-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VZ/l+1tJ45eE6T7IrExLIPsB4YPUmQTkCSWESwe0gr/hygdbG0tkLfSRZSG3HhUv mI4TuBitt/6VpnGkA2SvdQ== 0000950123-96-004485.txt : 19960816 0000950123-96-004485.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950123-96-004485 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRACE W R & CO /NY/ CENTRAL INDEX KEY: 0000042872 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 133461988 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03720 FILM NUMBER: 96614423 BUSINESS ADDRESS: STREET 1: ONE TOWN CENTER RD CITY: BOCA RATON STATE: FL ZIP: 33486-1010 BUSINESS PHONE: 4073622000 FORMER COMPANY: FORMER CONFORMED NAME: GRACE W R & CO /CT/ DATE OF NAME CHANGE: 19900423 10-Q 1 W. R. GRACE & CO. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1996 Commission File Number 1-3720 W. R. GRACE & CO. New York 13-3461988 (State of Incorporation) (I.R.S. Employer Identification No.) One Town Center Road Boca Raton, Florida 33486-1010 (407) 362-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 90,870,737 shares of Common Stock, $1.00 par value, were outstanding at August 1, 1996. ================================================================================ 2 W. R. GRACE & CO. AND SUBSIDIARIES Table of Contents
Page No. -------- Part I. Financial Information - ------- Item 1. Financial Statements Consolidated Statement of Operations I-1 Consolidated Statement of Cash Flows I-2 Consolidated Balance Sheet I-3 Notes to Consolidated Financial Statements I-4 to I-10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition I-11 to I-18 Part II. Other Information - ------- Item 1. Legal Proceedings II-1 Item 4. Submission of Matters to a Vote of Security Holders II-1 Item 5. Other Information II-3 Item 6. Exhibits and Reports on Form 8-K II-3
As used in this Report, the term "Company" refers to W. R. Grace & Co., and the term "Grace" refers to the Company and/or one or more of its subsidiaries. 3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended Consolidated Statement of Operations (Unaudited) June 30, June 30, ------------------------------------------------ ---------------------- ----------------------- $ millions (except per share) 1996 1995 1996 1995 --------------------------------- --------- -------- --------- -------- Sales and revenues . . . . . . . . . . . . . . . . . . . $ 948.9 $932.3 $1,834.9 $1,785.7 Other income . . . . . . . . . . . . . . . . . . . . . . 14.1 4.5 17.9 8.8 -------- ------ -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . 963.0 936.8 1,852.8 1,794.5 -------- ------ -------- -------- Cost of goods sold and operating expenses . . . . . . . 572.0 550.7 1,103.8 1,051.6 Selling, general and administrative expenses . . . . . . 206.4 219.7 405.7 450.5 Depreciation and amortization . . . . . . . . . . . . . 46.4 40.2 91.9 78.4 Interest expense and related financing costs . . . . . . 18.3 18.7 36.7 34.5 Research and development expenses . . . . . . . . . . . 29.0 31.1 57.8 61.6 Corporate expenses previously allocated to the health care segment . . . . . . . . . . . . . . - 11.6 - 21.7 Restructuring costs . . . . . . . . . . . . . . . . . . 53.7 - 53.7 - Gain on sales of businesses . . . . . . . . . . . . . . (326.4) - (326.4) - ------- ------- -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . 599.4 872.0 1,423.2 1,698.3 ------- ------- -------- -------- Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . 363.6 64.8 429.6 96.2 Provision for income taxes . . . . . . . . . . . . . . . 130.5 19.8 154.9 28.3 ------- ------ -------- -------- Income from continuing operations . . . . . . . . . . . 233.1 45.0 274.7 67.9 Income from discontinued operations . . . . . . . . . . 100.8 33.7 122.8 58.3 ------- ------ -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . $ 333.9 $ 78.7 $ 397.5 $ 126.2 ======= ======= ========= ======== --------------------------------------------------------------------------------------------------------------------- Earnings per share: Continuing operations . . . . . . . . . . . . . . . . $ 2.41 $ .47 $ 2.82 $ .71 Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33 Fully diluted earnings per share: Continuing operations . . . . . . . . . . . . . . . . $ 2.37 $ .46 $ 2.76 $ .70 Net income . . . . . . . . . . . . . . . . . . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30 Dividends declared per common share . . . . . . . . . . $ .125 $ .35 $ .25 $ .70 ---------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of this statement. I-1 4
W. R. Grace & Co. and Subsidiaries Six Months Ended Consolidated Statement of Cash Flows (Unaudited) June 30, - ------------------------------------------------ ----------------- $ millions 1996 1995 - ------------------------------------------------ ------- ------- OPERATING ACTIVITIES Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . $429.6 $ 96.2 Reconciliation to cash provided by/(used for) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.9 78.4 Noncash charge relating to restructuring costs . . . . . . . . . . . . . . . . . . . 53.7 - Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326.4) - Changes in assets and liabilities, excluding effect of businesses acquired/divested and foreign exchange: Increase in notes and accounts receivable, net . . . . . . . . . . . . . . . . . (78.4) (60.0) Decrease/(increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . 33.3 (82.3) Proceeds from asbestos-related insurance settlements . . . . . . . . . . . . . . 99.7 156.4 Payments made for asbestos-related litigation settlements, judgments and defense costs . . . . . . . . . . . . . . . . . . . . . . (73.1) (60.2) Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (20.3) (51.4) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98.1) (37.2) ------ ------ Net pretax cash provided by operating activities of continuing operations . . . . . . . . 111.9 39.9 Net pretax cash provided by operating activities of discontinued operations . . . . . . . 47.1 27.8 ------ ------ Net pretax cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 159.0 67.7 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40.5) (91.0) ------ ------ Net cash provided by/(used for) operating activities . . . . . . . . . . . . . . . . . . . 118.5 (23.3) ------ ------ INVESTING ACTIVITIES Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234.5) (232.6) Businesses acquired in purchase transactions, net of cash acquired and assumed debt . . . . . . . . . . . . . . . . . . . . . . . . . . . - (31.1) Increase in net investments in discontinued operations . . . . . . . . . . . . . . . . . . (97.6) (46.3) Net proceeds from divestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697.1 7.1 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7 2.5 ------ ------ Net cash provided by/(used for) investing activities . . . . . . . . . . . . . . . . . . . 379.7 (300.4) ------ ------ FINANCING ACTIVITIES Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24.5) (66.3) Repayments of borrowings having original maturities in excess of three months . . . . . . (50.8) (51.2) Increase in borrowings having original maturities in excess of three months . . . . . . . - 85.3 Net (decrease)/increase in borrowings having original maturities of less than three months . . . . . . . . . . . . . . . . . . . . . . . . (6.7) 251.0 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.2 84.3 Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (398.2) (12.1) (Decrease)/increase in net financing activities of discontinued operations . . . . . . . . (37.1) 2.2 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .1 ------ ------ Net cash (used for)/provided by financing activities . . . . . . . . . . . . . . . . . . . (464.1) 293.3 ------ ------ Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (1.0) 3.5 ------ ------ Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 33.1 $(26.9) ====== ======
The Notes to Consolidated Financial Statements are integral parts of these statements. I-2 5
W. R. Grace & Co. and Subsidiaries Consolidated Balance Sheet (Unaudited) -------------------------------------- June 30, December 31, $ millions (except par value) 1996 1995 -------------------------------------- --------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 73.7 $ 40.6 Notes and accounts receivable, net . . . . . . . . . . . . . . 712.5 596.8 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 402.4 491.9 Net assets of discontinued operations . . . . . . . . . . . . . 296.9 323.7 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 194.0 206.1 Other current assets . . . . . . . . . . . . . . . . . . . . . 25.4 22.2 -------- -------- Total Current Assets . . . . . . . . . . . . . . . . . . . . 1,704.9 1,681.3 Properties and equipment, net of accumulated depreciation and amortization of $1,398.9 and $1,418.8, respectively . . . . . . . . . . . . . . . . 1,771.8 1,736.1 Goodwill, less accumulated amortization of $12.7 and $20.6, respectively . . . . . . . . . . . . . . . . . 39.6 111.8 Net assets of discontinued operations - health care . . . . . . . 1,571.6 1,435.3 Asbestos-related insurance receivable . . . . . . . . . . . . . . 241.2 321.2 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 380.1 386.6 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 596.6 625.3 -------- -------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 603.9 $ 638.3 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 237.8 339.2 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 333.8 103.3 Other current liabilities . . . . . . . . . . . . . . . . . . . 828.6 836.4 Minority interest . . . . . . . . . . . . . . . . . . . . . . . 297.0 297.0 -------- -------- Total Current Liabilities . . . . . . . . . . . . . . . . . 2,301.1 2,214.2 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,262.8 1,295.5 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 773.6 789.0 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 43.2 44.8 Noncurrent liability for asbestos-related litigation . . . . . . . 659.1 722.3 -------- -------- Total Liabilities . . . . . . . . . . . . . . . . . . . . . 5,039.8 5,065.8 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stocks, $100 par value . . . . . . . . . . . . . . . 7.4 7.4 Common stock, $1 par value . . . . . . . . . . . . . . . . . . 98.7 97.4 Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 513.4 459.8 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 709.0 Cumulative translation adjustments . . . . . . . . . . . . . . (40.4) (39.4) Treasury stock - 5,189,124 common shares, at cost . . . . . . . (395.1) (2.4) -------- -------- Total Shareholders' Equity . . . . . . . . . . . . . . . . . 1,266.0 1,231.8 -------- -------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,305.8 $6,297.6 ======== ========
The Notes to Consolidated Financial Statements are integral parts of these statements. I-3 6 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) (A) BASIS OF PRESENTATION The financial statements in this Report at June 30, 1996 and 1995 and for the three- and six-month interim periods then ended are unaudited and should be read in conjunction with the consolidated financial statements in the Company's 1995 Annual Report on Form 10-K (1995 Annual Report). Such interim financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented; all such adjustments are of a normal recurring nature. Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current periods' basis of presentation. The results of operations for the three- and six-month interim periods ended June 30, 1996 are not necessarily indicative of the results of operations for the fiscal year ending December 31, 1996. (B) ASBESTOS AND RELATED INSURANCE LITIGATION As previously reported, Grace is a defendant in property damage and personal injury lawsuits relating to previously sold asbestos- containing products, and anticipates that it will be named as a defendant in additional asbestos-related lawsuits in the future. Due to the unique nature of each property damage claim, Grace cannot predict whether and to what extent asbestos-related property damage lawsuits and claims will be brought against it in the future or the expenses involved in defending against and disposing of any such future lawsuits and claims. By contrast, Grace believes that there are common features with respect to personal injury claims; therefore, in 1995, Grace determined that it had adequate experience to reasonably estimate the number of personal injury claims to be filed against it through 1998 and established an accrual for such claims. Grace was a defendant in approximately 44,100 asbestos-related lawsuits at June 30, 1996 (39 involving claims for property damage and the remainder involving approximately 109,000 claims for personal injury), as compared to approximately 40,800 lawsuits at December 31, 1995 (47 involving claims for property damage and the remainder involving approximately 92,400 claims for personal injury). During the first half of 1996, Grace settled four property damage lawsuits for a total of $11.3 (including one case that was on appeal); one new property damage lawsuit was filed; four property damage lawsuits were dismissed without the payment of any damages or settlement amounts by Grace; and, in a case that had been on appeal and is now final, Grace was held liable for $4.1. During the first half of 1996, approximately 1,400 personal injury claims against Grace were dismissed without payment and $13.6 was recorded to reflect settlements in approximately 3,500 personal injury claims. Based upon and subject to the factors discussed in Note 2 to Grace's consolidated financial statements for the year ended December 31, 1995, Grace estimates that its probable liability with respect to the defense and disposition of asbestos property damage and personal injury lawsuits and claims pending at June 30, 1996 and December 31, 1995 (except for four property damage lawsuits as to which the liabilities are not yet estimable because Grace has I-4 7 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) not yet been able to obtain sufficient information as to the relevant properties through discovery proceedings), as well as personal injury lawsuits and claims expected to be filed through 1998, is as follows:
June 30, December 31, 1996 1995 Current liability for asbestos-related litigation (1) . . . . . . . . . . . . . . . $100.0 $100.0 Noncurrent liability for asbestos-related litigation . . . . . . . . . . . . . . . . 659.1 (2) 722.3 ------ ------ Total asbestos-related liability . . . . . . . . . . . . . . . . . . . . . . . . . . $759.1 $822.3 ====== ======
(1) Included in "Other current liabilities" in the consolidated balance sheet. (2) The decrease from December 31, 1995 reflects payments made by Grace for settlements and defense costs in connection with asbestos-related lawsuits and claims during the six months ended June 30, 1996. Grace previously purchased insurance policies with respect to its asbestos-related lawsuits and claims. Grace has settled with and been paid by its primary insurance carriers with respect to both property damage and personal injury lawsuits and claims. With minor exceptions, Grace has also settled with its excess insurance carriers that wrote policies available for property damage claims; those settlements involve amounts paid and to be paid to Grace. In addition, Grace has settled with many excess insurance carriers that wrote policies available for personal injury lawsuits and claims. Grace is currently in litigation with its remaining excess insurance carriers whose policies Grace believes are available for asbestos-related personal injury lawsuits and claims. Recovery under these policies is subject to lengthy litigation and legal uncertainties. Insurance coverage for asbestos-related liabilities has not been commercially available since 1985. The following table shows Grace's total estimated insurance recoveries in reimbursement for past and estimated future payments to defend against and dispose of asbestos-related lawsuits and claims:
June 30, December 31, 1996 1995 Notes receivable from insurance carriers - current, net of discounts of $4.0 (1995 - $4.3) (1) $ 69.1 $ 62.0 Notes receivable from insurance carriers - noncurrent, net of discounts of $5.1 (1995 - $7.3) (2) 33.4 56.4 Asbestos-related insurance receivable . . . . . . . . . . . . . . . . . . . . 241.2(3) 321.2 ------ ------ Total amounts due from insurance carriers . . . . . . . . . . . . . . . . . . . . . $343.7 $439.6 ====== ======
(1) Included in "Notes and accounts receivable, net" in the consolidated balance sheet. (2) Included in "Other assets" in the consolidated balance sheet. (3) The decrease from December 31, 1995 reflects the receipt of net insurance proceeds of $33.3 and the reclassification of $46.7 from "Asbestos-related insurance receivable" to "Notes receivable from insurance carriers - current" and "- noncurrent" as the result of a 1996 settlement with an insurance carrier. At June 30, 1996, settlements with certain insurance carriers provided for the future receipt by Grace of $111.6, which Grace has recorded as notes receivable (both current and noncurrent) of $102.5, net of discounts. In the first half of 1996, Grace received net proceeds of $99.7 pursuant to settlements with insurance carriers in reimbursement for monies previously expended by Grace in connection with asbestos-related lawsuits and claims; of this amount, $65.1 was received pursuant to settlements entered into in 1993 through 1996, which had previously been classified as notes receivable. Pursuant to I-5 8 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) settlements with two groups of carriers in 1995, Grace will continue to receive payments based on future cash outflows for asbestos- related lawsuits and claims; such payments are estimated to represent approximately $215.8 of the asbestos-related receivable of $241.2 at June 30, 1996. Grace's ultimate exposure with respect to its asbestos-related lawsuits and claims will depend on the extent to which its insurance will cover damages for which it may be held liable, amounts paid in settlement and litigation costs. However, in Grace's opinion (which is not based on a formal opinion of counsel), it is probable that recoveries from its insurance carriers (including amounts reflected in the receivable discussed above), along with other funds, will be available to satisfy the personal injury and property damage lawsuits and claims pending at June 30, 1996, as well as personal injury lawsuits and claims expected to be filed in the future. Consequently, Grace believes that the resolution of its asbestos-related litigation will not have a material adverse effect on its consolidated results of operations or financial position. For additional information, see Note 2 to the consolidated financial statements in the 1995 Annual Report. (C) ACQUISITIONS AND DIVESTMENTS - CONTINUING OPERATIONS Acquisitions In July 1996, Grace announced that it had completed the acquisition of Cypress Packaging, Inc. (Cypress), a manufacturer of flexible packaging. Cypress, with 1995 sales of more than $20.0, is a leading supplier of plastic packaging materials for the retail pre-cut produce market segment. Divestments In June 1996, Grace sold its water treatment and process chemicals business to Betz Laboratories, Inc. (Betz). The purchase price in the transaction was $632.0, subject to certain adjustments, plus the assumption of certain liabilities. As initially adjusted, the purchase price of $636.4 (which is subject to further adjustment) was paid at closing as follows: $534.8 in cash, a $100.0 promissory note (secured by a letter of credit) due in January 1997, and a $1.6 promissory note paid in July 1996. The sales and revenues of Grace's water treatment and process chemicals business for the six months ended June 30, 1996 and 1995 were $201.2 and $193.9, respectively; its financial position and results of operations were not significant to Grace. As reflected in the consolidated statement of operations (in the line captioned "Gain on sales of businesses"), the sales of this business and the biopesticides business resulted in a pretax gain of $326.4, and an after-tax gain of $210.1 ($2.18 per common share), in continuing operations. I-6 9 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) (D) DISCONTINUED OPERATIONS Health Care As previously reported, in February 1996 Grace and Fresenius AG (Fresenius) entered into a definitive agreement to combine National Medical Care, Inc. (NMC), Grace's principal health care subsidiary, with Fresenius' worldwide dialysis business (FWD) to create Fresenius Medical Care AG (FMC). The combination would follow the borrowing and/or assumption of debt aggregating approximately $2,300 by NMC, a tax-free distribution of the net cash proceeds by NMC to W. R. Grace & Co.-Conn., a Connecticut subsidiary of the Company that conducts Grace's packaging and specialty chemicals businesses (Grace Chemicals) and a tax-free distribution by the Company, with respect to each share of its Common Stock, of one share of a newly formed Delaware corporation (New Grace) holding all of the stock of Grace Chemicals, as well as Grace's other businesses other than NMC. As a result of these transactions,the holders of the Company's Common Stock would own 100% of New Grace and would be allocated an aggregate of approximately 44.8% of FMC's ordinary shares on a fully diluted basis. The holders of the Company's Common Stock would also own preferred stock, the dividend on which would be linked to the performance of FMC. The Company's shareholders are to vote on the combination and related matters at a special meeting to be held on September 16, 1996, and it is expected that the various transactions will be completed following the date of the special meeting and prior to October 1, 1996; however, there can be no assurance as to whether or when such transactions will be completed. Grace, on behalf of NMC, has obtained a commitment letter from various financial institutions under which approximately $2,500 of financing is expected to be made available to NMC and certain specified subsidiaries and affiliates in connection with the above transactions. The credit agreement is expected to provide that certain obligations thereunder will be guaranteed by Grace Chemicals for specified periods of time and subject to certain conditions. See "FINANCING" in the Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for additional information. In October 1995, NMC received five investigative subpoenas from the Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services. In the event that a U.S. government agency believes that any wrongdoing has occurred, civil and/or criminal proceedings could be instituted, and if any such proceedings were to be instituted and the outcome were unfavorable, NMC could be subject to fines, penalties and damages or could become excluded from government reimbursement programs. Any such result could have a material adverse effect on NMC's financial position or the results of operations of NMC and Grace. However, at the present time, the results of the investigation and its impact cannot be predicted, as management does not believe that the liability, if any, with respect to the OIG investigation is estimable. Under the terms of the combination of FWD and NMC described above, NMC will remain responsible for all liabilities, if any, resulting from the OIG investigation. In July 1996, an agreement was reached with the U.S. government under which, subject to certain conditions I-7 10 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) and limitations, upon such combination, (i) FMC and the Company (which will become a subsidiary of FMC) are to guarantee the payment of the obligations, if any, of NMC to the U.S. government in respect of the OIG investigation and another proceeding; (ii) Grace Chemicals is to guarantee the obligations of FMC under the foregoing guarantee with respect to acts and transactions that took place prior to the consummation of the combination (but only if such obligations become due and payable and remain uncollected for 120 days); and (iii) NMC is to deliver a standby letter of credit in the principal amount of $150.0 in favor of the U.S. government to support its payment of such obligations. As a result of this agreement, the U.S. government has agreed (i) to not take any action to delay or interfere with the combination and (ii) to release Grace, NMC and certain other parties from certain fraudulent conveyance and related claims arising from or related to the combination (or any transaction comprising a part thereof). See Note 7 to the consolidated financial statements in the 1995 Annual Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- OIG Investigation" and " -- OIG Agreements" in the Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for additional information. Discontinued Operations - Consolidated Statement of Operations The sales and revenues and results of the discontinued health care operations and the gain on the sale of the transgenic plant business of Grace's Agracetus subsidiary (discussed below) were as follows:
