-----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, VxMsB9ikqvgcfk+3jJECm7PktqxwFcm6JG2Cz0ALtae6geXr7d7FVrPXiny7sZAM 1k40E98qGiuMEmBE3f7Uiw== 0000088204-98-000003.txt : 19980330 0000088204-98-000003.hdr.sgml : 19980330 ACCESSION NUMBER: 0000088204-98-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALED AIR CORP CENTRAL INDEX KEY: 0000088204 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 221682767 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07834 FILM NUMBER: 98576291 BUSINESS ADDRESS: STREET 1: PARK 80 EAST CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2017917600 FORMER COMPANY: FORMER CONFORMED NAME: CHAVANNES M A DATE OF NAME CHANGE: 19670406 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-7834 SEALED AIR CORPORATION (Exact name of registrant as specified in its charter) State or other jurisdiction of incorporation or organization: Delaware I.R.S. Employer Identification Number: 22-1682767 Address of principal executive offices: Park 80 East, Saddle Brook, New Jersey 07663-5291 Registrant's telephone number, including area code: (201) 791-7600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value $0.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ] The aggregate market value of the registrant's Common Stock held by non- affiliates of the registrant on March 17, 1998 was approximately $2,725,000,000. The number of outstanding shares of the registrant's Common Stock as of March 17, 1998 was 42,624,246. DOCUMENTS INCORPORATED BY REFERENCE: None PART I Item 1. Business Sealed Air Corporation (together with its subsidiaries, the "Company") is engaged primarily in a single line of business: the manufacture and sale of protective and specialty packaging products to a diverse group of customers throughout the world. The Company's operations are conducted primarily in the United States, Europe, the Asia/Pacific region, Canada and Latin America, and its products are distributed in these areas as well as in other parts of the world. Information by geographic area, including net sales, operating profit and identifiable assets, for each of the three years in the period ended December 31, 1997 appears in Note 4 of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, which Note is incorporated herein by reference. Significant Developments On August 14, 1997, the Company entered into an Agreement and Plan of Merger among the Company, W. R. Grace & Co., a Delaware corporation ("Grace") and a wholly owned subsidiary of Grace pursuant to which the worldwide packaging business of Grace will be combined with the Company. As part of the transaction, the Company will be renamed "Sealed Air Corporation (US)" and will become a wholly owned subsidiary of Grace, which will be renamed "Sealed Air Corporation." The stockholders of the Company and Grace approved the transaction on March 23 and March 20, 1998, respectively. Subject to certain customary conditions, the closing of the transaction is expected to occur on or about March 31, 1998. The transaction is described in a Joint Proxy Statement/Prospectus dated February 13, 1998 for the Special Meeting of Stockholders of the Company held on March 23, 1998. The Joint Proxy Statement/Prospectus was mailed to the stockholders of the Company on February 17, 1998. Except as specifically noted, the information in this Annual Report on Form 10-K does not give effect to any changes in the Company's business that may occur as a result of the transaction with Grace. Products The Company's principal protective packaging products are its engineered products and its surface protection and other cushioning products. Certain of these products are also produced for non-packaging applications. The Company's principal specialty packaging products are its food packaging products. The Company also manufactures and sells certain other products discussed below. The net sales contributed by each class of product for each of the five years in the period ended December 31, 1997 appear in the table under the caption "Selected Financial Data" in Item 6 of this Annual Report on Form 10-K, which data is incorporated herein by reference. Engineered Products The Company's engineered products include its Instapak(R) polyurethane foam packaging systems, specialty polyethylene foams for packaging and non-packaging uses, and Korrvu(R) packaging products. Instapak(R) Systems Instapak(R) polyurethane foam packaging systems consist of proprietary blends of polyurethane chemicals and specially designed dispensing equipment, certain features of which are patented. The Company also manufactures high-performance polyolefin films designed for use with Instapak(R) packaging systems. Most of the Company's net sales from Instapak(R) systems are attributable to the sale of the polyurethane chemicals and polyolefin films used in the systems installed at customer locations. Instapak(R) chemicals, films and equipment are marketed as integrated packaging systems to provide protective packaging for a wide variety of products, including computer, electronic, office, medical and communications equipment, compressors and motors, furniture and spare parts, and void-fill packaging of office supplies, books, cosmetics and other small products for distribution. Instapak(R) systems are also used to produce polyurethane foams used in certain non-packaging applications, including Instapak(R) Floral, a foam used as a design base for artificial flower arrangements. The Company's Instapak(R) products are sold in all geographic areas in which the Company's operations are conducted. The Company maintains ongoing programs to develop new chemical formulations and new equipment models to meet evolving customer needs. An Instapak(R) packaging system allows a customer to create protective cushions for products of any shape and thus to tailor its protective packaging to its individual products and needs. When Instapak(R) chemicals are mixed together and dispensed, they expand up to 280 times their liquid volume within seconds after they are dispensed to form a foam cushion. Because Instapak(R) chemicals expand significantly in volume only when mixed together, the storage space required for the chemicals before use is very small. The Company purchases chemicals from various suppliers, including major chemical companies, and blends these chemicals according to its own proprietary formulations. The