. Zeolite adsorbents are used between the two panes
of insulated glass to adsorb moisture and in process applications to separate
certain chemicals from mixtures. Competition is based on product performance,
customer service and price. Grace Davison is planning to expand its silica
business in the Asia Pacific region with a new plant in Kuantan, Malaysia, to
open in 1996.
Grace Davison's sales and revenues were $687 million in 1995, $610 million
in 1994 and $572 million in 1993; approximately 52% of Grace Davison's 1995
sales and revenues were generated in North America, 37% in Europe, 10% in Asia
Pacific and 1% in Latin America. At year-end 1995, Grace Davison employed
approximately 2,700 people worldwide in nine facilities (six in the United
States and one each in Canada, Germany and Brazil).
Most raw materials used in the manufacture of Grace Davison products are
available from multiple sources and, in some instances, are produced or
supplied by Grace. Because of the diverse applications of products using Grace
Davison technology and the geographic areas in which such products are used,
seasonality does not have a significant effect on Grace Davison's businesses.
Construction Products. Grace Construction Products ("Grace Construction")
is a leading supplier of specialty materials to the worldwide construction
industry. Grace Construction's products strengthen concrete, control
corrosion, prevent water damage and protect structural steel against collapse
due to fire. These include concrete admixtures, cement additives,
waterproofing systems and fireproofing materials. In North America, Grace
Construction also manufactures and distributes masonry block additives and
products and vermiculite products used in construction and other industrial
applications. Grace Construction's products are sold to a broad customer base,
including cement manufacturers, ready-mixed and prestressed concrete producers,
specialty subcontractors and applicators, masonry block manufacturers, building
materials distributors and other industrial manufacturers.
Grace Construction competes globally with several large construction
materials suppliers and regionally and locally with numerous smaller
competitors. Competition is based largely on
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price, product performance, proprietary technology and technical support and
service. Grace Construction's customers are frequently local contractors and
cement manufacturers; consequently, local suppliers are often able to compete
effectively.
Grace Construction's 1995 sales and revenues totaled $397 million (66% in
North America, 17% in each of Europe and Asia Pacific and less than 1% in Latin
America), versus $387 million and $333 million in 1994 and 1993, respectively.
At year-end 1995, Grace Construction employed approximately 1,900 people at 57
production facilities (27 in North America, 11 in Southeast Asia, 7 in
Australia/New Zealand, 7 in Europe, 4 in Latin America and 1 in Japan) and 70
sales offices worldwide.
The raw materials used for manufacturing Grace Construction products are
primarily commodities 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 Grace Construction. However, the worldwide
supply of calcium lignin, a wood pulping by-product used as a raw material in
the production of concrete admixtures, has been decreasing as paper mills
convert to new manufacturing processes. Grace Construction has secured
short-term supplies of calcium lignin and is exploring new technologies to
replace it in the future.
The construction business is seasonal, influenced by weather conditions,
and cyclical, in response to economic conditions and construction demand.
Grace Construction seeks to increase profitability and minimize the impact of
cyclical downturns in regional economies by introducing technically advanced,
value-added products, expanding geographically and developing business
opportunities in renovation construction markets. In addition, Grace
Construction has implemented a lower cost structure by consolidating
manufacturing operations in North America and through an extensive
restructuring plan in Europe.
Container and Specialty Polymer Products. Grace's container and specialty
polymers business ("Grace Container") consists primarily of four product lines:
container sealants, closure sealants, coatings for metal packaging, and
specialty polymers. Container sealants are applied to food and beverage cans,
as well as other rigid containers (such as industrial product containers and
aerosol cans), to ensure a hermetic seal between the lid and the can body.
Closure sealants are used to seal pry-off and twist-off metal crowns, as well
as roll-on pilfer proof and plastic closures, for the glass/plastic container
markets (primarily in beverage and food applications). Coatings are used in
the manufacture of cans and closures to protect the metal against
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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. Formulated engineered polymers are
used in printed circuit board and component assembly in the electronics,
electrical, automotive and defense industries, including surface mount and
conductive adhesives, capacitor coatings, light-emitting diode encapsulants and
conformal coatings. Grace Container is expanding its product offering through
new technologies such as its oxygen-scavenging compound, which combines with
closure sealants to extend shelf life by eliminating oxygen, and oxygen's
effect on taste, from sealed beer and other beverage bottles.
Grace Container sales and revenues were $357 million, $325 million and
$306 million in 1995, 1994 and 1993, respectively. Its products are marketed
internationally, with 34% of 1995 sales and revenues in Europe, 28% in each of
North America and Asia Pacific and 10% in Latin America. At year-end 1995,
Grace Container employed approximately 1,600 people at 30 production facilities
(9 in Asia Pacific and 7 in each of North America, Europe and Latin America)
and 57 sales offices worldwide. Competition is based on providing high-quality
customer service at all customer sites, as well as on price and product quality
and reliability. Although the raw materials used in Grace Container's
operations, including resins, rubber and latices, are generally available from
multiple sources, the prices of these raw materials experienced rapid
escalation throughout most of 1995, negatively impacting Grace Container's
gross margins; improvements are expected in 1996 as raw materials prices
started to ease during the latter part of 1995. Although demand for container
packaging and sealant products tends to increase slightly during the second and
third quarters, the impact of such seasonality is not significant to Grace
Container.
Water Treatment. Grace's water treatment and process chemicals business
("Grace Dearborn") consists of water treatment and paper industry services
business lines, which market the following products: (a) water treatment
chemicals and support equipment to prevent corrosion, scale and microbiological
growth in industrial utility waters, heating, cooling and steam generation
applications, and industrial wastewater applications for clarification, sludge
de-watering, odor control and water recycling; (b) process chemicals and
support equipment to optimize and protect processing systems for the production
of pulp and paper, refined petroleum products and petrochemicals, sugar and
alcohol; (c) chemicals for the protection and cleaning of industrial cooking
and sterilization equipment for canned foods; (d) paint detackification
products to remove paint sludge from water wash paint spray systems; (e)
chemicals and equipment for the treatment of process waters in the mining and
processing of metal ores; and (f) chemicals and
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other products useful in servicing and maintaining vessels used in salt and
fresh water. Grace Dearborn also provides consulting services related to its
products and equipment.
Grace Dearborn sales and revenues for 1995 totaled $399 million (41% in
Europe, 37% in North America, 19% in Latin America and 3% in Asia Pacific).
Sales and revenues for 1994 and 1993 were $363 million and $330 million,
respectively. At year-end 1995, Grace Dearborn employed approximately 2,500
people at 23 manufacturing facilities (6 in each of Latin America and Asia
Pacific, 5 in Europe, 4 in North America and 2 in South Africa) and 122 sales
offices.
The raw materials used in Grace Dearborn's business lines are readily
available from multiple sources, generally at stable prices. The paper
industry services business is affected by the cyclicality of the global paper
market. The water treatment services business responds to (but is not
adversely affected by) seasonal fluctuations, concentrating on boiler
treatment in colder seasons and cooling system treatment in warmer seasons.
The effects of seasonality are diminished by the geographic diversity of the
markets served by Grace Dearborn. Grace Dearborn competes globally with
several large companies and regionally and locally with numerous smaller
companies. Competition is based primarily on technical service and product
performance.
In March 1996, Grace announced that it had entered into a definitive
agreement to sell its Dearborn water treatment and process chemicals business
to Betz Laboratories, Inc. for $632 million. The transaction is expected to
close in the second quarter of 1996.
Thermal and Emission Control Systems. Grace's thermal and emission
control systems business ("Grace TEC Systems") is a developmental business that
consists of four principal product groups: web processing products, industrial
emission control products, mobile emission control products and specialty
catalysts. These products are designed to customer specifications and are sold
to a variety of industrial customers.
Web processing products, consisting primarily of air flotation dryers and
auxiliary equipment, are sold principally to the graphic arts, coating and
converting markets. The industrial emission control products group
manufactures volatile organic compound control equipment, including thermal,
catalytic and regenerative oxidation systems. Demand for this equipment is
driven principally by government regulations. The mobile emission control
products group sells washcoat materials and specialty substrates. Washcoat
materials are used by catalyst manufacturers to enhance the perfor-
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mance of catalytic converters sold to automotive original equipment
manufacturers. Specialty catalysts are used to control volatile organic
compounds, nitrogen oxides and carbon monoxide from a variety of sources.
