UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission file number 1-13953
W. R. GRACE & CO.
Incorporated under the Laws of the I.R.S. Employer Identification No.
State of Delaware 65-0773649
7500 GRACE DRIVE, COLUMBIA, MARYLAND 21044-4098
410/531-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $.01 par value } New York Stock Exchange, Inc.
Preferred Stock Purchase Rights }
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of W. R. Grace & Co. voting and non-voting common equity held by non-affiliates as of June 30, 2002 (the last business day of the registrant's most recently completed second fiscal quarter) was $162,603,000.
At February 28, 2003, 65,542,679 shares of W. R. Grace & Co. Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I............................................................................................................1
Item 1. Business....................................................................................1
Availability Of SEC Reports............................................................1
Chapter 11 Filing......................................................................1
Business Overview......................................................................2
Products And Markets...................................................................4
Intellectual Property; Research Activities.............................................9
Environmental, Health And Safety Matters...............................................9
Item 2. Properties.................................................................................10
Item 3. Legal Proceedings..........................................................................10
Item 4. Submission of Matters to a Vote of Security Holders........................................16
PART II..........................................................................................................16
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................16
Item 6. Selected Financial Data....................................................................18
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition......18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................18
Item 8. Financial Statements and Supplementary Data................................................18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................18
PART III.........................................................................................................18
Item 10. Directors and Executive Officers of the Registrant.........................................18
Item 11. Executive Compensation.....................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters....................................................................................27
Item 13. Certain Relationships and Related Transactions.............................................29
Item 14 Controls and Procedures....................................................................29
PART IV..........................................................................................................29
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................29
SIGNATURES.......................................................................................................34
CERTIFICATIONS...................................................................................................35
FINANCIAL SUPPLEMENT............................................................................................F-1
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PART I
ITEM 1. BUSINESS
AVAILABILITY OF SEC REPORTS
W. R. Grace & Co.(1) maintains an Internet website at www.grace.com Grace makes available (and made available throughout 2002), free of charge through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. These reports may be accessed through the website's investor information page.
CHAPTER 11 FILING
On April 2, 2001, W. R. Grace & Co. and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the District of Delaware. The cases were consolidated for the purpose of joint administration and were assigned case numbers 01-01139 through 01-01200. Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the filing.
The filing was made in response to a sharply increasing number of asbestos-related bodily injury claims. Under Chapter 11, Grace is operating its businesses as debtor-in-possession under court protection from its creditors and claimants, while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims against it.
Prior to 2000, Grace was able to settle asbestos-related claims through direct negotiations. The filing of claims had stabilized, and annual cash flows were manageable and fairly predictable. In 2000, the litigation environment changed with an unexpected 81% increase in bodily injury claims, which Grace believes was due to a surge in unmeritorious claims. Trends in claims filing and settlement demands showed no signs of returning to historic levels and were exacerbated by the Chapter 11 filings of several co-defendants in asbestos bodily injury litigation. These trends greatly increased the risk that Grace would not be able to resolve its pending and future asbestos-related claims under the state court system.
Grace concluded that a federal court-supervised Chapter 11 filing provides the best forum available to achieve predictability and fairness in the claims resolution process. By filing under Chapter 11, Grace expects to be able both to obtain a comprehensive resolution of the claims against it and preserve the inherent value of its businesses.
As a consequence of the filing, pending litigation against Grace is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to realize its pre-petition claims except pursuant to order of the Bankruptcy Court. Since the filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court.
Grace intends to address all of its pending and future asbestos-related claims and all other pre-petition claims in a plan of reorganization. Such a plan of reorganization may include the establishment of a trust
through which all pending and future asbestos-related claims would be channeled for resolution. However, it is currently impossible to predict with any degree of certainty the amount that would be required to be contributed to the trust, how the trust would be funded, how other pre-petition claims would be treated or what impact any reorganization plan may have on the shares of common stock of Grace. The interests of Grace's shareholders could be substantially diluted or cancelled under a plan of reorganization.
Grace's asbestos-related litigation and Chapter 11 filing are further discussed in Item 3 of this Report, and in Notes 1, 2 and 3 to Grace's Consolidated Financial Statements as of December 31, 2002 and December 31, 2001 and for each of the three years ended December 31, 2002 ("Consolidated Financial Statements") and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement to this Report.
BUSINESS OVERVIEW
Grace, through its subsidiaries, is one of the world's leading specialty chemicals and materials companies. Grace entered the specialty chemicals industry in 1954, when it acquired both the Dewey and Almy Chemical Company and the Davison Chemical Company. Grace operates in the following two business segments:
o Davison Chemicals manufactures catalysts and silica-based products. Davison Chemicals' catalysts include (1) fluid cracking catalysts and additives used by petroleum refineries to convert distilled crude oil into transportation fuels and other petroleum-based products; (2) hydroprocessing catalysts that upgrade heavy oils and remove certain impurities; and (3) polyolefin catalysts and catalyst supports that are essential components in the manufacture of high density and linear low density polyethylene resins used in products such as plastic film, high-performance plastic pipe and plastic household containers. Davison Chemicals' silica gels, colloidal silicas, precipitated silicas, and zeolite adsorbents are used in a wide variety of industrial, consumer, biotechnology and pharmaceutical segments, such as ink jet paper, paints, toothpastes, precision investment casting, rubber compounds, insulated glass and separations/chromatography, as well as in edible oil refining and petrochemical processes. Davison Chemicals accounted for approximately 52% of Grace's 2002 sales.
o Performance Chemicals produces (1) specialty construction chemicals, including performance-enhancing concrete admixtures, cement additives and masonry products; (2) specialty building materials, including fireproofing and waterproofing materials and systems; and (3) sealants and coatings for packaging that protect food and beverages from bacteria and other contaminants, extend shelf life and preserve flavor. Performance Chemicals accounted for approximately 48% of Grace's 2002 sales.
Grace's principal executive offices are located at 7500 Grace Drive, Columbia, Maryland 21044, telephone 410/531-4000. As of year-end 2002, Grace had approximately 6,400 full-time employees worldwide in its continuing operations.
Information concerning the net sales, pretax operating income and total assets of Grace's continuing operations by business segment and information by geographic area for 2002, 2001 and 2000 is contained in Note 19 to the Consolidated Financial Statements in the Financial Supplement to this Report.
Strategic Objectives and Actions. Grace's strategy has been, and will continue to be, to seek to enhance enterprise value by profitably growing its specialty chemicals businesses globally and achieving high levels of financial performance. To achieve these objectives, Grace plans to (i) invest in research and development activities, with the goals of introducing new high-performance products and services and
enhancing manufacturing processes; (ii) implement process and productivity improvements and cost-management initiatives (including the use of Six Sigma processes) such as rigorous controls on working capital and capital spending; and (iii) pursue selected acquisitions and alliances. These plans are designed to make Grace a high-performance company focused on the strengths of its global specialty chemicals businesses.
Projections and Other Forward-Looking Information. This Report contains, and other communications by Grace may contain, projections or other "forward-looking" information. Forward-looking information includes all statements regarding Grace's expected financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, benefits from new technology, plans and objectives of management, and markets for stock. Like any other business, Grace is subject to risks and other uncertainties that could cause its actual results to differ materially from any projections or that could cause other forward-looking information to prove incorrect. Grace does not undertake any obligation to update any forward-looking information that may be contained in this Report.
Most significantly, Grace filed for protection under Chapter 11 on April 2, 2001 as a result of a sharply increasing number of asbestos bodily injury claims. See Item 3 of this Report, and Notes 1, 2 and 3 to Grace's Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement to this Report, for a more detailed discussion of risks related to Grace's asbestos liabilities.
In addition to general economic, business and market conditions, Grace is also subject to other risks and uncertainties, including the following:
o developments in and the outcome of the Chapter 11 proceedings, including but not limited to the determination of the allowed number and cost of resolution of pending and future asbestos-related claims and the time required to confirm and implement a plan of reorganization;
o the loss of senior management and other key employees as a result of the Chapter 11 proceedings;
o the loss of flexibility in operating its businesses and the higher costs of doing business under Chapter 11;
o greater than expected liabilities with respect to environmental remediation;
o an inability to obtain committed credit facilities or alternative sources of liquidity in amounts sufficient to fund operations, growth initiatives and non-core obligations;
o a decline in worldwide oil consumption or the development of new methods of oil refining;
o increases in prices of raw materials and energy costs;
o the consolidation of major customers, which could increase customer purchasing power, thereby putting pressure on operating profits;
o an inability to gain customer acceptance, or slower than anticipated acceptance, of new products or product enhancements;
o changes in environmental regulations or societal pressures that make Grace's business operations more costly or that change the types of products used, especially petroleum-based products;
o slower than anticipated economic advances in less developed countries;
o foreign currency devaluations in developing countries or other adverse changes in currency exchange rates (including, in particular, the U.S. dollar to Euro exchange rate);
o technological breakthroughs rendering a product, a class of products or a line of business obsolete;
o an inability to adapt to continuing technological improvements by competitors or customers; and
o the acquisition (through theft or other means) and use by others of Grace's proprietary formulas and other know-how (particularly in the sealants and coatings business).
See Notes 1, 2, 3, 4, 5, 10, 13 and 14 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for additional information concerning risks and uncertainties.
PRODUCTS AND MARKETS
Specialty Chemicals Industry Overview. Specialty chemicals, such as those produced by Grace, are high-value-added products used as catalysts, intermediates, components or additives in a wide variety of products and processes. They are produced in relatively small volumes and must satisfy well-defined performance requirements and specifications. Specialty chemicals are often critical components of the end products and catalysts for the processes in which they are used; consequently, they are tailored to meet customer needs, which generally results in a close relationship between the specialty chemicals producer and the customer. Rapid response to changing customer needs and reliability of product and supply are important competitive factors in specialty chemicals businesses.
Grace's management believes that in specialty chemicals businesses technological leadership (resulting from continuous innovation through research and development), combined with product differentiation and superior customer service, lead to higher operating margins. Grace believes that these factors reward it for the research and development and customer service costs associated with its strategy.
Davison Chemicals Business Segment (Catalysts and Silica-Based
Products). Davison, founded in 1832, is composed of two primary product groups:
(i) catalysts and (ii) silica products and adsorbents. These product groups
principally apply silica, alumina and zeolite technology in the design and
manufacture of products to meet the varying specifications of such diverse
customers as major oil refiners, plastics and chemical manufacturers, and
consumer products and pharmaceutical/nutraceutical companies. Grace believes
that Davison's technological expertise provides a competitive edge, allowing it
to quickly design products and materials that meet changing customer
specifications and to develop new products and materials that expand its
existing technology.
Catalysts. Davison produces refinery catalysts, including (i) fluid cracking catalysts ("FCC") used by petroleum refiners to convert distilled crude oil into transportation fuels (such as gasoline and diesel fuels) and other petroleum-based products, and (ii) hydroprocessing catalysts that upgrade heavy oils and remove certain impurities (such as nitrogen, sulfur and heavy metals). Davison also develops and manufactures FCC additives used for octane enhancement and to reduce emissions of sulfur oxides, nitrogen oxides and carbon monoxide from the FCC unit. Davison has recently introduced new catalyst/additive technologies for sulfur reduction in gasoline. Oil refining is a highly specialized discipline, demanding that products be tailored to meet local variations in crude oil and the refinery's product mix. Davison works regularly with most of the approximately 360 refineries in the world, helping to find the most appropriate catalyst formulations for refiners' changing needs. To better serve its customers, Davison has designed a user-specific web site, e-Catalysts.com.
Davison's catalyst business has benefited from the increased use of FCC units to produce selected petrochemical feedstocks. It has also benefited from the passage of more stringent environmental regulations, which has increased demand for FCC additives and other products that reduce environmental emissions. Davison's business is affected by the capacity utilization of customers' processing units - as capacity utilization increases, the customer frequently uses a disproportionately greater amount of catalysts. Consolidation in the refining industry may affect Davison's catalyst sales and margins, as the purchasing power of its customers may increase, and the gain or loss of a customer may have a greater impact on Davison's sales.
Davison operates its hydroprocessing catalyst business through Advanced Refining Technologies LLC ("ART"), a joint venture between Grace and Chevron Products Company that combined Chevron's fixed bed residuum catalyst business with Davison's ebullating bed residuum catalyst and distillate catalyst business. In 2002, ART acquired an exclusive license in most of the world for the hydroprocessing technology of Japan Energy Corporation and its subsidiary, Orient Catalyst Company, which expanded Davison's position in residuum and distillate hydroprocessing technologies. In response to increased demand for lower sulfur transportation fuels, ART has recently introduced new hydroprocessing catalyst technologies for sulfur reduction in gasoline and diesel fuels.
Grace believes that Davison is one of the world leaders in refinery catalysts and the largest supplier of FCCs in the world. Competition in the refinery catalyst business is based on technology, product performance, customer service and price. Davison's two principal global competitors in FCCs are Engelhard Corporation and Akzo Nobel. Davison has several competitors for FCC additives and hydroprocessing catalysts.
Davison is also a major producer of polyolefin catalysts and catalyst supports, essential components in the manufacture of high density and linear low density polyethylene resins that are in turn used in products such as plastic film, high-performance plastic pipe and plastic household containers. Davison catalysts and catalyst supports are used in manufacturing nearly half of all such resins produced worldwide. The polyolefin catalyst business is technology-intensive and focuses on providing products formulated to meet customer specifications. There are many manufacturers of polyolefin catalysts, and most compete on a worldwide basis. Competition has recently intensified because of evolving technologies, particularly the use of metallocene catalysts, which allow manufacturers to design polymers with exact performance characteristics. In January 2002, Davison acquired the polyolefin catalyst manufacturing assets of Borealis A/S, giving Davison access to new polyolefin catalyst and catalyst carrier technologies.
Silicas and Adsorbents. Silica products and zeolite adsorbents produced by Davison are used in a wide variety of industrial, and consumer applications. Davison manufactures silica gels, colloidal silicas and precipitated silicas. These silicas have different physical properties, such as particle size, surface area, porosity, and surface chemistry, which give each type of silica unique characteristics that make it appropriate for specific applications. Davison has multiple competitors in each silicas/adsorbents segment in which it participates. Competition is based on product performance, customer service, and price.
Silica gels are used in coatings as matting agents (i.e., to reduce gloss), in plastics to improve handling, in pharmaceuticals as a formulating agent, in toothpastes as abrasives and whiteners, in foods to carry flavors and prevent caking, and in the purification of edible oils and beer stabilization. Davison is leveraging its materials science expertise, both internally and through acquisitions, to develop and introduce new silica materials and technologies, particularly for biotechnology separations applications. Davison recently has developed a new colloidal-based product and silica formulations for ink jet paper coatings to provide both glossy and matte functionality, expanding its portfolio of digital media solutions for ink jet papers, photos, and commercial wide-format printing. Davison has also introduced new products for other coatings (where silica is used to reduce gloss), such as for thin film applications, industrial wood coatings, and radiation-cured coatings. Davison intends to introduce new products for chromatography columns and separations media in 2003.
Colloidal silicas are used primarily as binders in precision investment casting and refractory applications. Precipitated silicas are used predominantly in the manufacture of tires and other industrial rubber goods such as belts, hoses and footwear. Zeolites, while not silica-based products, are based on silica/alumina technology. Zeolite adsorbents are used between the two panes of insulating glass to adsorb moisture and are also used in process applications to adsorb water and separate certain chemical components from mixtures.
The silicas and adsorbents business has a large, fragmented customer base, reflecting the diverse markets served by its products. To better serve these customers, Davison has introduced web-based initiatives, including online ordering of packaged desiccants, process design formulas to assist customers in determining their needs, and literature access and customer feedback tools. Approximately half of Davison's silica and adsorbent sales are in Europe.
Davison Financial and Other Business Information. Davison's net sales were $945 million in 2002, $874 million in 2001, and $784 million in 2000; 41% of Davison's 2002 net sales were generated in North America, 38% in Europe, 16% in Asia Pacific, and 5% in Latin America. Sales of catalysts accounted for 37% of total net sales of Grace in 2002, 36% in 2001, and 35% in 2000. Sales of silica products and zeolite adsorbents accounted for 15% of Grace's total net sales in 2002 and 2001, and 14% in 2000.
At year-end 2002, Davison employed approximately 3,100 people worldwide in 16 facilities (10 in the U.S., two in Germany, and one each in Canada, Brazil, Sweden and Malaysia). Davison's principal U.S. manufacturing facilities are located in Baltimore, Maryland and Lake Charles, Louisiana. Its largest non-U.S. location is in Worms, Germany. Davison has a direct selling force and distributes most of its products directly to approximately 12,000 customers (500 for catalysts and more than 11,000 for silicas/adsorbents), the largest of which accounted for approximately 4% of Davison's 2002 sales.
Most raw materials used in the manufacture of Davison products are available from multiple sources. In some instances, Davison produces its own raw materials and intermediates. Natural gas and petroleum-based raw materials are two of the principal materials used in Davison's manufacturing process. World events and other economic factors can cause volatility in the price of these materials, which can impact Davison's operating margins. Seasonality does not have a significant overall effect on Davison's business. However, sales of FCC catalysts tend to be lower in the first quarter prior to the shift in production by refineries from home heating oil for the winter season to gasoline production for the summer season. Silica products and polyolefin catalysts are the product lines most sensitive to general downturns in economic activity.
Performance Chemicals Business Segment (Specialty Construction Chemicals, Specialty Building Materials, and Sealants and Coatings). Grace's Performance Chemicals segments include: (1) specialty construction chemicals and building materials, in which Grace is a leading supplier to the nonresidential (commercial and infrastructure) construction industry, and to a lesser extent, the residential construction and repair segment; and (2) a sealants and coatings product line operated under the Darex(R) name.
Construction Chemicals and Building Materials. Specialty construction chemicals (principally concrete admixtures, cement additives and masonry products) add strength, control corrosion and enhance the handling and application of concrete, improve the manufacturing efficiency and performance of cement, and improve the water resistance and other qualities of masonry wall and paving systems. Grace has introduced a number of new construction chemicals products and product enhancements in recent years. These include an admixture that reduces concrete shrinkage and helps prevent cracking; a product that enables contractors to obtain improved concrete set times in colder temperatures; an admixture that inhibits corrosion and prolongs the life of concrete structures; and an additive that improves cement processing efficiency and product quality. Grace seeks to continuously improve and adapt these products for different applications.
In 2001, Grace introduced new fiber reinforcements for concrete and a system for producing self-consolidating concrete (which improves the concrete's conformity to the shape of a structure). In 2002, Grace acquired the masonry admixtures business of Addiment Incorporated, which expanded Grace's position in the U.S. paver segment.
Specialty building materials prevent structural water damage (for example, water- and ice-barrier products for residential use and waterproofing systems for commercial structures), and protect structural steel against collapse caused by fire. In North America, the specialty building materials product line also manufactures and distributes vermiculite products used in insulation and other applications. Recent product developments include liquid-applied waterproofing products and new roof underlayments that provide protection from ice and wind-driven rain; enhancements to spray-on fireproofing products that improve applicator productivity; and, through an acquisition in 2000, firestops. Firestops are caulk and sealant systems that retard the spread of heat, flame and smoke through walls, ceiling joints, and openings for wiring and piping.
In addition to new product introductions, product enhancements and acquisitions, Grace looks for growth opportunities in developing countries, where increases in construction activity and sophistication of construction practices can increase demand for Grace's construction chemicals and building materials products.
Construction chemicals and building materials are marketed under the Grace(R) name to abroad range of customers, including cement manufacturers, ready-mix and precast concrete producers, local contractors, specialty subcontractors and applicators, masonry block manufacturers, building materials distributors and other industrial manufacturers, as well as to architects and structural engineers. For some of these customer groups (such as contractors), cost and ease of application are key factors in making purchasing decisions; for others (such as architects and structural engineers), product performance and design versatility are the critical factors. In view of this diversity, and because the construction chemicals and building materials businesses require intensive sales and customer service efforts, Performance Chemicals maintains a separate sales and technical support team for each of its product groups. These sales and support teams sell products under global contracts, under U.S. or regional contracts, and on a job-by-job basis. Consequently, Grace competes globally with several large construction materials suppliers and regionally and locally with numerous smaller competitors. In recent years, the cement and concrete industry has experienced some consolidation, particularly in markets outside of the U.S. Competition is based largely on technical support and service, product performance, adaptability of the product and price.
The construction business is cyclical in response to economic conditions and construction demand. The construction business is also seasonal due to weather conditions. Grace seeks to increase profitability and minimize the impact of cyclical downturns in regional economies by introducing technically advanced higher-performance products, expanding geographically, and developing business opportunities in renovation construction markets. Although in recent years these strategies have been successful in minimizing the impact of cyclicality on Grace's construction business, a significant downturn in North American commercial construction activity adversely affected results of operations in 2002.
The raw materials used by the construction chemicals and building materials product lines can be obtained from multiple sources, including commodity chemical producers, petroleum companies and paper manufacturers. In most instances, there are at least two alternative suppliers for each of the principal raw materials used by these businesses.
Sealants and Coatings. The Darex(R) sealants and coatings business consists primarily of four product lines: can sealants and closure sealants for rigid containers, coatings for metal packaging, and specialty barrier coatings for flexible packaging. These products are used to assure the quality of packaging and to preserve container contents. Can sealants ensure a hermetic seal between the lid and the body of beverage, food, aerosol and other cans. Closure sealants are used to seal pry-off and twist-off metal crowns, as well as roll-on pilfer-proof and plastic closures for glass and plastic bottles and jars used in beverage and food applications. Coatings are used in the manufacture of cans and closures to protect the metal against corrosion, to protect the contents against the influences of metal, to ensure proper adhesion of sealing compounds to metal surfaces,
and to provide base coats for inks and for decorative purposes. These products are principally sold to container manufacturers. Specialty barrier coatings are used to improve the gas and/or vapor barrier performance of various packaging materials. They are principally sold to manufacturers of oriented polypropylene films for food packaging.
Grace is seeking to expand its Darex(R) product offerings and improve sales growth by extending its technology to new markets, such as its oxygen-scavenging compounds (which absorb oxygen to increase shelf life) and high barrier materials that limit gas transmission into plastic packaging. Grace is also looking to improve sales of sealants and coatings through niche opportunities in metal packaging and continued growth in developing countries. However, sales growth has been impacted and will likely be impacted in the future by the trend toward increasing use of plastic packaging. Therefore, Grace has also been focusing on improving the profitability and cash flows of this business through productivity initiatives and a worldwide program to rationalize facilities.
Competition is based on providing high-quality customer service at customer sites, as well as on uniform product quality and reliability, the ability to offer environmentally-friendly products and price. In addition, because of the relative concentration of the canning and bottling market, maintaining relationships with leading container manufacturers, canners and bottlers, and assisting them as they reengineer processes are key elements for success.
Although raw materials used in the sealants and coatings business, including resins, rubber and latices, are generally available from multiple sources, many raw materials are purchased from single source suppliers. Some raw materials are also subject to pricing pressures from time to time, particularly certain specialty resins and commodity solvents, resins and plasticizers because of market demand or the volatility of oil prices. Also, currency devaluations in developing countries may adversely affect raw material costs and the prices the business may charge for its products. Performance Chemicals has been successful in establishing a supply chain organization focused on managing raw material costs and flow to alleviate some of these pressures. The impact of seasonality is not significant to the sealants and coatings business.
Performance Chemicals Financial and Other Business Information. Net sales of Grace's Performance Chemicals segment in 2002 totaled $872 million (57% in North America, 23% in Europe, 14% in Asia Pacific, and 6% in Latin America), versus $849 million in 2001 and $814 million in 2000. Sales of specialty construction chemicals accounted for 22% of Grace's total net sales in 2002, 21% in 2001 and 22% in 2000; sales of specialty building materials accounted for 13% of Grace's total net sales in 2002, and 14% in 2001 and 2000; and sales of Darex(R) products accounted for 13% of Grace's total net sales in 2002, 14% in 2001 and 15% in 2000.
At year-end 2002, Grace employed approximately 3,000 people at 64 Performance Chemicals production facilities (25 in North America, 19 in Asia Pacific, 14 in Europe, and 6 in Latin America) and approximately 70 sales offices worldwide. Most of Performance Chemicals' sales are direct sales to the customer. Performance Chemicals' capital expenditures tend to be relatively lower, and sales and marketing expenditures tend to be relatively higher, than those of Davison Chemicals.
See Note 19 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for further information regarding the Davison and Performance Chemicals business segments.
INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES
Grace's products, processes and manufacturing equipment are protected by numerous patents and patent applications. Grace also benefits from legally protectable know-how and other proprietary information relating to many of its products and processing technologies. As competition in the markets in which Grace does business is often based on technological superiority and innovation, with new products based on technological developments being introduced frequently, the ability to achieve technological innovations and to obtain patent or other intellectual property protection is important. There can be no assurance, however, that Grace's patents, patent applications or other intellectual property will provide sufficient proprietary protection. In addition, other companies may independently develop similar systems or processes that circumvent patents issued to Grace, or may acquire patent rights within the fields of Grace's businesses.
Grace's research and development programs are directed toward the development of new products and processes and the improvement of, and development of new uses for, existing products and processes. Research is conducted in all regions, with North America and Europe accounting for the most activity. Grace's research and development strategy is to develop technology platforms on which new products will be based, while also focusing on the improvement of existing products and/or the adaptation of existing products to customer needs.
Research and development expenses relating to continuing operations amounted to $52 million in 2002, $49 million in 2001, and $46 million in 2000. These amounts include expenses incurred in funding external research projects. The amount of research and development expenses relating to government- and customer-sponsored projects (rather than projects sponsored by Grace) was not material.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Manufacturers of specialty chemicals products, including Grace, are subject to stringent regulations under numerous U.S. federal, state and local and foreign environmental, health and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other materials. Grace has expended substantial funds to comply with such laws and regulations and expects to continue to do so in the future. The following table sets forth Grace's expenditures in the past three years, and its estimated expenditures in 2003 and 2004, for (i) the operation and maintenance of environmental facilities and the disposal of wastes with respect to continuing operations; (ii) capital expenditures for environmental control facilities relating to continuing operations; and (iii) site remediation:
(i) (ii) (iii)
Operation of
Facilities and Capital Site
Waste Disposal Expenditures Remediation
-------------- ------------ -----------
(in $ millions)
2000 $26 $4 $42
2001 32 4 27
2002 37 6 14
2003 (est.) 37 7 8
2004 (est.) 38 10 22
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The decline in site remediation costs for 2002, and the estimated decline for 2003 reflects reduced spending at non-owned sites due to Grace's Chapter 11 status. The $22 million in estimated site remediation
expenditures in 2004 does not include possible additional spending or reimbursement of remediation costs related to Grace's former vermiculite mining and processing activities in the Libby, Montana area.
Grace continuously seeks to improve its environmental, health and safety performance. To the extent applicable, Grace extends the basic elements of the American Chemistry Council's Responsible Care(R) program to alL Grace locations worldwide, embracing specific performance objectives in the key areas of product stewardship, employee health and safety, community awareness and emergency response, distribution, process safety and pollution prevention. In addition, Grace is in the process of implementing the key elements of the new Responsible Care(R) Security Code for its operations and systems, including a review of existing company security (including cyber-security) vulnerability, the enhancement of security systems and countermeasures, and the protection of company assets.
For additional information, see Item 3 of this Report, and Note 14 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement to this Report.
ITEM 2. PROPERTIES
Grace operates manufacturing and other types of plants and facilities (including office and other service facilities) throughout the world. Some of these plants and facilities are shared by more than one Grace business unit. Grace considers its major operating properties to be in good operating condition and suitable for their current use. Grace believes that, after taking planned expansion into account, the productive capacity of its plants and other facilities is generally adequate for current operations and foreseeable growth. See Note 19 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for information regarding Grace's capital expenditures.
Specific information regarding Grace's properties by business segment is set forth in Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
Asbestos Litigation. Grace is a defendant in property damage and bodily injury lawsuits relating to previously sold asbestos-containing products. In most of the bodily injury lawsuits, Grace is one of many defendants. As a result of the Chapter 11 filing, all asbestos-related litigation has been stayed and no party may commence any new proceedings against Grace. However, Grace expects that it will receive additional asbestos-related claims during the Chapter 11 process.
Grace was a defendant in 65,656 asbestos-related lawsuits on April 2, 2001, the date of Grace's Chapter 11 filing. Seventeen of such lawsuits involve claims for property damage, nine relating to Grace's former Zonolite attic insulation ("ZAI") product (one of which has since been dismissed) and eight relating to a number of former asbestos-containing products (two of which also involve ZAI). The remainder of such lawsuits involve 129,191 claims for bodily injury. As part of the Chapter 11 process, the Bankruptcy Court established a bar date of March 31, 2003 for submission of additional asbestos-related property damage claims. (The bar date does not apply to asbestos-related bodily injury claims or claims related to ZAI, which will be addressed separately by the court.) As new claims are filed, Grace will be cataloguing and assessing their validity.
The plaintiffs in property damage lawsuits generally seek to have the defendants pay the cost of removing, containing or repairing the asbestos-containing materials in the affected buildings. Through April 2, 2001, 140 asbestos property damage cases were dismissed without payment of any damages or settlement
amounts; judgments were entered in favor of Grace in nine cases (excluding cases settled following appeals of judgments in favor of Grace); judgments were entered in favor of the plaintiffs in eight cases for a total of $86.1 million (one of which is on appeal); and 207 property damage cases were settled for a total of $696.8 million.
In February 2000 a purported class action lawsuit was filed in the U.S. District Court for the Eastern District of Massachusetts against the Company (Lindholm v. W. R. Grace & Co.) on behalf of all owners of homes containing ZAI, a product formerly sold by Grace that may contain trace amounts of asbestos. The action seeks damages and equitable relief, including the removal, replacement and/or disposal of all such insulation. After Lindholm was filed, nine additional purported class action ZAI lawsuits were initiated against Grace prior to the Chapter 11 filing. The nine lawsuits were filed in various state and federal courts asserting similar claims and seeking damages similar to those in Lindholm. One of the purported federal class actions has been consolidated with Lindholm. As a result of the Chapter 11 filing, all of these cases have been transferred to the U.S. Bankruptcy Court for the District of Delaware.
The plaintiffs in the ZAI lawsuits assert that this product is in millions of homes throughout the U.S. and that the cost of removal could be several thousand dollars per home. While Grace has not completed its investigation of the claims described in these lawsuits, testing and analysis of this product by Grace and others supports Grace's belief that the product was and continues to be safe for its intended purpose and poses little or no threat to human health. In July 2002, the Bankruptcy Court approved special counsel to represent the ZAI claimants, at Grace's expense, in a proceeding to determine certain threshold scientific issues regarding ZAI. The court has set a litigation schedule that would result in pretrial hearings on these issues in the third quarter of 2003. At this time, Grace is not able to assess the extent of any possible liability related to this matter.
Cumulatively through April 2, 2001, 16,354 bodily injury lawsuits involving 35,720 claims were dismissed without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved), and 55,489 lawsuits involving 163,698 claims were disposed of for a total of $645.6 million.
Based on Grace's experience and analysis of trends in asbestos bodily injury litigation, Grace has endeavored to project the number and ultimate cost of all present and future bodily injury claims expected to be asserted, based on actuarial principles, and to measure probable and estimable liabilities under generally accepted accounting principles. Grace has accrued $973.2 million at December 31, 2002 as its estimate of the cost to resolve all asbestos-related bodily injury cases and claims pending as well as those expected to be filed in the future, and all pending property damage cases for which sufficient information is available to form a reasonable estimate of the cost of resolution. This estimate has been made based on historical facts and circumstances prior to April 2, 2001. Grace does not expect to adjust this estimate (other than for normal costs of continuing claims administration) unless developments in the Chapter 11 proceeding provide a reasonable basis for a revised estimate. Grace intends to use the Chapter 11 process to determine the validity and ultimate amount of its aggregate liability for asbestos-related claims. Due to the uncertainties of asbestos-related litigation, Grace's ultimate liability for asbestos-related litigation could differ materially from the recorded liability.
Grace previously purchased insurance policies under which Grace claims coverage for its asbestos-related lawsuits and claims. Grace has settled with and has been paid by all of its primary insurance carriers with respect to both property damage and bodily injury cases and claims. Grace has also settled with its excess insurance carriers that wrote policies available for property damage cases; those settlements involve amounts paid and to be paid to Grace. Grace believes that certain of these settlements may cover attic insulation claims as well as other property damage claims. In addition, Grace believes that additional coverage for attic insulation claims may exist under excess insurance policies not subject to settlement
agreements. Grace has settled with excess insurance carriers that wrote policies available for bodily injury claims in layers of insurance that Grace believes may be reached based on its current estimates. Insurance coverage for asbestos-related liabilities has not been commercially available since 1985.
Pursuant to settlements with primary-level and excess-level insurance carriers with respect to asbestos-related claims, Grace received payments totaling $968.5 million prior to 2000, as well as payments totaling $85.6 million in 2000, $78.8 million in 2001, and $10.8 million in 2002. Under certain settlements, Grace expects to receive additional amounts from insurance carriers in the future and has recorded a receivable of $282.6 million to reflect the amounts expected to be recovered in the future, based on projected payments equal to the amount of the recorded asbestos-related liability.
During 2000, the number of bodily injury claims made against Grace increased significantly compared with 1999 and prior year claim levels, with a total of 48,786 bodily injury claims being received in 2000, versus 26,941 claims in 1999. This trend continued in the first quarter of 2001, when Grace received 16,411 bodily injury claims. Also, costs to resolve asbestos litigation were higher than expected for bodily injury and certain property damage claims. In addition, five significant codefendant companies in bodily injury litigation had petitioned for reorganization under Chapter 11. These developments and events caused an environment that increased the risk of more claims being filed against Grace than previously projected, with higher settlement demands and trial risks. These developments and events also raised substantial doubt whether Grace would be able to manage its asbestos liabilities over the long term under the existing state court system. As a result, following a thorough review of the strategic and operating issues associated with continuing to defend asbestos litigation through the court system versus voluntarily seeking a resolution of such litigation through reorganization under Chapter 11, Grace filed for protection under Chapter 11 on April 2, 2001.
Since its Chapter 11 filing, Grace is aware that asbestos bodily injury lawsuits have continued to be filed against co-defendant companies, and at higher than historical rates. As asbestos bodily injury claims are typically filed against numerous defendants, Grace believes that had it not filed for Chapter 11 reorganization, it likely would have received thousands more claims than it had previously projected.
See Item 1 of this Report and Notes 1, 2 and 3 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for additional information.
Environmental Proceedings. The following is a description of the material environmental proceedings in which Grace is involved:
Grace (together, in most cases, with many other companies) has been designated a "potentially responsible party" ("PRP") by the U.S. Environmental Protection Agency ("EPA") with respect to paying the costs of investigating and remediating pollution at various sites. At year-end 2002, proceedings were pending with respect to approximately 30 sites as to which Grace has been designated a PRP by the EPA. U.S. law provides that all PRPs for a site may be held jointly and severally liable for the costs of investigating and remediating the site. Grace is also conducting investigatory and remediation activities at sites under the jurisdiction of state and/or local authorities. During the Chapter 11 proceeding, Grace does not expect to participate (except in a limited number of special cases) in the joint funding of investigation and remediation, or other settlements, at non-owned sites where it is a PRP. Grace's ultimate liability with respect to such sites will be determined as part of its Chapter 11 proceeding.
From the 1920's until 1990, Grace and previous owners conducted vermiculite mining and related activities near Libby, Montana. The vermiculite ore that was mined contained varying amounts of asbestos as a contaminant, almost all of which was removed during processing. Expanded vermiculite from Libby
was used in products such as fireproofing, insulation and potting soil. In November 1999, Region 8 of the EPA began an investigation into alleged excessive levels of asbestos-related disease in the Libby population related to these former mining activities. This investigation led the EPA to undertake additional investigative activity and to carry out response actions in and around Libby. On March 30, 2001, the EPA filed a lawsuit in U.S. District Court for the District of Montana, Missoula Division (United States v. W. R. Grace & Company, et al.) under the Comprehensive Environmental Response, Compensation and Liability Act for the recovery of costs allegedly incurred by the United States in response to the release or threatened release of asbestos in the Libby, Montana area relating to such former mining activities. These costs include cleaning and/or demolition of contaminated buildings, the excavation and removal of contaminated soil, health screening of Libby residents and former mine workers, and investigation and monitoring costs. In this action, the EPA also sought a declaration of Grace's liability that would be binding in future actions to recover further response costs.
In connection with its defense, Grace conducted its own investigation to determine whether the EPA's actions and cost claims were justified and reasonable. However, in December 2002, the District Court granted the United States' motion for partial summary judgment on a number of issues that limited Grace's ability to challenge the EPA's response actions. In January 2003, a trial was held on the remainder of the issues, which primarily involved the reasonableness and adequacy of documentation of the EPA's cost recovery claims through December 31, 2001. No decision has yet been issued. The EPA's Libby-related cost recovery claims through December 31, 2001 totaled approximately $57 million. Based on the testimony of EPA witnesses deposed in the lawsuit and other information, Grace believes that the EPA's total cost recovery claims could reach, and potentially exceed, $100 million. This lawsuit is not subject to the automatic stay provided under the Bankruptcy Code. Grace has accrued a liability of $63 million as of December 31, 2002 with respect to this lawsuit and future cost recovery claims expected to be made by the EPA, which represents Grace's current best estimate of probable liability and defense costs, pending the issuance of a decision by the trial court and the availability of additional information about the EPA's 2002 costs and projected future costs. Liabilities for recovery costs are subject to compromise, and any payments would be subject to the outcome of the Chapter 11 proceedings.
In February 2000, a purported class action lawsuit was filed in the U.S. District Court for Montana, Missoula Division (Tennison, et al. v. W. R. Grace & Co., et al.) against Grace on behalf of all owners of improved private real property situated within 12 miles of Libby, Montana. The action alleges that the class members have suffered harm in the form of environmental contamination and loss of property rights resulting from Grace's former vermiculite mining and processing operations. The complaint seeks remediation, property damages and punitive damages. While Grace has not completed its investigation of the claims, and, therefore, is not able to assess the extent of any possible liability related to this lawsuit, Grace has no reason to believe that its former activities caused damage to the environment or property. This case has been stayed as a result of Grace's Chapter 11 filing.
In October 2000, a purported class action lawsuit was filed in the U.S. District Court for Minnesota, 4th Division (Chase v. W. R. Grace & Co.-Conn.) alleging loss of property values of residents in the vicinity of a former Grace vermiculite expanding plant in Minneapolis. This case has also been stayed as a result of Grace's Chapter 11 filing. The EPA has remediated industrial property in the area, including the former vermiculite expanding plant, at a cost of $650,000. The EPA has also commenced and is continuing a program for removing suspected vermiculite processing by-products from the yards and driveways of houses near the plant. The EPA has reviewed approximately 1,640 residential properties and has targeted 260 for cleanup. Of the 260 properties, the EPA has taken action at 208, with the remaining 52 scheduled for removal actions in 2003. As of December 31, 2002, the EPA had spent $2.6 million on residential cleanup actions.
The EPA has compiled for investigation a list of 244 facilities that at one time used, stored, or processed concentrate that originated from Grace's former vermiculite mine at Libby, Montana. Included in
this list are 50 vermiculite expansion plants currently or formerly operated by Grace. The EPA has listed 14 of these 50 sites as requiring additional action. Corrective actions or investigations have been conducted by Grace at six of these sites. The EPA has estimated that the cost of remediation for these 14 sites (exclusive of a Libby, Montana site) will be $6.6 million.
Grace is a party to additional proceedings involving U.S. federal, state and/or local government agencies and private parties regarding Grace's compliance with environmental laws and regulations. These proceedings are not expected to result in significant sanctions or in any material liability. However, Grace may incur material liability in connection with future actions of governmental agencies or private parties relating to past or future practices of Grace with respect to the generation, storage, handling, discharge, disposition or stewardship of hazardous wastes and other materials.
Grace is a party to three pending environmental insurance coverage actions. The first is styled Maryland Casualty Co. v. W. R. Grace & Co. (filed in 1988). This litigation, involving Grace's coverage claims against a primary-level carrier for environmental property damage, is currently the subject of an appeal in the U.S. Court of Appeals for the Second Circuit. The second case, entitled Uniguard v. W. R. Grace, was filed in 1997 in the U.S. District Court for the Southern District of New York. This declaratory judgment action seeks a determination concerning the liability of one excess carrier for bodily injury claims as a result of environmental contamination. This case has been stayed as a result of Grace's Chapter 11 filing. In June 2000, a separate lawsuit was filed in the U.S. District Court for the Southern District of New York against Grace by one of its former primary insurance carriers seeking coverage determinations regarding 45 claims (Continental Casualty Company v. W. R. Grace & Co. and W. R. Grace & Co.-Conn.). Most of these claims involve alleged environmental property damage at sites once owned and operated by Grace or at waste sites that allegedly received waste materials from plants operated by Grace, including Grace's claims for coverage regarding certain claims involving its former vermiculite mining operation in Libby, Montana. This case has been stayed as a result of Grace's Chapter 11 filing. The outcome of these cases, as well as the amounts of any recoveries that Grace may receive in connection therewith, is presently uncertain.
Grace's environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated. These liabilities are evaluated quarterly, based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties. In addition, environmental liabilities related to Libby, Montana in excess of the current recorded liability could be material, though not currently estimable, if the proceedings described above are adversely determined. Grace does not have sufficient information to determine how the funding of environmental remediation activities will be affected by the Chapter 11 proceedings. For further information, see "Environmental, Health and Safety Matters" under Item 1 above and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement.
Litigation Related to Former Packaging and Medical Care Businesses. Grace has been named in a purported class action suit filed in September 2000 in California Superior Court for the County of San Francisco alleging that the 1996 reorganization involving a predecessor of Grace and Fresenius A.G. and the 1998 reorganization involving a predecessor of Grace and Sealed Air Corporation were fraudulent transfers (Abner, et al., v. W. R. Grace & Co., et al.). The suit is alleged to have been brought on behalf of all individuals who then had lawsuits on file asserting personal injury or wrongful death claims against any of the defendants. Since Abner, and prior to the Chapter 11 filing, two other similar class actions were filed. These lawsuits have been stayed as a result of Grace's Chapter 11 filing.
The Bankruptcy Court authorized the Official Committee of Asbestos Personal Injury Claimants and the Official Committee of Asbestos Property Damage Claimants to proceed with claims against Sealed Air
Corporation that the 1998 transaction involving Grace's former packaging business and Sealed Air Corporation constituted a fraudulent conveyance. A trial had been scheduled to begin on December 9, 2002. On November 29, 2002, Sealed Air Corporation and Fresenius Medical Care AG each announced that they had reached agreements in principle with representatives of the asbestos creditors committees to resolve all of the current and future asbestos-related claims and the pending fraudulent transfer claims made against them and their respective affiliates. Under the terms of the proposed Sealed Air settlement, Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per annum, commencing on December 21, 2002) and nine million shares of Sealed Air common stock, valued at $335.7 million as of December 31, 2002, as directed by Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under the terms of the proposed Fresenius settlement, as subsequently revised, Fresenius would contribute $115 million to the Grace estate, or as otherwise directed by the Bankruptcy Court, upon confirmation of a plan of reorganization. Both settlements are subject to Bankruptcy Court approval. Upon the effectiveness of these settlements the Abner and all similar actions will be dismissed. Grace is unable to predict how these settlements may ultimately affect its plan of reorganization.
Tax Claims. Grace has received an Internal Revenue Service ("IRS") examination report for the 1993 through 1996 tax periods asserting in the aggregate approximately $114 million of proposed tax adjustments. The most significant contested issue addressed in such report concerns corporate-owned life insurance ("COLI") policies and is discussed in the next paragraph. Other proposed IRS tax adjustments relate to Grace's tax positions regarding research and development credits, reporting of certain divestitures and other miscellaneous proposed adjustments. The tax audit for the 1993 through 1996 tax period is currently under the jurisdiction of IRS Appeals, where Grace has filed a protest. Grace's federal tax returns covering tax periods 1997 and forward are either under examination by the IRS or open for future examination.
In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its employees as part of a strategy to fund the cost of post-retirement employee health care benefits and other long-term liabilities. COLI premiums have been funded in part by loans issued against the cash surrender value of the COLI policies. The IRS is challenging deductions of interest on loans secured by the COLI policies for years prior to January 1, 1999. In 2000, Grace paid $21.2 million of tax and interest related to this issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted approximately $163.2 million in interest attributable to COLI policy loans. Although Grace continues to believe that the deductions were legitimate, the IRS has successfully challenged interest deductions claimed by other corporations with respect to broad-based COLI policies in all of the three litigated cases to date. Therefore, Grace requested and was granted early referral to the IRS Office of Appeals for consideration of possible settlement alternatives of the COLI interest deduction issue.
On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding requesting that the Bankruptcy Court authorize Grace to enter into a settlement agreement with the IRS with respect to Grace's COLI interest deductions. The tax years at issue are 1989 through 1998. Under the terms of the proposed settlement, the government would allow 20% of the aggregate amount of the COLI interest deductions and Grace would owe federal income tax and interest on the remaining 80%. On October 22, 2002, the Bankruptcy Court issued an order authorizing Grace to enter into settlement negotiations with the IRS consistent with the aforementioned terms and further ordered that any final agreement would be subject to Bankruptcy Court approval. Grace is currently in discussions with the IRS concerning the proposed settlement.
The IRS also has assessed additional federal income tax withholding and Federal Insurance Contributions Act taxes plus interest and related penalties for calendar years 1993 through 1995 against a Grace subsidiary that formerly operated a temporary staffing business for nurses and other healthcare personnel. The assessments, aggregating $21.8 million, were made in connection with a meal and incidental
expense per diem plan for traveling healthcare personnel, which was in effect through 1999. The IRS contends that certain per diem reimbursements should have been treated as wages subject to employment taxes and federal income tax withholding. Grace contends that its per diem and expense allowance plans were in accordance with statutory and regulatory requirements, as well as other published guidance from the IRS. Grace expects that the IRS will make additional assessments for the 1996 through 1999 periods. The matter is pending in the United States Court of Claims. Grace is currently in discussions with the Department of Justice concerning possible settlement options.
For further information, see Note 14 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations under Financial Condition" in the Financial Supplement to this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This Item is inapplicable, as no matters were submitted to a vote of the Company's security holders during the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Except as provided below, the information called for by this Item appears in the Financial Supplement under the heading "Financial Summary" opposite the caption "Other Statistics - Common shareholders of record" (page F-35); under the heading "Quarterly Summary and Statistical Information - Unaudited" opposite the caption "Market price of common stock" (page F-34); and in Note 15 to the Consolidated Financial Statements (page F-29).
On March 31, 1998, the Company paid a dividend, in respect of each share of the Company's Common Stock, par value $.01 per share ("Common Stock"), of one Preferred Stock Purchase Right ("Right"). The Rights are not and will not become exercisable unless and until certain events occur (as described below). Until such events occur, the Rights will automatically trade with the Common Stock, and separate certificates for the Rights will not be distributed. The Rights will become exercisable on the earlier to occur of (a) 10 days after a person or group ("Acquiring Person") has acquired beneficial ownership of 20% or more of the then outstanding shares of Common Stock or (b) 10 business days (or such later date as may be fixed by the Company's Board of Directors) after an Acquiring Person commences (or announces the intention to commence) a tender offer or exchange offer that would result in such Acquiring Person becoming the beneficial owner or 20% or more of the then outstanding shares of Common Stock. Holders of Rights, as such, have no rights as shareholders of the Company; consequently, such holders have no rights to vote or receive dividends, among other things.
When the Rights become exercisable, each Right will initially entitle the holder to buy from the Company one hundredth of a share of the Company's Junior Participating Preferred Stock, par value $.01 per share ("Junior Preferred Stock"), for $100, subject to adjustment ("exercise price"). If a person or group becomes an Acquiring Person, each Right will entitle the holder to receive upon exercise, in lieu of shares of Junior Preferred Stock, that number of shares of Common Stock having a market value of two times the exercise price of the Right. If, at any time after a person or group becomes an Acquiring Person, the Company is acquired in a merger or other business combination or 50% or more of the Company's consolidated assets or earning power is sold, each Right not owned by an Acquiring Person will entitle the holder to buy a number of shares of common stock of the acquiring company having a market value equal to twice the exercise price.
Shares of Junior Preferred Stock that may be purchased upon exercise of the Rights will not be redeemable. Each share of Junior Preferred Stock will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend equal to 100 times the dividend declared per share of Common Stock whenever such dividend is declared. In the event of liquidation, holders of Junior Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment equal to 100 times the payment made per share of Common Stock. Each share of Junior Preferred Stock will have 100 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which the Common Stock is exchanged, each share of Junior Preferred Stock will be entitled to receive an amount equal to 100 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights of the Junior Preferred Stock, the value of the one-hundredth interest in a share of Junior Preferred Stock that may be purchased upon exercise of each Right should approximate the value of one share of Common Stock.
At any time after any person or group becomes an Acquiring Person, and prior to the acquisition by such Acquiring Person of 50% or more of the outstanding shares of Common Stock, the Company's Board of Directors may exchange the Rights (other than Rights owned by such person or group, which will become void after such person becomes an Acquiring Person) for Common Stock or Junior Preferred Stock, in whole or in part, at an exchange ratio of one share of Common Stock, or one hundredth of a share of Junior Preferred Stock (or of a share of another series of the Company's Preferred Stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the outstanding shares of Common Stock, the Company's Board of Directors may redeem the Rights in whole, but not in part, at a price of $.01 per Right.
The terms of the Rights may be amended by the Company's Board of Directors without the consent of the holders of the Rights, including an amendment to lower (a) the threshold at which a person becomes an Acquiring Person and (b) the percentage of Common Stock proposed to be acquired in a tender or exchange offer that would cause the Rights to become exercisable, to not less than the greater of (a) the sum of .001% plus the largest percentage of the Company's outstanding Common Stock then known to the Company to be beneficially owned by any person or group and (b) 10%, except that, from and after such time as any person or group becomes an Acquiring Person, no such amendment may adversely affect the interests of the holders of the Rights.
The Rights are currently scheduled to expire on March 31, 2008 (subject to extension or the earlier redemption or exchange of the Rights). As a result of Grace's Chapter 11 filing, the rights could be modified in a plan of reorganization.
The foregoing summary of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which was filed as an Exhibit 4.1 to the Company's Form 8-K filed on April 9, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item appears under the heading "Financial Summary" (page F-35 of the Financial Supplement) and in Notes 1, 2, 3, 4, 10, 13 and 14 to the Consolidated Financial Statements (pages F-10 through F-20, and F-23 through F-28 of the Financial Supplement), which is incorporated herein by reference. In addition, Exhibit 12 to this Report (page F-53) 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 1998-2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information called for by this Item appears on pages F-36 to F-52 of the Financial Supplement, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item appears in Notes 12 and 13 to the Consolidated Financial Statements (pages F-23 and F-24 of the Financial Supplement), which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibit on page F-2 of the Financial Supplement, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
This Item is inapplicable, as no such changes or disagreements have occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's current directors and executive officers are listed below. The Company's Certificate of Incorporation provides for the division of the Board of Directors into three classes, each to serve for a three-year term or until their respective successors are elected. In view of the Chapter 11 filing, the directors are expected to continue to serve beyond the expiration of their respective current terms. Executive officers are elected to serve until the following annual meeting of the Company's Board of Directors or until their respective successors are elected.
Name and Age Office First Elected
------------ ------ -------------
John F. Akers (68) Class II Director 05/09/97
H. Furlong Baldwin (71) Class I Director 01/16/02
Ronald C. Cambre (64) Class III Director 09/01/98
18
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Marye Anne Fox (55) Class I Director 05/10/96
John J. Murphy (71) Class II Director 05/09/97
Paul J. Norris (55) Class III Director (Chairman) 01/01/99
President and Chief Executive Officer 11/01/98
Thomas A. Vanderslice (71) Class I Director 05/10/96
Robert J. Bettacchi (60) Senior Vice President 04/01/97
William M. Corcoran (53) Vice President 05/11/99
W. Brian McGowan (53) Senior Vice President 12/06/90*
David B. Siegel (54) Senior Vice President, General Counsel 09/01/98*
and Chief Restructuring Officer
Robert M. Tarola (52) Senior Vice President and 05/11/99
Chief Financial Officer
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* Designated an Executive Officer on July 9, 1998
Mr. Akers served as Chairman of the Board and Chief Executive Officer of International Business Machines Corporation from 1985 until his retirement in 1993. He is a director of Hallmark Cards, Inc., Lehman Brothers Holdings, Inc., The New York Times Company and PepsiCo, Inc.
Mr. Baldwin served as a director of Mercantile Bankshares Corporation from 1970 to 2003, and as Chairman of the Board from 1984 to 2003. From 1976 to 2001 he served as President and Chief Executive Officer. Mr. Baldwin is also a director of NASDAQ Stock Market, Inc., Platinum Underwriters Holdings, Ltd. and a member of the board of governors of NASD.
Mr. Cambre is retired Chairman of the Board and CEO of Newmont Mining Corporation. He joined Newmont as Vice Chairman and CEO in 1993 and retired as CEO in 2000 and as Chairman in 2001. He is also a director of Cleveland-Cliffs Inc., McDermott International, Inc. and Inco Limited.
Dr. Fox is Chancellor of North Carolina State University and Distinguished Professor of Chemistry at that institution. She is also a director of Boston Scientific Corporation, Red Hat, Inc. and Pre-Paid Legal Services, Inc.
Mr. Murphy served as Chairman of the Board of Dresser Industries, Inc., a supplier of products and technical services to the energy industry, until 1996. From 1997 to 2000, he was a Managing Director of SMG Management L.L.C., a privately owned investment group. Mr. Murphy is a director of CARBO Ceramics, Inc. and ShawCor Ltd.
Mr. Norris was Senior Vice President of AlliedSignal Incorporated and President of its specialty chemicals business from January 1997 until he joined Grace. He joined AlliedSignal in 1989 as President of its fluorine products/chemicals and catalysts businesses. Mr. Norris is a director of Borden Chemical, Inc. He also performs advisory services for Kolberg, Kravis Roberts & Co., the principal shareholder of Borden.
Mr. Vanderslice served as Chairman and Chief Executive Officer of M/A-COM, Inc., a designer and manufacturer of radio frequency and microwave components, devices and subsystems for commercial and defense applications, from 1989 until his retirement in 1995. He is a director of ChevronTexaco Corporation.
Messrs. Bettacchi, McGowan and Siegel have been actively engaged in Grace's business for the past five years.
Mr. Corcoran previously served as Vice President of Business and Regulatory Affairs for AlliedSignal Incorporated's specialty chemicals business from 1997 until he joined Grace. For nine years prior to that, he served as Vice President of Public Affairs in AlliedSignal's engineered materials sector.
Mr. Tarola joined Grace from MedStar Health, Inc., where he had served as Senior Vice President and Chief Financial Officer from July 1998. He previously served in a similar capacity with Helix Health, Inc. for two years. From 1974 through 1996, Mr. Tarola was an employee and partner of Price Waterhouse LLP.
Section 16(a) Beneficial Ownership Reporting Compliance. Under Section 16 of the Securities Exchange Act of 1934, the Company's directors, certain of its officers, and beneficial owners of more than 10% of the outstanding Common Stock are required to file reports with the SEC and the New York Stock Exchange concerning their ownership of and transactions in Common Stock; such persons are also required to furnish the Company with copies of such reports. Based upon the reports and related information furnished to the Company, the Company believes that all such filing requirements were complied with in a timely manner during and with respect to 2002.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following Summary Compensation Table contains information concerning the compensation of (a) Paul J. Norris, Chief Executive Officer; and (b) the other four most highly compensated executive officers of Grace who were serving as such at year-end 2002. Certain information has been omitted from the Summary Compensation Table because it is not applicable or because it is not required under the rules of the Securities and Exchange Commission ("SEC").