Company offers its Instapak(R) customers a family of protective packaging foams, ranging from low-density foams used for light cushioning and void-fill applications to heavy-duty foams used for blocking and bracing heavy items. The Company produces a number of dispensing equipment models for low, medium and high volume use. The Company's SpeedyPacker(TM) foam-in-bag system and its High-Speed Instapacker(TM) foam-in-bag system produce ready-to- use foam cushions consisting of polyolefin film bags filled with Instapak(R) foam. Hand-held equipment models range from low-volume single station systems to microprocessor-controlled multiple station systems. Generally, customers may either buy or lease equipment from the Company. Customers are also able to produce pre-formed Instapak(R) foam cushions for use in packaging a wide range of products. The Company offers assistance to its customers in producing or in preparing the molds used to produce such pre-formed cushions. The Company offers Instamolder(TM) semi- automated cushion molding equipment that produces molded Instapak(R) cushions using its foam-in-bag systems. Specialty Polyethylene Foams The Company manufactures and sells extruded plank and laminated foams for packaging and non-packaging applications. Extruded plank foam, sold under various trademarks including CelluPlank(TM), is offered in varying densities and thicknesses up to three inches. Laminated foams, which are sold under various trademarks including Stratocell(TM) and Stratocell(TM) Plus in the United States and Europe, are produced in various densities and laminated into thicknesses ranging up to six inches. These foams can be produced in various colors and are available in anti-static and fire retardant forms. The Company's specialty polyethylene foams are generally sold to fabricators and converters for packaging and non-packaging applications in which a clean, non-abrasive material is required with such properties as shock absorption, vibration dampening, thermal insulation or buoyancy. In packaging applications, these foams are fabricated into a wide range of protective packaging shapes, forms and die-cuts for designed packages in which a clean, attractive appearance and cushioning or blocking and bracing performance is needed. Non-packaging applications for specialty foams include construction, automotive, sporting and athletic equipment products. The Company's specialty polyethylene foams are sold in all geographic areas in which the Company's operations are conducted. Korrvu(R) Packaging Products The Company is engaged in the manufacture and sale of Korrvu(R) suspension and retention packaging. Korrvu(R) suspension packaging suspends the product to be packaged in the air space of its shipping container between two strong, flexible, low-slip films. Korrvu(R) retention packaging holds the product to be packaged against a corrugated base using a single sheet of flexible retention film. Korrvu(R) packaging is sold primarily in North America and Europe. Surface Protection and Other Cushioning Products The Company's surface protection and other cushioning products include air cellular cushioning materials, protective and durable mailers and bags, thin polyethylene foams, paper packaging products, automated packaging systems and certain other packaging products. Air Cellular Cushioning Materials The Company manufactures and markets Bubble Wrap(R) air cellular cushioning materials, which are also marketed under various other trademarks, including AirCap(R) and PolyCap(R). The Company's air cellular cushioning materials consist of air bubbles encapsulated between two layers of plastic film, each containing a barrier layer to retard air loss, that form a pneumatic cushion to protect products from damage through shock or vibration during shipment. The Company's PolyCap(R) line of air cellular cushioning material contains a lighter barrier layer than the Company's AirCap(R) line. The Company's air cellular cushioning materials are used by a wide variety of end users, including both manufacturers and retailers. AirCap(R) cushioning is used primarily to protect a wide variety of lightweight and medium-weight delicate items, such as instruments, electronic components and glassware, that have no limitation on their shipping and shelf-life cycles. PolyCap(R) cushioning is used primarily for a wide variety of lightweight products that have a relatively short shipping and shelf-life cycle. The Company also markets anti-static forms of its air cellular cushioning materials. The Company's air cellular materials are manufactured and sold primarily in North America, Europe and Australasia. The Company's air cellular cushioning materials are produced in various forms, including continuous rolls, perforated rolls and sheets, depending on customer preference. These materials can be used alone or laminated to other materials such as paper. They are also available in bag form (marketed under the trademark Bubblebags(R)), primarily used to provide product protection to small parts. The Company's air cellular cushioning materials can be varied in the size, shape and spacing of their encapsulated air bubbles and the thickness of the plastic to provide specific types of performance in cushioning, surface protection and void fill. Many of the Company's air cellular cushioning product lines contain post-industrial and post-consumer recycled polyethylene resins. The Company also manufactures and sells adhesive-coated air cellular cushioning material under the trademark Bubble Mask(R) and cohesive air cellular cushioning material under the trademark Cold Seal(R) AirCap(R). Polypride(TM) air cellular materials are multi-web materials with high tensile strength used primarily as furniture wrapping. Protective and Durable Mailers and Bags The Company manufactures and markets a variety of protective and durable mailers and bags that are made in several standard sizes and are used for mailing or shipping a wide variety of items for which clean, lightweight pre-constructed protective packages are desirable. They can provide the user with significant postage savings, ease of use and enhanced product protection relative to other types of mailers and shipping containers. The Company's mailers are marketed primarily in North America, Europe and the Asia/Pacific region. The Company's protective mailers include