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ----------------------- 1996 1995 1996 1995 ------ ------ ----- ----- Sales and revenues - health care $565.5 $523.5 $1,105.2 $1,015.3 ====== ====== ======== ======== Income from health care operations before income taxes $ 38.9 $ 60.1 $ 77.1 $ 104.1 Provision for income taxes 17.5 26.4 33.7 45.8 ------ ------ -------- -------- Income from health care operations $ 21.4 $ 33.7 $ 43.4 $ 58.3 ------ ------ -------- -------- Gain on sale of business $129.0 $ - $ 129.0 $ - Provision for income taxes on sale of business 49.6 - 49.6 - ------ ------ -------- -------- Net gain on sale of business $ 79.4 $ - $ 79.4 $ - ------ ------ -------- -------- Income from discontinued operations $100.8 $ 33.7 $ 122.8 $ 58.3 ====== ====== ======== ========
The operating results of Grace's cocoa business and other discontinued operations have been charged against previously established reserves and are, therefore, not reflected in the above results. The net operating income of the health care business reflects an allocation of Grace's interest expense ($24.4 and $21.6 for the second quarters of 1996 and 1995, respectively, I-8 11 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) and $51.2 and $41.7 for the six months ended June 30, 1996 and 1995, respectively) based on a ratio of the net assets of the health care business as compared to Grace's total capital. Taxes have been allocated to the health care business as if it were a stand-alone taxpayer; however, these allocations are not necessarily indicative of the taxes attributable to the health care business in the future. For the quarter and six months ended June 30, 1995, net operating income of the health care business also reflects an allocation of Grace's health care-related research expenses (Grace management initiated the phase-out of certain of its health care research programs in the third quarter of 1995). In May 1996, Grace completed the sale of the transgenic plant business of its Agracetus subsidiary to the Monsanto Company for $150.0 in cash, resulting in a pretax gain of $129.0, and an after-tax gain of $79.4 ($0.82 per common share), in discontinued operations. Discontinued Operations - Consolidated Balance Sheet The net assets, excluding intercompany assets, of Grace's discontinued operations included in the consolidated balance sheet at June 30, 1996, are as follows:
Sub- Health Cocoa Other Total Care Total ----- ----- ------ --------- -------- Current assets $335.2 $ 4.7 $339.9 $ 726.2 $1,066.1 Properties and equipment, net 180.9 15.9 196.8 417.7 614.5 Investments in and advances to affiliated companies - 28.4 28.4 - 28.4 Other assets 57.4 - 57.4 981.5 1,038.9 ------ ----- ------ -------- -------- Total assets $573.5 $49.0 $622.5 $2,125.4 $2,747.9 ------ ----- ------ -------- -------- Current liabilities $237.2 $ 5.0 $242.2 $ 476.0 $ 718.2 Other liabilities 79.2 4.2 83.4 77.8 161.2 ------ ----- ------ -------- -------- Total liabilities $316.4 $ 9.2 $325.6 $ 553.8 $ 879.4 ------ ----- ------ -------- -------- Net assets $257.1 $39.8 $296.9(1) $1,571.6(2) $1,868.5 ====== ===== ====== ======== ========
(1) Classified as a current asset in the consolidated balance sheet. (2) Classified as a noncurrent asset in the consolidated balance sheet. Minority interest consists of a limited partnership interest in Grace Cocoa Associates, L.P. (LP). LP's assets consist of Grace Cocoa's worldwide cocoa and chocolate business, long-term notes and demand loans due from various Grace entities and guaranteed by the Company and its principal operating subsidiary, and cash. LP is a separate and distinct legal entity from each of the Grace entities and has separate assets, liabilities, business functions and operations. For financial reporting purposes, the assets, liabilities, results of operations and cash flows of LP are included in Grace's consolidated financial statements as components of discontinued operations and the outside investors' interest in LP is reflected as a minority interest. The intercompany notes held by LP are eliminated in preparing the consolidated financial statements and, therefore, have not been classified as pertaining to discontinued operations. I-9 12 W. R. Grace & Co. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in millions, except per share amounts) (E) RESTRUCTURING COSTS As discussed in Note 5 to the consolidated financial statements in the 1995 Annual Report, Grace began implementing in 1995 a worldwide program focused on streamlining processes and reducing general and administrative expenses, factory administration costs and noncore corporate research and development expenses. As previously reported, Grace expects to implement additional cost reduction and efficiency improvements beyond those initiated in 1995, as its businesses further evaluate and reengineer their operations. In furtherance of that plan, in the second quarter of 1996, Grace recorded a pretax charge of $53.7 million ($32.4 million after-tax), principally related to restructuring the Company's European packaging operations. The charge primarily relates to employee termination benefits and lease termination costs. (F ) OTHER Components of Grace's inventories were as follows:
June 30, December 31, 1996 1995 -------- ------------ Raw and packaging materials $120.0 $137.1 In process 79.5 78.0 Finished products 252.9 325.2 ------ ------ $452.4 $540.3 Less: Adjustment of certain inventories to a last-in/first-out (LIFO) basis (50.0) (48.4) ------ ------ Total Inventories $402.4 $491.9 ====== ======
Earnings per share are calculated on the basis of the following weighted average number of common shares outstanding:
1996 1995 ---------- ---------- Three Months Ended June 30: . . . . . . . . . . . . 96,634,000 95,116,000 Six Months Ended June 30: . . . . . . . . . . . . . 97,259,000 94,629,000
I-10 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVIEW OF OPERATIONS Overview The second quarter of 1996 included an after-tax gain on the sales of businesses, primarily the water treatment and process chemicals business and the transgenic plant business, totaling $289.5 million ($455.4 million pretax), offset by an after-tax charge for restructuring costs of $32.4 million ($53.7 million pretax). The first quarter of 1995 included an after-tax charge of $12.5 million ($20.0 million pretax) relating to corporate governance matters. Excluding the above items, net income for the second quarter of 1996 would have decreased 2% as compared to the second quarter of 1995, and net income for the 1996 first half would have increased by 1% over the 1995 first half. Operating Results The following table compares results for the specialty chemicals segment for the 1996 second quarter and first half to those for the comparable periods of 1995:
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended Specialty Chemicals Operating Results June 30, June 30, ------------------------------------- ----------------------- ----------------------- $ millions 1996 1995 1996 1995 ------------------------------------- ------ ------ -------- -------- Sales and revenues $948.9 $932.3 $1,834.9 $1,785.7 ====== ====== ======== ======== Operating income before taxes (i) $102.1 $ 85.3 $ 186.0 $ 153.7 Gain on sales of businesses 326.4 - 326.4 - Restructuring costs (53.7) - (53.7) - Provision for corporate governance - - - (20.0) Interest expense/financing costs (ii) (18.3) (18.7) (36.7) (34.5) Other income/(expenses), net (ii) 7.1 (1.8) 7.6 (3.0) ------ ------ -------- -------- Income from continuing operations before income taxes $363.6 $ 64.8 $ 429.6 $ 96.2 ====== ====== ======== ========
(i) Reflects the allocation of general corporate overhead, general corporate research expenses and certain other income and expense items that can be identified with the specialty chemicals operations. (ii) Corporate interest and financing costs and nonallocable expenses are not reflected in the results of the specialty chemicals segment. Corporate interest and financing costs are not allocated to the specialty chemicals operating results because all significant financing decisions are centralized at the corporate level. Sales and revenues increased 2% and 3% in the second quarter and first half of 1996, respectively, as compared to the 1995 periods. The increase for the 1996 second quarter reflected a favorable volume variance estimated at 4%, and unfavorable price/product mix and currency translation variances estimated at 1% each, compared to 1995. The increase for the first half of 1996 reflected a favorable volume variance estimated at 3%, with price/product mix and currency translation variances being flat. I-11 14 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) Comparison of Second Quarter 1996 to Second Quarter 1995 Construction products, catalysts and other silica-based products, packaging and water treatment product lines experienced improved volumes, offset by a volume decline in container products. # PACKAGING - Volume increases were offset by unfavorable price/product mix variances, resulting in sales being flat for the 1996 quarter versus the 1995 quarter. Sales of bags declined, particularly in Europe and Asia Pacific, due to the considerable decrease in beef consumption caused by the outbreak of bovine spongiform encephalopathy (commonly referred to a "mad cow disease"). Sales of films were down, primarily in North America, due to pricing pressures. Laminate sales increased, primarily as a result of market share gains in Asia Pacific. # CATALYSTS AND OTHER SILICA-BASED PRODUCTS - Sales were higher in all regions. Market share gains in Asia Pacific and Europe increased sales for refinery catalysts, and North America polyolefin catalyst sales increased primarily due to an improved resin market. # CONSTRUCTION PRODUCTS - Volumes increased in all regions and in all products, especially concrete and waterproofing products in North America and Asia Pacific. These increases were due to housing starts and projects that had been delayed by severe weather in the first quarter of 1996 in North America and market share gains in Asia Pacific. Volume increases were partially offset by the effect of the 1995 divestment of the composite material business. # CONTAINER - The negative effects of currency exchange, coupled with volume declines, led to decreased sales of can sealing products in Asia Pacific and closure compounds in Europe, partially offset by volume increases of can coating products in Latin America as a result of continued market penetration. # WATER TREATMENT - Volume increases, caused by market share gains, resulted in higher paper industry process chemicals sales in Europe. Water treatment chemicals sales in Latin America increased, as management implemented various programs to improve price/product mix. As discussed in note (c) to the consolidated financial statements in this Report, Grace sold its water treatment and process chemicals business in June 1996. Operating income before taxes increased by 20% in the second quarter of 1996 as compared to the 1995 second quarter, as cost management programs continued to favorably impact results across all regions and product lines. In addition to the favorable effects of the cost management programs, operating income before taxes was affected by the factors discussed below. # NORTH AMERICA - Improved results in the second quarter of 1996 reflected improved operating margins resulting from the sales volume increases in construction products, offset by continued weakness in fluid cracking catalysts and resultant pricing pressures. I-12 15 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) # EUROPE - Results improved versus the 1995 second quarter, primarily due to the volume increases in refinery catalysts, construction products and paper industry process chemicals. These favorable results were offset by lower results in packaging due to the volume decline in bags, discussed above. # ASIA PACIFIC - 1996 second quarter results declined versus the 1995 period, as the volume increases in construction products were offset by unfavorable results in can sealing products due to certain depressed economies and the shortage of products to be canned as a result of last year's floods in Southeast Asia, and in packaging due to the volume decline in bags, discussed above. # LATIN AMERICA - Results improved versus the 1995 second quarter, primarily due to the increased water treatment chemical sales and market share gains in coating products. For the first half of 1996, operating income increased 21% over the comparable period of 1995, primarily due to improved operating margins and the growth in catalysts and other silica-based products, construction products and water treatment, as discussed above. Statement of Operations Other Income Other income includes interest income, dividends, royalties from licensing agreements and equity in earnings of affiliated companies. Included in other income in the second quarter and first half of 1996 was interest income of $7.5 million relating to the settlement of prior years' Federal income tax returns. Interest Expense and Related Financing Costs Excluding amounts allocated to discontinued operations (as discussed in Note (d) to the consolidated financial statements in this Report), interest expense and related financing costs of $18.3 million and $36.7 million in the second quarter and first half of 1996, respectively, decreased 2% and increased 6%, respectively, versus the comparable 1995 periods. Including amounts allocated to discontinued operations, interest expense and related financing costs increased 6% and 15% in the second quarter and first half of 1996, respectively, over the comparable 1995 periods, to $42.7 million and $87.9 million, respectively. The overall increase in interest expense and related financing costs is primarily due to higher average debt levels. See "Financial Condition: Liquidity and Capital Resources" below for information on borrowings Research and Development Expenses Research and development spending decreased 7% and 6% in the second quarter and first half of 1996, respectively, versus the 1995 periods, reflecting cost management programs. Research and development spending for 1996 has been directed to Grace's core packaging and specialty chemicals businesses. I-13 16 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) Research and development spending is expensed as incurred. Research is carried out by product line laboratories in North America, Europe, Latin America and Asia Pacific and at a corporate research facility in the U.S. Corporate research spending is generally charged to the product lines, based upon the costs incurred on projects directly sponsored by the respective product lines. Restructuring Costs See note (e) to the consolidated financial statements in this Report for information relating to restructuring costs. Income Taxes The effective tax rates were 35.9% and 36.1%, respectively, for the second quarter and first half of 1996, compared with 30.6% and 29.4%, respectively, for the second quarter and first half of 1995. Excluding the items discussed under "Overview" above, Grace's effective tax rates would have been 39.1% for the second quarter of 1996 and 38.2% and 30.8% for the first half of 1996 and 1995, respectively. The low effective tax rates in the second quarter and first half of 1995 were primarily due to a lower overall foreign tax rate, as the result of a reassessment of the valuation allowance for certain deferred tax assets. Income from Discontinued Operations The following table compares the results for the health care business for the 1996 second quarter and first half to results for the comparable periods of 1995:
W. R. Grace & Co. and Subsidiaries Three Months Ended Six Months Ended Health Care Operating Results June 30, June 30, ---------------------------------- ---------------------- ------------------------ $ millions 1996 1995 1996 1995 ---------------------------------- ------ ------ -------- --------- Sales and revenues $565.5 $523.5 $1,105.2 $1,015.3 ====== ====== ======== ======== Operating income before taxes (i) $ 63.3 $ 81.7 $ 128.3 $ 145.8 ====== ====== ======== ========
(i) The above operating results do not include interest expense allocated to the discontinued health care business of $24.4 and $21.6 for the second quarters of 1996 and 1995, respectively, and $51.2 and $41.7 for the first six months of 1996 and 1995, respectively. Sales and revenues for the second quarter and first half of 1996 increased by 8% and 9%, respectively, over the comparable periods of 1995. These improvements were due to 11% increases in kidney dialysis services revenues in both the second quarter and first half of 1996, and increases of 8% and 12% in the second quarter and first half of 1996, respectively, in medical products operations. The increases were largely due to the effect of acquisitions subsequent to the first half of 1995, partially offset by the decision, effective July 1, 1995, to discontinue recognizing incremental revenue relating to certain dual eligible end I-14 17 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) stage renal disease patients; see the discussion below relating to the Omnibus Budget Reconciliation Act of 1993 (OBRA 93). The number of centers providing dialysis and related services increased 13%, from 623 at June 30, 1995 to 706 at June 30, 1996 (587 in North America, 66 in Europe, 37 in Latin America and 16 in Asia Pacific). The improvements in dialysis services and medical products operations were partially offset by a 5% decrease in both the second quarter and first half of 1996 in home health care revenues resulting from a decrease in infusion therapy revenues due to continued managed care pricing pressure. Operating income before taxes in the second quarter and first half of 1996 decreased by 23% and 12%, respectively, over the 1995 periods. The decreases were principally attributable to the effects of OBRA 93 (which reduced revenues without a commensurate decrease in costs) on kidney dialysis services results and a reduction in home health care operating income due to the decreased revenues discussed above and increased bad debt expense. Also negatively impacting operating income were costs incurred in connection with the OIG investigation, as discussed below and in note (d) to the consolidated financial statements in this Report. These decreases were offset by the increases in medical products operations due to the increased revenues discussed above. See below and note (d) to the consolidated financial statements in this Report for a discussion concerning certain items relating to NMC's operations and the possible material adverse effects of these items. Intradialytic Parenteral Nutrition (IDPN) Therapy Among its other services, NMC administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. Since late 1993, Medicare claims processors have sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims currently being paid by Medicare represents an unauthorized policy coverage change. Accordingly, NMC, along with certain other IDPN providers, is pursuing various administrative and legal avenues, including administrative appeals and a declaratory judgment action, to address this problem. Although NMC contends that its IDPN claims are consistent with published Medicare coverage guidelines and ultimately will be approved for payment, there can be no assurance that the claims will be approved for payment. Such claims represent substantial accounts receivable of NMC, amounting to approximately $130.0 million and $93.0 million as of June 30, 1996 and December 31, 1995, respectively, and which have been increasing at the rate of approximately $6.0 million per month; however, see below for information regarding a new IDPN reimbursement policy. If NMC is unable to collect its IDPN accounts receivable or if IDPN and/or Medicare Parenteral and Enteral Nutrition (PEN) program coverage is reduced or eliminated, NMC's business, financial position and results of operations could be materially adversely affected. In April 1996, the Medicare claims processors published new medical review policies which restrict substantially the number of patients for whom IDPN would be reimbursed by Medicare. The new policies are final and effective for claims submitted on and after I-15 18 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) July 1, 1996. NMC and other PEN providers continue to review whether and to what extent possible modifications to the new policies might be obtained in legislative, judicial or administrative forums. While the new policy permits continued coverage of IDPN and other PEN therapies, and while the potential impact of the new policy is subject to further analysis, NMC believes that the new policy will make it substantially more difficult to qualify patients for future coverage by, among other things, requiring certain patients to undergo onerous and/or invasive tests in order to qualify for coverage. The new policy also eliminates all reimbursement for infusion pumps. NMC, together with other interested parties, may seek to effect certain changes in the new policy (other than with respect to elimination of pumps revenues), and NMC has developed changes to its patient qualification procedures in order to comply with the policy. However, if NMC is unable to achieve meaningful change in the new policy, if physicians and patients fail to accept the new qualification procedures and/or if patients fail to qualify under such procedures, the policy could significantly reduce the number of patients eligible for Medicare coverage of IDPN and other PEN therapies, which would have a material adverse effect on NMC's financial position and results of operations. See Note 7 to the consolidated financial statements in the 1995 Annual Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- IDPN" and "-- Reimbursement -- U.S. -- IDPN" in the Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for additional information. OBRA 93 NMC's business, financial position and results of operations could also be materially adversely affected by an adverse outcome in the pending litigation concerning the implementation of certain provisions of OBRA 93 relating to the coordination of benefits between Medicare and employer health plans in the case of certain dialysis patients. See Note 7 to the consolidated financial statements in the 1995 Annual Report and "BUSINESS OF FRESENIUS MEDICAL CARE -- Regulatory and Legal Matters -- Legal and Regulatory Proceedings -- OBRA 93" in the Company's Joint Proxy Statement-Prospectus dated August 2, 1996 for additional information. FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES During the first half of 1996, the net pretax cash provided by Grace's continuing operating activities was $111.9 million, versus $39.9 million in the first half of 1995. The increase was primarily due to improved operating results, partially offset by reduced net cash inflows resulting from settlements with certain insurance carriers for asbestos-related litigation, net of amounts paid for the defense and disposition of asbestos-related litigation (as discussed below), of $26.6 million in the first half of 1996 as compared to $96.2 million in the first half of 1995. After giving effect to the net pretax cash provided by operating activities of discontinued operations and payments of income taxes, the net cash provided by operating activities was $118.5 million in the first half of 1996 versus $23.3 million used