Annual Compensation Long-Term Compensation
------------------------------------ -----------------------------------
Awards Payouts
------------------ --------------
No. of Shares
Other Underlying
Name and Principal Annual Options LTIP All Other
Position Year Salary Bonus Compensation Granted Payouts (a) Compensation (b)
-------- ---- ------ ----- ------------ ------- -------- ------------
P. J. Norris 2002 $958,333 $1,010,000 --- --- --- $ 587,808
Chairman, President 2001 887,500 936,250 --- 121,000 --- 1,457,298
and Chief Executive 2000 812,500 526,800 --- 315,000 --- 90,766
Officer
R. J. Bettacchi 2002 358,000 265,000 --- --- --- 30,597
Senior Vice President 2001 345,340 275,000 --- 35,000 --- 366,346
2000 332,344 125,000 --- 85,000 $102,670 42,171
W. M. Corcoran 2002 277,667 155,000 --- --- --- 33,643
Vice President 2001 267,333 150,000 --- 12,300 --- 283,428
2000 256,667 100,000 --- 40,000 --- 16,532
D. B. Siegel 2002 408,000 265,000 --- --- --- 244,448
Senior Vice 2001 370,000 240,000 --- 21,800 --- 627,915
President and 2000 306,667 125,000 --- 60,000 75,832 22,205
General Counsel
R. M. Tarola 2002 388,000 250,000 --- --- --- 33,147
Senior Vice 2001 374,500 250,000 --- 27,900 --- 374,277
President and Chief 2000 359,000 155,000 --- 75,000 --- 12,322
Financial Officer
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(a) The amounts in this column represent payments made in 2000 under Grace's previous Long-Term Incentive Plan for the 1997-1999 Performance Period (to the extent not previously paid).
(b) The amounts in this column for 2002 consist of the following:
(i) payments made to persons whose personal and/or Company contributions to Grace's Salaried Employees Savings and Investment Plan ("Savings Plan") would be subject to limitations under federal income tax law, as follows: Mr. Norris -- $74,658; Mr. Bettacchi -- $18,020; Mr. Corcoran -- $11,840; Mr. Siegel -- $19,500; and Mr. Tarola -- $21,570;
(ii) Company contributions to the Savings Plan, as follows: Mr.
Norris -- $12,000; Mr. Bettacchi -- $12,000; Mr. Corcoran --
$12,000; Mr. Siegel -- $11,933; and Mr. Tarola -- $12,000;
(iii) the value of Company-provided personal liability insurance, as follows: Mr. Norris -- $1,150; Mr. Bettacchi -- $577; Mr. Corcoran -- $428; Mr. Siegel -- $577; and Mr. Tarola -- $577;
(iv) a $500,000 retention payment made to Mr. Norris under the terms of his employment agreement. See "Employment Agreements" for a description of Mr. Norris's employment agreement;
(v) for Mr. Corcoran, $9,375 of forgiveness of indebtedness income under the terms of a relocation loan, the balance of which has been reduced to zero; and
(vi) for Mr. Siegel, (A) $194,738 of expense reimbursements and payments made to Mr. Siegel under Grace's relocation program for employees relocating from Boca Raton, Florida to Columbia, Maryland, and (B) $17,700 of forgiveness of indebtedness income under the terms of a relocation loan, the balance of which was $57,300 as of December 31, 2002.
Stock Options. Grace granted no stock options during 2002. No options were exercised by the named individuals during 2002, and none of the options held by them at year-end 2002 were "in the money" (i.e., the exercise price of all options held by the individuals was above the market value of the Common Stock at year-end 2002). The following table contains information concerning unexercised options held at December 31, 2002.
No. of Shares Underlying Unexercised Options
Name at 12/31/02 Exercisable/Unexercisable
P. J. Norris ........... 979,359 / 185,667
R. J. Bettacchi ........ 605,596 / 51,668
W. M. Corcoran ......... 63,266 / 21,534
D. B. Siegel ........... 345,461 / 34,534
R. M. Tarola ........... 159,300 / 43,600
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Long-Term Incentive Program. The Company's long-term incentive plans generally are designed to provide key employees with long-term incentives having a value at the 60th percentile of long-term incentives offered by specialty chemical companies of comparable size to Grace. In 2001, the Company's Board of Directors approved a Long-Term Incentive Plan for key employees ("2001 LTIP") for the 2001-2003 period. For each key employee, the targeted value of the 2001 LTIP award was split so that 50% of the value of the award was provided in the form of a stock option grant, and 50% was in the form of cash compensation, payable if the Company achieves certain pretax earnings targets over a three calendar year period.
In 2002, the Board and the Bankruptcy Court approved the 2002 LTIP for the 2002-2004 period (the "2002 LTP"). The 2002 LTIP operates in substantially the same manner as the 2001 LTIP, except that the targeted value of the 2002 LTIP award is payable 100% in cash, and the pretax earnings targets have been revised. If a key employee becomes entitled to cash compensation under the 2002 LTIP, then such compensation will generally be paid in two installments; one in early 2004 (which will be a partial payment based on performance for the first two years of the applicable three-year period), and the other installment will be paid to the employee in early 2005 (which will consider performance for the complete three-year period and will be offset by the amount of the prior installment). Generally, a key employee will forfeit his or her rights to receive an installment of cash compensation if, prior to the payment of the installment, the employee either voluntarily resigns from the Company or is terminated by the Company for cause. The following table sets forth threshold, targeted and maximum awards under the 2002 LTIP:
Estimated Future Payouts
Under Non-Stock Price-Based
Performance or Other Plans
No. of Shares, Units Period Until Maturation -----
Name Or Other Rights or Payout Threshold(a) Target Maximum
---- --------------- --------------------------- ------------ ------ -------
P. J. Norris $1,452,000 2002-2004 $0 or $ 24,248 $1,452,000 $2,904,000
R. J. Bettacchi 420,000 2002-2004 $0 or $ 7,014 420,000 840,000
W. M. Corcoran 150,000 2002-2004 $0 or $ 2,505 150,000 300,000
D. B. Siegel 335,000 2002-2004 $0 or $ 5,595 335,000 670,000
R. M. Tarola 335,000 2002-2004 $0 or $ 5,595 335,000 670,000
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(a) No payment will be made unless the minimum targeted level of pretax earnings is achieved.
Pension Arrangements. Full-time salaried employees who are 21 or older and who have one or more years of service are eligible to participate in the Retirement Plan for Salaried Employees. Under this basic retirement plan, pension benefits are based upon (a) the employee's average annual compensation for the 60 consecutive months in which his or her compensation is highest during the last 180 months of continuous participation, and (b) the number of years of the employee's credited service. For purposes of this basic retirement plan, compensation generally includes nondeferred base salary and annual incentive compensation (bonus) awards; however, for 2002, federal income tax law limited to $200,000 the annual compensation on which benefits under this plan may be based.
Grace also has a Supplemental Executive Retirement Plan under which a covered employee will receive the full pension to which he or she would be entitled in the absence of the limitations described above and other limitations imposed under federal income tax law. In addition, this supplemental plan recognizes deferred base salary, deferred annual incentive compensation awards and, in some cases, periods of employment during which an employee was ineligible to participate in the basic retirement plan. (Commencing in 2001, Grace no longer permits deferrals of base salary or incentive compensation.)
The following table shows the annual pensions payable under the basic and supplemental plans for different levels of compensation and years of credited service. The amounts shown have been computed on the assumption that the employee retired at age 65 on January 1, 2001, with benefits payable on a straight life annuity basis. Such amounts are subject to (but do not reflect) an offset of 1.25% of an estimate of the employee's primary Social Security benefit at retirement age for each year of credited service under the basic and supplemental plans.
Highest Average Years of Credited Service
Annual ---------------------------------------------------------------------------------------------
Compensation 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
------------------- ---------- ------------- ------------- -------------- ------------- --------------
$100,000 $15,000 $22,500 $30,000 $37,500 $45,000 $52,500
200,000 30,000 45,000 60,000 75,000 90,000 105,000
300,000 45,000 67,500 90,000 112,500 135,000 157,500
400,000 60,000 90,000 120,000 150,000 180,000 210,000
500,000 75,000 112,500 150,000 187,500 225,000 262,500
600,000 90,000 135,000 180,000 225,000 270,000 315,000
700,000 105,000 157,500 210,000 262,500 315,000 367,500
800,000 120,000 180,000 240,000 300,000 360,000 420,000
900,000 135,000 202,500 270,000 337,500 405,000 472,500
1,000,000 150,000 225,000 300,000 375,000 450,000 525,000
1,100,000 165,000 247,500 330,000 412,500 495,000 577,500
1,200,000 180,000 270,000 360,000 450,000 540,000 630,000
1,300,000 195,000 292,500 390,000 487,500 585,000 682,500
1,400,000 210,000 315,000 420,000 525,000 630,000 735,000
1,500,000 225,000 337,500 450,000 562,500 675,000 787,500
1,600,000 240,000 360,000 480,000 600,000 720,000 840,000
1,700,000 255,000 382,500 510,000 637,500 765,000 892,500
1,800,000 270,000 405,000 540,000 675,000 810,000 945,000
1,900,000 285,000 427,500 570,000 712,500 855,000 997,500
2,000,000 300,000 450,000 600,000 750,000 900,000 1,050,000
2,100,000 315,000 472,500 630,000 787,500 945,000 1,102,500
2,200,000 330,000 495,000 660,000 825,000 990,000 1,155,000
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At December 31, 2002, Messrs. Norris, Bettacchi, Corcoran, Siegel and Tarola had 10.83, 31, 3.56, 25.75 and 3.56 years of credited service, respectively, under the basic and supplemental retirement plans. (Mr. Norris' years of credited service include his eligible service with Grace from 1975 to 1981.) For purposes of those plans, the 2002 compensation of such executive officers was as follows: Mr. Norris -- $1,894,583; Mr. Bettacchi -- $633,000; Mr. Corcoran -- $427,667; Mr. Siegel -- $648,000; and Mr. Tarola -- $638,000. Messrs. Norris, Corcoran and Tarola are entitled to additional pension benefits under their employment agreements (see "Employment Agreements").
Employment Agreements. Paul J. Norris. Effective January 1, 2003, Mr. Norris entered into a letter agreement with Grace (the "Letter Agreement"), whereby his employment agreement, dated October 26, 1998 (the "1998 Agreement"), was extended beyond its original termination date of December 31, 2002, and was amended as described herein. Under the Letter Agreement, Mr. Norris' employment with Grace will continue until terminated by Grace or Mr. Norris. Except as amended by the Letter Agreement, the provisions of the 1998 Agreement remain applicable to Mr. Norris during his post-2002 employment term with Grace.
Under the 1998 Agreement, during his post-2002 employment term, Mr. Norris will continue to be entitled to an annual base salary of not less than $875,000. In addition, he will continue to participate in Grace's annual incentive compensation program, under which his targeted award will be at least 75% of his annual base salary. (Mr. Norris' annual base salary as of January 1, 2003 is $1,000,000.)
Under the terms of the Letter Agreement, on December 31, 2003, Mr. Norris will receive a $1,235,000 retention bonus for services performed during 2003; and on December 31, 2004, Mr. Norris will receive an additional retention bonus of $1,235,000 for services performed during 2004. Mr. Norris will not receive a retention bonus, if prior to the payment date of a retention bonus, he is terminated by Grace for cause. In addition, Mr. Norris will not receive a retention bonus, if prior to the payment date, he resigns his employment with Grace, unless such resignation is on the basis of constructive discharge. If Mr. Norris' employment is terminated on the basis of constructive discharge (or as a result of his death or disability) during 2003 or 2004, then he (or his beneficiary, in the case of death) will be entitled to a payment of a pro-rated portion of the retention bonus for the calendar year of termination, based on the portion of such calendar year that he remained an employee of Grace.
Under the 1998 Agreement, during his post-2002 employment term with Grace, if Mr. Norris' employment is terminated by Grace without cause or by Mr. Norris on the basis of constructive discharge, then he will be entitled to receive a severance payment equal to two times the dollar amount that equals 175% of his annual base salary at the time of such termination. Such payment will be made in a lump sum immediately after Mr. Norris' date of termination.
Under the Letter Agreement, Mr. Norris is obligated to provide Grace with at least 180 days written prior notice of his intention to resign his employment with Grace in order to receive certain benefits and payments upon termination, which were originally specified under the 1998 Agreement. Specifically, if Mr. Norris provides such timely notice, he will receive the following benefits and payments upon termination: (1) an award under Grace's annual incentive compensation program for the calendar year of termination, which will be pro-rated based on the portion of such calendar year that he remained an employee of Grace, (2) a supplemental pension payment (described below), (3) principal residence relocation assistance (described below), and (4) a payment of the cash component of any award made to Mr. Norris under Grace's long-term incentive plans, which will be pro-rated based on the portion of the applicable 3-year performance period that he remained an employee of Grace. Under the Letter Agreement, Mr. Norris will also be entitled to these benefits and payments if his employment terminates for any reason except cause. If Mr. Norris' employment is terminated for cause, he will not be entitled to those benefits and payments.
If Mr. Norris becomes entitled to a supplemental pension payment as referenced above, then in determining the benefits payable to Mr. Norris under Grace's basic and supplemental retirement plans, his years of service with Grace and his prior employer will be recognized as if those years were continuous service with Grace, with an offset for any retirement benefits payable from his prior employer's retirement plans. In addition, the "final average compensation" used to determine his retirement benefits payable under Grace's basic and supplemental retirement plans will only consider compensation earned by Mr. Norris from and after his commencement of his current term of employment with Grace on November 1, 1998. Such payment would be made in a lump sum immediately after Mr. Norris' date of termination.
Also, if Mr. Norris does not receive supplemental retirement benefits under any Grace plan (as a result of any reduction regarding such a plan pursuant to any Chapter 11 proceeding or otherwise), then such supplemental benefits will become payable to Mr. Norris under his employment agreement.
If Mr. Norris becomes entitled to the principal residence relocation assistance referenced above, Grace will provide him with relocation assistance to any location within the continental United States selected by Mr. Norris. Such relocation assistance would include certain cash payments and other relocation assistance, as well as compensation for any loss incurred on the sale of his Maryland home.
The 1998 Agreement also provides for Mr. Norris' participation in other benefits and compensation programs, including benefits and programs generally available to other senior executives of Grace.
The forgoing description of Mr. Norris' employment agreement does not purport to be complete and is qualified in its entirety by reference to the 1998 Agreement, which has been filed with the SEC as Exhibit 10.20 to Grace's 2000 Annual Report on Form 10-K, and by reference to the Letter Agreement, which has been filed with the SEC as Exhibit 10.19 to this Report.
William M. Corcoran. Mr. Corcoran had an employment agreement with Grace that expired on May 31, 2002. Under terms of the agreement that survived the expiration date, if Mr. Corcoran is terminated without cause, he will generally be entitled to a severance payment equal to 137% of his annual base salary at the time of termination. (However, along with other executive officers and certain key employees of Grace, Mr. Corcoran has entered into a retention agreement with Grace, described below, under which he may be entitled to enhanced severance pay in lieu of, but not in addition to, the severance pay provided under his employment agreement.) In addition, the benefits payable to Mr. Corcoran under Grace's basic and supplemental retirement plans will continue to be determined by adding additional years of credited service under those plans. Generally, for each year of credited service under those plans that he actually earns during his period of employment with Grace, he will receive credit for an additional one-half year of credited service (up to a maximum of 5 additional years of credited service), except that in no event will he receive less than 5 years of credited service, regardless of the date his employment with Grace actually terminates. The foregoing description of Mr. Corcoran's employment agreement does not purport to be complete and is qualified in its entirety by reference to such agreement, which has been filed with the SEC as Exhibit 10.24 to Grace's 2000 Annual Report on Form 10-K.
David B. Siegel. Under terms of a January 1, 2001 agreement, Mr. Siegel continues to be entitled to an enhanced severance payment equal to two times his annual base salary if his employment is involuntarily terminated without cause under circumstances that would qualify him for severance pay under Grace's severance plan that generally covers salaried employees. In addition, on January 1, 2002, under the terms of such agreement, Mr. Siegel relocated from Florida to Columbia, Maryland, and received the relocation benefits generally available to all Grace employees who relocated to Maryland in conjunction with the relocation of Grace's corporate headquarters. Grace has further agreed to provide Mr. Siegel with post-employment relocation assistance (on the terms of the relocation policy in effect for active employees) under certain conditions; this further agreement has not yet been finalized.
Robert M. Tarola. Mr. Tarola had an employment agreement that expired on November 10, 2002. Under terms of the agreement that survived the expiration date, if Mr. Tarola is terminated without cause, he will generally be entitled to a severance payment equal to 145% of his annual base salary at the time of termination. (However, along with the other executive officers and certain key employees of Grace, Mr. Tarola has entered into a retention agreement with Grace, described below, under which he may be entitled to enhanced severance pay in lieu of, but not in addition to, the severance pay provided under his employment agreement.) In addition, the benefits payable to Mr. Tarola under Grace's basic and supplemental retirement plans will continue to be determined by adding additional years of credited service under those plans. Generally, for each year of credited service under those plans that he actually earns during his period of employment with Grace, he will receive credit for one additional year of credited service (up to a maximum of 10 additional years of credited service), except that in no event will he receive less than 5 years of credited service, regardless of the date his employment with Grace actually terminates. The foregoing description of Mr. Tarola's employment agreement does not purport to be complete and is qualified in its entirety by reference to such agreement, which has been filed with the SEC as Exhibit 10.1 to Grace's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
Change-in-Control Severance Agreements. In addition to the severance provisions described under "Retention Agreements" below, Grace has severance agreements with all of its executive officers, which renew automatically unless the Board of Directors of the Company elects not to renew them. These agreements generally provide that in the event of the involuntary termination of the individual's employment without cause (including constructive termination caused by a material reduction in his or her authority or responsibility or by certain other circumstances) following a "change in control" of Grace, he or she will generally receive a severance payment equal to three times the sum of his or her annual base salary plus target annual incentive compensation (bonus), subject to pro rata reduction in the case of an officer who is within 36 months of normal retirement age (65). For purposes of the severance agreements, "change in control" means the acquisition of 20% or more of the Common Stock (but not if such acquisition is the result of the sale of Common Stock by Grace that has been approved by the Board), the failure of Board-nominated directors to constitute a majority of any class of the Board of Directors, the occurrence of a transaction in which the shareholders of Grace immediately preceding such transaction do not own more than 50% of the combined voting power of the company resulting from such transaction, or the liquidation or dissolution of Grace. This description of the severance agreements does not purport to be complete and is qualified in its entirety by reference to the form of such agreement, which has been filed with the SEC as Exhibit 10.17 to this Report. As a result of Grace's Chapter 11 filing, the following events will not constitute a "change in control": (i) the acquisition by a trust of Common Stock, established for purposes of administering asbestos-related claims pursuant to a plan of reorganization, and (ii) a corporate transaction pursuant to Section 363 of the U.S. Bankruptcy Code or a plan of reorganization.
Retention Agreements. Effective January 1, 2001, Grace entered into retention agreements with each of the executive officers other than Messrs. Norris and Siegel, whose retention arrangements were covered by their respective employment agreements. These agreements were approved by the Compensation Committee in recognition of the adverse effect that the market performance of the Common Stock has had and is expected to continue to have on Grace's ability to attract and retain key employees. Under the terms of these agreements, each such executive officer received a payment in January 2001 equal to his annual base salary, subject to remaining employed with Grace through December 31, 2002. The retention payments are not considered compensation for purposes of any Grace benefit or compensation plans or programs. In addition to the retention payment, the retention agreements provide that in the event of the involuntary termination of such officer's employment under circumstances that would qualify such officer for severance pay under Grace's severance plan that generally covers salaried employees, then the officer would be entitled to severance pay equal to two times his or her annual base salary. With respect to any such officer who has any other agreement with Grace regarding the payment of severance upon termination of employment, if such
officer becomes entitled to severance under both the terms of the retention agreement and such other agreement, then the officer would only receive severance pay under the retention agreement, unless the other agreement provides for a greater amount of severance pay (in which case, the officer would only receive severance pay under such other agreement).
Grace has implemented a new retention program for 2003 and 2004 under which each executive officer (except Mr. Norris, whose retention arrangement for those years is covered by his employment agreement) would be entitled to receive a payment equal to a designated percentage of his base salary if the officer remains employed with Grace for the entire year. For 2003, the percentage is 65% of base salary. The payment of the retention bonus will be made to each eligible executive officer at the end of the calendar year to which the payment relates. These retention payments are not considered compensation for purposes of any Grace benefit or compensation plans or programs.
Executive Salary Protection Plan. All executive officers participate in the Executive Salary Protection Plan ("ESPP"), which provides that, in the event of a participant's disability or death prior to age 70, Grace will continue to pay all or a portion of base salary to the participant or a beneficiary for a period based on the participant's age at the time of disability or death. Payments under the ESPP may not exceed 100% of base salary for the first year and 60% thereafter in the case of disability (50% in the case of death). This description of the ESPP does not purport to be complete and is qualified in its entirety by reference to the text of the ESPP, as amended, which is filed as Exhibit 10.8 to Grace's 2001 Annual Report on Form 10-K.
Effect of Chapter 11 Filing. The U.S. Bankruptcy Court has approved the employment agreements and the continuation of the executive compensation and benefit agreements and programs described above. The continuation of these agreements and programs, and the establishment of new programs may be affected by the Chapter 11 proceedings.
Directors' Compensation. Under the compensation program for nonemployee directors in effect for 2002, each nonemployee director received an annual retainer of $50,000, 50% of which was paid in cash and 50% of which was paid in the form of Common Stock. In addition, directors received $4,000 ($5,000 for directors holding a committee chair) in cash for each meeting date in respect of the Board meeting and all committee meetings held on such date. The same compensation program will be effective during 2003. Grace reimburses nonemployee directors for expenses they incur in attending Board and committee meetings. Grace also maintains business travel accident insurance coverage for them.
Compensation Committee Interlocks and Insider Participation. During
2002, the Compensation Committee of the Board was comprised of Messrs. Akers
(Chair), Baldwin, Cambre, Murphy and Vanderslice, and Dr. Fox. None of such
persons is a current or former officer or employee of Grace or any of its
subsidiaries, nor did any of such persons have any reportable transactions with
Grace or any of its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership. The following table sets forth the Common Stock beneficially owned, directly or indirectly, as of January 31, 2003 by (1) each person known to Grace to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, and (2) each current director, each of the executive officers named in the Summary Compensation Table set forth in Item 11 above, and such directors and all executive officers as a group.
Shares of Common Stock
Beneficial Owner Beneficially Owned Percent
---------------- ------------------ -------
Peninsula Partners, L.P. (1)........................ 10,765,600 16.43%
404B East Main Street, 2nd Floor
Charlottesville, VA 22902
J. F. Akers ........................................ 29,737 *
74,535 (O)
15,196 (T)
H. F. Baldwin ...................................... 12,659 *
R. J. Bettacchi .................................... 617,264 (O) *
24,675 (T)
R. C. Cambre ....................................... 54,876 *
W. M. Corcoran ..................................... 10,000 *
67,367 (O)
1,265 (T)
M. A. Fox .......................................... 31,987 *
8,942 (T)
J. J. Murphy ....................................... 29,671 *
15,528 (O)
18,629 (T)
P. J. Norris ....................................... 138,822 2.39%
1,458,719 (O)
1,071 (T)
D. B. Siegel ....................................... 15,100 *
352,187 (O)
20,832 (T)
R. M. Tarola ....................................... 15,000 *
168,600 (O)
50 (T)
T. A. Vanderslice .................................. 30,263 *
69,876 (O)
14,932 (T)
Directors and executive officers as a group ........ 378,115 5.29%
3,134,589 (O)
122,010 (T)
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* Indicates less than 1%
(O) Shares covered by stock options exercisable on or within 60 days after January 31, 2003.
(T) Shares owned by trusts and other entities as to which the person has the power to direct voting and/or investment.
(1) The ownership information set forth is based in its entirety on material contained in a Form 4 report dated September 10, 2001 filed with the SEC.
Equity Compensation Plan Information. The following table sets forth information as of December 31, 2002 with respect to Grace's compensation plans under which shares of Common Stock are authorized for issuance upon the exercise of options, warrants or other rights. The only such compensation plans in effect are stock incentive plans providing for the issuance of stock options. All such plans have been approved by Grace's shareholders.
Number of securities remaining
Number of securities to Weighted-average available for future issuance under
be issued upon exercise exercise price of equity compensation plans (excluding
Plan category of outstanding options outstanding options securities reflected in column (a))
(a) (b) (c)
Equity compensation 10,199,610 $11.90 4,468,504
plans approved by
security holders
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Commercial Transactions. During 2002, no director, executive officer (or any member of any of their respective immediate families) or, to the Company's knowledge, any holder of more than 5% of the Common Stock, had a direct or indirect material interest in any transaction (or any proposed transaction) to which the Company was (or will become) a party.
Loans to Officers. In April 2002, the Company made a $75,000 interest-free loan to Mr. Siegel under the terms of Grace's relocation policy covering employees relocating from Boca Raton, Florida to Columbia, Maryland. The loan is forgiven over a three year period so long as Mr. Siegel remains with the Company. The balance of such loan as of December 31, 2002 was $57,300.
Legal Proceedings; Indemnification. During 2002 there were no legal proceedings pending in which any current officers or directors of the Company were parties adverse to, or had a material interest adverse to, the Company.
ITEM 14. CONTROLS AND PROCEDURES
The information called for by this Item appears under the heading "Controls and Procedures" on page F-55 of the Financial Supplement, which is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules. See the Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibit on page F-2 of the Financial Supplement.
Reports on Form 8-K. The Company did not file any Reports on Form 8-K during the fourth quarter of 2002.
Exhibits. The exhibits to this Report are listed below. Other than exhibits that are filed herewith, all exhibits listed below are incorporated by reference. Exhibits indicated by an asterisk (*) are the management contracts and compensatory plans, contracts or arrangements required to be filed as exhibits to this Report.
For purposes of describing these exhibits, "Old Grace" means W. R. Grace & Co., a Delaware corporation (subsequently renamed Sealed Air Corporation), a predecessor to the Company, and "Grace New York" means W. R. Grace & Co., a New York corporation (subsequently renamed Fresenius Medical Care Holdings, Inc.), a predecessor to Old Grace.
EXHIBIT
NO. EXHIBIT WHERE LOCATED
--- ------- -------------
2.1 Form of Distribution Agreement, by and among Old Annex B to the Joint Proxy
Grace, W. R. Grace & Co.-Conn. and Grace Specialty Statement/Prospectus dated February 13,
Chemicals, Inc. (now named W. R. Grace & Co.) 1998 of Old Grace and Sealed Air
Corporation included in Form S-4 (filed
2/13/98)
3.1 Restated Certificate of Incorporation of Exhibit 3.1 to Form 8-K (filed 4/9/98)
W. R. Grace & Co.
3.2 Amended and Restated By-laws of W. R. Grace & Co. Exhibit 3.2 to Form 10-K (filed 3/28/02)
4.1 Rights Agreement dated as of March 31, 1998 between W. Exhibit 4.1 to Form 8-K (filed 4/8/98)
R. Grace & Co. and The Chase Manhattan Bank, as Rights
Agent
4.2 Credit Agreement dated as of May 14, 1998, among W. R. Exhibit 4.1 to Form 10-Q (filed 8/14/98)
Grace & Co.-Conn., W. R. Grace & Co., the several
banks parties thereto; the co-agents signatories
thereto; The Chase Manhattan Bank, as administrative
agent for such banks; and Chase Securities Inc., as
arranger
4.3 364-Day Credit Agreement, dated as of May 5, 1999, Exhibit 4.1 to Form 10-Q (filed 8/3/99)
among W. R. Grace & Co.-Conn.; W. R. Grace & Co.; the
several banks parties thereto; the co-agents
signatories thereto; Bank of America National Trust
and Savings Association, as documentation agent; The
Chase Manhattan Bank, as administrative agent for such
banks; and Chase Securities Inc., as book manager
4.4 First Amendment to 364-Day Credit Agreement dated as Exhibit 4 to Form 10-Q (filed 8/15/00)
of May 5, 1999 among W. R. Grace & Co.-Conn.; W. R.
Grace & Co.; the several banks
30
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parties thereto; Bank of America National Trust and
Savings Association, as document agent; The Chase
Manhattan Bank, as administrative agent for such banks;
and Chase Securities, Inc., as bank manager
4.5 Post-Petition Loan and Security Agreement dated as of Exhibit 4 to Form 10-Q (filed 8/14/01)
April 1, 2001 among the financial institutions named
therein, as Lenders, Bank of America, N.A. as Agent,
and W. R. Grace & Co. and its subsidiaries named
therein as Debtors and Debtors-in-Possession, as
Borrowers
10.1 Form of Employee Benefits Allocation Agreement, by and Filed herewith
among Old Grace, W. R. Grace & Co.-Conn. and Grace
Specialty Chemicals, Inc. (now named W. R. Grace & Co.)
10.2 Form of Tax Sharing Agreement, by and among Old Grace, Filed herewith
W. R. Grace & Co.-Conn. and Grace Specialty Chemicals,
Inc. (now named W. R. Grace & Co.)
10.3 W. R. Grace & Co. 2000 Stock Incentive Plan, as amended Exhibit 10 to Form 10-Q (filed 8/15/00)*
10.4 W. R. Grace & Co. 1998 Stock Incentive Plan Filed herewith*
10.5 W. R. Grace & Co. 1998 Stock Plan for Nonemployee Filed herewith*
Directors
10.6 W. R. Grace & Co. 1996 Stock Incentive Plan, as amended Exhibit 10.4 to Form 10-Q (filed
5/15/98)*
10.7 W. R. Grace & Co. Supplemental Executive Retirement Exhibit 10.7 to Form 10-K (filed
Plan, as amended 3/28/02)*
10.8 W. R. Grace & Co. Executive Salary Protection Plan, as Exhibit 10.8 to Form 10-K (filed
amended 3/28/02)*
10.9 W. R. Grace & Co. 1986 Stock Incentive Plan, as amended Exhibit 10.9 to Form 10-K (filed
3/28/02)*
10.10 W. R. Grace & Co. 1989 Stock Incentive Plan, as amended Exhibit 10.10 to Form 10-K (filed
3/28/02)*
10.11 W. R. Grace & Co. 1994 Stock Incentive Plan, as amended Exhibit 10.11 to Form 10-K (filed
3/28/02)*
31
|
10.12 Forms of Stock Option Agreements Exhibit 10.15 to Form 10-K (filed
3/29/99)*
10.13 Form of Stock Option Agreements Exhibit 10.14 to Registration Statement
on Form S-1 of Old Grace (filed 8/2/96)*
10.14 Form of Stock Option Agreements Exhibit 10.5 to Form 10-Q (filed
5/15/98)*
10.15 Form of 2001-2003 Long Term Incentive Exhibit 10.23 to Form 10-K (filed
Program Award 4/16/01)*
10.16 Form of 2002-2004 Long-Term Incentive Filed herewith*
Program Award
10.17 Form of Executive Severance Agreement between W. R. Filed herewith*
Grace & Co. and officers
10.18 Employment Agreement, dated January 1, 2001, by and Exhibit 10.20 to Form 10-K (filed
between W. R. Grace & Co. and Paul J. Norris 4/16/01)*
10.19 Amendment dated November 6, 2002 to Employment Filed herewith*
Agreement between W. R. Grace & Co. and Paul J. Norris
10.20 Employment Agreement dated May 11, 1999 between W. R. Exhibit 10.1 to Form 10-Q (filed
Grace & Co.-Conn. and Robert M. Tarola 8/13/99)*
10.21 Letter Agreement dated January 30, 2001 between Paul Exhibit 10.22 to Form 10-K (filed
J. Norris, on behalf of W. R. Grace & Co., and David 4/16/01)*
B. Siegel
10.22 Letter Agreement dated May 7, 1999 between Paul J. Exhibit 10.24 to Form 10-K (filed
Norris, on behalf of W. R. Grace & Co., and William M. 4/16/01)*
Corcoran
10.23 Form of Indemnification Agreement between W. R. Grace Exhibit 10.27 to Form 10-K (filed
& Co. and certain Officers and Directors 4/16/01)*
10.24 Form of Retention Agreement for 2001-2002 Exhibit 10.28 to Form 10-K (filed
4/16/01)*
10.25 Form of Retention Agreement for 2003-2004 Filed herewith*
10.26 Annual Incentive Compensation Program Filed herewith*
32
|
12 Computation of Ratio of Earnings to Fixed Charges and Filed herewith in Financial Supplement
Combined Fixed Charges and Preferred Stock Dividends to Grace's 2002 Form 10-K
21 List of Subsidiaries of W. R. Grace & Co. Filed herewith
23 Consent of Independent Accountants Filed herewith in Financial Supplement
to Grace's 2002 Form 10-K
24 Powers of Attorney Filed herewith
99.1 Certification of Periodic Report by Chief Executive Filed herewith
Officer under Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of Periodic Report by Chief Financial Filed herewith
Officer under Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized.
W. R. GRACE & CO.
By: /s/ Paul J. Norris
------------------
Paul J. Norris
(Chairman, President and
Chief Executive Officer)
By: /s/ Robert M. Tarola
--------------------
Robert M. Tarola
(Senior Vice President and
Chief Financial Officer)
Dated: March 13, 2003
|
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 13, 2003.
Signature Title
J. F. Akers* }
H. F. Baldwin* }
R. C. Cambre* }
M. A. Fox* } Directors
J. J. Murphy* }
T. A. Vanderslice* }
/s/ Paul J. Norris President and Director
--------------------------------- (Principal Executive Officer)
Paul J. Norris
/s/ Robert M. Tarola Senior Vice President and Chief
--------------------------------- Financial Officer (Principal Financial
(Robert M. Tarola) Officer and Principal Accounting
Officer)
---------------------------------
|
* By signing his name hereto, Mark A. Shelnitz is signing this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission.
By: /s/ Mark A. Shelnitz
------------------------
Mark A. Shelnitz
(Attorney-in-Fact)
|
CERTIFICATION
I, Paul J. Norris, certify that:
1. I have reviewed this annual report on Form 10-K of W. R. Grace & Co.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Paul J. Norris
-----------------------
Paul J. Norris
Chairman, President and
Chief Executive Officer
|
CERTIFICATION
I, Robert M. Tarola, certify that:
1. I have reviewed this annual report on Form 10-K of W. R. Grace & Co.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Robert M. Tarola
--------------------
Robert M. Tarola
Senior Vice President and
Chief Financial Officer
|
FINANCIAL SUPPLEMENT
W. R. GRACE & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
FINANCIAL SUPPLEMENT
TO
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
W. R. GRACE & CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibit
Management's Responsibility for Financial Reporting................................ F-3
Report of Independent Accountants.................................................. F-4
Report of Independent Accountants on Financial Statement Schedule.................. F-5
Consent of Independent Accountants................................................. F-5
Consolidated Statement of Operations for the three years in the
period ended December 31, 2002............................................... F-6
Consolidated Statement of Cash Flows for the three years in the
period ended December 31, 2002............................................... F-7
Consolidated Balance Sheet at December 31, 2002 and 2001........................... F-8
Consolidated Statement of Shareholders' Equity (Deficit) for the three
years in the period ended December 31, 2002.................................. F-9
Consolidated Statement of Comprehensive (Loss) Income for the three
years in the period ended December 31, 2002.................................. F-9
Notes to Consolidated Financial Statements......................................... F-10 - F-34
Financial Summary.................................................................. F-35
Management's Discussion and Analysis of Results of Operations
and Financial Condition...................................................... F-36 - F-52
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves................ F-53
Exhibit 12: Computation of Ratio of Earnings to Fixed Charges and
Combined Fixed Charges and Preferred Stock Dividends......................... F-54
Report on Internal Controls and Procedures ........................................ F-55
|
The financial data listed above appearing in this Financial Supplement are incorporated by reference herein. The Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Financial statements of less than majority-owned persons and other persons accounted for by the equity method have been omitted as provided in Rule 3-09 of Securities and Exchange Commission Regulation S-X. Financial Statement Schedules not included have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of the Consolidated Financial Statements and the other financial information included in this report. Such financial information has been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly includes certain amounts that represent management's best estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal control systems to assist it in fulfilling its responsibility for financial reporting. These systems include business, accounting and reporting policies and procedures, selection of personnel, segregation of duties and an internal audit function. For 2002, a Disclosure Committee was established to oversee Grace's public financial reporting process; and executives and certain managers were required to confirm their compliance with Grace's policies and internal control systems. While no system can ensure elimination of all errors and irregularities, Grace's systems, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed and transactions are properly executed and reported and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should not exceed their benefits.
The Audit Committee of the Board of Directors, which is comprised solely of independent directors, meets regularly with Grace's senior financial management, internal auditors and independent accountants to review audit plans and results, as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal control systems. The Audit Committee reports its findings to the Board of Directors. The Audit Committee is responsible for the selection of the independent accountants. Grace's financial management, internal auditors and independent accountants have direct and confidential access to the Audit Committee at all times.
The independent accountants are engaged to conduct the audits of and report on the Consolidated Financial Statements in accordance with auditing standards generally accepted in the United States of America. These standards require an assessment of the systems of internal controls and tests of transactions to the extent considered necessary by the independent accountants for purposes of supporting their opinion as set forth in their report.
/s / Paul J. Norris /s/ Robert M. Tarola Paul J. Norris Robert M. Tarola Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer March 13, 2003 |
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
W. R. GRACE & CO.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows, of shareholders' equity (deficit) and of comprehensive loss, present fairly, in all material respects, the financial position of W. R. Grace & Co. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, on April 2, 2001, the Company and substantially all of its domestic subsidiaries voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code, which raises substantial doubt about the Company's ability to continue as a going concern in its present form. Management's intentions with respect to this matter are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland January 29, 2003 |
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF W. R. GRACE & CO.
Our audits of the consolidated financial statements referred to in our report dated January 29, 2003, which was modified as to a matter raising substantial doubt about the Company's ability to continue as a going concern, appearing on page F-4 of this 2002 Annual Report on Form 10-K of W. R. Grace & Co. also included an audit of the Financial Statement Schedule listed on page F-2 in the Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibit of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland January 29, 2003 |
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-37024, 333-49083, 333-49507, 333-49509, 333-49511, 333-49513, 333-49515, 333-49703 and 333-49705) of W. R. Grace & Co. of our report dated January 29, 2003 appearing on page F-4 of this 2002 Annual Report on Form 10-K of W. R. Grace & Co. We also consent to the incorporation by reference of our report dated January 29, 2003 relating to the Financial Statement Schedule, which appears above in this Form 10-K.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland March 13, 2003 |
CONSOLIDATED FINANCIAL STATEMENTS
=====================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------
Amounts in millions, except per share amounts 2002 2001 2000
---------- ---------- ----------
Net sales .................................................................... $ 1,817.2 $ 1,723.2 $ 1,597.4
Other income ................................................................. 23.2 31.2 49.5
---------- ---------- ----------
1,840.4 1,754.4 1,646.9
---------- ---------- ----------
Cost of goods sold, exclusive of depreciation and amortization
shown separately below ................................................. 1,148.9 1,079.4 973.9
Selling, general and administrative expenses ................................. 362.4 332.2 312.7
Research and development expenses ............................................ 51.7 49.4 45.7
Depreciation and amortization ................................................ 94.6 89.0 87.8
Interest expense and related financing costs ................................. 20.0 37.1 28.1
Provision for environmental remediation ...................................... 70.7 5.8 10.4
Provision for asbestos-related litigation, net of insurance .................. -- -- 208.0
---------- ---------- ----------
1,748.3 1,592.9 1,666.6
---------- ---------- ----------
Income (loss) before Chapter 11 expenses, income taxes, and
minority interest ...................................................... 92.1 161.5 (19.7)
Chapter 11 reorganization expenses, net ...................................... (30.1) (15.7) --
Provision for income taxes ................................................... (38.0) (63.7) (70.0)
Minority interest in consolidated entities ................................... (1.9) (3.5) --
---------- ---------- ----------
NET INCOME (LOSS) ...................................................... $ 22.1 $ 78.6 $ (89.7)
=====================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) ...................................................... $ 0.34 $ 1.20 $ (1.34)
Weighted average number of basic shares ...................................... 65.4 65.3 66.8
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) ...................................................... $ 0.34 $ 1.20 $ (1.34)
Weighted average number of diluted shares .................................... 65.5 65.4 66.8
=====================================================================================================================
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------
Dollars in millions 2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES
Income (loss) before Chapter 11 expenses, income taxes, and minority interest .......... $ 92.1 $ 161.5 $ (19.7)
Reconciliation to cash provided by operating activities:
Depreciation and amortization .................................................... 94.6 89.0 87.8
Interest accrued on pre-petition debt subject to compromise ...................... 14.5 23.2 --
Gain on sales of investments ..................................................... (1.2) (7.9) (19.0)
Gain on disposals of assets ...................................................... (0.7) (1.8) (5.5)
Provision for environmental remediation .......................................... 70.7 5.8 10.4
Provision for asbestos-related litigation, net of insurance ...................... -- -- 208.0
Income from life insurance policies, net ......................................... (4.7) (5.4) (6.4)
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign currency translation:
Decrease (increase) in working capital items ................................... 23.1 (60.9) (28.7)
Increase in accounts receivable due to termination of securitization program ... -- (65.3) --
Expenditures for asbestos-related litigation ................................... (13.1) (109.6) (281.8)
Proceeds from asbestos-related insurance ....................................... 10.8 78.8 85.6
Expenditures for environmental remediation ..................................... (20.0) (24.9) (36.8)
Expenditures for postretirement benefits ....................................... (21.5) (22.3) (23.0)
Net expenditures for retained obligations of discontinued operations ........... (5.3) (13.1) (34.9)
Changes in accruals and other non-cash items ................................... 15.0 7.3 (51.4)
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES
AND CHAPTER 11 REORGANIZATION EXPENSES ........................................... 254.3 54.4 (115.4)
Chapter 11 reorganization expenses paid, net ........................................... (27.1) (11.8) --
Income taxes paid, net of refunds ...................................................... (31.8) (27.9) (28.3)
-------- -------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ............................. 195.4 14.7 (143.7)
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures ................................................................... (91.1) (62.9) (64.8)
Businesses acquired in purchase transactions, net of cash acquired ..................... (28.5) (84.4) (49.0)
Investments in life insurance policies ................................................. (16.4) (17.6) (29.8)
Proceeds from life insurance policies .................................................. 19.4 18.0 18.7
Proceeds from sales of investments ..................................................... 0.9 7.9 19.0
Proceeds from disposals of assets ...................................................... 5.0 7.6 11.9
-------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES ........................................... (110.7) (131.4) (94.0)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from loans secured by cash value of life insurance, net of repayments ......... (5.1) 33.7 (5.2)
Borrowings under credit facilities, net of repayments .................................. (3.1) 93.5 311.3
Borrowings under debtor-in-possession facility, net of fees ............................ 19.0 71.5 --
Repayments of term debt ................................................................ -- -- (24.7)
Repayments of borrowings under debtor-in-possession facility ........................... (20.0) (75.0) --
Exercise of stock options .............................................................. -- -- 5.8
Purchase of treasury stock ............................................................. -- (0.6) (47.3)
-------- -------- --------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES ............................. (9.2) 123.1 239.9
-------- -------- --------
Effect of currency exchange rate changes on cash and cash equivalents .................. 16.1 (6.9) (10.1)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. 91.6 (0.5) (7.9)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 191.4 191.9 199.8
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 283.0 $ 191.4 $ 191.9
================================================================================================================================
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
====================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET DECEMBER 31,
---------------------------------------------------------------------------------------------------
Amounts in millions, except par value and shares 2002 2001
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 283.0 $ 191.4
Accounts and other receivables, net ...................................... 311.3 302.1
Inventories .............................................................. 172.4 180.0
Deferred income taxes .................................................... 28.0 22.5
Asbestos-related insurance expected to be realized within one year ....... -- 9.7
Other current assets ..................................................... 35.7 30.2
---------- ----------
TOTAL CURRENT ASSETS ............................................... 830.4 735.9
Properties and equipment, net of accumulated depreciation and
amortization of $1,069.8 (2001 - $995.3) ........................... 620.8 589.0
Goodwill ................................................................. 65.2 55.8
Cash value of life insurance policies, net of policy loans ............... 82.4 75.6
Deferred income taxes .................................................... 566.7 502.9
Asbestos-related insurance expected to be realized after one year ........ 282.6 283.7
Other assets ............................................................. 239.6 275.5
---------- ----------
TOTAL ASSETS ....................................................... $ 2,687.7 $ 2,518.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ............................................. $ 3.4 $ 6.3
Accounts payable ......................................................... 98.2 86.3
Income taxes payable ..................................................... 11.4 14.4
Other current liabilities ................................................ 130.3 126.3
---------- ----------
TOTAL CURRENT LIABILITIES .......................................... 243.3 233.3
Deferred income taxes .................................................... 30.5 20.8
Other liabilities ........................................................ 301.3 94.5
---------- ----------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ........................ 575.1 348.6
---------- ----------
LIABILITIES SUBJECT TO COMPROMISE - NOTE 2 ............................... 2,334.7 2,311.5
---------- ----------
TOTAL LIABILITIES .................................................. 2,909.8 2,660.1
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $.01; 300,000,000 shares authorized;
outstanding: 2002 - 65,466,725 (2001 - 65,399,600) ................ 0.8 0.8
Paid-in capital .......................................................... 433.0 433.0
Retained earnings (accumulated deficit) .................................. (115.7) (137.8)
Treasury stock, at cost: shares: 2002 - 11,513,035; (2001 - 11,500,800) .. (137.0) (137.0)
Accumulated other comprehensive loss ..................................... (403.2) (300.7)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ............................... (222.1) (141.7)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ............... $ 2,687.7 $ 2,518.4
====================================================================================================
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Retained Accumulated
and Earnings Deferred Other TOTAL
Paid-in (Accumulated Compensation Treasury Comprehensive SHAREHOLDERS'
Dollars in millions Capital Deficit) Trust Stock Loss EQUITY (DEFICIT)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999....... $ 423.4 $ (126.7) $ (0.6) $ (89.1) $ (95.9) $ 111.1
Net loss ........................ -- (89.7) -- -- -- (89.7)
Purchase of common stock ........ -- -- -- (47.3) -- (47.3)
Shares issued under stock plans.. 9.4 -- -- -- -- 9.4
Rabbi trust activity............. 0.2 -- (0.8) -- -- (0.6)
Rabbi trust obligations.......... -- -- 1.4 -- -- 1.4
Other comprehensive loss......... -- -- -- -- (55.6) (55.6)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000....... $ 433.0 $ (216.4) $ -- $ (136.4) $ (151.5) $ (71.3)
===============================================================================================
Net income ...................... $ -- $ 78.6 $ -- $ -- $ -- $ 78.6
Purchase of common stock......... -- -- -- (0.6) -- (0.6)
Shares issued under stock plans.. 0.8 -- -- -- -- 0.8
Other comprehensive loss ........ -- -- -- -- (149.2) (149.2)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001....... $ 433.8 $ (137.8) $ -- $ (137.0) $ (300.7) $ (141.7)
===============================================================================================
Net income ...................... $ -- $ 22.1 $ -- $ -- $ -- $ 22.1
Other comprehensive loss......... -- -- -- -- (102.5) (102.5)
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002....... $ 433.8 $ (115.7) $ -- $ (137.0) $ (403.2) $ (222.1)
====================================================================================================================================
|
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions 2002 2001 2000
-------------------------------------------------------
NET INCOME (LOSS)....................................................... $ 22.1 $ 78.6 $ (89.7)
-------------------------------------------------------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments............................. 45.3 (24.6) (34.1)
Net unrealized losses on investments, net of income taxes............ (0.1) (0.2) (17.7)
Minimum pension liability adjustments, net of income taxes........... (147.7) (124.4) (3.8)
-------------------------------------------------------
Total other comprehensive loss.......................................... (102.5) (149.2) (55.6)
-------------------------------------------------------
COMPREHENSIVE LOSS...................................................... $ (80.4) $ (70.6) $ (145.3)
====================================================================================================================================
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions unless otherwise stated)
W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a worldwide basis. These businesses consist of catalysts and silica products ("Davison Chemicals") and construction chemicals, building materials and sealants and coatings ("Performance Chemicals").
W. R. Grace & Co. conducts substantially all of its business through a direct, wholly owned subsidiary, W. R. Grace & Co.-Conn. ("Grace-Conn."). Grace-Conn. owns substantially all of the assets, properties and rights of W. R. Grace & Co., either directly or through subsidiaries.
As used in these notes, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors.
VOLUNTARY BANKRUPTCY FILING: In response to a sharply increasing number of asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), W. R. Grace & Co. and 61 of its United States subsidiaries and affiliates, including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The cases were consolidated and are being jointly administered under case number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the Filing.
During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in bodily injury claims, higher than expected costs to resolve bodily injury and certain property damage claims, and class action lawsuits alleging damages from a former attic insulation product. (These claims are discussed in more detail in Note 3 to the Consolidated Financial Statements.) After a thorough review of these developments, the Board of Directors of Grace concluded on April 2, 2001 that a federal court-supervised Chapter 11 filing provided the best forum available to achieve predictability and fairness in the claims settlement process.
By filing under Chapter 11, Grace expects to be able to both obtain a comprehensive resolution of the claims against it and preserve the inherent value of its businesses. Under Chapter 11, the Debtors expect to continue to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims against them.
Consequence of Filing - As a consequence of the Filing, pending litigation against the Debtors for pre-petition matters is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to realize its pre-petition claims except pursuant to an order of the Bankruptcy Court.
The Debtors intend to address all of their pending and future asbestos-related claims and all other pre-petition claims in a plan of reorganization. Such a plan of reorganization may include the establishment of a trust through which all pending and future asbestos-related claims would be channeled for resolution. However, it is currently impossible to predict with any degree of certainty the amount that would be required to be contributed to the trust, how the trust would be funded, how other pre-petition claims would be treated or what impact any reorganization plan may have on the shares of common stock of the Company. The interests of the Company's shareholders could be substantially diluted or cancelled under a plan of reorganization. The formulation and implementation of the plan of reorganization is expected to take a significant period of time.
Status of Chapter 11 Proceedings - Since the Filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court. In addition, the Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations in the ordinary course of business, including employee wages and benefits, customer programs, shipping charges and a limited amount of claims of essential trade creditors.
As provided by the Bankruptcy Code, the Debtors had the exclusive right to propose a plan of reorganization for a 120-day period following the Filing Date. The
Debtors have received an extension of their exclusivity period during which to file a plan of reorganization through August 1, 2003, and an extension of the Debtors' exclusive rights to solicit acceptances of a reorganization plan through October 1, 2003.
Three creditors' committees, two representing asbestos claimants and the third representing other unsecured creditors, and a committee representing shareholders have been appointed in the Chapter 11 Cases. These committees will have the right to be heard on all matters that come before the Bankruptcy Court and, together with a legal representative of future asbestos claimants (whom Grace expects to be appointed by the Bankruptcy Court in the future), are likely to play important roles in the Chapter 11 Cases. The Debtors are required to bear certain of the committees' and the future asbestos claimants representative's costs and expenses, including those of their counsel and financial advisors.
The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding over asbestos bodily injury matters and the fraudulent conveyance litigation described below. He has assigned the Debtors' other bankruptcy matters to Judge Judith Fitzgerald, a U.S. bankruptcy judge from the Western District of Pennsylvania, sitting in Wilmington, Delaware.
At a hearing on April 22, 2002, the Bankruptcy Court entered an order establishing a bar date of March 31, 2003 for claims of general unsecured creditors, asbestos property damage claims and medical monitoring claims related to asbestos. The bar date does not apply to asbestos-related bodily injury claims or claims related to Zonolite(R) attic insulation ("ZAI"), which will be addressed separately. Grace has distributed notices and run media announcements of the bar date under a program approved by the Bankruptcy Court. Rust Consulting, the court-approved claims handling agent for the Chapter 11 Cases, is maintaining a register of all claims filed. Grace is cataloguing claims as filed and assessing their validity. At this time, it is not possible to estimate the value of all claims that will ultimately be allowed by the Bankruptcy Court, due to the uncertainties of the Chapter 11 process, the in-progress state of Grace's investigation of submitted claims, and the lack of documentation submitted in support of many claims.
In July 2002, the Bankruptcy Court approved special counsel to represent the ZAI claimants, at the Debtors' expense, in a proceeding to determine certain threshold scientific issues regarding ZAI. The court has set a litigation schedule that would result in pretrial hearings on these issues in the third quarter of 2003.
On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius Medical Care AG ("Fresenius") each announced that they had reached agreements in principle with the Official Committee of Asbestos Personal Injury Claimants and the Official Committee of Asbestos Property Damage Claimants to settle asbestos and fraudulent conveyance claims related to the 1998 transaction involving Grace's former packaging business and Sealed Air, and the 1996 transaction involving Grace's former medical care business and Fresenius, respectively. Under the terms of the proposed Sealed Air settlement, Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per annum commencing on December 21, 2002) and nine million shares of Sealed Air common stock, valued at $335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under the terms of the proposed Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0 million to the Grace estate, or as otherwise directed by the Bankruptcy Court, upon confirmation of a plan of reorganization. The Sealed Air and Fresenius settlements are subject to the approval of the Bankruptcy Court. Grace is unable to predict how these settlements may ultimately affect its plan of reorganization.
Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due to the Filing. The accompanying Consolidated Balance Sheet as of December 31, 2002 reflects the classification of the Debtors' pre-petition debt within "liabilities subject to compromise."
The Debtors have entered into a debtor-in-possession post-petition loan and security agreement with Bank of America, N. A. (the "DIP facility") in the aggregate amount of $250 million. The DIP facility has a term expiring on April 1, 2003 and bears interest under a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points depending on the level of loans outstanding. The Debtors have filed a motion with the Bankruptcy Court seeking approval to extend the term of the DIP facility for an additional three years and to modify certain other provisions.
Accounting Impact - The accompanying Consolidated Financial Statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated by the American Institute of Certified Public Accountants. SOP 90-7 requires that financial statements of debtors-in-possession be prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, the realization of certain Debtors' assets and the liquidation of certain Debtors' liabilities are subject to significant uncertainty. While operating as debtors-in-possession, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the Consolidated Financial Statements, which do not currently give effect to any adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of a plan of reorganization.
Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to compromise are required to be reported separately on the balance sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of December 31, 2002, such pre-petition liabilities include fixed obligations (such as debt and contractual commitments) as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation and other claims). The recorded amounts of such liabilities generally reflect accounting measurements as of the Filing Date, adjusted as warranted, for changes in facts and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the Consolidated Financial Statements for detail of the liabilities subject to compromise as of December 31, 2002, and as of the Filing Date.) Obligations of Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items.
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the accounts of the Company and entities as to which the Company exercises control over operating and financial policies. Intercompany transactions and balances are eliminated in consolidation. Investments in affiliated companies as to which the Company does not exercise control over operating and financial policies are accounted for under the equity method, unless the Company's investment is determined to be temporary, in which case the investment is accounted for under the cost method.
RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the 2002 presentation.
EFFECT OF NEW ACCOUNTING STANDARDS: In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Grace has elected to early adopt the provisions of FIN 46. The adoption of FIN 46 required Grace to consolidate Advanced Refining Technologies LLC. The impact of this consolidation was insignificant.
In December 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Grace adopted the provisions of SFAS No. 148 in December 2002. The adoption had no material impact on the Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). The disclosure provisions of FIN 45 are effective for Grace's 2002 Consolidated Financial Statements. (See Note 14 for required disclosures.)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 is effective for Grace in 2003 and is not expected
to have a material impact on the Consolidated Financial Statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations." The provisions of SFAS No. 141: (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (3) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. Grace adopted SFAS No. 141 in July 2001.
SFAS No. 142 supersedes APB 17, "Intangible Assets," and is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS No. 142: (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and indefinite-lived intangible assets be tested annually for impairment, (3) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (4) remove the 40 year limitation on the amortization period of intangible assets that have finite lives.