lightweight, tear- resistant mailers marketed under various trademarks, including Jiffylite(R) and Mail Lite(TM). These mailers, which are lined with air cellular cushioning material, are offered in heat-sealable or self-seal forms. These products also include the widely used Jiffy(TM) padded mailers made from recycled kraft paper padded with macerated recycled newspaper, Jiffy(TM) reinforced mailers, which are highly tear resistant and moisture retardant, Jiffy(TM) utility mailers, which are low-cost, lightweight mailers without padding, and Jiffy Rigi Bag(R) mailers, which are rigid mailers without padding that are well suited for products such as books and photographs. The Company also manufactures and markets Jiffy(TM) foam-lined mailers. The kraft paper used in many of these mailer lines and the foam lining of certain foam mailer products contain recycled content. The Company's durable plastic mailers and bags, which are produced from multi-layered polyolefin film, are lightweight, water-resistant and puncture-resistant and are available in tamper-evident varieties. Such mailers and bags are used by a wide range of customers including air courier, mail order, banking, postal, security and office supply services. Such mailers and bags are marketed under a number of brand names, including ShurTuff(R), MailTuff(TM), Trigon(R), Lab Pak(R), Keepsafe(TM) and Crush-Gard(TM). Thin Polyethylene Foams In addition to the specialty polyethylene foams described above, the Company manufactures thin polyethylene foams in roll and sheet form, in low, medium and special densities, in flat, ribbed or bag form and in a number of colors and thicknesses up to one-half inch. The Company also sells thin polyethylene foam that has anti-static properties and foam laminate products in which the foam is laminated to paper, polyethylene film or other substrates for specialized applications. Such products are marketed primarily in North America, Europe and Australasia. Low-density thin polyethylene foam manufactured by the Company is marketed under the trademark Cell-Aire(R) and is used primarily for surface protection and light-duty cushioning. Medium-density thin polyethylene foam is marketed under the trademark Cellu Cushion(R) as a cushioning material to protect products from damage through shock or vibration during shipment. The Company's Quicksilver(TM) cohesive polyethylene film and foam laminates and its Cellu-Mask(TM) adhesive foam laminates are used for masking and other surface protection applications. The Company's Dolphin Pad(TM) film and foam laminate wrap is used in the moving and storage industry. The Company also manufactures special density polyethylene foams for a variety of packaging and non-packaging applications. Paper Packaging Products The Company manufactures recycled kraft, tissue and creped paper for use as a raw material in the manufacture of the Company's protective mailer and food packaging products. The Company also manufactures and sells paper packaging products under the trademarks Kushion Kraft(R), Custom Wrap(TM), Jiffy(TM) Padwrap(R) and Void Kraft(TM) for industrial surface protection, furniture surface protection, moving and storage blankets, and for use as cushioning or void fill in various packaging applications. The Company's paper packaging products are sold primarily in North America and Europe. Packaging Systems The Company produces and markets the Instasheeter(TM) high-speed converting system, designed for on-line packaging applications, which automatically converts the Company's flexible packaging materials, including air cellular cushioning materials, thin polyethylene foam and paper packaging materials, described above, into sheets of a pre-selected size and quantity. The Company also produces and markets the Accu-Cut(TM) converting system, an economical system for converting the Company's flexible packaging materials in off-line packaging applications. Such systems are sold primarily in North America and Europe. The Company's Jiffy Packer(TM) high-speed paper dunnage system, which is marketed in Europe under the name Paperboy(TM) and in Japan under the name Eco Packer(TM), produces paper dunnage material on site from the Company's multi-ply Void Kraft(TM) recycled kraft paper. The Jiffy Packer(TM) system is also offered in a bench-top version. The Company's Rapid Fill(R) inflatable packaging system, marketed primarily in North America, consists of a compact, portable inflator and self-sealing inflatable plastic bags, available in several sizes. When inflated, the bags can be used in a wide range of void fill applications, and they can be deflated and re-inflated for reuse. The Company sells on-site packaging systems for void fill and light-duty cushioning applications. These systems, marketed primarily in Europe under the trademark Fill Air(TM), convert rolls of polyethylene film into packaging materials on demand. Other Surface Protection and Cushioning Products The Company participates in a joint venture named PolyMask Corporation with Minnesota Mining and Manufacturing Company ("3M") that manufactures and sells protective tapes consisting of adhesive-coated polyethylene films marketed by 3M. These products are used primarily for protecting the surfaces of polished metal, glass, plastic and other materials from abrasion during fabrication, handling and shipping. This joint venture is accounted for using the equity method. The Company manufactures and sells specialty plastic films in Europe for a variety of packaging and non-packaging applications. Food Packaging Products The Company's food packaging products include absorbent pads, produce bags, and flexible films, bags, pouches and related equipment. Absorbent Pads and Produce Bags The Company manufactures and sells absorbent pads used for food packaging, including its Dri-Loc(R) absorbent pads, certain features of which are covered by patents. The Company also produces other absorbent pads that utilize the features of its Dri-Loc(R) pads, including the Company's Pad-Loc(TM) pad for the poultry processor industry. These products are used in meat, fish and poultry trays to absorb excess fluids and are sold in the geographic areas in which the Company's operations are conducted. The Company's Dri-Loc(R) pads consist of two layers of polyethylene film sealed on all four sides which enclose a layer of fluffed virgin wood- pulp