Competition for Grace TEC Systems' products is based primarily on system
design, materials, technology, customer service, product performance and price.
DISCONTINUED OPERATIONS
In 1993 Grace classified its then remaining noncore businesses as
discontinued operations, and in 1995 Grace classified its health care business
as a discontinued operation. As discussed above (see "Strategic Restructuring
and Other Growth Initiatives"), Grace has completed the sale and monetization
of a substantial portion of its noncore businesses (although Grace remains
subject to certain liabilities relating to those businesses). Grace's health
care and cocoa businesses are the principal discontinued operations that have
not yet been divested. Grace is actively pursuing the disposition of these two
businesses and its other remaining discontinued operations and expects to
complete their disposition in 1996. Following is a description of Grace's
health care and cocoa businesses; see Notes 3, 5, 7, 12 and 13 to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Financial Supplement, and
"Strategic Restructuring and Other Growth Initiatives" above, for additional
information.
Health Care. Grace's health care business is conducted primarily through
NMC, which provides kidney dialysis services; manufactures and distributes
products and equipment for dialysis treatment; performs clinical laboratory
testing and other medical services; and provides home infusion, home
respiratory therapy and home health services.
NMC is the largest United States provider of kidney dialysis and related
services to patients suffering from chronic kidney disease and has been
actively expanding this business overseas. At December 31, 1995, NMC operated
and/or managed 681 outpatient dialysis centers (574 in North America, 62 in
Europe, 33 in Latin America and 12 in Asia Pacific); these centers,
substantially all of which are leased, average approximately 5,600 square feet
in size. NMC also provides inpatient acute dialysis services under contracts
with hospitals in the United States (526 at December 31, 1995) and furnishes
dialysis equipment and supplies to patients who elect home treatment. At
December 31, 1995, NMC was treating ap-
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proximately 42,900 patients in the United States and 7,900 patients in other
countries. Revenues from kidney dialysis services were $1.5 billion in 1995,
$1.3 billion in 1994 and $1 billion in 1993.
Since 1991, Grace has made numerous acquisitions relating to its health
care business. These acquisitions, totaling $857 million plus 115,621 shares
of the Company's Common Stock over the 1991-1995 period, included a United
States provider of alternate-site infusion therapy and dialysis health care
services, a United States provider of home infusion therapy services, regional
United States providers of home infusion therapy services and home support
nursing services, and numerous dialysis centers located primarily in the
United States.
NMC manufactures disposable bloodlines, dialysis concentrates, artificial
kidneys (dialyzers) and dialysis machines for use in its dialysis centers and
for sale to unaffiliated dialysis providers and home patients; distributes
dialysis supplies and equipment and other medical products and supplies
manufactured by others; and provides laboratory services for dialysis and other
patients in the United States and Portugal.
NMC also provides infusion and respiratory therapies and home health
services to patients in their homes through a network of 105 United States
locations (104 leased and 1 owned) in 34 states. Infusion therapy consists of
the intravenous delivery of an expanding range of medications and nutritional
preparations, such as chemotherapy, total parenteral nutrition, antibiotic
therapy and drugs for pain management. Respiratory therapy consists of the
delivery of oxygen and aerosolized drugs and the use of monitors, nebulizers
and ventilators. In addition, NMC provides other home health services through
21 locations.
NMC provides various ancillary medications and services to patients
suffering from end-stage renal disease ("ESRD") at its dialysis centers, the
most significant of which is the administration of erythropoietin ("EPO"). EPO
is used to treat anemia, a medical complication frequently experienced by ESRD
patients, and is administered to most of NMC's dialysis patients. Revenues
from EPO accounted for approximately 13% of NMC's revenues in 1995. EPO is
produced by a single manufacturer, and any interruption of supply could
adversely affect NMC's business and results of operations.
NMC's United States business is dependent on the continuation of Medicare
and other third-party insurance coverage for dialysis and home care services
and products. At such time as Medicare becomes a patient's primary payor for
dialysis (generally, three months following commencement of treatment or, in
the case of
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patients covered by employer-sponsored health insurance, 21 months
after commencement of treatment) and/or home care products and services,
Medicare currently reimburses suppliers of such services and products for
approximately 80% of established fees or reasonable charges; the remaining 20%
is paid by the patient and/or a non-Medicare insurance carrier. NMC estimates
that, in 1995, Medicare, Medicaid and other governmental health care programs
accounted for approximately 60% of NMC's revenues. The reimbursement rates
under such programs, as well as the scope of their coverage, are subject to
legislative change as a result of deficit reduction and other measures.
Because in most cases the prices of dialysis services and products in the
United States are directly or indirectly regulated by Medicare or other
government payors, competition for patients is based primarily on quality and
accessibility of service and referrals from physicians and hospitals. In
addition, some states limit competition under laws that restrict the number of
dialysis facilities within a geographic area based on need, as determined by
state agencies. Competition in the home care business is also based on quality
of service as well as price, and, where state laws do not impose limits on
competition, there are no significant barriers to entering this business.
Further, the rapid growth of managed care (a combination of financial
incentives and management controls intended to direct patients to efficient
providers in cost-effective settings) has resulted in greater emphasis on
service costs for patients insured by third parties; therefore, cost efficiency
is also a key element of competition in this market. Based upon its knowledge
and understanding of the health care industry in general and of other providers
of kidney dialysis and infusion therapy, as well as information obtained from
publicly available sources, NMC believes that it is among the most
cost-efficient of the companies in its field and that it is the leading United
States supplier of dialysis services and a leading United States provider of
infusion and respiratory therapies.
In most countries other than the United States where NMC provides dialysis
services, prices and the opening of new facilities are directly or indirectly
regulated by governments, and competition is based primarily on the quality and
availability of service and relationships with referring physicians.
NMC believes there are adequate sources of supply for the raw materials
and products used in its health care services and medical products businesses.
At year-end 1995, NMC employed approximately 18,900 people full-time at its
facilities worldwide.
On February 4, 1996, Grace and Fresenius AG announced that they had
entered into an agreement pursuant to which NMC would
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combine with Fresenius' worldwide dialysis business. See "Strategic
Restructuring and Other Growth Initiatives" above for additional information.
See "Legal Proceedings" below for information concerning certain lawsuits
and government investigations and proceedings relating to NMC and Note 7 to
Grace's Consolidated Financial Statements and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Financial
Supplement for additional information concerning NMC.
Grace Cocoa. Grace's cocoa and chocolate business ("Grace Cocoa")
produces high-quality intermediate cocoa and chocolate products for sale as
ingredients to the bakery, confectionery, dairy and beverage industries. Cocoa
liquor, cocoa butter and cocoa powder are sold internationally; coatings and
intermediate chocolate products are sold to the European market; and
intermediate chocolate products, primarily coatings and cookie drops, are sold
to the North American market. Grace Cocoa competes primarily on the basis of
superior service, product quality and reliability. Sales of cocoa and
chocolate products were $798 million in 1995, $718 million in 1994 and $636
million in 1993. At year-end 1995, Grace Cocoa employed approximately 1,700
people at 9 production facilities (4 in each of Europe and North America and 1
in Asia Pacific) and 5 other offices worldwide.
See "Strategic Restructuring and Other Growth Initiatives" above and Notes
7 and 13 to Grace's Consolidated Financial Statements for additional
information concerning Grace Cocoa.
RESEARCH ACTIVITIES
Grace engages in research and development programs 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
carried out by product line laboratories in North America, Europe, Asia and
Latin America and by the Corporate Research Division in Columbia, Maryland. The
Research Division's activities focus on Grace's core product lines and include
research in specialty polymers; water treatment; catalysis; construction
materials; photopolymers; specialty packaging; and process engineering,
principally involving the development of technologies to manufacture chemical
specialties.
Research and development expenses relating to continuing operations
amounted to $121 million in 1995, $107 million in 1994 and $112 million in 1993
(including expenses incurred in funding
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external research projects). The amount of research and development expenses
relating to government- and customer-sponsored projects (as opposed to projects
sponsored by Grace) is not material.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Financial Supplement for additional information.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
In constructing and operating its facilities, Grace incurs capital and
operating expenditures relating to the protection of the environment, as well
as costs to remediate properties. The following table sets forth Grace's
expenditures in the past three years, and its estimated expenditures in 1996
and 1997, for (a) the operation and maintenance of environmental facilities and
the disposal of hazardous and nonhazardous wastes with respect to continuing
operations; (b) capital improvements to environmental control facilities
relating to continuing operations; and (c) the remediation of sites:
(a) (b) (c)
Operation of
Facilities and Capital
Waste Disposal Improvements Remediation
-------------- ------------ -----------
(in millions)
1993 $41 $19 $44
1994 36 22 31
1995 44 15 31
1996 (est.) 45 20 30
1997 (est.) 47 17 20
Such expenditures have not had, and are not expected to have, a material effect
on Grace's other capital expenditures or on its earnings or competitive
position. See Note 12 to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Financial Supplement.