Grace adopted the provisions of SFAS No. 142 in the first quarter ended March 31, 2002. Grace has identified its reporting units as catalyst products ("Catalysts"), silica products ("Silicas"), specialty construction chemicals ("SCC"), specialty building materials ("SBM") and specialty sealants and coatings ("SSC") for purposes of measuring impairment under the provisions of SFAS No. 142. All amounts of goodwill, intangible assets, other assets, and liabilities have been appropriately classified and allocated to these reporting units. Amortization expense on goodwill for the year ended December 31, 2001 was insignificant. The adoption of SFAS No. 142 did not have a material impact on the Consolidated Financial Statements.
SFAS No. 142 requires that goodwill and certain intangible assets be tested annually for impairment. In connection with the adoption of SFAS No. 142 and as of November 30, 2002, Grace evaluated its goodwill and other intangible assets that have indefinite useful lives, with no impairment charge required.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires the accrual of asset retirement obligations by increasing the initial carrying amount of the related long-lived asset, and systematically expensing the cost of such obligations over the asset's useful life. The standard is effective for Grace in 2003. Grace does not expect SFAS No. 143 to have a material effect on the Consolidated Financial Statements. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and expands the scope of discontinued operations. SFAS No. 144 was effective for Grace in 2002 and did not have a material impact on the Consolidated Financial Statements.
USE OF ESTIMATES: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and assumptions affecting the assets and liabilities reported at the date of the Consolidated Financial Statements, and the revenues and expenses reported for the periods presented. Actual amounts could differ from those estimates. Changes in estimates are recorded in the period identified. Grace's accounting measurements that are most affected by management's estimates of future events are:
o Contingent liabilities such as asbestos-related matters, environmental remediation, income taxes and retained obligations of divested businesses.
o Pension and post-retirement liabilities that depend on assumptions regarding discount rates and/or total returns on invested funds.
o Depreciation and amortization periods for long-lived assets, including property and equipment, intangible and other assets.
o Realization values of various assets such as trade receivables, inventories, insurance receivables, income taxes and goodwill.
The accuracy of these and other estimates may also be materially affected by the uncertainties arising under the Chapter 11 Cases.
CASH EQUIVALENTS: Cash equivalents consist of liquid instruments with maturities of three months or less when purchased. The recorded amounts approximate fair value.
SALE OF ACCOUNTS RECEIVABLE: Prior to the Filing, Grace entered into a program to sell certain of its trade
accounts receivable and retained a subordinated interest and servicing rights. Net losses on the sale of receivables were based on the carrying value of the assets sold, allocated in proportion to their fair value. Retained interests were carried at fair value and were included in "Other current assets" in the Consolidated Balance Sheet. Grace generally estimated fair value based on the present value of expected future cash flows less management's best estimate of uncollectible accounts receivable. Grace maintained an allowance for doubtful accounts receivable based upon the expected collectibility of all trade receivables, including receivables sold. The allowance was reviewed regularly and adjusted for accounts deemed uncollectible by management. Expenses and losses associated with the program were recognized as a component of interest expense and related financing costs. As a result of the Filing, which constituted an event of default under the program, outstanding balances were satisfied through the use of pre-petition trade receivables collected during the period from the Filing Date to early May 2001. The program was terminated effective May 14, 2001.
INVENTORIES: Inventories are stated at the lower of cost or market. The methods used to determine cost include first-in/first-out and, for substantially all U.S. inventories, last-in/first-out. Market values for raw materials are based on current cost and, for other inventory classifications, net realizable value.
PROPERTIES AND EQUIPMENT: Properties and equipment are stated at cost. Depreciation of properties and equipment is generally computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives range from 20 to 40 years for buildings, 3 to 7 years for information technology equipment, 3 to 10 years for machinery and equipment and 5 to 10 years for furniture and fixtures. Interest is capitalized in connection with major project expenditures. Fully depreciated assets are retained in properties and equipment and related accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is charged or credited to operations. Grace reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
GOODWILL: Goodwill arises from certain purchase business combinations. With respect to business combinations completed prior to June 30, 2001, goodwill was amortized through December 31, 2001 using the straight-line method over appropriate periods not exceeding 40 years. Grace reviews its goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The provisions of SFAS No. 141 were applied to goodwill and intangible assets acquired after June 30, 2001.
REVENUE RECOGNITION: Grace recognizes revenue when all of the following criteria are satisfied: risk of loss and title transfer to the customer; the price is fixed and determinable; and collectibility is reasonably assured. Certain customer arrangements include conditions for volume rebates. Grace accrues a rebate allowance and reduces recorded sales for anticipated selling price adjustments at the time of sale. Grace regularly reviews this rebate accrual based on actual and anticipated sales patterns.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to expense as incurred.
INCOME TAXES: Grace recognizes deferred tax assets and liabilities with respect to the expected future tax consequences of events that have been recorded in the Consolidated Financial Statements and tax returns. If it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is provided against such deferred tax assets.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign subsidiaries (other than those located in countries with highly inflationary economies) are translated into U.S. dollars at current exchange rates, while their revenues, costs and expenses are translated at average exchange rates during each reporting period. The resulting translation adjustments are included in the "Accumulated other comprehensive loss" section of the Consolidated Balance Sheet. The financial statements of subsidiaries located in countries with highly inflationary economies, if any, are remeasured as if the functional currency were the U.S. dollar; the remeasurement creates translation adjustments that are reflected in "Net income (loss)" in the Consolidated Statement of Operations.
FINANCIAL INSTRUMENTS: From time to time, Grace enters into interest rate swap agreements and foreign exchange forward and option contracts to manage exposure to fluctuations in interest and foreign currency exchange rates. Grace does not hold or issue derivative financial instruments for trading purposes. At December 31, 2002, Grace did not hold and had not issued any derivative financial instruments.
As a result of the Filing, Grace's Consolidated Balance Sheet separately identifies the liabilities that are "subject to compromise" as a result of the Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise" represent pre-petition liabilities as determined under U.S. generally accepted accounting principles. Changes to the recorded amount of such liabilities will be based on developments in the Chapter 11 Cases and management's assessment of the claim amounts that will ultimately be allowed by the Bankruptcy Court. Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1) cash payments under approved court orders; 2) the accrual of interest on pre-petition debt at the pre-petition contractual rate; 3) accruals for employee-related programs; and 4) changes in estimates related to pre-petition contingent liabilities and assets.
Components of liabilities subject to compromise are as follows:
==================================================================
Filing
DECEMBER 31, December 31, Date
(Dollars in millions) 2002 2001 (Unaudited)
==================================================================
Debt, pre-petition
plus accrued
interest ............ $ 538.8 $ 524.5 $ 511.5
Asbestos-related
liability ........... 973.2 996.3 1,002.8
Income taxes .......... 227.8 216.6 210.1
Environmental
remediation ......... 201.1 153.1 164.8
Postretirement
benefits other than
pensions ............. 147.2 169.1 185.4
Special pension
arrangements ........ 74.9 72.5 70.8
Retained obligations
of divested
business ............ 55.3 80.5 75.5
Accounts
payable .............. 32.4 31.7 43.0
Other accrued
liabilities ......... 84.0 67.2 102.1
------------------------------------------
$ 2,334.7 $2,311.5 $ 2,366.0
==================================================================
|
Set forth below is a reconciliation of the changes in pre-filing date liability balances for the period from the Filing Date through December 31, 2002.
================================================================================
Cumulative Since
(Dollars in millions) (Unaudited) Filing
================================================================================
Balance, Filing Date...................................... $ 2,366.0
Cash disbursements and/or reclassifications under
Bankruptcy Court orders:
Freight and distribution order......................... (5.7)
Trade accounts payable order........................... (9.1)
Other court orders including employee wages and benefits,
sales and use tax and customer programs................ (145.1)
Expense/(income) items:
Interest on pre-petition debt.......................... 35.5
Current period employment-related accruals............. 14.7
Change in estimate of environmental contingencies...... 76.5
Change in estimate of income tax contingencies......... 20.5
Balance sheet reclassifications........................... (18.6)
-----------------
Balance, end of period.................................... $ 2,334.7
================================================================================
|
Additional liabilities subject to compromise may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.
The Debtors recorded Chapter 11 reorganization expenses for 2002 consisting of:
================================================================================
(Dollars in millions) 2002 2001
================================================================================
Legal and financial advisory fees.................. $ 30.6 $ 16.6
Interest income.................................... (0.5) (0.9)
---------------------------
Chapter 11 reorganization expenses, net............ $ 30.1 $ 15.7
================================================================================
|
Pursuant to SOP 90-7, interest income earned on the Debtors' cash balances must be offset against reorganization expenses.
Condensed financial information of the Debtors subsequent to the Filing Date is presented below:
=========================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING JANUARY 1, APRIL 2,
ENTITIES 2002 2001
DEBTOR-IN-POSSESSION STATEMENT OF TO TO
OPERATIONS (UNAUDITED) DOLLARS IN DECEMBER 31, DECEMBER 31,
MILLIONS 2002 2001
=========================================================================
Net sales, including intercompany ......... $ 985.2 $ 768.7
Other income .............................. 61.3 38.5
-----------------------------
1,046.5 807.2
-----------------------------
Cost of goods, including intercompany,
exclusive of depreciation and
amortization shown separately below .... 632.1 480.0
Selling, general and administrative
expenses ............................... 236.4 153.6
Research and development expenses ......... 41.2 30.6
Depreciation and amortization ............. 60.7 43.4
Interest expense and related financing
costs .................................. 19.4 26.9
Provision for environmental remediation ... 70.7 5.8
-----------------------------
1,060.5 740.3
-----------------------------
Income before Chapter 11 reorganization
expenses, income taxes, and equity
in net income of non-filing entities ... (14.0) 66.9
Chapter 11 reorganization expenses, net ... (30.1) (12.7)
Provision for income taxes ................ (3.3) (35.5)
Equity in net income of non-filing
entities ............................... 69.5 45.2
-----------------------------
NET INCOME ............................. $ 22.1 $ 63.9
=========================================================================
=============================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING JANUARY 1, APRIL 2,
ENTITIES 2002 2001
DEBTOR-IN-POSSESSION STATEMENT OF TO TO
OPERATIONS (UNAUDITED) DOLLARS IN DECEMBER 31, DECEMBER 31,
MILLIONS 2002 2001
=============================================================================
OPERATING ACTIVITIES
Net income................................. $ 22.1 $ 63.9
Reconciliation to net cash provided by
operating activities:
Non-cash items, net........................ 71.8 67.1
Increase in accounts receivable due to
termination of securitization program .. -- (98.4)
Decrease in subordinated interest of
accounts receivable sold................ -- 33.1
Changes in other assets and liabilities,
excluding the effect of businesses
acquired/divested....................... 18.2 --
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. 112.1 65.7
NET CASH USED FOR INVESTING ACTIVITIES..... (66.0) (20.0)
NET CASH USED FOR FINANCING ACTIVITIES..... (27.3) (16.3)
-------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.. 18.8 29.4
Cash and cash equivalents, beginning of
period.................................. 38.0 8.6
-------------------------------
Cash and cash equivalents, end of period... $ 56.8 $ 38.0
==============================================================================
|
======================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEET DECEMBER 31, DECEMBER 31,
(UNAUDITED) DOLLARS IN MILLIONS 2002 2001
======================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............ $ 56.8 $ 38.0
Notes and accounts receivable, net ... 115.0 128.2
Receivables from non-filing entities,
net ............................... 41.3 33.8
Inventories .......................... 70.5 89.5
Other current assets.................. 53.0 78.6
--------------------------
TOTAL CURRENT ASSETS .............. 336.6 368.1
Properties and equipment, net......... 389.7 384.9
Cash value of life insurance policies,
net of policy loans................ 82.4 75.6
Deferred income taxes ................ 567.0 502.6
Asbestos-related insurance expected to
be realized after one year......... 282.6 283.7
Loans receivable from non-filing
entities, net ..................... 444.4 388.0
Investment in non-filing entities .... 241.4 153.5
Other assets ......................... 97.4 156.8
--------------------------
TOTAL ASSETS ...................... $2,441.5 $ 2,313.2
======================================================================
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LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities .................. $ 99.3 $ 94.5
Debt payable after one year .......... -- 1.6
Other liabilities .................... 229.6 47.3
--------------------------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE......................... 328.9 143.4
LIABILITIES SUBJECT TO COMPROMISE .... 2,334.7 2,311.5
--------------------------
TOTAL LIABILITIES.................. 2,663.6 2,454.9
SHAREHOLDERS' EQUITY (DEFICIT) .... (222.1) (141.7)
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) ............... $2,441.5 $ 2,313.2
======================================================================
|
In addition to Grace's financial reporting obligations as prescribed by the U.S. Securities and Exchange Commission ("SEC"), the Debtors are also required, under the rules and regulations of the Bankruptcy Code, to periodically file certain statements and schedules and a monthly operating report with the Bankruptcy Court. This information is available to the public through the Bankruptcy Court. This information is prepared in a format that may not be comparable to information in Grace's quarterly and annual financial statements as filed with the SEC. The monthly operating reports are not audited, do not purport to represent the financial position or results of operations of Grace on a consolidated basis and should not be relied on for such purposes.
Grace is a defendant in property damage and bodily injury lawsuits relating to previously sold asbestos-containing products. On April 2, 2001, Grace filed voluntary petitions for reorganization under Chapter 11 to use the court-supervised reorganization process to develop and implement a plan for addressing pending and future asbestos-related claims. (See Note 1 for further discussion.)
As of the Filing Date, Grace was a defendant in 65,656 asbestos-related lawsuits, 17 involving claims for property damage (one of which has since been dismissed), and the remainder involving 129,191 claims for bodily injury. Due to the Filing, holders of asbestos-related claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Debtors. Additional asbestos-related claims are expected to be filed as part of the Chapter 11 claims process. Separate creditors' committees representing the interests of property damage and bodily injury claimants have been appointed in the Chapter 11 Cases. Grace's obligations with respect to present and future claims will be determined through proceedings in the Bankruptcy Court and negotiations with each of the official committees appointed in the Chapter 11 Cases, and a legal representative of future asbestos claimants, which are expected to provide the basis for a plan of reorganization.
PROPERTY DAMAGE LITIGATION
The plaintiffs in asbestos property damage lawsuits generally seek to have the defendants absorb the cost of removing, containing or repairing the asbestos-containing materials in the affected buildings. Each property damage case is unique in that the age, type, size and use of the building, and the difficulty of asbestos abatement, if necessary, vary from structure to structure. Information regarding product identification, the amount of product in the building, the age, type, size and use of the building, the jurisdictional history of prior cases and the court in which the case is pending has provided meaningful guidance as to the range of potential costs. Grace has recorded an accrual for all outstanding property damage cases for which sufficient information is available to form a reasonable
estimate of such exposure. (See "Asbestos-Related Liability" below.)
Through December 31, 2002, out of 380 asbestos property damage cases filed, 140 were dismissed without payment of any damages or settlement amounts; judgments were entered in favor of Grace in nine cases (excluding cases settled following appeals of judgments in favor of Grace); judgments were entered in favor of the plaintiffs in eight cases (one of which is on appeal) for a total of $86.1 million; 207 property damage cases were settled for a total of $696.8 million; and 16 cases remain outstanding (including the one on appeal). Of the 16 remaining cases, eight relate to ZAI and eight relate to a number of former asbestos-containing products (two of which also involve ZAI). Additional asbestos property damage claims (other than claims with respect to ZAI) are to be filed as part of the Chapter 11 claims process and are subject to the March 31, 2003 bar date established by the Bankruptcy Court.
The ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of owners of homes containing ZAI. These cases seek damages and equitable relief, including the removal, replacement and/or disposal of all such insulation. The plaintiffs assert that this product is in millions of homes throughout the U.S. and that the cost of removal could be several thousand dollars per home. As a result of the Filing, these cases have been transferred to the U.S. Bankruptcy Court. While Grace has not completed its investigation of the claims described in these lawsuits, testing and analysis of this product by Grace and others supports Grace's belief that the product was and continues to be safe for its intended purpose and poses little or no threat to human health. At this time, Grace is not able to assess the extent of any possible liability related to this matter. In July 2002, the Bankruptcy Court approved special counsel to represent the ZAI claimants, at the Debtors' expense, in a proceeding to determine certain threshold scientific issues regarding ZAI. The court has set a litigation schedule that would result in pretrial hearings on these issues in the third quarter of 2003.
BODILY INJURY LITIGATION
Asbestos bodily injury claims are generally similar to each other (differing primarily in the type of asbestos-related illness allegedly suffered by the plaintiff). However, Grace's estimated liability for such claims has been influenced by numerous variables, including the solvency of other former asbestos producers, cross-claims by co-defendants, the rate at which new claims are filed, the jurisdiction in which the claims are filed, and the defense and disposition costs associated with these claims. Grace's bodily injury liability reflects management's estimate, as of the Filing Date, of the number and ultimate cost of present and future bodily injury claims expected to be asserted against Grace given demographic assumptions of possible exposure to asbestos containing products previously manufactured by Grace.
Through the Filing Date, 16,354 asbestos bodily injury lawsuits involving approximately 35,720 claims were dismissed without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved), and approximately 55,489 lawsuits involving approximately 163,698 claims were disposed of (through settlement and judgments) for a total of $645.6 million. (See "Asbestos-Related Liability" below.)
ASBESTOS-RELATED LIABILITY
Asbestos-related litigation is stayed by the Chapter 11 Cases. Ongoing costs are generally limited to claims administration costs and to defense costs incurred in connection with litigation permitted by the Bankruptcy Court. Any other adjustments to the recorded liability is based on developments in the Chapter 11 Cases. For periods prior to and as of the Filing Date, Grace's estimated property damage and bodily injury liabilities were based on its experience with, and recent trends in, asbestos litigation. Its recorded liabilities covered indemnity and defense costs for pending property damage cases and for pending and projected future bodily injury claims. However, due to the Filing and the uncertainties of asbestos-related litigation, actual amounts could differ materially from the recorded liability. Since the Filing, Grace is aware that bodily injury claims have continued to be filed against co-defendant companies, and at higher than historical rates. Grace believes that had it not filed for Chapter 11 reorganization, it likely would have received thousands more claims than it had previously projected.
The total asbestos-related liability balances as of December 31, 2002 and 2001 were $973.2 million and $996.3 million, respectively. The decrease in the liability is primarily due to the payment of normal post-Filing administrative costs relating to claims management. The remaining decrease is due to the satisfaction of pre-petition settlements through draws on letters of credit securing such settlements. These draws were reclassified to "other accrued liabilities"
in "liabilities subject to compromise" as payables to the issuing banks. The recorded asbestos-related liability is included in "liabilities subject to compromise."
ASBESTOS INSURANCE
Grace previously purchased insurance policies with respect to its asbestos-related lawsuits and claims. Insurance coverage for asbestos-related liabilities has not been commercially available since 1985. Grace has settled with and has been paid by all of its primary insurance carriers with respect to both property damage and bodily injury cases and claims. Grace has also settled with its excess insurance carriers that wrote policies available for property damage cases; those settlements involve amounts paid and to be paid to Grace. Grace believes that certain of these settlements may cover ZAI claims as well as other property damage claims. In addition, Grace believes that additional coverage for ZAI claims may exist under excess insurance policies not subject to settlement agreements. Grace has settled with excess insurance carriers that wrote policies available for bodily injury claims in layers of insurance that Grace believes may be reached based on its current estimates.
The asbestos-related insurance asset represents amounts expected to be received from carriers under settlement agreements for defense and disposition costs to be paid by Grace. Estimated insurance reimbursements are based on the recorded amount of the asbestos-related liability and are only collectible as liabilities are satisfied. In the event that Grace's ultimate asbestos-related liability is determined to exceed recorded amounts, insurance exists to cover a portion of such incremental liability, but generally in a lower proportion than the currently recorded insurance receivable bears to the currently recorded liability.
Activity in the asbestos-related insurance receivable during 2002 and 2001 was as follows:
ESTIMATED INSURANCE RECOVERY ON ASBESTOS-RELATED
LIABILITIES
(Dollars in millions) 2002 2001 -------------------------------------------------------------------------------- INSURANCE RECEIVABLE Asbestos-related insurance receivable, beginning of year ........................... $ 293.4 $ 369.3 Proceeds received under asbestos-related insurance settlements ....................... (10.8) (75.9) -------------------------------------------------------------------------------- Asbestos-related insurance receivable, end of year ........................................ 282.6 293.4 -------------------------------------------------------------------------------- Expected to be realized within one year ........ -- (9.7) -------------------------------------------------------------------------------- Expected to be realized after one year ......... $ 282.6 $ 283.7 ================================================================================ |
The components of income (loss) from consolidated operations before income taxes and the related provision for income taxes for 2002, 2001, and 2000 are as follows:
================================================================================
INCOME TAXES - CONSOLIDATED
OPERATIONS (Dollars in millions) 2002 2001 2000
--------------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic...................... $ (44.6) $ 67.1 $ (94.7)
Foreign....................... 104.7 75.2 75.0
-------------------------------------------
$ 60.1 $ 142.3 $ (19.7)
===========================================
(Provision) benefit for income taxes:
Federal - current............. $ 8.1 $ (7.7) $ (66.2)
Federal - deferred............ (11.0) (27.5) 39.4
State and local - current..... (1.0) (3.2) (20.0)
Foreign - current............. (27.6) (22.2) (21.8)
Foreign - deferred............ (6.5) (3.1) (1.4)
-------------------------------------------
$ (38.0) $ (63.7) $ (70.0)
================================================================================
|
At December 31, 2002 and 2001, the tax attributes in the Consolidated Balance Sheet giving rise to deferred tax assets and liabilities consisted of the following items:
DEFERRED TAX ANALYSIS
(Dollars in millions) 2002 2001 -------------------------------------------------------------------------------- Liability for asbestos-related litigation..... $ 340.6 $ 348.7 Net operating loss/tax credit carryforwards.............................. 155.1 155.9 Deferred state taxes.......................... 117.7 105.3 Liability for environmental remediation....... 70.4 53.6 Other post-retirement benefits................ 51.5 59.2 Deferred charges.............................. 46.1 50.2 Reserves and allowances....................... 27.1 38.2 Research and development...................... 35.0 40.0 Pension liabilities........................... 172.6 84.8 Foreign loss/credit carryforwards............. 14.8 23.3 Other......................................... 12.4 9.9 -------------------------------------------------------------------------------- Total deferred tax assets..................... $ 1,043.3 $ 969.1 -------------------------------------------------------------------------------- Asbestos-related insurance receivable......... (103.6) (106.9) Pension assets................................ (91.7) (85.8) Properties and equipment...................... (71.7) (56.3) Other......................................... (60.4) (58.3) -------------------------------------------------------------------------------- Total deferred tax liabilities................ (327.4) (307.3) -------------------------------------------------------------------------------- Valuation allowance .......................... (152.5) (158.0) -------------------------------------------------------------------------------- Net deferred tax assets....................... $ 563.4 $ 503.8 ================================================================================ |
The valuation allowance shown above arises from uncertainty as to the realization of certain deferred tax assets, primarily foreign tax credit carryforwards and state and local net operating loss carryforwards. Based upon anticipated future results, Grace has concluded that it is more likely than not that the balance of the net deferred tax assets, after consideration of the valuation allowance, will be realized. Because of the nature of the items that make up this balance, the realization period is likely to extend over a number of years.
At December 31, 2002, there were $307.8 million of net operating loss carryforwards, representing deferred tax assets of $107.7 million, with expiration dates through 2022; $6.2 million of foreign tax credit carryforwards with expiration dates through 2006; $6.6 million of general business credit carryforwards with expiration dates through 2011; and $34.6 million of alternative minimum tax credit carryforwards with no expiration dates.
The differences between the (provision) benefit for income taxes at the federal income tax rate of 35% and Grace's overall income tax provision are summarized as follows:
Tax (provision) benefit at federal
corporate rate...................... $ (21.0) $ (49.8) $ 6.9
Change in provision resulting from:
Nontaxable income/non-deductible
expenses............................ (1.0) (1.6) (1.6)
State and local income taxes, net of
federal income tax benefit.......... (0.7) (1.7) (1.8)
Federal and foreign taxes on foreign
operations.......................... 1.6 1.3 1.5
Chapter 11 reorganization expenses
(non-deductible).................... (10.5) (5.5) --
Tax and interest relating to tax
deductibility of interest on COLI
policy loans (See note 14).......... (6.4) (6.4) (75.0)
-----------------------------------
Income tax provision from continuing
operations.......................... $ (38.0) $ (63.7) $ (70.0)
================================================================================
|
Federal, state, local and foreign taxes have not been accrued on approximately $316.5 million of undistributed earnings of certain foreign subsidiaries, as such earnings are expected to be retained indefinitely by such subsidiaries for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes of approximately $22.5 million and additional federal income taxes to the extent they are not offset by foreign tax credits. It is not practicable to estimate the total tax liability that would be incurred upon such a distribution.
In 2002, Grace completed three business combinations for a total cash cost of $28.5 million as follows:
o In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst manufacturing assets of Borealis A/S.
o In March 2002, Grace acquired the assets of Addiment, Incorporated, a leading supplier of specialty chemicals to the concrete paver and masonry industries in the U.S. and Canada.
o In August 2002, Advanced Refining Technologies LLC ("ART"), a joint venture between Grace and Chevron Products Company ("Chevron"), acquired an exclusive license for the hydroprocessing catalyst technology of Japan Energy Corporation and its subsidiary Orient Catalyst Company.
Goodwill recognized in those transactions amounted to $3.8 million, which was assigned to the Davison Chemicals and Performance Chemicals segments in the amounts of $0.9 million and $2.9 million, respectively.
In 2001, Grace completed three business combinations for a total cash cost of $84.4 million as follows:
o In March 2001, Grace acquired The Separations Group, a manufacturer of chromatography columns and separations media.
o In March 2001, Grace's German subsidiary acquired the precipitated silicas business of Akzo-PQ Silicas.
o In July 2001, Grace's French subsidiary acquired Pieri S.A., a leading supplier of specialty construction chemicals in Europe.
Goodwill recognized in those transactions amounted to $23.6 million, which was assigned to the Davison Chemicals and Performance Chemicals segments in the amounts of $10.8 million and $12.8 million, respectively.
Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or aggregate basis.
On March 1, 2001, Grace and Chevron formed ART to develop and market hydroprocessing catalysts globally. ART conducts business through two distribution companies and one operating company. ART has agreements with both Grace and Chevron under which each provides certain administrative and research and development services to ART. Although structured as a joint venture with shared governance, Grace is the primary manufacturer of ART products, Grace appoints the Chief Operating Officer and Grace is entitled to 55% of the economic benefits and assumes 55% of the
economic risks. Accordingly, ART is consolidated for Grace's financial reporting purposes.
Components of other income are as follows:
OTHER INCOME
(Dollars in millions) 2002 2001 2000 -------------------------------------------------------------------------------- Investment income............ $ 4.7 $ 5.4 $ 6.4 Interest income.............. 3.9 4.6 9.7 Gain on sale of investments.. 1.2 7.9 19.0 Net gain on dispositions of assets.................... 0.7 1.8 5.5 Tolling revenue.............. 3.1 3.1 1.2 Equity in net income of affiliates................ 0.7 0.4 0.6 Other miscellaneous income .. 8.9 8.0 7.1 -------------------------------------------------------------------------------- Total other income........... $ 23.2 $ 31.2 $ 49.5 ================================================================================ |
Grace adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002 and ceased the amortization of goodwill. The pro forma impact on pre-tax income and earnings per share was immaterial. SFAS No. 142 requires that goodwill and indefinite life intangible assets be tested for impairment on an annual basis. For the purpose of measuring impairment under the provisions of SFAS No. 142, Grace has identified its reporting units as Catalysts and Silicas (Davison Chemicals) and SCC, SBM and SSC (Performance Chemicals). In connection with the adoption of SFAS No. 142 and as of November 30, 2002, Grace evaluated its goodwill and other intangible assets that have indefinite useful lives, with no impairment charge required.
At December 31, 2002 and December 31, 2001, Grace had goodwill balances of $65.2 million and $55.8 million, respectively. The carrying amount of goodwill attributable to each reporting unit and the changes in those balances during the year ended December 31, 2002 are as follows:
================================================================================
Davison Performance Total
(Dollars in millions) Chemicals Chemicals Grace
================================================================================
Balance as of December 31, 2001 ... $ 12.5 $ 43.3 $ 55.8
Goodwill acquired during the year.. 0.9 2.9 3.8
Reclass of other intangible
assets.......................... 1.7 (1.2) 0.5
Foreign currency translation
adjustment...................... 1.9 3.2 5.1
---------------------------------------
Balance as of December 31, 2002 ... $ 17.0 $ 48.2 $ 65.2
================================================================================
|
Grace's book value of other intangible assets at December 31, 2002 and December 31, 2001 was $63.3 million and $57.5 million, respectively, including unamortizable intangible assets (primarily trademarks) of $6.9 million and $5.8 million, respectively. The composition of the remaining net amortizable intangible assets of $56.4 million and $51.7 million as of December 31, 2002 and December 31, 2001, respectively, was as follows:
================================================================================
(Dollars in millions) As of December 31, 2002
================================================================================
Gross Carrying Accumulated
Amount Amortization
----------------------------------------------
Technology ................... $ 34.6 $ 4.6
Patents....................... 15.3 13.6
Customer lists................ 24.1 3.3
Other......................... 5.0 1.1
----------------------------------------------
Total......................... $ 79.0 $ 22.6
================================================================================
================================================================================
(Dollars in millions) As of December 31, 2001
================================================================================
Gross Carrying Accumulated
Amount Amortization
----------------------------------------------
Technology ................... $ 29.9 $ 1.7
Patents....................... 15.3 12.2
Customer lists................ 20.0 1.0
Other......................... 1.8 0.4
----------------------------------------------
Total......................... $ 67.0 $ 15.3
================================================================================
|
At December 31, 2002, estimated future annual amortization expenses were (dollars in millions):
2003........................................... $ 6.1
2004........................................... 4.9
2005........................................... 4.7
2006........................................... 4.6
2007........................................... 4.4
==========================================================================
|
The tables below present the pre-tax, tax and after tax components of Grace's other comprehensive loss for the years ended December 31, 2002, 2001 and 2000:
================================================================================
YEAR ENDED AFTER
DECEMBER 31, 2002 Pre-Tax Tax TAX
(Dollars in millions) Amount Benefit AMOUNT
--------------------------------------------------------------------------------
Change in unrealized appreciation
during the year................ $ (0.1) $ -- $ (0.1)
Minimum pension liability
adjustments ................... (227.2) 79.5 (147.7)
Foreign currency translation
adjustments.................... 45.3 -- 45.3
-----------------------------------------
Other comprehensive loss.......... $ (182.0) $ 79.5 $ (102.5)
================================================================================
|
================================================================================
YEAR ENDED Tax After
DECEMBER 31, 2001 Pre-Tax (Expense) Tax
(Dollars in millions) Amount Benefit Amount
--------------------------------------------------------------------------------
Change in unrealized appreciation
during the year................ $ (0.4) $ 0.2 $ (0.2)
Minimum pension liability
adjustments ................... (191.4) 67.0 (124.4)
Foreign currency translation
adjustments.................... (24.6) -- (24.6)
-----------------------------------------
Other comprehensive loss.......... $ (216.4) $ 67.2 $ (149.2)
================================================================================
================================================================================
YEAR ENDED Tax After
DECEMBER 31, 2000 Pre-Tax (Expense) Tax
(Dollars in millions) Amount Benefit Amount
--------------------------------------------------------------------------------
Change in unrealized appreciation
during the year................ $ (27.0) $ 9.3 $ (17.7)
Minimum pension liability
adjustments ................... (2.2) (1.6) (3.8)
Foreign currency translation
adjustments.................... (34.1) -- (34.1)
-----------------------------------------
Other comprehensive loss.......... $ (63.3) $ 7.7 $ (55.6)
================================================================================
|
The decline in value of the U.S. and global equity markets, coupled with a decline in interest rates, during 2002 and 2001 created a shortfall between the accounting measurement of Grace's obligations under certain of its qualified pension plans for U.S. employees and the market value of dedicated pension assets. This condition required Grace to record a minimum pension liability for these plans equal to the funding shortfall and to offset related deferred costs against shareholders' equity (deficit) at December 31, 2002 and 2001. (See Note 18.)
COMPOSITION OF ACCUMULATED OTHER COMPREHENSIVE LOSS
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
Foreign currency translation.................... $ (119.5) $ (164.8)
Minimum pension liability....................... (283.7) (136.0)
Securities available for sale................... -- 0.1
----------------------------
Accumulated other comprehensive loss............ $ (403.2) $ (300.7)
================================================================================
--------------------------------------------------------------------------------
9. OTHER BALANCE SHEET ACCOUNTS
--------------------------------------------------------------------------------
================================================================================
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
ACCOUNTS AND OTHER RECEIVABLES, NET
Trade receivables, less allowance of $3.7
(2001 - $5.7)................................ $ 297.3 $ 276.4
Other receivables, less allowances of $1.7
(2001 - $1.9)................................ 14.0 25.7
----------------------------
$ 311.3 $ 302.1
================================================================================
INVENTORIES (1)
Raw materials .................................. $ 39.2 $ 39.2
In process ..................................... 30.3 27.6
Finished products .............................. 109.6 113.3
General merchandise ............................ 26.8 25.8
Less: Adjustment of certain inventories to a
last-in/first-out (LIFO) basis(2) ........... (33.5) (25.9)
----------------------------
$ 172.4 $ 180.0
================================================================================
|
(1) Inventories valued at LIFO cost comprised 48.5% of total inventories at December 31, 2002 and 51.9% at December 31, 2001
(2) During 2002, a reduction in U.S. LIFO inventory levels resulted in product valued at costs pertaining to prior years being reflected in 2002 cost of sales. This so-called LIFO liquidation had the effect of increasing pre-tax income for the Davison segment and Grace by $0.5 million.
OTHER ASSETS
Deferred pension costs.......................... $ 104.2 $ 143.3
Deferred charges ............................... 38.3 44.9
Long-term receivables, less allowances of $0.8
(2001 - $0.6) ............................... 2.0 2.8
Investments in unconsolidated affiliates........ 0.4 3.0
Patents, licenses and other intangible assets,
net ........................................ 63.3 57.5
Pension-unamortized prior service cost ........ 26.4 19.7
Other assets ................................... 5.0 4.3
----------------------------
$ 239.6 $ 275.5
================================================================================
OTHER CURRENT LIABILITIES
Accrued compensation ........................... $ 40.0 $ 39.4
Accrued interest ............................... 6.4 4.8
Deferred tax liability ......................... 0.8 0.8
Customer volume rebates ........................ 21.2 19.2
Accrued commissions ............................ 6.0 6.1
Accrued reorganization fees .................... 9.4 6.4
Other accrued liabilities ...................... 46.5 49.6
----------------------------
$ 130.3 $ 126.3
================================================================================
OTHER LIABILITIES
Pension-underfunded plans ...................... $ 295.1 $ 85.8
Other accrued liabilities ...................... 6.2 8.7
----------------------------
$ 301.3 $ 94.5
================================================================================
|
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
Land........................................... $ 20.5 $ 17.7
Buildings...................................... 367.2 335.1
Information technology and equipment........... 99.8 104.4
Machinery, equipment and other................. 1,137.0 1,076.0
Projects under construction.................... 66.2 51.1
-----------------------------
Properties and equipment, gross................ 1,690.7 1,584.3
Accumulated depreciation and amortization...... (1,069.9) (995.3)
-----------------------------
Properties and equipment, net.................. $ 620.8 $ 589.0
================================================================================
|
Interest costs are capitalized for significant, extended construction projects. The amounts were insignificant for the periods presented. Depreciation and lease amortization expense relating to properties and equipment amounted to $89.6 million in 2002, $84.0 million in 2001 and $84.6 million in 2000. Grace's rental expense for operating leases amounted to $15.1 million in 2002, $14.2 million in 2001 and $14.2 million in 2000. (See Note 14 for information regarding contingent rentals.)
At December 31, 2002, minimum future payments for operating leases were (dollars in millions):
2003.................................................... $ 16.0
2004.................................................... 13.5
2005.................................................... 11.7
2006.................................................... 7.8
2007.................................................... 6.5
Thereafter.............................................. 12.0
================================================================================
Total minimum lease payments............................ $ 67.5
================================================================================
|
The above minimum lease payments are net of anticipated sublease income of $1.6 million in 2003, $1.5 million in 2004, $1.4 million in 2005, $1.4 million in 2006 and $1.3 million in 2007.
Grace is the beneficiary of life insurance policies on certain current and former employees with a net cash surrender value of $82.4 million and $75.6 million at December 31, 2002 and 2001, respectively. The policies were acquired to fund various employee benefit programs and other long-term liabilities and are structured to provide cash flow (primarily tax-free) over an extended number of years. The following table summarizes activity in these policies for 2002, 2001 and 2000:
LIFE INSURANCE - ACTIVITY SUMMARY
(Dollars in millions) 2002 2001 2000
--------------------------------------------------------------------------------
Earnings on policy assets........ $ 39.4 $ 40.3 $ 36.8
Interest on policy loans......... (34.7) (34.9) (30.4)
Premiums......................... 2.4 2.5 2.5
Proceeds from policy loans....... -- (48.7) --
Policy loan repayments........... 5.1 15.0 5.2
Net investing activity........... (5.4) (2.9) 8.6
-------------------------------------------
Change in net cash value......... $ 6.8 $ (28.7) $ 22.7
===========================================
Gross cash value................. $ 471.3 $ 477.5 $ 452.4
Principal - policy loans......... (365.4) (377.6) (325.8)
Accrued interest - policy loans . (23.5) (24.3) (22.3)
-------------------------------------------
Net cash value................... $ 82.4 $ 75.6 $ 104.3
================================================================================
Insurance benefits in force...... $ 2,240.8 $ 2,291.0 $ 2,286.0
================================================================================
Tax-free proceeds received....... $ 19.4 $ 18.0 $ 18.7
================================================================================
|
Grace's financial statements display income statement activity and balance sheet amounts on a net basis, reflecting the contractual interdependency of policy assets and liabilities.
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
DEBT PAYABLE WITHIN ONE YEAR
Other short-term borrowings (1).............. $ 3.4 $ 6.3
--------------------------------
$ 3.4 $ 6.3
================================
DEBT PAYABLE AFTER ONE YEAR
DIP facility (2)............................. $ -- $ --
DEBT SUBJECT TO COMPROMISE
Bank borrowings (3).......................... $ 500.0 $ 500.0
Other borrowings (4)......................... 1.0 1.3
Accrued interest (5)......................... 37.8 23.2
--------------------------------
$ 538.8 $ 524.5
================================
Full-year weighted average interest rates on
total debt (6)............................ 2.8% 5.8%
================================================================================
|
(1) Represents borrowings under various lines of credit and other miscellaneous borrowings, primarily of non-U.S. subsidiaries.
(2) In 2001, the Debtors entered into a debtor-in-possession post-petition loan and security agreement with Bank of America, N.A. (the "DIP facility") in the aggregate amount of $250 million. The DIP facility has a term of two years, is secured by priority liens on substantially all assets of the Debtors, and bears interest based on LIBOR plus 2.00 to 2.25 percentage points. As of December 31, 2002, the Debtors had no outstanding borrowings under the DIP facility. However, $13.7 million of standby letters of credit were issued and outstanding under the facility as of December 31, 2002, which were issued mainly for trade-related matters such as performance bonds, as well as certain insurance and environmental matters. The outstanding amount of standby letters of credit issued under the DIP facility reduces the borrowing availability by a corresponding amount. Under the DIP facility, the Debtors are required to maintain $50 million of liquidity, a combination of cash, cash equivalents and the cash value of life insurance policies. As of December 31, 2002, the cash value of life insurance policies exceeds the $50 million requirement.
(3) Under bank revolving credit agreements in effect prior to the Filing, Grace could borrow up to $500 million at interest rates based upon the prevailing prime, federal funds and/or Eurodollar rates. Of that amount, $250 million was available under short-term facilities expiring in May 2001, and $250 million was available under a long-term facility expiring in May 2003. As a result of the Filing,
Grace was in default under the bank revolving credit agreements, and accordingly, the balance as of the Filing Date was reclassified to debt subject to compromise in the Consolidated Balance Sheet.
(4) Miscellaneous borrowings primarily consisting of U.S. mortgages.
(5) Grace is continuing to accrue interest expense on its pre-petition debt at the pre-petition contractual rate of LIBOR plus 100 basis points.
(6) Computation excludes interest expense and financing costs related to Grace's receivables securitization program, which was terminated in May 2001.
The Debtors have filed a motion with the Bankruptcy Court seeking approval to extend the term of the DIP facility for an additional three years and to modify certain other provisions.
Interest payments amounted to $1.1 million in 2002, $9.5 million in 2001 and $23.7 million in 2000.
DEBT AND INTEREST RATE SWAP AGREEMENTS
Grace was not a party to any financial derivative instruments at December 31, 2002 and December 31, 2001.
FAIR VALUE OF DEBT AND OTHER FINANCIAL INSTRUMENTS
At December 31, 2002, the fair value of Grace's debt payable within one year not subject to compromise approximated the recorded value of $3.4 million. Fair value is determined based on expected future cash flows (discounted at market interest rates), quotes from financial institutions and other appropriate valuation methodologies. At December 31, 2002, the recorded values of other financial instruments such as cash, short-term investments, trade receivables and payables and short-term debt approximated their fair values, based on the short-term maturities and floating rate characteristics of these instruments. The fair value of debt subject to compromise is undeterminable; the ultimate value of such debt will be determined by the outcome of the Chapter 11 proceedings.
SALE OF ACCOUNTS RECEIVABLE
Prior to the Filing, Grace sold, on an ongoing basis, approximately a $100 million pool of its eligible trade accounts receivable to a multi-seller receivables company (the "conduit") through a wholly owned special purpose subsidiary (the "SPS"). Upon sale of the receivables, the SPS held a subordinated retained interest in the receivables. Under the terms of the agreement, new receivables were added to the pool as collections reduced previously sold receivables. Grace serviced, administered and collected the receivables on behalf of the SPS and the conduit. The proceeds were used for the reduction of other short-term obligations and are reflected as operating cash flows in the Consolidated Statement of Cash Flows for the years ended December 31, 2001 and 2000. Grace has recorded net losses of $1.2 and $5.0 million in 2001 and 2000, respectively, from the corresponding sales to the conduit. As a result of the Filing, which constituted an event of default under the program, the amount outstanding under the program, approximately $65.3 million, was satisfied through the use of pre-petition trade receivables collected by the SPS during the period from the Filing Date to early May 2001. The program was terminated effective May 14, 2001.
CREDIT RISK
Trade receivables potentially subject Grace to credit risk. Concentrations of credit to customers in the petroleum and construction industries represent the greatest exposure. Grace's credit evaluation policies, relatively short collection terms and history of minimal credit losses mitigate credit risk exposures. Grace does not generally require collateral for its trade accounts receivable.
ASBESTOS-RELATED LITIGATION - SEE NOTE 3
ENVIRONMENTAL REMEDIATION
General Matters and Discussion
Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to the generation, storage, handling, discharge and disposition of hazardous wastes and other materials. Grace accrues for anticipated costs associated with investigative and remediation efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. These accruals do not take into account any discounting for the time value of money. At December 31, 2002, Grace's liability for environmental investigative and remediation costs related to continuing and discontinued operations totaled $201.1 million, as compared to $153.1 million at December 31, 2001. This estimate of environmental cost is based on funding and/or
remediation agreements in place and Grace's best estimate of its cost for sites not subject to a formal remediation plan. The amounts of cash expenditures below have been charged against previously established reserves for the periods presented.
================================================================================
2002 2001 2000
-----------------------------------------
Continuing Operations.............. $ 20.0 $ 24.9 $ 36.8
Discontinued Operations............ 0.8 4.0 10.4
--------------------------------------------------------------------------------
Total.............................. $ 20.8 $ 28.9 $ 47.2
================================================================================
|
Grace has continued to fund environmental remediation activities related to its owned sites while in Chapter 11. Charges against previously established reserves include $1.4 million for draws under letters of credit supporting environmental remediation activity. During 2002, the draws were reclassified to "other" liabilities subject to compromise as a payable to the issuing banks.
During 2002, Grace recorded pre-tax charges of $70.7 million for environmental matters. Approximately $68.0 million of these charges were in connection with a cost recovery lawsuit brought by the U.S. government relating to Grace's former vermiculite mining and processing activities near Libby, Montana. The environmental risks related to such activities could result in additional material future charges to Grace's earnings, the amounts of which are not currently determinable. (See discussion under "Vermiculite Related Matters" below.)
Grace's environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated. These liabilities are evaluated based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties. Grace expects that the funding of environmental remediation activities will be affected by the Chapter 11 proceedings; any such effect could be material. Grace's environmental liabilities are included in "liabilities subject to compromise" as of December 31, 2002.
Vermiculite Related Matters
From the 1920's until 1990, Grace and previous owners conducted vermiculite mining and related activities near Libby, Montana. The vermiculite ore that was mined contained varying amounts of asbestos as a contaminant, almost all of which was removed during processing. Expanded vermiculite from Libby was used in products such as fireproofing, insulation and potting soil. In November 1999, Region 8 of the U.S. Environmental Protection Agency ("EPA") began an investigation into alleged excessive levels of asbestos-related disease in the Libby population related to these former mining activities. This investigation led the EPA to undertake additional investigative activity and to carry out response actions in and around Libby. On March 30, 2001, the EPA filed a lawsuit in U.S. District Court for the District of Montana, Missoula Division (United States v. W. R. Grace & Company et al.) under the Comprehensive Environmental Response, Compensation and Liability Act for the recovery of costs allegedly incurred by the United States in response to the release or threatened release of asbestos in the Libby, Montana area relating to such former mining activities. These costs include cleaning and/or demolition of contaminated buildings, the excavation and removal of contaminated soil, health screening of Libby residents and former mine workers, and investigation and monitoring costs. In this action, the EPA also sought a declaration of Grace's liability that would be binding in future actions to recover further response costs.
In connection with its defense, Grace conducted its own investigation to determine whether the EPA's actions and cost claims were justified and reasonable. However, in December 2002, the District Court granted the United States' motion for partial summary judgment on a number of issues that limited Grace's ability to challenge the EPA's response actions. In January 2003, a trial was held on the remainder of the issues, which primarily involved the reasonableness and adequacy of documentation of the EPA's cost recovery claims through December 31, 2001. No decision has yet been issued. The EPA's Libby-related cost recovery claims through December 31, 2001 totaled approximately $57 million. Based on the testimony of EPA witnesses deposed in the lawsuit and other information, Grace believes that the EPA's total cost recovery claims could reach, and potentially exceed, $100 million. This lawsuit is not subject to the automatic stay provided under the Bankruptcy Code. Grace has accrued a
liability of $63 million at December 31, 2002 with respect to this lawsuit and future cost recovery claims expected to be made by the EPA, which represents Grace's current best estimate of probable liability and defense costs, pending the issuance of a decision of the trial court and the availability of additional information about the EPA's 2002 costs and projected future costs. Grace's liability for this matter is included in "liabilities subject to compromise" and any payments would be subject to the outcome of the Chapter 11 proceedings.
Since January 2000, Grace has spent approximately $13.2 million for remediation of certain Libby area vermiculite processing sites and for health care of Libby area residents diagnosed with asbestos-related illness.
The EPA is also evaluating environmental risks at vermiculite processing sites throughout the U.S. that processed vermiculite from Libby, Montana, and has made claims against Grace to carry out or fund remediation activities. Grace is reviewing the EPA's actions and cost claims to determine whether they are justified and reasonable and, in several instances, has remediated or agreed to remediate certain sites. Costs associated with the above are included in "provision for environmental remediation" included in the Consolidated Statement of Operations.
Insurance Matters
Grace is a party to three environmental insurance coverage actions involving one primary and one excess insurance carrier regarding the applicability of the carriers' policies to Grace's environmental remediation costs. The outcome of such litigation as well as the amounts of any recoveries that Grace may receive is presently uncertain. Accordingly, Grace has not recorded a receivable with respect to such insurance coverage.
CONTINGENT RENTALS
Grace is the named tenant or guarantor with respect to leases entered into by previously divested businesses. These leases, some of which extend through the year 2017, have future minimum lease payments aggregating $79.8 million, and are fully offset by anticipated future minimum rental income from existing tenants and subtenants. In addition, Grace is liable for other expenses (primarily property taxes) relating to the above leases; these expenses are paid by current tenants and subtenants. Certain of the rental income and other expenses are payable by tenants and subtenants that have filed for bankruptcy protection or are otherwise experiencing financial difficulties. Grace believes that any loss from these lease obligations would be immaterial. Grace has rejected certain of these leases as permitted by the Bankruptcy Code, the financial impacts of which are insignificant.
TAX MATTERS
Grace has received the examination report from the Internal Revenue Service ("IRS") on tax periods 1993 through 1996 asserting, in the aggregate, approximately $114.0 million of proposed tax adjustments. The most significant contested issue addressed in such report concerns corporate-owned life insurance ("COLI") policies and is discussed below. Other proposed IRS tax adjustments include Grace's tax position regarding research and development credits, reporting of certain divestitures and other miscellaneous proposed adjustments. The tax audit for the 1993 through 1996 tax period is under the jurisdiction of IRS Appeals, where Grace has filed a protest. Grace's federal tax returns covering periods 1997 and forward are either under examination by the IRS or open for future examination. Grace believes that previously established reserves for tax matters will be sufficient to cover the expected net cost of probable tax return adjustments. Any cash payment would be subject to Grace's Chapter 11 proceedings.
In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its employees as part of a strategy to fund the cost of postretirement employee health care benefits and other long-term liabilities. COLI premiums have been funded in part by loans issued against the cash surrender value of the COLI policies. The IRS is challenging deductions of interest on loans secured by COLI policies for years prior to 1999. In 2000, Grace paid $21.2 million of tax and interest related to this issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted approximately $163.2 million in interest attributable to COLI policy loans. Although Grace continues to believe that the deductions were legitimate, the IRS has successfully challenged interest deductions claimed by other corporations with respect to broad-based COLI policies in all of the three litigated cases to date. Therefore, Grace requested and was granted early referral to the IRS Office of Appeals for consideration of possible settlement alternatives of the COLI interest deduction issue.
On September 23, 2002, Grace filed a motion in its Chapter 11 bankruptcy proceeding requesting that the Bankruptcy Court authorize Grace to enter into a settlement agreement with the IRS with respect to Grace's COLI interest deductions. The tax years at issue are 1989 through 1998. Under the terms of the proposed settlement, the government would allow 20% of the aggregate amount of the COLI interest deductions and Grace would owe federal income tax and interest on the remaining 80%. Grace has accrued for the potential tax and interest liability related to the disallowance of all COLI interest deductions and continues to accrue interest as part of its quarterly income tax provision. On October 22, 2002, the Bankruptcy Court issued an order authorizing Grace to enter into settlement discussions with the IRS consistent with the aforementioned terms and further ordered that any final agreement would be subject to Bankruptcy Court approval. Grace is currently in negotiations with the IRS concerning the proposed settlement.
The IRS has assessed additional federal income tax withholding and Federal Insurance Contributions Act taxes plus interest and related penalties for calendar years 1993 through 1995 against a Grace subsidiary that formerly operated a temporary staffing business for nurses and other health care personnel. The assessments, aggregating $21.8 million, were made in connection with a meal and incidental expense per diem plan for traveling health care personnel, which was in effect through 1999. The IRS contends that certain per diem reimbursements should have been treated as wages subject to employment taxes and federal income tax withholding. Grace contends that its per diem and expense allowance plans were in accordance with statutory and regulatory requirements, as well as other published guidance from the IRS. Grace expects that the IRS will make additional assessments for the 1996 through 1999 periods. The matter is currently pending in the United States Court of Claims. Grace is currently in discussions with the Department of Justice concerning possible settlement options.
LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES
Grace has been named in a purported class action suit filed in September 2000 in California Superior Court for the County of San Francisco alleging that the 1996 reorganization involving a predecessor of Grace and Fresenius AG and the 1998 reorganization involving a predecessor of Grace and Sealed Air Corporation were fraudulent transfers. The Bankruptcy Court authorized the Official Committee of Asbestos Personal Injury Claimants and the Official Committee of Asbestos Property Damage Claimants to represent Grace in these lawsuits. On November 29, 2002, Sealed Air Corporation and Fresenius Medical Care AG each announced that they had reached agreements in principle with representatives of the asbestos creditors committees to resolve all of the current and future asbestos-related claims and the pending fraudulent transfer claims made against them and their respective affiliates. Under the terms of the proposed Sealed Air settlement, Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per annum, commencing on December 21, 2002) and nine million shares of Sealed Air common stock, valued at $335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under the terms of the proposed Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0 million to the Grace estate, or as otherwise directed by the Bankruptcy Court, upon confirmation of a plan of reorganization. Both settlements are subject to Bankruptcy Court approval. Grace is unable to predict how these settlements may ultimately affect its plan of reorganization.
PURCHASE COMMITMENTS
From time to time, Grace engages in purchase commitments in its various business activities, all of which are expected to be fulfilled with no material adverse consequences to Grace's operations or financial condition.
GUARANTEES AND INDEMNIFICATION OBLIGATIONS
Grace is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
o Contracts providing for the sales of a former business unit or product line in which Grace has agreed to indemnify the buyer against liabilities arising prior to the closing of the transaction, including environmental liabilities. These liabilities are included in "liabilities subject to compromise" in the Consolidated Balance Sheet;
o Guarantees of real property lease obligations of third parties, typically arising out of (a) leases entered into by former subsidiaries of Grace, or
(b) the assignment or sublease of a lease by Grace to a third party. These obligations are included in "liabilities subject to compromise" in the Consolidated Balance Sheet;
o Contracts entered into with third party consultants, independent contractors and other service providers in which Grace has agreed to indemnify such parties against certain liabilities in connection with their performance. Based on historical experience and the likelihood that such parties will ever make a claim against Grace, such indemnification obligations are immaterial;
o Product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that product will conform to specifications. Grace generally does not establish a liability for product warranty based on a percentage of sales or other formula. Grace accrues a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale. Both the liability and annual expense related to product warranties are immaterial to the Consolidated Financial Statements.
FINANCIAL ASSURANCES
Financial assurances have been established for a variety of purposes, including insurance and environmental matters, asbestos settlements and appeals, trade-related commitments and other matters. At December 31, 2002, Grace had gross financial assurances issued and outstanding of $237.7 million, comprised of $137.4 million of gross surety bonds issued by various insurance companies and $100.3 million of standby letters of credit issued by various banks. Of the standby letters of credit, $19.7 million act as collateral for surety bonds, thereby reducing Grace's overall obligations under its financial assurances to a net amount of $218.0 million. Of this net amount, approximately $6.5 million were issued on behalf of non-Debtor entities and $211.5 million were issued on behalf of the Debtors. Of the amounts issued by the Debtors, approximately $195.1 million were issued before the Filing Date, with the remaining $16.4 million being subsequent to the Filing, of which $13.7 million was issued under the DIP facility.
ACCOUNTING FOR CONTINGENCIES
Although the outcome of each of the matters discussed above cannot be predicted with certainty, Grace has assessed its risk and has made accounting estimates as required under U.S. generally accepted accounting principles. As a result of the Filing, claims related to the items discussed above will be addressed as part of Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have been included in "liabilities subject to compromise" on the accompanying Consolidated Balance Sheet as of December 31, 2002. The amounts of these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts recorded by Grace at December 31, 2002.
Under its Certificate of Incorporation, the Company is authorized to issue 300,000,000 shares of common stock, $.01 par value. Of the common stock unissued at December 31, 2002, approximately 10,440,400 shares were reserved for issuance pursuant to stock options and other stock incentives. The Company has not paid a dividend on its common stock since 1998. The Certificate of Incorporation also authorizes 53,000,000 shares of preferred stock, $.01 par value, none of which has been issued. 3,000,000 of such shares have been designated as Series A Junior Participating Preferred Stock and are reserved for issuance in connection with the Company's Preferred Stock Purchase Rights ("Rights"). A Right trades together with each outstanding share of common stock and entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock under certain circumstances and subject to certain conditions. The Rights are not and will not become exercisable unless and until certain events occur, and at no time will the Rights have any voting power.