in the first half of 1995. I-16 19 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) Investing activities provided $379.7 million of cash in the first half of 1996, largely reflecting the net cash proceeds of $697.1 million from the divestments of businesses (excluding $101.6 million of promissory notes received on the sale of the water treatment and process chemicals business). This positive cash flow was partially offset by capital expenditures of $234.5 million (more than 70% of which relates to Grace's packaging and catalyst and other silica-based businesses). Also, investing activities of discontinued operations for the first half of 1996 used $97.6 million (compared to $46.3 million used in the first half of 1995), primarily reflecting the classification of the health care business as a discontinued operation in the 1995 second quarter. Management anticipates that capital expenditures for 1996 will not exceed the capital expenditures for 1995. Net cash used for financing activities in the first half of 1996 was $464.1 million, primarily reflecting the purchase of stock (as discussed below), reductions in debt and the payment of dividends, partially offset by proceeds from the exercise of employee stock options. Total debt was $1,866.7 million at June 30, 1996, reflecting a decrease of $67.1 million from December 31, 1995. Grace's total debt as a percentage of total capital (debt ratio) decreased from 61.1% at December 31, 1995 to 59.6% at June 30, 1996, primarily due to the decrease in debt. At June 30, 1996 and December 31, 1995, the net assets of the discontinued health care business included $188.1 million and $226.7 million of debt, respectively. During the first six months of 1996, Grace received $697.1 million of cash proceeds from divestments, principally from the sales of the water treatment and process chemicals business and the transgenic plant business, and it expects to receive approximately $2.3 billion (in the form of cash and/or the assumption of debt) from the expected distribution from NMC (as discussed in note (d) to the consolidated financial statements in this Report). Grace has applied the cash proceeds received to date, and expects to apply the cash proceeds generated from the NMC distribution and, to a lesser extent, funds generated by operations, to the reduction of borrowings, the repurchase of stock and investments in core businesses. See note (d) to the consolidated financial statements in this Report for information concerning an agreement reached with the U.S. government regarding the OIG investigation, and the commitment letter for approximately $2.5 billion of financing obtained by Grace on behalf of NMC. In May 1996, Grace Chemicals entered into a new credit agreement providing for total borrowings of $1.85 billion and terminated three previous agreements providing for total borrowings of $850 million. The new credit agreement is intended to provide liquidity to finance the repurchase of stock and potential acquisitions pending the receipt of the distribution from NMC. Borrowings under the new credit agreement are to be guaranteed by New Grace and the Company. Upon the completion of the disposition of NMC, the total borrowings available under the new credit agreement will be reduced to $650 million and the guarantee by the Company will terminate. The Company initiated its previously announced share repurchase program in April 1996. As of June 30, 1996, Grace had acquired 5,229,600 shares under this program at a cost of I-17 20 Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) approximately $398.2 million (or an average price of approximately $76.14 per share). In late July 1996, the Company temporarily suspended the repurchase program. Through late July 1996, Grace had purchased a total of 7,920,200 shares at a cost of approximately $583.3 million (or an average price of approximately $73.65 per share). In July 1996, Grace announced that it had completed the acquisition of Cypress Packaging, Inc. (Cypress), a manufacturer of flexible packaging. Cypress, with 1995 sales of more than $20.0 million, is a leading supplier of plastic packaging materials for the retail pre-cut produce market segment. The acquisition of Cypress is in lieu of the previously announced plan to construct a $50.0 million plant in Seneca, South Carolina to serve the fresh-cut produce market. Asbestos-Related Matters As reported in note (b) to the consolidated financial statements in this Report, Grace is a defendant in property damage and personal injury lawsuits relating to previously sold asbestos-containing products and is involved in related litigation with certain of its insurance carriers. In the first half of 1996, Grace received $26.6 million under settlements with certain insurance carriers, net of amounts paid for the defense and disposition of asbestos-related property damage and personal injury litigation. The balance sheet at June 30, 1996 includes a receivable due from insurance carriers, a portion of which is subject to litigation, of $241.2 million. Grace has also recorded notes receivable of $111.6 million ($102.5 million, net of discounts) for amounts to be received in 1996 to 2001 pursuant to settlement agreements with certain insurance carriers. Although the amounts to be paid in 1996 in respect of asbestos-related lawsuits and claims cannot be precisely estimated, Grace expects that it will be required to expend approximately $40.0 million (pretax) in 1996 to defend against and dispose of such lawsuits and claims (after giving effect to payments to be received from certain insurance carriers, as discussed above and in note (b) to the consolidated financial statements in this Report). As indicated therein, the amounts reflected in the consolidated financial statements with respect to the probable cost of defending against and disposing of asbestos-related lawsuits and claims and probable recoveries from insurance carriers represent estimates; neither the outcomes of such lawsuits and claims nor the outcomes of Grace's continuing litigations with certain of its insurance carriers can be predicted with certainty. Environmental Matters There were no significant developments relating to environmental liabilities in the first half of 1996. For additional information relating to environmental liabilities, see Note 12 to the consolidated financial statements in the 1995 Annual Report. I-18 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (a) The section captioned "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and Regulatory Matters" on pages 20-27 of the Prospectus dated August 2, 1996 included in a Registration Statement on Form S-1 (Registration No. 333-09495) filed by Grace Holding, Inc., a subsidiary of the Company, and the section captioned "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal Matters--Legal and Regulatory Proceedings" (insofar as such section contains information relating to Grace and/or NMC) on pages 130-142 of the Joint Proxy Statement-Prospectus dated August 2, 1996 included in a Registration Statement on Form S-4 (Registration No. 333-09497) filed by the Company, are incorporated herein by reference. (b) Note (b) to the Consolidated Financial Statements in Part I of this Report is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security-Holders. The Company's 1996 Annual Meeting of Shareholders ("Annual Meeting") was held on May 10, 1996. At the Annual Meeting, the Company's shareholders (a) elected three Class I Directors for a term expiring in 1999 and one Class II Director for a term expiring in 1997; (b) ratified the selection of Price Waterhouse LLP as independent certified public accountants of the Company and its consolidated subsidiaries for 1996; (c) approved the Company's Long-Term Incentive Program; (d) approved the II-1 22 Company's Annual Incentive Compensation Program; and (e) defeated a shareholder proposal regarding nonemployee directors' retirement benefits. The following sets forth the results of voting at the Annual Meeting:
VOTES --------------------------------------------------------- MATTER FOR AGAINST* ABSTENTIONS BROKER NON-VOTES - ------ --- ------- ----------- ---------------- Election of Directors* - --------------------- Class I A. J. Costello 77,650,539 7,517,194 -0- -0- M. A. Fox 77,788,812 7,378,921 -0- -0- T. A. Vanderslice 77,794,637 7,373,096 -0- -0- Class II C. L. Hampers 77,494,633 7,673,100 -0- -0- Selection of Independent Accountants 77,618,746 7,223,154 325,833 -0- Approval of Long-Term Incentive Program 69,625,813 14,758,408 783,509 -0- Approval of Annual Incentive Compensation Program 77,305,760 7,081,791 778,580 -0- Shareholder Proposal 24,044,222 52,093,064 1,004,906 -0-
- --------------------------- * With respect to the election of directors, the form of proxy permitted shareholders to check boxes indicating votes either "for" or "withheld"; votes relating to directors designated above as "against" are votes cast as "withheld". II-2 23 Item 5. Other Information. In July 1996, Grace completed the acquisition of Cypress Packaging, Inc. ("Cypress"), a manufacturer of flexible packaging located in Rochester, N.Y. Cypress, with 1995 sales of more than $20 million, is a leading supplier of plastic packaging materials for the retail pre-cut market segment. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following are being filed as exhibits to this Report: -- 364-Day Credit Agreement, dated as of May 17, 1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding, Inc., the several banks parties thereto, NationsBank, N.A. (South), as documentation agent, and Chemical Bank, as administrative agent, for such banks (filed as Exhibit 4.4 to the Registration Statement on Form S-1 (Registration No. 333-09495) of Grace Holding, Inc. filed on August 2, 1996 ("S-1 Registration Statement") and incorporated herein by reference) -- Amended and Restated Credit Agreement, dated as of May 17, 1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding, Inc., the several banks parties thereto and Chemical Bank, as agent for such banks (filed as Exhibit 4.5 to the S-1 Registration Statement and incorporated herein by reference) -- Commitment letter for the Credit Agreement to be entered into by National Medical Care, Inc., the principal health care subsidiary of II-3 24 W. R. Grace & Co., and certain lenders (filed as Exhibit 4.7 to the S-1 Registration Statement and incorporated herein by reference) -- Form of Long-Term Incentive Program Award (filed as Exhibit 10.13 to the S-1 Registration Statement and incorporated herein by reference) -- Form of Stock Option Agreement (filed as Exhibit 10.14 to the S-1 Registration Statement and incorporated herein by reference) -- Form of Executive Severance Agreement between W. R. Grace & Co. and new officers (filed as Exhibit 10.23 to the S-1 Registration Statement and incorporated herein by reference) -- Form of Executive Severance Agreement between W. R. Grace & Co. and others (filed as Exhibit 10.22 to the S-1 Registration Statement and incorporated herein by reference) -- Letter Agreement dated June 14, 1996 between W. R. Grace & Co. and Constantine L. Hampers (filed as Exhibit 10.35 to the S-1 Registration Statement and incorporated herein by reference) -- Option Agreement between W. R. Grace & Co. and Albert J. Costello, dated May 1, 1995 (filed as Exhibit 10.36 to the S-1 Registration Statement and incorporated herein by reference) -- Option Agreement between W. R. Grace & Co. and Albert J. Costello, dated March 6, 1996 (filed as Exhibit 10.37 to the S-1 Registration Statement and incorporated herein by reference) II-4 25 -- Form of Indemnification Agreement between W. R. Grace & Co. and certain directors (filed as Exhibit 10.39 to the S-1 Registration Statement and incorporated herein by reference) -- Guarantee Agreement among Fresenius Medical Care AG, the United States of America, W. R. Grace & Co., and National Medical Care, Inc. dated July 31, 1996 (filed as Exhibit 10.41 to the S-1 Registration Statement and incorporated herein by reference) -- Guarantee Agreement between W. R. Grace & Co.-Conn. and the United States of America dated July 31, 1996 (filed as Exhibit 10.42 to the S-1 Registration Statement and incorporated herein by reference) -- Letter Agreement among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius Medical Care AG dated July 31, 1996 (filed as Exhibit 10.43 to the S-1 Registration Statement and incorporated herein by reference) -- weighted average number of shares and earnings used in per share computations -- computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends -- financial data schedule -- Pro forma financial information for Grace Holding, Inc. for the six-month period ended June 30, 1996 II-5 26 -- Special-purpose, consolidated interim financial statements of the Company for the three-month and six-month periods ended June 30, 1996 -- "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and Regulatory Matters" section of the Prospectus dated August 2, 1996 included in the S-1 Registration Statement -- "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal Matters--Legal and Regulatory Proceedings" section of the Joint Proxy Statement-Prospectus dated August 2, 1996 included in a Registration Statement on Form S-4 (Registration No. 333-09497) filed by W. R. Grace & Co. (insofar as such section contains information relating to Grace and/or NMC) (b) Reports on Form 8-K. The Company filed a Report on Form 8-K on April 15, 1996, relating to an agreement to sell the transgenic plant business of its Agracetus subsidiary to the Monsanto Company for $150 million. The Company filed a Report on Form 8-K on May 6, 1996, relating to the announcement of 1996 first quarter results. The Company filed a Report on Form 8-K on July 11, 1996, relating to the sale of the business and assets of its Dearborn water treatment and process chemicals business to Betz Laboratories, Inc. The Company also filed a Report on Form 8-K on August 9, 1996, relating to the announcement of 1996 second quarter results. II-6 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. W. R. GRACE & CO. ------------------------------- (Registrant) Date: August 14, 1996 By /s/ Kathleen A. Browne --------------------------- Kathleen A. Browne Vice President and Controller (Principal Accounting Officer) II-7 28 W. R. GRACE & CO. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 4.1 364-Day Credit Agreement, dated as of May 17, 1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding, Inc., the several banks parties thereto, NationsBank, N.A. (South), as documentation agent, and Chemical Bank, as administrative agent, for such banks (filed as Exhibit 4.4 to the Registration Statement on Form S-1 (Registration No. 333-09495) of Grace Holding, Inc. filed on August 2, 1996 ("S-1 Registration Statement") and incorporated herein by reference) 4.2 Amended and Restated Credit Agreement, dated as of May 17, 1996, among W. R. Grace & Co.-Conn., W. R. Grace & Co., Grace Holding, Inc., the several banks parties thereto and Chemical Bank, as agent for such banks (filed as Exhibit 4.5 to the S-1 Registration Statement and incorporated herein by reference) 4.3 Commitment letter for the Credit Agreement to be entered into by National Medical Care, Inc., the principal health care subsidiary of W. R. Grace & Co., and certain lenders (filed as Exhibit 4.7 to the S-1 Registration Statement and incorporated herein by reference) 10.1 Form of Long-Term Incentive Program Award (filed as Exhibit 10.13 to the S-1 Registration Statement and incorporated herein by reference) 10.2 Form of Stock Option Agreement (filed as Exhibit 10.14 to the S-1 Registration Statement and incorporated herein by reference) 10.3 Form of Executive Severance Agreement between W. R. Grace & Co. and new officers (filed as Exhibit 10.23 to the S-1 Registration Statement and incorporated herein by reference) 10.4 Form of Executive Severance Agreement between W. R. Grace & Co. and others (filed as Exhibit 10.22 to the S-1 Registration Statement and incorporated herein by reference) 29 10.5 Letter Agreement dated June 14, 1996 between W. R. Grace & Co. and Constantine L. Hampers (filed as Exhibit 10.35 to the S-1 Registration Statement and incorporated herein by reference) 10.6 Option Agreement between W. R. Grace & Co. and Albert J. Costello, dated May 1, 1995 (filed as Exhibit 10.36 to the S-1 Registration Statement and incorporated herein by reference) 10.7 Option Agreement between W. R. Grace & Co. and Albert J. Costello, dated March 6, 1996 (filed as Exhibit 10.37 to the S-1 Registration Statement and incorporated herein by reference) 10.8 Form of Indemnification Agreement between W. R. Grace & Co. and certain directors (filed as Exhibit 10.39 to the S-1 Registration Statement and incorporated herein by reference) 10.9 Guarantee Agreement among Fresenius Medical Care AG, the United States of America, W. R. Grace & Co., and National Medical Care, Inc. dated July 31, 1996 (filed as Exhibit 10.41 to the S-1 Registration Statement and incorporated herein by reference) 10.10 Guarantee Agreement between W. R. Grace & Co.-Conn. and the United States of America dated July 31, 1996 (filed as Exhibit 10.42 to the S-1 Registration Statement and incorporated herein by reference) 10.11 Letter Agreement among W. R. Grace & Co., W. R. Grace & Co.-Conn. and Fresenius Medical Care AG dated July 31, 1996 (filed as Exhibit 10.43 to the S-1 Registration Statement and incorporated herein by reference) 11 Weighted average number of shares and earnings used in per share computations 12 Computation of ratio of earnings to fixed charges and combined fixed charges and preferred stock dividends 27 Financial Data Schedule 99.1 Pro forma financial information for Grace Holding, Inc. for the six-month period ended June 30, 1996 99.2 Special-purpose, consolidated interim financial statements of the Company for the three-month and six-month periods ended June 30, 1996 30 99.3 "BUSINESS OF GRACE CHEMICALS--Legal Proceedings and Regulatory Matters" section of the Prospectus dated August 2, 1996 included in the S-1 Registration Statement 99.4 "BUSINESS OF FRESENIUS MEDICAL CARE--Regulatory and Legal Matters--Legal and Regulatory Proceedings" section of the Joint Proxy Statement-Prospectus dated August 2, 1996 included in a Registration Statement on Form S-4 (Registration No. 333-09497) filed by W. R. Grace & Co. (insofar as such section contains information relating to Grace and/or NMC) EX-11 2 PER SHARE COMPUTATIONS 1 EXHIBIT 11 W. R. GRACE & CO. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS (Unaudited) The weighted average number of shares of Common Stock outstanding were as follows (in thousands):
3 Mos. Ended 6 Mos. Ended 6/30/96 - 6/30/95 6/30/96 - 6/30/95 ----------------------- --------------------- Weighted average number of shares of Common Stock outstanding . . . . . . . . . . . . . . . . . 96,634 95,116 97,259 94,629 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) . . . . . . . . . . . . . . . . . . . 1,878 2,486 2,022 2,486 ------ ------ ------ ------ Weighted average number of shares of Common Stock outstanding assuming full dilution . . . . . 98,512 97,602 99,281 97,115 ====== ====== ====== ======
Income used in the computation of earnings per share were as follows (in millions except per share):
3 Mos. Ended 6 Mos. Ended 6/30/96 - 6/30/95 6/30/96 - 6/30/95 ---------------------- --------------------- Net income . . . . . . . . . . . . . . . . . . . . $333.9 $78.7 $397.5 $126.2 Dividends paid on preferred stocks . . . . . . . . (.2) (.2) (.3) (.3) ------ ----- ------ ------ Income used in per share computation of earnings and in per share computation of earnings assuming full dilution . . . . . . . . . . $333.7 $78.5 $397.2 $125.9 ====== ===== ====== ====== Earnings per share . . . . . . . . . . . . . . . . $ 3.45 $ .83 $ 4.09 $ 1.33 Earnings per share assuming full dilution . . . . . $ 3.39 $ .80 $ 4.00 $ 1.30
EX-12 3 COMPUTATION OF RATIO 1 EXHIBIT 12 W. R. GRACE & CO. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (in millions except ratios) (Unaudited)
Six Months Ended Years Ended December 31, June 30, ---------------------------------------------------- ----------------- 1995 (b) 1994 (c) 1993 (d) 1992 (e) 1991 1996 (f) 1995(g) ------- ------- ------- ------- ---- -------- ------- Net (loss)/income from continuing operations $(196.6) $(41.4) $ 19.1 $ 1.4 $157.4 $274.7 $ 67.9 Add/(deduct): (Benefit from)/provision for income taxes (115.8) (46.6) 10.1 79.9 99.1 154.9 28.3 Income taxes of 50%-owned companies . . . . - - .1 2.1 1.5 - - Equity in unremitted losses/(earnings) of less than 50%-owned companies . . . . .8 (.6) (.5) (2.0) ( .9) .5 (.9) Interest expense and related financing costs, including amortization of capitalized interest . . . . . . . . . . . 179.8 138.5 122.7 162.7 209.6 93.1 83.7 Estimated amount of rental expense deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 5.6 7.1 ------- ------ ------ ------ ------ ------ ------ (Loss)/income as adjusted . . . . . . . . . . $(123.3) $ 60.0 $162.8 $258.1 $479.4 $528.8 $186.1 ======= ====== ====== ====== ====== ====== ====== Combined fixed charges and preferred stock dividends: Interest expense and related financing costs, including capitalized interest. . . . . . . $195.5 $143.2 $122.8 $176.3 $224.5 $104.2 $90.3 Estimated amount of rental expense deemed to represent the interest factor 8.5 10.1 11.3 14.0 12.7 5.6 7.1 ------ ------ ------ ------ ------ ----- ----- Fixed charges . . . . . . . . . . . . . . . . 204.0 153.3 134.1 190.3 237.2 109.8 97.4 Preferred stock dividend requirements (a) . . .5 .5 .8 .8 .9 .4 .4 ------ ------ ------ ------ ------ ------ ----- Combined fixed charges and preferred stock dividends . . . . . . . . . . . . . $204.5 $153.8 $134.9 $191.1 $238.1 $110.2 $97.8 ====== ====== ====== ====== ====== ====== ===== Ratio of earnings to fixed charges . . . . . (h) (h) 1.21 1.36 2.02 4.82 1.91 ====== ====== ====== ====== ====== ====== ===== Ratio of earnings to combined fixed charges and preferred stock dividends . . . . . . (h) (h) 1.21 1.35 2.01 4.80 1.90 ======= ====== ====== ====== ====== ====== =====
(a) For each period with an income tax provision, the preferred stock dividend requirements are increased to include the pretax earnings required to cover such requirements based on Grace's effective tax rate for that period. (b) Includes pretax provisions of $275.0 for asbestos-related liabilities and insurance coverage; $220.0 relating to restructuring costs, asset impairments and other activities; $77.0 for environmental liabilities at former manufacturing sites; and $30.0 for corporate governance activities. (c) Includes a pretax provision of $316.0 relating to asbestos-related liabilities and insurance coverage. (d) Includes a pretax provision of $159.0 relating to asbestos-related liabilities and insurance coverage. (e) Includes a pretax provision of $140.0 relating to a fumed silica plant in Belgium. (f) Includes a pretax gain of $326.4 on the sales of businesses, principally the water treatment and process chemicals business; and a pretax provision of $53.7 relating to restructuring costs. (g) Includes a pretax provision of $20.0 for corporate governance activities. (h) As a result of the losses incurred for the years ended December 31, 1995 and 1994, Grace was unable to fully cover the indicated fixed charges. EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 73,700 0 712,500 0 402,400 1,704,900 3,170,700 1,398,900 6,305,800 2,301,100 1,262,800 0 7,400 98,700 1,159,900 6,305,800 1,834,900 1,852,800 1,103,800 1,103,800 0 0 36,700 429,600 154,900 274,700 122,800 0 0 397,500 4.09 4.00 Amount shown is net of allowances. Included within current assets and total assets are net assets of discontinued operations of $296,900 and $1,868,500, respectively. Excludes sales reported by the discontinued health care segment of $1,105,200 for the first half of 1996. Includes (i) a gain of $326,400 ($210,100 after-tax) on the sales of businesses, principally the water treatment and process chemicals business, and (ii) a charge of $53,700 ($32,400 after-tax) relating to restructuring costs. Includes (i) after-tax income of $43,400 from health care operations and (ii) an after-tax gain of $79,400 on the sale of the transgenic plant business of Grace's Agracetus subsidiary.