fibers. On one side, the layer of film has tiny openings that permit fluids to be absorbed and retained by the enclosed fibers. The Company believes that Dri-Loc(R) pads are more effective and more attractive in use than conventional absorbent pads. The Company also manufactures conventional padding, sold as individual pads and in roll stock form for use by converters and processors to prepad trays. This padding consists of layers of bleached creped tissue with one or two outer layers of polyethylene film. During 1997, the Company began manufacturing padding containing super-absorbents for sale primarily in Australia and New Zealand. The Company also sells supermarket display case liners, which are similar in construction to conventional padding, under the trademark Cellu Liner(TM). The Company also offers its All Star(TM) produce bagging systems, which consist of easy-open plastic bags with star seal bottoms that are dispensed one at a time through patented dispensers supplied by the Company, for use in supermarket produce departments. Flexible Films and Related Equipment The Company produces a variety of flexible films, bags and pouches and associated packaging equipment marketed and sold primarily in the Asia/Pacific region and Europe and used to package a broad range of perishable foods such as meat, poultry, fish, prepared foods, cheese and other dairy products. The Company produces proprietary flexible films, bags and pouches in permeable and barrier varieties. The Company's permeable shrink bags are designed primarily for frozen or dried foods. The oxygen permeability and water vapor barrier properties of the film allow for the retention of fresh product color and appearance to enhance product presentation. The Company's barrier films, bags and pouches provide a high barrier to oxygen and water, allowing extended storage for fresh chilled or processed products by preserving the texture, taste and moisture balance of the chilled or processed product. Both permeable shrink bags and barrier films, bags and pouches are produced in various grades to meet customer requirements. The Company markets permeable shrink bags under the Shrinkvac(R) and other trademarks. Barrier vacuum skin packaging films are marketed under the Intact(R) trademark. The Company also offers Tuf-flex(TM) barrier pouches with high puncture resistance. The Company's food packaging equipment offerings include automatic film and bag making, dispensing and loading units to package foods in vacuum or vacuum skin packages using the Company's films. Systems are marketed to the food processing industry under the Intact(R), Flexibag(TM) and other trademarks. The Company also manufactures printed co-extruded films for packaging frozen foods and other loose food products as well as a wide range of mono- and multi-layer films for other food and general applications. Other Products The Company's other products consist primarily of specialty adhesive products, loose-fill polystyrene packaging, paper products, products that control static electricity, and recreation and energy conservation products. Through a subsidiary in New Zealand, the Company manufactures and sells a wide range of specialty adhesive tapes on a variety of substrates. These specialty adhesive tapes provide custom formulations for a wide range of applications that include the tape strip or closure tape for disposable diapers, foil tapes used in heating, air conditioning and refrigeration, and cloth based tapes used in construction and underground applications on pipe work for corrosion protection. Subsidiaries of the Company in the Asia/Pacific region and Mexico produce loose-fill polystyrene packaging for sale to customers in those countries. As noted above, the Company manufactures recycled kraft, tissue and creped paper and sells such paper to unaffiliated customers in the United States. In addition to air cellular cushioning materials and polyethylene foam with anti-static properties, the Company sells other products related to the elimination and neutralization of static electricity, including conductive shielding bags and floor and benchtop mats. Static control products, which are sold primarily in the Asia/Pacific region, are used principally by manufacturers of static-sensitive microelectronic devices. Translucent air cellular material similar to AirCap(R) cushioning that is fabricated into solar pool covers is sold in certain countries outside the United States. In the United States, the Company manufactures and sells solar heating systems for swimming pools that use thermostatically controlled pumps to circulate pool water through plastic solar collector panels. Foreign Operations The Company manufactures and sells most of its product lines in a number of foreign countries as well as in the United States, as described more fully above. In addition, the Company has unaffiliated foreign licensees that manufacture certain of its protective packaging products in Chile, England, Japan, the Netherlands, South Africa and Sweden. Licensing revenues are not material to the Company's consolidated financial statements. During 1997, 1996 and 1995, foreign net sales represented approximately 39%, 39% and 38%, respectively, of the Company's total net sales, while operating profit from foreign operations represented approximately 24%, 27% and 30%, respectively, of the Company's total operating profit. For a discussion of the factors affecting these changes in foreign net sales and operating profit, see Management's Discussion and Analysis of Results of Operations and Financial Condition in Item 7 of this Annual Report on Form 10-K. In maintaining its foreign operations, the Company runs the risks inherent in such operations, including those of currency fluctuations. Marketing, Distribution and Customers The Company employs several hundred sales and account representatives in the countries in which it has operations who market the Company's products through a large number of distributors, fabricators and converters as well as directly to end users. In the United States and certain other countries, the Company has separate sales and marketing groups for its engineered products, its surface protection and other cushioning products, its food packaging products and certain of its other products. These groups often work together to develop market opportunities for the Company's