The Company's Board of Directors previously approved programs to repurchase outstanding shares of common stock. During the year ended December 31, 2000, the Company acquired 4,815,400 shares of common stock for $47.3 million (at an average price per share of $9.82). No shares were repurchased under this program during 2002 and 2001.
In November 2001, 56,911 shares of restricted stock were reclassified as treasury shares to reflect an election made by Paul J. Norris, Grace's Chairman,
President and Chief Executive Officer, under a Bankruptcy Court approved employment agreement.
The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings (loss) per share from continuing operations.
EARNINGS (LOSS) PER SHARE
(Amounts in millions,
except per share amounts) 2002 2001 2000
----------------------------------------------------------
NUMERATORS
Net income (loss)........ $ 22.1 $ 78.6 $ (89.7)
===============================
DENOMINATORS
Weighted average common
shares - basic
calculation............. 65.4 65.3 66.8
Dilutive effect of
employee stock options
and restricted shares... 0.1 0.1 --
-------------------------------
Weighted average common
shares - diluted
calculation............. 65.5 65.4 66.8
===============================
BASIC EARNINGS (LOSS)
PER SHARE............... $ 0.34 $ 1.20 $ (1.34)
===============================
DILUTED EARNINGS (LOSS)
PER SHARE............... $ 0.34 $ 1.20 $ (1.34)
==========================================================
|
Stock options that could potentially dilute basic earnings (loss) per share (that were excluded from the computation of diluted earnings (loss) per share because their exercise prices were greater than the average market price of the common shares) averaged approximately 11.9 million in 2002, 14.2 million in 2001 and 9.4 million in 2000. As a result of the 2000 net loss of $89.7 million, approximately 800,000 of employee compensation-related shares, primarily issuable under stock options, were excluded from the diluted loss per share calculation in 2000 because their effect would have been antidilutive.
Each stock option granted under the Company's stock incentive plans has an exercise price equal to the fair market value of the Company's common stock on the date of grant. Options become exercisable at the time or times determined by a committee of the Company's Board of Directors and may have terms of up to ten years and one month. The following table sets forth information relating to such options during 2002, 2001 and 2000:
==============================================================
STOCK OPTION ACTIVITY 2002
--------------------------------------------------------------
Average
Number Exercise
of Shares Price
------------ ----------
Balance at beginning of year..... 12,772,431 $ 11.88
Options granted.................. -- --
Options exercised................ (1,266) 2.40
Options terminated or cancelled.. (2,330,748) 11.60
------------
Balance at end of year........... 10,440,417 11.94
==============================================================
Exercisable at end of year....... 8,973,964 $ 12.58
==============================================================
2001
--------------------------------------------------------------
Balance at beginning of year..... 14,005,209 $ 12.70
Options granted.................. 1,339,846 2.53
Options exercised................ -- --
Options terminated or cancelled.. (2,572,624) 11.46
------------
Balance at end of year........... 12,772,431 11.88
==============================================================
Exercisable at end of year....... 9,586,993 $ 12.64
==============================================================
2000
--------------------------------------------------------------
Balance at beginning of year..... 12,530,287 $ 12.27
Options granted.................. 2,555,000 13.32
Options exercised................ (779,863) 7.52
Options terminated or cancelled.. (300,215) 13.62
------------
Balance at end of year........... 14,005,209 12.70
==============================================================
Exercisable at end of year....... 9,386,539 $ 11.96
==============================================================
|
At December 31, 2002, 4,468,504 shares were available for additional grants. Currently outstanding options expire on various dates through November 2011.
Following is a summary of stock options outstanding at December 31, 2002:
Weighted-
Average Weighted- Weighted-
EXERCISE Remaining Average Average
PRICE Number Contractual Exercise Number Exercise
RANGE Outstanding Life (Years) Price Exercisable Price
--------------------------------------------------------------------------------
$1 - $8 2,661,025 5.62 $ 4.33 1,934,444 $ 5.06
$8 - $13 3,247,866 5.77 12.28 3,247,866 12.28
$13 - $18 2,807,826 7.64 14.13 2,067,954 14.37
$18 - $21 1,723,700 6.02 19.47 1,723,700 19.47
--------------------------------------------------------------------
10,440,417 6.27 $ 11.94 8,973,964 $ 12.58
================================================================================
|
In 2000, the Company granted a total of 25,000 shares of the Company's Common Stock to certain executives, subject to various restrictions. (No shares were granted in 2001 and 2002.) Such shares are subject to forfeiture if certain employment conditions are not met. At December 31, 2001, restrictions on all prior grants of restricted stock, net of forfeitures, totaled 55,000 shares; these restrictions lapsed in 2002. The quoted market value of the restricted shares at the date of grant is amortized to expense ratably over the restriction period.
SFAS No. 123, "Accounting for Stock-Based Compensation," permits the Company to follow the measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and not recognize compensation expense for its stock-based
incentive plans. Had compensation cost for the Company's stock-based
incentive compensation plans been determined based on the fair value at the
grant dates of awards under those plans, consistent with the methodology
prescribed by SFAS No. 123, the Company's net income (loss) and related earnings
(loss) per share for 2002, 2001 and 2000 would have been reduced to the pro
forma amounts indicated below:
PRO FORMA EARNINGS
UNDER SFAS NO. 123
(Amounts in millions, except per share amounts) 2002 2001 2000 -------------------------------------------------------------------------------- Net income (loss): As reported......................... $ 22.1 $ 78.6 $ (89.7) Pro forma (1)....................... 17.9 71.2 (98.5) Basic earnings (loss) per share: As reported......................... $ 0.34 $ 1.20 $ (1.34) Pro forma (1)....................... 0.27 1.09 (1.47) Diluted earnings (loss) per share: As reported......................... $ 0.34 $ 1.20 $ (1.34) Pro forma (1)....................... 0.27 1.09 (1.47) ================================================================================ |
(1) These pro forma amounts may not be indicative of future income (loss) and earnings (loss) per share due to Grace's Chapter 11 Filing.
To determine compensation cost under SFAS No. 123, the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model, with the following historical weighted average assumptions applied to grants in 2001 and 2000:
================================================================================ OPTION VALUE ASSUMPTIONS 2001 2000 -------------------------------------------------------------------------------- Dividend yield............................... -- % -- % Expected volatility.......................... 61 % 59 % Risk-free interest rate...................... 5 % 7 % Expected life (in years)..................... 4 4 ================================================================================ |
Based upon the above assumptions, the weighted average fair value of each option granted was $1.28 per share for 2001 and $6.86 per share for 2000.
Grace maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based on final average salary and years of service. Grace funds its U.S. pension plans in accordance with U.S. federal laws and regulations. Non-U.S. pension plans are funded under a variety of methods, as required under local laws and customs, and therefore cannot be summarized. Grace's accumulated other comprehensive loss, reflected as a reduction of shareholders' equity (deficit), included additional minimum pension liabilities as of December 31, 2002 and 2001 of $436.5 million ($283.7 million, net of tax) and $209.3 million ($136.0 million, net of tax), respectively, for plans where the accumulated benefit obligation exceeded the fair market value of assets. These amounts include offsets of related deferred pension costs.
Grace provides certain other postretirement health care and life insurance benefits for retired employees of certain U.S. business units and certain divested units. The postretirement medical plan provides various levels of benefits to employees (depending on their dates of hire) who retire from Grace after age 55 with at least 10 years of service. These plans are unfunded, and Grace pays the costs of benefits under these plans as they are incurred. Grace applies SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires that the future costs of postretirement health care and life insurance benefits be accrued over the employees' years of service.
An amendment to the structure of the retiree-paid premiums for postretirement medical benefits was approved by the Company's Board in November 2001. The amendment became effective January 1, 2002, and requires all retirees and beneficiaries covered by the postretirement medical plan to contribute a minimum of 40% of the calculated premium for that coverage.
The following summarizes the changes in benefit obligation and fair value of retirement plan assets during the period:
====================================================================================================================================
PENSION
----------------------------------------------------------
OTHER POST-
CHANGE IN FINANCIAL STATUS OF RETIREMENT PLANS U.S. NON-U.S. TOTAL RETIREMENT PLANS
---------------------------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $ 776.6 $ 741.0 $ 196.1 $ 199.2 $ 972.7 $ 940.2 $ 136.0 $ 176.7
Service cost..................................... 8.5 7.9 4.3 3.8 12.8 11.7 0.6 0.7
Interest cost.................................... 55.1 55.3 12.5 11.2 67.6 66.5 8.7 9.8
Plan participants' contributions................. -- -- 0.4 0.4 0.4 0.4 -- --
Amendments....................................... 5.6 -- 2.4 1.6 8.0 1.6 (31.1) --
Actuarial loss (gain)............................ 93.6 42.9 2.8 0.6 96.4 43.5 31.1 (28.9)
Benefits paid.................................... (69.2) (70.5) (11.1) (11.7) (80.3) (82.2) (21.5) (22.3)
Currency exchange translation adjustments........ -- -- 26.3 (9.0) 26.3 (9.0) -- --
------------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year...... $ 870.2 $ 776.6 $ 233.7 $ 196.1 $1,103.9 $ 972.7 $ 123.8 $ 136.0
====================================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year... $ 689.5 $ 800.2 $ 167.3 $ 198.3 $ 856.8 $ 998.5 $ -- $ --
Actual return on plan assets..................... (67.8) (47.0) (21.4) (15.2) (89.2) (62.2) -- --
Employer contribution............................ 4.3 6.8 5.9 3.8 10.2 10.6 21.5 22.3
Acquisitions/spinoff............................. 0.4 -- 1.8 -- 2.2 -- -- --
Plan participants' contribution.................. -- -- 0.4 0.4 0.4 0.4 -- --
Benefits paid.................................... (69.2) (70.5) (11.1) (11.7) (80.3) (82.2) (21.5) (22.3)
Currency exchange translation adjustment......... -- -- 16.3 (8.3) 16.3 (8.3) -- --
------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year......... $ 557.2 $ 689.5 $ 159.2 $ 167.3 $ 716.4 $ 856.8 $ -- $ --
====================================================================================================================================
Funded status.................................... $(313.0) $ (87.1) $ (74.5) $ (28.8) $ (387.5) $ (115.9) $(123.8) $(136.0)
Unrecognized transition obligation (asset)....... -- 0.7 0.5 0.8 0.5 1.5 -- --
Unrecognized actuarial loss (gain)............... 463.6 253.7 90.6 45.6 554.2 299.3 51.9 23.8
Unrecognized prior service cost (benefit)........ 26.1 25.1 3.8 4.0 29.9 29.1 (75.3) (56.9)
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized............................ $ 176.7 $ 192.4 $ 20.4 $ 21.6 $ 197.1 $ 214.0 $(147.2) $(169.1)
====================================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
Deferred pension costs......................... $ 5.3 $ 58.2 $ 98.9 $ 85.1 $ 104.2 $ 143.3 $ -- $ --
Pension related liability...................... (290.7) (93.2) (79.3) (65.1) (370.0) (158.3) (147.2) (169.1)
Unamortized prior service cost................. 26.2 19.0 0.2 0.7 26.4 19.7 N/A N/A
Accumulated other comprehensive loss........... 435.9 208.4 0.6 0.9 436.5 209.3 N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized......................... $ 176.7 $ 192.4 $ 20.4 $ 21.6 $ 197.1 $ 214.0 $(147.2) $(169.1)
====================================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate.................................... 6.75% 7.25% 5.72% 5.87% N/M N/M 6.75% 7.25%
Expected return on plan assets................... 9.00% 9.00% 8.67% 8.65% N/M N/M N/M N/M
Rate of compensation increase.................... 4.25% 4.25% 3.84% 4.08% N/M N/M N/M N/M
====================================================================================================================================
|
===========================================================================================================================
2002 2001 2000
----------------------- ----------------------- -------------------------
COMPONENTS OF NET PERIODIC BENEFIT (INCOME) COST
(Dollars in millions) U.S. NON-U.S. OTHER U.S. NON-U.S. OTHER U.S. NON-U.S. OTHER
------------------------------------------------ ---- -------- ----- ---- -------- ----- ---- -------- -------
Service cost..................................... $ 8.5 $ 4.3 $ 0.6 $ 7.9 $ 3.8 $ 0.7 $ 6.3 $ 3.8 $ 0.6
Interest cost.................................... 55.1 12.5 8.7 55.3 11.2 9.8 54.5 11.4 14.4
Expected return on plan assets................... (59.1) (14.8) -- (69.1) (15.9) -- (78.2) (18.2) --
Amortization of transition asset................. 0.7 0.4 -- (10.0) -- -- (10.0) (0.2) --
Amortization of prior service cost (benefit)..... 5.2 0.6 (12.7) 7.6 0.5 (8.3) 7.4 0.6 (6.7)
Amortization of unrecognized actuarial loss...... 9.7 1.8 3.0 2.4 0.2 0.1 0.8 (0.4) 2.4
Net curtailment and settlement loss.............. -- -- -- -- 0.2 -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit (income) cost............... $ 20.1 $ 4.8 $ (0.4) $ (5.9) $ -- $ 2.3 $ (19.2) $ (3.0) $10.7
=============================================================================================================================
|
==================================================================== ====================== ===========================
OTHER POST-
PENSION PLANS WHERE ACCUMULATED BENEFIT U.S. NON-U.S. RETIREMENT PLANS
OBLIGATIONS EXCEED PLAN ASSETS ----------------------- ---------------------- ---------------------------
(Dollars in millions) 2002 2001 2002 2001 2002 2001
-------------------------------------------------------- ----------- ---------- ----------- ------------- -------------
Projected benefit obligation............... $ 867.1 $ 691.1 $ 95.6 $ 74.1 N/A N/A
Accumulated benefit obligation............. 841.9 676.8 82.1 63.8 $ 123.8 $ 136.0
Fair value of plan assets.................. 551.2 583.7 3.3 0.9 -- --
======================================================== =========== ========== =========== ============= =============
|
N/M - Not meaningful
N/A - Not applicable
For 2002 measurement purposes, rates of increase of 9.0% and 9.5% in the per capita cost of covered retiree health care benefits for pre-age 65 and post-age 65, respectively, were assumed. The rate is assumed to decrease gradually to 5.3% through 2007 and remain at that level thereafter. A one percentage point increase (decrease) in assumed health care medical cost trend rates would have a negligible impact on Grace's postretirement benefit obligations.
Grace is a global producer of specialty chemicals and specialty materials. It generates revenues from two business segments: Davison Chemicals and Performance Chemicals. Davison Chemicals produces a variety of catalysts and silica products. Performance Chemicals produces specialty construction chemicals, building materials and sealants and coatings. Intersegment sales, eliminated in consolidation, are not material. The table below presents information related to Grace's business segments for 2002, 2001 and 2000. Only those corporate expenses directly related to the segment are allocated for reporting purposes. All remaining corporate items are reported separately and labeled as such.
================================================================================
BUSINESS SEGMENT DATA (Dollars
in millions) 2002 2001 2000
--------------------------------------------------------------------------------
NET SALES (a)
Davison Chemicals............. $ 945.2 $ 874.1 $ 783.9
Performance Chemicals......... 872.0 849.1 813.5
----------------------------------------------
Total......................... $ 1,817.2 $ 1,723.2 $ 1,597.4
==============================================
PRE-TAX OPERATING INCOME
Davison Chemicals............. $ 129.4 $ 123.8 $ 128.0
Performance Chemicals......... 98.8 96.7 91.6
----------------------------------------------
Total......................... $ 228.2 $ 220.5 $ 219.6
==============================================
DEPRECIATION AND AMORTIZATION
Davison Chemicals............. $ 61.7 $ 58.4 $ 57.2
Performance Chemicals......... 31.8 29.5 29.3
----------------------------------------------
Total......................... $ 93.5 $ 87.9 $ 86.5
==============================================
CAPITAL EXPENDITURES
Davison Chemicals............. $ 59.5 $ 39.3 $ 33.7
Performance Chemicals......... 27.9 22.8 28.3
----------------------------------------------
Total......................... $ 87.4 $ 62.1 $ 62.0
==============================================
TOTAL ASSETS
Davison Chemicals............. $ 751.1 $ 704.1 $ 639.2
Performance Chemicals......... 530.9 504.1 486.7
----------------------------------------------
Total......................... $ 1,282.0 $ 1,208.2 $ 1,125.9
================================================================================
|
a= Net sales amounts presented herein for 2000 reflect a reclassification of freight costs and sales commissions (previously shown as a reduction of sales).
The table below presents information related to the geographic areas in which Grace operated in 2002, 2001 and 2000.
GEOGRAPHIC AREA DATA
(Dollars in millions) 2002 2001 2000
--------------------------------------------------------------------------------
NET SALES
United States.................. $ 829.2 $ 835.1 $ 825.6
Canada and Puerto Rico......... 56.2 40.7 34.4
Europe......................... 551.9 472.9 416.8
Asia Pacific................... 272.8 267.5 216.8
Latin America.................. 107.1 107.0 103.8
---------------------------------------------
Total.......................... $ 1,817.2 $ 1,723.2 $ 1,597.4
================================================================================
PROPERTIES AND EQUIPMENT, NET
United States.................. $ 392.0 $ 386.7 $ 408.3
Canada and Puerto Rico......... 18.4 20.1 19.9
Europe......................... 152.0 118.0 101.1
Asia Pacific................... 47.4 49.1 54.7
Latin America.................. 11.0 15.1 17.7
---------------------------------------------
Total.......................... $ 620.8 $ 589.0 $ 601.7
================================================================================
|
Pre-tax operating income, depreciation and amortization, capital expenditures and total assets for Grace's business segments are reconciled below to amounts presented in the Consolidated Financial Statements.
RECONCILIATION OF BUSINESS SEGMENT
DATA TO FINANCIAL STATEMENTS
(Dollars in millions) 2002 2001 2000
--------------------------------------------------------------------------------
Pre-tax operating income - business
segments.............................. $ 228.2 $ 220.5 $ 219.6
Add back:
Minority Interest........................ 1.9 3.5 --
--------------------------------------
$ 230.1 $ 224.0 $ 219.6
Gain on disposal of assets............... 0.7 1.8 5.5
Gain on sale of investments.............. 1.2 7.9 19.0
Provision for environmental remediation . (70.7) (5.8) (10.4)
Provisions for asbestos-related
litigation, net of insurance
coverage.............................. -- -- (208.0)
Interest expense and related financing
costs................................. (20.0) (37.1) (28.1)
Corporate operating costs................ (47.4) (33.0) (32.5)
Other, net............................... (1.8) 3.7 15.2
--------------------------------------
Income (loss) from operations before
Chapter 11 expenses, income taxes,
and minority interest................. $ 92.1 $ 161.5 $ (19.7)
================================================================================
Depreciation and amortization -
business segments..................... $ 93.5 $ 87.9 $ 86.5
Depreciation and amortization -
corporate............................. 1.1 1.1 1.3
--------------------------------------
Total depreciation and amortization...... $ 94.6 $ 89.0 $ 87.8
================================================================================
Capital expenditures - business
segments.............................. $ 87.4 $ 62.1 $ 62.0
Capital expenditures - corporate......... 3.7 0.8 2.8
--------------------------------------
Total capital expenditures............... $ 91.1 $ 62.9 $ 64.8
================================================================================
Total assets - business segments......... $ 1,282.0 $ 1,208.2 $1,125.9
Total assets - corporate................. 528.4 491.4 599.8
Asbestos-related receivables............. 282.6 293.4 372.0
Deferred tax assets...................... 594.7 525.4 487.2
--------------------------------------
Total assets............................. $ 2,687.7 $ 2,518.4 $2,584.9
================================================================================
|
=====================================================================================================
QUARTERLY SUMMARY AND STATISTICAL INFORMATION (Unaudited)
(Dollars in millions, except per share)
-----------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31(1)
-----------------------------------------------------------------------------------------------------
2002
Net sales ....................... $ 413.5 $ 471.6 $ 478.7 $ 453.4
Cost of goods sold (2) .......... 260.8 294.6 299.4 294.1
Net income (loss) ............... 12.4 21.2 14.0 (25.5)
Net income per share: (3)
Basic earnings per share:
Net income .................... $ 0.19 $ 0.32 $ 0.21 $ (0.39)
Diluted earnings per share:
Net income .................... 0.19 0.32 0.21 (0.39)
Market price of common stock: (4)
High ........................ $ 2.47 $ 3.75 $ 3.05 $ 2.50
Low ......................... 1.56 2.13 1.46 0.99
Close ....................... 2.20 3.00 1.60 1.96
-----------------------------------------------------------------------------------------------------
2001
Net sales ....................... $ 395.7 $ 450.3 $ 448.1 $ 429.1
Cost of goods sold (2) .......... 252.2 279.0 275.2 273.0
Net income ...................... 14.6 23.0 19.8 21.2
Net income per share: (3)
Basic earnings per share:
Net income .................... $ 0.22 $ 0.35 $ 0.30 $ 0.32
Diluted earnings per share:
Net income .................... 0.22 0.35 0.30 0.32
Market price of common stock: (4)
High ........................ $ 4.38 $ 2.35 $ 1.87 $ 1.72
Low ......................... 1.63 1.31 1.46 1.35
Close ....................... 2.30 1.75 1.55 1.55
=====================================================================================================
|
(1) Fourth quarter 2002 net income includes a $51.0 million pre-tax charge to adjust Grace's estimate of defense and other probable costs to resolve cost recovery claims by the EPA for cleanup of vermiculite in and around Libby, Montana.
(2) 2002 and 2001 quarterly results are retroactively restated to reflect the full consolidation of Advanced Refining Technologies, LLC, previously reported as an equity method joint venture. This restatement had no effect on reported sales or net income.
(3) Per share results for the four quarters may differ from full-year per share results, as a separate computation of the weighted average number of shares outstanding is made for each quarter presented.
(4) Principal market: New York Stock Exchange.
====================================================================================================================================
FINANCIAL SUMMARY (1) (Dollars in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Net sales ............................................. $ 1,817.2 $ 1,723.2 $ 1,597.4 $ 1,550.9 $ 1,546.2
Income (loss) from continuing operations before
Chapter 11 expenses, income taxes, and
minority interest (2)............................. 92.1 161.5 (19.7) 203.4 (223.2)
Income (loss) from continuing operations (2)........... 22.1 78.6 (89.7) 130.2 (194.7)
Income from discontinued operations (2) ............... -- -- -- 5.7 0.9
Minority interest in consolidated entities............. (1.9) (3.5) -- -- --
Net income (loss) ..................................... 22.1 78.6 (89.7) 135.9 (229.1)
------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Current assets (3)..................................... $ 830.4 $ 735.9 $ 773.9 $ 779.8 $ 625.6
Current liabilities (3)................................ 243.3 233.3 1,092.9 769.4 669.8
Properties and equipment, net.......................... 620.8 589.0 601.7 617.3 661.4
Total assets (3)....................................... 2,687.7 2,518.4 2,584.9 2,475.1 2,556.3
Total debt not subject to compromise (3)............... 3.4 6.3 421.9 136.2 113.4
Liabilities subject to compromise...................... 2,334.7 2,311.5 -- -- --
Shareholders' equity (deficit)......................... (222.1) (141.7) (71.3) 111.1 42.1
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW
Operating activities (3) .............................. $ 195.4 $ 14.7 $ (143.7) $ 130.5 $ (66.9)
Investing activities................................... (110.7) (131.4) (94.0) 89.4 (114.0)
Financing activities (3)............................... (9.2) 123.1 239.9 (80.9) 196.6
Net cash flow (3)...................................... 91.6 (0.5) (7.9) 134.5 17.7
------------------------------------------------------------------------------------------------------------------------------------
DATA PER COMMON SHARE (DILUTED)
Income (loss) from continuing operations (2)........... $ 0.34 $ 1.20 $ (1.34) $ 1.76 $ (2.61)
Net income (loss) ..................................... 0.34 1.20 (1.34) 1.84 (3.07)
Average common diluted shares outstanding (thousands).. 65,500 65,400 66,800 73,800 74,600
------------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Capital expenditures................................... $ 91.1 $ 62.9 $ 64.8 $ 82.5 $ 100.9
Common stock price range (4)........................... $0.99-3.75 $1.31-4.38 $14 15/16-1 15/16 $21-11 13/16 $21 11/16-10
Common shareholders of record.......................... 11,187 11,643 12,240 13,215 14,438
Number of employees - continuing operations............ 6,400 6,400 6,300 6,300 6,600
====================================================================================================================================
|
(1) Certain prior-year amounts have been reclassified to conform to the 2002 presentation and to reflect a reclassification of freight costs and sales commissions (previously shown as a reduction of sales) to cost of sales and selling expenses in accordance with Emerging Issues Task Force Consensus No. 00-10, "Accounting for Shipping and Handling Revenues and Costs" adopted in 2000.
(2) Amounts contain a provision for environmental remediation of $70.7 million for 2002. Amounts for 2000 and 1998 also contain a provision for asbestos litigation, net of expected insurance recovery, of $208.0 million and $376.1 million, respectively.
(3) 2001 results are retroactively restated to reflect the full consolidation of Advanced Refining Technologies, LLC, previously reported as an equity method joint venture. This restatement had no effect on reported sales or net income.
(4) On March 31, 1998, a predecessor of the Company ("Old Grace") completed a transaction in which its flexible packaging business ("Packaging Business") was combined with Sealed Air Corporation ("Sealed Air"). Old Grace effected this transaction by transferring its specialty chemicals businesses along with certain other businesses and assets to the Company (then named Grace Specialty Chemicals, Inc.), distributing the shares of the Company's common stock to Old Grace's shareholders on a one-for-one basis ("Spin-off") and merging a subsidiary of Old Grace with Sealed Air ("Merger"). Immediately following the Spin-off and Merger, the Company changed its name to "W. R. Grace & Co." and Old Grace changed its name to "Sealed Air Corporation" ("New Sealed Air"). For further information, see Old Grace's Joint Proxy Statement/Prospectus dated February 13, 1998 and the Company's Information Statement dated February 13, 1998. Stock prices in 1998 have been adjusted so that they are on a basis comparable to the stock prices following the disposition of the Packaging Business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
W. R. Grace & Co. and its subsidiaries are engaged in specialty chemicals and specialty materials businesses on a global basis. Its business segments are Davison Chemicals, which produces catalysts and silica products, and Performance Chemicals, which produces construction chemicals, building materials and sealants and coatings.
As used herein, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors.
In response to a sharply increasing number of asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), the Company and 61 of its United States subsidiaries and affiliates, including W. R. Grace & Co.-Conn. (collectively, the "Debtors"), filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The cases were consolidated and are being jointly administered under case number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the Filing.
During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in bodily injury claims, higher than expected costs to resolve bodily injury and certain property damage claims, and class action lawsuits alleging damages from a former attic insulation product. (These claims are discussed in more detail in Note 3 to the Consolidated Financial Statements.) After a thorough review of these developments, the Board of Directors of Grace concluded on April 2, 2001 that a federal court-supervised Chapter 11 filing provided the best forum available to achieve predictability and fairness in the claims settlement process.
By filing under Chapter 11, Grace expects to be able to both obtain a comprehensive resolution of the claims against it and preserve the inherent value of its businesses. Under Chapter 11, the Debtors expect to continue to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims against them.
Consequence of Filing - As a consequence of the Filing, pending litigation against the Debtors for pre-petition matters is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to realize its pre-petition claims except pursuant to an order of the Bankruptcy Court.
The Debtors intend to address all of their pending and future asbestos-related claims and all other pre-petition claims in a plan of reorganization. Such a plan of reorganization may include the establishment of a trust, through which all pending and future asbestos-related claims would be channeled for resolution. However, it is currently impossible to predict with any degree of certainty the amount that would be required to be contributed to the trust, how the trust would be funded, how other pre-petition claims would be treated or what impact any reorganization plan may have on the shares of common stock of the Company. The interests of the Company's shareholders could be substantially diluted or cancelled under a plan of reorganization. The formulation and implementation of the plan of reorganization is expected to take a significant period of time.
Status of Chapter 11 Proceedings - Since the Filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court. In addition, the Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations in the ordinary course of business, including employee wages and benefits, customer programs, shipping charges and a limited amount of claims of essential trade creditors.
As provided by the Bankruptcy Code, the Debtors had the exclusive right to propose a plan of reorganization for a 120-day period following the Filing Date. The Debtors have received an extension of their exclusivity period during which to file a plan of reorganization through August 1, 2003, and an extension of the Debtors' exclusive rights to solicit acceptances of a reorganization plan through October 1, 2003.
Three creditors' committees, two representing asbestos claimants and the third representing other unsecured creditors, and a committee representing shareholders have been appointed in the Chapter 11 Cases. These
committees will have the right to be heard on all matters that come before the Bankruptcy Court, and, together with a legal representative of future asbestos claimants (whom Grace expects to be appointed by the Bankruptcy Court in the future), are likely to play important roles in the Chapter 11 Cases. The Debtors are required to bear certain of the committees' and the future asbestos claimants representative's costs and expenses, including those of their counsel and financial advisors.
The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding over asbestos bodily injury matters and the fraudulent conveyance litigation described below. He has assigned the Debtors' other bankruptcy matters to Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the Western District of Pennsylvania, sitting in Wilmington, Delaware.
At a hearing on April 22, 2002 the Bankruptcy Court entered an order establishing a bar date of March 31, 2003 for claims of general unsecured creditors, asbestos property damage claims and medical monitoring claims related to asbestos. The bar date does not apply to asbestos-related bodily injury claims or claims related to Zonolite(R) attic insulation ("ZAI"), which will be addressed separately. Grace has distributed notices and run media announcements of the bar date under a program approved by the Bankruptcy Court. Rust Consulting, the court-approved claims handling agent for the Chapter 11 Cases, is maintaining a register of all claims filed. As claims are filed, Grace will be cataloguing and assessing their validity. At this time, it is not possible to estimate the value of the claims that will ultimately be allowed by the Bankruptcy Court, due to the uncertainties of the Chapter 11 process, the in-progress state of Grace's investigation of submitted claims and the lack of documentation submitted in support of many claims.
In July 2002, the Bankruptcy Court approved special counsel to represent the ZAI claimants, at the Debtors' expense, in a proceeding to determine certain threshold scientific issues regarding ZAI. The court has set a litigation schedule that would result in pretrial hearings on these issues in the third quarter of 2003.
On November 29, 2002 Sealed Air Corporation ("Sealed Air") and Fresenius Medical Care AG ("Fresenius") each announced that they had reached agreements in principle with the Official Committee of Asbestos Personal Injury Claimants and the Official Committee of Asbestos Property Damage Claimants to settle asbestos and fraudulent conveyance claims related to the 1998 transaction involving Grace's former packaging business and Sealed Air, and the 1996 transaction involving Grace's former medical care business and Fresenius, respectively. Under the terms of the proposed Sealed Air settlement, Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per annum commencing on December 21, 2002) and nine million shares of Sealed Air common stock, valued at $335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under the terms of the proposed Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0 million to the Grace estate, or as otherwise directed by the Bankruptcy Court, upon confirmation of a plan of reorganization. The Sealed Air and Fresenius settlements are subject to the approval of the Bankruptcy Court. Grace is unable to predict how these settlements may ultimately affect its plan of reorganization.
Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due to the Filing. The accompanying Consolidated Balance Sheet as of December 31, 2002 reflects the classification of the Debtors' pre-petition debt within "liabilities subject to compromise."
The Debtors have entered into a debtor-in-possession post-petition loan and security agreement with Bank of America, N.A. (the "DIP facility") in the aggregate amount of $250 million. The DIP facility has a term expiring on April 1, 2003 and bears interest under a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points depending on the level of loans outstanding. The Debtors have filed a motion with the Bankruptcy Court seeking approval to extend the term of the DIP facility for an additional three years and to modify certain other provisions.
Accounting Impact - The accompanying Consolidated Financial Statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated by the American Institute of Certified Public Accountants. SOP 90-7 requires that financial statements of debtors-in-possession be prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, the realization of certain Debtors' assets and the liquidation of certain Debtors' liabilities are subject to significant uncertainty. While operating as debtors-in-possession, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in the Consolidated Financial Statements, which do not currently give effect to any adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of a plan of reorganization.
Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to compromise are required to be reported separately on the balance sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of December 31, 2002, such pre-petition liabilities include fixed obligations (such as debt and contractual commitments) as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation and other claims). The recorded amounts of such liabilities generally reflect accounting measurements as of the Filing Date, adjusted as warranted for changes in facts and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the Consolidated Financial Statements for detail of the liabilities subject to compromise as of December 31, 2002, and as of the Filing Date.) Obligations of Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and assumptions affecting the assets and liabilities reported at the date of the Consolidated Financial Statements, and the revenues and expenses reported for the periods presented. Actual amounts could differ from those estimates. Changes in estimates are recorded in the period identified. Grace's accounting measurements that are most affected by management's estimates of future events are:
o Contingent liabilities such as asbestos-related matters, environmental remediation, income taxes and retained obligations of divested businesses.
o Pension and postretirement liabilities that depend on assumptions regarding discount rates and/or total returns on invested funds.
o Depreciation and amortization periods for long-lived assets, including property and equipment, intangible and other assets.
o Realization values of various assets such as trade receivables, inventories, insurance receivables, income taxes, and goodwill.
The accuracy of these and other estimates may also be materially affected by the uncertainties arising under the Chapter 11 Cases.
Set forth below is a chart that lists key operating statistics and percentage changes for the years ended December 31, 2002, 2001 and 2000. Immediately following the chart is an overview of the matters affecting the comparison of 2002 and 2001 as well as the comparison of 2001 and 2000. Each of these items should be referenced when reading management's discussion and analysis of the results of operations and financial condition. The chart below, as well as the financial information presented throughout this discussion, divides Grace's financial results between "core operations" and "noncore activities." Core operations comprise the financial results of Davison Chemicals, Performance Chemicals and the costs of corporate activities that directly or indirectly support business operations. In contrast, noncore activities comprise all other events and transactions not directly related to the generation of operating revenue or the support of core operations.
Neither pre-tax income from core operations nor pre-tax income from core operations before depreciation and amortization purport to represent income or cash flow as defined under generally accepted accounting principles, and should not be considered an alternative to such measures as an indicator of Grace's performance.
====================================================================================================================================
ANALYSIS OF CONSOLIDATED OPERATIONS % Change % Change
(Dollars in millions) 2002 2001 (a) Fav(Unfav) 2000 (a) Fav(Unfav)
------------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Davison Chemicals.................................... $ 945.2 $ 874.1 8.1% $ 783.9 11.5%
Performance Chemicals................................ 872.0 849.1 2.7% 813.5 4.4%
-----------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS...................... $ 1,817.2 $ 1,723.2 5.5% $ 1,597.4 7.9%
=======================================================================
PRE-TAX OPERATING INCOME (b):
Davison Chemicals (c)................................ $ 129.4 $ 123.8 4.5% $ 128.0 (3.3%)
Performance Chemicals................................ 98.8 96.7 2.2% 91.6 5.6%
Corporate operating costs............................ (47.4) (33.0) (43.6%) (32.5) (1.5%)
-----------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS (d).................. 180.8 187.5 (3.6%) 187.1 0.2%
-----------------------------------------------------------------------
PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES............ (74.5) 3.0 NM (188.4) NM
Interest expense......................................... (20.0) (37.1) 46.1% (28.1) (32.0%)
Interest income.......................................... 3.9 4.6 (15.2%) 9.7 (52.6%)
-----------------------------------------------------------------------
INCOME (LOSS) BEFORE CHAPTER 11 REORGANIZATION EXPENSE
AND INCOME TAXES......................................... 90.2 158.0 (42.9%) (19.7) NM
Chapter 11 reorganization expenses, net.................. (30.1) (15.7) (91.7%) -- NM
Provision for income taxes............................... (38.0) (63.7) 40.3% (70.0) 9.0%
-----------------------------------------------------------------------
NET INCOME (LOSS)....................................... $ 22.1 $ 78.6 (71.9%) $ (89.7) 187.6%
=======================================================================
KEY FINANCIAL MEASURES:
PRE-TAX INCOME FROM CORE OPERATIONS AS A
PERCENTAGE OF SALES:
Davison Chemicals.................................. 13.7% 14.2% (0.5)pts 16.3% (2.1)pts
Performance Chemicals.............................. 11.3% 11.4% (0.1)pts 11.3% 0.1 pts
Consolidated....................................... 9.9% 10.9% (1.0)pts 11.7% (0.8)pts
Pre-tax income from core operations before
depreciation and amortization (d).................... $ 275.4 $ 276.5 (0.4%) $ 274.9 0.6%
As a percentage of sales............................... 15.2% 16.0% (0.8)pts 17.2% (1.2)pts
=======================================================================
NET SALES BY REGION:
North America........................................... $ 885.4 $ 875.8 1.1% $ 860.0 1.8%
Europe.................................................. 551.9 472.9 16.7% 416.8 13.5%
Asia Pacific............................................ 272.8 267.5 2.0% 216.8 23.4%
Latin America........................................... 107.1 107.0 0.1% 103.8 3.1%
-------------- ------------ -------------- ------------- --------------
TOTAL................................................... $ 1,817.2 $ 1,723.2 5.5% $ 1,597.4 7.9%
====================================================================================================================================
|
NM = Not meaningful a = Net sales amounts presented herein reflect a
reclassification of freight costs and sales
commissions (previously shown as a reduction of
sales).
b = Pre-tax operating income for all periods
presented reflects a reallocation of the cost of
annual accrued pension benefits of active
participants from corporate to the respective
business segments.
c = Davison Chemicals pre-tax operating income
includes minority interest related to the
Advanced Refining Technologies joint venture.
d = Neither pre-tax income from core operations nor
pre-tax income from core operations before
depreciation and amortization purport to
represent income or cash flow as defined under
generally accepted accounting principles, and
should not be considered an alternative to such
measures as an indicator of Grace's performance.
|
COSTS OF DOING BUSINESS IN CHAPTER 11
Although it is difficult to measure precisely how Chapter 11 has impacted Grace's overall financial performance, there are certain added costs that are directly attributable to operating under the Bankruptcy Code. Net reorganization expenses of $30.1 million in 2002 and $15.7 million in 2001 consist primarily of legal, financial and consulting fees incurred by Grace and three creditors' committees. In addition, for 2002 and 2001, Grace's pre-tax income from core operations included expenses of $7.8 million and $10.0 million, respectively, for Chapter 11-related compensation charges. Poor stock price performance in the period leading up to and after the Filing diminished the value of Grace's stock option program to current and prospective employees, which caused Grace to change its long-term incentive compensation program into a cash-based program. Grace has also sought to address employee retention issues by providing added compensation to certain employees and increasing Grace's contribution to its savings and investment plan.
There are numerous other indirect costs to manage Grace's Chapter 11 proceedings such as: management time devoted to Chapter 11 matters; added cost of debt capital; added costs of general business insurance, including directors and officers liability insurance; and lost business or acquisition opportunities due to complexities of operating under Chapter 11.
MATTERS AFFECTING COMPARISON - 2002 VS. 2001
The principal factors affecting changes in pre-tax income from core operations from 2001 to 2002 were: sales and income from three acquisitions completed in 2002 for a total cash cost of $28.5 million; the full-year impact of 2001 acquisitions; productivity gains; higher costs for pensions, medical benefits and insurance; the negative effects of the cost of facility rationalizations; and continued weakness in the global economy and in U.S. commercial construction activity. The primary factors affecting changes in pre-tax income from noncore activities included accruals for legal and environmental matters and higher pension costs, offset by income from life insurance policies. The effects of each of these factors are quantified throughout management's discussion and analysis.
MATTERS AFFECTING COMPARISON - 2001 VS. 2000
The principal factors affecting changes in pre-tax income from core operations from 2000 to 2001 were: sales and income from three acquisitions for a total cash cost of $84.4 million; the formation of a joint venture; a downturn in world economic activity beginning in late 2000 (exacerbated by the events of September 11, 2001); productivity gains; strengthening of the U.S. dollar compared to most foreign currencies; and increased energy costs. The primary factors affecting changes in pre-tax income from noncore activities were the sale of Grace's remaining interest in Cross Country Staffing in 2001 and accruals for legal and environmental matters. The effects of each of these factors are quantified throughout management's discussion and analysis.
NET SALES
The following table identifies the year-over-year increase or decrease in sales attributable to changes in product volumes, product prices and/or mix, and the impact of foreign currency translation.
================================================================================
NET SALES 2002 AS A PERCENTAGE
VARIANCE ANALYSIS INCREASE (DECREASE) FROM 2001
--------------------------------------------------------------------------------
VOLUME PRICE/MIX TRANSLATION TOTAL
-----------------------------------------------------
Davison Chemicals...... 6.3% 0.7% 1.1% 8.1%
Performance Chemicals.. 3.8% (0.1%) (1.0%) 2.7%
Net sales.............. 5.1% 0.3% 0.1% 5.5%
--------------------------------------------------------------------------------
BY REGION:
North America........ 1.6% (0.5%) -- 1.1%
Europe............... 13.1% 0.1% 3.7% 16.7%
Latin America........ 2.7% 13.2% (15.9%) 0.1%
Asia Pacific......... 3.0% (1.2%) 0.2% 2.0%
================================================================================
|
Davison Chemicals...... 9.1% 4.5% (2.1%) 11.5% Performance Chemicals.. 6.6% 0.5% (2.7%) 4.4% Net sales.............. 7.8% 2.6% (2.5%) 7.9% -------------------------------------------------------------------------------- BY REGION: North America........ 0.5% 1.6% (0.3%) 1.8% Europe............... 14.4% 2.9% (3.8%) 13.5% Latin America........ (1.3%) 9.7% (5.3%) 3.1% Asia Pacific......... 28.5% 2.1% (7.2%) 23.4% ================================================================================ |
Grace's 2002 net sales increased 5.5% to $1,817.2 million, compared with $1,723.2 million in 2001. Sales were favorably impacted by strong demand for refining catalysts, and by revenue from synergistic acquisitions in catalyst products, silica products and construction chemicals. Acquisitions contributed $45.0 million or 2.6 percentage points of the sales growth. The impact from foreign currency translation occurred primarily in Europe, where sales reported in U.S. dollars were positively affected by 3.7%, partially offset by Latin
America, where sales reported in U.S. dollars were adversely affected by 15.9%.
In 2002 and 2001, both business segments experienced volume growth. Catalyst volumes were strong due to increased refining catalyst demand. Silica products sales reflect the addition of two acquisitions during the first quarter of 2001 and volume increases in coatings. Construction chemical volume growth in Europe was driven by the acquisition of Pieri S.A. in July 2001.
In 2002, the most significant volume increases were experienced in Europe, primarily attributable to the Borealis A/S and Pieri S.A. acquisitions. In 2001, the most significant volume increases were experienced in Asia Pacific and Europe, attributable to acquisitions and the Advanced Refining Technologies LLC joint venture ("ART"). Reported net sales from Grace's non-U.S. operations were relatively free from impact of foreign currency translation in 2002, but were negatively impacted in 2001. Approximately 48% and 45% of Grace's reported net sales were generated by its non-U.S. operations in 2002 and 2001, respectively. For countries in which Grace operates, weighted average foreign currency exchange rates appreciated approximately 0.3% in 2002, and depreciated approximately 5.0% in 2001.
PRE-TAX INCOME FROM CORE OPERATIONS
Pre-tax income from core operations was $180.8 million for the year ended December 31, 2002, compared with $187.5 million for the year ended December 31, 2001, a decrease of 3.6%.
Grace values its U.S. inventories under the last-in/first-out method ("LIFO"), and its non-U.S. inventories under the first-in/first-out ("FIFO") method. LIFO was selected in 1974 for U.S. book and tax purposes because it generally results in a better match of current revenue with current costs. Grace cannot elect LIFO for its non-U.S. inventories due to statutory restrictions. However, if Grace valued its U.S. inventories using the FIFO method, consistent with non-U.S. subsidiaries, pre-tax income from core operations would have been $186.4 million for the year ended December 31, 2002, compared with $184.1 million for the year ended December 31, 2001, an increase of 1.2%. If Grace valued its U.S. inventories using the FIFO method, pre-tax income from core operations would have been $184.1 million for the year ended December 31, 2001, compared with $189.2 million for the year ended December 31, 2000, a decrease of 2.7%.
Operating income in 2002 was adversely affected by: continued weakness in the global economy and in U.S. commercial construction activity; lower than normal plant utilization; product mix; higher expenses to support growth initiatives; and higher costs for pensions, medical benefits, insurance and other operating costs. Higher sales and lower energy costs favorably affected operating income in 2002.
Higher energy costs and the negative effects of currency translation were the most significant factors adversely affecting operating income in 2001 and 2000. In the first half of 2001 and the last half of 2000, the rise in natural gas prices (used by Davison Chemicals as part of its manufacturing process) and transportation fuel prices (impacting distribution costs for Performance Chemicals) had an adverse affect on profit margins. These energy sources are also a significant factor in the cost of many raw materials used by both business segments. Selling price increases did not keep pace with the rapid rise in these energy related costs.
Corporate operating costs for the years ended December 31, 2002, 2001 and 2000 were $47.4 million, $33.0 million and $32.5 million, respectively. The increase from 2001 to 2002 is primarily attributable to higher pension and general insurance costs, offset by a year-over-year improvement in support function costs. The increase in pension costs was attributable to negative returns on pension plan assets, due to poor equity market performance. Grace also experienced a significant increase in costs of medical, general, and directors and officers liability insurance, due to market factors.
During 2002 and 2001, Grace continued to focus on productivity improvements. The results of its productivity initiatives are reflected in: 1) sales - through added plant capacity by improving production processes; 2) costs - through efficiency gains and purchasing synergies; 3) working capital - by improving collection processes and inventory management; and 4) capital avoidance - by maximizing asset utilization.
PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES
The pre-tax loss from noncore activities totaled $74.5 million for 2002, compared with pre-tax income from noncore activities of $3.0 million for 2001. The expense from noncore activities for 2002 included $70.7 million for Grace's defense and other probable costs to resolve pending environmental litigation (primarily in Libby, Montana).
Income from noncore activities for 2001 included $7.7 million from the sale of Grace's remaining cost-based
investment in Cross Country Staffing, offset by accruals for legal and environmental matters primarily related to Grace's former vermiculite mining operations in Libby, Montana.
The pre-tax loss for 2000 included a provision of $208.0 million for asbestos-related litigation, net of insurance, as well as accruals for legal and environmental matters related to Grace's former vermiculite mining operations. These items were offset by a $19.0 million gain on the sale of marketable securities, and a $5.5 million gain on the sale of noncore assets.
CHAPTER 11 EXPENSES
Net reorganization expenses for the year ended December 31, 2002 were $30.1 million compared with $15.7 million for the prior year, and consisted primarily of legal, financial and consulting fees incurred by Grace and three creditors' committees related to the Filing. The increase in net reorganization expenses in 2002 compared with 2001 is due to a full year of costs and more activity in the Chapter 11 Cases. Grace believes that reorganization expenses will continue between $6 and $8 million per quarter for the foreseeable future.
INTEREST
Net interest expense for 2002 was $16.1 million, a decrease of 50.5% from net interest expense of $32.5 million in 2001. This decrease was attributable to a lower contractual interest rate on pre-petition debt subject to compromise, as well as lower interest expense on the DIP facility due to reduced borrowings in 2002 as compared with 2001. Net interest expense increased 76.6% in 2001 over the 2000 amount of $18.4 million. This increase was attributable to higher average debt levels in 2001 versus 2000 and the continued accrual of contractual interest on pre-petition debt subject to compromise, as well as interest expense on the DIP facility. Average debt levels were $508.6 million in 2002; $538.6 million in 2001; and $277.3 million in 2000. Interest accrued on pre-petition debt is subject to Grace's Chapter 11 proceedings. Weighted average interest rates in each year were 2.8%, 5.8% and 7.1%, respectively.
INCOME TAXES
Grace's provisions for income taxes at the federal corporate rate of 35% were $21.0 million and $49.8 million for the years ended December 31, 2002 and 2001, respectively. The primary differences between these amounts and the overall provisions for income taxes of $38.0 million for 2002 and $63.7 million for 2001 were attributable to current period interest on tax contingencies and the non-deductibility of certain Chapter 11 reorganization expenses. In 2000, Grace's benefit from income taxes at the federal corporate rate was $6.9 million. The primary difference between this amount and the overall provision for income taxes of $70.0 million was attributable to an accrual for probable additional taxes and interest relating to the tax deductibility of interest on corporate owned life insurance policy loans.
DAVISON CHEMICALS
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% Change
NET SALES 2002 2001 Fav(Unfav)
--------------------------------------------------------------------------------
Catalyst products .......... $ 680.6 $ 624.8 8.9%
Silica products............. 264.6 249.3 6.1%
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS..... $ 945.2 $ 874.1 8.1%
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% Change
2001 2000 Fav(Unfav)
--------------------------------------------------------------------------------
Catalyst products .......... $ 624.8 $ 562.7 11.0%
Silica products............. 249.3 221.2 12.7%
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TOTAL DAVISON CHEMICALS..... $ 874.1 $ 783.9 11.5%
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Recent Acquisitions and Joint Ventures
In August 2002, ART, Grace's joint venture with Chevron Products Company ("Chevron"), acquired an exclusive license for the hydroprocessing catalyst technology of Japan Energy Corporation and its subsidiary Orient Catalyst Company. The joint venture will market and distribute catalysts based on this technology worldwide.
In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst manufacturing assets of Borealis A/S. This acquisition has been integrated into Grace's global polyolefin catalysts business.
In March 2001, Grace acquired The Separations Group, a manufacturer of chromatography columns and separations media. In March 2001, a German subsidiary of Grace acquired the precipitated silicas business of Akzo-PQ Silicas.
In March 2001, Grace and Chevron formed ART, to develop and market hydroprocessing catalysts globally. ART conducts business through two distribution companies and one operating company. ART has agreements with both Grace and Chevron under which each provides certain administrative and research and development services to ART.
Sales
Catalyst products represented approximately 37%, 36% and 35% of 2002, 2001 and 2000 total Grace sales, respectively. This product group includes: fluid cracking catalysts and additives ("FCC") used in petroleum refineries to convert distilled crude oil into transportation fuels and other petroleum-based products; hydroprocessing catalysts, which upgrade heavy oils and remove certain impurities; polyolefin catalysts, which are essential components in the manufacture of polyethylene used in products such as high-performance plastic pipe and other plastic parts; and chemical catalysts, which are used in a variety of chemical processes. Silica products represented approximately 15%, 15% and 14% of 2002, 2001 and 2000 total Grace sales, respectively. Silica products are used in a wide range of industrial and consumer applications such as coatings, food processing, plastics, adsorbents, personal care products and separations.
Sales for the Davison Chemicals segment in 2002 were $945.2 million, an 8.1% increase over 2001. Acquisitions accounted for $25.0 million or 2.9 percentage points of the sales growth. Sales of catalyst products were up 8.9%. This increase primarily reflected added revenue from acquisitions and joint ventures that complemented polyolefin and hydroprocessing catalyst product offerings and an increase in FCC volumes. Sales of silica products were up 6.1% for the period, primarily from growth programs in coating applications and added volume in Latin America, Europe and Asia Pacific.
Sales in 2002 were up 5.9% in North America and 16.8% in Europe. In Latin America, sales were down 3.4%, and Asia Pacific sales were about even with 2001. In North America, the increase was primarily attributable to favorable order patterns of hydroprocessing catalysts, offset by a decrease in chemical catalysts. In Europe, the increase was driven by refining catalysts and silica coating applications, along with the Borealis A/S acquisition in polyolefin catalysts completed in the first quarter of 2002. The decrease in Latin America was primarily due to a reduction in sales of hydroprocessing catalysts offset by an increase in sales of silica materials.
Sales for the Davison Chemicals segment in 2001 were $874.1 million, an 11.5% increase over 2000. Acquisitions accounted for $40.9 million or 5.2 percentage points of the sales growth. Sales of catalyst products in 2001 were up 11.0% as compared with 2000. Excluding the negative impact of currency translation, 2001 sales were up 14.1%. This increase mainly reflected sales of new FCCs for value-added refinery applications. Silica product sales in 2001 were up 12.7% as compared with 2000. Excluding acquisitions and the negative impact of currency translation, 2001 sales decreased 2.5%, mainly reflecting weakness in demand for end-use segments such as plastics and coatings, which were most affected by the general economic downturn.
2001 sales in North America were down 4.6% compared with 2000. Sales were up 17.2% in Europe, 5.2% in Latin America, and 67.3% in Asia Pacific in 2001 as compared with 2000, despite the effect of currency weakness in those regions compared with the U.S. dollar, which adversely impacted 2001 sales by $16.6 million. Excluding the impact of currency translation, total Davison sales increased by 13.6%.
Operating Income
Pre-tax operating income of $129.4 million in 2002 was 4.5% higher than 2001. Added income from good year-over-year sales growth was partially offset by higher expenses to support growth initiatives and increases in employee benefits (including pension), insurance and other operating costs.
Pre-tax operating income of $123.8 million in 2001 was down 3.3% from $128.0 million in 2000. The decline in operating income was primarily attributable to higher energy and raw materials costs, partially offset by productivity initiatives.
PERFORMANCE CHEMICALS
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% Change
NET SALES 2002 2001 Fav(Unfav)
--------------------------------------------------------------------------------
Construction chemicals........ $ 393.9 $ 365.1 7.9%
Building materials............ 230.8 239.9 (3.8%)
Sealants and coatings......... 247.3 244.1 1.3%
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TOTAL PERFORMANCE CHEMICALS... $ 872.0 $ 849.1 2.7%
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% Change
2001 2000 Fav(Unfav)
--------------------------------------------------------------------------------
Construction chemicals........ $ 365.1 $ 348.7 4.7%
Building materials............ 239.9 228.0 5.2%
Sealants and coatings......... 244.1 236.8 3.1%
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TOTAL PERFORMANCE CHEMICALS... $ 849.1 $ 813.5 4.4%
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Recent Acquisitions and Joint Ventures
In March 2002, Grace acquired the assets of Addiment, Incorporated, a leading supplier of specialty chemicals to the concrete paver and masonry industries in the U.S. and Canada, which has been integrated into the construction chemicals product line.
In July 2001, a French subsidiary of Grace acquired Pieri S.A., a leading supplier of specialty chemicals to the European construction industry.
Sales
The major product groups of this business segment include: specialty construction chemicals and specialty building materials used primarily by the nonresidential construction industry, and container sealants and coatings for food and beverage packaging. Construction chemicals, which represented 22% of 2002 total Grace sales (21% in 2001 and 22% in 2000) add strength, control corrosion, and enhance the handling and application of concrete, and reduce the manufacturing cost and improve the quality of cement. Building materials, which represented 13% of 2002, 14% of 2001 and 14% of 2000 total Grace sales, prevent water damage to structures and protect structural steel against collapse due to fire. Sealants and coatings, which represented 13% of 2002 total Grace sales (14% in 2001 and 15% in 2000) are used to seal beverage and food cans, and glass and plastic bottles, and to protect metal packaging from corrosion and the contents from the influences of metal.
Sales for the Performance Chemicals segment in 2002 were $872.0 million, a 2.7% increase over 2001. Acquisitions accounted for $20.0 million, or 2.4 percentage points of the sales growth, all related to construction chemicals. Sales of construction chemicals were up 7.9%, despite reduced commercial construction activity in North America. Sales were strong in all other geographic regions, reflecting additional sales from the Pieri S.A. acquisition, some pickup in construction activity and the success of new product programs and sales initiatives in key economics worldwide. Sales of building materials products were down 3.8%, reflecting softness in North American construction and re-roofing activity. This business is largely based in the United States and is most affected by changes in U.S. commercial construction activity. Sales of sealants and coatings were up 1.3%, reflecting continued good results from growth programs in coatings and closure compounds, particularly in North America and Europe.