EX-99.1 5 PRO FORMA FINANCIAL INFORMATION 1 EXHIBIT 99.1 On August 2, 1996, New Grace filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (Registration No. 333-09495), including a Prospectus dated August 2, 1996 ("Prospectus") that was sent to the Company's shareholders in connection with a Special Meeting of Shareholders to be held on September 16, 1996. The Prospectus contained unaudited pro forma financial information for New Grace ("Pro Forma Information"). The following unaudited pro forma financial information is being provided to update the Pro Forma Information contained in the Prospectus, and should be read in conjunction with the Consolidated Financial Statements and the First Quarter Financial Statements (each as defined in the Prospectus), as well as the consolidated financial statements and the notes thereto included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 ("Second Quarter Financial Statements"). The following unaudited pro forma financial information does not necessarily indicate the financial position and results of operations that would actually have occurred if New Grace were a stand-alone entity on the dates and for the periods indicated. Undefined terms used in the following unaudited pro forma financial information have the meanings given those terms in the Prospectus. 2 PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET The unaudited pro forma condensed consolidated balance sheet of New Grace has been derived from the historical consolidated balance sheet of Grace New York, adjusted for the disposition of NMC and for certain costs and expenses to be incurred in connection with the Reorganization. The pro forma condensed consolidated balance sheet has been prepared on the assumption that the Reorganization occurred on June 30, 1996.
GRACE NEW YORK PRO FORMA ADJUSTMENTS NEW GRACE --------------------------- HISTORICAL DEBIT CREDIT PRO FORMA ---------------- ---------- ----------- ------------- (DOLLARS IN MILLIONS) ASSETS Current Assets Cash and cash equivalents . . . . . . . . . . $ 73.7 $2,259.1 (a) $1,199.1 (b) 60.0 (a) $ 1,073.7 Notes and accounts receivable, net . . . . . . 712.5 101.5 (b) 814.0 Other current assets . . . . . . . . . . . . . 918.7 918.7 --------- --------- Total Current Assets . . . . . . . . . . . . 1,704.9 2,806.4 Properties and equipment, net . . . . . . . . . 1,771.8 1,771.8 Net assets of discontinued operations - health care 1,571.6 361.3 (b) 1,872.0 (c) 60.9 Other assets . . . . . . . . . . . . . . . . . . 1,257.5 1,257.5 --------- --------- Total Assets . . . . . . . . . . . . . . . . $ 6,305.8 $ 5,896.6 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt . . . . . . . . . . . . . . . $ 603.9 566.2 (b) $ 37.7 Other current liabilities . . . . . . . . . . 1,697.2 1,697.2 --------- --------- Total Current Liabilities . . . . . . . . . 2,301.1 1,734.9 Long-term debt . . . . . . . . . . . . . . . . . 1,262.8 170.1 (b) 1,092.7 Other liabilities . . . . . . . . . . . . . . . 816.8 816.8 Noncurrent liability for asbestos-related litigation 659.1 659.1 --------- --------- Total Liabilities . . . . . . . . . . . . . 5,039.8 4,303.5 --------- --------- Commitments and Contingencies Shareholders' Equity Preferred stocks . . . . . . . . . . . . . . . 7.4 7.4 (e) -- Common stock . . . . . . . . . . . . . . . . . 98.7 97.7 (d) 1.0 Paid in capital . . . . . . . . . . . . . . . 513.4 297.4 (d) 216.0 Retained earnings . . . . . . . . . . . . . . 1,082.0 60.0 (a) 2,259.1 (a) 1,872.0 (c) 7.4 (e) 1,416.5 Cumulative translation adjustments . . . . . . (40.4) (40.4) Treasury stock, at cost . . . . . . . . . . . (395.1) 395.1 (d) -- --------- --------- Total Shareholders' Equity . . . . . . . . . 1,266.0 1,593.1 --------- --------- Total Liabilities and Shareholders' Equity . $ 6,305.8 $ 5,896.6 ========= =========
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION PRESENTED. 1 3 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS The unaudited pro forma condensed consolidated statement of operations of New Grace has been derived from the historical consolidated statement of operations of Grace New York, adjusted to reflect the reduction in interest expense expected to result from the Reorganization. The pro forma condensed consolidated statement of operations has been prepared on the assumption that the Reorganization occurred on January 1, 1995.
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------- GRACE PRO FORMA NEW NEW YORK ADJUSTMENTS GRACE ---------------- HISTORICAL DEBIT CREDIT PRO FORMA ------------------ ----- ------ -------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales and revenues . . . . . . . . . . . . . . . . . . . . . . $3,665.5 $ 3,665.5 Other income . . . . . . . . . . . . . . . . . . . . . . . . . 41.9 41.9 -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . 3,707.4 3,707.4 -------- --------- Cost of goods sold and operating expenses . . . . . . . . . . . 2,243.7 2,243.7 Selling, general and administrative expenses . . . . . . . . . 905.6 905.6 Depreciation and amortization . . . . . . . . . . . . . . . . . 186.3 186.3 Interest expense and related financing costs . . . . . . . . . 71.3 $0.7 (f) 70.6 Research and development expenses . . . . . . . . . . . . . . . 120.6 120.6 Corporate expenses previously allocated to health care operations 37.8 37.8 Restructuring costs and asset impairments . . . . . . . . . . . 179.5 179.5 Provision relating to asbestos-related liabilities and insurance coverage . . . . . . . . . . . . . . . . . . . . . . . 275.0 275.0 -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,019.8 4,019.1 -------- --------- Loss from continuing operations before income taxes . . . . . . (312.4) (311.7) Benefit from income taxes . . . . . . . . . . . . . . . . . . . (115.8) $0.3 (f) (115.5) -------- --------- Loss from continuing operations . . . . . . . . . . . . . . . $ (196.6) $ (196.2) ======== ========= Loss per share: Continuing operations . . . . . . . . . . . . . . . . . . $ (2.05) $ (2.05) Fully diluted loss per share: Continuing operations . . . . . . . . . . . . . . . . . . $ -- (1) $ -- (1) Weighted average shares of Common Stock outstanding (in thousands) 95,822 95,822 - ------------
(1) Not presented as the effect is anti-dilutive.
SIX MONTHS ENDED JUNE 30, 1996 ------------------------------------------- GRACE PRO FORMA NEW NEW YORK ADJUSTMENTS GRACE ---------------- HISTORICAL DEBIT CREDIT PRO FORMA ------------ ----- ------ ------------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales and revenues . . . . . . . . . . . . . . . . . . . . . . $1,834.9 $1,834.9 Other income . . . . . . . . . . . . . . . . . . . . . . . . . 17.9 17.9 -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,852.8 1,852.8 -------- -------- Cost of goods sold and operating expenses . . . . . . . . . . . 1,103.8 1,103.8 Selling, general and administrative expenses . . . . . . . . . 405.7 405.7 Depreciation and amortization . . . . . . . . . . . . . . . . . 91.9 91.9 Interest expense and related financing costs . . . . . . . . . 36.7 $8.9 (f) 45.6 Research and development expenses . . . . . . . . . . . . . . . 57.8 57.8 Restructuring costs . . . . . . . . . . . . . . . . . . . . . . 53.7 53.7 Gain on sales of businesses . . . . . . . . . . . . . . . . . . (326.4) (326.4) --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,423.2 1,432.1 --------- -------- Income from continuing operations before income taxes . . . . . 429.6 420.7 Provision for income taxes . . . . . . . . . . . . . . . . . . 154.9 $3.6 (f) 151.3 -------- -------- Income from continuing operations . . . . . . . . . . . . . . $ 274.7 $ 269.4 ======== ======== Earnings per share: Continuing operations . . . . . . . . . . . . . . . . . . $ 2.82 $ 2.77 Fully diluted earnings per share: Continuing operations . . . . . . . . . . . . . . . . . . $ 2.76 $ 2.71 Weighted average shares of Common Stock outstanding (in thousands) 97,259 97,259
THE NOTES TO THIS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS ARE AN INTEGRAL PART OF THE PRO FORMA FINANCIAL INFORMATION PRESENTED. 2 4 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PAR VALUE) (a) The Reorganization Agreement provides that, prior to the Reorganization, NMC will borrow and/or will assume debt of Grace Chemicals in an aggregate amount of approximately $2,263 (as adjusted pursuant to the Reorganization Agreement), and will distribute the net cash proceeds to Grace Chemicals; it is currently estimated that such aggregate amount will be approximately $2,259.1. A portion of such net cash proceeds will be applied to further reduce Grace Chemicals' debt, resulting in an aggregate reduction of $1,199.1 in Grace Chemicals' debt (see note (b) below). In addition, Grace will incur expenses totaling approximately $60.0 (net of applicable tax benefit) in connection with the Reorganization. The remaining net cash proceeds received from NMC (estimated at $1,000.0) are expected to be used to (i) purchase shares of New Grace Common Stock (which would result in a decrease in current assets and a commensurate decrease in shareholders' equity); (ii) invest in core businesses; and (iii) further reduce Grace Chemicals' debt. (b) As discussed in note (a) above, the assumption of Grace Chemicals' debt by NMC and the application of a portion of the net cash proceeds distributed to Grace Chemicals by NMC to the reduction of Grace Chemicals' debt is expected to result in an aggregate reduction of $1,199.1 in Grace Chemicals' debt, consisting of (i) $179.8 of borrowings under NMC receivables financing arrangements; (ii) $181.5 of other NMC debt; (iii) $566.2 of short-term debt (consisting of $336.0 of commercial paper and bank borrowings and $230.2 of other short-term borrowings); (iv) $170.1 of commercial paper classified as long-term debt; and (v) $101.5 of borrowings under Grace Chemicals receivables financing arrangements. (c) Reflects the disposition of NMC's net assets of $1,872.0. Subsequent to the disposition of NMC, New Grace will retain as discontinued operations certain health care assets, primarily a bioseparation sciences business, a health care services company and other assets (including NMC's cash and marketable securities). The resulting gain of $387.1 (reflecting net cash proceeds of $2,259.1, as described in note (a) above, less the disposition of NMC's net assets of $1,872.0) is not reflected in the pro forma condensed consolidated statement of operations. (d) As part of the Reorganization, Grace New York will distribute, on a one-share-for-one-share basis, all of the issued and outstanding New Grace Common Stock (which has a par value of $.01 per share) to the holders of shares of Grace New York Common Stock (which has a par value of $1.00 per share) at the Time of Distribution. The treasury stock held by Grace New York at the Time of Distribution will not be transferred to New Grace and is therefore eliminated in the pro forma adjustments. As a result of the retirement of the treasury stock and the difference in the par values, (i) the $395.1 of treasury stock will be eliminated, (ii) Common stock will decrease by $97.7 and (iii) paid in capital will decrease by $297.4. (e) The currently issued and outstanding shares of Grace New York Preferred Stock will remain issued and outstanding following the Reorganization and the Distribution, and no New Grace preferred stock will be issued. The resulting reduction in outstanding Preferred stock is presented as an increase in retained earnings within the shareholders' equity section of the pro forma balance sheet. (f) Grace Chemicals has allocated interest expense to discontinued operations (including NMC), based on the ratio of the net assets of the businesses classified as discontinued operations as compared to Grace Chemicals' total capital. Excluding amounts allocated to discontinued operations, interest expense and related financing costs were $71.3 for the year ended December 31, 1995 and $36.7 for the six months ended June 30, 1996. For the year ended December 31, 1995, the assumed reduction in debt as of January 1, 1995 would have the pro forma effect of reducing total interest expense and related financing costs by $94.2 (of which $0.7 was attributable to continuing operations and $93.5 was attributable to discontinued operations). For the six months ended June 30, 1996, the assumed reduction in debt as of January 1, 1995 would have the pro forma effect of reducing total interest expense and related financing costs by $42.3 (increasing interest expense and related financing costs attributable to continuing operations by $8.9 and reducing interest expense and related financing costs attributable to discontinued operations by $51.2). The above adjustments to interest expense and related financing costs would have the pro forma effect of increasing tax expense by $0.3 for the year ended December 31, 1995 and reducing tax expense by $3.6 for the six-month period ended June 30, 1996. The tax effects were calculated using an effective tax rate of approximately 40%, which represents the U.S. federal corporate tax rate of 35%, plus state and local income taxes, net of U.S. federal income tax benefit. ________________ For accounting purposes, Grace Chemicals will receive the Distribution Payment and will be deemed to receive a 44.8% common equity interest in FMC and to immediately distribute such interest to the holders of Grace New York Common Stock; however, the receipt and distribution of the interest in FMC Ordinary Shares are not reflected in the pro forma condensed consolidated balance sheet and statement of operations. 3 5 CAPITALIZATION The following table sets forth the capitalization of Grace New York and the pro forma capitalization of New Grace at June 30, 1996, giving effect to the Reorganization and related transactions described in the notes to the unaudited pro forma condensed consolidated balance sheet and statement of operations. This table should be read in conjunction with such notes, the Consolidated Financial Statements and the Second Quarter Financial Statements.