With the goal of continuously improving its environment, health and safety
("EHS") performance, Grace established its Commitment to Care(TM) initiative
(based on the Responsible Care(R) program of the Chemical Manufacturers
Association) in 1994 as the program under which all Grace EHS activities are to
be implemented.
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To the extent applicable, Commitment to Care extends the basic elements of
Responsible Care to all Grace locations worldwide, embracing specific
objectives in the key areas of product stewardship, employee health and safety,
community awareness and emergency response, distribution, process safety and
pollution prevention.
In 1995 (following completion of the first year of the implementation of
the Commitment to Care program), Grace conducted a survey of facilities
worldwide to determine the program's results. The survey showed significant
progress toward Grace's goal of implementing the program in all Grace
facilities.
See Item 3 of this Report for information concerning environmental
proceedings to which Grace is a party and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Financial Supplement
for additional information concerning environmental matters.
ITEM 2. PROPERTIES.
Grace operates manufacturing and other types of plants and facilities
(including office and other service facilities) throughout the world, some of
which are shared by two or more of Grace's product lines. Grace considers its
major operating properties to be in good operating condition and suitable for
their current use. Although 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, it conducts ongoing, long-range forecasting of its capital requirements
to assure that additional capacity will be available when and as needed (see
information regarding Grace's capital expenditures in "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and on page F-27
of the Financial Supplement). Accordingly, Grace does not anticipate that its
operations or income will be materially affected by the absence of available
capacity.
Additional information regarding Grace's properties is set forth in Item 1
above and in Notes 1, 9 and 12 to the Consolidated Financial Statements in the
Financial Supplement.
ITEM 3. LEGAL PROCEEDINGS.
Asbestos Litigation. Grace is a defendant in lawsuits relating to
previously sold asbestos-containing products and anticipates that it will be
named as a defendant in additional asbestos-related
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lawsuits in the future. Grace was a defendant in approximately 40,800
asbestos-related lawsuits at year-end 1995 (47 involving claims for property
damage and the remainder involving approximately 92,400 claims for personal
injury), as compared to approximately 38,700 lawsuits at year-end 1994 (65
involving claims for property damage and the remainder involving approximately
67,900 claims for personal injury). In most of these lawsuits, Grace is one of
many defendants.
The plaintiffs in property damage lawsuits generally seek, among other
things, to have the defendants absorb the cost of removing, containing or
repairing the asbestos-containing materials in the affected buildings. Through
year-end 1995, 129 asbestos property damage cases were dismissed with respect
to Grace without payment of any damages or settlement amounts; judgments were
entered in favor of Grace in 10 cases (excluding cases settled following
appeals of judgments in favor of Grace and a case in which the plaintiff was
granted a new trial on appeal); Grace was held liable for a total of $74.7
million in 7 cases (2 of which are on appeal); and 177 property damage suits
and claims were settled for a total of $421.8 million.
Included in the asbestos property damage lawsuits pending against Grace
and others at year-end 1995 were the following class actions: (1) a
Pennsylvania state court action (Prince George Center, Inc. v. U.S. Gypsum
Company, et al., Court of Common Pleas of Philadelphia County), certified in
1992, covering all commercial buildings in the United States leased in whole or
in part to the United States government on or after May 30, 1986; (2) an
action, conditionally certified by the United States Court of Appeals for the
Fourth Circuit in 1993 and pending in the United States District Court for the
District of South Carolina, covering all public and private colleges and
universities in the United States whose buildings contain asbestos materials
(Central Wesleyan College, et al. v. W. R. Grace, et al.); and (3) a purported
class action (Anderson Memorial Hospital, et al. v. W. R. Grace & Co., et al.),
filed in 1992 in the Court of Common Pleas for Hampton County, South Carolina,
on behalf of all entities that own, in whole or in part, any building
containing asbestos materials manufactured by Grace or one of the other named
defendants, other than buildings subject to the class action lawsuits described
above and any building owned by the federal or any state government. In
December 1995, Grace entered into an agreement to settle the claims under
Prince George Center, Inc. v. U.S. Gypsum Company, et al. The terms of the
settlement agreement (which is subject to judicial review and approval after
class members have an opportunity to be heard) are not expected to have a
significant effect on Grace's consolidated results of operations or financial
position. In July
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1994, the claims of most class members in Anderson Memorial Hospital, et al.,
v. W. R. Grace & Co., et al. were dismissed due to a ruling that a South
Carolina statute prohibits nonresidents from pursuing claims in the South
Carolina state courts with respect to buildings located outside the state. The
plaintiffs have requested that the court reconsider its decision. In August
1994, Grace entered into an agreement to settle In re: Asbestos School
Litigation, a nationwide class action brought in 1983 in the United States
District Court for the Eastern District of Pennsylvania on behalf of all public
and private elementary and secondary schools in the United States that contain
friable asbestos materials (other than schools that "opted out" of the class).
The terms of the settlement agreement (which were approved by the District
Court in September 1995) are not expected to have a significant effect on
Grace's consolidated results of operations or financial position.
The remaining asbestos lawsuits pending at year-end 1995 involved claims
for personal injury. Through year-end 1995, approximately 10,100 personal
injury lawsuits involving 24,500 claims were dismissed with respect to Grace
without payment of any damages or settlement amounts (primarily on the basis
that Grace products were not involved), and approximately 23,700 such suits
involving 29,600 claims were disposed of for a total of $109 million (see
"Insurance Litigation" below). However, as a result of various trends
(including the insolvency of other former asbestos producers and cross-claims
by co-defendants in asbestos personal injury lawsuits), the costs incurred in
disposing of such lawsuits in the past may not be indicative of the costs of
disposing of such lawsuits in the future.
In 1991, the Judicial Panel on Multi-District Litigation consolidated in
the United States District Court for the Eastern District of Pennsylvania, for
pre-trial purposes, all asbestos personal injury cases pending in the federal
courts, including approximately 7,000 cases then pending against Grace; 3,600
new cases involving 7,200 claims against Grace have subsequently been added to
the consolidated cases. To date, no action has been taken by the court
handling the consolidated cases that would indicate whether the consolidation
will affect Grace's cost of disposing of these cases or its defense costs.
Grace's ultimate exposure with respect to its asbestos-related lawsuits
and claims will depend on the extent to which its insurance will cover damages
for which it may be held liable, amounts paid in settlement and litigation
costs. As discussed below under "Insurance Litigation," a May 1994 decision of
the U.S. Court of Appeals for the Second Circuit limited the amount of
insurance
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coverage available with respect to property damage lawsuits and claims.
Because Grace's insurance covers both property damage and personal injury
lawsuits and claims, the May 1994 decision has had the concomitant effect of
reducing the insurance coverage available with respect to Grace's asbestos
personal injury lawsuits and claims. However, in Grace's opinion, it is
probable that recoveries from its insurance carriers, along with other funds,
will be available to satisfy the property damage and personal injury lawsuits
and claims pending at year-end 1995, as well as personal injury lawsuits and
claims expected to be filed through 1998. Consequently, Grace believes that the
resolution of its asbestos-related litigation will not have a material adverse
effect on its consolidated results of operations or financial position. See
"Insurance Litigation" below and Note 2 to the Consolidated Financial
Statements in the Financial Supplement for additional information.
Environmental Proceedings. Grace (together with other companies) has been
designated a "potentially responsible party" ("PRP") by the United States
Environmental Protection Agency ("EPA") with respect to absorbing the costs of
investigating and remediating pollution at various sites. At year-end 1995,
proceedings were pending with respect to approximately 30 sites as to which
Grace has been designated a PRP. Federal law provides that all PRPs may be
held jointly and severally liable for the costs of investigating and
remediating a site. Grace is also conducting investigatory and remediation
activities at sites under the jurisdiction of state and/or local authorities.