2002 sales in North America were down 2.5% compared with 2001. 2002 sales were up in Europe by 16.9%, in Asia Pacific by 4.6% and in Latin America by 3.3%. Declining sales in North America occurred primarily in construction chemicals and building materials, reflecting softness in North American commercial construction activity. Sealants and coatings sales were up slightly compared with the prior year. In Europe, the increase in sales was primarily attributable to the Pieri S.A. acquisition and volume growth in all three product lines. Sales in Asia Pacific reflected an increase in construction chemicals, with offsetting declines in building materials and sealants and coatings. Sales in Latin America reflected an overall increase in sales of construction chemicals, with slight decreases in sales of building materials and sealants and coatings.
In 2001, sales of construction chemicals were $365.1 million, an increase of 4.7% over 2000. The Pieri S.A. acquisition accounted for 2.9 percentage points of the increase. Sales increased in all major regions and were driven by penetration of high-performance products for concrete and cement, especially in value added water reducers, grinding aids and quality improvers. Sales of building materials were $239.9 million in 2001, a 5.2% increase over 2000. Excluding the impact of acquisitions and unfavorable currency translation, sales were up 5.8%. This growth was attributable to increased sales in North America, primarily roofing underlayments and specialty structural waterproofing. Sales of sealants and coatings were $244.1 million in 2001, a 3.1% increase over 2000. Excluding acquisitions and unfavorable currency translation, sales were up 0.2%, primarily from volume gains in closure sealants and coatings.
2001 sales were down 7.6% in Asia Pacific as compared with 2000. 2001 sales were up 7.0% in North America, 7.2% in Europe and 1.1% in Latin America as compared with 2000. The effect of currency weakness in Europe, Asia Pacific and Latin America compared with the U.S. dollar adversely impacted sales by $20.3 million for 2001. Excluding the impact of currency translation, total Performance Chemicals sales increased 7.0%.
Operating Income
Pre-tax operating income increased 2.2% from $96.7 million in 2001 to $98.8 million in 2002. The cost of facility rationalizations during 2002, primarily in the sealants and coatings product line, partially offset the profit improvement from added sales and productivity. Pre-tax operating income of $96.7 million in 2001 was up 5.6% compared with pre-tax operating income of $91.6 million in 2000. This increase was attributable to
higher sales and savings generated from productivity programs, which more than offset higher petroleum-based raw material costs.
CORPORATE OPERATING COSTS
Corporate operating costs include expenses incurred by corporate headquarters' functions in support of core operations. It includes the cost of corporate functions such as legal, finance, human resources and information technology, as well as other costs not directly attributable to business segments. Corporate operating costs for the year ended December 31, 2002 were $47.4 million, up from $33.0 million in 2001. This increase was primarily attributable to an increase in pension costs and directors and officers liability insurance ("D&O"), offset by lower support function expenses. Pension costs rose $17.6 million in 2002, reflecting the accounting effects of negative returns on pension assets from 2000 to 2002. The loss in value of pension assets will cause 2003 pension expense to increase by approximately $25.0 million. D&O costs increased $1.1 million, or 24.5% in 2002, reflecting the current tight insurance market for this coverage. Due to the continued difficulty in the D&O market, 2003 premiums for D&O are anticipated to increase by $5.4 million. Corporate operating costs for the year ended December 31, 2001 totaled $33.0 million, compared with $32.5 million for the prior year period, a 1.5% increase.
FINANCIAL POSITION AND CASH FLOWS
The following chart sets forth Grace's net asset position supporting its core operations and its net cash flows from core operations.
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Core Operations DECEMBER December
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
Book value of invested capital
Receivables................................... $ 308.4 $ 296.3
Inventory..................................... 172.4 180.0
Properties and equipment, net................. 614.6 582.9
Intangible assets and other................... 609.7 585.0
Assets supporting core operations............. 1,705.1 1,644.2
Accounts payable and accruals................. (311.0) (294.5)
-------------------------------
Capital invested in core operations........... $ 1,394.1 $ 1,349.7
After-tax return on average invested capital
(trailing twelve months).................... 8.3% 9.4%
===============================
DECEMBER 31,
-------------------------------
Cash flows: 2002 2001
-------------------------------
Pre-tax operating income...................... $ 180.8 $ 187.5
Depreciation and amortization................. 94.6 89.0
-------------------------------
Pre-tax earnings before depreciation and
amortization ............................... 275.4 276.5
Working capital and other changes............. 28.1 (47.9)
-------------------------------
Cash flow before investing.................... 303.5 228.6
Capital expenditures.......................... (91.1) (62.9)
Businesses acquired........................... (28.5) (84.4)
-------------------------------
Net cash flow from core operations............ $ 183.9 $ 81.3
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Grace had a net asset position supporting its core operations of $1,394.1 million at December 31, 2002, compared with $1,349.7 million at December 31, 2001 (including the cumulative translation account reflected in Shareholders' Equity (Deficit) of $119.5 million for 2002 and $164.8 million for 2001). The increase in invested capital supporting core operations was primarily due to:
a) An increase in receivables of $12.1 million, which was attributable to currency translation, primarily of European and Asian receivables, reflecting the weaker dollar.
b) An overall decrease in inventory of $7.6 million consisting of: a $15.4 million decrease based on a reduction in the number of days on hand as compared with the prior year, offset by an increase of $7.8 million attributable to currency translation, primarily of European and Asian inventories reflecting the weaker dollar.
c) An increase in property, equipment and intangibles due to currency translation and capital invested in property and acquisitions.
The after tax return on capital invested in core operations decreased by 1.1 percentage points in 2002, due to a 3.6% decline in pre-tax operating income compared to a higher investment base. Net cash flows from core operations increased due to the easing of working capital pressures that began prior to the Filing, and a reduction in cash invested in business acquisitions,
partially offset by an increase in capital spending, primarily for expansion projects coming on line in 2003.
EFFECT OF CHAPTER 11
As described under "Voluntary Bankruptcy Filing", the Company and its principal U.S. operating subsidiary are debtors-in-possession under Chapter 11 of the Bankruptcy Code. Grace's non-U.S. subsidiaries, although not part of the Filing, are owned directly or indirectly by the Company's principal operating subsidiary or other filing entities. Consequently, it is likely that a Chapter 11 reorganization plan will involve the combined value of Grace's global businesses and its other assets to fund (with cash and/or securities) Grace's obligations as adjudicated through the bankruptcy process. Grace has analyzed its cash flow and capital needs to continue to fund its businesses and believes that, while in Chapter 11, sufficient cash flow and credit facilities are available to support its business strategy.
The following sections address Grace's financial condition in more detail and describe the major contingencies that are being addressed as part of the Chapter 11 process. Grace's ability to present a plan of reorganization to the Bankruptcy Court depends largely on the timing of resolution of these contingencies.
LIABILITIES AND CONTINGENCIES
Grace has a number of financial exposures originating from past businesses, products and events. These obligations arose from transactions and/or business practices that date back to when Grace was a much larger company, when it produced products or operated businesses that are no longer part of its revenue base, and when government regulations and scientific knowledge were much less advanced than today. The table below summarizes the net noncore liability at December 31, 2002 and 2001 and the net cash flow from noncore activities for the years then ended:
NONCORE ACTIVITIES
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
NONCORE LIABILITIES:
Asbestos-related liabilities............. $ (973.2) $ (996.3)
Asbestos-related insurance receivable.... 282.6 293.4
-----------------------------------
Asbestos-related liability, net ......... (690.6) (702.9)
Environmental remediation................ (201.1) (153.1)
Postretirement benefits.................. (147.2) (169.1)
Retained obligations and other........... (55.3) (80.6)
-----------------------------------
NET NONCORE LIABILITY.................... $ (1,094.2) $ (1,105.7)
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CASH FLOWS:
Pre-tax (loss) income from noncore
activities............................. $ (74.5) $ 3.0
Non-cash charges......................... 77.6 4.0
Cash spending for:
Asbestos-related litigation, net of
insurance recovery................... (2.3) (30.8)
Environmental remediation.............. (20.8) (28.9)
Postretirement benefits................ (21.5) (22.3)
Retained obligations and other......... (4.5) (9.1)
-----------------------------------
NET CASH FLOW FROM NONCORE ACTIVITIES ... $ (46.0) $ (84.1)
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As described under "Voluntary Bankruptcy Filing," the resolution of most of these noncore recorded and contingent liabilities will be determined through the Chapter 11 proceedings. Grace cannot predict with any certainty how, and for what amounts, any of such estimates will be resolved. The amounts of these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts recorded by Grace at December 31, 2002.
ASBESTOS-RELATED MATTERS
Grace is a defendant in lawsuits relating to previously sold asbestos-containing products. In 2002, Grace paid $2.3 million for the defense and disposition of asbestos-related property damage and bodily injury litigation, net of amounts received under settlements with insurance carriers, compared with net expenditures in 2001 of $30.8 million. At December 31, 2002, Grace's balance sheet reflects a gross liability of $973.2 million, ($690.6 million net of insurance). This liability represents management's estimate of the undiscounted future net cash outflows in satisfaction of Grace's current and expected asbestos-related claims, based on facts and circumstances existing prior to the Filing. Changes to the recorded amount of such liability will be based on Chapter 11 developments and Grace's assessment of the claim amounts that will ultimately be allowed by the Bankruptcy Court. Grace's ultimate liability for asbestos-related litigation could differ materially from the recorded liability.
During the year prior to the Filing, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in bodily injury claims; higher than expected costs to resolve certain property damage and bodily injury claims; and defense costs related to new class-action lawsuits alleging damages from a former attic insulation product not previously subject to property damage litigation. In addition, five co-defendant companies in asbestos bodily injury litigation petitioned for bankruptcy court protection. These developments contribute to the risk that Grace would be subject to more claims than previously projected, with higher settlement demands. (See Notes 1 and 3 to the Consolidated Financial Statements for further information concerning asbestos-related lawsuits and claims.)
The Consolidated Balance Sheet at December 31, 2002 includes total amounts due from insurance carriers of $282.6 million pursuant to settlement agreements with insurance carriers. The recovery of amounts due from insurance carriers is dependent upon the timing, character and exposure periods of asbestos-related claims. Grace's Chapter 11 proceedings could also affect recovery timing and amounts.
Grace intends to address all of its pending and future asbestos-related claims as part of a plan of reorganization under Chapter 11. Grace will seek to have the Bankruptcy Court establish a process to assess and appropriately quantify the numerous property damage and bodily injury claims against it. Measurement of Grace's asbestos-related liabilities will be materially affected by Bankruptcy Court rulings, the outcome of litigation and negotiations among interested parties.
ENVIRONMENTAL MATTERS
Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations. Grace has expended substantial funds to comply with such laws and regulations and expects to continue to do so in the future. The following table sets forth Grace's expenditures in the past three years for (i) the operation and maintenance of environmental facilities and the disposal of wastes with respect to continuing operations; (ii) capital expenditures for environmental control facilities relating to continuing operations; and (iii) site remediation.
================================================================================
OPERATION OF
FACILITIES CAPITAL
(DOLLARS IN MILLIONS) AND WASTE EXPENDITURES SITE REMEDIATION
--------------------------------------------------------------------------------
2002 $ 36.9 $ 5.6 $ 13.7
--------------------------------------------------------------------------------
2001 31.7 3.8 26.6
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2000 26.4 4.0 42.4
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Expenditures to comply with environmental initiatives in 2003 and 2004 are estimated to be between $35.0 and $39.0 million for the operation of facilities and waste disposal and $5.0 and $10.0 million for capital expenditures. Costs incurred to remediate environmentally impaired sites have been charged against previously established reserves. At December 31, 2002, Grace's recorded liability for environmental investigative and remediation costs related to both continuing and discontinued operations totaled $201.1 million, as compared with $153.1 million at December 31, 2001. This estimate of environmental costs is based on funding and/or remediation agreements in place, together with Grace's best estimate of its cost for sites not subject to a formal remediation plan. Future pre-tax cash outlays for remediation costs are expected to range between $8.0 and $22.0 million over the next few years. This estimate does not include spending or reimbursement of remediation costs related to Grace's former vermiculite mining and processing activities in the Libby, Montana area.
From the 1920's until 1990, Grace and previous owners conducted vermiculite mining and related activities near Libby, Montana. The vermiculite ore that was mined contained varying amounts of asbestos as a contaminant, almost all of which was removed during processing. Expanded vermiculite from Libby was used in products such as fireproofing, insulation and potting soil. In November 1999, Region 8 of the U.S. Environmental Protection Agency ("EPA") began an investigation into alleged excessive levels of asbestos-related disease in the Libby population related to these former mining activities. This investigation led the EPA to undertake additional investigative activity and to carry out response actions in and around Libby. On March 30, 2001, the EPA filed a lawsuit in U.S. District Court for the District of Montana, Missoula Division (United States v. W. R. Grace & Company et al.) under the Comprehensive Environmental Response, Compensation and Liability Act for the recovery of costs allegedly incurred by the United States in response to the release or threatened release of asbestos in the Libby, Montana area relating to such former mining activities. These costs include cleaning and/or demolition of contaminated buildings, the excavation and removal of contaminated soil, health screening of Libby residents and former mine workers, and investigation and monitoring costs. In this action, the EPA also sought a declaration of Grace's liability
that would be binding in future actions to recover further response costs.
In connection with its defense, Grace conducted its own investigation to determine whether the EPA's actions and cost claims were justified and reasonable. In December 2002, the District Court granted the United States' motion for partial summary judgment on a number of issues that limited Grace's ability to challenge the EPA's response actions. In January 2003, a trial was held on the remainder of the issues, which primarily involved the reasonableness and adequacy of documentation of the EPA's cost recovery claims through December 31, 2001. No decision has yet been issued. The EPA's Libby-related cost recovery claims through December 31, 2001 totaled approximately $57 million. Based on the testimony of EPA witnesses deposed in the lawsuit and other information, Grace believes that the EPA's total cost recovery claims could reach, and potentially exceed, $100 million. This lawsuit is not subject to the automatic stay provided under the Bankruptcy Code. Grace has accrued a liability of $63.0 million at December 31, 2002, with respect to this lawsuit and future cost recovery claims expected to be made by the EPA, which represents Grace's current estimate of probable liability and defense costs, pending the issuance of a decision of the trial court and the availability of additional information about the EPA's 2002 costs and projected future costs. Liabilities for recovery costs are included in "liabilities subject to compromise" and any payments would be subject to the outcome of the Chapter 11 proceedings.
Since January 2000, Grace has spent approximately $13.2 million for remediation of certain Libby area vermiculite processing sites and for health care of Libby area residents diagnosed with asbestos-related illness.
The EPA is also evaluating environmental risks at vermiculite processing sites throughout the U.S. that processed vermiculite from Libby, Montana, and has made claims against Grace to carry out or fund remediation activities. Grace is reviewing the EPA's actions and cost claims to determine whether they are justified and reasonable and, in several instances, has remediated or agreed to remediate certain sites. Costs associated with the above are included in "provision for environmental remediation" included in the Consolidated Statement of Operations.
POSTRETIREMENT BENEFITS
Grace provides certain postretirement health care and life insurance benefits for retired employees, a large majority of which pertain to retirees of previously divested businesses. These plans are unfunded, and Grace pays the costs of benefits under these plans as they are incurred. Effective January 1, 2002, Grace's postretirement medical plan was amended to increase the contribution required to be paid by the retirees to a minimum of 40% of the calculated premium. During 2002, per capita costs under the retiree medical plans exceeded caps on the amount Grace is required to subsidize under the 1993 amendment to the plan. As a result, for 2003 and future years, retirees will bear 100% of any increase in premium costs.
RETAINED OBLIGATIONS OF DIVESTED BUSINESSES
The principal retained obligations of divested businesses relate to contractual indemnification and to contingent liabilities not passed on to the new owner. At December 31, 2002, Grace had recorded $55.3 million, as compared with $80.5 million at December 31, 2001, to satisfy such obligations. The decrease primarily relates to a reclassification within "liabilities subject to compromise." Most of these matters are now subject to the automatic stay of the Bankruptcy Court and are expected to be resolved as part of Grace's Chapter 11 proceedings.
TAX MATTERS
Grace has received the examination report from the Internal Revenue Service ("IRS") on tax periods 1993 through 1996 asserting, in the aggregate, approximately $114.0 million of proposed tax adjustments. The most significant contested issue addressed in such report concerns corporate-owned life insurance ("COLI") policies and is discussed below. Other proposed IRS tax adjustments include Grace's tax position regarding research and development credits, reporting of certain divestitures and other miscellaneous proposed adjustments. The tax audit for the 1993 through 1996 tax period is under the jurisdiction of IRS Appeals, where Grace has filed a protest. Grace's federal tax returns covering tax periods 1997 and forward are either under examination by the IRS or open for future examination. Grace believes that previously established reserves for tax matters will be sufficient to cover the expected net cost of probable tax return adjustments. Any cash payment would be subject to Grace's Chapter 11 proceedings.
In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its employees as part of a strategy to fund the cost of postretirement employee health care benefits and other long-term liabilities. COLI premiums have been funded in part by loans issued against the cash surrender value of the COLI policies. The IRS is
challenging deductions of interest on loans secured by COLI policies for years prior to 1999. In 2000, Grace paid $21.2 million of tax and interest related to this issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted approximately $163.2 million in interest attributable to COLI policy loans. Although Grace continues to believe that the deductions were legitimate, the IRS has successfully challenged interest deductions claimed by other corporations with respect to broad-based COLI policies in all of the three litigated cases to date. Therefore, Grace requested and was granted early referral to the IRS Office of Appeals for consideration of possible settlement alternatives of the COLI interest deduction issue.
On September 23, 2002, Grace filed a motion in its Chapter 11 bankruptcy proceeding requesting that the Bankruptcy Court authorize Grace to enter into a settlement agreement with the IRS with respect to Grace's COLI interest deductions. The tax years at issue are 1989 through 1998. Under the terms of the proposed settlement, the government would allow 20% of the aggregate amount of the COLI interest deductions and Grace would owe federal income tax and interest on the remaining 80%. Grace has accrued for the potential tax and interest liability related to the disallowance of all COLI interest deductions and continues to accrue interest as part of its quarterly income tax provision. On October 22, 2002, the Bankruptcy Court issued an order authorizing Grace to enter into settlement negotiations with the IRS consistent with the aforementioned terms and further ordered that any final agreement would be subject to Bankruptcy Court approval. Grace is currently in discussions with the IRS concerning the proposed settlement.
The IRS has assessed additional federal income tax withholding and Federal Insurance Contributions Act taxes plus interest and related penalties for calendar years 1993 through 1995 against a Grace subsidiary that formerly operated a temporary staffing business for nurses and other health care personnel. The assessments, aggregating $21.8 million, were made in connection with a meal and incidental expense per diem plan for traveling health care personnel, which was in effect through 1999. The IRS contends that certain per diem reimbursements should have been treated as wages subject to employment taxes and federal income tax withholding. Grace contends that its per diem and expense allowance plans were in accordance with statutory and regulatory requirements, as well as other published guidance from the IRS. Grace expects that the IRS will make additional assessments for the 1996 through 1999 periods. The matter is currently pending in the United States Court of Claims. Grace is currently in discussions with the Department of Justice concerning possible settlement options.
LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES
On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius Medical Care AG ("Fresenius") each announced that they had reached agreements in principle with the Official Committee of Asbestos Personal Injury Claimants and the Official Committee of Asbestos Property Damage Claimants to settle asbestos and fraudulent conveyance claims related to the 1998 transaction involving Grace's former packaging business and Sealed Air, and the 1996 transaction involving Grace's former medical care business and Fresenius, respectively. Under the terms of the proposed Sealed Air settlement, Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per annum commencing on December 21, 2002) and nine million shares of Sealed Air common stock, valued at $335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under the terms of the proposed Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0 million to the Grace estate, or as otherwise directed by the Bankruptcy Court, upon confirmation of a plan of reorganization. The Sealed Air and Fresenius settlements are subject to the approval of the Bankruptcy Court. Grace is unable to predict how these settlements may ultimately affect its plan of reorganization.
CASH RESOURCES AND AVAILABLE CREDIT FACILITIES
At December 31, 2002, Grace had $365.4 million in cash and cash-like assets on hand ($283.0 million in cash and cash equivalents and $82.4 million in cash value of life insurance). In addition, Grace had access to committed credit facilities aggregating $248.4 million under the DIP facility, of which $226.2 million (net of letters of credit and holdback provisions) was available at December 31, 2002. The Debtors have filed a motion with the Bankruptcy Court seeking approval to extend the term of the DIP facility for an additional three years and to modify certain other provisions. Grace believes that these funds and credit facilities will be sufficient to finance its business strategy while in Chapter 11.
CASH FLOW
Grace's net cash flow from core operations before investing was $303.6 million in 2002, compared with $228.6 million in 2001. Acquisition investments aggregated $28.5 million in 2002, compared with $84.4 million in 2001. Total Grace capital expenditures for 2002 and 2001 were $91.1 million and $62.9 million, respectively, substantially all of which was directed toward its business segments for capacity expansion and routine upgrades.
Grace expects to continue to invest excess cash flow and/or other available capital resources in its core business segments. These investments are likely to be in the form of added plant capacity, product line extensions and geographic market expansions. Such investments may be subject to Bankruptcy Court approval and Chapter 11 creditor committee review. Grace has taken steps to improve productivity and manage costs and, at this time, projects 2003 cash flow from core operations comparable to 2002.
The pre-tax cash outflow of noncore activities was $46.0 million in 2002, compared with an outflow of $84.1 million in 2001. The decreased cash outflow was primarily due to lower asbestos-related payments in 2002 resulting from the stay on payments for asbestos-related claims after the Filing Date. Expenditures for environmental remediation were lower in 2002, due partly to Grace's Chapter 11 proceedings and partly to the completion of remediation work on certain sites. Postretirement benefit payments were consistent with the prior year. Payments for retained obligations of divested businesses and other contingencies were lower in 2002 due to the stay of litigation and to the one-time nature of these matters.
Cash flows used for investing activities in 2002 were $110.7 million, compared with cash used of $131.4 million in 2001, and cash used of $94.0 million in 2000. Net cash outflows in 2002 were primarily impacted by businesses acquired of $28.5 million and capital expenditures of $91.1 million, $20.8 million of which was for capacity expansion projects. Net cash outflows in 2001 consisted of $84.4 million in businesses acquired and $62.9 million of capital expenditures.
Net cash (used for) provided by financing activities in 2002, 2001, and 2000 was ($9.2 million), $123.1 million and $239.9 million, respectively. In 2002, cash used in financing activities was primarily for loan repayments against life insurance policies. In 2001, borrowings under credit facilities of $93.5 million, net of repayments, were used to pay down Grace's receivables securitization program, which was terminated in May 2001, and to fund investments in acquired businesses, capital expenditures and noncore obligations. Net cash provided by financing activities in 2000 primarily related to borrowings under credit facilities of $311.3 million and the exercise of stock options of $5.8 million, offset by the repayment of $24.7 million of long-term debt, and the purchase of $47.3 million of treasury stock.
LIFE INSURANCE
Grace is the beneficiary of life insurance policies on certain current and former employees with a net cash surrender value of $82.4 million at December 31, 2002. This net cash surrender value is composed of $471.3 million in policy gross cash value offset by $388.9 million of policy loans. The policies were acquired to fund various employee benefit programs and other long-term liabilities and are structured to provide cash flows (primarily tax-free) over an extended period. Certain of these policies are of the type that has received recent judicial and legislative attention. Pending rulings and proposed reforms could adversely affect the availability of these policies as a funding source for Grace's noncore liabilities. Grace is evaluating whether to continue the policies that may be affected by these developments or to terminate them for their cash value.
DEBT AND OTHER CONTRACTUAL OBLIGATIONS
Total debt outstanding at December 31, 2002 was $542.2 million. As a result of the Filing, Grace is now in default on $501.0 million of such debt, which has been included in "liabilities subject to compromise" as of December 31, 2002. The automatic stay provided under the Bankruptcy Code prevents Grace's lenders from taking any action to collect the principal amounts as well as related accrued interest. However, Grace will continue to accrue and report interest on such debt during the Chapter 11 proceedings (unless further developments lead management to conclude that it is probable that such interest will not be paid).
In addition, Grace's accounts receivable securitization program was terminated effective May 14, 2001. As a result of the Filing, outstanding balances of approximately $65.3 million were satisfied under the terms of the program through the use of pre-petition trade receivables collected during the period from the Filing Date to early May 2001. During the period from the Filing Date to the termination of the program, Grace compensated for the lack of access to trade receivables collections by borrowing under the DIP facility.
Financial assurances have been established for a variety of purposes, including insurance and environmental matters, asbestos settlements and appeals, trade-related commitments and other matters. At December 31, 2002, Grace had gross financial assurances outstanding of $237.7 million, comprised of $137.4 million of gross surety bonds issued by various insurance companies and $100.3 million of standby letters of credit issued by various banks. Of the standby letters of credit, $19.7 million act as collateral for surety bonds, thereby reducing Grace's overall obligations under its financial assurances to a net amount of $218.0 million. Of this net amount, approximately $6.5 million were issued on behalf of non-Debtor entities and $211.5 million were issued on behalf of the Debtors. Of the amounts issued by the Debtors, approximately $195.1 million were issued before the Filing Date, with the remaining $16.4 million being subsequent to the Filing, of which $13.7 million was issued under the DIP facility.
Payments due by Period
-----------------------------------------------
Less
than 1 1-3
(Dollars in millions) Total Year Years Thereafter
--------------------------------------------------------------------------------
Debt....................... $ 3.4 $ 3.4 $ -- $ --
Operating leases........... 67.5 16.0 33.0 18.5
-----------------------------------------------
TOTAL CONTRACTUAL CASH
OBLIGATIONS................ $ 70.9 $ 19.4 $ 33.0 $ 18.5
================================================================================
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PENSION BENEFITS
The decline in value of the U.S. and global equity markets, coupled with a decline in interest rates during 2002 and 2001, created a shortfall between accounting measurements of Grace's obligations under certain of its qualified pension plans for U.S. employees and the market value of dedicated pension assets. Grace's U.S. pension trust has been reduced by an overall negative return of 6.9% per annum over this three year period. The combination of negative returns on assets and lower interest rates required a balance sheet adjustment in shareholders' equity (deficit) of $147.7 million and $124.4 million at December 31, 2002 and 2001, respectively (net of tax), to recognize the pension shortfall and to fully reserve deferred pension losses. Grace has lowered its assumed return on plan assets for 2003 to 8.25%, down from 9.0% for 2002 and 2001. The new rate of return is comparable to the average long-term rate of return Grace has experienced since 1990. Furthermore, as a result of these conditions, certain of Grace's U.S. qualified pension plans are underfunded as defined by the Employee Retirement Income Security Act of 1984 (ERISA) and will require contributions from Grace over the next several years to close the shortfall between dedicated assets and measured pension obligations. The amount and timing of contributions could be affected by Grace's Chapter 11 proceedings. The total shortfall as of December 31, 2002 as defined under ERISA is $227.1 million.
SHARE ACTIVITY
Key employees of Grace currently receive salaries, and are eligible to receive incentive bonuses and other long-term benefits, including stock options. In 2002, no options were issued as the uncertainties resulting from the Filing have diminished the value of the stock option program to current and prospective employees. In 2001, the Company granted a total of 1,339,846 options with an average exercise price of $2.53.
The financial statements are presented on a historical cost basis and do not fully reflect the impact of prior years' inflation. While the U.S. inflation rate has been modest for several years, Grace operates in international economies with both inflation and currency risks. The ability to pass on inflation costs is an uncertainty due to general economic conditions and competitive situations. The cost of replacing Grace's property and equipment today is estimated to be greater than its historical cost. Accordingly, depreciation expense would be greater if the expense were stated on a current cost basis.
See Note 1 of Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect on Grace.
The forward-looking statements contained in this document are based on current expectations regarding important risk factors. Actual results may differ materially from those expressed. In addition to the uncertainties referred to in Management's Discussion and Analysis of Results of Operations and Financial Condition, other uncertainties include: the impact of worldwide economic conditions; pricing of both Grace's products and raw materials; customer outages and customer demand; factors resulting from fluctuations in interest rates and foreign currencies; the impact of competitive products and pricing; the continued success of Grace's process improvement initiatives; the impact
of tax, legislation and other regulations in the jurisdictions in which the Company operates; and development in and the outcome of the Chapter 11 proceedings discussed above. Also, see "Introduction and Overview - Projections and Other Forward-Looking Information" in Item 1 of Grace's current Annual Report on Form 10-K.
W. R. GRACE & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in millions)
FOR THE YEAR 2002
========================================================================================================================
Additions/(deductions)
--------------------------------------------------------
Charged/
Balance at (credited) Balance at
beginning of to costs Other end of
Description period and expenses net (a) period
------------------------------------------------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
Allowances for notes and accounts receivable............. $ 7.6 $ (2.2) $ -- $ 5.4
Allowances for long-term receivables..................... 0.6 0.2 -- 0.8
Valuation allowance for deferred tax assets.............. 158.0 (5.5) -- 152.5
RESERVES:
Reserves for retained obligations of divested businesses. $ 80.5 $ -- $ (25.2) $ 55.3
========================================================================================================================
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FOR THE YEAR 2001
========================================================================================================================
Additions/(deductions)
--------------------------------------------------------
Charged/
Balance at (credited) Balance at
beginning of to costs Other end of
Description period and expenses net (b) period
------------------------------------------------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
Allowances for notes and accounts receivable............. $ 4.4 $ 3.2 $ -- $ 7.6
Allowances for long-term receivables..................... 0.8 (0.2) -- 0.6
Valuation allowance for deferred tax assets.............. 179.1 (21.1) -- 158.0
RESERVES:
Reserves for retained obligations of divested businesses. $ 78.1 $ -- $ 2.4 $ 80.5
========================================================================================================================
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FOR THE YEAR 2000
========================================================================================================================
Additions/(deductions)
--------------------------------------------------------
Charged/
Balance at (credited) Balance at
beginning of to costs Other end of
Description period and expenses net (b) period
------------------------------------------------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
Allowances for notes and accounts receivable............. $ 4.1 $ 0.3 $ -- $ 4.4
Allowances for long-term receivables..................... 0.8 -- -- 0.8
Valuation allowance for deferred tax assets.............. 153.2 16.4 9.5 179.1
RESERVES:
Reserves for retained obligations of divested businesses. $ 99.1 $ 6.2 $ (27.2) $ 78.1
========================================================================================================================
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(a) $25.2 million represents net spending offset by a reclass of an $18.0 million tax receivable relating to Grace's divested packaging business.
(b) Consists of additions and deductions applicable to businesses acquired, disposals of businesses, bad debt write-offs, foreign currency translation, reclassifications (including the deconsolidation of amounts relating to discontinued operations), cash payments for previously established reserves for divested businesses and miscellaneous other adjustments.
EXHIBIT 12
W. R. GRACE & CO. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a)
(Dollars in millions, except ratios)
(Unaudited)
============================================================================================================================
Years Ended December 31, (b)
------------------------------------------------------------------
2002 (C) 2001 2000 (d) 1999 1998 (e)
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations......... $ 22.1 $ 78.6 $ (89.7) $ 130.2 $ (194.7)
Add (deduct):
Provision for (benefit from) income taxes............ 38.0 63.7 70.0 73.2 (28.5)
Minority interest in income (loss) of majority owned
subsidiaries......................................... (1.9) (3.5) -- -- --
Equity in unremitted losses (earnings) of less than
50%-owned companies.................................. 1.7 (4.0) (0.5) (0.2) (1.2)
Interest expense and related financing costs,
including amortization of capitalized interest....... 22.3 39.5 30.6 18.8 37.5
Estimated amount of rental expense deemed to
represent the interest factor........................ 5.0 4.7 4.7 5.2 5.2
------------------------------------------------------------------
Income (loss) as adjusted............................ $ 87.2 $ 179.0 $ 15.1 $ 227.2 $ (181.7)
==================================================================
Combined fixed charges and preferred stock dividends:
Interest expense and related financing costs,
including capitalized interest....................... $ 21.8 $ 37.6 $ 29.1 $ 17.0 $ 37.4
Estimated amount of rental expense deemed to
represent the interest factor........................ 5.0 4.7 4.7 5.2 5.2
------------------------------------------------------------------
Fixed charges........................................ 26.8 42.3 33.8 22.2 42.6
Combined fixed charges and preferred stock dividends. $ 26.8 $ 42.3 $ 33.8 $ 22.2 $ 42.6
==================================================================
Ratio of earnings to fixed charges................... 3.25 4.23 (f) 10.23 (f)
==================================================================
Ratio of earnings to combined fixed charges and
preferred stock dividends............................ 3.25 4.23 (f) 10.23 (f)
============================================================================================================================
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(a) Grace's preferred stocks were retired in 1996.
(b) Certain amounts have been restated to conform to the 2002 presentation.
(c) Amounts contain a provision for non-operating environmental remediation of $70.7 million.
(d) Includes a pre-tax provision of $208.0 million for asbestos-related liabilities net of insurance coverage. The provision for income taxes includes a $75.0 million charge for tax and interest relating to tax deductibility of interest on corporate-owned life insurance policy loans.
(e) Includes a pre-tax provision of $376.1 million for asbestos-related liabilities net of insurance coverage; $21.0 million relating to restructuring costs and asset impairments, offset by a pre-tax gain of $38.2 million for the receipt of insurance proceeds related to environmental matters, partially offset by a charge to reflect a change in the environmental remediation strategy for a particular site.
(f) As a result of the losses incurred for the years ended December 31, 2000 and 1998, Grace was unable to fully cover the indicated fixed charges.
W. R. GRACE & CO. AND SUBSIDIARIES
REPORT ON INTERNAL CONTROLS AND PROCEDURES
The management of Grace is responsible for the preparation, integrity and objectivity of the Consolidated Financial Statements and the other information included in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly include certain amounts that represent management's best estimates and judgments. Actual amounts could differ from those estimates. Management maintains internal control systems to assist it in fulfilling its responsibility for financial reporting. These systems include business, accounting and reporting policies and procedures, selection of personnel, segregation of duties and an internal audit function. For 2002, a Disclosure Committee was established to oversee Grace's public financial reporting process and key managers were required to confirm their compliance with Grace's policies and internal control systems. While no system can ensure elimination of all errors and irregularities, Grace's systems, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed, transactions are properly executed and reported and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should not exceed their benefits.
Within the 90 days prior to the date of this report, Grace carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, Grace's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in the Company's periodic filings under the Exchange Act is accumulated and communicated to such officers to allow timely decisions regarding required disclosures. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company completed its evaluation.
23
EXHIBIT 10.1
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
This EMPLOYEE BENEFITS ALLOCATION AGREEMENT (this "Agreement"), dated as of March 30, 1998, by and among W. R. Grace & Co., a Delaware corporation ("Grace"), W. R. Grace & Co.-Conn., a Connecticut corporation and a wholly owned subsidiary of Grace ("Grace-Conn."), and General Specialty Chemicals, Inc. (to be renamed W. R. Grace & Co.), a Delaware corporation and a wholly owned subsidiary of Grace ("New Grace").
RECITALS
A. The Merger Agreement. Grace and Sealed Air Corporation, a Delaware corporation ("SAC"), have entered into an Agreement and Plan of Merger, dated as of August 14, 1997 (the "Merger Agreement"), pursuant to which, at the Effective Time (as defined therein), a wholly owned subsidiary of Grace will merge with and into SAC, with SAC being the surviving corporation (the "Merger"), and Grace being renamed Sealed Air Corporation.
B. The Distribution Agreement. The Distribution Agreement dated as of March 30, 1997, by and among Grace, Grace-Conn. and New Grace (the "Distribution Agreement") and the Other Agreements (as defined in the Distribution Agreement) set forth certain transactions that SAC has required as a condition to its willingness to consummate the Merger, and the purpose of the Distribution Agreement is to make possible the Merger by divesting Grace of the businesses and operations to be conducted by New Grace and its subsidiaries, including New Grace-Conn.
C. The Contribution. Prior to the Effective Time, and subject to the terms and conditions set forth in the Distribution Agreement, Grace intends to cause the transfer to a wholly owned subsidiary of Grace-Conn. ("Packco") of certain assets and liabilities of Grace and its subsidiaries predominantly related to the Packaging Business (the "Contribution"), as contemplated by the Distribution Agreement and the Other Agreements.
D. The Distribution. Following the Contribution and prior to the Effective Time, subject to the conditions set forth in the Distribution Agreement, (i) the capital stock of Packco will be distributed to Grace, (ii) the capital stock of Grace-Conn. will be contributed to New Grace and (iii) all of the issued and outstanding shares of the common stock of New Grace (together with the New Grace Rights, "New Grace Common
Stock") will be distributed (the "Distribution") to the holders as of the Record Date of the common stock of Grace, par value $.01 per share ("Grace Common Stock"), other than shares held in the treasury of Grace, on a pro rata basis.
E. This Agreement. This Agreement is one of the Other Agreements contemplated by the Distribution Agreement, and its purpose is to set forth the agreement of Grace, GraceConn. and New Grace with respect to certain matters relating to employees and employee benefit plans and compensation arrangements;
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 GENERAL. Capitalized terms used but not defined herein shall have the meanings set forth in the Distribution Agreement or the Merger Agreement, as applicable. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
Agreement: has the meaning assigned to it in the preamble hereof.
ABO: has the meaning assigned to it in Section 4.01(b).
AICP: the Annual Incentive Compensation Program of Grace.
Alternate Payee: an alternate payee under a domestic relations order which qualifies under Section 414(p) of the Code and Section 206(d) of ERISA and which creates or recognizes an alternate payee's right to, or assigns to an alternate payee, all or a portion of the benefits payable to a participant under any Plan, or an alternate recipient under a medical child support order which qualifies under Section 609(a) of ERISA and which creates or recognizes the existence of an alternate recipient's right to, or assigns to an alternate recipient the right to, receive benefits for which a participant or beneficiary is eligible under any Plan.
ASA: has the meaning assigned to it in Section 4.01(b).
Benefit Plan: any Plan established, sponsored or maintained by any member of the Packco Group, any member of the New Grace Group, or any predecessor or affiliate of any of the foregoing, existing as of the Distribution Date or prior thereto, to which any member of the Packco Group or the New Grace Group contributes, has contributed, is required to contribute or has been required to contribute, on behalf of any employee of a member of the Packco Group or a member of the New Grace Group, or under which any employee of a member of the Packco Group or a member of the New Grace Group, former employee of a member of the Packco Group or a member of the New Grace Group, or any beneficiary or dependent thereof, is covered, is eligible for coverage or has benefits rights.
Change in Control Severance Agreements: the agreements listed on Schedule I hereto.
Change in Control Severance Plan: the Grace Change in Control Severance Program for U.S. Employees (April 3, 1996-April 3, 1998).
Current Performance Period: any three-year performance period under the Grace LTIP that begins before and ends after the Effective Time.
Current Plan Year: the plan year or fiscal year, to the extent applicable with respect to any Plan, during which the Distribution Date occurs.
Cypress 401(k) Plans: the Cypress Packaging, Inc. Union Employees
401(k) Pension Plan and the Cypress Packaging, Inc. 401(k) Retirement Plan.
Deferred Compensation Plan: the W. R. Grace & Co. Deferred Compensation Program.
Distribution Agreement: has the meaning assigned to it in the fourth paragraph hereof.
Employee: with respect to any entity, an individual who is considered, according to the payroll and other records of such entity, to be employed by such entity, regardless of whether such individual is, at the relevant time, actively at work or on leave of absence (including vacation, holiday, sick leave, family and medical leave, disability leave, military leave, jury duty, layoff with rights of recall, and any other leave of absence or similar interruption of active employment
that is not considered, according to the policies or practices of such entity, to have resulted in a permanent termination of such individual's employment), but excluding any individual who is, as of the relevant time, on long-term disability leave.
Foreign Plan: has the meaning assigned to it in Section 6.01.
Grace: has the meaning assigned to it in the first paragraph hereof.
Grace Dependent Care Plan: the W. R. Grace & Co. Dependent Care Plan.
Grace LTIP: the Grace Long Term Incentive Program.
Grace Medical Expense Plan: the W. R. Grace & Co. Health Care Reimbursement Account Plan.
Grace Option: an option to purchase shares of Grace Common Stock granted pursuant to any Grace Stock Incentive Plan.
Grace Severance Pay Plan: the W. R. Grace & Co. Severance Pay Plan for Salaried Employees, as amended effective July 1, 1996.
Grace Stock Incentive Plans: the Grace 1996 Stock Incentive Plan, the Grace 1994 Stock Incentive Plan, the Grace 1989 Stock Incentive Plan, the Grace 1986 Stock Incentive Plan, and the Grace 1981 Stock Incentive Plan.
Hourly Non-Union Retirement Plan: the W. R. Grace & Co.-Conn. Retirement Plan for Non-Union Employees of Subsidiary Corporations.
Hourly SIP: the W. R. Grace & Co. Hourly Employee Savings and Investment Plan.
Insured Foreign Plan: a Foreign Plan that provides retirement or pension benefits and that is funded through individually allocated insurance contracts, each of which is identified as such in the Packaging Business Disclosure Letter to the Merger Agreement.
IRS: the Internal Revenue Service.
Local Actuary: has the meaning assigned to it in Section 6.01.
LTIP Awards: has the meaning assigned to it in Section 3(a) hereof.
Newco Ratio: the amount obtained by dividing (i) the average of the
arithmetic mean between the highest and lowest sales prices of a share of Grace
Common Stock on the New York Stock Exchange Composite Tape on each of the five
trading days immediately preceding the ex-dividend date for the Distribution, by
(ii) the average of the arithmetic mean between the highest and lowest sales
prices of a share of Newco Common Stock on the New York Stock Exchange Composite
Tape on each of the five trading days beginning on the ex-dividend date for the
Distribution.
New Grace Benefit Plan: any Benefit Plan that is sponsored or maintained by a member of the New Grace Group as of the Distribution Date.
New Grace Employee: any Employee who is allocated to the New Grace Group pursuant to Section 2.01 of this Agreement and who is not hired by any member of the Packco Group pursuant to Section 6.11(b) of the Merger Agreement.
New Grace Participant: any individual who is a New Grace Employee or a beneficiary, dependent or Alternate Payee of such an individual.
New Grace Ratio: the amount obtained by dividing (i) the average of the
arithmetic mean between the highest and lowest sales prices of a share of Grace
Common Stock on the New York Stock Exchange Composite Tape on each of the five
trading days immediately preceding the ex-dividend date for the Distribution by
(ii) the average of the arithmetic mean between the highest and lowest sales
prices of a share of New Grace Common Stock on the New York Stock Exchange
Composite Tape on each of the five trading days beginning on the ex-dividend
date for the Distribution.
Noninsured Foreign Pension Plan: a Foreign Plan that is a defined benefit pension plan and is not an Insured Foreign Plan, each Noninsured Foreign Pension Plan being identified as such in the Packaging Business Disclosure Schedule to the Merger Agreement.
Packco Benefit Plan: any Benefit Plan that is sponsored or maintained by a member of the Packco Group following the Distribution Date.
Packco Employee: any Employee who is allocated to the Packco Group pursuant to Section 2.01 of this Agreement or who is hired by any member of the Packco Group pursuant to Section 6.11(b) of the Merger Agreement.
Packco Health Plan: the Blue Cross Blue Shield Health Plan for Cryovac and Formpac Employees.
Packco Hourly Non-Union Retirement Plan: has the meaning assigned to it in Section 4.01(d).
Packco Medical and Dependent Care Expense Plan: the Health Care and Dependent Care Spending Account Plan for Cryovac and Formpac Employees.
Packco Participant: any individual who is a Packco Employee or a beneficiary, dependent or Alternate Payee of such an individual.
Packco Savings Plan: a Qualified Plan designated by Grace to receive a
transfer of assets from the Hourly SIP and/or the Salaried SIP pursuant to
Section 4.02(b).
Pension Plan: any Benefit Plan that is an "employee pension benefit plan" (within the meaning of section 3(2) of ERISA), whether or not that Plan is a Qualified Plan.
Plan: any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, company car, fringe benefit, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, medical, accident, disability, workman's compensation or other insurance, severance, separation or other employee benefit plan, practice, policy or other arrangement of any kind (including, but not limited to, any "employee benefit plan" (within the meaning of section 3(3) of ERISA)).
Qualified Plan: any Benefit Plan that is an "employee pension benefit plan" (within the meaning of section 3(2) of ERISA) and which is intended to qualify under section 401(a) of the Code.
Salaried Retirement Plan: the W. R. Grace & Co. Retirement Plan for Salaried Employees.
Salaried SIP: the W. R. Grace & Co. Salaried Employees Savings and Investment Plan.
Salary Protection Plan: the W.R. Grace & Co. Executive Salary Protection Plan.
Schurpack 401(k) Plan: the Schurpack Employees 401(k) Thrift Plan.
SERP: the W. R. Grace & Co. Supplemental Executive Retirement Plan.
Split Dollar Program: the W. R. Grace & Co. Executive Split Dollar Life Insurance Program.
Terminated Grace Employee: any individual who is, as of the Distribution Date, a former Employee of any member of the New Grace Group or the Packco Group.
Terminated Grace Participant: a Terminated Grace Employee or a beneficiary, dependent or Alternate Payee of a Terminated Grace Employee.
Termination Benefits: has the meaning assigned to it in Section 2.02(a) hereof.
Union Retirement Plan: the Retirement Plan of W. R. Grace & Co.-Conn. Chemical Group (Cedar Rapids Plant).
U.S. Welfare Plan: a Welfare Plan other than a Welfare Plan that is maintained outside of the United States primarily for the benefit of individuals substantially all of whom are nonresident aliens with respect to the United States.
Welfare Plan: any Benefit Plan that is an "employee welfare benefit plan" (within the meaning of section 3(1) of ERISA).
ARTICLE II
TRANSFER OF EMPLOYEES; TERMINATION BENEFITS
SECTION 2.01 TRANSFER OF EMPLOYEES. (a) Grace and New Grace shall take all steps necessary or appropriate so that all of the Employees of Grace and its subsidiaries are allocated between the New Grace Group and the Packco Group in accordance with the principles set forth in the Section 2.01(b), and so that each individual who is so allocated to the Packco Group is, as of the Distribution Date, an Employee of a member of the Packco Group, and each other individual who is, as of the Distribution Date, an Employee of Grace or any of its Subsidiaries is an Employee of a member of the New Grace Group.
(b) In making the allocation provided for in Section 2.01, Grace and New Grace shall allocate each Employee who is exclusively employed in the Packaging Business to the Packco Group and each Employee who is exclusively employed in the New Grace Business to the New Grace Group. All other Employees
shall be allocated in a mutually agreeable manner that, to the extent possible, takes into account the Employees' expertise, experience and existing positions and duties and does not unreasonably disrupt either the Packaging Business or the New Grace Business and maximizes the ability of each of the Packco Group and the New Grace Group to manage and operate their respective businesses after the Distribution Date, taking into account the respective needs of such businesses as established by past practice.
SECTION 2.02 CHANGE OF CONTROL BENEFITS; TERMINATION BENEFITS. (a) No New Grace Employee and no Packco Employee shall be deemed, as a result of the steps called for by Section 2.01 or otherwise as a result of the consummation of the transactions contemplated by the Distribution Agreement and the Merger, to have become entitled to any benefits under any Ben- efit Plan, contract, agreement, statute, regulation or other arrangement that provides for the payment of severance pay, salary continuation, pay in lieu of notice, unused vacation pay, or similar benefits in connection with actual or constructive termination or alleged actual or constructive termination of employment (collectively, "Termination Benefits") . Without limiting the generality of the foregoing, none of the transactions contemplated by the Distribution Agreement and the Merger Agreement constitute a "change in control" for purposes of any Benefit Plan. Grace shall take all steps necessary and appropriate so that any Change in Control Severance Agreement between Grace and any Packco Employee terminates before the Distribution Date.
(b) All Liabilities (other than for Severance Costs as defined in
Section 8.04 of the Distribution Agreement) relating to or arising out of claims
made by or on behalf of New Grace Participants or Packco Participants for, or
with respect to, Termination Benefits relating to the actual or constructive
termination or alleged actual or constructive termination of employment of any
New Grace Employee or Packco Employee with any member of the Packco Group or the
New Grace Group, which claims arise as a result of the consummation of the
transactions contemplated by the Distribution Agreement, shall be considered
other Transaction Costs that are governed by clause (ii) of the first sentence
of Section 8.04 of the Distribution Agreement.
(c) Except as specifically provided otherwise in Section 2.02(b) above and in Section 8.04 of the Distribution Agreement, effective as of the Distribution Date, the New Grace Group shall assume or retain, as appropriate, all Liabilities relating to or arising out of claims made by or on behalf of New Grace Participants for, or with respect to, Termination
Benefits relating to the actual or constructive termination or alleged actual or constructive termination of employment of any New Grace Employee with any member of the Packco Group or the New Grace Group, whether before, on or after the Distribution Date. In addition, the New Grace Group shall assume or retain, as appropriate, all Liabilities (including with respect to Packco Employees) pursuant to the Change in Control Severance Plan and the Change in Control Severance Agreements.
(d) Except as specifically provided otherwise in Sections 2.02(b) and
(c) above and in Section 8.04 of the Distribution Agreement, effective as of the
Distribution Date, the Packco Group shall assume or retain, as appropriate, all
Liabilities relating to or arising out of claims made by or on behalf of Packco
Participants for, or with respect to, Termination Benefits relating to the
actual or constructive termination or alleged actual or constructive termination
of employment of any Packco Employee with any member of the Packco Group or the
New Grace Group, whether before (in the case of constructive termination), on or
after the Distribution Date.
ARTICLE III
INCENTIVE PLANS
SECTION 3.01 GRACE LTIP. (a) The contingent awards for Current Performance Periods held by New Grace Participants and Packco Participants (such contingent awards, the "LTIP Awards") under the Grace LTIP shall be adjusted and paid in cash by New Grace in accordance with such methodology as New Grace determines in its sole discretion.
(b) Effective as of the Distribution Date, the New Grace Group shall assume or retain, as appropriate, all Liabilities relating to or arising out of awards payable under the Grace LTIP.
SECTION 3.02 GRACE OPTIONS. (a) New Grace shall assume and adopt, effective as of the Distribution Date, each of the Grace Stock Incentive Plans, with such changes as may be necessary to reflect the change in the issuer of awards thereunder and such other changes as New Grace shall, in its sole discretion, determine. As soon as practicable after and effective as of the Distribution Date, all Grace Options that are then outstanding shall be adjusted or replaced as set forth in this Section 3.02, or in such other manner as the parties hereto shall agree.
(b) Each such Grace Option that is held by a New Grace Employee or a Terminated Grace Participant shall be replaced with an option (a "New Grace Option") to acquire a number of New Grace Common Shares that equals the number of shares subject to such Grace Option immediately before such replacement, times the New Grace Ratio (rounded up to the nearest whole share), with a per-share exercise price that equals the per-share exercise price of such Grace Option immediately before such replacement, divided by the New Grace Ratio (rounded up to the nearest one hundredth of a cent). Each New Grace Option shall otherwise have the same terms and conditions as the Grace Option it replaces, except that references to employment by or termination of employment with Grace and its affiliates shall be changed to references to employment by or termination of employment with New Grace and its affiliates. Effective as of the Distribution Date, New Grace shall assume all Liabilities relating to or arising under the New Grace Options or the Grace Stock Incentive Plans.
(c) Each such Grace Option that is held by a Packco Employee shall be adjusted so that the number of Newco Common Shares subject to such Grace Option equals the number of shares subject to such Grace Option immediately before such adjustment, times the Newco Ratio (rounded down to the nearest whole share), and the per-share exercise price equals the per-share exercise price of such Grace Option immediately before such adjustment, divided by the Newco Ratio (rounded up to the nearest whole cent) . Each Grace Option as so adjusted shall otherwise have the same terms and conditions as were in effect before such adjustment. Effective as of the Distribution Date, Grace shall retain all Liabilities relating to or arising under the Grace Options held by Packco Employees.
SECTION 3.03 ANNUAL INCENTIVE COMPENSATION PLAN. (a) New Grace shall pay, or cause to be paid by another member of the New Grace Group, all bonuses earned by Packco Employees and New Grace Employees for the 1997 calendar year under the AICP, in accordance with the terms of the AICP as interpreted by New Grace in its sole discretion. Effective as of the Distribution Date, the New Grace Group shall assume all Liabilities relating to or arising under the AICP.
(b) Packco Employees shall not be eligible to earn bonuses under the AICP for 1998 or any subsequent year. However, if the Distribution Date occurs later than March 31, 1998, then Grace and New Grace shall use reasonable best efforts to develop and implement an annual incentive program for Packco Employees, the cost of which will be shared between the New Grace Group and the Packco Group in a manner relating to
the relative portions of the 1998 calendar year that precede and follow the Distribution Date.
ARTICLE IV
PENSION M~D SAVINGS PLANS
SECTION 4.01 RETIREMENT PLANS AND SUPPLEMENTAL RETIREMENT PLAN. (a) Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate so that, effective no later than the Distribution Date: (i) one or more members of the New Grace Group are the sole sponsors of the Salaried Retirement Plan, the SERP and the Hourly Non-Union Retirement Plan; and (ii) one or more members of the Packco Group are the sole sponsors of the Union Retirement Plan. Such steps shall include, without limitation, the appointment or reappointment by New Grace (by action after the Distribution Date to approve or ratify such appointment or reappointment) of all named fiduciaries, trustees, custodians, recordkeepers and other fiduciaries and service providers to the Salaried Retirement Plan, the SERP and the Hourly Non-Union Retirement Plan, and the appointment or reappointment by Grace of all named fiduciaries, trustees, custodians, recordkeepers and other fiduciaries and service providers to the Union Retirement Plan.
(b) Effective as of the Distribution Date, the Packco Employees shall cease accruing benefits under the Salaried Retirement Plan, the SERP and the Hourly Non-Union Retirement Plan. As promptly as practicable following the Distribution Date, and effective as of the Distribution Date, Grace intends to implement a program for Packco Employees who participated in the Salaried Retirement Plan before the Distribution Date designed to substantially make up for any anticipated material adverse impact on them resulting from the termination of such participation as of the Distribution Date. Such program will assume that each such Packco Participant works as an em- ployee until normal retirement (age 65) and that he or she will achieve a reasonable investment return on his or her account in the Sealed Air Corporation Profit Sharing Plan. Upon the implementation of such program by Grace, New Grace shall (i) cause the Salaried Retirement Plan to be amended so that, effective immediately before the Distribution Date: (A) the accrued benefit of each Packco Employee who is a participant therein is increased by crediting such Packco Employee with an additional year of service; (B) the accrued benefit of each such Packco Employee who is at least 40 years old as of the Distribution Date is also increased by an amount equal to the lesser of (x) 13 percent of the amount of such accrued benefit (after giving effect to the increase described in clause (A) of
this sentence) or (y) the increase that results from crediting such Packco Employee with an additional four years of service, and (C) the accrued benefits of all such Packco Employees, as so increased, shall be fully vested as of the Distribution Date; or (ii) provide additional retirement benefits to such Packco Employees as a group having, in the aggregate, a value substantially equivalent to the increased benefits described in clause (i); provided, that the aggregate expense associated with the benefits described in clause (i) or (ii) (as applicable) shall be limited to the extent necessary so that the Accrued Benefit Obligation, calculated in accordance with FAS 87 ("ABO), of such benefits does not exceed $15 million. Such ABO shall be determined by Actuarial Sciences Associates ("ASA") in accordance with the actuarial assumptions set forth in Schedule II hereto and in a manner consistent with past practice with respect to the Salaried Retirement Plan.
(c) Effective as of the Distribution Date, the New Grace Group shall assume or retain (as applicable) all Liabilities relating to or arising under the Salaried Retirement Plan and the SERP, including without limitation for benefits payable thereunder to Packco Participants. Effective as of the Distribution Date, the Packco Group shall assume or retain (as applicable) all Liabilities relating to or arising under the Union Retirement Plan.
(d) (i) Effective immediately after the Effective Time, Grace shall establish, cause to be established or designate a defined benefit pension plan (the "Packco Hourly NonUnion Retirement Plan") to provide benefits and assume liabilities and accept a transfer of assets from the Hourly Non-Union Retirement Plan, as provided for in this Section 4.01(d).