JUNE 30, 1996 ---------------------------------------- GRACE NEW YORK NEW GRACE HISTORICAL PRO FORMA ----------------- ------------- (DOLLARS IN MILLIONS, EXCEPT PAR VALUE) Debt, including short-term debt (a) . . . . . . . . . . . . . . . . . . . . . . . . $1,866.7 $1,130.4 -------- -------- Shareholders' equity: Grace New York Common Stock: Common stock, $1.00 par value; 300,000,000 shares authorized; 98,740,000 issued; 93,550,000 outstanding . . . . . . . . . . . . . $ 98.7 -- New Grace Common Stock: Common stock, $.01 par value; 300,000,000 shares authorized; 93,550,000 outstanding . . . . . . . . . . . . . . . . . . . . . . . -- $ 1.0 Grace New York Preferred Stock: 6% Preferred Stock, Cumulative, $100 par value; 40,000 shares authorized; 36,460 outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 -- Class A Preferred Stock, 8% Cumulative, $100 par value; 50,000 shares authorized; 16,256 outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 -- Class B Preferred Stock, 8% Noncumulative, $100 par value; 40,000 shares authorized; 21,577 outstanding . . . . . . . . . . . . . . . . . . . . 2.2 -- Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513.4 216.0 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082.0 1,416.5 Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . (40.4) (40.4) Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . (395.1) -- -------- -------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 1,266.0 1,593.1 -------- -------- Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . $3,132.7 $2,723.5 ======== ======== - ----------------------
(a) In addition to the retirement of debt reflected above, it is also expected that $101.5 of borrowings under Grace Chemicals receivables financing arrangement, $179.8 of borrowings under NMC receivables financing arrangements and $181.5 of other NMC debt will be retired. These amounts are classified within Notes and accounts receivable, net and Net assets of discontinued operations - health care, respectively, in the Grace New York historical balance sheet at June 30, 1996. 4 EX-99.2 6 S/P CONSOLIDATED INTERIM STATEMENTS OF EARNINGS 1 EXHIBIT 99.2 On August 2, 1996, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4 (Registration No. 333-09497), including a Joint Proxy Statement-Prospectus dated August 2, 1996 ("Joint Proxy Statement-Prospectus") that was sent to the Company's shareholders in connection with a Special Meeting of Shareholders to be held on September 16, 1996. The Joint Proxy Statement-Prospectus included special-purpose financial information of the Company ("Special-Purpose Information"). The following unaudited financial information is being provided to update the Special-Purpose Information contained in the Joint Proxy Statement-Prospectus, and should be read in conjunction with the Special-Purpose, Consolidated Financial Statements of the Company in the Joint Proxy Statement-Prospectus, as well as the Second Quarter Financial Statements. The following unaudited special-purpose financial information does not necessarily indicate the financial position and results of operations that would have occurred if the NMC Business (as defined in the Joint Proxy Statement-Prospectus) were a stand-alone entity on the dates and for the periods indicated. Undefined terms used in the following unaudited special-purpose financial information have the meanings given those terms in the Joint Proxy Statement-Prospectus. 2 W. R. GRACE & CO. SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, ---------------------------- 1996 1995 -------- -------- NET REVENUES Health care services . . . . . . . . . . . . . . . . . . . . . . . . $511,236 $471,825 Medical supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 40,883 36,720 -------- -------- 552,119 508,545 -------- -------- EXPENSES Cost of health care services . . . . . . . . . . . . . . . . . . . . 295,456 260,978 Cost of medical supplies . . . . . . . . . . . . . . . . . . . . . . 27,397 26,192 General and administrative expenses . . . . . . . . . . . . . . . . . 103,691 90,306 Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 21,442 19,742 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 31,533 26,480 Research and development . . . . . . . . . . . . . . . . . . . . . . 622 597 Allocation of Grace Chemicals expenses . . . . . . . . . . . . . . . 1,769 10,101 Interest expense, net, and related financing costs . . . . . . . . . 7,459 5,791 -------- -------- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489,369 440,187 -------- -------- EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 62,750 68,358 PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 28,832 31,253 -------- -------- NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,918 $ 37,105 ======== ======== Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.35 $ 0.39
See accompanying Notes to Special-Purpose, Consolidated Interim Financial Statements. 1 3 W. R. GRACE & CO. SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, -------------------------- 1996 1995 ----------- ----------- NET REVENUES Health care services . . . . . . . . . . . . . . . . . . . . . . . . $ 999,607 $ 916,305 Medical supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 80,803 70,298 ---------- ---------- 1,080,410 986,603 ---------- ---------- EXPENSES Cost of health care services . . . . . . . . . . . . . . . . . . . . 582,987 512,766 Cost of medical supplies . . . . . . . . . . . . . . . . . . . . . . 55,299 51,005 General and administrative expenses . . . . . . . . . . . . . . . . . 205,138 182,557 Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 42,928 39,141 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 62,161 52,395 Research and development . . . . . . . . . . . . . . . . . . . . . . 1,308 1,368 Allocation of Grace Chemicals expenses . . . . . . . . . . . . . . . 3,786 19,649 Interest expense, net, and related financing costs . . . . . . . . . 14,463 11,541 ---------- ---------- 968,070 870,422 ---------- ---------- EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 112,340 116,181 PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 51,977 53,060 ---------- ---------- NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,363 $ 63,121 ========== ========== Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.66
See accompanying Notes to Special-Purpose, Consolidated Interim Financial Statements. 2 4 W. R. GRACE & CO. SPECIAL-PURPOSE, CONSOLIDATED INTERIM BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------ ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,039 $ 33,530 Accounts receivable, less allowances of $124,309 and $119,914 . . . . . . . . 437,079 406,682 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,485 72,491 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,812 81,192 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,345 51,835 ---------- ---------- Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 708,760 645,730 ---------- ---------- Properties and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 396,828 377,328 ---------- ---------- Other Assets: Excess of cost over the fair value of net assets acquired and other intangible assets, net of accumulated amortization of $273,778 and $247,644 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949,732 954,811 Other assets and deferred charges . . . . . . . . . . . . . . . . . . . . . . 19,201 20,275 ---------- ---------- Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968,933 975,086 ---------- ---------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,074,521 $1,998,144 ========== ========== LIABILITIES AND EQUITY Current Liabilities: Current portion of long-term debt and capitalized lease obligations . . . . $ 155,222 $ 183,488 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,332 104,586 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,980 220,771 Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,194 12,555 ---------- ---------- Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 478,728 521,400 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,577 27,903 Capitalized lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . 4,743 7,516 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,778 48,109 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,286 30,441 ---------- ---------- Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592,112 635,369 ---------- ---------- Commitments and Contingencies (Note 3) . . . . . . . . . . . . . . . . . . . . Equity: Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,487,525 1,365,901 Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . (5,116) (3,126) ---------- ---------- Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,482,409 1,362,775 ---------- ---------- Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . $2,074,521 $1,998,144 ========== ==========
See accompanying Notes to Special-Purpose, Consolidated Interim Financial Statements. 3 5 W. R. GRACE & CO. SPECIAL-PURPOSE, CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------- 1996 1995 ---- ---- Cash Flows Provided by Operating Activities: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,363 $ 63,121 Adjustments to reconcile net earnings to net cash provided by Operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 62,161 52,395 Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . 42,928 39,141 Provision for deferred income taxes . . . . . . . . . . . . . . . . . . (4,283) (6,367) Loss on disposal of properties and equipment . . . . . . . . . . . . . 3,194 1,598 Changes in operating assets and liabilities, net of effects of purchase acquisitions and foreign exchange: Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . (71,578) (57,017) Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . (778) (3,257) Increase in other current assets . . . . . . . . . . . . . . . . . . . (13,440) (12,319) Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . (5,403) (13,547) Increase in accrued income taxes . . . . . . . . . . . . . . . . . . . 9,971 26,718 Decrease in accrued liabilities . . . . . . . . . . . . . . . . . . . . (10,809) (16,743) (Decrease)/increase in other long-term liabilities . . . . . . . . . . (8,155) 4,088 Increase in other assets and deferred charges . . . . . . . . . . . . (106) (2,842) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225) (5,413) -------- -------- Net cash provided by operating activities . . . . . . . . . . . . . . . . 63,840 69,556 -------- -------- Cash Flows from Investing Activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (58,545) (46,881) Payments for acquisitions, net of cash acquired . . . . . . . . . . . . (26,190) (63,774) Payments for physicians' contract agreements . . . . . . . . . . . . . 0 (2,900) -------- -------- Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (84,735) (113,555) -------- -------- Cash Flows from Financing Activities: Advances from Grace Chemicals, net . . . . . . . . . . . . . . . . . . 61,260 28,921 Proceeds on issuance of debt . . . . . . . . . . . . . . . . . . . . . 124,176 9,813 Payments on debt and capitalized leases . . . . . . . . . . . . . . . . (161,540) (5) -------- -------- Net cash provided by financing activities . . . . . . . . . . . . . . . . 23,896 38,729 -------- -------- Effects of changes in foreign exchange rates . . . . . . . . . . . . . . . 3,508 (5,011) -------- -------- Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . 6,509 (10,281) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 33,530 39,758 -------- -------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 40,039 $ 29,477 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,429 $ 10,788 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,340 26,981
See accompanying Notes to Special-Purpose, Consolidated Interim Financial Statements. 4 6 W. R. GRACE & CO. NOTES TO SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1. BASIS OF PRESENTATION The Special-Purpose, Consolidated Interim Financial Statements of Grace New York and NMC (together with Grace New York, the "Company") have been prepared by the Company in accordance with the accounting policies stated in the Special-Purpose, Consolidated Financial Statements in the Joint Proxy Statement-Prospectus and should be read in conjunction with the Notes to Special-Purpose, Consolidated Financial Statements appearing therein. In the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included in the interim financial statements. The results for the six-month period ended June 30, 1996 may not necessarily be indicative of the results for the fiscal year ending December 31, 1996. NOTE 2. INVENTORIES
JUNE 30, 1996 ----------------- Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,460 Manufactured goods in process . . . . . . . . . . . . . . . . . . . . . . . . . . 3,378 Manufactured and purchased inventory available for sale . . . . . . . . . . . . . 32,608 ----------------- 44,446 Health care supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,039 ----------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,485 =================
NOTE 3. COMMITMENTS AND CONTINGENCIES See Note 15 to the Special-Purpose, Consolidated Financial Statements in the Joint Proxy Statement-Prospectus. 5 7 W. R. GRACE & CO. SPECIAL-PURPOSE, CONSOLIDATED INTERIM FINANCIAL STATEMENTS WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS (UNAUDITED) The weighted average number of shares of Common Stock outstanding were as follows:
(IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------- 1996 1995 1996 1995 ------ ------ ------ ------ Weighted average number of shares of common stock outstanding . . . . . . . . . 96,634 95,116 97,259 94,629 ====== ====== ====== ======
Income used in the computation of earnings per share was as follows:
(IN THOUSANDS EXCEPT PER SHARE) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Net income . . . . . . . . . . . . . . . . . $33,918 $37,105 $60,363 $63,121 Dividends paid on preferred stocks . . . . . (130) (131) (261) (261) ------- ------- ------- ------- Income used in per share computation of earnings . . . . . . . . . . . . . . . . $33,788 $36,974 $60,102 $62,860 ======= ======= ======= ======= Earnings per share . . . . . . . . . . . . . $ 0.35 $ 0.39 $ 0.62 $ 0.66
6 EX-99.3 7 LEGAL PROCEEDINGS AND REGULATORY MATTERS 1 EXHIBIT 99.3 LEGAL PROCEEDINGS AND REGULATORY MATTERS Asbestos Litigation. Grace Chemicals is a defendant in property damage and personal injury lawsuits relating to previously sold asbestos-containing products, and anticipates that it will be named as a defendant in additional asbestos-related lawsuits in the future. Due to the unique nature of each property damage claim, Grace Chemicals cannot predict whether and to what extent asbestos-related property damage lawsuits and claims will be brought against it in the future or the expenses involved in defending against and disposing of any such future lawsuits and claims. By contrast, Grace Chemicals believes that there are common features with respect to personal injury claims; in the fourth quarter of 1995, Grace Chemicals determined that it had adequate experience to reasonably estimate the number of personal injury claims to be filed against it through 1998 and established an accrual for such claims. Grace Chemicals' aggregate accrual for asbestos liabilities as of March 31, 1996 was $792.4 million; this amount reflects all asbestos-related property damage and personal injury lawsuits and claims pending at that date (except for four property damage lawsuits as to which the liabilities are not yet estimable because Grace Chemicals has not yet been able to obtain sufficient information as to the relevant properties through discovery proceedings), as well as personal injury lawsuits and claims expected to be filed through 1998. Grace Chemicals previously purchased insurance policies with respect to its asbestos-related lawsuits and claims. Grace Chemicals has settled with and been paid by its primary insurance carriers with respect to both property damage and personal injury lawsuits and claims. With minor exceptions, Grace Chemicals has also 1 2 settled with its excess insurance carriers that wrote policies available for property damage claims; those settlements involve amounts paid and to be paid to Grace Chemicals. In addition, Grace Chemicals has settled with many excess insurance carriers that wrote policies available for personal injury lawsuits and claims. Grace Chemicals is currently in litigation with its remaining excess insurance carriers whose policies Grace Chemicals believes are available for asbestos-related personal injury lawsuits and claims. Recovery under these policies is subject to lengthy litigation and legal uncertainties. Insurance coverage for asbestos-related liabilities has not been commercially available since 1985. As of March 31, 1996, Grace Chemicals had recorded a receivable of $281.5 million, which is the amount estimated to be the probable recovery from its insurance carriers with respect to pending and projected asbestos claims. In Grace Chemicals' opinion, it is probable that recoveries from its insurance carriers, along with other funds, will be available to satisfy the pending property damage and personal injury claims, and personal injury claims expected to be filed through year-end 1998. Consequently, Grace Chemicals believes that the resolution of its asbestos-related litigation will not have a material adverse effect on its consolidated results of operations or financial position. In addition to the discussion below, see Note 2 to the historical consolidated financial statements of Grace New York and the notes thereto for the year ended December 31, 1995, attached hereto as Annex F (the "Consolidated Financial Statements"), and Note (b) to the unaudited historical consolidated financial statements of Grace New York and the notes thereto for the three-month period ended March 31, 1996, attached hereto as Annex G (the "First Quarter Financial Statements"), for a more comprehensive discussion of these matters, including tabular presentations of accrued liabilities and asbestos-related receivables. Grace Chemicals was a defendant in approximately 40,800 asbestos-related lawsuits at year-end 1995 (47 involving claims for property damage and the remainder involving approximately 92,400 claims for personal injury), as compared to approximately 38,700 lawsuits at year-end 1994 (65 involving claims for property damage and the remainder involving approximately 67,900 claims for personal injury). In most of these lawsuits, Grace Chemicals is one of many defendants. The plaintiffs in property damage lawsuits generally seek, among other things, to have the defendants absorb the cost of removing, containing or repairing the asbestos-containing materials in the affected buildings. Through 1995, 129 asbestos property damage cases were dismissed with respect to Grace Chemicals without payment of any damages or settlement amounts; judgments were entered in favor of Grace Chemicals in 10 cases (excluding cases settled following appeals of judgments in favor of Grace Chemicals and a case in which the plaintiff was granted a new trial on appeal); Grace Chemicals was held liable for a total of $74.7 million in seven cases (two of which are on appeal); and 177 property damage suits and claims were settled for a total of $421.8 million. Included in the asbestos property damage lawsuits pending against Grace Chemicals and others at year-end 1995 were the following class actions: (i) a Pennsylvania state court action (Prince George Center, Inc. v. U.S. Gypsum Company, et al., Court of Common Pleas of Philadelphia County), certified in 1992, covering all commercial buildings in the U.S. leased, in whole or in part, to the U.S. government on or after May 30, 1986; (ii) an action, conditionally certified by the U.S. Court of Appeals for the Fourth Circuit in 1993 and pending in the U.S. District Court for the District of South Carolina, covering all public and private colleges and universities in the U.S. whose buildings contain asbestos materials (Central Wesleyan College, et al. v. W. R. Grace, et al.); and (iii) a purported class action (Anderson Memorial Hospital, et al. v. W. R. Grace & Co., et al.), filed in 1992, in the Court of Common Pleas for Hampton County, South Carolina, on behalf of all entities that own, in whole or in part, any building containing asbestos materials manufactured by Grace Chemicals or one of the other named defendants, other than buildings subject to the class action lawsuits described above and any building owned by the federal or any state government. In December 1995, Grace Chemicals entered into an agreement to settle the claims under Prince George Center, Inc. v. U.S. Gypsum Company, et al. The terms of the settlement agreement (which is subject to judicial review and approval after class members have an opportunity to be heard) are not expected to have a significant effect on Grace Chemicals' consolidated results of operations or financial position. In July 1994, the claims of most class members in Anderson Memorial Hospital, et al., v. W. R. Grace & Co., et al. were dismissed due to a ruling that a South Carolina statute prohibits nonresidents from pursuing claims in the South Carolina state courts 2 3 with respect to buildings located outside the state. The plaintiffs have requested that the court reconsider its decision. In August 1994, Grace Chemicals entered into an agreement to settle In re: Asbestos School Litigation, a nationwide class action brought in 1983 in the U.S. District Court for the Eastern District of Pennsylvania on behalf of all public and private elementary and secondary schools in the U.S. that contain friable asbestos materials (other than schools that "opted out" of the class). The terms of the settlement agreement (which were approved by the U.S. District Court for the Eastern District of Pennsylvania in September 1995) are not expected to have a significant effect on Grace Chemicals' consolidated results of operations or financial position. The remaining asbestos lawsuits pending at year-end 1995 involved claims for personal injury. Through year-end 1995, approximately 10,100 personal injury lawsuits involving 24,500 claims were dismissed with respect to Grace Chemicals without payment of any damages or settlement amounts (primarily on the basis that Grace Chemicals products were not involved), and approximately 23,700 such suits involving 29,600 claims were disposed of for a total of $109 million (see "-- Insurance Litigation" below). However, as a result of various trends (including the insolvency of other former asbestos producers and cross-claims by co-defendants in asbestos personal injury lawsuits), the costs incurred in disposing of such lawsuits in the past may not be indicative of the costs of disposing of such lawsuits in the future. In 1991, the Judicial Panel on Multi-District Litigation consolidated in the U.S. District Court for the Eastern District of Pennsylvania, for pre-trial purposes, all asbestos personal injury cases pending in the U.S. federal courts, including approximately 7,000 cases then pending against Grace Chemicals; 3,600 new cases involving 7,200 claims against Grace Chemicals have subsequently been added to the consolidated cases. To date, no action has been taken by the court handling the consolidated cases that would indicate whether the consolidation will affect Grace's cost of disposing of these cases or its defense costs. Grace Chemicals' ultimate exposure with respect to its asbestos-related lawsuits and claims will depend on the extent to which its insurance will cover damages for which it may be held liable, amounts paid in settlement and litigation costs. A May 1994 decision of the U.S. Court of Appeals for the Second Circuit limited the amount of insurance coverage available with respect to property damage lawsuits and claims. Because Grace Chemicals' insurance covers both property damage and personal injury lawsuits and claims, the May 1994 decision has had the concomitant effect of reducing the insurance coverage available with respect to Grace Chemicals' asbestos personal injury lawsuits and claims. However, in Grace Chemicals' opinion (which is not based on a formal opinion of counsel), it is probable that recoveries from its insurance carriers, along with other funds, will be available to satisfy the property damage and personal injury lawsuits and claims pending at year-end 1995, as well as personal injury lawsuits and claims expected to be filed in the future. Consequently, Grace Chemicals believes that the resolution of its asbestos-related litigation will not have a material adverse effect on its consolidated results of operations or financial position. See "-- Insurance Litigation" below and Note 2 to the Consolidated Financial Statements attached hereto for additional information. Environmental Proceedings. Manufacturers of specialty chemical products, including Grace Chemicals, are subject to stringent regulations under numerous federal, state and local environmental, health and safety laws and regulations relating to the generation, storage, handling, discharge and disposition of hazardous wastes and other materials. Grace Chemicals has expended substantial funds in order to comply with such laws and regulations and expects to continue to do so in the future. See "-- Environmental, Health and Safety Matters." There can be no assurance that additional material environmental costs will not arise as a result of future legislation or other developments. Grace Chemicals believes that neither its operations, its financial condition nor its competitive position will be materially adversely affected by compliance with environmental requirements or by the impact of environmental considerations on the marketability of its products. However, there can be no assurance that Grace Chemicals will not incur material liability in connection with future actions of governmental agencies and/or private parties relating to past or future practices of Grace Chemicals with respect to the generation, storage, handling, discharge or disposition of hazardous wastes and other materials. 