products. To assist its marketing efforts and to provide specialized customer services, the Company maintains packaging laboratories in many of its United States and foreign facilities. These laboratories are staffed by professional packaging engineers and equipped with drop-testing and other equipment used to develop and test cost-effective package designs to meet the particular protective packaging requirements of each customer. Certain of these laboratories also design and construct molds for Instapak(R) packaging customers who prefer to use preformed foam cushions. The Company has no material long-term contracts for the distribution of its packaging products. In 1997, no customer or affiliated group of customers accounted for as much as 10% of the Company's consolidated net sales. Raw Materials The raw materials utilized in the Company's operations generally have been readily available on the open market and are purchased from several suppliers, reprocessed from scrap generated in the Company's manufacturing operations or obtained through participation in recycling programs. The principal raw materials used in the Company's operations include polyethylene and other resins and films, polyurethane chemicals, paper and wood pulp products (including recycled or reprocessed paper products, resins, films and chemicals), and blowing agents used in foam products. Product Development The Company incurred expenses of $15,781,000 related to Company- sponsored research and development in 1997 compared with $15,449,000 during 1996 and $14,597,000 during 1995. The Company maintains a continuing effort to develop new products based on its existing product lines as well as new packaging and non-packaging applications for its products. The Company also maintains ongoing efforts to add or increase recycled or reprocessed content in certain of its product lines. Patents and Licenses The Company is the owner or licensee of a number of United States and foreign patents and patent applications that relate to certain of its products, manufacturing processes and equipment. While some of these patents and licenses, as well as certain trademarks which the Company owns, offer some protection and competitive advantage for the Company's products and their manufacture, the Company does not consider that the expiration or unenforceability of any of such patents, applications or licenses would be material to the Company's business or financial position, since the Company believes that its success depends primarily on its marketing, engineering and manufacturing skills and on its research and product technology. Competition Competition for most of the Company's protective and specialty packaging products is based primarily on packaging performance characteristics, service and price. Certain firms producing competing products are well established and may have greater financial resources than the Company. The Company's protective packaging products compete with similar products made by others and with a number of other packaging materials, including various forms of paper packaging products, expanded plastics, corrugated die cuts, loosefill packaging materials, and with envelopes, reinforced bags, boxes and other containers and various corrugated materials. Heavy-duty applications of the Company's engineered products also compete with various types of molded foam plastics, fabricated foam plastics and mechanical shock mounts and with wood blocking and bracing systems. As discussed below under "Environmental Matters," the Company is also subject to competitive factors affecting packaging materials that are based upon customers' environmental preferences. The Company believes that it is a leading manufacturer of air cellular cushioning materials containing a barrier layer and polyurethane foam packaging systems in the geographic areas in which it sells these products. There are a number of competing manufacturers of food packaging products. The Company believes that its Dri-Loc(R) products have a competitive advantage over conventional pads because of their efficiency and appearance in use. Conventional pads and display case liners compete primarily on the basis of price, absorbency and service. The Company believes it is one of the leading suppliers of meat, fish and poultry absorbent pads to supermarkets and poultry processors in the United States and Europe. The Company's food packaging films and systems compete with similar flexible films and systems produced by other companies around the world as well as with other food packaging materials. Environmental Matters The Company, like other manufacturers, is subject to various laws, rules and regulations in the countries, jurisdictions and localities in which it operates regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company believes that compliance with current environmental laws and regulations has not had a material effect on the Company's capital expenditures or financial position. In some jurisdictions in which the Company's packaging products are sold or used, laws and regulations have been adopted or proposed that seek to regulate, among other things, recycled or reprocessed content, sale and disposal of packaging materials. In addition, customer demand for packaging materials that are viewed as being "environmentally responsible" and that minimize the generation of solid waste continues to evolve. While these issues can be a competitive factor in the marketplace for packaging materials, the Company maintains active programs designed to comply with these laws and regulations, to monitor their evolution, and to meet such customer demand. The Company believes that its protective packaging materials offer superior packaging protection, enabling customers to achieve lower package cube and weight using the Company's protective packaging materials than with many alternative packaging methods, thereby reducing the disposal of damaged products as well as the generation of packaging waste. Because the Company offers both plastic-based and paper-based protective packaging materials, customers can select the protective packaging materials that they consider to best meet their performance and cost needs and environmental preferences. A number of the Company's product lines incorporate recycled or reprocessed content, and the Company maintains ongoing efforts to add or increase