(ii) As soon as practicable after the Effective Time, following (A)
the receipt by New Grace of a copy of a favorable determination letter or
Grace's certification to New Grace, in a manner reasonably acceptable to New
Grace, that the Packco Hourly Non-Union Retirement Plan is qualified under
Section 401(a) of the Code and the related trust is exempt from taxation under
Section 501(a) of the Code, and (B) the receipt by Grace of a copy of a
favorable determination letter or New Grace's certification to Grace, in a
manner reasonably acceptable to Grace, that the Hourly Non-Union Retirement Plan
is qualified under Section 401(a) of the Code and the related trust is exempt
from taxation under Section 501(a) of the Code, New Grace shall direct the
trustee of the trust funding the Hourly Non-Union Retirement Plan to transfer to
the trustee of the trust established to fund the Packco Hourly Non-Union
Retirement Plan the amount described in Section 4.01(d) (iii) below. Such
transfer shall be in cash unless otherwise agreed by
Grace and New Grace. As of the date of such transfer, and effective immediately after the Effective Time, the Packco Group and the Packco Hourly Non-Union Retirement Plan shall assume all Liabilities for benefits payable to Packco Participants under the Hourly Non-Union Retirement Plan, and the New Grace Group and the Hourly Non-Union Retirement Plan shall retain no Liabilities for such benefits.
(iii) The amount transferred pursuant to this Section 4.01(d) shall
be an amount equal to (A) less (B), as adjusted by (C); where (A) equals a
portion of the assets of the Hourly Non-Union Retirement Plan having a fair
market value equal to the ABO as of the Distribution Date attributable to Packco
Participants; where (B) equals the aggregate payments made from the trust
funding the Hourly Non-Union Retirement Plan in respect of Packco Participants
from the Effective Time through the date the transfer occurs; and where (C)
equals the amount of the net earnings or losses, as the case may be, from the
Effective Time through the date the transfer occurs, on the average of the daily
balances of the foregoing and based upon the actual rate of return earned by the
Hourly Non-Union Retirement Plan during such period. All of the foregoing
calculations shall be made by ASA in accordance with the assumptions set forth
on Schedule III hereto. Grace shall be entitled to review and comment on such
calculations as ASA is in the process of performing them. Notwithstanding the
foregoing, however, in no event shall the amount so transferred be less than the
amount necessary to comply with, nor more than the maximum amount permitted by,
Section 414(1) of the Code and the regulations promulgated thereunder, as
determined by ASA.
(iv) Grace, New Grace and Grace-Conn. shall, in connection with the transfer described in this Section 4.01(d), cooperate in making any and all appropriate filings required under the Code or ERISA, and the regulations thereunder and any applicable securities laws, and take all such action as may be necessary and appropriate to cause such transfers to take place as soon as practicable after the Effective Time. New Grace and Grace-Conn. agree, during the period ending with the date of the transfer of assets to the Packco Hourly Non-Union Retirement Plan, to cause distributions in respect of Packco Participants to be made in the ordinary course from the Hourly Non-Union Retirement Plan in accordance with applicable law and pursuant to plan provisions.
SECTION 4.02 Savings Plans. (a) Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate so that, effective no later than the Distribution Date: (i) one or more members of the New Grace Group are the sole sponsors of the Hourly SIP and the Salaried SIP; and (ii) one or
more members of the Packco Group are the sole sponsors of the Cypress 401(k) Plans and the Schurpack 401(k) Plan. Effective as of the Distribution Date, the Packco Group shall assume all Liabilities relating to or arising under the Cypress 401(k) Plans and the Schurpack 401(k) Plan. Such steps shall include, without limitation, the appointment or reappointment by New Grace (by action after the Distribution Date to approve or ratify such appointment or reappointment) of all named fiducia-ries, trustees, custodians, recordkeepers and other fiduciaries and service providers to the Hourly SIP and the Salaried SIP, and the appointment or reappointment by Grace of all named fi-- duciaries, trustees, custodians, recordkeepers and other fiduciaries and service providers to the Cypress 401(k) Plans and the Schurpack 401(k) Plan.
(b) Each of the transfers provided for in this Section 4.02(b) shall be implemented only if both Grace and New Grace so agree after the Distribution Date.
(i) Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate in order to transfer to a Packco Savings Plan and the related trust, as soon as practicable after the Effective Time, all account balances (including the pre-tax, after-tax and rollover account balances) under each of the Hourly SIP and the Salaried SIP of all Packco Participants. Such assets shall be transferred in kind, to the extent elected by New Grace with the consent of Grace (which consent shall not be unreasonably withheld), and otherwise shall be made in cash; provided, that in any event, unless the parties agree otherwise, any outstanding participant loans and FMC American Depositary Receipts shall be transferred in kind. It is the intention of Grace, New Grace and Grace-Conn. to carry out such transfer so as to preserve, to the extent practicable, the investment elections of participants as in effect immediately before the transfer, unless the parties agree otherwise.
(ii) Grace, New Grace and Grace-Conn. shall cooperate in making all appropriate filings required under the Code or ERISA, and the regulations thereunder and any applicable securities laws, implementing all appropriate communications with participants, maintaining and transferring appropriate records, and taking all such other actions as may be necessary and appropriate to implement the provisions of this Section 4.02(b) and to cause the transfers of assets pursuant to this Section 4.02(b) to take place as soon as practicable after the Effective Time; provided, that each of such transfers shall take place only after (A) the receipt by New Grace of a favorable determination letter or Grace's certification, in a manner reasonably acceptable to New Grace, that the relevant
Packco Savings Plan is qualified under Section 401(a) of the Code and the related trust is exempt from taxation under Section 501(a) of the Code, and (B) the receipt by Grace of a favorable determination letter or New Grace's certification, in a manner reasonably acceptable to Grace, that the Hourly SIP or the Salaried SIP, as applicable, is qualified under Section 401(a) of the Code and the related trust is exempt from taxation under Section 501(a) of the Code.
(c) If Grace and New Grace agree to implement the transfers provided for in Section 4.02(b), subject to the completion of such transfer and effective as of the Distribution Date, the members of the Packco Group and the SAC Savings Plan shall assume all Liabilities to or relating to Packco Participants relating to or arising under the Hourly SIP and the Salaried SIP. Effective as of the Distribution Date, the New Grace Group shall assume or retain (as applicable) all Liabilities relating to or arising under the Hourly SIP and the Salaried SIP, including without limitation for benefits payable thereunder to Packco Participants, that are not assumed by the Packco Group and the relevant Packco Savings Plan pursuant to the preceding sentence.
SECTION 4.03 QUALIFICATION OF PLANS. The New Grace Group shall be
responsible for all Liabilities incurred by the Packco Group as a result of the
failure of any of the Hourly Non-Union Retirement Plan, the Union Retirement
Plan, the Hourly SIP, the Salaried SIP, the Cypress 401(k) Plans or the
Schurpack 401(k) Plan to be qualified under Section 401(a) of the Code on or
before the date assets are transferred from such Plan to a Packco Benefit Plan,
or the date sponsorship of such Plan is assumed by any member of the Packco
Group, as applicable. The Packco Group shall be responsible for all Liabilities
incurred by the New Grace Group as a result of the failure of the Packco Hourly
Non-Union Retirement Plan or any Packco Savings Plan to be qualified under
Section 401(a) of the Code on or before the date assets are transferred to such
Plan from a New Grace Benefit Plan. The parties hereto agree that to the extent
any of them becomes aware that any such Plan fails or may fail to be so
qualified, it shall notify the other parties and the parties shall cooperate and
use best efforts to avoid such disqualification, including using the Internal
Revenue Service's Voluntary Compliance Resolution program or similar programs,
and taking any steps available pursuant to such program to avoid
disqualification, as determined by the party who is made responsible under this
Section 4.03 for the Liabilities that would result from such disqualification
(and the Liabilities for which such party is responsible shall include all costs
and expenses resulting from such steps, including
fines, penalties, contributions, attorneys' fees and expenses and administrative expenses).
ARTICLE V
WELFARE AND OTHER BENEFITS
SECTION 5.01 BENEFITS FOR ACTIVE EMPLOYEES. (a) Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate so that, effective no later than the Distribution Date, one or more members of the Packco Group are the sole sponsors of the Packco Health Plan. Such steps shall include, without limitation, the appointment or reappointment by Grace of all named fiduciaries, trustees, custodians, recordkeepers and other fiduciaries and service providers to the Packco Health Plan, to the extent such appointments or reappointments are necessary.
(b) Effective as of the Distribution Date, the New Grace Group shall
assume or retain (as applicable) all Liabilities relating to or arising out of
claims for benefits under U.S. Welfare Plans by New Grace Participants and
Terminated Grace Participants, whenever such claims are incurred, and (ii) by
Packco Participants to the extent such claims are incurred before the
Distribution Date and reported within 365 days thereafter. Effective as of the
Distribution Date, the Packco Group shall assume or retain (as applicable) all
Liabilities relating to or arising out of all other claims for benefits under
U.S. Welfare Plans by Packco Participants, except as specifically provided in
Section 5.02.
SECTION 5.02 RETIREE WELFARE BENEFITS. Effective as of the Distribution Date, the New Grace Group shall assume all Liabilities for providing post-retirement medical and life insurance benefits under U.S. Welfare Plans sponsored by Grace or any of its subsidiaries before the Distribution Date or any members of the New Grace Group on or after the Distribution Date, to: (i) Terminated Grace Participants; (ii) Packco Participants who would have been eligible to receive such benefits if they had retired at any time on or before the first anniversary of the Distribution Date (regardless of when they actually do retire); and (iii) any New Grace Participants who become eligible for such benefits after the Distribution Date pursuant to the Grace Severance Pay Plan as a result of a termination of employment as of the Distribution Date. Effective as of the Distribution Date, the Packco Group shall provide Packco Participants who retire after the Distribution Date for whom the New Grace has not assumed Liabilities for providing post-retirement medical and life insurance benefits pursuant to the
preceding sentence with such benefits pursuant to one or more group insurance or group self-insured programs; provided, that the Packco Group may require such Packco Participants to bear the entire cost of such benefits, together with a reasonable fee for their allocable share of the Packco Group's costs of administering such programs.
SECTION 5.03 SEVERANCE. The Packco Group shall adopt, effective as of the Distribution Date, and shall maintain in effect without amendment adverse to participants, at least through the first anniversary of the Distribution Date, a severance plan providing Packco Employees with severance benefits as outlined in Exhibit A hereto.
SECTION 5.04 SPLIT DOLLAR PLAN; DEFERRED COMPENSATION PLAN; SALARY PROTECTION PLAN. Effective as of the Distribution Date, each Packco Employee who participates in the Split Dollar Plan, the Deferred Compensation Plan or the Salary Protection Plan shall be treated as a terminated participant under such Plan, and shall have the same options with respect to such Plan as are available to any other participant in such Plan upon termination of employment, in accordance with the terms of such Plan as in effect immediately before the Distribution Date. Effective as of the Distribution Date, the New Grace Group shall assume all Liabilities relating to or arising under the Split Dollar Plan, the Deferred Compensation Plan and the Salary Protection Plan.
SECTION 5.05 DEPENDENT CARE AND MEDICAL EXPENSE PLANS. (a) Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate so that, effective no later than the Distribution Date, one or more members of the New Grace Group are the sole sponsors of the Grace Dependent Care Plan and the Grace Medical Expense Plan, and the New Grace Group shall assume all Liabilities under such Plans. Such steps shall include, without limitation, the appointment or reappointment by New Grace (by action after the Distribution Date to approve or ratify such appointment or reappointment) of all named fiduciaries, trustees, custodians, recordkeepers and other fiduciaries and service providers to such Plans, to the extent such appointments or reappointments are necessary.
(b) Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate so that, effective no later than the Distribution Date, one or more members of the Packco Group are the sole sponsors of the Packco Medical and Dependent Care Expense Plan, and the Packco Group shall assume all Liabilities under such Plan. Such steps shall include, without limitation, the appointment or reappointment by Grace of all named fiduciaries, trustees, custodians, recordkeepers and other fiduciaries
and service providers to such Plan, to the extent such appointments or reappointments are necessary. No employer contributions to such Plan shall be made or promised with respect to the 1998 plan year unless the parties otherwise agree.
ARTICLE VI
NON-U.S. PLANS
SECTION 6.01 NON-U.S. PLANS GENERALLY. As soon as practicable after the date of this Agreement, the parties hereto shall enter into one or more agreements or memoranda of understanding (collectively, the "Foreign Plans Agreement") regarding the treatment and allocation of Liabilities relating to or arising under Benefit Plans (the "Foreign Plans") for Employees located outside the United States, including without limitation expatriates, and to expatriate employees located in the United States. The Foreign Plans Agreement shall provide for the treatment of each Foreign Plan, which treatment may include (without limitation) (i) the retention or assumption of such Foreign Plan by the Packco Group, (ii) the retention or assumption of such Foreign Plan by the New Grace Group, or (iii) an allocation of the liabilities and assets (if any) of the Foreign Plan between a Plan (which may include the Foreign Plan) that is intended to be maintained by the New Grace Group and a Plan (which may include the Foreign Plan) that is intended to be maintained by the Packco Group, after the Distribution Date; provided, that the insurance contracts funding each Insured Foreign Pension Plan (and any assets related thereto) shall be divided between the appropriate Packco Benefit Plan and New Grace Benefit Plan by the insurer in accordance with applicable law, regulation and practice. Any transfers of assets or liabilities from a Noninsured Foreign Pension Plan shall be made on the basis of reasonable methods and assumptions determined by the local actuarial firm that is, as of the date of this Agreement, serving as the actuary for such Noninsured Foreign Pension Plan (or another actuarial firm if the parties hereto so agree) (the "Local Actuary"), in accordance with applicable legal and regulatory requirements, local practice and the past practice of Grace; provided, that each of Grace, Grace-Conn. and New Grace shall be entitled to review such methods and assumptions and object to them if they are unreasonable, and to review all calculations and determinations of the Local Actuary for accuracy. It is the intention of the parties hereto that the Packco Group will assume or retain Liabilities for Packco Employees under Foreign Plans and that to the extent permitted and practicable under legal and regulatory requirements and local practice, assets transferred from Noninsured Foreign Pension Plans pursuant to the Foreign
Plans Agreement shall equal the Projected Benefit Obligation, calculated in accordance with FAS 87, for the liabilities assumed by Packco Benefit Plans pursuant to the Foreign Plans Agreement.
ARTICLE VII
GENERAL
SECTION 7.01 PRESERVATION OF RIGHTS TO AMEND OR TERMINATE PLANS AND TO TERMINATE OR CHANGE TERMS OF EMPLOYMENT. No provision of this Agreement shall be construed as a limitation on the rights of any member of the Packco Group or the New Grace Group to amend or terminate any Benefit Plan or other plan, program or arrangement relating to employees. No provision of this Agreement shall be construed to create a right in any employee or former employee or beneficiary or dependent of such employee or former employee under a Benefit Plan which such employee or former employee or beneficiary would not otherwise have under the terms of the Benefit Plan itself. Nothing contained in this Agreement shall confer upon any individual the right to remain an employee of any member of the Packco Group or the New Grace Group or restrain any member of the Packco Group or the New Grace Group from changing the terms and conditions of employment of any individual at any time following the Distribution Date, except as provided in Section 5.03 of this Agreement.
SECTION 7.02 OTHER LIABILITIES; GUARANTEE OF OBLIGATIONS. Effective as of the Distribution Date, the New Grace Group shall assume or retain (as applicable) all Liabilities relating to or arising out of claims for compensation and benefits made by or on behalf of any New Grace Participant, including salary, wages, bonuses, incentive compensation, severance benefits, separation pay, accrued sick, holiday, vacation, health, dental or retirement benefits, or other compensation under applicable law or otherwise, relating to or arising out of employment by Grace or any of its subsidiaries before the Distribution Date or employment by any member of the New Grace Group on or after the Distribution Date. Effective as of the Distribution Date, the Packco Group shall assume or retain (as applicable) responsibility for all Liabilities relating to or arising out of claims for compensation and benefits made by or on behalf of any Packco Participant, including salary, wages, bonuses, incentive compensation, severance benefits, separation pay, accrued sick, holiday, vacation, health, dental or retirement benefits, or other compensation under applicable law or otherwise, relating to or arising out of employment by Grace
or any of its subsidiaries before the Distribution Date or employment by any member of the Packco Group on or after the Distribution Date. Notwithstanding the foregoing, this Section 7.02 shall not apply to any Liability that is specifically provided for elsewhere in this Agreement.
SECTION 7.03 ASSUMPTION OF PLANS; TERMINATION OF PARTICIPATION. Except as specifically provided otherwise in this Agreement, Grace, New Grace and Grace-Conn. shall take all steps necessary or appropriate so that, effective no later than the Distribution Date, one or more members of the New Grace Group are the sole sponsors of all Benefit Plans that are, as of the date of this Agreement, sponsored by Grace, and the New Grace Group shall assume or retain (as applicable) all Liabilities relating to or arising under such Benefit Plans. Such steps shall include, without limitation and where appropriate, the appointment or reappointment by New Grace (by action after the Distribution Date to approve or ratify such appointment or reappointment) of all named fiduciaries, trustees, custodians, recordkeepers and other fiduciaries and service providers to such Benefit Plans. Except as specifically provided otherwise in this Agreement or in the agreement provided for in Section 6.01 of this Agreement, the accrual of benefits by Packco Participants in any New Grace Benefit Plan shall cease not later than the Distribution Date.
SECTION 7.04 INFORMATION. The parties hereto shall, before the Distribution Date or as soon as practicable thereafter, provide each other with all information as may reasonably be requested and necessary to administer each Benefit Plan effectively in compliance with applicable law. Such information shall be provided in the form requested if, at the time of such request, it exists in such form or can readily be converted to such form. If a request would require a party providing information to incur any expenses in order to receive advice from any actuary, consultant or consulting firm, the information need not be provided unless the requesting party reimburses the party providing the information for all such expenses.
SECTION 7.05 COMPLETE AGREEMENT; COORDINATION WITH TAX SHARING AGREEMENT. (a) This Agreement, the Exhibits and Schedules hereto and the agreements and other documents referred to herein, shall constitute the entire agreement between the parties hereto with respect to the subject matter hereof (other than the Distribution Agreement, the Merger Agreement and the schedules and exhibits thereto) and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.
(b) This Agreement, and not the Tax Sharing Agreement, constitutes the sole agreement of the parties regarding responsibility for any excise taxes, penalties or similar levies that may be imposed by any taxing authority on, or with respect to, any Benefit Plan, except as otherwise specifically provided in the Tax Sharing Agreement with respect to payroll taxes.
SECTION 7.06 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware (other than the laws regarding choice of laws and conflict of laws that would apply the substantive laws of any other jurisdiction) as to all matters, including matters of validity, construction, effect, performance and remedies, except to the extent preempted by federal law.
SECTION 7.07 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given as provided in the Distribution Agreement.
SECTION 7.06 SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns, but neither this Agreement nor any of the rights, interests and obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party (which consent shall not be unreasonably withheld). Without limiting the generality of the foregoing, it is expressly acknowledged that at the Effective Time, the Certificate of Incorporation of Grace will be amended (the "Newco Amendment") to change the name of Grace to "Sealed Air Corporation" and that references herein to "Grace" include, from and after the Effective Time, such corporation (which is also referred to in the Merger Agreement as Newco). Accordingly, to the extent this Agreement calls for the agreement of "Grace" or of "the parties" from and after the Effec- tive Time, the agreement of Newco (as defined in the Merger Agreement) will be required. This Agreement is solely for the benefit of the parties hereto and their Subsidiaries and is not intended to confer, nor shall it confer, upon any other Persons (including New Grace Participants and Packco Participants) any rights or remedies hereunder.
SECTION 7.09 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by a written agreement signed by all of the parties hereto.
SECTION 7.10 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
SECTION 7.11 INTERPRETATION. The Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties hereto and shall not in any way affect the meaning or interpretation of this Agreement.
SECTION 7.12 INDEMNITY PROCEDURES. The provisions of Article IV of the Distribution Agreement shall apply with respect to Liabilities allocated under this Agreement.
SECTION 7.13 SEVERABILITY. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party.
SECTION 7.14 REFERENCES; CONSTRUCTION. References to any "Article," "Exhibit," "Schedule" or "Section," without more, are to Articles, Exhibits, Schedules and Sections to or of this Agreement. Unless otherwise expressly stated, clauses beginning with the term "including" set forth examples only and in no way limit the generality of the matters thus exemplified.
SECTION 7.15 SAC REASONABLE CONSENT. The parties hereto agree that any actions to be taken by Grace, Grace-Conn. or New Grace to implement the terms of this Agreement that are not specifically required herein that relate to Packco or the Packaging Business, and any actions that are to be taken pursuant to this Agreement only by agreement of the parties, must be reasonably satisfactory to SAC.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
W. R. GRACE & CO.
W. R. GRACE & CO.-CONN.
GRACE SPECIALTY CHEMICALS, INC.
EXHIBIT 10.2
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (this "Agreement"), dated as of March 30, 1998, by and among W. R. Grace & Co., a Delaware corporation ("Grace"), W. R. Grace & Co.-Conn., a Connecticut corporation and a wholly owned subsidiary of Grace ("Grace-Conn."), and Sealed Air Corporation, a Delaware corporation ("Sealed Air").
RECITALS
WHEREAS, Grace, Packco Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Grace, and Sealed Air have entered into an Agreement and Plan of Merger (the "Merger Agreement");
WHEREAS, Grace, Grace-Conn. and Grace Specialty Chemicals, Inc., a Delaware corporation and a wholly owned subsidiary of Grace ("New Grace"), have entered into the Distribution Agreement;
AND WHEREAS, Grace, on behalf of itself and the Packco Group, and Grace-Conn., on behalf of itself and the New Grace Group, wish to provide for the allocation between the Packco Group and the New Grace Group of all responsibilities, liabilities and benefits relating to or affecting Taxes (as hereinafter defined) paid or payable by either of them for all taxable periods, whether beginning before, on or after the Distribution Date (as hereinafter defined) and to provide for certain other matters.
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to them in the Distribution Agreement or the Merger Agreement. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined):
"Action": as defined in Section 5.3(a).
"Active New Grace Businesses": as defined in Section 5.2(b).
"Active Packo Business": as defined in Section 5.1(b).
"Adjusted Item": as defined in Section 3.2(a)(v).
"Adjusted Party" means the party for the account of which is an Adjusted Item.
"Affiliated Group" means the affiliated group of which Grace is the common parent or any predecessor or successor thereto.
"Agreed Date": as defined in Section 2.2(b).
"Code" means the Internal Revenue Code of 1986, as amended, and shall include corresponding provisions of any subsequently enacted federal tax laws.
"Conn Prepared Returns": as defined in Section 2.2(a).
"Conn Prior Payments": as defined in Section 3.2(c)(iii).
"Consistency/Basis Disagreement": as defined in Section 2.2(b).
"Corresponding Item": as defined in Section 3.2(a)(v).
"Corresponding Party" means the party for the account of which is a Corresponding Item.
"Del Prepared Returns": as defined in Section 2.2(a).
"Discontinued Businesses": shall mean (x) the can sealing and coating portion of the New Grace Business which portion is described in the proviso to the definition of the Packaging Business and (y) certain other businesses currently accounted for as discontinued operations.
"Distribution Date" means the date on which the Distribution occurs. For purposes of this Agreement, the
Distribution shall be deemed effective as of the close of business on the Distribution Date.
"Equity Securities" means any stock or other equity securities treated as stock for tax purposes, or options, warrants, rights, convertible debt, or any other instrument or security that affords any Person the right, whether conditional or otherwise, to acquire stock.
"Final Determination" means the final resolution of liability for any Tax for a taxable period (i) by a duly executed IRS Form 870 or 870-AD (or any successor forms thereto), on the date such Form is effective, or by a comparable form under the laws of other jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination with respect to the right so reserved; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the jurisdiction imposing Tax; or (v) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the parties.
"Foreign Cap" shall mean $3 million.
"Foreign Packco Subsidiary" means a Packco Subsidiary organized in a foreign jurisdiction.
"Foreign Packco Tax Item" means a Tax Item of a Foreign Packco Subsidiary arising in the Pre-Distribution Period attributable to the Packaging Business conducted by such Subsidiary other than any Tax Item of a Foreign Packco Subsidiary arising as a result of a Foreign Transfer.
"Foreign New Grace Subsidiary" means a New Grace Subsidiary organized in a foreign jurisdiction.
"Forwarding Party": as defined in Section 4.1.
"Forwarding Responsibilities": as defined in Section 4.1.
"Hypothetical Pre-Distribution Tax": as defined in Section 2.2(d).
"Hypothetical Pre-Distribution Overall Tax Benefit": as defined in
Section 2.2(d).
"Indemnified Amount": as defined in Section 4.1.
"Indemnitee": as defined in Section 4.2(a).
"Indemnitor": as defined in Section 4.2(a).
"Indemnity Issue": as defined in Section 4.2(a).
"Interest": as defined under "Taxes" below.
"IRS" means the Internal Revenue Service.
"New Grace Tax Item" means a Tax Item arising in the Pre-Distribution Period attributable to (i) New Grace, Grace- Conn., Packco, any Foreign New Grace Subsidiary, any member of the Affiliated Group which was a member prior to the Distribution Date or any member of the affiliated group for United States federal income tax purposes of which W. R. Grace & Co., a New York corporation, was the common parent or (ii) the New Grace Business conducted by any Foreign Packco Subsidiary.
"Overall Tax Benefit" shall mean, for any taxable period, the net operating loss, unused credits (taking into account foreign tax credits when realized regardless of the period for which the associated earnings and profits were earned) and any other aggregate net unused Tax Benefit not used to reduce Taxes for the period.
"Packco Prior Payments": as defined in Section 3.2(c)(iii).
"Packaging Tax Item" means a Tax Item attributable to Sealed Air, any member of the Packco Group or otherwise relating to the Packaging Business or the Packaging Assets that is not a New Grace Tax Item or a Foreign Packco Tax Item.
"Payee": as defined in Section 3.2(c).
"Payor": as defined in Section 3.2(c).
"Post-Distribution Period" means the Post-Distribution Taxable Periods and the portion of any Straddle Period beginning on the date after the Distribution Date.
"Post-Distribution Taxable Period" means any taxable period beginning after the Distribution Date.
"Pre-Distribution Period" means the Pre-Distribution Taxable Periods and the portion of any Straddle Period ending on the Distribution Date.
"Pre-Distribution Schedules": as defined in Section 2.2(b).
"Pre-Distribution Taxable Period" means any taxable period ending on or before the Distribution Date
"Proceeding" shall mean any audit or other examination, judicial or administrative proceeding relating to liability for or refunds or adjustments with respect to Taxes.
"Recipient Group": as defined in Section 4.1.
"Restriction Period" means the period beginning on the date hereof and ending on the two-year anniversary of the Effective Time.
"Reviewing Party": as defined in Section 5.3(c).
"Ruling/Opinion Exception": as defined in Section 5.1.
"Sealed Air Parties" means Sealed Air and each of its past, present or future Affiliates, other than any member of the Packco Group.
"Straddle Period" means a taxable period that includes, but does not end on, the Distribution Date.
"Substantial Authority": as defined in Section 2.1.
"Tax Benefit" means any item of loss, deduction, credit or any other Tax Item which decreases Taxes paid or payable.
"Tax Deficiency" means an assessment of Taxes, as a result of a Final Determination.
"Tax Detriment" means any item of income, gain, recapture of credit or any other Tax Item which increases Taxes paid or payable.
"Tax-Free Status" means the qualification of the Distribution (i) as a
transaction described in Section 355(a)(1) of the Code, (ii) as a transaction in
which the stock distributed thereby is qualified property for purposes of
Section 355(c)(2) of the Code and (iii) as a transaction in which each of Grace,
Grace-Conn., Packco, New Grace and each member of the New Grace Group recognizes
no income or gain.
"Tax Item" means any item of income, gain, loss, deduction, credit, recapture of credit or any other item which increases or decreases Taxes paid or payable, including an adjustment under Code Section 481 resulting from a change in accounting method.
"Tax Opinions" shall mean the tax opinions referred to in Section 7.1(e) of the Merger Agreement.
"Tax Refund" means a refund of Taxes as the result of a Final Determination.
"Tax Return" means any return, filing, questionnaire, information return or other document required to be filed, including requests for extensions of time, filings made with estimated tax payments, claims for refund and amended returns that may be filed, for any period with any taxing authority (whether domestic or foreign) in connection with any Tax or Taxes (whether or not a payment is required to be made with respect to such filing).
"Taxes" means all forms of taxation, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, governmental, state, foreign, federation or other body, and, without limiting the generality of the foregoing, shall include income, sales, use, ad valorem, gross receipts, trade, license, value added, franchise, transfer, recording, withholding, payroll, employment, excise, occupation, unemployment insurance, social security, business license, business organization, stamp, environmental, premium and property taxes, together with any related interest, penalties and additions to any such tax, or additional amounts imposed by any taxing authority (domestic or foreign) (such interest, penalties, additions and additional amounts, "Interest").
"Transaction Party": as defined in Section 5.3(c).
ARTICLE II.
FILING OF TAX RETURNS
Section 2.1. Manner of Filing. All Tax Returns filed after the Distribution Date and the Pre-Distribution Schedules shall be prepared on a basis which is consistent with the consummation of the transactions as set forth in the Distribution Agreement, the Grace Tax Matters Certificate, the Sealed Air Tax Matters Certificate, the Tax Opinions and any opinions, rulings, agreements or written advice relating to Foreign Transfers (in the absence of a controlling change in law or circumstances) and shall be filed on a timely basis (including extensions) by the party responsible for such filing under this Agreement. In the absence of a controlling change in law or circumstances, all such Tax Returns and Pre-Distribution Schedules shall also be prepared on a basis which is consistent with the treatment of each of the Foreign Transfers in the jurisdictions listed on Exhibit A hereto as a reorganization, pursuant to a plan of reorganization, within the meaning of Section 368(a)(1)(D) of the Code. The Pre-Distribution Schedules and all Tax Returns in respect of a Pre-Distribution Taxable Period or portion, ending on the Distribution Date of any Straddle Period, that include any member of the New Grace Group or the Packco Group shall be prepared on the basis of substantial authority or on a reasonable basis with (if applicable) appropriate disclosure (each, "Substantial Authority"); provided, however, that such Schedules and Returns shall be prepared on a basis consistent with the elections (other than elections relating to carrybacks and carryforwards described in Section 3.3(a)), accounting methods, conventions and principles of taxation used for the most recent taxable periods of members of the New Grace Group for which Tax Returns involving similar Tax Items have been filed, to the extent that a failure to do so would result in a Tax Detriment, or a reduction in a Tax Benefit, to a member of the Packco Group, as long as such consistent position has Substantial Authority. All Tax Returns in respect of a Post-Distribution Taxable Period or portion, beginning after the Distribution Date, of any Straddle Period, shall be prepared with Substantial Authority; provided, however, that such Returns shall be prepared on a basis consistent with the elections (other than elections relating to carrybacks and carryforwards described in Section 3.3(a)), accounting methods, conventions and principles of taxation used for the most recent taxable periods of members of the New Grace Group for which Tax Returns involving similar Tax Items have
been filed, to the extent that a failure to do so would result in a Tax Detriment, or a reduction in a Tax Benefit, to a member of the other Group, as long as such consistent position has Substantial Authority. In the event of a conflict with respect to a Straddle Period between the requirements of the immediately preceding sentence and the second preceding sentence, the second preceding sentence shall prevail. Subject to the provisions of this Agreement, all decisions relating to the preparation of Tax Returns shall be made in the sole discretion of the party responsible under this Agreement for such preparation. Grace shall provide Grace-Conn. with copies of all Tax Returns filed after the Distribution Date that relate to any member of the New Grace Group. Grace-Conn. shall provide Grace with a copy of any portion of a Tax Return necessary to confirm Grace-Conn.'s entitlement to payment hereunder in respect of a carryback or refund.
Section 2.2. Pre-Distribution and Straddle Period Tax Returns.
(a) Grace shall prepare and file, or cause to be prepared and filed, any Tax Returns required to be filed by a member or members of the New Grace Group or the Packco Group for any Pre-Distribution Taxable Period and any Straddle Period; provided, however, that Grace-Conn. shall prepare and file, or cause to be prepared and filed, any Tax Returns relating solely to a member or members of the New Grace Group or their respective assets or businesses (such Tax Returns to be prepared and filed, or caused to be prepared and filed, by Grace, the "Del Prepared Returns", and by Grace-Conn., the "Conn Prepared Returns", respectively).
(b) With respect to any Del Prepared Return that has not been filed as
of the Distribution Date and relates to a Pre-Distribution Taxable Period or a
Straddle Period, Grace-Conn. shall, 25 calendar days before the due date
(including extensions) for such Return, provide Grace with a schedule
(collectively, the "Pre-Distribution Schedules") detailing the computation of
(i) in the case of a Pre-Distribution Taxable Period, the Tax and/or Overall Tax
Benefit and (ii) in the case of a Straddle Period, the Hypothetical
Pre-Distribution Tax and/or Hypothetical Pre-Distribution Overall Tax Benefit,
in either case, attributable to the member or members of the New Grace Group or
the Packco Group included in such Return. Any Pre-Distribution Schedule relating
to a Pre-Distribution Taxable Period shall be delivered to Grace in the form of
a completed, but unexecuted Tax Return. If Grace so requests, Grace-Conn. shall
discuss with Grace the preparation of, and allow Grace
periodically to review major issues with respect to, any Pre-Distribution Schedule. In the event that Grace disagrees with any Tax Item reflected (or anticipated to be reflected) on a Pre-Distribution Schedule and demonstrates (by means of a written explanation in sufficient detail to permit such conclusion to be verified) its conclusion that Grace-Conn. has failed to comply with the requirements of the third sentence of Section 2.1 hereof (a "Consistency/Basis Disagreement"), Grace-Conn. shall explain its calculation of such Tax Item within 14 days of receipt of Grace's written explanation. The parties shall attempt in good faith mutually to resolve any Consistency/Basis Disagreements prior to the due date for filing the relevant Tax Return. Notwithstanding any other provision of this Agreement, with respect to estimated Tax payments to a foreign governmental authority for the first quarter of 1998 that are due before the parties have agreed on the amount in connection therewith for which Grace-Conn. is responsible hereunder, (I) Grace shall estimate in good faith and in accordance with past practice and make such estimated Tax payment, (II) Grace shall promptly provide such estimate to Grace-Conn., (III) Grace-Conn. shall deliver to Grace the applicable Pre-Distribution Schedule reasonably promptly after the Distribution Date (provided that Grace and its Affiliates reasonably and promptly cooperate with Grace-Conn. in the preparation thereof), (IV) Grace-Conn. shall not be required to make any payment in respect of such estimated Taxes to Grace until five days after the date that the parties agree on such Pre-Distribution Schedule (the "Agreed Date") (and such payment shall not exceed the amount of such estimated Tax paid, shall otherwise be determined based on the Pre-Distribution Schedule as distinguished from the estimated Tax paid, and shall be made in immediately available funds), and (IV) such payment shall bear interest from the time that payment is due to the applicable governmental authority until the earlier of the date that payment is made by Grace-Conn. and five days after the Agreed Date at the rate of interest charged for Eurodollar or LIBOR loans under Grace-Conn.'s principal senior bank debt agreement. If such payment by Grace-Conn. is not made by the fifth day after the Agreed Date, then such payment shall bear interest from the fifth day after the Agreed Date until the date that payment is made by Grace-Conn. at the rate that is two percent in excess of the rate set forth in clause (IV) of the preceding sentence.
(c) Whether or not any Consistency/Basis Disagreements or any other disagreements relating to a Tax Item on a Pre-Distribution Schedule have been resolved by the
applicable due date, Grace shall (i) prepare the Del Prepared Returns on the basis of, and in a manner consistent with, the Pre-Distribution Schedules, (ii) provide Grace-Conn. with a copy of each Del Prepared Return 14 calendar days before such Return is filed and reflect any comments thereon provided in good faith by Grace-Conn. and (iii) provide Grace-Conn. with a copy of each Del Prepared Return two business days after such Return is filed. In the event that any Consistency/Basis Disagreements relating to a Pre-Distribution Schedule have not been resolved prior to the filing of the relevant Tax Return, such disagreements shall be promptly resolved pursuant to Section 6.7 hereof.
(d) The "Hypothetical Pre-Distribution Tax" shall mean the Tax that would have been due for the taxable period ending on the Distribution Date if the Distribution Date were the last day of the taxable period. The "Hypothetical Pre-Distribution Overall Tax Benefit" shall mean the Overall Tax Benefit that would have arisen in the taxable period ending on the Distribution Date if the Distribution Date were the last day of the taxable period. Such Tax or Overall Tax Benefit shall be computed by determining items of income, expense, deduction, loss and credit on a "closing of the books" basis, reflecting tax accounting principles as of the close of business on the Distribution Date.
Section 2.3. Post-Distribution Tax Returns. Any Tax Return for a Post-Distribution Taxable Period shall be the responsibility of the New Grace Group if such Tax Return relates solely to a member or members of the New Grace Group or their respective assets or businesses, and shall be the responsibility of the Packco Group if such Tax Return relates solely to a member or members of the Packco Group or Sealed Air or their respective assets or businesses.
ARTICLE III.
PAYMENT OF TAXES
Section 3.1. Allocation of Tax Liabilities With Respect to Unfiled Returns.
(a) All Taxes shall be paid by the party responsible under this Agreement for filing the Tax Return pursuant to which such Taxes are due; provided, however, that
(i) in the case of Taxes due with respect to Del Prepared Returns for Pre-Distribution Taxable Periods or
Straddle Periods, Grace-Conn. shall pay Grace the amount, if any, of the Tax or Hypothetical Pre-Distribution Tax, as the case may be, if any, reflected in the Pre-Distribution Schedule relating to such Tax Return attributable to the member or members of the New Grace Group or the Packco Group included in such Return (and in the case of the Business Tax and Real Estate Tax due to France or a political subdivision thereof (and other Taxes due to any jurisdiction based on analogous principles), with respect to Post-Distribution Periods in 1998, Grace-Conn. shall pay Grace the amount of any Tax liability attributable to the New Grace Business). Such payment shall be made, at Grace-Conn.'s discretion, either in immediately available funds on the morning of the relevant date when payment is due to the governmental authority in respect of such Tax Return or, if not in immediately available funds, two business days prior to such due date. Grace shall forward any such payment that it receives from Grace-Conn. to the appropriate taxing authority.
(ii) in the case of Del Prepared Returns for any taxable period, on the relevant date on which payment is due (or a refund is received) in respect of such Tax Return, Grace shall pay Grace-Conn. the amount, if any, of the actual reduction in Taxes, or the actual increase in the Tax refund, that would have been payable or receivable with respect to such Tax Return but for any Overall Tax Benefit (or Hypothetical Pre-Distribution Overall Tax Benefit) that is for the account of Grace-Conn. under Section 3.2(a)(iii), below. In the case of a payment by Grace in respect of a reduction in Taxes, such payment shall be made in immediately available funds on the morning of the relevant due date or, if not in immediately available funds, two business days prior to the due date.
(iii) the parties intend that, in implementing this Section 3.1(a), payment and reimbursement between the parties shall reflect the principles of Section 3.2(a).
(b) Notwithstanding anything to the contrary, any Tax Item resulting from any act or omission not in the ordinary course of business (other than transactions contemplated by this Agreement, the Distribution Agreement, the Merger Agreement or the Benefits Agreement) on the part of any member of the Packco Group or any of the Sealed Air Parties occurring on the Distribution Date after the Effective Time shall be deemed to arise in a taxable period which begins after the Distribution Date.
Section 3.2. Indemnities; Redetermined Tax Liabilities. Except as otherwise provided in Article V:
(a) Indemnities.
(i) Grace-Conn. shall be responsible for (w) any Tax for a Pre-Distribution Taxable Period (and any Hypothetical Pre-Distribution Tax for a Straddle Period) of Grace, Grace-Conn., Packco, any Foreign New Grace Subsidiary, any current or former member of the Affiliated Group which was a member prior to the Distribution Date or any current or former member of the affiliated group for United States federal income tax purposes of which W. R. Grace & Co., a New York corporation, was the common parent, (x) any Tax for a Pre-Distribution Taxable Period (and any Hypothetical Pre-Distribution Tax for a Straddle Period) of a Foreign Packco Subsidiary attributable to the Packaging Business reflected on a Tax Return filed by such Subsidiary on or before the Distribution Date or on a Pre-Distribution Schedule, (y) any Tax of any member of the New Grace Group or a Foreign Packco Subsidiary, in either case, to the extent attributable to the New Grace Business and (z) 75% (or if the Packco Group has borne an amount of Tax in respect of adjustments to Foreign Packco Tax Items (and fees and expenses in Proceedings relating to such adjustments) that exceeds the Foreign Cap, then 100%) of any increase in Tax of a member of the Packco Group attributable to an adjustment to a Foreign Packco Tax Item.
(ii) Grace shall be responsible for any Taxes (x) of any member of the Packco Group or otherwise relating to the Packaging Business or the Packaging Assets (except to the extent that Grace-Conn. is responsible for such Taxes pursuant to clause (i) above) and (y) of any of the Sealed Air Parties, whether arising before, on or after the Distribution Date.
(iii) Any Overall Tax Benefit (or Hypothetical Pre-Distribution Overall Tax Benefit) shall be for the account of Grace-Conn. to the extent that such Overall Tax Benefit (or Hypothetical Pre-Distribution Overall Tax Benefit) is attributable to (w) Grace, Grace-Conn., Packco, any Foreign New Grace Subsidiary, any current or former member of the Affiliated Group which was a member prior to the Distribution Date or any current or former member of the affiliated group for United States federal income tax purposes of which W. R. Grace & Co., a New York corporation, was the common parent, in each case, for the Pre-Distribution Period, (x) the Packaging Business of a Foreign Packco Subsidiary for the Pre-Distribution
Period reflected on a Tax Return filed by such Subsidiary on or before the Distribution Date or on a Pre-Distribution Schedule (other than the Foreign NOLs), (y) a Pre-Distribution Period of any member of the New Grace Group or a Foreign Packco Subsidiary, in either case, to the extent attributable to the New Grace Business (other than the Foreign NOLs) or (z) any adjustment to a Foreign Packco Tax Item.
(iv) For purposes of determining the amount for which Grace or Grace-Conn. is responsible for paying the other party, or entitled to receive from the other party, in the event of any adjustment, including a Final Determination, of a Tax Item of a Foreign Packaging Subsidiary (other than a Tax Item that arises as a result of a Foreign Transfer), Tax Items that are clearly attributable to the Packaging Business or the New Grace Business, respectively, shall be allocated to such Business and Tax Items that are not so attributable shall be allocated in the proportion that the earnings from operations of such Business operated by such Subsidiary bears to the total earnings from operations of such Subsidiary, as reflected in audited financial statements for the most recent, as of the end of such taxable period, full-year accounting period. Tax Items so allocated shall be treated for all purposes of this Agreement as attributable to the Business to which they are allocated.
(v) Timing Adjustments. In the event of any adjustment, including
a Final Determination, of a Tax Item (the "Adjusted Item") which results in a
Tax Benefit or Tax Detriment for the account of one party and a corresponding
Tax Detriment or Tax Benefit (the "Corresponding Item") for the account of the
other party, then (I) if the Corresponding Item is a Tax Benefit, the
Corresponding Party shall pay the Adjusted Party and (II) if the Corresponding
Item is a Tax Detriment, the Adjusted Party shall pay the Corresponding Party,
in either case, for each taxable period in which a member of the Group of the
party entitled to payment under this Section 3.2(a)(v) actually realizes the Tax
Benefit, in the case of (I), or the Tax Detriment, in the case of (II), by
reason of the adjustment, an amount equal to such realized Tax Benefit, in the
case of (I), or realized Tax Detriment, in the case of (II), including interest
(computed at a 5% annual rate) from the original due date (without extensions)
for filing of the Return for such taxable period through the date of payment
under this Section 3.2(a)(v).
(b) Final Determinations. In the case of any Final Determination regarding a Tax Return, any Tax Deficiency shall be paid to the appropriate taxing authority by, and any Tax
Refund received from the appropriate taxing authority shall be paid to, the party which filed such Return; provided, however, that whether or not there is a Tax Deficiency or Tax Refund and whether or not a payment is required to or from the appropriate taxing authority, Grace shall make payments to, or receive payments from, Grace-Conn. based upon the following principles:
(i) Grace-Conn. shall make a payment to Grace in an amount equal
to (x) any increase in the Tax of any of the Sealed Air Parties or any member of
the Packco Group resulting from any adjustment to a New Grace Tax Item and (y)
75% (or, if the Packco Group has borne an amount of Tax in respect of
adjustments to Foreign Packco Tax Items (and fees and expenses in Proceedings
relating to such adjustments) that exceeds the Foreign Cap, then 100%) of any
increase in the Tax of any of the Sealed Air Parties or any member of the Packco
Group resulting from any adjustment to a Foreign Packco Tax Item, in either case
(x) or (y), together with any Interest relating thereto that is or has been
imposed by the relevant taxing authority (or would have been imposed but for an
offsetting Packaging Tax Item).
(ii) Grace shall pay to Grace-Conn. an amount equal to (x) any decrease in the Tax of any of the Sealed Air Parties or any member of the Packco Group resulting from any adjustment to a New Grace Tax Item and (y) any decrease in the Tax of any of the Sealed Air Parties or any member of the Packco Group resulting from any adjustment to a Foreign Packco Tax Item, in either case (x) or (y), together with any Interest relating thereto that is or has been paid by the relevant taxing authority (or would have been paid but for an offsetting Packaging Tax Item).
(iii) The parties intend that, in implementing this Section 3.2(b), payment and reimbursement between the parties shall reflect the principles of Section 3.2(a).
(iv) Payments otherwise required to be made under this Section 3.2(b) with respect to a single Final Determination shall be netted and offset against each other so that either Grace shall make a payment to Grace-Conn. or Grace-Conn. shall make a payment to Grace, but not both.
(c) Calculation and Payment of Amounts.
(i) All calculations and determinations required to be made pursuant to this Article III shall initially be made by the party obligated to make such payment (the "Payor") in its good faith. If the party entitled to receive a payment (the "Payee") so requests, the Payor shall present its calculations and determinations to the Payee in writing. The Payee shall be deemed to consent to such calculations and determinations unless the Payee notifies the Payor in writing within 30 days of receiving such calculations and determinations. If the Payee disagrees with the Payor's calculations and determinations, the parties shall attempt in good faith mutually to resolve the disagreement. In the event that they cannot so resolve the disagreement, it shall be resolved promptly pursuant to Section 6.7 hereof.
(ii) For all tax purposes, the parties hereto agree to treat, and to cause their respective affiliates to treat, (x) any payment required to be paid to a member of the other Group by this Agreement as an adjustment to the portion of the New Grace Capital Contribution that is contributed from Grace to New Grace and (ii) any payment of interest or Taxes (other than U.S. Federal income taxes) by or to a taxing authority as taxable or deductible, as the case may be, to the party entitled under this Agreement to retain such payment or required under this Agreement to make such payment, in either case except as otherwise mandated by the law or a Final Determination. In the event of such a Final Determination, the payment in question shall be adjusted to place the parties in the same after-tax position that they would have enjoyed absent such Final Determination. Any payment required by this Agreement that is not made on or before the date required hereunder shall bear interest, from and after such date through the date of payment, at the rate that is two percent in excess of the rate of interest charged for Eurodollar or LIBOR loans under the principal senior bank debt agreement of the party required to make such payment.
(iii) Payment of any amount required to be made pursuant to this Article III as a result of a Final Determination shall become due and payable after such Final Determination has been made within ten business days of the receipt of written notice from the party entitled to receive such payment to the party required to make such payment. Any amounts required to be paid in respect of Taxes or Overall Tax Benefits pursuant to this Article III shall be adjusted to avoid duplication of payments and to take into account the sum of any
payments previously made by any member of the Packco Group on or prior to the Distribution Date or by Grace-Conn. or any other member of the New Grace Group at any time in respect of such Taxes or Overall Tax Benefits (the "Conn Prior Payments") and the sum of any payments previously made by any member of the Packco Group after the Distribution Date in respect of such Taxes or Overall Tax Benefits (the "Packco Prior Payments"). Appropriate payments will be made between the parties in the event that the Conn Prior Payments or the Packco Prior Payments, respectively, exceed the amounts for which Grace-Conn. or Packco, respectively, is responsible under the principles of Section 3.2(a).
(d) Other Tax Liabilities and Refunds. Any Tax or Tax refund that is not otherwise covered by Section 3.1 or 3.2(b) shall be allocated, and payment shall be made by Grace-Conn. or Grace, using the principles of Sections 3.2(a); provided, however, that any Tax refund (whether or not governed by Section 3.1 or 3.2(b)) arising as a result of an adjustment of a Foreign Packco Tax Item shall be allocated in the same manner and to the same extent as Taxes and expenses in respect of adjustments of Foreign Packco Tax Items have been borne (it being agreed and understood that to the extent that the Foreign Cap has been exceeded, such refund shall be entirely for the benefit of Grace-Conn. and to the extent that refunds are shared 75% by Grace-Conn. and 25% by Grace the Foreign Cap shall be increased by the amount refunded to Grace). Any Tax refund received by one party that is for the account of the other party shall be paid to such other party promptly upon receipt thereof. Any Tax paid by one party that is the responsibility of the other party shall be reimbursed promptly by the other party.
Section 3.3. Carrybacks and Refund Claims. (a) Any Tax refund resulting from the carryback by any member of the New Grace Group of any Tax Item arising after the Distribution Date to a Pre-Distribution Taxable Period or a Straddle Period shall be for the account of Grace-Conn., and Grace shall promptly pay over to Grace-Conn. any such Tax refund that it receives. In the event that a member of the New Grace Group, on the one hand, and a member of the Packco Group or a Sealed Air Party, on the other hand, are each entitled to carryback a Tax Item to a Pre-Distribution Taxable Period or a Straddle Period, the respective Tax Items shall be utilized under the rules of applicable law (which shall be, in the case of carrybacks to such periods of the Affiliated Group and carrybacks under foreign or State law with respect to which there is no applicable rule regarding the priority of such utilization, the rules contained in Treasury
Regulation (section)1.1502-21T). Any election affecting the carryback or carryforward of any Tax Item of any member of the New Grace Group, or a payment to or by such a member under this Agreement in respect of a carryback or carryforward, including the elections under Section 172(b)(3) of the Code and Treasury Regulation (section)1.1502-21T(b)(3) and 1.172-13(c) with respect to the taxable years of the Affiliated Group that begin on each of January 1, 1997, and January 1, 1998, shall not be made without the consent of Grace-Conn. and shall be made if Grace-Conn. so requests.
(b) Grace-Conn. shall be permitted to file, and Grace shall fully cooperate with Grace-Conn. in connection with, any refund claim. To the extent that such a refund claim (other than a claim arising from a carryback) does not result in a Tax refund (or would not result in a refund if a claim were filed) as the result of an offsetting Packaging Tax Item (including a Packaging Tax Item carried back to a Pre-Distribution Taxable Period or a Straddle Period), Grace shall remit to Grace-Conn. the amount of any decrease in Tax that results or would have resulted from such refund claim.
Section 3.4. Liability for Taxes with Respect to Post-Distribution Periods. Unless otherwise specifically provided in this Agreement or the Distribution Agreement, the New Grace Group shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to periods beginning after the Distribution Date which are attributable to the New Grace Business. Unless otherwise provided in this Agreement, the Packco Group shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to periods beginning after the Distribution Date which are attributable to the Packaging Business.
ARTICLE IV.
INDEMNITY, COOPERATION AND EXCHANGE OF INFORMATION
Section 4.1. Breach. Grace-Conn. shall be liable for and shall indemnify, defend and hold harmless the Packco Indemnitees from and against, and Grace shall be liable for and shall indemnify, defend and hold harmless the New Grace Indemnitees from and against, any payment required to be made as a result of the breach by a member of the New Grace Group or the Packco Group, respectively, of any obligation under this Agreement. If any member of the Packco Group or the New Grace Group, fails to comply in any respect whatsoever with any of its responsibilities under this Agreement relating to promptly
forwarding to any member of the other Group (the "Recipient Group") any communications with and refunds received from any taxing authority ("Forwarding Responsibilities"), then Grace or Grace-Conn., as the case may be, (the "Forwarding Party") shall be liable for and shall indemnify and hold the New Grace Indemnitees or the Packco Indemnitees, as the case may be, harmless from and against any costs or expenses (including, without limitation, Taxes and reasonably incurred lawyers' and accountants' fees) ("Indemnified Amount") incurred by or imposed upon any member of the Recipient Group arising out of, in connection with or relating to such communication; provided, however, that the liability of the Forwarding Party with respect to any one such failure shall be equal to that portion of the Indemnified Amount that a member of the Recipient Group demonstrates is caused (directly or indirectly) by such failure.
Section 4.2. Contests. (a) Whenever a party hereto (the "Indemnitee") becomes aware of the existence of an issue that could increase the liability for any Tax, or decrease the amount of any refund, of the other party hereto or any member of its Group or require a payment hereunder (an "Indemnity Issue"), the Indemnitee shall in good faith promptly give notice to such other party (the "Indemnitor") of such Indemnity Issue. The failure of any Indemnitee to give such notice shall not relieve any Indemnitor of its obligations under this Agreement, except to the extent that such Indemnitor or its affiliate is actually materially prejudiced by such failure to give notice.
(b) The Indemnitor and its representatives, at the Indemnitor's expense, shall be entitled to participate (i) in all conferences, meetings or proceedings with any taxing authority, the subject matter of which is or includes an Indemnity Issue in respect of a Pre-Distribution Period and (ii) in all appearances before any court, the subject matter of which is or includes an Indemnity Issue in respect of a Pre-Distribution Period.
(c) Except as provided in Section 4.2(d), Grace-Conn. shall have the right to decide as between the parties hereto how any Indemnity Issue for a Pre-Distribution Taxable Period is to be dealt with and finally resolved with the appropriate taxing authority and shall control all Proceedings relating thereto. Grace agrees to cooperate with Grace-Conn. in the settlement of any such Indemnity Issue; provided, however, that Grace-Conn. shall act in good faith in the conduct of such Proceedings and shall keep Grace reasonably informed of any developments which can reasonably be expected to affect adversely Grace. Such cooperation shall include permitting Grace-Conn. to litigate or
otherwise resolve any such Indemnity Issue. It is expressly the intention of the parties to this Agreement to take, and the parties shall take, all actions necessary to establish Grace-Conn. as the sole agent for Tax purposes of each member of the Affiliated Group, as if Grace-Conn. were the common parent of the Affiliated Group, with respect to all combined, consolidated and unitary Tax Returns of the Affiliated Group for the Pre-Distribution Taxable Periods.
(d) The parties jointly shall represent the interests of (i) the Affiliated Group in any Proceeding relating to any Straddle Period and (ii) any Foreign Packco Subsidiary in any Proceeding relating to any taxable period that involves an Indemnity Issue. Neither party shall settle any dispute relating to any such period without the consent of the other party (which consent shall not be unreasonably withheld); provided, however, that if either party proposes a settlement and the other party does not consent thereto, the nonconsenting party shall assume control of the Proceeding (and bear all subsequently incurred costs, fees and expenses relating thereto) and the respective liabilities of the parties shall be determined pursuant to Section 6.7 based on the magnitude and likelihood of success of the issues involved in the Proceeding, the reasonableness of the settlement offer, the expense of continuing the Proceeding and other relevant factors. Any other disputes regarding the conduct or resolution of any such Proceeding shall be resolved pursuant to Section 6.7. All costs, fees and expenses paid to third parties in the course of such Proceeding shall be borne by the parties in the same ratio as the ratio in which, pursuant to the terms of this Agreement, the parties would share the responsibility for payment of the Taxes asserted by the taxing authority in its claim or assessment if such claim or assessment were sustained in its entirety; provided, however, that in the event that any party hereto retains its own advisors or experts in connection with any Proceeding, the costs and expenses thereof shall be borne solely by such party.