3 4 The following is a description of the material environmental proceedings in which Grace Chemicals is involved: Grace Chemicals (together with certain other companies) has been designated a "potentially responsible party" ("PRP") by the U.S. Environmental Protection Agency ("EPA") with respect to absorbing the costs of investigating and remediating pollution at various sites. At year-end 1995, proceedings were pending with respect to approximately 30 sites as to which Grace has been designated a PRP. Federal law provides that all PRPs may be held jointly and severally liable for the costs of investigating and remediating a site. Grace Chemicals is also conducting investigatory and remediation activities at sites under the jurisdiction of state and/or local authorities. In addition, in 1989, Hatco Corporation ("Hatco"), which purchased the assets of a Grace Chemicals business in 1978, instituted a lawsuit against Grace Chemicals in the U.S. District Court for the District of New Jersey (Hatco Corporation v. W. R. Grace & Co.-Conn.) seeking recovery of cleanup costs for waste allegedly generated at a New Jersey facility during the period of Grace Chemicals' ownership. Grace Chemicals subsequently filed a lawsuit against its insurance carriers seeking indemnity against any damages assessed against Grace Chemicals in the underlying lawsuit, as well as defense costs. In decisions rendered during 1993, the U.S. District Court for the District of New Jersey ruled that Grace Chemicals is responsible for a substantial portion of Hatco's costs. In July 1995, the U.S. Court of Appeals for the Third Circuit reversed the decisions of the U.S. District Court for the District of New Jersey and remanded the lawsuit to the U.S. District Court for the District of New Jersey for further proceedings. Specifically, the Court of Appeals (i) reversed the U.S. District Court for the District of New Jersey ruling that Grace Chemicals is responsible for a substantial portion of Hatco's costs and (ii) ruled that in the remand proceeding the burden of proof would be on Hatco to establish that it had not released Grace Chemicals from the asserted liabilities. In an earlier decision, the U.S. District Court for the District of New Jersey had resolved, in a manner favorable to Grace Chemicals, certain legal issues regarding Grace Chemicals' right to insurance coverage; however, the ultimate liability of Grace Chemicals' insurance carriers will be determined at trial, should a trial be necessary after the remand proceedings described above. Remediation costs, and Grace Chemicals' share, if any, of such costs, will be determined once ongoing site investigations are completed, a remediation plan is approved by the State of New Jersey (which is expected by year-end 1997) and the litigation is fully resolved. Grace Chemicals estimates that any amounts that it may be required to pay in connection with this litigation (which amounts are expected to be partially offset by recoveries from insurance carriers) will not exceed its established reserves. See "-- Insurance Litigation" below. In November 1995, Grace Chemicals received a letter from the U.S. Department of Energy ("DOE") inquiring as to Grace Chemicals' willingness to contribute to the continued cleanup of a former Grace Chemicals property located in Wayne, New Jersey. The letter asserted that Grace Chemicals has a legal duty to pay for the site's cleanup and that the total cost of cleanup may exceed $100 million. The operations conducted by Grace Chemicals at the Wayne site (from 1955 to 1970) included work done on radioactive materials under contract with the U.S. government for the "Manhattan Project" and with the U.S. Atomic Energy Commission. In 1975, the U.S. Nuclear Regulatory Commission inspected the site, concluded that it was decontaminated in accordance with applicable regulations and released it for unrestricted use. In 1984, pursuant to a request from the DOE, Grace Chemicals transferred the Wayne property to the DOE and made a cash payment as a contribution towards the DOE's cleanup efforts at the site, which was acknowledged by the DOE as fulfilling any obligation Grace Chemicals had to contribute to DOE's cleanup effort. As a result of these transactions, Grace Chemicals believes it has no further obligation to contribute to the DOE's cleanup activities. In March 1993, an action was filed in the U.S. District Court for the Southern District of Texas against Grace Drilling Company, a subsidiary of Grace Chemicals, the business and assets of which have since been sold, and several other defendants, for alleged violations of the Clean Water Act and the Rivers and Harbors Act (U.S. v. Fina Oil and Chemical Co., et al.). The government alleges that seagrasses and seabeds around a drilling rig operated by Fina Oil and Chemical Co. were damaged in connection with the placing, servicing and removal of the rig. The government is seeking injunctive relief requiring the defendants to restore the damaged areas and to compensate for temporary loss of the seagrass habitat, as well as civil penalties of up to $25,000 4 5 per day of violation and attorneys' fees. The parties to such action are currently participating in a court-ordered mediation process. Grace Chemicals is also a party to other proceedings involving federal, state and/or local government agencies and private parties regarding Grace Chemicals' compliance with environmental laws and regulations. These proceedings are not expected to result in significant sanctions or in any material liability. As a voluntary participant in the EPA Toxic Substances Control Act ("TSCA") Compliance Audit Program, Grace Chemicals agreed to undertake a corporate-wide audit of compliance with Section 8 of TSCA, and agreed to pay a stipulated civil penalty for each study or report that the EPA alleges should have been, but was not, submitted to the EPA as required under Section 8 of TSCA. Grace Chemicals has been advised that it will be required to pay the EPA a penalty of $255,000 for information discovered in the course of the audit. In addition, Grace Chemicals has voluntarily reported to the EPA violations of certain notification and related requirements under TSCA, and penalties may be assessed against Grace Chemicals in connection therewith; however, the amount of such penalties cannot be determined at this time. Grace Chemicals believes that the liabilities for environmental remediation costs that have been recorded in Grace New York's historical financial statements are adequate. In addition, Grace Chemicals is presently involved in litigation with its insurance carriers seeking to hold them responsible for certain amounts for which Grace Chemicals may be held liable with respect to such costs. The outcome of such litigation, as well as the amounts of any recoveries that Grace Chemicals may receive in connection therewith, is presently uncertain. However, Grace Chemicals believes that the resolution of pending environmental proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of New Grace. For further information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION." Insurance Litigation. Grace Chemicals is involved in litigation with certain of its insurance carriers with respect to asbestos-related insurance claims and environmental liabilities. It has settled all of its asbestos-related insurance coverage actions, with the exception of Maryland Casualty Co. v. W. R. Grace & Co., pending in the U.S. District Court for the Southern District of New York. Grace Chemicals' two environmental insurance coverage actions consist of an action pending in the U.S. District Court for the Southern District of New York, also styled Maryland Casualty Co. v. W. R. Grace & Co., and an action pending in the U.S. District Court for the District of New Jersey, Hatco Corp. v. W. R. Grace & Co.-Conn. The relief sought by Grace Chemicals in these three actions would provide insurance that would partially offset Grace Chemicals' estimated exposure with respect to amounts already expended, and that may be expended in the future, by Grace Chemicals to defend claims, satisfy judgments and fund settlements. See Note 2 to the Consolidated Financial Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" for additional information. Prior to 1993, Grace Chemicals received payments totaling $97.7 million from insurance carriers, the majority of which represented the aggregate remaining obligations owed to Grace Chemicals by those carriers for primary-level insurance coverage written for the period June 30, 1962 through June 30, 1987. In 1993 and 1994, Grace Chemicals settled with insurance carriers for a total of $300.2 million (portions of which were paid or will be paid in subsequent years), in reimbursement for amounts expended by Grace Chemicals in connection with asbestos-related litigation. In 1995, Grace Chemicals settled with a primary-level insurer for $100 million, and with other insurers for a total of $200.3 million, including future payments of approximately $70 million. In 1996, Grace Chemicals has settled with additional excess-level insurers for a total of $59.9 million (including $19.2 million to be received over the next five years) with respect to both products liability and other coverage. As a result of these settlements, Grace Chemicals' asbestos-related insurance claims have been dismissed as to the primary-level product liability insurance coverage previously sold by the relevant insurers to Grace Chemicals, as well as to many of Grace Chemical's excess-level liability insurers. However, ligation continues in New York federal court as to certain excess-level carriers which have not settled. In April 1996, as a result of rulings in the New York federal court action favorable to Grace Chemicals with respect to its asbestos-related property damage liabilities, the insurers agreed to the entry of summary 5 6 judgment in favor of Grace Chemicals. These insurers have stated that they intend to appeal the trial court's rulings. The New York court has not yet addressed Grace Chemicals' claims for insurance coverage for its asbestos-related bodily injury liabilities. The Hatco environmental coverage action, involving a single environmental site, is set for trial in September 1996, with its discovery phase substantially complete. The comprehensive environmental coverage action in New York federal court, potentially involving several hundred sites, is just entering its discovery phase, focusing on eight representative or "test" environmental sites. No trial date has been set, but the test sites will probably be tried next year. Fumed Silica Plant Litigation. In 1993, Grace Chemicals initiated legal action in the Belgian courts against the Flemish government to recover losses resulting from the closing of Grace Chemicals' fumed silica plant in Puurs, Belgium. Grace Chemicals is seeking damages in excess of four billion Belgian francs (approximately $135.5 million at the December 29, 1995 exchange rate), plus interest and lost profits. This claim was dismissed at the trial court level and is now being appealed by Grace Chemicals. The trial court also determined that Grace Chemicals should repay approximately 239 million Belgian francs (approximately $8.1 million at the December 29, 1995 exchange rate), plus interest to the Flemish government for previously received investment grants; this decision is also being appealed by Grace Chemicals. Also pending is an arbitration involving the engineering company that was responsible for the design and construction of the fumed silica plant. The outcome of this proceeding may affect the action filed against the Flemish government. Shareholder Litigation. Commencing in March 1995, five lawsuits were brought against Grace New York and members of the Grace New York Board (as well as against J. P. Bolduc, who resigned as President and Chief Executive Officer and a director of Grace New York in March 1995) in New York State Supreme Court, New York County. These lawsuits were consolidated in the case entitled Weiser, et al. v. Grace, et al. The consolidated amended complaint in this lawsuit, which purports to be a derivative action (i.e., an action brought on behalf of Grace New York), alleges, among other things, that the individual defendants breached their fiduciary duties to Grace New York (i) by providing J. Peter Grace, Jr. (the Chairman and a director of Grace New York until his death in April 1995) with certain compensation arrangements upon his voluntary retirement as Grace New York's Chief Executive Officer in 1992 and (ii) by approving Mr. Bolduc's severance arrangements, and that Messrs. Grace and Bolduc breached their fiduciary duties by accepting such benefits and payments. The lawsuit seeks unspecified damages, the cancellation of all allegedly improper agreements, the cancellation of the non-employee director retirement plan, the return of all remuneration paid to the present and former directors who are defendants while they were in breach of their fiduciary duties to Grace New York, an award of attorneys' and experts' fees and costs, and such other relief as the Court may deem appropriate. In March 1996, two purported shareholder derivative class actions were filed in New York State Supreme Court, New York County, against Grace New York and Albert J. Costello, Grace New York's Chairman, President and Chief Executive Officer, alleging that the defendants breached their fiduciary duties to Grace New York's shareholders by failing to investigate and consider fully a proposal by Hercules, Incorporated to acquire or merge with Grace New York (Izes, etc. v. W. R. Grace & Company, et al. and Polikoff, etc. v. W. R. Grace & Company, et al.). The lawsuits seek injunctive relief ordering defendants to carry out their fiduciary duties by considering and evaluating such proposal, unspecified monetary damages, costs and counsel fees and such other relief as the Court deems proper. Securities and Exchange Commission Investigations. Grace New York has been notified that the Securities and Exchange Commission (the "Commission") has issued a formal order of investigation with respect to Grace New York's prior disclosures regarding benefits and retirement arrangements provided to J. Peter Grace, Jr. (the Chairman and a director of Grace New York until his death in April 1995) and certain matters relating to J. Peter Grace III, a son of J. Peter Grace, Jr. Grace New York is cooperating with the investigation. In April 1996, Grace New York received a formal order of investigation issued by the Commission directing an investigation into, among other things, whether Grace New York violated the federal securities 6 7 laws by filing periodic reports with the Commission that contained false and misleading financial information. Pursuant to this formal order of investigation, Grace New York has received a subpoena from the Southeast Regional Office of the Commission requiring the Company to produce documents relating to reserves (net of applicable taxes) established by Grace New York and NMC during the period from January 1, 1990 to the date of the subpoena (the "Covered Period"). New Grace believes that all financial statements filed by Grace New York with the Commission during the Covered Period, the financial statements of NMC included in the NMC Form 10 filed with the Commission on September 25, 1995, and the Consolidated Financial Statements (all of which financial statements, other than unaudited quarterly financial statements, were covered by unqualified opinions issued by Price Waterhouse LLP, independent certified public accountants), have been fairly stated, in all material respects, in conformity with generally accepted accounting principles. Grace New York is cooperating with the investigation. The outcome of this investigation and its impact, if any, on Grace New York, New Grace or NMC cannot be predicted at this time. Shareholder Actions Relating to NMC. In 1995, nine purported class action lawsuits were brought against Grace New York and certain of its officers and directors in various federal courts. These lawsuits have been consolidated in the case entitled Murphy, et al. v. W. R. Grace & Co., et al., which is pending in the U.S. District Court for the Southern District of New York. The first amended class action complaint in this lawsuit, which purports to be a class action on behalf of all persons and entities who purchased Grace New York's publicly traded securities during the period from March 13, 1995 through October 17, 1995, generally alleges that the defendants concealed information, and issued misleading public statements and reports, concerning NMC's financial position and business prospects, a proposed spin-off of NMC and the matters that are the subject of the investigations of NMC by the Office of the Inspector General of the U.S. Department of Health and Human Services (the "OIG"), in violation of federal securities laws. The lawsuit seeks unspecified damages, attorneys' and experts' fees and costs and such other relief as the Court deems proper. In October 1995, a purported derivative lawsuit was filed in the U.S. District Court for the Southern District of Florida, Northern Division, against Grace New York, certain of its directors and its former President and Chief Executive Officer, alleging that such individuals breached their fiduciary duties by failing to properly supervise the activities of NMC in the conduct of its business (Bennett v. Bolduc, et al.). In December 1995, the plaintiff in this action filed a new action, based on similar allegations, in the U.S. District Court for the Southern District of New York (Bennett v. Bolduc, et al.). The Florida action has been dismissed in favor of the action filed in the U.S. District Court for the Southern District of New York. A second action making similar allegations was filed in October 1995 in New York State Supreme Court, New York County (Bauer v. Bolduc, et al.). Grace New York has been advised that this action will be dismissed or stayed in favor of the Bennett action, which has been consolidated, for discovery purposes only, with the Murphy action described above. The complaint in the Bennett action seeks unspecified damages, attorneys' and experts' fees and costs and such other relief as the Court deems proper. In February 1996, a purported class action was filed in New York State Supreme Court, New York County, against Grace New York and certain of its current and former directors, alleging that the defendants breached their fiduciary duties, principally by failing to provide internal financial data concerning NMC to Vivra Incorporated and by failing to negotiate with Baxter International, Inc. in connection with a business combination involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The lawsuit seeks injunctive relief ordering the defendants to carry out their fiduciary duties and preventing or rescinding the Reorganization or any related transactions with Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys' and experts' fees and costs and such other relief as the court may deem just and proper. The plaintiff has not taken any steps to prosecute this lawsuit since it was filed, and the defendants believe this lawsuit is without merit. OIG Investigation. As discussed in the Joint Proxy Statement-Prospectus mailed herewith, NMC is the subject of an investigation (the "OIG Investigation") by the OIG, among others. One of the subpoenas received in connection with the OIG Investigation requests documents from NMC relating to the relationship of NMC with Grace New York and Grace Chemicals and Grace Chemicals' and Grace New York's knowledge of NMC's activities. Such request may indicate that investigators are looking into Grace Chemicals' potential liability in respect of NMC's activities. Under the Distribution Agreement, Grace New 7 8 York will indemnify Grace Chemicals with respect to all liabilities arising from or relating to the OIG Investigation and may not settle or compromise the OIG Investigation unless, as part of such settlement or compromise, Grace Chemicals is granted an unconditional release in respect thereof. However, no assurance can be given that Grace Chemicals will not have liability in this regard. See "THE DISTRIBUTION -- Fraudulent Transfer and Related Considerations." In addition, under the OIG Agreement, Grace Chemicals has given certain guarantees in connection with the OIG Investigation. See "THE DISTRIBUTION -- Other Arrangements." 8 EX-99.4 8 LEGAL AND REGULATORY PROCEEDINGS 1 EXHIBIT 99.4 LEGAL AND REGULATORY PROCEEDINGS As discussed in greater detail below, NMC is the subject of investigations by several federal agencies and authorities, the outcome of which cannot be predicted. If the government were successfully to pursue claims arising from any of these investigations, NMC or one or more of its subsidiaries could be subject to civil or criminal penalties, including substantial fines, suspension of payments or exclusion from the Medicare program. Any such result could have a material adverse effect on NMC's business, financial condition and results of operation. In addition, as discussed below, NMC has become aware that it is the subject of a qui tam or "whistleblower" action with respect to some or all of the issues raised by the government investigations; and NMC may be the subject of other "whistleblower" actions. OIG INVESTIGATION On October 17, 1995, NMC received five investigative subpoenas from the OIG. The subpoenas were issued in connection with an investigation being conducted by the OIG, the U.S. Attorney for the District of Massachusetts and others concerning possible violations of federal laws, including the anti-kickback statute and the False Claims Act. The subpoenas call for extensive document production relating to various aspects of NMC's business. The five subpoenas cover the following areas: (a) NMC's corporate management, personnel and employees, organizational structure, financial information and internal communications; (b) NMC's dialysis services business, principally relating to its Medical Director contracts and compensation; (c) NMC's treatment of credit balances resulting from overpayments received under the Medicare ESRD program, its billing for home dialysis services, and its payment of supplemental medical insurance premiums on behalf of indigent patients; (d) LifeChem's laboratory business, including documents relating to testing procedures, marketing, customers, competition and certain over-payments totaling approximately $4.9 million that were received by LifeChem from the Medicare program with respect to laboratory services rendered between 1989 and 1993; and (e) NMC Homecare and, in particular, information concerning IDPN billing practices related to various services, equipment and supplies and payments made to third parties as compensation for administering IDPN therapy. NMC is cooperating with the OIG investigation and has made, and is expected to continue to make, extensive document production in response to the subpoenas. Because of the breadth of the subpoenas, the government has identified and is continuing to identify specific categories of documents that it is requiring NMC to produce and has deferred compliance with substantial portions of the subpoenas at this time. NMC has received another OIG subpoena requiring the production of limited categories of additional documents relating to subject matters covered by the original subpoenas and may receive additional such subpoenas from time to time. 1 2 The government has identified a number of particular areas of its inquiry. The government has indicated that the areas identified are not exclusive, and that it may pursue additional areas. As noted, the penalties applicable under the anti-kickback statute, the False Claims Act and other federal and state statutes and regulations applicable to NMC's business can be substantial. See "-- Anti-Kickback Statute, False Claims Act, Stark Law and Fraud and Abuse Laws." While NMC asserts that it is able to offer legal and/or factual defenses with respect to the areas the government has identified, there can be no assurance that the federal government and/or one or more state agencies will not claim that NMC has violated statutory or regulatory provisions. Additionally, it is possible that one or more qui tam actions alleging that NMC submitted false claims to the government may have been filed under seal by former or current NMC employees or other individuals who may have familiarity with one or more of the issues under investigation. As noted, under the False Claims Act, any such private plaintiff could pursue an action against NMC in the name of the U.S. at his or her own expense if the government declines to do so. It is also possible that one or more private payors will claim that NMC received excess payments and will seek reimbursement and other damages from NMC. An adverse determination with respect to any of the issues addressed by the subpoenas, or any of the other issues that have been or may be identified by the government, could have a material adverse impact on NMC and could result in the payment of substantial fines, penalties and reimbursements or the suspension of payments or exclusion of NMC or one or more of its subsidiaries from the Medicare program. Under the terms of the Reorganization, any potential resulting liability will be retained by NMC, and New Grace will be indemnified by FNMC against all potential liability arising from or relating to the OIG Investigation. See "THE REORGANIZATION -- The Distribution Agreement." The particular areas identified by the government to date are as follows. Medical Director Compensation The government is investigating whether DSD's compensation arrangements with its Medical Directors constitute payments to induce referrals, which would be illegal under the anti-kickback statute, rather than payment for services