recycled or reprocessed content in many of its product lines. The Company also supports its customers' interests in eliminating waste by offering or participating in collection programs for certain of the Company's products or product packaging and for materials used in certain of the Company's products, including programs aimed at recovering and recycling polyethylene materials from customers in the United States, an Instapak(R) foam return program with return sites worldwide, collection programs for packaging materials in Europe, and local newspaper collection programs to obtain materials used to produce Jiffy(TM) padded mailers and certain other products. Whenever possible, materials collected through these collection programs are reprocessed and either reused in the Company's operations or offered to other manufacturers for use in other products. Certain of the Company's protective packaging products can be reused and, as an alternative to recycling or disposal in solid waste landfills, are suitable fuel sources for waste-to- energy conversion facilities. Employees At December 31, 1997, the Company had approximately 4,400 employees worldwide, with approximately 600 employees covered by collective bargaining agreements. The Company believes that its employee relations are satisfactory. Item 2. Properties The Company has manufacturing facilities at twenty-six locations in the United States, five other locations in North America, including three facilities in Canada and two in Mexico, twenty locations in Europe, including facilities in England, France, Germany, Italy, the Netherlands, Norway, Spain and Sweden, and nine locations in the Asia/Pacific region, including two facilities in Australia, two facilities in New Zealand and facilities in Hong Kong, Malaysia, Singapore, Taiwan and Thailand. The Company occupies other facilities containing fabricating or converting operations or sales, distribution, technical, warehouse or administrative offices at several locations in the United States, in Brazil, Belgium, Finland, China, India, Japan, Korea and Poland and in a number of the other countries in which the Company manufactures its products. In the United States, the Company's Instapak(R) products are manufactured at facilities in Connecticut and North Carolina, its surface protection and other cushioning products and certain of its other products are manufactured at facilities in California, Georgia, Illinois, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Texas and Washington, and its food packaging products are manufactured at facilities in California, Mississippi, North Carolina and Pennsylvania. Because of the light but bulky nature of the Company's air cellular, polyethylene foam and protective mailer products, significant freight savings may be realized by locating manufacturing facilities for these products near markets. To realize the benefit of such savings, the Company has facilities for manufacturing these products in various locations in proximity to major markets. The Company owns thirty-three of its manufacturing facilities, certain of which are owned subject to mortgages or similar financing arrangements. The balance of the Company's manufacturing facilities are located in leased premises. The Company's manufacturing facilities are usually located in general purpose buildings in which the Company's specialized machinery for the manufacture of one or more products is contained. The Company believes that its manufacturing facilities are well maintained, suitable for their purposes, and adequate for the Company's needs. Item 3. Legal Proceedings The Company is a party to various lawsuits and administrative and other proceedings incidental to its business, including certain federal or state governmental environmental proceedings or private environmental claims relating to the cleanup of Superfund sites or other sites. While it is often difficult to estimate potential environmental liabilities and the future impact of environmental matters, based upon the information currently available to the Company and its experience in dealing with such matters, the Company believes that its potential liability with respect to such sites is not material. The Company believes, after consulting with counsel, that the disposition of its lawsuits and other legal proceedings, including environmental matters, will not have a material effect on the Company's consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 1997. Executive Officers of the Registrant The information appearing in the table below sets forth the current position or positions held by each executive officer of the Company, his or her age as of March 15, 1998, the year in which he or she first was elected to the position currently held, and the year in which he or she first was elected an officer of the Company. All of the Company's officers serve at the pleasure of the Board of Directors. All officers have been employed by the Company or its subsidiaries for more than five years. There are no family relationships among any of the Company's officers or directors. Name and Age as of First Elected to First Elected Current Position March 15, 1998 Current Position an Officer T. J. Dermot Dunphy 65 1971 1971 Chairman of the Board, Chief Executive Officer and Director William V. Hickey 53 1996 1980 President and Chief Operating Officer Bruce A. Cruikshank 55 1996 1990 Senior Vice President Robert A. Pesci 52 1997 1990 Senior Vice President Jonathan B. Baker 45 1994 1994 Vice President James A. Bixby 54 1990 1990 Vice President Mary A. Coventry 44 1994 1994 Vice President Jean-Luc Debry 52 1992 1992 Vice President Paul B. Hogan 58 1995 1995 Vice President James P. Mix 46 1994 1994 Vice President Abraham N. Reichental 41 1994 1994 Vice President Horst Tebbe 57 1997 1986 Vice President-Finance and Chief Financial Officer Jeffrey S. Warren 44 1996 1996 Controller H. Katherine White 52 1996 1996 Secretary PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is listed on the New York Stock Exchange (trading symbol: SEE). The table below sets forth the high and low sales prices for the Company's Common Stock for each quarter during the two- year period ended December 31, 1997. 