Section 4.3. Cooperation and Exchange of Information.
(a) Grace shall, and shall cause each appropriate member of the Packco Group to, prepare and submit to Grace-Conn., as soon as practicable, but in no event later than the date that is 30 days after a request from Grace-Conn. (i) all information as Grace-Conn. shall reasonably request to enable Grace-Conn. to file any Conn Prepared Return or prepare any Pre-Distribution Schedule (which information shall be provided in the form and of the quality in which comparable information was
provided prior to the Distribution) and (ii) any Del Prepared Return (including any amended return) for any year within the carryback or carryforward period for an Overall Tax Benefit or Hypothetical Pre-Distribution Overall Tax Benefit that is for the account of Grace-Conn. or for any year with respect to which Grace is entitled to a payment under Section 3.2(a)(v). Grace-Conn. shall bear any out-of-pocket marginal expense paid by any member of the Packco Group in preparing and submitting such information in respect of a Pre-Distribution Schedule relating to a Pre-Distribution Taxable Period, and the parties shall share equally any such expenses in respect of a Pre-Distribution Schedule relating to a Straddle Period.
(b) Each party on behalf of itself and each member of its Group, agrees to provide the other party and the members of such party's Group with such cooperation and information as the second party or its Group members shall reasonably request in connection with the preparation or filing of any Tax Return, Pre-Distribution Schedule or claim for refund not inconsistent with this Agreement or in conducting any Proceeding in respect of Taxes. Such cooperation and information shall include, without limitation, (i) execution and delivery of a power of attorney by Grace or any other member of the Packco Group to Grace-Conn. or another member of the New Grace Group or designation of an officer of Grace-Conn. or another member of the New Grace Group as an officer of Grace or any other member of the Packco Group for the purpose of signing Tax Returns, cashing refund checks and conducting Proceedings if Grace-Conn. could not otherwise exercise its rights under this Agreement with respect to such Returns, refunds or Proceedings, (ii) promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any taxing authority which relate to the Affiliated Group, the Packaging Business or the New Grace Business and (iii) providing copies of all relevant portions of Tax Returns, accompanying schedules, related workpapers, documents relating to rulings or other determinations by taxing authorities, including, without limitation, foreign taxing authorities, and records concerning the ownership and Tax basis of property, which either party may possess. Each party shall make, and shall cause the members of the Packco Group to make, their employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder.
(c) Grace and Grace-Conn. agree to retain all Tax Returns, related schedules and workpapers, and all material records and other documents as required under Section 6001 of
the Code and the regulations promulgated thereunder relating thereto existing on the date hereof or created through the Distribution Date, until the expiration of the statute of limitations (including extensions) of the taxable years to which such Tax Returns and other documents relate and until the Final Determination of any payments which may be required in respect of such years under this Agreement. Grace-Conn. and Grace agree to advise each other promptly of any such Final Determination. Any information obtained under this Section shall be kept confidential, except as may be otherwise necessary in connection with the filing of Tax Returns or claims for refund or in conducting any audit or other proceeding.
(d) If (i) any member of the Packco Group fails to provide any information requested pursuant to Section 4.3(a) by the dates and in the manner specified in Section 4.3(a) hereof or (ii) with respect to information not requested pursuant to Section 4.3(a) hereof, any member of either Group fails to provide any information requested pursuant to this Section 4.3, within a reasonable period, then the requesting party shall have the right to engage a "Big Six" public accounting firm of its choice to gather such information. Each party agrees upon two business days' notice, in the case of a failure to provide information pursuant to Section 4.3 hereof to permit any such "Big Six" public accounting firm full access to all appropriate records or other information in the possession of any member of the party's Group during reasonable business hours, and promptly to reimburse or pay directly all costs and expenses in connection with the engagement of such public accountants.
(e) If any member of either Group supplies information pursuant to this Agreement and an officer of any member of the other Group signs a statement or other document under penalties of perjury in reliance upon the accuracy of such information and so requests, then a duly authorized officer of the member supplying such information shall certify, under penalties of perjury, the accuracy and completeness of the information so supplied. Grace agrees to indemnify and hold harmless each New Grace Indemnitee, and Grace-Conn. agrees to indemnify and hold harmless each Packco Indemnitee, from and against any cost, fine, penalty or other expense of any kind attributable to the gross negligence or willful misconduct of a member of the Packco Group, or New Grace Group, as the case may be, in supplying a member of the other Group with inaccurate or incomplete information.
ARTICLE V.
CERTAIN POST-DISTRIBUTION TRANSACTIONS
Section 5.1 Sealed Air and Packco Group Covenants.
Unless, in the case of any of Sections 5.1(a) through (f) below, Grace has obtained a ruling letter from the IRS or an opinion of nationally recognized counsel to Grace, in either case, to the effect that, without material qualification, such act or omission will not adversely affect the federal income tax consequences of the Distribution to any of Grace, Grace-Conn. or the stockholders of Grace-Conn., as set forth in the Tax Opinions, and the substance of, and basis for, such conclusion in such ruling or opinion is reasonably satisfactory to Grace-Conn. in its good faith solely with regard to preserving the Tax-Free Status of the Distribution (the "Ruling/Opinion Exception"):
(a) No Sealed Air Party at any time nor any member of the Packco Group at any time after the Effective Time shall take any action, or fail or omit to take any action, that would cause any representation made in the Sealed Air Tax Matters Certificate or the Grace Tax Matters Certificate to be untrue in a manner that would have an adverse effect on the Tax-Free Status of the Distribution.
(b) Until the first day after the Restriction Period, the Packco Group shall continue the active conduct of the Packaging Business (the "Active Packco Business"). The Packco Group shall not liquidate, dispose of, or otherwise discontinue the conduct of any material portion of the Active Packco Busi-ness. The Packco Group shall continue the active conduct of the Packaging Business primarily through officers and employees of the Packco Group (and not through independent contractors).
(c) Until the first day after the Restriction Period, no Sealed Air
Party nor any member of the Packco Group shall sell or otherwise issue to any
Person, or redeem or otherwise acquire from any Person (other than any member of
the Packco Group), any Equity Securities of Grace or any other member of the
Packco Group; provided, however, that (i) purchases that, in the aggregate, meet
the requirements of Section 4.05(1)(b) of Revenue Procedure 96-30 shall not
constitute a redemption or acquisition of stock of Grace for purposes of this
Section 5.1(c), (ii) if required by law, any member of the Packco Group may
issue a de minimis number of Equity Securities of such member to any person
in order to qualify such person to serve as
an officer or director of such member and (iii) Grace may issue, as compensation for services or pursuant to the exercise of compensatory stock options, Equity Securities of Grace that do not exceed in the aggregate ten percent of the Equity Securities of Grace.
(d) Until the first day after the Restriction Period, no Sealed Air
Party nor any member of the Packco Group shall (i) solicit any Person to make a
tender offer for, or otherwise acquire or sell, the Equity Securities of Grace,
(ii) participate in or support any unsolicited tender offer for, or other
acquisition, disposition or issuance of, the Equity Securities of Grace or (iii)
approve or otherwise permit any proposed business combination or any transaction
which, in the case of (i), (ii) or (iii), individually or in the aggregate,
together with the transactions contemplated under the Distribution Agreement,
the Merger Agreement, the Benefits Agreement and this Agreement, results in one
or more Persons acquiring (other than in acquisitions not taken into account for
purposes of Section 355(e)) directly or indirectly stock representing a 50
percent or greater interest (within the meaning of Section 355(e) of the Code)
in Grace. In addition, no Sealed Air Party nor any member of the Packco Group
shall at any time, whether before or subsequent to the expiration of the
Restriction Period, engage in any action described in clauses (i), (ii) or (iii)
of the preceding sentence if it is pursuant to an arrangement negotiated (in
whole or in part) prior to the Distribution, even if at the time of the
Distribution it is subject to various conditions, nor shall any such Party or
member take any action, or fail or omit to take any action, that would cause
Section 355(d) or (e) to apply to the Distribution.
(e) Until the first day after the Restriction Period, no Sealed Air Party nor the members of the Packco Group shall sell, transfer, or otherwise dispose of or agree to dispose of assets (including, for such purpose, any shares of capital stock of a Subsidiary) that, in the aggregate, constitute more than 60% of the gross assets of Packco, nor shall they sell, transfer, or otherwise dispose of or agree to dispose of assets (including, for such purpose, any shares of capital stock of a Subsidiary) that, in the aggregate, constitute more than 60% of the consolidated gross assets of the Packco Group. The foregoing sentence shall not apply to sales, transfers, or dispositions of assets in the ordinary course of business. The percentages of gross assets or consolidated gross assets of Packco or the Packco Group, as the case may be, sold, transferred, or otherwise disposed of, shall be based on the
fair market value of the gross assets of Packco and the Packco Group as of the Effective Time, and for this purpose, the values set forth in the Packaging Business Disclosure Letter Balance Sheet shall be conclusive.
(f) Until the first day after the Restriction Period, neither Packco nor its Subsidiaries shall voluntarily dissolve or liquidate or engage in any merger, consolidation or other re-organization. The foregoing sentence shall not apply to transactions in which Grace or Packco acquires another corporation, limited liability company, limited partnership, general partnership or joint venture solely for cash or other consideration that is not Equity Securities. Reorganizations of Grace or Packco or their respective Subsidiaries with their Affiliates, and liquidations of Packco's Affiliates, are not subject to Section 5.1(b) or this Section 5.1(f) to the extent not inconsistent with the structure necessary for the Distribution to qualify for Tax-Free Status.
(g) Until the first day after the Restriction Period, Grace shall furnish Grace-Conn. with a copy of any ruling request that Sealed Air, Grace or any of their Affiliates may file with the IRS and any opinion received that relates to or otherwise reasonably could be expected to have an effect on the Tax-Free Status of the Distribution.
Section 5.2 New Grace Covenants.
Unless, in the case of any of Sections 5.2(a) through (e) below, Grace-Conn. has obtained a ruling letter from the IRS or an opinion of nationally recognized counsel to Grace-Conn., in either case, to the effect that, without material qualification, such act or omission will not adversely affect the federal income tax consequences of the Distribution to any of Grace, Grace-Conn. or the stockholders of Grace-Conn., as set forth in the Tax Opinions, and the substance of, and basis for, such conclusion in such ruling or opinion is reasonably satisfactory to Grace in its good faith solely with regard to preserving the Tax-Free Status of the Distribution:
(a) No member of the New Grace Group shall take any action, or fail or omit to take any action, that would cause any representation made in the Sealed Air Tax Matters Certificate or the Grace Tax Matters Certificate to be untrue in a manner that would have an adverse effect on the Tax-Free Status of the Distribution.
(b) Until the first day after the Restriction Period,
the New Grace Group shall continue the active conduct of one of the Active New Grace Businesses. "Active New Grace Businesses" shall mean each of the Grace Davison business and the Grace Construction Business. The New Grace Group may dispose of, liquidate or discontinue the conduct of the Grace Davison business or the Grace Construction Products business if it actively continues the conduct of the other. The New Grace Group shall continue the active conduct of at least one of the Active New Grace Businesses primarily through officers and employees of the New Grace Group (and not through independent contractors).
(c) Until the first day after the Restriction Period, no member of the New Grace Group shall sell or otherwise issue to any Person, or redeem or otherwise acquire from any Person (other than any member of the New Grace Group), any Equity Securities of New Grace or any other member of the New Grace Group; provided, however, that (i) purchases that, in the aggregate, meet the requirements of Section 4.05(1)(b) of Revenue Procedure 96-30 shall not constitute a redemption or acquisition of stock of New Grace for purposes of this Section 5.2(c), (ii) if required by law, any member of the New Grace Group may issue a de minimis number of Equity Securities of such member to any person in order to qualify such person to serve as an officer or director of such member and (iii) New Grace may, pursuant to shareholder-approved equity compensation plans, issue, as compensation for services or pursuant to the exercise of compensatory stock options, Equity Securities of New Grace.
(d) Until the first day after the Restriction Period, no member of the New Grace Group shall (i) solicit any Person to make a tender offer for, or otherwise acquire or sell, the Equity Securities of New Grace, (ii) participate in or support any unsolicited tender offer for, or other acquisition, disposition or issuance of, the Equity Securities of New Grace or (iii) approve or otherwise permit any proposed business combination or any transaction which, in the case of (i), (ii) or (iii), individually or in the aggregate, together with the transactions contemplated under the Distribution Agreement, the Merger Agreement, the Benefits Agreement and this Agreement, results in one or more Persons acquiring (other than in acquisitions not taken into account for purposes of Section 355(e)) directly or indirectly stock representing a 50 percent or greater interest (within the meaning of Section 355(e) of the Code) in New Grace. In addition, no member of the New Grace Group shall at any time, whether before or subsequent to the expiration of the Restriction Period, engage in any action
described in clauses (i), (ii) or (iii) of the preceding sentence if it is pursuant to an arrangement negotiated (in whole or in part) prior to the Distribution, even if at the time of the Distribution it is subject to various conditions, nor shall any such member take any action, or fail or omit to take any action, that would cause Section 355(d) or (e) of the Code to apply to the Distribution.
(e) Until the first day after the Restriction Period, no member of the New Grace Group shall sell, transfer, or otherwise dispose of or agree to dispose of assets (including, for such purpose, any shares of capital stock of a Subsidiary) that, in the aggregate, constitute more than 60% of the gross assets of New Grace, nor shall they sell, transfer, or otherwise dispose of or agree to dispose of assets (including, for such purpose, any shares of capital stock of a Subsidiary) that, in the aggregate, constitute more than 60% of the consolidated gross assets of the New Grace Group. The foregoing sentence shall not apply to sales, transfers, or dispositions of assets in the ordinary course of business or to a sale, transfer or disposition of any or all of the Discontinued Businesses and either of the Active New Grace Businesses; provided, however, that in the event of a sale, transfer or disposition of one of the Active New Grace Businesses, the retained Active New Grace Business shall be conducted by a member of the New Grace Group at substantially the same level as on the Distribution Date. The percentages of gross assets or consolidated gross assets of New Grace or the New Grace Group, as the case may be, sold, transferred, or otherwise disposed of, shall be based on the fair market value of the gross assets of New Grace and the New Grace Group as of the Effective Time, and for this purpose, the values set forth in the Registration Statements shall be conclusive.
(f) Until the first day after the Restriction Period, Grace-Conn. shall furnish Grace with a copy of any ruling request that Grace-Conn. or any of its Affiliates may file with the IRS and any opinion received that relates to or otherwise reasonably could be expected to have an effect on the Tax-Free Status of the Distribution.
Section 5.3. Responsibility for Taxes.
(a) Sealed Air and Grace agree to indemnify and hold the Grace-Conn.
Indemnitees harmless from and against all Indemnifiable Losses resulting from
(x) any Action which causes the Distribution to fail to have Tax-Free Status or
(y) the Merger failing to qualify as a reorganization under Section 368
of the Code. An "Action" shall mean any act or omission which fails to comply with any of the representations in the Sealed Air Tax Matters Certificate or the covenants in Section 5.1 and any act or omission which would fail to comply with any of the covenants in Section 5.1 but for compliance with the Ruling/Opinion Exception. An "Action" shall also include an action or omission which would be a breach of the covenant contained in the first sentence of Section 5.1(d), if such covenant were in effect until the day which is five years after the Effective Time instead of until the first day after the Restriction Period.
(b) Grace-Conn. agrees to indemnify and hold the Packco Indemnitees harmless from and against any Tax resulting from the failure of the Distribution to have Tax-Free Status, except where such failure is attributable to an Action.
(c) For purposes of Sections 5.1 and 5.2 hereof, when a tax opinion or ruling of one party (the "Transaction Party") is required to be reasonably satisfactory to the other party (the "Reviewing Party"), the Reviewing Party at the request of the Transaction Party shall designate nationally recognized counsel to review such opinion or ruling without revealing the substance of the underlying transaction to the Reviewing Party and the concurrence of such outside counsel to the sufficiency of such opinion or ruling shall constitute "reasonable satisfaction" to the Reviewing Party for purposes of this Agreement.
Section 5.4. Injunction. The parties hereto agree that the payment of monetary compensation would not be an adequate remedy for a breach of the obligations contained in Article V hereof, and each party consents to the issuance and entry of an injunction against the taking of any action by it or a member of its Group that would constitute such a breach; provided, however, that the foregoing shall be without prejudice to and shall not constitute a waiver of any other remedy either party may be entitled to at law or at equity hereunder.
Section 5.5. Distribution. For purposes of this Article V only, "Distribution" shall mean the contribution by Grace-Conn. of assets and liabilities to Packco, the distribution of cash by Packco to Grace-Conn., the distribution by Grace-Conn. of the stock of Packco to Grace, the contribution of cash and the stock of Grace-Conn. to New Grace, the loan from New Grace to Grace-Conn. and the distribution by Grace of the stock of New Grace to the shareholders of Grace, each as provided in the Distribution Agreement.
ARTICLE VI.
MISCELLANEOUS
Section 6.1. Expenses. Unless otherwise expressly provided in this Agreement, the Distribution Agreement or the Merger Agreement, each party shall bear any and all expenses that arise from their respective obligations under this Agreement.
Section 6.2. Foreign Transfer Taxes. Adjusted Foreign Transfer Taxes shall be shared by the parties as provided in the Distribution Agreement. Audit adjustments and Final Determina-tions of such Taxes shall be governed by the Distribution Agree-ment. This Agreement governs responsibilities of the parties with respect to filing Tax Returns relating to Foreign Transfer Taxes, paying Foreign Transfer Taxes reflected on such Tax Returns to the applicable governmental authority and conducting Proceedings relating to Foreign Transfer Taxes. For purposes of determining indemnity and reimbursement obligations of the parties under this Agreement, Tax Items arising as a result of the Foreign Transfers (but not Tax Items arising from any actual distribution of Subsidiary Excess Cash) shall be disregarded, and the Pre-Distribution Schedules shall not reflect such Tax Items.
Section 6.3. Payments Paid or Received on Behalf of Indemnitees; Right to Designate Payee. Each of Grace-Conn. and Grace shall be entitled to designate an Affiliate of such party as payee with respect to any payment that would otherwise be made to Grace-Conn. or Grace, respectively, under this Agreement. Any payment received by Grace-Conn. or Grace, respectively, or its respective designees shall be received on behalf of the relevant Grace-Conn. Indemnitees or Packco Indemnitees.
Section 6.4. Foreign Exchange Rate. If any amount required to be paid hereunder is determined by reference to a Tax, Tax refund, Tax Benefit or Tax Detriment that is denominated in a currency other than United States dollars, such payment shall be made in United States dollars and the amount thereof shall be computed using the Foreign Exchange Rate for such currency determined as of the date that such Tax is paid, such Tax refund is received or such Tax Benefit or Tax Detriment reduces or increases the amount of Tax or Tax refund that would otherwise be paid or received.
Section 6.5. Amendment. This Agreement may not be amended except by an agreement in writing, signed by the parties hereto. Anything in this Agreement or the Distribution Agreement to the contrary notwithstanding, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the Distribution Agreement, the provisions of this Agreement shall control.
Section 6.6. Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand including overnight business courier or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received:
(a) To Grace-Conn. or any member of the New Grace Group:
W. R. Grace & Co.-Conn.
One Town Center Road
Boca Raton, Florida 33486-1010
Attention: Secretary
Fax: (561) 362-1635
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Andrew R. Brownstein, Esq.
Fax: (212) 403-2000
(b) To Grace or any member of the Packco Group:
care of Sealed Air
Park 80 East
Saddle Brook, New Jersey 07663
Attention: President
Fax: (201) 703-4152
with a copy to:
Davis Polk & Wardwell
450 Lexington Ave.
New York, New York 10017
Attention: Christopher Mayer, Esq. Fax: (212) 450-4800
Section 6.7. Resolution of Disputes. Any disputes between the parties with respect to this Agreement regarding the practice and preparation of returns or the calculation of amounts shall be resolved by a "Big Six" public accounting firm whose determination shall be conclusive and binding on the parties. The fees and expenses of such firm shall be shared equally by Grace-Conn. and Grace, except as otherwise provided herein. Any other disputes shall be resolved by a "Big Six" public accounting firm or a law firm or by any other procedure that the parties may choose.
Section 6.8. Application to Present and Future Subsidiaries. This Agreement is being entered into by Grace-Conn. and Grace on behalf of themselves and each member of the New Grace Group and Packco Group, respectively. This Agreement shall constitute a direct obligation of each such member. Grace-Conn. and Grace hereby guarantee the performance of all actions, agreements and obligations provided for under this Agreement of each member of the New Grace Group and the Packco Group, respectively. Grace-Conn. and Grace shall, upon the written request of the other, cause any of their respective Group members formally to execute this Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of any of the corporations bound hereby.
Section 6.9. Term. This Agreement shall commence on the date of execution indicated below and shall continue in effect until otherwise agreed to in writing by Grace-Conn. and Grace, or their successors.
Section 6.10. Titles and Headings. Titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part or to affect the meaning or interpretation of this Agreement.
Section 6.11. Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the
obligations of the parties hereunder shall be specifically enforceable.
Section 6.12. Governing Law. This Agreement shall be governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.
W. R. GRACE & CO.
By: ____________________________
Name:
Title:
W. R. GRACE & CO.-CONN.
By: ____________________________
Name:
Title:
SEALED AIR CORPORATION
By: ____________________________
Name:
Title:
Exhibit A
Argentina
Australia
Belgium
Brazil
Canada
Chile
Colombia
Germany
Hong Kong
Italy
Japan
Mexico
Netherlands
New Zealand
Poland
Russia
South Africa
Spain
Sweden
United Kingdom
Venezuela
EXHIBIT 10.4
W. R. GRACE & CO.
(FORMERLY NAMED GRACE SPECIALTY CHEMICALS, INC.)
1998 STOCK INCENTIVE PLAN
1. Purposes. The purposes of this Plan are (a) to enable Key Persons to have incentives related to Common Stock, (b) to encourage Key Persons to increase their interest in the growth and prosperity of the Company and to stimulate and sustain constructive and imaginative thinking by Key Persons, (c) to further the identity of interests of Key Persons with the interests of the Company's stockholders, and (d) to induce the service or continued service of Key Persons and to enable the Company to compete with other organizations offering similar or other incentives in obtaining and retaining the services of the most highly qualified individuals.
2. Definitions. When used in this Plan, the following terms shall have the meanings set forth in this section 2.
Board of Directors: The Board of Directors of the Company.
cessation of service (or words of similar import): When a person ceases to be an employee of the Company or a Subsidiary. For purposes of this definition, if an entity that was a Subsidiary ceases to be a Subsidiary, persons who immediately thereafter remain employees of that entity (and are not employees of the Company or an entity that is a Subsidiary) shall be deemed to have ceased service.
Change in Control: Shall be deemed to have occurred if (a) the Company determines that any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, has become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more of the outstanding Common Stock of the Company (provided, however, that a Change in Control shall not be deemed to have occurred if such person has become the beneficial owner of 20% or more of the outstanding Common Stock as the result of a sale of Common Stock by the Company that has been approved by the Board of Directors); (b) individuals who are "Continuing Directors" (as defined below) cease to constitute a majority of any class of the Board of Directors; (c) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Corporate Transaction"), in each case, with respect to which the stockholders of the Company immediately prior to such Corporate Transaction do not, immediately after the Corporate Transaction, own 50% or more of the combined voting power of the corporation resulting from such Corporate Transaction; or (d) the stockholders of the Company approve a complete liquidation or dissolution of the Company. "Continuing
EXHIBIT 10.4
Director" means any member of the Board of Directors who was such a member on the date on which this Plan was approved by the Board of Directors and any successor to such a Continuing Director who is approved as a nominee or elected to succeed a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors.
Change in Control Price: The higher of (a) the highest reported sales price, regular way, as reported in The Wall Street Journal or another newspaper of general circulation, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (b) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Common Stock paid in such tender or exchange offer or Corporate Transaction; provided, however, that in the case of Incentive Stock Options, the Change in Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option is exercised. To the extent that the consideration paid in any Corporate Transaction or other transaction described above consists in whole or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board of Directors.
Code: The Internal Revenue Code of 1986, as amended.
Committee: The Compensation Committee of the Board of Directors of the Company or any other committee designated by the Board of Directors to administer stock incentive and stock option plans of the Company and the Subsidiaries generally or this Plan specifically.
Common Stock: The common stock of the Company, par value $.01 per share, or such other class of shares or other securities or property as may be applicable pursuant to the provisions of section 8.
Company: W. R. Grace & Co., a Delaware corporation formerly named Grace Specialty Chemicals, Inc.
Continuing Director: The meaning set forth in the definition of "Change in Control" above.
Corporate Transaction: The meaning set forth in the definition of "Change in Control" above.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exercise Period: The meaning set forth in section 14(b) of this Plan.
EXHIBIT 10.4
Fair Market Value: (a) The mean between the high and low sales prices of a share of Common Stock in New York Stock Exchange composite transactions on the applicable date, as reported in The Wall Street Journal or another newspaper of general circulation, or, if no sales of shares of Common Stock were reported for such date, for the next preceding date for which such sales were so reported, or (b) the fair market value of a share of Common Stock determined in accordance with any other reasonable method approved by the Committee.
Incentive Stock Option: A stock option that states that it is an incentive stock option and that is intended to meet the requirements of Section 422 of the Code and the regulations thereunder applicable to incentive stock options, as in effect from time to time.
issuance (or words of similar import): The issuance of authorized but unissued Common Stock or the transfer of issued Common Stock held by the Company or a Subsidiary.
Key Person: An employee of the Company or a Subsidiary who, in the opinion of the Committee, has contributed or can contribute significantly to the growth and successful operations of the Company or one or more Subsidiaries. The grant of a Stock Incentive to an employee shall be deemed a determination by the Committee that such person is a Key Person.
Nonstatutory Stock Option: An Option that is not an Incentive Stock Option.
Option: An option granted under this Plan to purchase shares of Common Stock.
Option Agreement: An agreement setting forth the terms of an Option.
Plan: The 1998 Stock Incentive Plan of the Company herein set forth, as the same may from time to time be amended.
service: Service to the Company or a Subsidiary as an employee. "To serve" has a correlative meaning.
Spread: The meaning set forth in section 14(b) of this Plan.
Stock Award: An issuance of shares of Common Stock or an undertaking (other than an Option) to issue such shares in the future.
Stock Incentive: A stock incentive granted under this Plan in one of the forms provided for in section 3.
Subsidiary: A corporation (or other form of business association) of which shares (or other ownership interests) having 50% or more of the voting power regularly entitled to vote for directors (or equivalent management rights) are owned, directly or
EXHIBIT 10.4
indirectly, by the Company, or any other entity designated as such by the Board of Directors; provided, however, that in the case of an Incentive Stock Option, the term "Subsidiary" shall mean a Subsidiary (as defined by the preceding clause) that is also a "subsidiary corporation" as defined in Section 424(f) of the Code and the regulations thereunder, as in effect from time to time.
3. Grants of Stock Incentives. (a) Subject to the provisions of this Plan, the Committee may at any time and from time to time grant Stock Incentives under this Plan to, and only to, Key Persons.
(b) The Committee may grant a Stock Incentive to be effective at a specified future date or upon the future occurrence of a specified event. For the purposes of this Plan, any such Stock Incentive shall be deemed granted on the date it becomes effective. An agreement or other commitment to grant a Stock Incentive that is to be effective in the future shall not be deemed the grant of a Stock Incentive until the date on which such Stock Incentive becomes effective.
(c) A Stock Incentive may be granted in the form of:
(i) a Stock Award, or
(ii) an Option, or
(iii) a combination of a Stock Award and an Option.
4. Stock Subject to this Plan. (a) Subject to the provisions of paragraph (c) of this section 4 and the provisions of section 8, the maximum number of shares of Common Stock that may be issued pursuant to Stock Incentives granted under this Plan shall not exceed Six Million (6,000,000).
(b) Authorized but unissued shares of Common Stock and issued shares of Common Stock held by the Company or a Subsidiary, whether acquired specifically for use under this Plan or otherwise, may be used for purposes of this Plan.
(c) If any shares of Common Stock subject to a Stock Incentive shall not be issued and shall cease to be issuable because of the termination, in whole or in part, of such Stock Incentive or for any other reason, or if any such shares shall, after issuance, be reacquired by the Company or a Subsidiary from the recipient of such Stock Incentive, or from the estate of such recipient, for any reason, such shares shall no longer be charged against the limitation provided for in paragraph (a) of this section 4 and may again be made subject to Stock Incentives.
(d) Of the total number of shares specified in paragraph (a) of this section 4 (subject to adjustment as specified therein), during the term of this Plan as defined in section 9, (i) no more than 15% may be subject to Options granted to any one Key
EXHIBIT 10.4
Person and (ii) no more than 15% may be subject to Stock Incentives granted to any one Key Person.
5. Stock Awards. Except as otherwise provided in section 12, Stock Incentives in the form of Stock Awards shall be subject to the following provisions:
(a) For purposes of this Plan, all shares of Common Stock subject to a Stock Award shall be valued at not less than 100% of the Fair Market Value of such shares on the date such Stock Award is granted, regardless of whether or when such shares are issued pursuant to such Stock Award and whether or not such shares are subject to restrictions affecting their value.
(b) Shares of Common Stock subject to a Stock Award may be issued to a Key Person at the time the Stock Award is granted, or at any time subsequent thereto, or in installments from time to time. In the event that any such issuance shall not be made at the time the Stock Award is granted, the Stock Award may provide for the payment to such Key Person, either in cash or shares of Common Stock, of amounts not exceeding the dividends that would have been payable to such Key Person in respect of the number of shares of Common Stock subject to such Stock Award (as adjusted under section 8) if such shares had been issued to such Key Person at the time such Stock Award was granted. Any Stock Award may provide that the value of any shares of Common Stock subject to such Stock Award may be paid in cash, on each date on which shares would otherwise have been issued, in an amount equal to the Fair Market Value on such date of the shares that would otherwise have been issued.
(c) The material terms of each Stock Award shall be determined by the Committee. Each Stock Award shall be evidenced by a written instrument consistent with this Plan. It is intended that a Stock Award would be (i) made contingent upon the attainment of one or more specified performance objectives and/or (ii) subject to restrictions on the sale or other disposition of the Stock Award or the shares subject thereto for a period of three or more years; provided, however, that (x) a Stock Award may include restrictions and limitations in addition to those provided for herein and (y) of the total number of shares specified in paragraph (a) of section 4 (subject to adjustment as specified therein), up to 3% may be subject to Stock Awards not subject to clause (i) or clause (ii) of this sentence.
(d) A Stock Award shall be granted for such lawful consideration as may be provided for therein.
6. Options. Except as otherwise provided in section 12, Stock Incentives in the form of Options shall be subject to the following provisions:
(a) The purchase price per share of Common Stock shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted. The purchase price and any withholding tax that may be due on the exercise of an Option may be paid in cash, or, if so provided in the Option Agreement, (i) in shares of Common Stock (including shares issued pursuant to the Option being exercised and
EXHIBIT 10.4
shares issued pursuant to a Stock Award granted subject to restrictions as provided for in paragraph (c) of section 5), or (ii) in a combination of cash and such shares; provided, however, that no shares of Common Stock delivered in payment of the purchase price may be "immature shares," as determined in accordance with generally accepted accounting principles in effect at the time. Any shares of Common Stock delivered to the Company in payment of the purchase price or withholding tax shall be valued at their Fair Market Value on the date of exercise. No certificate for shares of Common Stock shall be issued upon the exercise of an Option until the purchase price for such shares has been paid in full.
(b) If so provided in the Option Agreement, the Company shall, upon the request of the holder of the Option and at any time and from time to time, cancel all or a portion of the Option then subject to exercise and either (i) pay the holder an amount of money equal to the excess, if any, of the Fair Market Value, at such time or times, of the shares subject to the portion of the Option so canceled over the purchase price for such shares, or (ii) issue shares of Common Stock to the holder with a Fair Market Value, at such time or times, equal to such excess, or (iii) pay such excess by a combination of money and shares.
(c) Each Option may be exercisable in full at the time of grant, or may become exercisable in one or more installments and at such time or times or upon the occurrence of such events, as may be specified in the Option Agreement, as determined by the Committee. Unless otherwise provided in the Option Agreement, an Option, to the extent it is or becomes exercisable, may be exercised at any time in whole or in part until the expiration or termination of such Option.
(d) Each Option shall be exercisable during the life of the holder only by him and, after his death, only by his estate or by a person who acquires the right to exercise the Option by will or the laws of descent and distribution. An Option, to the extent that it shall not have been exercised or canceled, shall terminate as follows after the holder ceases to serve: (i) if the holder shall voluntarily cease to serve without the consent of the Committee or shall have his service terminated for cause, the Option shall terminate immediately upon cessation of service; (ii) if the holder shall cease to serve by reason of death, incapacity or retirement under a retirement plan of the Company or a Subsidiary, the Option shall terminate three years after the date on which he ceased to serve; and (iii) except as provided in the next sentence, in all other cases the Option shall terminate three months after the date on which the holder ceased to serve unless the Committee shall approve a longer period (which approval may be given before or after cessation of service) not to exceed three years. If the holder shall die or become incapacitated during the three-month period (or such longer period as the Committee may approve) referred to in the preceding clause (iii), the Option shall terminate three years after the date on which he ceased to serve. A leave of absence for military or governmental service or other purposes shall not, if approved by the Committee (which approval may be given before or after the leave of absence commences), be deemed a cessation of service within the meaning of this paragraph (d). Notwithstanding the foregoing provisions of this paragraph (d) or any other provision of this Plan, no Option shall
EXHIBIT 10.4
be exercisable after expiration of a period of ten years and one month from the date the Option is granted. Where a Nonstatutory Option is granted for a term of less than ten years and one month, the Committee may, at any time prior to the expiration of the Option, extend its term for a period ending not later than ten years and one month from the date the Option was granted. Such an extension shall not be deemed the grant of a new Option under this Plan.
(e) No Option nor any right thereunder may be assigned or transferred except by will or the laws of descent and distribution and except, in the case of a Nonstatutory Option, pursuant to a qualified domestic relations order (as defined in the Code), unless otherwise provided in the Option Agreement.
(f) An Option may, but need not, be an Incentive Stock Option. All shares of Common Stock that may be made subject to Stock Incentives under this Plan may be made subject to Incentive Stock Options; provided, however, that (i) no Incentive Stock Option may be granted more than ten years after the effective date of this Plan, as provided in section 9; and (ii) the aggregate Fair Market Value (determined as of the time an Incentive Stock Option is granted) of the shares subject to each installment becoming exercisable for the first time in any calendar year under Incentive Stock Options granted on or after January 1, 1987 (under all plans, including this Plan, of his employer corporation and its parent and subsidiary corporations) to the Key Person to whom such Incentive Stock Option is granted shall not exceed $100,000.
(g) The material terms of each Option shall be determined by the Committee. Each Option shall be evidenced by a written instrument consistent with this Plan, and shall specify whether the Option is an Incentive Stock Option or a Nonstatutory Option. An Option may include restrictions and limitations in addition to those provided for in this Plan.
(h) Options shall be granted for such lawful consideration as may be provided for in the Option Agreement.
7. Combination of Stock Awards and Options. Stock Incentives authorized by paragraph (c)(iii) of section 3 in the form of combinations of Stock Awards and Options shall be subject to the following provisions: (a) A Stock Incentive may be a combination of any form of Stock Award and any form of Option; provided, however, that the terms and conditions of such Stock Incentive pertaining to a Stock Award are consistent with section 5 and the terms and conditions of such Stock Incentive pertaining to an Option are consistent with section 6.
(b) Such combination Stock Incentive shall be subject to such other terms and conditions as may be specified therein, including without limitation a provision terminating in whole or in part a portion thereof upon the exercise in whole or in part of another portion thereof.
EXHIBIT 10.4
(c) The material terms of each combination Stock Incentive shall be determined by the Committee. Each combination Stock Incentive shall be evidenced by a written instrument consistent with this Plan.
8. Adjustment Provisions. (a) In the event that any reclassification, split-up or consolidation of the Common Stock shall be effected, or the outstanding shares of Common Stock are, in connection with a merger or consolidation of the Company or a sale by the Company of all or a part of its assets, exchanged for a different number or class of shares of stock or other securities or property of the Company or for shares of the stock or other securities or property of any other corporation or person, or a record date for determination of holders of Common Stock entitled to receive a dividend payable in Common Stock shall occur, (i) the number, kind and class of shares or other securities or property that may be issued pursuant to Stock Incentives thereafter granted, (ii) the number, kind and class of shares or other securities or property that have not been issued under outstanding Stock Incentives, (iii) the purchase price to be paid per share or other unit under outstanding Stock Incentives, and (iv) the price to be paid per share or other unit by the Company or a Subsidiary for shares or other securities or property issued pursuant to Stock Incentives that are subject to a right of the Company or a Subsidiary to re-acquire such shares or other securities or property, shall in each case be equitably adjusted as determined by the Committee.
(b) In the event that there shall occur any spin-off or other distribution of assets of the Company to its shareholders (including without limitation an extraordinary dividend), (i) the number, kind and class of shares or other securities or property that may be issued pursuant to Stock Incentives thereafter granted, (ii) the number, kind and class of shares or other securities or property that have not been issued under outstanding Stock Incentives, (iii) the purchase price to be paid per share or other unit under outstanding Stock Incentives, and (iv) the price to be paid per share or other unit by the Company or a Subsidiary for shares or other securities or property issued pursuant to Stock Incentives that are subject to a right of the Company or a Subsidiary to re-acquire such shares or other securities or property, shall in each case be equitably adjusted as determined by the Committee.
9. Term. This Plan shall be deemed adopted and shall become effective on the date on which the Common Stock is distributed to the holders of the common stock of W. R. Grace & Co., a Delaware corporation subsequently renamed "Sealed Air Corporation." No Stock Incentives shall be granted under this Plan after the tenth anniversary of such date.
10. Administration. (a) This Plan shall be administered by the Committee, which shall have full authority to act in the matter of selection of Key Persons and in granting Stock Incentives to them and such other authority as is granted to the Committee by this Plan. Notwithstanding any other provision of this Plan, the Board of Directors may exercise any and all powers of the Committee with respect to this Plan, except to the extent that the possession or exercise of any power by the Board of
EXHIBIT 10.4
Directors would cause any Stock Incentive to become subject to, or to lose an exemption from, Section 162(m) of the Code or Section 16(b) of the Exchange Act.
(b) The Committee may establish such rules and regulations, not inconsistent with the provisions of this Plan, as it deems necessary to determine eligibility to be granted Stock Incentives under this Plan and for the proper administration of this Plan, and may amend or revoke any rule or regulation so established. The Committee may make such determinations and interpretations under or in connection with this Plan as it deems necessary or advisable. All such rules, regulations, determinations and interpretations shall be binding and conclusive upon the Company, its Subsidiaries, its shareholders and its directors, officers and employees, and upon their respective legal representatives, beneficiaries, successors and assigns, and upon all other persons claiming under or through any of them.
(c) Members of the Board of Directors and members of the Committee acting under this Plan shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability in the performance of their duties, except as otherwise provided by applicable law.
11. General Provisions. (a) Nothing in this Plan or in any instrument executed pursuant hereto shall confer upon any person any right to continue in the service of the Company or a Subsidiary, or shall affect the right of the Company or of a Subsidiary to terminate the service of any person with or without cause.
(b) No shares of Common Stock shall be issued pursuant to a Stock Incentive unless and until all legal requirements applicable to the issuance of such shares have, in the opinion of counsel to the Company, been complied with. In connection with any such issuance, the person acquiring the shares shall, if requested by the Company, give assurances, satisfactory to counsel to the Company, in respect of such matters as the Company or a Subsidiary may deem desirable to assure compliance with all applicable legal requirements.
(c) No person (individually or as a member of a group), and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any shares of Common Stock allocated or reserved for the purposes of this Plan or subject to any Stock Incentive except as to such shares of Common Stock, if any, as shall have been issued to him.
(d) In the case of a grant of a Stock Incentive to a Key Person who is employed by a Subsidiary, such grant may provide for the issuance of the shares covered by the Stock Incentive to the Subsidiary, for such consideration as may be provided, upon the condition or understanding that the Subsidiary will transfer the shares to the Key Person in accordance with the terms of the Stock Incentive.
(e) In the event the laws of a country in which the Company or a Subsidiary has employees prescribe certain requirements for Stock Incentives to qualify for advantageous tax treatment under the laws of that country (including, without limitation,
EXHIBIT 10.4
laws establishing options analogous to Incentive Stock Options), the Committee, may, for the benefit of such employees, amend, in whole or in part, this Plan and may include in such amendment additional provisions for the purposes of qualifying the amended plan and Stock Incentives granted thereunder under such laws; provided, however, that (i) the terms and conditions of a Stock Incentive granted under such amended plan may not be more favorable to the recipient than would be permitted if such Stock Incentive had been granted under this Plan as herein set forth, (ii) all shares allocated to or utilized for the purposes of such amended plan shall be subject to the limitations of section 4, and (iii) the provisions of the amended plan may restrict but may not extend or amplify the provisions of sections 9 and 13.
(f) The Company or a Subsidiary may make such provisions as either may deem appropriate for the withholding of any taxes that the Company or a Subsidiary determines is required to be withheld in connection with any Stock Incentive.
(g) Nothing in this Plan is intended to be a substitute for, or shall preclude or limit the establishment or continuation of, any other plan, practice or arrangement for the payment of compensation or benefits to directors, officers or employees generally, or to any class or group of such persons, that the Company or any Subsidiary now has or may hereafter put into effect, including, without limitation, any incentive compensation, retirement, pension, group insurance, stock purchase, stock bonus or stock option plan.
12. Acquisitions. If the Company or any Subsidiary should merge or
consolidate with, or purchase stock or assets or otherwise acquire the whole or
part of the business of, another entity, the Company, upon the approval of the
Committee, (a) may assume, in whole or in part and with or without modifications
or conditions, any stock incentives granted by the acquired entity to its
directors, officers, employees or consultants in their capacities as such, or
(b) may grant new Stock Incentives in substitution therefor. Any such assumed or
substitute Stock Incentives may contain terms and conditions inconsistent with
the provisions of this Plan (including the limitations set forth in paragraph
(d) of section 4), including additional benefits for the recipient; provided,
however, that if such assumed or substitute Stock Incentives are Incentive Stock
Options, such terms and conditions are permitted under the plan of the acquired
entity. For the purposes of any applicable plan provision involving time or a
date, a substitute Stock Incentive shall be deemed granted as of the date of
grant of the original stock incentive.
13. Amendments and Termination. (a) This Plan may be amended or terminated by the Board of Directors upon the recommendation of the Committee; provided, however, that, without the approval of the stockholders of the Company, no amendment shall be made which (i) causes this Plan to cease to comply with applicable law, (ii) permits any person who is not a Key Person to be granted a Stock Incentive (except as otherwise provided in section 12), (iii) amends the provisions of paragraph (d) of section 4, paragraph (a) of section 5 or paragraph (a) or paragraph (f) of section 6 to permit shares to be valued at, or to have a purchase price of,
EXHIBIT 10.4
respectively, less than the percentage of Fair Market Value specified therein,
(iv) amends section 9 to extend the date set forth therein, or (v) amends this
section 13.
(b) No amendment or termination of this Plan shall adversely affect any Stock Incentive theretofore granted, and no amendment of any Stock Incentive granted pursuant to this Plan shall adversely affect such Stock Incentive, without the consent of the holder thereof.
14. Change in Control Provisions. (a) Notwithstanding any other provision of this Plan to the contrary, in the event of a Change in Control:
(i) Any Options outstanding as of the date on which such Change in Control occurs, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; and
(ii) All restrictions and deferral limitations applicable to Stock Incentives shall lapse, and Stock Incentives shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant.
(b) Notwithstanding any other provision of this Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, the holder of an Option shall have the right, in lieu of the payment of the purchase price for the shares of Common Stock being purchased under the Option, by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Option to the Company and to receive cash, within 30 days after such notice, in an amount equal to the amount by which the Change in Control Price per share of Common Stock on the date of such election shall exceed the purchase price per share of Common Stock under the Option (the "Spread") multiplied by the number of shares of Common Stock subject to the Option as to which the right subject to this Section 14(b) shall have been exercised.
(c) Notwithstanding any other provision of this Plan, if any right granted pursuant to this Plan to receive cash in respect of a Stock Incentive would make a Change in Control transaction ineligible for pooling-of-interests accounting that, but for the nature of such grant, would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for such cash Common Stock with a Fair Market Value equal to the amount of such cash.
EXHIBIT 10.5
W. R. GRACE & CO.
(formerly named Grace Specialty Chemicals, Inc.)
1998 STOCK PLAN FOR NONEMPLOYEE DIRECTORS
1. Purposes. The purposes of this Plan are (a) to enable the Company to attract and retain the most highly qualified individuals to serve as Nonemployee Directors, (b) to link the compensation of Nonemployee Directors to the performance of the Common Stock, and (c) to unite the interests of Nonemployee Directors with those of the Company's shareholders.
2. Definitions. When used in this Plan, the following terms shall have the meanings set forth in this section 2.
Board of Directors: The Board of Directors of the Company.
Common Stock: The common stock of the Company, par value $.01 per share, or such other class of shares or other securities or property as may be applicable pursuant to the provisions of section 7.
Company: W. R. Grace & Co., a Delaware corporation formerly named Grace Specialty Chemicals, Inc.
Fair Market Value: (a) The mean between the high and low sales prices of a share of Common Stock in New York Stock Exchange composite transactions for the applicable date, as reported in The Wall Street Journal or another newspaper of general circulation, or, if no sales of shares of Common Stock were reported for such date, for the next preceding date for which such sales were so reported, or (b) the fair market value of a share of Common Stock determined in accordance with any other reasonable method.
Fee: A fee for attendance by a Nonemployee Director at a meeting of the Board of Directors or a committee thereof.
issuance (or words of similar import): (a) The issuance of authorized but unissued Common Stock, (b) the transfer of issued Common Stock held by the Company or a Subsidiary, or (c) the delivery of Common Stock purchased for use under this Plan by an agent independent of the Company.
Nonemployee Director: An individual who is (or was) a director of the Company and who is (or was) not employed by the Company or a Subsidiary while serving as a director of the Company.
Plan: The 1998 Stock Plan for Nonemployee Directors herein set forth, as the same may from time to time be amended.
Retainer: An annual retainer for service as a Nonemployee Director or for service as the chair of a committee of the Board of Directors.
service: Service as a Nonemployee Director. "To serve" has a correlative meaning.
Service Period: A calendar year, or any other period designated by the Board of Directors, in respect of which a Nonemployee Director is to receive a Retainer and/or Fees.
Subsidiary: A corporation (or other form of business association) of which shares (or other ownership interests) having 50% or more of the voting power regularly entitled to vote for directors (or equivalent management rights) are owned, directly or indirectly, by the Company.
3. Eligibility and Participation. All Nonemployee Directors are eligible to participate in the Plan. Each Nonemployee Director will participate as described in section 5.
4. Stock Subject to this Plan.
(a) Subject to the provisions of paragraphs (b) and (c) of this section 4 and the provisions of section 7, the maximum number of shares of Common Stock that may be issued under this Plan shall be One Hundred Fifty Thousand (150,000) shares of Common Stock.
(b) Authorized but unissued shares of Common Stock and issued shares of Common Stock held by the Company or a Subsidiary, whether acquired specifically for use under this Plan or otherwise, may be used for purposes of this Plan. In addition, shares of outstanding Common Stock purchased by an agent independent of the Company may be used under this Plan, in which case such shares shall be deemed issued under this Plan for purposes of paragraph (a) of this section 4.
(c) If any shares of Common Stock issued pursuant to this Plan shall, after issuance, be reacquired by the Company or a Subsidiary from the recipient of such Common Stock, or from the estate of such recipient, for any reason, such shares shall no longer be charged against the limitation provided for in paragraph (a) of this section 4 and may be issued pursuant to this Plan.
5. Use of Common Stock Issued under this Plan. Shares of Common Stock may be issued under this Plan in respect of Fees and Retainers on such terms as may be fixed by the Board of Directors from time to time. All shares of Common Stock issued pursuant to this Plan shall be valued at not less than 100% of the Fair Market Value of
such shares on the effective date of issuance of such shares, regardless of when such shares are actually issued.
6. Payment and Deferral of Retainers and Fees.
(a) Except as otherwise expressly set forth in this section 6, (i) a portion of any Retainer or Fee shall be payable in shares of Common Stock, with the balance being payable in cash, all in accordance with determinations made by the Board of Directors from time to time, and (ii) all payments shall be made as promptly as practicable following the conclusion of each Service Period.
(b) Subject to and in conformity with such procedures as may be approved by the Board of Directors from time to time, a Nonemployee Director may elect to receive in shares of Common Stock all or any portion of any Retainer or Fee that would otherwise be payable in cash.
(c) Not later than the day immediately preceding the first day of any Service Period, a Nonemployee Director may elect to defer all or any portion of the Common Stock or the cash payable in respect of any Retainer or Fee, as the case may be, for the next following Service Period. Such election shall be made in writing and, once made, shall be irrevocable.
(d) (i) Any portion of a Retainer or Fee payable in cash and as to which a deferral election is made shall be payable to the Nonemployee Director or his or her heirs or beneficiaries in a lump sum or in installments (as specified by the Nonemployee Director in accordance with arrangements approved by the Board of Directors) following a date specified by the Nonemployee Director, which date shall in no event be earlier than such Nonemployee Director's termination from service. An interest equivalent on any amount so deferred shall be computed at such rate or rates as may be fixed by the Board of Directors from time to time.
(ii) Any portion of a Retainer or Fee payable in Common Stock and as to which a deferral election is made shall be payable to the Nonemployee Director or his or her heirs or beneficiaries in a lump sum or in installments (as specified by the Nonemployee Director in accordance with arrangements approved by the Board of Directors) following a date specified by the Nonemployee Director, which date shall in no event be earlier than such Nonemployee Director's termination from service. The Common Stock shall be held in a trust established by the Company. Dividends paid on such Common Stock will be reinvested in Common Stock. The Nonemployee Director shall have the right to vote the Common Stock held in such trust, if, as and to the extent specified in the trust.
(e) The terms of this Plan are intended to insure that the electing Nonemployee Director is not subject to income tax on any cash or Common Stock (including any cash or Common Stock that has been deferred) until such amounts are paid to the Nonemployee Director.
7. Adjustment Provisions.
(a) In the event that any reclassification, split up or consolidation of the Common Stock shall be effected, or the outstanding shares of Common Stock are, in connection with a merger or consolidation of the Company or a sale by the Company of all or a part of its assets, exchanged for a different number or class of shares of stock or other securities or property of the Company or for shares of the stock or other securities or property of any other corporation or person, or a record date for determination of holders of Common Stock entitled to receive a dividend payable in Common Stock shall occur, the number, class and kind of shares that have not been issued pursuant to this Plan shall be equitably adjusted.
(b) In the event that any spin off or other distribution of assets of the Company to its shareholders (including without limitation an extraordinary dividend) shall occur, the number, class and kind of shares that have not been issued pursuant to this Plan shall be equitably adjusted.
8. Term. This Plan shall be deemed adopted and shall become effective on the date on which the Common Stock is distributed to the holders of common stock of W. R. Grace & Co., a Delaware corporation subsequently renamed "Sealed Air Corporation." No Common Stock shall be issued under this Plan after the tenth anniversary of such date.
9. General Provisions.
(a) Nothing in this Plan or in any instrument executed pursuant hereto shall confer upon any person any right to continue to serve as a Nonemployee Director or to receive Retainers or Fees.
(b) No shares of Common Stock shall be issued pursuant to this Plan unless and until all legal requirements applicable to the issuance of such shares have, in the opinion of counsel to the Company, been complied with. In connection with any such issuance, the person or entity acquiring the shares shall, if requested by the Company, give assurances, satisfactory to counsel to the Company, in respect of such matters as the Company or a Subsidiary may deem desirable to assure compliance with all applicable legal requirements.
(c) No person, individually or as a member of a group, and no beneficiary or other person claiming under or through him or her, shall have any right, title or interest in or to any shares of Common Stock allocated or reserved for the purposes of this Plan except as to such shares of Common Stock, if any, as shall have been issued to him or her. No rights to receive shares of Common Stock under this Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, encumbrance or charge, except by will or the laws of descent and distribution. The only rights that may exist under this Plan shall be limited to those of an unsecured creditor of the Company.
(d) Nothing in this Plan is intended to be a substitute for, or shall preclude or limit the establishment or continuation of, any other plan, practice or arrangement for the payment of compensation or benefits to Nonemployee Directors that the Company now has or may hereafter put into effect.
10. Amendments and Termination.
(a) This Plan may be terminated, suspended or amended at any time by the Board of Directors upon the recommendation of its Compensation Committee; provided, however, that no amendment shall become effective without the approval of the shareholders of the Company to the extent shareholder approval is required by applicable law.
(b) No termination, suspension or amendment of this Plan shall adversely affect any shares theretofore issued pursuant to this Plan.
EXHIBIT 10.16
GRACE MEMO Human Resources Columbia, Maryland
Date: July 2002
To: Participants in the 2002 Long-Term Incentive Program
From: M. N. Piergrossi
cc: J. P. Forgach S. K. Krawczel
M. T. Johnson W. B. McGowan
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I am pleased to inform you that you have been selected to participate in Grace's 2002-2004 Long-Term Incentive Program. The 2002 Long-Term Incentive Program provides for 100% of the value of your award to be paid in cash.
LTIP CASH PAYOUT
Your 2002 LTIP payout will be based on the average annual growth rate (AAGR) in total Grace core EBIT achieved during the 3-year performance period (i.e. 2002-2004). The target AAGR is 6%, using 2001 results as the base. The payout will vary with actual results as described in Annex B attached to your award.
Under U.S. federal income tax law, the value of the cash payments, when received, will constitute ordinary income and will trigger income tax withholding obligations at that time. If you are subject to taxes in a country other than the United States, the tax consequences of the receipt of cash will be determined under the laws of such country.
ENCLOSURES
o Two copies of your 2002 LTIP Award
o Sample Calculation of the 2002-2004 LTIP (which constitutes part of Annex B)
o Administrative Practices - Long-Term Cash Award Program (which constitutes
Annex C)
REQUIRED ACTIONS
Please promptly sign and return one copy of the cash award to Marihelen Johnson in the Columbia office.
ADDITIONAL QUESTIONS
If you have any questions on this program, please feel free to call me at (410) 531-4183 or Sonya Krawczel at (410) 531-4479.
THIS DOCUMENT CONSTITUTES PART OF A
PROSPECTUS COVERING SECURITIES THAT
HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933.
ANNEX B
CALCULATION OF 2002-2004 LTIP
Name of Participant: ______________________________
Targeted Award: ______________________________
Your 2002-2004 LTIP award payout will be based on the 3-year average annual growth rate (AAGR) in total Grace core earnings before interest and taxes (core EBIT). Payouts are contingent upon achievement of target AAGR for the 3-year performance period. The target AAGR is 6%, using 2001 results as the base year.
The core earnings before interest and taxes (core EBIT) in 2001 was $187.5 million. The chart below details five scenarios at different assumed growth rates. The target growth is highlighted.
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PERFORMANCE PERIOD
ASSUMED BASE 2002 2003 2004 TOTAL LTIP CUMULATIVE
GROWTH PERIOD GROWTH POOL REPORTED
RATES 2001 02-04 (1) EARNINGS (2)
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1.50% 187.5 190.3 193.2 196.1 579.5 2.9 576.6
3.00% 187.5 193.1 198.9 204.9 596.9 5.9 591.0
6.00% 187.5 198.8 210.7 223.3 632.7 11.8 620.9
10.00% 187.5 206.3 226.9 249.6 682.7 14.3 670.9
15.00% 187.5 215.6 248.0 285.2 748.8 17.3 737.0
25.00% 187.5 234.4 293.0 366.2 893.6 23.6 881.8
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(1) All results include full recognition/accrual of Annual Incentive Compensation Program and, for achievement levels above 6% (i.e., 10%, 15%, and 25%), all totals include accruals for Long-Term Incentive Program Payments
(2) Up to the first $11.8 million (target AAGR 6%) is deducted from reported results. Payouts over target ($11.8 million) must be accrued as part of reported earnings. As a result, actual growth rate is slightly lower than assumed growth rate.