In addition, in 1989, Hatco Corporation ("Hatco"), which purchased the
assets of a Grace chemical business in 1978, instituted a lawsuit against Grace
in the United States District Court for the District of New Jersey (Hatco
Corporation v. W. R. Grace & Co.-Conn.) seeking recovery of cleanup costs for
waste allegedly generated at a New Jersey facility during the period of Grace's
ownership. Grace subsequently filed a lawsuit against its insurance carriers
seeking indemnity against any damages assessed against Grace in the underlying
lawsuit, as well as defense costs. In decisions rendered during 1993, the
District Court ruled that Grace is responsible for a substantial portion of
Hatco's costs. In July 1995, the United States Court of Appeals for the Third
Circuit reversed the decisions of the District Court and remanded the lawsuit
to the District Court for further proceedings. Specifically, the Court of
Appeals (a) reversed the District Court's ruling that Grace is responsible for
a substantial portion of Hatco's costs and (b) ruled that in the remand
proceeding the burden of proof would be on Hatco to establish that it had not
released Grace from the asserted liabilities. In an earlier
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decision, the District Court had resolved, in a manner favorable to
Grace, certain legal issues regarding Grace's right to insurance coverage;
however, the ultimate liability of Grace's insurance carriers will be
determined at trial, should a trial be necessary after the remand proceedings
described above. Remediation costs, and Grace's share, if any, of such costs,
will be determined once ongoing site investigations are completed and a
remediation plan is approved by the State of New Jersey. As a result of the
above factors, the amount that Grace may be required to pay to Hatco, if any
(which Grace expects will be partially offset by recoveries from insurance
carriers), cannot be reliably estimated at this time.
In November 1995, Grace received a letter from the United States
Department of Energy ("DOE") inquiring as to Grace's willingness to contribute
to the continued cleanup of a former Grace property located in Wayne, New
Jersey. The letter asserted that Grace has a legal duty to pay for the site's
cleanup and that the total cost of cleanup may exceed $100 million. The
operations conducted by Grace at the Wayne site (from 1955 to 1970) included
work done on radioactive materials under contract with the United States
government for the "Manhattan Project" and with the United States Atomic Energy
Commission. In 1975, the United States Nuclear Regulatory Commission inspected
the site, concluded that it was decontaminated in accordance with applicable
regulations and released it for unrestricted use. In 1984, pursuant to a
request from the DOE, Grace transferred the Wayne property to the DOE and made
a cash payment as a contribution towards the DOE's cleanup efforts at the site,
which was acknowledged by the DOE as fulfilling any obligation Grace had to
contribute to DOE's cleanup effort. As a result of these transactions, Grace
believes it has no further obligation to contribute to the DOE's cleanup
activities.
In March 1993, an action was filed in the United States District Court for
the Southern District of Texas against Grace Drilling Company, a subsidiary of
the Company the business and assets of which have since been sold, and several
other defendants, for alleged violations of the Clean Water Act and the Rivers
and Harbors Act (U.S. v. Fina Oil and Chemical Co., et al.). The government
alleges that seagrasses and seabeds around a drilling rig operated by Fina Oil
and Chemical Co. were damaged in connection with the placing, servicing and
removal of the rig. The government is seeking injunctive relief requiring the
defendants to restore the damaged areas and to compensate for temporary loss of
the seagrass habitat, as well as civil penalties of up to $25,000 per day of
violation and attorneys' fees.
Grace is also a party to other proceedings involving federal, state and/or
local government agencies and private parties
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regarding Grace's compliance with environmental laws and regulations.
These proceedings are not expected to result in significant sanctions or in any
material liability. As a voluntary participant in the EPA Toxic Substances
Control Act Compliance Audit Program, Grace agreed to undertake a
corporate-wide audit of compliance with Section 8 of such Act and to pay a
stipulated civil penalty for each study or report that EPA alleges should have
been, but was not, submitted to the EPA as required under such Section.
Although final review of the audit is not complete, Grace believes it will be
required to pay the EPA penalties aggregating from $250,000 to $400,000 for
information discovered in the course of the audit. In addition, Grace has
voluntarily reported to the EPA violations of certain notification and related
requirements under such Act, and penalties may be assessed against Grace in
connection therewith; however, the amount of such penalties cannot be
determined at this time.
Grace believes that the liabilities for environmental remediation costs
that have been recorded in the Consolidated Financial Statements are adequate.
In addition, Grace is presently involved in litigation with its insurance
carriers seeking to hold them responsible for certain amounts for which Grace
may be held liable with respect to such costs. The outcome of such litigation,
as well as the amounts of any recoveries that Grace may receive in connection
therewith, is presently uncertain. For further information, see Note 12 to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Financial Supplement.
Insurance Litigation. Grace is involved in litigation with certain
insurance carriers with respect to asbestos-related claims and environmental
liabilities. Its asbestos-related insurance actions consist of a case styled
Maryland Casualty Co. v. W. R. Grace & Co., pending in the United States
District Court for the Southern District of New York; Dayton Independent School
District v. United States Mineral Products Company, et al., pending in the
United States District Court for the Eastern District of Texas; Independent
School District No. 197, et al. v. W. R. Grace & Co. and Accident & Casualty
Insurance Co., et al., pending in the First Judicial District in Minnesota; The
County of Hennepin v. Central National Insurance Company, et al., pending in
the Fourth Judicial District in Minnesota; Ecolab, Inc. v. Central National
Insurance Co., pending in the District Court for Ramsey County, Minnesota; and
American Employers' Insurance Co., American Re-Insurance Co., Commercial Union
Insurance Co., and Unigard Security Insurance Co. v. W. R. Grace & Co.,
Continental Casualty Co., and Maryland Casualty Co., which is pending in the
New York state courts; Grace's insurance actions relating to environmental
liabilities consist of
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Maryland Casualty Co. v. W. R. Grace & Co., pending in the United
States District Court for the Southern District of New York; and Hatco Corp. v.
W. R. Grace & Co.-Conn., pending in the United States District Court for the
District of New Jersey. The relief sought by Grace in these actions would
provide insurance to partially offset Grace's estimated exposure with respect
to the actions' subject matter, including amounts previously expended by Grace
to defend claims and satisfy judgments and settlements (see Note 2 to the
Consolidated Financial Statements in the Financial Supplement). The factual
bases underlying these actions are the nature of the underlying
asbestos-related and environmental claims, the language of the insurance
policies sold by the carriers to Grace and the drafting history of those
policies.
In 1991 (in an asbestos-related case involving Maryland Casualty Co.), the
United States District Court for the Southern District of New York determined
that coverage for property damage is triggered by the "discovery of damage"
during the period covered by the relevant policy. In September 1993, the
United States Court of Appeals for the Second Circuit reversed the District
Court's ruling as to a "discovery of damage" trigger for such claims and,
instead, ruled that coverage for these claims is triggered based on the date of
installation of asbestos-containing materials. In January 1994, the United
States Court of Appeals for the Second Circuit granted Grace's petition for a
rehearing concerning the September 1993 decision, and in May 1994, the Court
issued a new decision confirming its September 1993 decision. As a result,
Grace recorded net noncash charges totaling $300 million after taxes in 1993
and 1994 to reflect the reduction in asbestos property damage insurance
coverage. Subsequently, the Second Circuit refused to rehear its decision, and
the United States Supreme Court denied Grace's petition for a writ of
certiorari with respect to that decision.
In 1991 and 1994, a Mississippi court held that certain of Grace's excess
insurance carriers are obligated to defend and indemnify Grace, determining
that, for purposes of insurance coverage, damage to buildings from
asbestos-containing products occurs at the time such products are put in place
and that the damage continues as long as the building contains the products
(referred to as a "continuous trigger"); Grace subsequently settled with each
of the insurance carriers, and an appeal of the Mississippi court's decision
was dismissed. In 1992, the Minnesota court referred to above reached a
similar decision in interpreting Grace's insurance policies. In January 1994,
the Minnesota court entered judgment against certain of Grace's carriers in the
amount of $14.2 million, but that judgment was reversed by the Minnesota Court
of Appeals in January 1995. After the Minnesota Supreme Court
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denied review of this decision, the parties agreed to settlements in
1995 and early 1996.