1996 High Low 1997 High Low First Quarter $35-1/4 $26 First Quarter $48 $39-3/4 Second Quarter $38-1/4 $32-3/8 Second Quarter $49-5/8 $41-1/4 Third Quarter $39 $30-1/8 Third Quarter $55-3/8 $45-15/16 Fourth Quarter $44-1/8 $37 Fourth Quarter $63 $49-3/4 The Company is currently subject to certain covenants in loan documents that limit the payment of cash dividends. No dividends were paid in 1997 or 1996. As of March 13, 1998, there were approximately 1,329 holders of record of the Company's Common Stock. Item 6. Selected Financial Data See Index to Financial Supplement on page F-1. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations See Index to Financial Supplement on page F-1. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data See Index to Financial Supplement on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information set forth in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant" is incorporated herein by reference. The following table sets forth the business experience for the last five years and other information about the directors of the Company. Director Name Business Experience Since Age John K. Castle Chairman and Chief Executive Officer 1971 57 of Castle Harlan, Inc., a merchant banking firm, and of Branford Castle, Inc., a holding company. Director of Commemorative Brands, Inc., Morton's Restaurant Group, Inc., Statia Terminals International, N.V. and Universal Compression, Inc. Lawrence R. Codey President and Chief Operating Officer 1993 53 of Public Service Electric and Gas Company, a public utility. Director of Public Service Enterprise Group Incorporated, The Trust Company of New Jersey and United Water Resources Inc. T. J. Dermot Dunphy Chairman of the Board and Chief Executive 1969 65 Officer of the Company. Director of Public Service Enterprise Group Incorporated, Summit Bancorp and Summit Bank. Charles F. Farrell, President of Crystal Creek Partners, 1971 67 Jr. an investment management and business consulting firm. David Freeman Chairman and Chief Executive Officer of 1993 53 Loctite Corporation, a manufacturer of adhesives and sealants. He has held senior management positions with Loctite Corporation for more than five years. Alan H. Miller Private investor. Until his retirement in 1984 64 December 1994, President and Chief Executive Officer of Laird, Inc., a manufacturer of specialty folding cartons and special commercial printing and a distributor of rigid plastics. Director of The Laird Group PLC. Robert L. San Soucie President and Chief Executive Officer 1971 70 of The Math Learning Center, a non-profit educational organization, since September 1997. Previously Managing Director and President of MRV Financial Associates, a financial and management consulting firm. Item 11. Executive Compensation Directors' Compensation Each member of the Board of Directors who is neither an officer nor an employee of the Company (each a "Non-Employee Director") receives an annual retainer fee for serving as a director. The Restricted Stock Plan for Non-Employee Directors (the "Directors Stock Plan") provides for the payment of such retainer in the form of an annual grant of 1,200 shares of the Company's Common Stock to each eligible director who is elected at each annual meeting of stockholders. During 1997, each director other than Mr. Dunphy received a retainer grant of 1,200 shares of Common Stock at a price of $1.00 per share following his election at the 1997 Annual Meeting of Stockholders. Shares of Common Stock issued under the Directors Stock Plan may not be sold, transferred or encumbered while the director serves on the Board of Directors, except that Non-Employee Directors may transfer shares issued under the Directors Stock Plan to certain family members or to trusts or other forms of indirect ownership so long as the Non-Employee Director would be deemed a beneficial owner of the shares with a direct or indirect pecuniary interest in the shares and would retain voting and investment control over the shares while the Non-Employee Director remains a director of the Company. During this period, the director is entitled to receive any dividends or other distributions in respect of shares of Common Stock and has voting rights in respect of such shares. The restrictions on the disposition of shares issued pursuant to the Directors Stock Plan terminate upon the occurrence of any of certain events related to change of control of the Company that are specified in the Directors Stock Plan. In August 1997, the provision of the Directors Stock Plan related to change in control was amended so that the restrictions on disposition of shares previously issued under the Plan will remain in place following the upcoming combination of the Grace packaging business with the Company so long as the director continues to serve as a director of the new Sealed Air Corporation. In addition, each member of the Audit Committee and of the Organization and Compensation Committee receives a retainer fee of $2,000 per year for serving as a member of such committee. The chairman of each such committee receives an additional retainer fee of $2,000 per year for serving as such. Each Non-Employee Director also receives a fee of $1,000 for each Board or committee meeting attended. These fees are paid in cash in quarterly installments. All directors are reimbursed for expenses incurred in attending Board or committee meetings. Executive Compensation Summary Compensation Table Annual Long-Term Compensation(1) Compensation Contingent Name and Principal Stock All Other Position Year Salary Bonus Awards(2) Compensation(3) T. J. Dermot Dunphy 1997 $363,600 $390,000 $2,733,750 $29,000 Chairman of the Board 1996 363,600 390,000 -0- 29,000 and Chief Executive 1995 363,600 340,000 1,590,000 29,000 Officer William V. Hickey 1997 $253,600 $225,000 $1,366,875 $22,600 President and Chief 1996 226,100 200,000 -0- 22,600 Operating Officer 1995 217,767 150,000 795,000 22,600 Elmer N. Funkhouser III 1997 $218,600 $120,000 $ -0- $26,000 Senior Vice 1996 217,433 120,000 -0- 26,000 President (4) 1995 211,600 95,000 -0- 26,000 Bruce A. Cruikshank 1997 $175,000 $ 80,000 $ -0- $22,400 Senior Vice President 1996 167,100 65,000 396,000 22,400 1995 153,267 52,000 -0- 22,400 Robert A. Pesci 1997 $175,000 $ 75,000 $ -0- $22,000 Senior Vice President 1996 161,933 70,000 -0 - 22,000 1995 145,183 60,000 270,000 22,000 ___________________ (1) Annual compensation is reported in this table before deducting amounts deferred pursuant to Section 401(k) of the Internal Revenue Code, as