The Long-Term Cash Award payout will vary with actual results as shown in the chart below:
----------------------- -------------------------------------------
AAGR LEVEL ACHIEVED PAYOUT
(ROUNDED TO THE NEAREST WHOLE PERCENTAGE)
----------------------- -------------------------------------------
25% 200%
----------------------- -------------------------------------------
15% 147%
----------------------- -------------------------------------------
10% 121%
----------------------- -------------------------------------------
6% 100%
----------------------- -------------------------------------------
3% 50%
----------------------- -------------------------------------------
1.5% 25%
----------------------- -------------------------------------------
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For the 2002-2004 LTIP, cash payments will be made in two installments - 50% of what is earned based on current performance at the end of 2003, but no more than 50% of target, will be paid in March 2004, and the balance will be paid in March 2005.
Example:
A sample calculation of the Long-Term Cash Award Earned is provided below. Assume that your Targeted Award is $20,400.
----------------- --------------------- ------------------ --------------------
AAGR LEVEL PAYOUT IN MARCH PAYOUT IN MARCH
ACHIEVED 2004 2005 TOTAL PAYOUT
----------------- --------------------- ------------------ --------------------
25% $6,800 $34,000 $40,800
----------------- --------------------- ------------------ --------------------
15% $6,800 $23,188 $29,988
----------------- --------------------- ------------------ --------------------
10% $6,800 $17,885 $24,685
----------------- --------------------- ------------------ --------------------
6% $6,800 $13,600 $20,400
----------------- --------------------- ------------------ --------------------
3% $3,400 $6,800 $10,200
----------------- --------------------- ------------------ --------------------
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ANNEX C
W. R. GRACE & CO.
ADMINISTRATIVE PRACTICES - LONG-TERM CASH AWARD PROGRAM
2002-2004 Performance Period
DEFINITIONS
"Award Payment": An Interim Long-Term Cash Award Payment or Remaining Long-Term Award Payment, as applicable.
"BOARD OF DIRECTORS": THE BOARD OF DIRECTORS OF THE COMPANY
"Committee": The Compensation Committee of the Board of Directors.
"Company": W. R. Grace & Co., a Delaware Corporation and/or, if applicable in the context, one or more of its Subsidiaries.
"Incomplete Long-Term Cash Awards": A Long-Term Cash Award for which the Performance Period has not been completed as of the date referenced.
"Interim Long-Term Cash Award Payment": As defined on page 4, provided that such payment will not exceed 50% of the Participant's Targeted Award for the first two years, regardless of Company performance at the time of payment.
"Key Employee": An officer or other senior, full-time employee of the Company, who, in the opinion of the Company, can contribute significantly to the growth and successful operations of the Company.
"Long-Term Cash Award Program": An undertaking by the Company to financially reward a Key Employee at the end of a Performance Period, which undertaking is contingent upon or measured by the attainment over the Performance Period of specified performance objectives determined (on a consolidated or unconsolidated basis) by changes in the 3-year average annual growth rate (AAGR) in Total Grace's core earnings before interest and taxes (core EBIT).
"Long-Term Cash Award": A cash award, to be paid in the future, which is granted to Key Employees under the Company's long-term incentive program.
"Long-Term Cash Award Earned": The amount of cash earned by a Participant pursuant to the terms of a Long-Term Cash Award.
"Participant": A Key Employee who is, or who is proposed to be, a recipient of a Long-Term Cash Award.
"Performance Period": Except as provided herein, a period of three calendar years over which a Long-Term Cash Award may be earned, as approved by the Committee. The first Performance Period under this Plan will commence effective January 1, 2002 and will end on December 31, 2004. Performance Periods with respect to different Long-Term Cash Awards to the same individual may overlap.
"Total Grace Core EBIT": The core earnings before interest and taxes (core EBIT)" of the Company as reported on (and calculated in accordance with) the statement of W. R. Grace & Co. Continuing Operations- Segment Basis.
"Remaining Long-Term Cash Award Payment": As defined on Page 4, the second installment of the Long-Term Cash Award that may be paid after the end of the Performance Period, based on Company performance for the entire Performance Period.
"Subsidiary": A corporation, partnership, limited liability company or other form of business association of which shares of common stock or other ownership interests (i) having more than 50% of the voting power regularly entitled to vote for directors (or equivalent management rights) or (ii) regularly entitled to receive more than 50% of the dividends (or their equivalents) paid on the common stock (or other ownership interests), are owned, directly or indirectly, by the Company.
"Targeted Award": The amount of cash award specified in writing for a Participant as his or her "Targeted Award" for a Performance Period and which is subject to and covered by the terms and conditions of a Long-Term Cash Award. This amount may be different from the Long-Term Cash Award Earned by an individual.
PLAN ADMINISTRATION
The Plan shall be administered by the Committee, provided that no member of the Committee shall be eligible to receive a Long-Term Cash Award while serving on the Committee.
The Committee shall approve (i) the performance measurements and objectives for each Long-Term Cash Award and (ii) the Performance Period over which a Long-Term Cash Award is to be earned.
The Committee shall approve (i) the Key Employees who are to be granted Long-Term Cash Awards and (ii) the Targeted Award subject to each Long-Term Cash Award.
LONG-TERM CASH AWARDS
The Committee may, at any time or from time to time, grant Long-Term Cash Awards to Key Employees.
Each Long-Term Cash Award shall be evidenced by a written instrument containing such terms and conditions as the Committee shall approve, provided the instrument is consistent with these practices.
No Long-Term Cash Award, nor any payment or right thereunder, shall be subject in any manner to alienation, sale, transfer, assignment, pledge, encumbrance or charge, except by will or the laws of descent and distribution, or by the terms of a Participant's Designation of Beneficiary, if any, on file with the Company.
In the case of a Key Employee who becomes a Participant after the beginning of a Performance Period, the Committee may ratably reduce the amount of the Targeted Award covered by such Employee's Long-Term Cash Award or otherwise appropriately adjust the terms of the Long-Term Cash Award to reflect the fact that the Key Employee is to be a Participant for only part of the Performance Period.
It is the intention of the Committee that Long-Term Cash Awards be related to the results of the core operations affected by the management actions taken by the Participants. Subject to the administrative practices that apply to termination or change in employment status and to the amendment or discontinuance of Long-Term Cash Awards, the performance objectives applicable to Long-Term Cash Awards will remain unchanged during the Performance Period except as follows:
o In the event of the divestment of a Business prior to completion of the Performance Period, both the performance objectives and results pertaining to that Business shall be eliminated for the full year in which the divestment occurs and for any subsequent years.
o In general, acquisitions will be included in the performance results.
TERMINATION OR CHANGE IN EMPLOYMENT STATUS
A Participant shall forfeit all rights to any Award Payment, if, prior to the date of payment of such Award Payment, the Participant (1) resigns without the consent of the Committee, (2) retires under a retirement plan of the Company or Subsidiary before age 62 without the consent of the Committee, or (3) is terminated for cause.
If a Participant retires under a retirement plan of the Company or Subsidiary at or after age 62, or ceases employment as a result of death or disability, or ceases employment as a result of an involuntary termination after a Change in Control of the Company (as defined herein), during a Performance Period, then his rights in any Incomplete Long-Term Cash Award related to that Performance Period shall thereupon vest, and he shall be entitled to receive any Award Payment of any Long-Term Cash Award Earned he would otherwise have received (at the time he would have otherwise received the Award Payment), except that the amount of any Long-Term Cash Award Earned shall be reduced ratably in proportion to the portion of the Performance Period during which the Participant was not an employee. If a Participant ceases employment with the Company for any of the reasons specified in this paragraph, after the completion of any Performance Period (but before the payment of the Remaining Long-Term Cash Award Payment related to the completed Performance Period), then his rights to any Long-Term Cash Award Earned and to such Award Payment related to the completed Performance Period shall thereupon vest, and he shall be entitled to receive such Award Payment at the time he would have otherwise received the Payment.
If a Participant ceases employment with the Company for any reason other than those indicated in the previous two paragraphs (including by reason of involuntary termination not for cause, except as provided above with respect to involuntary termination after a Change in Control of the Company, or transfer of employment to a buyer of any business unit of the Company), then his rights in any Incomplete Long-Term Cash Award, and any Award Payment that is unpaid as of the date the Participant ceases
such employment, shall be determined by the Committee (or the designee of the Committee, which may include the Chief Executive Officer of the Company) as soon as practicable after the Participant ceases such employment. All such determinations shall be final and binding on all parties.
Except as modified by the provisions of the second and third paragraphs of this section, payments due to Participants pursuant to the applicable preceding paragraphs, above, shall be calculated and made in accordance with the provisions described under the section entitled "Calculation of Long-Term Cash Awards Earned: Form of Payment".
A leave of absence, if approved by the Committee, shall not be deemed a termination or change of employment status for the purposes of this section, but, unless the Committee otherwise directs, any Long-Term Cash Award Earned that a Participant would otherwise have received under a Long-Term Cash Award Program shall be reduced ratably in proportion to the portion of the Performance Period during which the Participant was on such leave of absence.
Any consent, approval or direction which the Committee may give under this section in respect of an event or transaction may be given before or after the event or transaction.
CALCULATION OF LONG-TERM CASH AWARDS EARNED: FORM OF PAYMENT
Long-Term Cash Awards Earned will be paid to a Participant in two installments
(1) the first installment shall be paid in March of the third and final year of
the Performance Period and shall be equal to 50% of what is earned based on the
Company's performance for the first two calendar years of the applicable
Performance Period, but no more than 50% of the Participant's Targeted Award
(the "Interim Long-Term Cash Award Payment"), and (2) the balance, if any, of
the Long-Term Cash Award Earned will be paid in March after the end of the third
and final year of the Performance Period (the "Remaining Long-Term Cash Award
Payment").
The Committee shall determine the extent to which the performance objectives of a Long-Term Cash Award have been achieved during the Performance Period and the amount of any Long-Term Cash Awards Earned (and the amount of any Award Payment). All calculations in this regard shall be made in accordance with the generally accepted accounting principles customarily applied by the Company and shall be submitted to the Committee for its review and approval. The determination of the Committee shall be final and binding.
GENERAL
Nothing in this document nor in any instrument executed pursuant hereto shall confer upon a Participant any right to continue in the employ of the Company or a Subsidiary, or shall affect the right of the Company or a Subsidiary to terminate his or her employment with or without cause.
The Company or a Subsidiary may make such provisions as it may deem appropriate for the withholding or any taxes that the Company or a Subsidiary determines it is required to withhold in connection with any Long-Term Cash Award Earned.
Nothing in a Long-Term Cash Award is intended to be a substitute for, or shall preclude or limit the establishment or continuation of, any other plan, practice, or arrangement for the payment of compensation or benefits to employees generally, or to any class or group of employees, which the Company or a Subsidiary now has or may hereafter lawfully put into effect, including, without limitation, any retirement, pension, group insurance, annual bonus, stock purchase, stock bonus or stock option plan; provided, however, that no amounts awarded or paid pursuant to any Long-Term Cash Award shall be included or counted as compensation for the purposes of any employee benefit plan of the Company or a Subsidiary where contributions to the plan, or the benefits received from the plan, are measured or determined in whole or in part, by the amount of the employee's compensation.
The grant of a Long-Term Cash Award to an employee of a Subsidiary shall be contingent on the approval of the Long-Term Cash Award by the Subsidiary and the Subsidiary's agreement that (i) the Company may administer such Award on its behalf and (ii) the Subsidiary will make, or reimburse the Company for, the payments called for by the Long-Term Cash Award. The provisions of this paragraph and the obligations of the Subsidiary so undertaken may be waived, in whole or in the part, from time to time by the Company.
AMENDMENTS AND DISCONTINUANCE
In the event acquisitions, divestments, substantial changes in tax or other laws or in accounting principles or practices, natural disasters or other extraordinary events render fulfillment of the performance objectives of a Long-Term Cash Award impossible or impracticable, or result in the achievement of the performance objectives without appreciable effort by the Participant, the Committee may, but shall not be obligated to, amend any such Long-Term Cash Award in any appropriate manner so that the Participant may earn Long-Term Cash Awards comparable to those that might have been earned if the extraordinary event had not occurred.
The Chief Executive Officer of the Company may approve such technical changes and clarifications to the Long-Term Cash Award Program as necessary, provided such changes or clarifications do not vary substantially from the terms and conditions outlined in this description.
In the event a Change in Control of the Company (as defined herein) shall occur
or the Board of Directors has reason to believe that a Change of Control may
occur, the Committee may, with respect to any one or more Long-Term Cash Awards,
(i) reduce the length of a Performance Period to not less than one year, (ii)
make ratable adjustments to performance objectives and Targeted Awards, (iii)
change the methods of measuring the performance objectives, (iv) accelerate the
payment of any Long-Term Cash Awards Earned or any Award Payment, and (v) take
other action deemed by it to be appropriate and in the best interests of the
Company under the circumstances. For the purposes of this paragraph:
(A) "Change in Control of the Company" means and shall be deemed to have occurred if (a) the Company determines that any "person" (as such term is used in Section 13(d) and 14 (d) of the Securities Exchange Act of 1934), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, has become the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of 20% or more of the outstanding common stock of the Company (provided, however, that a Change in Control shall not be deemed to have occurred if such person has become the beneficial owner of 20% or more of the outstanding Common Stock as the results of a sale of Common Stock by the Company that has been approved by the Board of Directors); or pursuant to a plan of reorganization which has been confirmed by the U.S. District Court or Bankruptcy Court having jurisdiction of the Company's Chapter 11 case, Case No. 01-01139 (JJF), pursuant to an order of such Court which is final and nonappealable, and becomes effective); (ii) individuals who are Continuing Directors cease to constitute a majority of any class of directors of the Board; (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Corporate Transaction"), in each case, with respect to which the stockholders of the Company immediately prior to such Corporate Transaction do not, immediately after the Corporate Transaction, own 50% or more of the combined voting power of the corporation resulting from such Corporate Transaction, provided that this clause (iii) shall not apply to a Corporate Transaction which is pursuant to section 363 of the Bankruptcy Code, or is pursuant to a plan of reorganization which has been confirmed by the U.S. District Court or Bankruptcy Court having jurisdiction of the Company's chapter 11 case, Case No. 01-01139 (JJF), pursuant to an order of such Court which is final and nonappealable, and becomes effective, or (iv) the shareholders of the Company approve a complete liquidation or dissolution of the Company.
(B) "Continuing Director" means any member of the Board of Directors who was such a member on the date on which this Program was approved by the Board of Directors, and any successor to a Continuing Director who is approved as a nominee or elected to succeed to a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors.
The granting of Long-Term Cash Awards may be amended or discontinued by the Committee at any time.
No amendment or discontinuance of Long-Term Cash Awards shall, without a Participant's consent, adversely affect his rights in any Long-Term Cash Awards theretofore granted to him, except that, if the Committee so directs, all Incomplete Long-Term Cash Awards may be terminated prospectively with the same effect as a termination of employment under the second paragraph of the section entitled "Termination or Change in Employment Status".
Exhibit 10.17
CONFIDENTIAL
___________, 20__
Dear:
W. R. Grace & Co., a Delaware corporation (the "Company"), considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company, its subsidiaries and other business units, and its stockholders.
Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Company, although no such change is now contemplated.
In order to induce you to remain in the employ of Grace (as hereafter defined), the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with Grace is terminated subsequent to a Change in Control of the Company (as hereinafter defined) under the circumstances provided in this Agreement.
1. Definitions. When used in this Agreement as capitalized terms, the following defined terms shall have the meanings set forth or specified in this Section.
(a) "Board" shall have the meaning specified in the first paragraph of this Agreement.
(b) "Change in Control of the Company" means and shall be deemed to have occurred if (i) the Company determines that any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, has become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more of the outstanding common stock of the Company (provided, however, that a Change in Control of the
Exhibit 10.17
Company shall not be deemed to have occurred if such person has become the beneficial owner of 20% or more of the outstanding common stock of the Company as the result of a sale of common stock by the Company that has been approved by the Board of Directors or pursuant to a plan of reorganization which has been confirmed by the U.S. District Court or Bankruptcy Court having jurisdiction of the Company's Chapter 11 case, Case No. 01-01139 (JJF), pursuant to an order of such Court which is final and nonappealable, and becomes effective); (ii) individuals who are Continuing Directors cease to constitute a majority of any class of directors of the Board; (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Corporate Transaction"), in each case, with respect to which the stockholders of the Company immediately prior to such Corporate Transaction do not, immediately after the Corporate Transaction, own 50% or more of the combined voting power of the corporation resulting from such Corporate Transaction, provided that this clause (iii) shall not apply to a Corporate Transaction which is pursuant to section 363 of the Bankruptcy Code, or is pursuant to a plan of reorganization which has been confirmed by the U.S. District Court or Bankruptcy Court having jurisdiction of the Company's chapter 11 case, Case No. 01-01139 (JJF), pursuant to an order of such Court which is final and nonappealable, and becomes effective; or (iv) the
Exhibit 10.17
shareholders of the Company approve a complete liquidation or dissolution of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended and in effect at the time of a Change in Control of the Company.
(d) "Company" means W. R. Grace & Co., a Delaware corporation, and any successor as provided in Section 6(a).
(e) "Continuing Director" means any member of the Board who was such a member on the date hereof and any successor to such a Continuing Director who is approved as a nominee or elected to succeed a Continuing Director by a majority of Continuing Directors who are then members of the Board.
(f) "Corporate Transaction" shall have the meaning specified in Section 1(b).
(g) "Date of Termination" shall have the meaning specified in
Section 3(e).
(h) "Disability" shall have the meaning specified in Section 3(a).
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Excise Tax" means the excise tax imposed by Section 4999 of the Code and/or any interest or penalties with respect to such excise tax.
Exhibit 10.17
(k) "Grace" means the Company and/or one or more of its subsidiaries.
(l) "Good Reason" shall have the meaning specified in Section 3(c).
(m) "Notice of Termination" means a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated.
(n) "Other Payments" means payments and/or the value of benefits to which you are entitled (other than the Severance Payment) pursuant to any agreement (including this Agreement) that constitute "parachute payments" (as defined in Section 280G of the Code and the regulations thereunder).
(o) "Retirement" shall have the meaning specified in Section 4(a).
(p) "Retirement Plans" means retirement plans of Grace; "Retirement Arrangements" means Retirement Plans and agreements of Grace relating to retirement benefits, and "Insurance Plans" means Grace's basic life and health insurance plans, the survivor benefit under any Grace deferred compensation program, and the Executive Salary Protection Plan.
Exhibit 10.17
(q) "Severance Payment" means a single, lump sum payment, in accordance with Section 4(c)(ii).
(r) "Tax Advisor" means a tax advisor that, in the reasonable judgment of the Company, is familiar with and experienced in the tasks required of the "tax advisor" hereunder, and is selected by the Company to perform those tasks. The Company shall pay all of the fees and expenses of the Tax Advisor.
2. Term of Agreement. This Agreement shall become effective on November 1, 1998 and shall continue in effect through December 31, 1998; provided, however, that commencing on each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement or you shall have given such notice to the Company; provided, further, if a Change in Control of the Company shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of 24 months beyond the month in which such Change in Control of the Company occurred. This Agreement shall terminate upon your ceasing to be an officer of the Company unless prior thereto a Change in Control of the Company shall have occurred.
Exhibit 10.17
3. Termination Following Change in Control. No benefits shall
be payable hereunder unless there shall have been a Change in Control of the
Company during the term of this Agreement. If any of the events described in
Section 1(b) constituting a Change in Control of the Company shall have
occurred, you shall be entitled to the benefits provided in Section 4 upon the
subsequent termination of your employment during the term of this Agreement
unless such termination is (i) because of your death, Disability or Retirement,
(ii) by the Company for Cause, or (iii) by you other than for Good Reason, as
specified below.
(a) Disability. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with Grace for six consecutive months, and within 30 days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability".
(b) Cause. The Company shall be entitled to terminate your employment for Cause. For the purposes of this Agreement, "Cause" means (i) the willful and continued failure by you to substantially perform your duties with Grace (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by you for Good Reason) after a
Exhibit 10.17
written demand for substantial performance is delivered to you as authorized by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (ii) the willful engaging by you in conduct which is demonstrably and materially injurious to Grace, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of Grace. Any act or omission based upon authority given pursuant to authorization of the Board or upon the advice of counsel for Grace shall be conclusively presumed to be done or omitted by you in good faith and in the best interest of Grace. Notwithstanding the foregoing, your employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board, held after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board, finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clause (i) or (ii) of the second sentence of this Subsection and specifying the particulars thereof in detail.
Exhibit 10.17
(c) Good Reason. You shall be entitled to terminate your employment for "Good Reason". For purposes of this Agreement, "Good Reason" means the occurrence after a Change in Control of the Company of any of the following circumstances, without your express written consent, unless such circumstances (other than that specified in paragraph (iii)) are fully corrected prior to the Date of Termination specified in the Notice of Termination given by you in respect thereof:
(i) The assignment to you of any duties inconsistent with your status as an officer of the Company and an executive of Grace or a substantial adverse alteration in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control of the Company.
(ii) A reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time, or Grace's failure to increase your annual base salary substantially in accordance with increases given to other officers of the Company.
(iii) Grace's requiring you to be based anywhere other than the metropolitan area in which your office is located immediately prior to the Change in Control of the Company, except for required travel on Grace's business to an extent
Exhibit 10.17
substantially consistent with your business travel obligations immediately prior to the Change in Control of the Company.
(iv) The failure by Grace, without your consent, to pay to you any portion of your then current compensation, or the failure by Grace (and/or any trust of which Grace is the grantor) to pay to you any portion of an installment of deferred compensation under any deferred compensation program of Grace within seven days of the date such deferred compensation is due.
(v) The failure by Grace to continue in effect any compensation plan or program in which you participate immediately prior to the Change in Control of the Company which is material to your total compensation, including but not limited to Grace's incentive compensation, stock incentive and deferred compensation plans or programs or any substitute plans or programs adopted prior to such Change in Control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan or program) has been made with respect to such plan or program, or the failure by Grace to continue your participation therein (or in such substitute or alternative plan or program) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative
Exhibit 10.17
to other participants, as existed at the time of such Change in Control of the Company.
(vi) The failure by Grace to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Retirement Arrangements or Insurance Plans in which you were participating at the time of the Change in Control of the Company, the taking of any action by Grace that would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the Change in Control of the Company, or the failure by Grace to provide you with the number of paid vacation days to which you are entitled on the basis of your years of service with Grace in accordance with Grace's normal vacation policies in effect at the time of the Change in Control of the Company.
(vii) The failure of the Company to obtain a satisfactory agreement from any successor corporation to assume and agree to perform this Agreement, as contemplated in Section 6.
(viii) Any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (d) below (and, if applicable, the requirements of Subsection (b) above). For
Exhibit 10.17
purposes of this Agreement, no such purported termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder.
(d) Notice of Termination. Any purported termination of your employment by Grace or by you following a Change in Control of the Company shall be communicated by a Notice of Termination to the other party hereto in accordance with Sections 1(m) and 7.
(e) Date of Termination, Etc. "Date of Termination" shall mean
(i) if your employment is terminated for Disability, 30 days after Notice of
Termination is given (provided that you shall not have returned to the full-time
performance of your duties during such 30-day period), and (ii) if your
employment is terminated pursuant to Subsection (b) or (c) above or for
Retirement or for any reason (other than Disability), the date specified in the
Notice of Termination (which, in the case of a termination pursuant to
Subsection (b) above shall not be less than 30 days, and in the case of a
termination pursuant to Subsection (c) above shall not be less than 15 nor more
than 60 days,
Exhibit 10.17
respectively, after the date such Notice of Termination is given); provided that if within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay, or cause a subsidiary to pay, you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation plans and programs, Retirement Arrangements and Insurance Plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this
Exhibit 10.17
Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement.
4. Compensation During Disability and upon Termination. Following a Change in Control of the Company, upon termination of your employment or during a period of disability you shall be entitled to the following benefits:
(a) Disability; Retirement. During any period that you fail to perform your full-time duties with Grace as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary at the rate in effect at the commencement of any such period, plus all other amounts to which you are entitled under any compensation plan or program of Grace in effect during such period, until your employment is terminated for Disability pursuant to Section 3(a). Thereafter your benefits shall be determined under the Retirement Arrangements, Insurance Plans and other compensation plans and programs then in effect in accordance with the terms of such plans and programs (without regard to any amendment to such plans and programs made subsequent to a Change in Control of the Company and on or prior to the Date of Termination).
If your employment shall be terminated by your Retirement, or by reason of your death, the Company shall pay, or
Exhibit 10.17
cause a subsidiary to pay, you your full base salary through the Date of Termination or the date of your death plus all other amounts to which you are entitled under any compensation plan or program of Grace. Thereafter your benefits shall be determined in accordance with the Retirement Arrangements, Insurance Plans and other compensation plans and programs then in effect in accordance with the terms of such plans and programs (without regard to any amendment to such plans and programs made subsequent to a Change in Control of the Company and on or prior to the Date of Termination). As used herein, "Retirement" shall mean termination of employment and retirement under a Retirement Plan but shall not include termination of employment for Good Reason or involuntary retirement by reason of the failure of the Company to approve your continued employment after you reach normal retirement age.
(b) Cause; Voluntary Termination. If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, Disability, Retirement or death, the Company shall pay, or cause a subsidiary to pay, you your full base salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan or program of Grace at the time such payments are due, and the Company shall have no
Exhibit 10.17
further obligations to you under this Agreement except as provided in Subsection
(g) below.
(c) Involuntary Termination. If your employment shall be terminated by you for Good Reason, or by the Company other than for Cause or Disability, you shall be entitled to the benefits provided below:
(i) The Company shall pay, or cause a subsidiary to pay: (A) you your full base salary and vacation pay accrued (but not taken) through the Date of Termination at the rate in effect at the time Notice of Termination is given; (B) you your total "targeted" annual incentive compensation award (under the annual incentive compensation program of the Company) for the calendar year immediately preceding the year in which the Date of Termination occurs, but only if you have not received such an award for such preceding calendar year; (C) you a pro-rata portion of your total "targeted" annual incentive compensation award (under the annual incentive compensation program of the Company) for the calendar year in which the Date of Termination occurs (determined by reference to your base salary and salary grade on the day before the Date of Termination), calculated by multiplying such total "targeted" award by a fraction of which the numerator is the number of days in such calendar year prior to your Date of
Exhibit 10.17
Termination, and the denominator is 365; (D) you all other amounts to which you are entitled under any compensation plan or program of Grace at the time such payments are due; and (E) an independent, third-party outplacement service provider to provide you (at your request) with outplacement services that are the same as (or substantially similar to) outplacement services offered to Company officers under the termination program of the Company instituted during 1997.
(ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination: A Severance Payment equal to 3.00 multiplied by the sum of (a) your annual base salary in effect on the day immediately preceding the Date of Termination plus (b) an amount equal to your total "targeted" annual incentive compensation award (under the annual incentive compensation program of the Company) for the calendar year in which the Date of Termination occurs (determined by reference to your base salary and salary grade on the day before the Date of Termination). Notwithstanding the foregoing, if you have attained age 62 prior to the Date of Termination, the Severance Payment payable to you under this Section 4(c)(ii) shall be reduced (but not below zero) by multiplying such Severance Payment by a fraction of which the numerator is equal to the number of whole calendar months that
Exhibit 10.17
have elapsed since the calendar month immediately preceding the month in which your 62nd birthday occurs (i.e., the first calendar month counted is the calendar month in which you attain age 62) but prior to the Date of Termination (i.e., the last calendar month counted is the calendar month ending immediately prior to the calendar month in which the Date of Termination occurs), and the denominator is 36 (which, of course, reflects the number of months from age 62 to age 65, the normal retirement age under the W. R. Grace & Co. Retirement Plan for Salaried Employees).
(iii) For a 24-month period following the Date of Termination, the Company shall arrange to provide you with basic life and health insurance benefits substantially similar to those you are receiving under Insurance Plans immediately prior to the Notice of Termination, and with salary continuance benefits similar to those which you would receive under the Executive Salary Protection Plan had you continued to be employed at the date of your death less the amount of your Severance Payment hereunder. Benefits otherwise receivable by you pursuant to this paragraph shall be reduced to the extent comparable benefits are actually received by you during the 24-month period following the Date of Termination,
and any such benefits actually received by you shall be reported by you to the Company. Thereafter your benefits shall be determined in accordance with the Insurance Plans as in effect at the Date of Termination (without regard to any amendment to such plans made subsequent to a Change in Control of the Company and on or prior to the Date of Termination). Notwithstanding the foregoing, benefits otherwise receivable by you pursuant to this paragraph shall cease on the first day of the calendar month following the month in which your 65th birthday occurs (your "65th birthdate month"), unless you are not entitled to receive retiree medical coverage from the Company as of the first day of the calendar month following your 65th birthdate month, in which case such benefits shall continue to be provided under the terms of this paragraph (iii) for the remainder of the 24-month period following the Date of Termination.
(d) Excise Tax. (i) Whether or not you are entitled to any
Other Payments, the Severance Payment calculated and payable under
Section 4(c)(ii) (after any adjustment necessary to satisfy the
requirements of the last sentence of Section 4(c)(ii)) shall be reduced
(but not below zero) by the amount necessary to avoid the imposition of
the Excise Tax with regard to the Severance Payment and/or Other
Payments;
Exhibit 10.17
provided that such reduction shall only be effective if, as calculated in accordance with this Agreement, the total amount of the Severance Payment, as so reduced, plus Other Payments (together, the "Reduced Payment") would be greater than the total amount of the Severance Payment, without regard to any such reduction, plus Other Payments (together, the "Full Payment"), after reducing the amount of both the Reduced Payment and the Full Payment by the total of all applicable federal, state, local and foreign taxes (including, but not limited to, the Excise Tax).
(ii) The applicable federal, state, local and foreign taxes shall be those taxes that, in the opinion of the Tax Advisor, will be imposed upon you as a result of the receipt or enjoyment of the Severance Payment and/or Other Payments and shall be calculated based upon the highest possible marginal tax rates that could be applicable to you for the year in which you receive the Severance Payment, unless you inform the Tax Advisor that a different marginal tax rate is applicable with respect to you for any such tax for that year.
(iii) The calculations necessary to effectuate the provisions of this Section 4(c) shall be performed by the Tax Advisor prior to the date the Severance Payment is made to you pursuant to Section 4(e). All issues with regard to those
Exhibit 10.17
calculations that are not specifically provided for by this Agreement shall be decided in a manner that provides you with the greatest net after-tax benefit with respect to the Severance Payment and Other Payments, taking into consideration the above-mentioned applicable federal, state, local and foreign taxes.
(e) Payment Of Severance Payment.
Exhibit 10.17
(i) The Severance Payment to which you are entitled shall be paid to you not later than the fifth day following your Date of Termination, provided, however, that if the amount of such payment cannot be fully determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Tax Advisor, of the amount of such payment and shall pay the remainder of such payment (together with interest from such fifth day to the date of such payment at a rate of interest per annum equal to the prime rate of interest announced by Morgan Guaranty Trust Company of New York from time to time plus 2 percentage points) as soon as the amount thereof can be determined but in no event later than the thirtieth day after your Date of Termination. In the event that the amount of the estimated payment exceeds the amount subsequently determined to have been due, such excess shall be payable by you to the Company, without interest, on the fifth day after demand by the Company.
(ii) The Company also shall pay to you all legal fees and expenses incurred by you as a result of your termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination, in seeking to obtain or enforce any right or benefit provided by
Exhibit 10.17
this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). Such payments shall be made at the later of the times specified in paragraph (i) above, or within five days after your request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require.
(f) No Mitigation. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owing by you to the Company, or otherwise, except as provided in Section 4(c)(iii) above.
(g) Retirement Benefits. In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under all Retirement Arrangements.
(h) Tax Advisor. Each calculation necessary to effectuate the provisions of Section 4 shall be performed by the Tax Advisor within the appropriate time periods specified herein
Exhibit 10.17
for such calculation or, absent such specification, prior to the date the Severance Payment is made to you pursuant to Section 4(e) above. All issues with regard to those calculations that are not specifically provided for by this Agreement shall be decided in a manner that provides you with the greatest After-Tax Total Payment. Any determination by the Tax Advisor shall be binding upon you and the Company.
5. Relationship to Other Agreements and Plans. To the extent that any provision of any other agreement between Grace and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for the purposes of this Agreement (while this Agreement remains in effect) the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. The Severance Payment shall not be considered to be compensation for the purpose of any Retirement Arrangements, Insurance Plans or compensation plans of Grace.
Exhibit 10.17
6. Successors.
(a) Successors to the Company.
The Company shall require any successor (whether direct or indirect, by purchase or merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a Change in Control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination (provided you shall have delivered a Notice of Termination to the Company). As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and/or any successor to the Company's business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise.
Exhibit 10.17
(b) Your Successors. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate.
7. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
8. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York.
Exhibit 10.17
9. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Such arbitration, whether commenced by you or the Company, shall be conducted in either the city and state in which you reside, the city and state in which the Company maintains its principal offices or the city and state in which you were employed at the time the dispute or controversy arose, as designated by you. Any arbitration pursuant to this provision shall be conducted before an arbitrator to be selected by the Company from a list of three arbitrators to be provided by you to the Company. All expenses, including attorneys fees, which you incur as a result of the arbitration and/or the dispute or controversy giving rise to the arbitration shall be paid directly by the Company. In the event that you are entitled to, or believe that you are entitled to, compensation pursuant to Section 4, the Company shall pay you such compensation unless and until directed to cease such payments pursuant to an award issued in accordance with this Section.
Exhibit 10.17
Judgment may be entered on an award issued pursuant to this Section in any court of competent jurisdiction. In the event that the Company seeks to stay an arbitration sought under this Section 10, it shall post a bond, or provide similar security, in an amount equal to any unpaid compensation which is due you, or claimed to be due you, pursuant to Section 4.
11. General. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board or its Compensation, Employee Benefits and Stock Incentive Committee or any successor to such Committee. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.
Exhibit 10.17
The section and subsection headings contained in this Agreement are for convenient reference only, and shall not in any way affect the meaning or interpretation of this Agreement.
Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state, local or foreign law. The obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement.
12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Secretary of the Company the enclosed copy of this letter which will then constitute our agreement on this subject. By your signing this Agreement, you agree that, as of the date hereof, this Agreement supersedes any
Exhibit 10.17
and all prior agreements between you and the Company setting forth your severance benefits in the event of a Change in Control of the Company.
Sincerely,
W. R. GRACE & CO.
By
W. Brian McGowan
Senior Vice President
Agreed to __________, 20__
Name: ____________________
EXHIBIT 10.19
GRACE
W. R. Grace & Co.
7500 Grace Drive
Columbia, MD 21044
November 6, 2002
Mr. Paul J. Norris
W. R. Grace & Co.
7500 Grace Drive
Columbia, MD 21044
Dear Paul:
As you and the Compensation Committee have discussed, this letter agreement concerns your continued employment with W. R. Grace & Co. - Conn. (the "Company").
The Board is pleased that you have agreed to continue your employment with the Company until at least the expiration of the "Initial Term" of your employment agreement with the Company, dated January 1, 2001 (the "2001 Employment Agreement"). As you know, the Initial Term of the 2001 Employment Agreement will expire on December 31, 2002.
In addition, this letter amends the 2001 Employment Agreement as specified below, in accordance with section 26(b) of the 2001 Employment Agreement.
If you agree with the terms of this letter and the amendments specified below, please sign this letter where indicated and return a signed original copy to me.
Amendments To The 2001 Employment Agreement
Effective January 1, 2003, the 2001 Employment Agreement is hereby amended as follows:
Section 2 is amended by adding the following after subsection (b):
"c) Notwithstanding any other provision of this Agreement to the contrary, Executive shall be entitled to provide prior notice on any date on or after January 1, 2003 specifying his date of resignation of employment with the Company (in accordance with the provisions of this sentence), with a last date of employment effective as of any date on or after June 30, 2003; provided that Executive has delivered to the Chairman of the Compensation Committee of the Company's Board of Directors a written notice
Mr. P. J. Norris
November 6, 2002
specifying the effective date of Executive's last date of employment at least 180 calendar days prior to the effective date specified as his last date of employment.
"d) Notwithstanding any other provision of this Agreement to the contrary, the Executive shall be entitled to the following benefits, if the Executive resigns in a manner that complies with the requirements of Section 2(c), or if the Executive terminates his employment with the Company on the basis of Constructive Discharge, or if the Executive's employment terminates as a result of his death or Disability, or if the Executive is terminated by the Company for any reason other than for Cause:
o A pro-rated award under the Company's Annual Incentive Compensation Program under Section 3(b);
o A lump sum cash supplemental pension payment under Section 7;
o Residential relocation assistance under Section 10; and
o A pro-rated payment of the cash component of any award made to Executive under any Company Long Term Incentive Program, calculated and paid in accordance with the provisions of Section 3(g) below.
"Notwithstanding any other provision of this Agreement to the contrary, the
Executive shall not be entitled to any of the benefits specified above in this
Section 2(d), if the Executive's employment with the Company is terminated for
Cause, or terminates under any other circumstances, except those circumstances
specified above in this Section 2(d)."
The fourth sentence of Section 3(b) is amended to read as follows:
"Subject to Section 2(d), for the calendar year in which Executive's employment with the Company terminates, Executive or his beneficiary shall receive an award under the Annual Incentive Compensation Program at the time that Executive would have received such award had his employment with the Company not terminated, in an amount equal to the product of (i) the award to which Executive would be entitled by operation of the Annual Incentive Compensation Program for performance in the year of Executive's employment termination, as if his employment had not terminated, and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through Executive's employment termination date, and the denominator of which is 365.
Section 3(f) is amended in its entirety to read as follows:
"f) Executive shall become entitled to receive, and shall receive: (i) on December 31, 2003, for services rendered for the 2003 calendar year, a retention bonus in an amount
Mr. P. J. Norris
November 6, 2002
that is equal to Executive's annual base salary (as of October 31, 2002) multiplied by a percentage that is two-times the "Executive Retention Bonus Percentage" (as defined below) applicable to the 2003 calendar year; and (ii) on December 31, 2004, for services rendered for the 2004 calendar year, a retention bonus in an amount that is equal to Executive's annual base salary (as of October 31, 2002) multiplied by a percentage that is two-times the Executive Retention Bonus Percentage applicable to the 2004 calendar year. The payments described in clause (i) and clause (ii) of the immediately preceding sentence are each referred to separately as a "Retention Bonus." If Executive's employment is terminated by the Company for Cause or by Executive other than on the basis of Constructive Discharge (including following a Change in Control), death or Disability, Executive shall not receive the Retention Bonus applicable to the calendar year in which Executive's last date of employment with the Company occurs. If Executive's employment is terminated by Executive on the basis of Constructive Discharge (including following a Change in Control), death or Disability, or by the Company without Cause, the Company shall pay to Executive a portion of the Retention Bonus applicable to the calendar year in which Executive's last date of employment with the Company occurs, which is equal to the product of (i) the amount of such Retention Bonus to which Executive would be entitled as if his employment had not terminated and (ii) a fraction, the numerator of which is the number of days in the applicable calendar year through Executive's employment termination date, and the denominator of which is 365. The Company shall make such payment within five business days of such termination. (In no event shall Executive be entitled to receive a Retention Bonus applicable to any calendar year commencing after the date Executive's employment with the Company terminates for any reason.)
"The "Executive Retention Bonus Percentage" means the greatest percentage of annual base salary authorized for any senior executive of the Company (not including the Executive) as a retention payment for the applicable calendar year, in accordance with an order of the United States Bankruptcy Court."
Section 3 is amended by adding the following after subsection (f):
"g) Subject to Section 2(d), upon termination of employment with the Company, Executive or his beneficiary shall receive a cash payment under each Long-Term Incentive Program award (an "LTIP Award") made to Executive, calculated and paid under the terms of this Section 3(g). With respect to each such LTIP Award, Executive will receive a cash payment at the time that Executive would have received such payment had his employment with the Company not terminated. Each such payment shall be in an amount equal to the product of (i) the cash payment to which Executive would be entitled by operation of the applicable LTIP Award, as if his employment had not terminated and (ii) a fraction, the numerator of which is the number of days in the applicable LTIP Award performance period through Executive's employment termination date, and the denominator of which is 1095. (The Executive's rights and
Mr. P. J. Norris
November 6, 2002
obligations regarding any stock option portion of any LTIP Award shall be governed by the provisions of the applicable Company Stock Option Plan.)
"h) Immediately upon Executive providing notice that he will resign his employment (or upon the sooner of the date the Company notifies Executive that he is to be terminated or the date Executive's employment with the Company actually terminates, if either such date occurs before Executive provides a notice of resignation), Executive shall cease to be eligible for any subsequent awards under any Company Long-Term Incentive Program."
The first sentence of Section 7(a) is amended to read as follows:
"Except as otherwise provided below, and subject to Section 2(d), Executive shall receive a supplemental pension from the Company, which considers all of Executive's prior years of actual service (i) with W. R. Grace & Co. from February 1968 to May 1969 and from February 8, 1971 to August 5, 1981, and (ii) with AlliedSignal from August 1989 to October 1998 (the "Prior Years of Service"), as if such service had been continuous service with the Company."
The first sentence of Section 7(e) is amended to read as follows:
"e) Notwithstanding anything to the contrary in this Agreement or in any plan or
program relating to Executive's retirement benefits (but subject to Section
2(d)), the Company shall, immediately after the date of Executive's termination
of employment with the Company, but in no event later than 30 business days
after such date, pay to Executive, in a lump sum (such lump sum determined,
except to the extent otherwise set forth in Section 7(b), in accordance with the
methodology and assumptions specified under the Grace Salaried Retirement Plan),
all supplemental retirement benefits payable to Executive by the Company
(including pursuant to the supplemental pension arrangement and the SERP),
whether or not payable pursuant to a plan of the Company."
The first sentence of Section 10 is amended to read as follows:
"Subject to Section 2(d), and subject to the restrictions set forth in this
Section 10, the Company shall, upon written request from Executive received by
the Company after the date of Executive's termination of employment with the
Company, provide to Executive all relocation assistance described in the
Headquarters Office Relocation Policy (the "Policy") for current employees in
effect as of the date of this Agreement (copy attached hereto)."
Mr. P. J. Norris
November 6, 2002
Effective Date Of Amendments
The amendments to the 2001 Employment Agreement that are specified above shall be effective January 1, 2003.
Non-Amended Provisions Of The 2001 Employment Agreement
The provisions of the 2001 Employment Agreement that are not amended by this letter agreement (including, but not limited to, the provisions of Section 10, "Relocation Assistance", other than the first sentence of that Section) shall remain in effect as provided by the terms of the 2001 Employment Agreement.
Agreed:
W. R. Grace & Co.
W. R. Grace & Co. - Conn.
Agreed:
EXHIBIT 10.25
GRACE
Paul J. Norris
Chairman, President & Chief Executive
Officer
W. R. Grace & Co.
7500 Grace Drive
Columbia, MD 21044
Voice: (410) 531-4406
Fax: (410) 531-4414
email: paul.j.norris@grace.com
September 13, 2002
To:
PERSONAL AND CONFIDENTIAL
Dear :
In order to continue Grace's successful operating performance in the Chapter 11 environment, it is important to retain key employees by providing compensation programs that are valued and compete with our industry peers. Therefore, Grace has proposed, and the Court has approved, a special retention program for selected key employees.
I am pleased to inform you that you have been selected to participate in this retention program for 2003. The total amount of your retention payment will be [ ]% of your base earnings. You will receive payment in one lump sum installment on December 26, 2003 (based on earnings from January 1 - December 31, 2003). The terms applicable to the supplemental payments are more specifically described in the attachment to this letter.
I realize that cash is not the only reason why an employee should stay with an organization. At Grace, you should expect to continue to receive opportunities to experience personal growth, to upgrade your skills, and to engage in challenging, satisfying work.
Your commitment to Grace's Vision and Values is appreciated. Thanks.
Sincerely,
Paul J. Norris
EXHIBIT 10.26
PURPOSE:
The Annual Incentive Compensation Program (AICP) is the bonus program for
regular non-sales salaried employees in Bands 1-4. Grace offers the AICP program
as a way to share in the company's financial success.
The AICP program was designed to support:
1. The focus of employees on achieving financial performance targets
2. The concept of measurements as a way to improve performance
3. A "pay for performance" philosophy.
SCOPE:
This policy covers all regular salaried employees in Bands 1-4 who are not eligible to participate in other incentive plans and whose individual performance rated is "good" or higher. Except as specified below, employees must be actively employed by GRACE through the payout date, which will typically be made in March. Awards will be prorated for employees who did not work for GRACE for the full year.
POLICY:
Each Business Unit's pool will be funded based on the Business Unit's financial performance as measured by its Pre-Tax Earnings from Core Operations performance versus target.
Each year employees eligible for the AICP receive a letter informing them of their target award percentage range for the current year. The band that an employee's job is assigned to determines the target award percentage range. The following table has the target award percentage ranges for each band:
----------------------- ------------------------------
Band Target Incentive as a % of
Salary
----------------------- ------------------------------
1 CEO - set by BOD
----------------------- ------------------------------
2 50%-85%
----------------------- ------------------------------
3 30%-65%
----------------------- ------------------------------
4 10%-25%
----------------------- ------------------------------
|
It is expected that any employee whose performance is rated at the "Needs Improvement" or "Unsatisfactory" performance level will not receive an AICP incentive and their funds will be distributed to the employees' with the highest ratings. The target awards are adjusted based on the Business Unit performance, then multiplied by the employee's base salary as of the end of the performance year for active employees.
EXHIBIT 10.26
The year-end salary for non-US employees is converted to US dollars based on the average exchange rate for the year. Their AICP award recommendation, which is initially determined in US dollars during the process, is then converted to a percent of salary. This percent is applied to their salary in local currency and the payment is made through their country's payroll system in local currency. Awards may be further adjusted to accommodate factors such as the performance of the participant's product-line and region against financial performance and individual performance. The total of AICP bonuses paid by each Business Unit's must conform to its annual AICP budget.
New hires may be considered for prorated awards in the AICP program if they have more than three months' service.
An employee who is promoted from one eligible position to a higher-graded eligible position will have his/her award calculated and determined on the basis of the higher-graded position, irrespective of when the promotion was effective (the actual award reflecting individual performance should take timing into account).
In the case of employees entering the program from sales-incentive eligible jobs, their eligibility will commence when the employee becomes ineligible to participate in a sales incentive program as a result of the job change.
DEMOTIONS/DECREASES IN SALARY GRADE
An employee whose position is decreased from the AICP program to the PFP program will be paid in accordance with the PFP program guidelines.
TERMINATIONS OF EMPLOYMENT
Employees whose employment terminates prior to the date on which awards are normally paid may receive an award (usually provided by terms of a written agreement) if employment terminates for any of the following reasons, provided they had more than three months' service in an AICP eligible position:
o Retirement under a plan of the Company, or a subsidiary
o Death
o Disability
o Divestment
o Other termination of employment by the Company not for cause
Awards in such cases are to be prorated if employment terminated prior to the end of the year in which services were performed.
EXHIBIT 21
|X| W. R. GRACE & CO., A DELAWARE CORPORATION
U.S. SUBSIDIARIES
12/31/2002
|X| Chapter 11 Filing - April 2, 2001
----- --------------------------------------- -------------------------
STATE OF
SUBSIDIARY NAME INCORPORATION
----- --------------------------------------- -------------------------
|X| A-1 Bit & Tool Co., Inc. DE
----- --------------------------------------- -------------------------
Advanced Refining Technologies
Management, Inc. DE
----- --------------------------------------- -------------------------
Advanced Refining Technologies DE
LLC
----- --------------------------------------- -------------------------
|X| Alewife Boston Ltd. MA
----- --------------------------------------- -------------------------
|X| Alewife Land Corporation MA
----- --------------------------------------- -------------------------
|X| Amicon, Inc. DE
----- --------------------------------------- -------------------------
AP Chem Incorporated MD
----- --------------------------------------- -------------------------
|X| CB Biomedical, Inc. DE
----- --------------------------------------- -------------------------
|X| CCHP, Inc. DE
----- --------------------------------------- -------------------------
|X| Coalgrace, Inc. DE
----- --------------------------------------- -------------------------
|X| Coalgrace II, Inc. DE
----- --------------------------------------- -------------------------
Construction Products Dubai, Inc. DE
----- --------------------------------------- -------------------------
|X| Creative Food 'N Fun Company DE
----- --------------------------------------- -------------------------
|X| Darex Puerto Rico, Inc. DE
----- --------------------------------------- -------------------------
|X| Del Taco Restaurants, Inc. DE
----- --------------------------------------- -------------------------
|X| Dewey and Almy, LLC DE
----- --------------------------------------- -------------------------
|X| Ecarg, Inc. NJ
----- --------------------------------------- -------------------------
|X| Five Alewife Boston Ltd. MA
----- --------------------------------------- -------------------------
|X| G C Limited Partners I, Inc. DE
----- --------------------------------------- -------------------------
|X| G C Management, Inc. DE
----- --------------------------------------- -------------------------
|X| GEC Management Corporation DE
----- --------------------------------------- -------------------------
|X| GN Holdings, Inc. DE
----- --------------------------------------- -------------------------
|X| GPC Thomasville Corp. DE
----- --------------------------------------- -------------------------
|X| Gloucester New Communities NJ
Company, Inc.
----- --------------------------------------- -------------------------
|X| Grace A-B Inc. DE
----- --------------------------------------- -------------------------
|X| Grace A-B II Inc. DE
----- --------------------------------------- -------------------------
Grace Asia Pacific, Inc. DE
----- --------------------------------------- -------------------------
Grace Chemicals, Inc. DE
----- --------------------------------------- -------------------------
|X| Grace Chemical Company of IL
Cuba
----- --------------------------------------- -------------------------
Grace Collections, Inc. DE
----- --------------------------------------- -------------------------
|X| Grace Culinary Systems, Inc. MD
----- --------------------------------------- -------------------------
|X| Grace Drilling Company DE
----- --------------------------------------- -------------------------
|X| Grace Energy Corporation DE
----- --------------------------------------- -------------------------
|X| Grace Environmental, Inc. DE
----- --------------------------------------- -------------------------
|X| Grace Europe, Inc. DE
----- --------------------------------------- -------------------------
|
EXHIBIT 21
----- --------------------------------------- -------------------------
STATE OF
SUBSIDIARY NAME INCORPORATION
----- --------------------------------------- -------------------------
Grace Germany Holdings, Inc. DE
----- --------------------------------------- -------------------------
|X| Grace H-G Inc. DE
----- --------------------------------------- -------------------------
|X| Grace H-G II Inc. DE
----- --------------------------------------- -------------------------
|X| Grace Hotel Services Corporation DE
----- --------------------------------------- -------------------------
|X| Grace International Holdings, Inc. DE
----- --------------------------------------- -------------------------
Grace Management Services, Inc. DE
----- --------------------------------------- -------------------------
|X| Grace Offshore Company LA
----- --------------------------------------- -------------------------
|X| Grace PAR Corporation DE
----- --------------------------------------- -------------------------
|X| Grace Petroleum Libya DE
Incorporated
----- --------------------------------------- -------------------------
Grace Receivables Purchasing, DE
Inc.
----- --------------------------------------- -------------------------
|X| Grace Tarpon Investors, Inc. DE
----- --------------------------------------- -------------------------
|X| Grace Ventures Corp. DE
----- --------------------------------------- -------------------------
|X| Grace Washington, Inc. DE
----- --------------------------------------- -------------------------
|X| W. R. Grace Capital Corporation NY
----- --------------------------------------- -------------------------
|X| W. R. Grace & Co.-Conn. CT
----- --------------------------------------- -------------------------
|X| W. R. Grace Land Corporation NY
----- --------------------------------------- -------------------------
|X| Gracoal, Inc. DE
----- --------------------------------------- -------------------------
|X| Gracoal II, Inc. DE
----- --------------------------------------- -------------------------
|X| Guanica-Caribe Land DE
Development Corporation
----- --------------------------------------- -------------------------
|X| Hanover Square Corporation DE
----- --------------------------------------- -------------------------
|X| Homco International, Inc. DE
----- --------------------------------------- -------------------------
Ichiban Chemical Co., Inc. DE
----- --------------------------------------- -------------------------
|X| Kootenai Development Company MT
----- --------------------------------------- -------------------------
|X| L B Realty, Inc. DE
----- --------------------------------------- -------------------------
|X| Litigation Management, Inc. DE
----- --------------------------------------- -------------------------
|X| Monolith Enterprises, Incorporated DC
----- --------------------------------------- -------------------------
|X| Monroe Street, Inc. DE
----- --------------------------------------- -------------------------
|X| MRA Holdings Corp. DE
----- --------------------------------------- -------------------------
|X| MRA Intermedco, Inc. DE
----- --------------------------------------- -------------------------
|X| MRA Staffing Systems, Inc. DE
----- --------------------------------------- -------------------------
|X| Remedium Group, Inc. DE
----- --------------------------------------- -------------------------
Separations Group, The CA
----- --------------------------------------- -------------------------
|X| Southern Oil, Resin & Fiberglass, FL
Inc.
----- --------------------------------------- -------------------------
|X| Water Street Corporation DE
----- --------------------------------------- -------------------------
|
EXHIBIT 21
NON-U.S. SUBSIDIARIES
EXHIBIT 21
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby appoints ROBERT M. TAROLA, MARK A. SHELNITZ, and DAVID B. SIEGEL as his true and lawful attorneys-in-fact for the purpose of signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended December 31, 2002, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other.
/s/ John F. Akers
----------------------------
John F. Akers
Dated: March 6, 2003
|
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby appoints ROBERT M. TAROLA, MARK A. SHELNITZ, and DAVID B. SIEGEL as his true and lawful attorneys-in-fact for the purpose of signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended December 31, 2002, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other.
/s/ H. Furlong Baldwin
----------------------------
H. Furlong Baldwin
Dated: March 6, 2003
|
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby appoints ROBERT M. TAROLA, MARK A. SHELNITZ, and DAVID B. SIEGEL as his true and lawful attorneys-in-fact for the purpose of signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended December 31, 2002, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other.
/s/ Ronald C. Cambre
----------------------------
Ronald C. Cambre
Dated: March 6, 2003
|
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby appoints ROBERT M. TAROLA, MARK A. SHELNITZ, and DAVID B. SIEGEL as his true and lawful attorneys-in-fact for the purpose of signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended December 31, 2002, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other.
/s/ Marye Anne Fox
----------------------------
Marye Anne Fox
Dated: March 6, 2003
|
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby appoints ROBERT M. TAROLA, MARK A. SHELNITZ, and DAVID B. SIEGEL as his true and lawful attorneys-in-fact for the purpose of signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended December 31, 2002, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other.
/s/ John J. Murphy
----------------------------
John J. Murphy
Dated: March 6, 2003
|
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby appoints ROBERT M. TAROLA, MARK A. SHELNITZ, and DAVID B. SIEGEL as his true and lawful attorneys-in-fact for the purpose of signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended December 31, 2002, and all amendments thereto, to be filed with the Securities and Exchange Commission. Each of such attorneys-in-fact is appointed with full power to act without the other.
/s/ Thomas A. Vanderslice
----------------------------
Thomas A. Vanderslice
Dated: March 6, 2003
|
EXHIBIT 99.1
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned certifies that (1) this Annual Report of W. R. Grace & Co. (the "Company") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (this "Report"), fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Paul J. Norris ------------------------------ Chairman, President and Chief Executive Officer Date: March 13, 2003 |
EXHIBIT 99.2
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned certifies that (1) this Annual Report of W. R. Grace & Co. (the "Company") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (this "Report"), fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert M. Tarola --------------------------------- Senior Vice President and Chief Financial Officer Date: March 13, 2003 |