Prior to 1993, Grace received payments totaling $97.7 million from
insurance carriers, the majority of which represented the aggregate remaining
obligations owed to Grace by those carriers for primary-level insurance
coverage written for the period June 30, 1962 through June 30, 1987. In 1993
and 1994, Grace settled with insurance carriers for a total of $300.2 million
(portions of which were paid or will be paid in subsequent years) in
reimbursement for amounts expended by Grace in connection with asbestos-related
litigation. In 1995, Grace settled with a primary-level insurer for $100
million, and with other insurers for a total of $200.3 million, including
future payments of approximately $70 million. As a result of these
settlements, insurance litigations were dismissed as to the primary-level
product liability insurance coverage previously sold by the relevant insurers
to Grace; however, litigations continue as to certain excess-level carriers.
In a 1995 settlement included in the amounts set forth above, Grace
settled with an affiliated group of excess-level carriers that had agreed to a
settlement in 1993, had made a series of payments under that agreement and had
subsequently notified Grace that it would no longer honor the agreement.
Pursuant to the 1995 settlement, the group of carriers paid Grace $44 million
in 1995, and agreed to make additional payments totaling $60.2 million in 1996
and 1997. Pursuant to a settlement with another group of carriers, Grace
received $26.8 million in 1995 and $9.7 million in early 1996. Grace will also
continue to receive payments under these agreements based on future cash
outflows for asbestos-related litigation and claims; such payments are
estimated to represent approximately $237.3 million of the asbestos-related
receivable of $321.2 million at December 31, 1995.
See Note 2 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.
Fumed Silica Plant Litigation. In 1993, Grace initiated legal action
in the Belgian courts against the Flemish government to recover losses
resulting from the closing of Grace's fumed silica plant in Puurs, Belgium.
Grace is seeking damages in excess of four billion Belgian francs
(approximately $135.5 million at the December 29, 1995 exchange rate), plus
interest and lost profits. This claim was dismissed at the trial court level
and is now being appealed by Grace. The trial court also determined that Grace
should repay approximately 239 million Belgian francs (approximately $8.1
million at the December 29, 1995 exchange rate) plus
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interest to the Flemish government for previously received investment
grants; this decision is also being appealed by Grace. Also pending is an
arbitration involving the engineering company that was responsible for the
design and construction of the fumed silica plant. The outcome of this
proceeding may affect the action filed against the Flemish government.
Shareholder Litigation. Commencing in March 1995, five lawsuits were
brought against the Company and members of its Board of Directors (as well as
J. P. Bolduc, who resigned as President and Chief Executive Officer and a
director of the Company in March 1995) in New York State Supreme Court, New
York County. These lawsuits were consolidated in the case entitled Weiser, et
al. v. Grace, et al. The consolidated amended complaint in this lawsuit, which
purports to be a derivative action (i.e., an action brought on behalf of the
Company), alleges, among other things, that the individual defendants breached
their fiduciary duties to the Company (a) by providing J. Peter Grace, Jr. (the
Chairman and a director of the Company until his death in April 1995) with
certain compensation arrangements upon his voluntary retirement as the
Company's Chief Executive Officer in 1992 and (b) by approving Mr. Bolduc's
severance arrangements, and that Messrs. Grace and Bolduc breached their
fiduciary duties by accepting such benefits and payments. The lawsuit seeks
unspecified damages, the cancellation of all allegedly improper agreements, the
cancellation of the non-employee director retirement plan, the return of all
remuneration paid to the present and former directors who are defendants while
they were in breach of their fiduciary duties to the Company, an
award of attorneys' and experts' fees and costs and such other relief as the
Court may deem appropriate.
In March 1996, two purported shareholder derivative class actions were
filed in New York State Supreme Court, New York County, against the Company and
Albert J. Costello, the Company's Chairman, President and Chief Executive
Officer, alleging that the defendants breached their fiduciary duties to the
Company's shareholders by failing to investigate and consider fully a proposal
by Hercules, Incorporated to acquire or merge with Grace (Izes, etc. v. W. R.
Grace & Company, et al. and Polikoff, etc. v. W. R. Grace & Company, et al.).
The lawsuits seek injunctive relief ordering defendants to carry out their
fiduciary duties by considering and evaluating such proposal, unspecified
monetary damages, costs and counsel fees and such other relief as the Court
deems proper.
Securities and Exchange Commission Investigation. The Company has been
notified that the Securities and Exchange Commission has issued a formal order
of investigation with respect to the
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Company's prior disclosures regarding benefits and retirement
arrangements provided to J. Peter Grace, Jr., and certain matters relating to
J. Peter Grace III, a son of J. Peter Grace, Jr. The Company is cooperating
fully with the investigation.
NMC - OIG Investigation. On October 17, 1995, NMC received five
investigative subpoenas from the Office of the Inspector General of the United
States Department of Health and Human Services ("OIG"). The subpoenas call for
the production of extensive documents relating to various aspects of NMC's
business. A letter accompanying the subpoenas stated that they had been issued
in conjunction with an investigation being conducted by the OIG, the United
States Attorney for the District of Massachusetts and others, concerning
possible violations of federal laws relating to health care payments and
reimbursements. The five subpoenas cover the following areas: (a) NMC's
corporate management, personnel and employees, organizational structure,
financial information and internal communications; (b) NMC's dialysis services
business, principally medical director contracts and compensation; (c) NMC's
treatment of credit balances resulting from overpayments received under the
Medicare ESRD program and its payment of supplemental medical insurance
premiums on behalf of indigent patients; (d) NMC's LifeChem laboratory
business, including documents relating to testing procedures, marketing,
customers, competition and certain overpayments totaling approximately $4.9
million that were received by LifeChem from the Medicare program with respect
to laboratory services rendered between 1989 and 1993; and (e) NMC's Homecare
Division and, in particular, information concerning the intradialytic
parenteral nutrition ("IDPN") business, including billing practices related to
various services, equipment and supplies and payments made to third parties as
compensation for administering IDPN therapy.
NMC is cooperating with the OIG investigation and has made, and is
expected to continue to make, extensive production of documents and information
in response to the subpoenas. The results of the investigation and its impact,
if any, cannot be predicted at this time. In the event that a U.S. government
agency believes that any wrongdoing has occurred, civil and/or criminal
proceedings could be instituted, and if any such proceedings were to be
instituted and the outcome were unfavorable, NMC could be subject to fines,
penalties and damages or could become excluded from government reimbursement
programs. Any such result could have a material adverse effect on NMC's
financial position or the results of operations of NMC and Grace.
Under the terms of the proposed transaction with Fresenius AG described
above under "Strategic Restructuring and Other Growth
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Initiatives," any liability arising as a result of the OIG investigation would
remain the responsibility of NMC.
NMC - OBRA 93 Litigation. The Omnibus Budget Reconciliation Act of 1993
("OBRA 93") affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July 1994, the Health Care
Financing Administration ("HCFA") issued an instruction to Medicare claims
processors to the effect that Medicare benefits for the patients affected by
OBRA 93 would be subject to a new 18-month "coordination of benefits" period.
This instruction had a positive impact on NMC's dialysis revenues because,
during the 18-month coordination of benefits period, the patient's employer
health plan was responsible for payment, which was generally at a rate higher
than that provided under Medicare.
In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect
of the initial instruction on NMC's dialysis business. Under the new
instruction, no 18-month coordination of benefits period would arise, and
Medicare would remain the primary payor. HCFA further proposed that its new
instruction be effective retroactive to August 1993, the effective date of OBRA
93. Consequently, NMC may be required to refund payments received from
employer health plans for services provided after August 1993 under HCFA's
original instruction and to re-bill Medicare for the same services, which would
result in a cumulative reduction of net revenues to NMC totaling approximately
$120 million as of December 31, 1995. Effective July 1, 1995, NMC ceased to
recognize the incremental revenue realized under the original instruction,
which has resulted in a material reduction in NMC's operating earnings in
comparison to prior periods in which NMC recognized such incremental revenue.
However, NMC continued to bill the employer health plans as primary payors
through December 31, 1995, at which time NMC commenced billing Medicare for the
patients affected by OBRA 93.
In May 1995, NMC filed suit in the United States District Court for the
District of Columbia seeking a declaratory judgment with respect to HCFA's
instructions relating to OBRA 93 (National Medical Care, Inc., et al. v.
Shalala). In June 1995, the court granted NMC's motion for a preliminary
injunction to preclude HCFA from retroactively enforcing its new instruction.
The litigation is continuing with respect to NMC's request to permanently
enjoin HCFA's new instruction, both retroactively and prospectively. While
there can be no assurance that a permanent injunction will be issued, NMC
believes that it will ultimately prevail in its claim that the retroactive
reversal by HCFA of its original instruction
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31
relating to OBRA 93 was impermissible under applicable law. If HCFA's revised
instruction is upheld, NMC's business, financial position and results of
operations would be materially adversely affected, particularly if the revised
instruction is applied retroactively.