rendered. DSD compensated the substantial majority of its Medical Directors on the basis of a percentage of the earnings of the dialysis center for which the Medical Director was responsible from the inception of NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II. Under the arrangements in effect prior to January 1, 1995, the compensation paid to Medical Directors was adjusted to include "add backs," which represented a portion of the profit earned by MPG on products purchased by the Medical Director's facility from MPG and (until January 1, 1992) a portion of the profit earned by LifeChem on laboratory services provided to patients at the Medical Director's facility. These adjustments were designed to allocate a profit factor to each dialysis center relating to the profits that could have been realized by the center if it had provided the items and services directly rather than through a subsidiary of NMC. The percentage of profits paid to any specific Medical Director was reached through negotiation, and was typically a provision of a multi-year consulting agreement. Since January 1, 1995, DSD has compensated its Medical Directors on a fixed fee arrangement to comply with the requirements of Stark II. As part of the arrangement, approximately 25% of the Medical Director's compensation is held back and earned by the Medical Director on the basis of the Medical Director's achievement of quality and cost containment goals. In renegotiating its Medical Director compensation arrangements in connection with Stark II, DSD took account of the compensation levels paid to its Medical Directors in prior years. Certain government representatives have expressed the view in meetings with counsel for NMC that arrangements where the Medical Director was or is paid amounts in excess of the "fair market value" of the services rendered may evidence illegal payments to induce referrals, and that hourly compensation is a relevant measure for evaluating the "fair market value" of the services. DSD does not compensate its Medical Directors on an hourly basis and has asserted to the government that hourly compensation and "fair market value" are not relevant factors in determining whether the anti-kickback statute has been violated. Because of the wide variation in the profitability of its facilities, and the variation in the profit percentage contractually negotiated between DSD and its Medical Directors, there is a wide variation in the amounts that have been 2 3 paid to Medical Directors. The Medical Director contracts negotiated in connection with the requirements of Stark II also have a wide variation in Medical Director compensation. The compensation that DSD has paid and is continuing to pay to a material number of its Medical Directors could be viewed as being in excess of "fair market value," both in absolute terms and in terms of hourly compensation. NMC has asserted to the government that its compensation arrangements do not constitute illegal payments to induce referrals. NMC has also asserted to the government that OIG auditors repeatedly reviewed NMC's compensation arrangements with its Medical Directors in connection with their audits of the costs claimed by DSD; that the OIG stated in its audit reports that, with the exception of certain technical issues, NMC had complied with applicable Medicare laws and regulations pertaining to the ESRD program; and that NMC reasonably relied on these audit reports in concluding that its program for compensating Medical Directors was lawful. There has been no indication that the government will accept NMC's assertions concerning the legality of its arrangements generally or NMC's assertion that it reasonably relied on OIG audits, or that the government will not focus on specific arrangements that DSD has made with one or more Medical Directors and claim that those specific arrangements were or are unlawful. The government is also investigating whether DSD's profit sharing arrangements with its Medical Directors influenced them to order unnecessary ancillary services and items. NMC has asserted to the government that the rate of utilization of ancillary services and items by its Medical Directors is reasonable and that it did not provide illegal inducements to Medical Directors to order ancillary services and items. Credit Balances In the ordinary course of business, Medicare providers like DSD receive overpayments from Medicare intermediaries for services that they provide to Medicare patients. Medicare intermediaries commonly direct such providers to notify them of the overpayment and not remit such amounts to the intermediary by check or otherwise unless specifically requested to do so. In 1992, HCFA adopted a regulation requiring certain Medicare providers, including dialysis centers, to file a quarterly form listing unrecouped overpayments with the Medicare intermediary responsible for reimbursing the provider. The first such filing was required to be made as of June 30, 1992 for the period beginning with the initial date that the provider participated in the Medicare program and ending on June 30, 1992. The government is investigating whether DSD intentionally understated the Medicare credit balance reflected on its books and records for the period ending June 30, 1992 by reversing entries out of its credit balance account and taking overpayments into income in anticipation of the institution of the new filing requirement. DSD's policy was to notify Medicare intermediaries in writing of overpayments upon receipt and to maintain unrecouped Medicare overpayments as credit balances on the books and records of DSD for four years; overpayments not recouped by Medicare within four years would be reversed from the credit balance account and would be available to be taken into income. NMC asserts that Medicare overpayments that have not been recouped by Medicare within four years are not subject to recovery under applicable regulations. NMC also asserts that its initial filing with the intermediaries disclosed the credit balance on the books and records of DSD as shown in accordance with its policy. The government is also investigating whether DSD failed to disclose Medicare overpayments that resulted from DSD's obligation to rebill commercial payors for amounts originally billed to Medicare under HCFA's initial implementation of the OBRA 93 amendments to the secondary payor provisions of the Medicare Act. See "-- OBRA 93." DSD experienced delays in reporting a material amount of overpayments after the implementation of the OBRA 93 amendments. NMC asserts that most of these delays were the result of the substantial administrative burdens placed on DSD as a consequence of the changing and inconsistent instructions issued by HCFA with respect to the OBRA 93 amendments and were not intentional. Substantially all overpayments resulting from the rebilling effort associated with the OBRA 93 amendments have now been reported. Procedures are in place that are designed to ensure that subsequent overpayments resulting from the OBRA 93 amendments will be reported on a timely basis. 3 4 Supplemental Medical Insurance DSD provides grants or loans for the payment of premiums for supplemental medical insurance (under which Medicare Part B coverage is provided) on behalf of a small percentage of its patients who are financially needy. The government is investigating this practice. NMC asserts that the practice is lawful. Overpayments for Home Dialysis Services NMC acquired HIC, an in-center and home dialysis service provider, in 1993. At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC had received payments for home dialysis services in excess of the Medicare reasonable charge for services rendered prior to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The government is investigating whether the settlement concerning the alleged overpayments made to HIC resolved all issues relating to such alleged overpayments. The government is also investigating whether an NMC subsidiary, Home Dialysis Services, Inc. ("HDS"), received payments similar to the payments that HIC received, and whether HDS improperly billed for home dialysis services in excess of the monthly cost cap for services rendered on or after February 1, 1990. The government is investigating whether NMC was overpaid for services rendered. NMC asserts that the billings by HDS were proper. LifeChem Overpayments. On September 22, 1995, LifeChem voluntarily disclosed certain billing problems to the government that had resulted in LifeChem's receipt of approximately $4.9 million in overpayments from the Medicare program for laboratory services rendered between 1989 and 1993. LifeChem asserts that most of these overpayments relate to errors caused by a change in LifeChem's computer systems and that the remainder of the overpayments were the result of the incorrect practice of billing for a complete blood count with differential when only a complete blood count was ordered and performed, and of the incorrect practice of billing for a complete blood count when only a hemoglobin or hematocrit test was ordered. LifeChem asserts that the overpayments it received were not caused by fraudulent activity. LifeChem made these disclosures to the government as part of an application to be admitted to a voluntary disclosure program begun by the government in mid-1995. At the time of the disclosures, LifeChem tendered repayment to the government of the $4.9 million in overpayments. After the OIG investigation was announced, the government indicated that LifeChem had not been accepted into its voluntary disclosure program. The government has deposited the $4.9 million check with NMC's approval. The matters disclosed in LifeChem's September 22, 1995 voluntary disclosure are a subject of the OIG Investigation. On June 7, 1996, LifeChem voluntarily disclosed an additional billing problem to the government that had resulted in LifeChem's receipt of between $40,000 and $160,000 in overpayments for laboratory services rendered in 1991. LifeChem advised the government that this overpayment resulted from the submission for payment of a computer billing tape that had not been subjected to a "billing rules" program designed to eliminate requests for payments for laboratory tests that are included in the composite rate and that were not eligible for separate reimbursement. LifeChem also advised the government that there may have been additional instances during the period from 1990 to 1992 when other overpayments were received as a result of the submission of computer billing tapes containing similar errors and that it was in the process of determining whether such additional overpayments were received. On June 21, 1996, LifeChem advised the government that the 1991 billing problem disclosed on June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also advised the government that certain records suggest instances in July 1990 and August 31 through September 11, 1990, when billing tapes may have been processed without rules processing. LifeChem is continuing its effort to determine whether any other overpayments occurred. Capitation for routine tests and panel design. In October 1994, the OIG issued a special fraud alert in which it stated its view that the industry practice of offering to perform or performing the routine tests covered by the Composite Rate at a price below fair market value, coupled with an agreement by a dialysis center to refer all or most of its non-Composite Rate tests to the laboratory, violates the anti-kickback statute. See "-- Reimbursement." In response to this alert, LifeChem changed its practices with respect to testing covered 4 5 by the Composite Rate to increase the amount charged to both DSD and third-party dialysis centers and reduce the number of tests provided for the fixed rate. The government is investigating LifeChem's practices with respect to these tests. Benefits provided to dialysis centers and persons associated with dialysis centers. The government is investigating whether any DSD or third-party dialysis center or any person associated with any such center was provided with benefits in order to induce them to use LifeChem services. Such benefits could include, for example, discounts on RPD supplies, the provision of computer equipment, the provision of money for the purchase of computer equipment, and the provision of research grants. NMC has identified certain instances in which benefits were provided to MPG customers who purchased medical products from RPD and used LifeChem's laboratory services. The government may claim that the provision of such benefits violates, among other things, the anti-kickback statute. Business and testing practices. As noted above, the government has identified a number of specific categories of documents that it is requiring NMC to produce at this time. In addition to documents relating to the areas discussed above, the government has also required LifeChem to produce at this time documents relating to the equipment and systems used by LifeChem in performing and billing for clinical laboratory blood tests, the design of the test panels offered and requisition forms used by LifeChem, the utilization rate for certain tests performed by LifeChem, recommendations concerning diagnostic codes to be used in ordering tests for patients with given illnesses or conditions, and internal and external audits and investigations relating to LifeChem's billing and testing. These areas of inquiry are similar to inquiries that the OIG has made to other Medicare and Medicaid providers in the clinical laboratory industry within the past several years. IDPN Administration kits. As discussed above, one of the principal activities of NMC Homecare is to provide IDPN therapy to dialysis patients at both NMC-owned facilities and at facilities owned by other providers. See "-- Business of NMC -- NMC Homecare." IDPN therapy is typically provided to the patient 12-13 times per month during dialysis treatment. Bills are submitted to Medicare on a monthly basis and include separate claims for reimbursement for supplies, including, among other things, nutritional solutions, administration kits and infusion pumps. In February 1991, the Medicare carrier responsible for processing NMC Homecare's IDPN claims issued a Medicare advisory to all parenteral and enteral nutrition suppliers announcing a coding change for reimbursement of administration kits provided in connection with IDPN therapy for claims filed for items provided on or after April 1, 1991. The Medicare allowance for administration kits during this period was approximately $625 per month per patient. The advisory stated that IDPN providers were to indicate the "total number of actual days" when administration kits were "used," instead of indicating that a one-month supply of administration kits had been provided. In response, NMC Homecare billed for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period, which typically represented the entire month, as opposed to the number of days the treatment was actually administered. During the period from April 1991 to June 1992, NMC Homecare had an average of approximately 1,200 IDPN patients on service. In May 1992, the carrier issued another Medicare advisory to all PEN suppliers in which it stated that it had come to the carrier's attention that some IDPN suppliers had not been prorating their billing for administration kits used by IDPN patients and that providers should not bill for administration kits on the basis of the number of days that the patient was on an IDPN treatment program during the billing period. The advisory stated further that the carrier would be conducting "a special study to determine whether or not overpayments have occurred as a result of incorrect billing" and that "[i]f overpayments have resulted, providers that have incorrectly billed" would "be contacted so that refunds can be recovered." NMC Homecare revised its billing practices in response to this advisory for claims filed for items provided on or after July 1, 1992. NMC Homecare was not asked to refund any amounts relating to its billings for administration kits following the issuance of the second advisory. The government is investigating whether NMC submitted false claims for administration kits during the period from April 1, 1991 to June 30, 1992. NMC asserts that the claims submitted in connection with billing 5 6 for administration kits were proper. The government may claim that NMC Homecare's billing for administration kits during this period violates, among other things, the False Claims Act. Infusion Pumps and IV Poles. During the time period covered by the subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for the infusion pumps and, until 1992, for IV poles provided to IDPN patients in connection with the administration of IDPN treatments. These regulations do not expressly specify that a particular pump and IV pole be dedicated to a specific patient, and NMC asserts that these regulations permitted NMC Homecare to bill Medicare for an infusion pump and IV pole so long as the patient was infused using a pump and IV pole. Despite the absence of an express regulatory specification, NMC Homecare developed a policy to deliver to a dialysis center a dedicated infusion pump and IV pole for each patient, although NMC cannot represent that it followed this policy in every instance. The government is investigating the propriety of NMC Homecare's billings for infusion pumps and IV poles. As noted above, under the new policies published by HCFA with respect to IDPN therapy, NMC will not be able to bill for infusion pumps after July 1, 1996. The government discontinued reimbursement for IV poles in 1992. "Hang fees" and other payments. IDPN therapy is typically provided to the patient during dialysis by personnel employed by the dialysis center treating the patient with supplies provided and billed to Medicare by NMC Homecare in accordance with the Medicare parenteral nutrition supplier rules. In order to compensate dialysis centers for the costs incurred in administering IDPN therapy and monitoring the patient during therapy, NMC Homecare followed the industry-wide practice of paying a "hang fee" to the center. Dialysis centers are responsible for reporting such fees to HCFA on their cost reports. For DSD dialysis centers, the fee was $30 per administration, based upon internal DSD cost calculations. For third-party dialysis centers, the fee was negotiated with each center, typically pursuant to a written contract, and ranged from $15 to $65 per administration. NMC has identified instances in which other payments and amounts beyond that reflected in a contract were paid to these third-party centers. In July 1993, the OIG issued a management advisory alert to HCFA in which it stated that "hang fees" and other payments made by suppliers of IDPN to dialysis centers "appear to be illegal as well as unreasonably high." The government is investigating the nature and extent of the "hang fees" and other payments made by NMC Homecare as well as payments by NMC Homecare to physicians whose patients have received IDPN therapy. The government may claim that the payments by NMC Homecare to dialysis centers violate, among other things, the anti-kickback statute. Utilization of IDPN. Since 1984, when HCFA determined that Medicare should cover IDPN and other parenteral nutrition therapies, NMC has been an industry leader in identifying situations in which IDPN therapy is beneficial to ESRD patients. It is the policy of NMC Homecare to seek Medicare reimbursement for IDPN therapy only when it is prescribed by a patient's treating physician and when it believes that the circumstances satisfy the requirements published by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for payment more than 90% of the IDPN claims submitted by NMC Homecare. Since 1994, the rate of approval for Medicare reimbursement for IDPN claims submitted by NMC Homecare for new patients, and by the infusion industry in general, has fallen to approximately 9%. NMC contends that the reduction in rates of approval has occurred because HCFA and its carriers have implemented an unauthorized change in coverage policy without giving notice to providers. See "-- IDPN Coverage Issues." While NMC Homecare has continued to offer IDPN to patients pursuant to the prescription of the patients' treating physicians and to submit claims for Medicare reimbursement when it believes the requirements stated in HCFA's published regulations are satisfied, other providers have responded to the drop in the approval rate for new Medicare IDPN patients by abandoning the Medicare IDPN business, cutting back on the number of Medicare patients to whom they provide IDPN, or declining to add new Medicare patients. The number of patients to whom NMC Homecare provides IDPN has thus increased. The government is investigating the utilization rate of IDPN therapy among NMC patients and whether NMC submitted IDPN claims to Medicare for patients who were not eligible for coverage or with inadequate documentation of eligibility. NMC asserts that the utilization rate of IDPN therapy among its dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the factors discussed above and that it is the policy of NMC Homecare to seek Medicare reimbursement for IDPN therapy prescribed by the patient's 6 7 treating physician in accordance with the requirements published by HCFA and its carrier agents. There can be no assurance that the government will accept NMC's view or that the government will not claim that NMC Homecare submitted IDPN claims for individuals who were not eligible for coverage or with inadequate documentation of eligibility. QUI TAM ACTION Grace and NMC have recently become aware that a qui tam action has been filed in the United States District Court for the Southern District of Florida, Southern Division (the "Florida Action"). The original complaint in the Florida Action was filed under seal in 1994. The Relator filed an Amended Complaint under seal on July 8, 1996. The seal with respect to the Amended Complaint was partially lifted pursuant to court order to permit the government to provide Grace and NMC with a copy of the Amended Complaint. Grace and NMC received copies of the Amended Complaint on July 10, 1996. Pursuant to a court order dated July 26, 1996, the seal was further modified to permit Grace to provide copies of the Amended Complaint to Fresenius AG, lenders involved in the NMC credit facility and their respective counsel and to permit Grace and NMC to describe the allegations of the Amended Complaint in its securities filings with respect to the Reorganization. The Amended Complaint alleges, among other things, that Grace, Grace Chemicals and NMC violated the False Claims Act in connection with certain billing practices regarding IDPN and the administration of EPO. The Amended Complaint alleges that as a result of this allegedly wrongful conduct, the United States suffered actual damages in excess of $200 million and alleges that the defendants are liable to the United States for three times the amount of the alleged damages plus fines of up to $10,000 per false claim. The Amended Complaint also seeks the imposition of a constructive trust on the proceeds of the NMC dividend to Grace Chemicals for the benefit of the United States on the ground that the Reorganization constitutes a fraudulent conveyance that will render NMC unable to satisfy the claims asserted in the Amended Complaint. As noted under "-- OIG Agreements," the United States has agreed to release any such claim. OIG AGREEMENTS As a result of discussions with representatives of the United States in connection with the OIG investigation, certain agreements (the "OIG Agreements") have been entered into to guarantee the payment of any obligations of NMC to the United States relating to or arising out of the OIG investigation and the Florida Action (the "Government Claims"). For the purposes of the OIG Agreements, an Obligation is (a) a liability or obligation of NMC to the United States in respect of a Government Claim pursuant to a court order (i) which is final and nonappealable or (ii) the enforcement of which has not been stayed pending appeal or (b) a liability or obligation agreed to be an Obligation in a settlement agreement executed by Fresenius Medical Care, Grace or NMC, on the one hand, and the United States, on the other hand. As stated elsewhere herein, the outcome of the OIG investigation cannot be predicted. The entering into of the OIG Agreements is not an admission of liability by any party with respect to the OIG investigation, nor does it indicate the liability, if any, which may result therefrom. Under the OIG Agreements, effective upon consummation of the Reorganization, the United States will be provided by Fresenius Medical Care and Grace with a joint and several guarantee of payment when due of all Obligations (the "Primary Guarantee"). As credit support for this guarantee, NMC will deliver, on or prior to the Effective Date, an irrevocable standby letter of credit in the amount of $150 million. The United States will return such letter of credit (or any renewal or replacement) for cancellation when all Obligations have been paid in full or it is determined that NMC has no liability in respect of the Government Claims. In addition, under the OIG Agreements, effective upon consummation of the Reorganization, the United States will be provided with a guarantee by Grace Chemicals of the obligations of Fresenius Medical Care under the Primary Guarantee in respect of Government Claims for acts and transactions that took place at any time up to the consummation of the Reorganization (the "Secondary Guarantee"). Under the Secondary Guarantee, payment will be required only if, and to the extent that, Obligations have become due and payable and remain uncollected for 120 days. Grace Chemicals is a third party beneficiary of the Primary Guarantee and may institute suit to enforce its terms. 