NMC - IDPN Proceedings. NMC administers IDPN therapy to chronic
dialysis patients who suffer from severe gastrointestinal malfunctions. Since
late 1993, Medicare claims processors have applied medical coverage
interpretations in a manner that has sharply reduced the number of IDPN claims
approved for payment as compared to prior periods. NMC believes that the
reduction in IDPN claims currently being paid by Medicare represents an
unauthorized policy coverage change. Accordingly, NMC and other IDPN providers
are pursuing various administrative and legal remedies, including
administrative appeals, to address this reduction. In November 1995, NMC filed
a complaint in the United States District Court for the Middle District of
Pennsylvania (NMC Homecare, Inc. v. Shalala) seeking a declaratory judgment and
injunctive relief to prevent the implementation of this policy coverage change.
NMC management believes that its IDPN claims are consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to $93
million as of December 31, 1995, and currently increasing at the rate of
approximately $5 million per month. If NMC is unable to collect its IDPN
receivable, or if IDPN coverage is reduced or eliminated, depending on the
amount of the receivable that is not collected and/or the nature of the
coverage change, NMC's business, financial position and results of operations
could be materially adversely affected.
As previously reported, in May 1995 the Medicare claims processors
circulated a draft coverage policy which, if implemented in the form proposed,
would have limited or precluded continued coverage of parenteral and enteral
nutrition ("PEN") therapies, including IDPN therapy. In March 1996, NMC
received a copy of a revised final version of the new coverage policy, which is
expected to become effective for services billed on and after July 1, 1996.
While the new policy permits continued coverage of IDPN and other PEN
therapies, and while the potential impact of the new policy is subject to
further analysis, NMC believes that the new policy would make it substantially
more difficult to qualify patients for future coverage by, among other things,
requiring certain patients to undergo onerous and/or invasive tests in order to
qualify for coverage. NMC, together with other interested parties, plans to
seek to effect certain changes in the new policy, and NMC is considering
changes to its patient qualification procedures in
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order to comply with the policy. However, if NMC is unable to achieve changes
in the new policy, if physicians and patients fail to accept the new
qualification procedures and/or if patients fail to qualify under such
procedures, the policy could significantly reduce the number of patients
eligible for Medicare coverage of IDPN and other PEN therapies, which would
have a material adverse effect on NMC's financial position and results of
operations.
NMC - Import Alerts. In 1993, the United States Food and Drug
Administration ("FDA") issued import alerts with respect to (a) hemodialysis
bloodlines manufactured at NMC's facility in Reynosa, Mexico and (b)
hemodialyzers manufactured in NMC's Dublin, Ireland facility. Products subject
to FDA import alerts may not enter the United States until the FDA approves
the quality assurance systems of the facility at which such products are
manufactured. In January 1994, NMC entered into a consent decree providing
that the importation of bloodlines and hemodialyzers could resume upon
certification by NMC that the relevant facility complies with FDA regulations
and successful completion of an FDA inspection to verify such compliance. The
consent decree also required NMC to certify, and be inspected for, compliance
with applicable FDA manufacturing requirements at all of its United States
manufacturing facilities.
NMC submitted all required certifications for its United States and
non-United States facilities in accordance with the timetable specified in the
consent decree, and the bloodline import alert was lifted in March 1994. The
Dublin hemodialyzer import alert was lifted in December 1995. No fines or
penalties have been imposed on NMC as a result of the FDA's actions or in
connection with the consent decree.
NMC - Grand Jury Investigations. NMC has received multiple subpoenas from
a federal grand jury in the District of New Jersey investigating, among other
things, (a) NMC's efforts to persuade the United States Food and Drug
Administration to lift a January 1991 import hold issued with respect to NMC's
Dublin, Ireland facility, (b) whether NMC sold defective products, (c) the
manner in which NMC handled customer complaints and (d) the development of a
new dialyzer product line. Grace has also received two subpoenas relating to
this investigation. NMC and Grace have made extensive document production in
response to these subpoenas and have fully cooperated with the grand jury in
response to these subpoenas. In February 1996, the United States Attorney for
the District of New Jersey notified NMC that it is a target of the New Jersey
grand jury investigation, insofar as it relates to possible violations of
federal criminal law in connection with efforts to affect the January 1991
import hold referred to above; the material element of the import hold was
lifted in 1992.
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In addition, in December 1994, a subsidiary of NMC received a subpoena
from a federal grand jury in the Eastern District of Virginia investigating the
contractual relationships between subsidiaries of NMC that provide dialysis
services and third parties that provide medical directorship and related
services to those subsidiaries. NMC has made document production in response
to this subpoena.
The outcome of these investigations and their impact, if any, on NMC's
business, financial condition and results of operations cannot be predicted at
this time.
Shareholder Actions relating to NMC. In 1995, nine purported class
action lawsuits were brought against the Company and certain of its officers
and directors in various federal courts. These lawsuits are being consolidated
in the case entitled Murphy, et al. v. W. R. Grace & Co., et al., which is
pending in the United States District Court for the Southern District of New
York. The first amended class action complaint in this lawsuit, which purports
to be a class action on behalf of all persons and entities who purchased the
Company's publicly traded securities during the period from March 13, 1995
through October 17, 1995, generally alleges that the defendants concealed
information, and issued misleading public statements and reports, concerning
NMC's financial position and business prospects, a proposed spin-off of NMC and
the matters that are the subject of the investigations described above in "NMC
- - OIG Investigation" and "NMC - Grand Jury Investigations," in violation of
federal securities laws. The lawsuit seeks unspecified damages, attorneys' and
experts' fees and costs and such other relief as the Court deems proper.
In October 1995, a purported derivative lawsuit was filed in the United
States District Court for the Southern District of Florida, Northern Division,
against the Company, certain of its directors and its former President and
Chief Executive Officer, alleging that such individuals breached their
fiduciary duties by failing to properly supervise the activities of NMC in the
conduct of its business (Bennett v. Bolduc, et al.). In December 1995, the
plaintiff in this action filed a new action, based on similar allegations, in
the United States District Court for the Southern District of New York (Bennett
v. Bolduc, et al.). The Florida action has been dismissed in favor of the
action filed in the Southern District of New York. A second action making
similar allegations was filed in October 1995 in New York State Supreme Court,
New York County (Bauer v. Bolduc, et al.). The Company has been advised that
this action will be dismissed or stayed in favor of the Bennett action, which
has been consolidated, for discovery purposes only, with the Murphy action
described above. The com-
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34
plaint in the Bennett action seeks unspecified damages, attorneys' and
experts' fees and costs and such other relief as the Court deems proper.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against the Company, certain of its directors
and a former director, alleging that the defendants breached their fiduciary
duties in connection with the Company's agreement to combine NMC with Fresenius
AG's worldwide dialysis business, as described in Item 1 above under "Strategic
Restructuring and Other Growth Initiatives" (Rosman v. W. R. Grace & Co., et
al.). The lawsuit seeks injunctive relief ordering defendants to carry out
their fiduciary duties and preventing or rescinding the transaction or any
related transactions with Fresenius AG, unspecified monetary damages, an award
of attorneys' and experts' fees and costs and such other relief as the Court
may deem just and proper.
See Note 7 to the Consolidated Financial Statements for additional
information concerning litigation involving NMC.
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 1995.
EXECUTIVE OFFICERS
The Company's current executive officers are listed below. Executive
officers are elected to serve until the following annual meeting of the
Company's Board of Directors; the next such meeting is scheduled to be held on
May 10, 1996.
Name and Age Office First Elected
------------ ------ -------------
R. H. Beber (62) Executive Vice President 05/10/93
and General Counsel 09/01/91
Robert J. Bettacchi (53) Vice President 02/01/90
Albert J. Costello (60) Chairman 05/10/95
President and Chief 05/01/95
Executive Officer
Larry Ellberger (48) Senior Vice President 07/06/95
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Constantine L. Hampers (63) Executive Vice President 06/06/91
Peter D. Houchin (48) Senior Vice President and 08/03/95
Chief Financial Officer
James R. Hyde (57) Senior Vice President 07/06/95
J. Gary Kaenzig, Jr. (51) Senior Vice President 10/05/95
Donald H. Kohnken (61) Executive Vice President 12/07/89
Fred Lempereur (58) Senior Vice President 02/06/92
Ian Priestnell (51) Vice President 02/06/92
All the above executive officers have been actively engaged in Grace's
business for the past five years, other than Mr. Costello, who served as
chairman of the board and chief executive officer of American Cyanamid Company
from April 1993 to December 1994 and as president of American Cyanamid Company
from 1991 through March 1993; Mr. Ellberger, who was a corporate vice president
and director of corporate development and planning from October 1991 until
1995, and prior to that vice president, industrial and performance products
division, of American Cyanamid Company; and Mr. Houchin, who was chief
executive officer of Gulfstream Land & Development prior to joining Grace in
October 1991.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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-28); under
the heading "Quarterly Summary and Statistical Information - Unaudited"
opposite the captions "Dividends declared per common share" and "Market price
of common stock" (page F-26); and in Note 14 to the Consolidated Financial
Statements (page F-22).
Each share of the Company's Common Stock has an attendant Common 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
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the Rights will not be distributed. The Rights will become
exercisable on the tenth business day (or such later business day as may be
fixed by the Company's Board of Directors) after a person or group (a) becomes
an "interested shareholder," as defined in Section 912 of the New York Business
Corporation Law (generally, a beneficial owner of 20% or more of the
outstanding voting stock), or (b) commences a tender offer or exchange offer
that would result in such person or group becoming an interested shareholder.
The Rights will not have any voting power at any time.
When the Rights become exercisable, each Right will initially entitle the
holder to buy from the Company one share of Common Stock for $87.50, subject to
adjustment in certain cases ("purchase price"). If, at any time after the
Rights become exercisable, (a) the Company is involved in a merger or other
business combination in which (i) the Company is not the surviving corporation
or (ii) any of the Common Stock is changed or converted into or exchanged for
stock or other securities of any other person or cash or other property, or (b)
50% of the Company's assets, cash flow or earning power is sold, each Right
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 purchase price.
Alternatively, each right not owned by a person who becomes an interested
shareholder would become exercisable for Common Stock (or other consideration)
having a market value equal to twice the purchase price.
The Rights may be redeemed by the Company at $.025 per Right (payable in
cash, Common Stock or any other form of consideration deemed appropriate by the
Board) at any time through the tenth business day (or such later business day
as may be fixed by the Board) after a public announcement that a person or
group has become an interested shareholder; this right of redemption may be
reinstated if all interested shareholders reduce their holdings to 10% or less
of the outstanding Common Stock. The Rights will expire in January 1997.
In connection with its authorization of the proposed transaction with
Fresenius (see "Strategic Restructuring and Other Growth Initiatives" above),
the Company's Board of Directors authorized the amendment of the Rights so as
to prevent the Rights from becoming exercisable as a result of such transaction
and the other transactions contemplated thereby. The Rights may be further
amended either before or after they become exercisable. However, the basic
economic terms of the Rights (such as the purchase and redemption prices and
the expiration date) cannot be changed.
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37
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item appears under the heading
"Financial Summary" (page F-28 of the Financial Supplement) and in Notes 6, 7,
10 and 17 to the Consolidated Financial Statements (pages F-13, F-15, F-19 and
F-24 of the Financial Supplement). In addition, Exhibit 12 to this Report
(page F-37 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 1991-1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information called for by this Item appears on pages F-29 to F-34 of
the Financial Supplement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Consolidated Financial Statements and Financial Statement
Schedule and Exhibits on page F-1 of the Financial Supplement.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except for information regarding the Company's executive officers (see
pages 32 and 33), the information called for by this Item is incorporated in
this Report by reference to the definitive Proxy Statement for the Company's
1996 Annual Meeting of Shareholders, except for information not deemed to be
"soliciting material" or "filed" with the Securities and Exchange Commission
("SEC"), information subject to Regulations 14A or 14C under the Securities
Exchange Act of 1934 ("Exchange Act") or information subject to the liabilities
of Section 18 of the Exchange Act.
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38
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 11, 12 and 13 is incorporated in this
Report by reference to the definitive Proxy Statement for the Company's 1996
Annual Meeting of Shareholders, except for information not deemed to be
"soliciting material" or "filed" with the SEC, information subject to
Regulations 14A or 14C under the Exchange Act or information subject to the
liabilities of Section 18 of the Exchange Act.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K.
Financial Statements and Schedules. See the Index to Consolidated
Financial Statements and Financial Statement Schedule and Exhibits on page F-1
of the Financial Supplement.
Reports on Form 8-K. The Company filed two Reports on Form 8-K during the
fourth quarter of 1995. On October 16, 1995, the Company filed a Report on
Form 8-K relating to (a) the Company's declaration of a quarterly cash dividend
at a rate lower than that previously in effect and (b) a program to repurchase
up to 10 million shares of the Company's Common Stock in open market or private
transactions from time to time. The Company filed a Report on Form 8-K on
October 27, 1995 concerning the receipt of five investigative subpoenas by NMC,
as well as lawsuits relating to NMC, as further described in Item 3, "Legal
Proceedings."
On February 6, 1996, the Company filed a Report on Form 8-K relating to an
agreement to combine NMC with Fresenius AG's dialysis business, as further
discussed in Item 1 above under "Strategic Restructuring and Other Growth
Initiatives." The Company filed a Report on Form 8-K on February 13, 1996,
relating to (a) the announcement of 1995 fourth quarter and full year results
and (b) the Company's receipt of a letter indicating that NMC is a target of a
federal grand jury investigation, as further described in Item 3, "Legal
Proceedings." On March 6, 1996, the
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39
Company filed a Report on Form 8-K announcing the resignation of Thomas L.
Gossage from its Board of Directors. The Company also filed a Report on
Form 8-K on March 27, 1996, relating to the agreement to sell Grace's water
treatment and process chemicals business to Betz Laboratories, Inc., as
further discussed in Item 1 above under "Strategic Restructuring and Other
Growth Initiatives."
Exhibits. The exhibits to this Report are listed below. Other than
exhibits that are filed herewith, all exhibits listed below are incorporated
herein 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.
Exhibit Where Located
- --------------------------------- ---------------------
Agreement and Plan of Reorga- Exhibit 2 to Form 8-K
nization, dated as of February 4, (filed 2/6/96)
1996, between W. R. Grace & Co.
and Fresenius AG (including, as
exhibits thereto, the Distribu-
tion Agreement, dated as of
February 4, 1996, between W. R.
Grace & Co., Fresenius AG and
W. R. Grace & Co.-Conn., and the
Contribution Agreement, dated as
of February 4, 1996, among W. R.
Grace & Co., Fresenius AG,
Steril Pharma GmbH and W. R.
Grace & Co.-Conn.)
Grace Dearborn Worldwide Purchase Exhibit 99.2 to Form 8-K
and Sale Agreement, dated as of (filed 3/27/96)
March 11, 1996, between W. R.
Grace & Co.-Conn. and Betz
Laboratories, Inc.
Certificate of Incorporation of Exhibit 3 to Form 8-K
W. R. Grace & Co., as amended (filed 6/9/88)
By-laws of W. R. Grace & Co., as Exhibit 3.02 to Form 10-K
amended (filed 3/31/95)
Indenture dated as of Septem- Exhibit 4.2 to Form 10-K
ber 29, 1992 among W. R. Grace (filed 3/26/93)
& Co.-Conn., W. R. Grace & Co.
and Bankers Trust Company
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40
Indenture dated as of January Exhibit 4.4 to Form 10-K
28, 1993 among W. R. Grace (filed 3/26/93)
& Co.-Conn., W. R. Grace & Co.
and Bank of New York (successor
to NationsBank of Georgia, N.A.)
364-Day Credit Agreement, dated Exhibit 4.1 to Form 10-Q
as of September 1, 1994, among (filed 11/10/94)
W. R. Grace & Co.-Conn., W. R.
Grace & Co., the several banks
parties thereto and Chemical
Bank, as agent for such banks
Credit Agreement, dated as of Exhibit 4.2 to Form 10-Q
September 1, 1994, among W. R. (filed 11/10/94)
Grace & Co.-Conn., W. R. Grace
& Co., the several banks parties
thereto and Chemical Bank, as
agent for such banks
First Amendment, dated as of Exhibit 4.05 to Form 10-K
December 28, 1994, to the 364- (filed 3/31/95)
Day Credit Agreement dated
as of September 1, 1994
First Amendment, dated as of Exhibit 4.06 to Form 10-K
December 28, 1994, to the (filed 3/31/95)
Credit Agreement dated
as of September 1, 1994
Second Amendment, dated as of Filed herewith
December 31, 1995, to the 364-
Day Credit Agreement dated as
of September 1, 1994
Second Amendment, dated as of Filed herewith
December 31, 1995, to the Credit
Agreement dated as of
September 1, 1994
Credit Agreement, dated as of Filed herewith
December 29, 1995, among W. R.