7 8 Under the OIG Agreements, the United States has agreed, solely in its capacity as holder of the Government Claims: (a) to not take any action whatsoever to impede, prohibit, enjoin, delay or otherwise interfere with consummation of the Reorganization on grounds that the Reorganization constitutes a fraudulent conveyance or other similarly avoidable transfer as to the United States; (b) to represent to the court in the Florida Action or any other court presented with an attempt by a relator in any qui tam action relating in substantial part to matters that are the subject of the Florida Action or the OIG investigation to impede, prohibit, enjoin, delay or otherwise interfere with consummation of the Reorganization that the OIG Agreements satisfy the concerns of the United States with respect to the Reorganization and; (c) effective upon consummation of the Reorganization, to release and discharge Grace Chemicals, Grace, NMC, Fresenius Medical Care, and certain other parties (collectively, the "Releasees") from claims to the effect that the Reorganization (or any transaction comprising a part thereof) constitutes a fraudulent conveyance or other similarly avoidable transfer as to the United States. Fresenius Medical Care and the United States state in the OIG Agreements that they will negotiate in good faith to attempt to arrive at a consensual resolution of the Government Claims and, in the context of such negotiations, will negotiate in good faith as to the need for any restructuring of the payment of any obligations arising under such resolution, taking into account the ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements state that the foregoing statements shall not be construed to obligate any person to enter into any settlement of the Government Claims or to agree to a structured settlement. Moreover, the OIG Agreements state that the statements described in the first sentence of this paragraph are precatory and statements of intent only and that (a) compliance by the United States with such provisions is not a condition or defense to the obligations of Fresenius Medical Care, Grace or Grace Chemicals under the OIG Agreements and (b) breach of such provisions by the United States cannot and will not be raised by Fresenius Medical Care, Grace New York or Grace Chemicals to excuse performance of their respective obligations under the OIG Agreements. If the Reorganization in not consummated on or before October 1, 1996, the OIG Agreements will terminate and be of no further force and effect unless all parties thereto agree otherwise in writing. If the Reorganization Agreement is amended, modified or supplemented after the date of this Joint Proxy Statement-Prospectus, Fresenius Medical Care will provide the United States with written notice describing the nature of such amendment, modification or supplement. If the United States determines that such amendment, modification or supplement is adverse to its interests, the United States will have the right to terminate the OIG Agreements by delivering written notice of such termination within 10 business days of its actual receipt of notice of such amendment, modification or supplement. The foregoing describes the material terms of the OIG Agreements, copies of which have been filed as exhibits to the Registration Statements. The foregoing description does not purport to be complete and is qualified in its entirety by reference to such exhibits. EASTERN DISTRICT OF VIRGINIA In December 1994, a subsidiary of NMC received a subpoena from a federal grand jury in the Eastern District of Virginia investigating the contractual relationships between subsidiaries of NMC that provide dialysis services and third parties that provide medical directorship and related services to those subsidiaries. NMC cooperated with the grand jury and produced documents in response to the subpoena, and there has been no further communication from the government. DISTRICT OF NEW JERSEY INVESTIGATION NMC has received multiple subpoenas from a federal grand jury in the District of New Jersey investigating, among other things, whether NMC sold defective products, the manner in which NMC handled customer complaints and certain matters relating to the development of a new dialyzer product line. NMC is cooperating with this investigation and has provided the grand jury with extensive documents. On February 12, 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that it is the target of a federal grand jury investigation into possible violations of criminal law in connection with its efforts to persuade the FDA to lift a January 1991 import hold issued with respect to NMC's Dublin, Ireland 8 9 manufacturing facility. In June 1996, NMC received a letter from the U.S. Attorney for the District of New Jersey indicating that the U.S. Attorney had declined to prosecute NMC with respect to a submission related to NMC's effort to lift the import hold. The letter added that NMC remains a subject of a federal grand jury's investigation into other matters. NMC also received a subpoena in June 1996 from the federal grand jury requesting certain documents in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995. The outcome of this investigation and its impact, if any, on NMC's business or results of operations cannot be predicted at this time. FDA MATTERS Since 1993, NMC has engaged in a number of voluntary recalls of products that it manufactured or that were manufactured by third parties and distributed by NMC. None of these product recalls has resulted in fines or penalties for NMC. In 1995, Fresenius USA completed a voluntary action with respect to the Optum(R) exchange device that Fresenius USA acquired from Abbott, which was classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with respect to this device and determined that they were adequate. During the period from 1991 through 1993, the FDA issued warning letters concerning four of the six RPD facilities in the U.S., as well as import alerts concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland facility. As a result of the import alerts, NMC was prohibited from importing the products covered by the alerts into the U.S. until the FDA confirmed compliance with GMP requirements at the facilities where such products were manufactured. In January 1994, NMC and certain members of its senior management entered into the Consent Decree providing that the importation of bloodlines and hemodialyzers could resume upon certification by NMC that the relevant manufacturing facility complied with GMP requirements and successful completion of an FDA inspection at the relevant facility to confirm compliance. The Consent Decree also required NMC to certify, and be inspected for, GMP compliance at all of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD committed to maintaining ongoing compliance with GMP and related requirements at both U.S. and non-U.S. manufacturing facilities. As a result of the Consent Decree, NMC's U.S. facilities were required to undertake significant GMP improvements. NMC submitted all required certifications for its U.S. and non-U.S. facilities in accordance with timetables specified in the Consent Decree, and the bloodline import alert was lifted in March 1994. During the course of 1994 and 1995, NMC also worked with the FDA and demonstrated that its other manufacturing facilities in the U.S. were in compliance with GMP requirements. The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the FDA in April and December 1994 but did not pass inspection. NMC completed all remaining corrective actions, and in December 1995 the FDA determined that the Dublin facility was in compliance with GMP requirements and lifted the import alert. No fines or penalties have been imposed on NMC as a result of the FDA's actions or in connection with the Consent Decree. By policy, however, the FDA generally will undertake more frequent and more rigorous inspections of facilities that have been subject to consent decrees. For a discussion of the effects of the warning letters and import alerts issued by the FDA on NMC's business, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC." On January 24, 1995, the FDA issued a warning letter and import alert relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland facility. That facility was not expressly named in the Consent Decree described above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in December 1994, and, for business reasons, decided to shut down the Diafilter(R) business at the Limerick facility on January 23, 1995, no subsequent compliance review was deemed necessary by the FDA. NMC was not restricted from importing into the U.S. the other products manufactured at the Limerick facility. In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each location, violations of certain GMP were found. At the Walnut Creek facility, violations of pre-market notification filing requirements were also found, although these findings were subsequently reversed when the devices in question were determined to be covered by 9 10 appropriate filings. The FDA issued warning letters with respect to each facility, as a result of which the issuance of new 510(k) notices and new export clearances was placed on administrative hold. Fresenius USA responded to the inspection findings at Maumee in a manner it believes addresses the FDA's findings. Fresenius USA subsequently closed the Maumee facility in connection with the relocation of production from that facility to a facility in Lewisberry, Pennsylvania. Fresenius USA undertook an exhaustive review of the FDA's findings relating to Walnut Creek and submitted a detailed response to those findings. The Ogden plant was reinspected in 1995 and the administrative holds have been lifted from both Ogden and Walnut Creek. The Walnut Creek facility was inspected again in January and February of 1996 and Fresenius USA was advised that all GMP issues raised by the FDA have been resolved. Fresenius USA believes that its facilities are currently in compliance in all material respects with applicable state, local and federal requirements. In addition, the FDA may inspect facilities in the ordinary course of business to ensure compliance with GMP and other applicable regulations. INTERNATIONAL REGULATORY CLAIMS As discussed above, as a general matter, licenses and certifications are required in connection with the operation of dialysis clinics outside the United States, and NMC is dependent upon its ability to obtain and maintain such licenses and certifications. NMC lacks certain licenses and certifications technically required to operate its facilities in Portugal. However, based on discussions with regulatory officials in Portugal, NMC management does not believe that the absence of such licenses will have a material adverse effect on NMC or materially affect its ability to operate such facilities. MEDICARE CERTIFICATION ISSUES As discussed above, licenses and certification for participation in the Medicare and Medicaid programs are regulated at the federal, state and local levels. The Medicare carriers serving Florida, New Jersey and Pennsylvania have implemented coverage policies that may restrict the ability of nuclear-imaging providers, such as DSI, to qualify as a provider for this service. If DSI is not permitted to bill for these services as a Medicare provider, it may be able to bill physicians for the services DSI provides. DSI participates as a provider under the Medicare Part B program in all states where applicable, primarily as an independent physiological laboratory. DSI's Medicare provider number is currently administratively suspended or temporarily revoked in Rhode Island, Connecticut, and Colorado, due largely to transitional issues related to the timely completion of applications in connection with recent acquisitions. The Medicare carrier in Connecticut has verbally advised DSI that the provider number will be reinstated and applications are pending in Rhode Island and Colorado. If the provider numbers are not reinstated retroactively, DSI may not be able to bill for services rendered during the periods in which the numbers were administratively suspended or temporarily revoked. IDPN In November 1995, NMC filed a complaint in the United States District Court for the Middle District of Pennsylvania (NMC Homecare, Inc. v. Shalala) seeking declaratory judgment and injunctive relief to prevent application of a 1993 interpretation of Medicare's coverage guidelines that results in a sharp reduction in the reimbursement rate for IDPN services provided by NMC. On May 17, 1996, the Magistrate Judge assigned to the case issued a Report to the District Court Judge recommending grant of the government's motion and dismissal of the action. NMC has filed objections to the Report, and the government is expected to respond to those objections in July 1996. The District Court Judge will issue an order granting or denying the government's motion to dismiss following completion of the briefing. See "-- Reimbursement -- U.S. -- IDPN." NMC Homecare's unpaid IDPN claims represent substantial accounts receivable of NMC Homecare (approximately $103 million as of March 31, 1996, currently increasing at a rate of approximately $6 million per month). NMC believes that the reduction in IDPN coverage by Medicare is an unauthorized policy coverage change. The outcome of this proceeding cannot be predicted. If NMC is not successful in its effort to obtain payment for its IDPN accounts receivable, NMC's business, financial position and results of operations could be adversely affected. 10 11 OBRA 93 OBRA 93 affected the payment of benefits under Medicare and employer health plans for certain eligible ESRD patients. In July 1994, HCFA issued an instruction to Medicare claims processors to the effect that Medicare benefits for the patients affected by OBRA 93 would be subject to a new 18-month "coordination of benefits" period. This instruction had a positive impact on NMC's dialysis revenues because, during the 18-month coordination of benefits period, patients' employer health plans were responsible for payment, which was generally at rates higher than that provided under Medicare. In April 1995, HCFA issued a new instruction, reversing its original instruction in a manner that would substantially diminish the positive effect of the original instruction on NMC's dialysis business. Under the new instruction, no 18-month coordination of benefits period would arise, and Medicare would remain the primary payor. HCFA further proposed that its new instruction be effective retroactive to August 1993, the effective date of OBRA 93. If HCFA's reversal of its original implementation of the provisions of OBRA 93 that relate to ESRD patients for whom Medicare is the secondary payor (see "-- Reimbursement -- U.S. -- Coordination of Benefits") is upheld, NMC may be required to refund the payments received from employer health plans for services provided after August 10, 1993 under HCFA's original implementation, and to re-bill Medicare for the same services, which would result in a net loss to DSD of approximately $120 million as of June 30, 1995. NMC ceased to recognize the incremental revenue realized under the original Program Memorandum as of July 1, 1995, but it continued to bill employer health plans as primary payors for patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for dual eligible ESRD patients effected by OBRA 93, and has recently begun to rebill in compliance with the revised policy for services rendered between April 24 and December 31, 1995. On May 5, 1995, NMC filed a complaint in the U.S. District Court for the District of Columbia (National Medical Care, Inc. and Bio-Medical Applications of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No. 95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April 24, 1995 implementation of the OBRA 93 provisions relating to the coordination of benefits for dual eligible ESRD patients. See "-- Reimbursement -- U.S. -- Coordination of Benefits." On May 9, 1995, NMC moved for a preliminary injunction to preclude HCFA from enforcing its new policy retroactively, that is, to billings for services provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a preliminary injunction. The litigation is continuing with respect to NMC's request to enjoin HCFA's new policy, both retroactively and prospectively, on a permanent basis. While there can be no assurance that a permanent injunction will be issued, NMC believes that it will ultimately prevail in its claim that the retroactive reversal by HCFA of its original implementation of OBRA 93 was impermissible under applicable law. Pending the outcome of the litigation, HCFA's new policy remains effective for services provided after April 23, 1995. If HCFA's revised interpretation is upheld, NMC's business, financial position and results of operations would be materially adversely affected, particularly if the revised interpretation is applied retroactively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC." SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In April 1996, Grace received a formal order of investigation issued by the Commission directing an investigation into, among other things, whether Grace violated the federal securities laws by filing periodic reports with the Commission that contained false and misleading financial information. Pursuant to this formal order of investigation, Grace received a subpoena from the Southeast Regional Office of the Commission requiring Grace to produce documents relating to reserves (net of applicable taxes) established by Grace and NMC during the period from January 1, 1990 to the date of the subpoena (the "Covered Period"). Grace believes that all financial statements filed by Grace with the Commission during the Covered Period, including the financial statements of NMC included in the NMC Form 10 filed with the Commission on September 25, 1995, and the consolidated financial statements of Grace filed in Grace's Annual Report on Form 10-K for the year ended December 31, 1995 (all of which financial statements, other than unaudited quarterly financial statements, were covered by unqualified opinions issued by Price Waterhouse LLP, 11 12 independent certified public accountants), have been fairly stated, in all material respects, in conformity with US GAAP. Grace is cooperating with the Commission. The outcome of this investigation and its impact, if any, on Grace or NMC cannot be predicted at this time. IDPN COVERAGE ISSUES NMC Homecare administers IDPN therapy to chronic dialysis patients who suffer from severe gastrointestinal malfunctions. Since late 1993, Medicare claims processors have sharply reduced the number of IDPN claims approved for payment as compared to prior periods. NMC believes that the reduction in IDPN claims currently being paid by Medicare represents an unauthorized policy coverage change. Accordingly, NMC and other IDPN providers are pursuing various administrative and legal remedies, including administrative appeals, to address this reduction. In November 1995, NMC filed a complaint in the U.S. District Court for the Middle District of Pennsylvania seeking a declaratory judgment and injunctive relief to prevent the implementation of this policy coverage change. (National Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). The government has filed a motion to dismiss on grounds of failure to exhaust administrative remedies. NMC has filed a cross-motion for summary judgment. The motions are pending. On May 17, 1996, the Magistrate Judge assigned to the case issued a Report to the District Court Judge recommending grant of the government's motion and dismissal of the action. NMC has filed objections to the Report, and the government is expected to respond to those objections in July 1996. The District Court Judge will issue an order granting or denying the government's motion to dismiss following completion of the briefing. NMC management believes that its IDPN claims are consistent with published Medicare coverage guidelines and ultimately will be approved for payment. Such claims represent substantial accounts receivable of NMC, amounting to approximately $103 million as of March 31, 1996, respectively, and currently increasing at the rate of approximately $6 million per month. If NMC is unable to collect its IDPN receivable or if IDPN coverage is reduced or eliminated, depending on the amount of the receivable that is not collected and/or the nature of the coverage change, NMC's business, financial position and results of operations could be materially adversely affected. SHAREHOLDER LITIGATION In 1995, nine purported class action lawsuits were brought against Grace and certain of its officers and directors in various federal courts. These lawsuits have been consolidated in a case entitled Murphy, et al. v. W. R. Grace & Co., et al. No. 95-CV-9003(JFK) (the "Murphy Action"), which is pending in the U.S. District Court for the Southern District of New York. The first amended class action complaint in this lawsuit, which purports to be a class action on behalf of all persons and entities who purchased publicly traded securities of Grace during the period from March 13, 1995 through October 17, 1995, generally alleges that the defendants violated federal securities laws by concealing information and issuing misleading public statements and reports concerning NMC's financial position and business prospects, a proposed spin-off of NMC, and the matters that are the subject of the OIG Investigation and the investigation by the federal grand jury in the District of New Jersey. See "-- OIG Investigation" and "-- District of New Jersey Investigation." The Murphy Action seeks unspecified damages, attorneys' and experts' fees and costs and such other relief as the court deems proper. In October 1995, a purported derivative lawsuit was filed in the U.S. District Court for the Southern District of Florida, Northern Division against Grace, certain of its directors and its former President and Chief Executive Officer, alleging that such individuals breached their fiduciary duties by failing to properly supervise the activities of NMC in the conduct of its business (Bennett v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the plaintiff in this action filed a new action, based on similar allegations, in the U.S. District Court for the Southern District of New York (Bennett v. Bolduc, et al. 95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida has been dismissed in favor of the Bennett Action. A second action making similar allegations was filed in October 1995 in New York State Supreme Court, New York County (Bauer v. Bolduc, et al. 95-125751). This action has been stayed in favor of the Bennett Action, which has been 12 13 consolidated, for discovery purposes only, with the Murphy Action described above. The complaint in the Bennett Action seeks unspecified damages, attorneys' and experts' fees and costs and such other relief as the court deems proper. These actions are at early stages and their outcomes cannot be predicted, although Grace, NMC and the individual defendants believe that they have substantial defenses to the claims asserted. In February 1996, a purported class action was filed in New York State Supreme Court, New York County, against Grace and certain of its current and former directors, alleging that the defendants breached their fiduciary duties, principally by failing to provide internal financial data concerning NMC to Vivra and by failing to negotiate with Baxter in connection with a business combination involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The lawsuit seeks injunctive relief ordering defendants to carry out their fiduciary duties and preventing or rescinding the Reorganization or any related transactions with Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys' and experts' fees and costs, and such other relief as the court may deem just and proper. The plaintiff has not taken any steps to prosecute the action since it was filed. The defendants believe this lawsuit is without merit. OTHER LITIGATION AND EXPOSURES In recent years, physicians, hospitals and other participants in the health care industry have become subject to an increasing number of lawsuits alleging professional negligence, malpractice, product liability, workers' compensation or related claims, many of which involve large claims and significant defense costs. Fresenius USA and NMC have been, and can be expected to continue from time to time to be, subject to such suits due to the nature of their business. Additionally, NMC, in connection with its diagnostics business, has been the subject of a "wrongful life" lawsuit. Although Fresenius USA and NMC maintain insurance at a level which they believe to be prudent, there can be no assurance that the coverage limits will be adequate or that all asserted claims will be covered by insurance. In addition, there can be no assurance that liability insurance will continue to be available at acceptable costs. A successful claim against Fresenius USA or NMC in excess of insurance coverage could have a material adverse effect upon Fresenius Medical Care, Fresenius USA or NMC and the results of their operations. Any claims, regardless of their merit or eventual outcome, also may have a material adverse effect on the reputation and business of Fresenius Medical Care, Fresenius USA or NMC. NMC has identified two instances in which a low level employee and/or an agent engaged in illegal billing practices. In such instances, NMC has terminated its affiliation with such persons and advised the appropriate law enforcement authority. The illegal actions of such persons may subject NMC to liability under the False Claims Act, among other laws. In addition, Fresenius USA and NMC assert claims and suits arising in the ordinary course of business, the ultimate resolution of which would not, in the opinion of Fresenius Medical Care and NMC, have a material adverse effect on their financial condition. 13 -----END PRIVACY-ENHANCED MESSAGE-----