Grace & Co.-Conn., W. R. Grace &
Co., the several banks parties
thereto and Chemical Bank, as
agent for such banks
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41
First Amendment, dated as of Filed herewith
December 31, 1995, to the
Credit Agreement dated as of
December 29, 1995
Amended and Restated Rights Exhibit to Amendment on
Agreement dated as of June 7, Form 8 to Application for
1990 between W. R. Grace & Co. Registration on Form 8-B
and Manufacturers Hanover Trust (filed 6/19/90)
Company
W. R. Grace & Co. Executive Exhibit 19(f) to Form
Salary Protection Plan, as 8-K (filed 6/9/88)*
amended
W. R. Grace & Co. 1981 Stock Filed herewith*
Incentive Plan, as amended
W. R. Grace & Co. 1986 Stock Filed herewith*
Incentive Plan, as amended
W. R. Grace & Co. 1989 Stock Filed herewith*
Incentive Plan, as amended
W. R. Grace & Co. 1994 Stock Filed herewith*
Incentive Plan, as amended
W. R. Grace & Co. 1994 Stock Filed herewith*
Retainer Plan for Nonemployee
Directors, as amended
Forms of Stock Option Agreements Exhibit 10(h) to Form
10-K (filed 3/28/92)*
Forms of Restricted Share Award Exhibit 10(i) to Form 10-K
Agreements (filed 3/28/92)*
Information Concerning W. R. Pages 8-13 and 29-33 of
Grace & Co. Incentive Compen- Proxy Statement
sation Program, Deferred (filed 4/10/95)*
Compensation Program and
Long-Term Incentive Program
W. R. Grace & Co. Retirement Exhibit 10(o) to Form
Plan for Outside Directors, as 10-K (filed 3/28/92)*
amended
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42
Employment Agreement dated Exhibit 10(x) to Form
as of April 1, 1991 between 10-K (filed 3/28/92)*
W. R. Grace & Co.-Conn. and
Constantine L. Hampers, as
amended
Housing Loan Agreement dated Exhibit 10(q) to Form
as of August 1, 1987 between 10-K (filed 3/29/88);
W. R. Grace & Co. and J. P. Exhibit 19(i) to Form
Bolduc, related Amendment and 8-K (filed 6/9/88)*
Assignment dated May 10, 1988
Employment Agreement dated Exhibit 10.13 to Form
August 1, 1993 between J. P. 10-K (filed 3/28/94)*
Bolduc and W. R. Grace & Co.
Retirement Agreement between Exhibit 10.23 to Form 10-K
W. R. Grace & Co. and J. Peter (filed 3/26/93)*
Grace dated December 21, 1992
Executive Severance Agreement Exhibit 10.26 to Form 10-K
dated September 1, 1992 (filed 3/26/93)*
between W. R. Grace & Co. and
Constantine L. Hampers
Form of Executive Severance Exhibit 10.28 to Form 10-K
Agreement between W. R. Grace (filed 3/26/93)*
& Co. and others
Consulting Agreement Exhibit 10.29 to Form 10-K
dated June 1, 1992 between (filed 3/26/93)*
W. R. Grace & Co. and
Kamsky Associates, Inc.
Incentive Compensation Agreement Exhibit 10.30 to Form 10-K
dated June 1, 1992 between (filed 3/26/93)*
National Medical Care, Inc.
and Kamsky Associates, Inc.
Consulting Agreement dated as of Exhibit 10.23 to Form 10-K
December 1993 between National (filed 3/31/95)*
Medical Care, Inc. and Virginia
A. Kamsky
Amendment to Consulting Agreement, Exhibit 10.1 to Form 10-Q
dated as of May 1, 1995, among (filed 5/12/95)*
National Medical Care, Inc.,
Virginia A. Kamsky and Southeast
Asia Markets, Inc.
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43
W. R. Grace & Co. Supplemental Exhibit 10.25 to Form 10-K
Executive Retirement Plan, as (filed 3/28/94)*
amended
Agreement dated March 1, 1995 Exhibit 10.27 to Form 10-K
between W. R. Grace & Co. and (filed 3/31/95)*
Jean-Louis Greze
Letter Agreement dated February Filed herewith*
12, 1996 between W. R. Grace &
Co. and Jean-Louis Greze
Letter Agreement dated June 15, Filed herewith*
1995 between W. R. Grace & Co.
and Dr. F. Peter Boer
Letter Agreement dated July 31, Filed herewith*
1995 between W. R. Grace & Co.
and Brian J. Smith and letter
dated August 9, 1995 from W. R.
Grace & Co. to Brian J. Smith
Agreements dated March 2 and Exhibit 10.28 to Form 10-K
March 7, 1995 between J. P. (filed 3/31/95)*
Bolduc and W. R. Grace & Co.
Agreement dated April 1, 1991 Exhibit 10.29 to Form 10-K
between National Medical Care, (filed 3/31/95)*
Inc. and Constantine L. Hampers
Employment Agreement dated as Exhibit 10.1 to Form 10-Q
of May 1, 1995 between the (filed 8/14/95)*
Company and Albert J. Costello
Weighted Average Number of Filed herewith
Shares and Earnings Used in (in Financial Supplement
Per Share Computations to 10-K)
Computation of Ratio of Earnings Filed herewith
to Fixed Charges and Combined (in Financial Supplement
Fixed Charges and Preferred to 10-K)
Stock Dividends
Selected Portions of the 1995 Filed herewith
Annual Report to Shareholders (in Financial Supplement
of W. R. Grace & Co. to 10-K)
List of Subsidiaries of Filed herewith
W. R. Grace & Co.
-41-
44
Consent of Independent Accoun- Filed herewith
tants (in Financial Supplement
to 10-K)
Powers of Attorney Filed herewith
Letter of Intent dated Exhibit 99.01 to Form 10-K
November 5, 1993 between (filed 3/31/95)
W. R. Grace & Co. and J.
Peter Grace III, as amended
Agency Agreement dated Exhibit 99.02 to Form 10-K
June 13, 1994 between HSC (filed 3/31/95)
Holding Co., Inc. and Grace
Hotel Services Corporation
Letter Agreement dated Exhibit 99.03 to Form 10-K
December 14, 1994 among HSC (filed 3/31/95)
Holding Co., Inc., Grace Hotel
Services Corporation and W. R.
Grace & Co.
Services Agreement dated Exhibit 99.04 to Form 10-K
November 10, 1994 between HSC (filed 3/31/95)
Holding Co., Inc. and Grace
Hotel Services Corporation
Settlement Agreement, dated as Filed herewith
of January 26, 1996, among HSC
Hospitality, Inc. (f/k/a HSC
Holding Co., Inc.), Grace Hotel
Services Corporation and W. R.
Grace & Co.
Consulting Agreement dated as Filed herewith
of December 1, 1995 between
W. R. Grace & Co. and Gordon
J. Humphrey
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45
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, thereunto duly authorized.
W. R. GRACE & CO.
By /s/ P. D. Houchin
--------------------------
P. D. Houchin
(Senior Vice President and
Chief Financial Officer)
Date: March 29, 1996
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 29, 1996.
Signature Title
--------- -----
A. J. Costello* President and Director
(Principal Executive Officer)
E. W. Duffy* T. A. Holmes* }
H. A. Eckmann* P. S. Lynch* }
M. A. Fox* R. C. Macauley* } Directors
J. W. Frick* J. E. Phipps* }
C. L. Hampers* E. J. Sullivan* }
/s/ P. D. Houchin Senior Vice President
- ------------------------- (Principal Financial Officer and
(P. D. Houchin) Acting Principal Accounting Officer)
____________
* By signing his name hereto, Robert B. Lamm 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/ Robert B. Lamm
---------------------------------
Robert B. Lamm
(Attorney-in-Fact)
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46
FINANCIAL SUPPLEMENT
W. R. GRACE & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
47
FINANCIAL SUPPLEMENT
TO
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
W. R. GRACE & CO. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE AND EXHIBITS