amended (the "Code"), under the Company's Thrift and Tax-Deferred Savings Plan (the "Thrift Plan") or other amounts excludible from income for tax purposes. Perquisites, other personal benefits, securities and property paid or accrued during each year not otherwise reported did not exceed for any named executive officer the lesser of $50,000 or 10% of the annual compensation reported in the Summary Compensation Table for that individual. (2) Represents the fair market value on the date of an award made under the Company's Contingent Stock Plan after deducting the purchase price of the shares covered by such award. The total number of unvested shares held by each of the named executive officers as of December 31, 1997 is set forth in the following table, and the fair market values of such unvested shares as of such date are as follows: Mr. Dunphy - $8,645,000, Mr. Hickey - $4,847,375, Mr. Cruikshank - $741,000 and Mr. Pesci - $617,500. As of such date, such awards, all of which were granted with an original vesting period of three years, which has been extended in certain cases, vested as follows: 1998 1999 2000 T. J. Dermot Dunphy 80,000 -0- 60,000 William V. Hickey 48,500 -0- 30,000 Elmer N. Funkhouser II -0- -0- -0- Bruce A. Cruikshank -0- 12,000 -0- Robert A. Pesci -0- 10,000 -0- During the vesting period, pursuant to the terms of such Plan, recipients of awards are entitled to receive any dividends or other distributions with respect to the unvested shares they hold. (3) Includes Company contributions to the Company's Profit-Sharing Plan, matching contributions under the Company's Thrift Plan, and premiums paid by the Company for supplemental universal life insurance policies owned by the named executive officers. For 1997, such amounts were as follows: Profit- Insurance Sharing Plan Thrift Plan Premiums T. J. Dermot Dunphy $ 15,000 $ 4,500 $ 9,500 William V. Hickey 15,000 4,500 3,100 Elmer N. Funkhouser III 15,000 4,500 6,500 Bruce A. Cruikshank 15,000 4,500 2,900 Robert A. Pesci 15,000 4,500 2,500 The Company's Profit-Sharing Plan and its Thrift Plan are broad-based defined contribution plans. Contributions to the Profit-Sharing Plan are made only by the Company. Further information about the Profit-Sharing Plan is discussed in note 5 to the table in Item 12. (4) Mr. Funkhouser retired at the end of 1997. Compensation Committee Interlocks and Insider Participation The members of the Organization and Compensation Committee of the Company's Board of Directors are Mr. Miller (chairman), Mr. Castle and Mr. Freeman. None of the members of the Organization and Compensation Committee has been an officer or employee of the Company or any of its subsidiaries. Until the end of 1983, Mr. Miller was the President of Cellu-Products Company, a corporation that the Company acquired in October 1983. Mr. Codey is the President and Chief Operating Officer of Public Service Electric and Gas Company. Mr. Dunphy is a member of the Organization and Compensation Committee of the Board of Directors of Public Service Enterprise Group Incorporated, the parent company of Public Service Electric and Gas Company. Such committee administers the compensation program for executive officers of Public Service Electric and Gas Company. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the number and percentage of outstanding shares of the Company's common stock beneficially owned, directly or indirectly, as of March 17, 1998 by: (i) each person known to the Company to be the beneficial owner of more than five percent of the then outstanding shares of the Company's common stock, (ii) each director of the Company and each executive officer of the Company named in the Summary Compensation Table in Item 11 of this Annual Report on Form 10-K who continues to serve as an executive officer, and (iii) all directors and executive officers of the Company as a group. Except as indicated below, none of the directors or executive officers listed below beneficially owns more than 1% of the outstanding shares of the Company's common stock. Shares of % of Common Outstand- Stock ing Beneficially Common Beneficial Owner Owned Stock The Equitable Companies Incorporated (1) 4,465,278 10.5 1290 Avenue of the Americas New York, New York 10104 Janus Capital Corporation (2) 3,852,848 9.0 100 Fillmore Street, Suite 300 Denver, Colorado 80206-4923 FMR Corp. (3) 4,690,000 11.0 82 Devonshire Street Boston, Massachusetts 02109 Travelers Group Inc. (4) 2,325,086 5.5 388 Greenwich Street New York, New York 10013 John K. Castle 12,936 * Lawrence R. Codey 5,800 * Bruce A. Cruikshank 183,120 (5) * T. J. Dermot Dunphy 1,091,719 (5) 2.6 (6) Charles F. Farrell, Jr. 24,600 (6) * David Freeman 5,600 * William V. Hickey 286,905 (5) * Alan H. Miller 502,710 (6) 1.2 Robert A. Pesci 67,618 (5) * Robert L. San Soucie 11,400 (6) * All directors and executive officers as a group (20 persons) 2,679,494 (7) 6.3 * Less than 1%. (1) The ownership information set forth in the table is based in its entirety on material contained in Amendment No. 1 to Schedule 13G, dated February 10, 1998, filed with the Securities and Exchange Commission ("SEC") by The Equitable Companies Incorporated ("Equitable Companies"), AXA-UAP, which beneficially owns a majority interest in Equitable Companies, and Mutuelles AXA, which as a group beneficially own a majority interest in AXA-UAP. The Schedule 13G stated that the shares were acquired solely for investment purposes. The shares are owned by the following subsidiaries of Equitable Companies in the amounts indicated: The Equitable Life Assurance Society of the United States, 30,700; Alliance Capital Management L.P., 4,434,478; and Donaldson, Lufkin & Jenrette Securities Corporation, 100. (2) The ownership information set forth in the table is based in its entirety on material contained in Amendment No. 2 to Schedule 13G, dated February 13, 1998, filed with the SEC by Janus Capital Corporation ("Janus"), which indicated that Janus beneficially owned such shares, with shared voting and dispositive power as to such shares. Such Schedule 13G states that Thomas H. Bailey may be deemed to control Janus Capital Corporation and to be a beneficial owner of such shares, which beneficial ownership Mr. Bailey disclaims. (3) The ownership information set forth in the table is based in its entirety on material contained in Amendment No. 3 to Schedule 13G, dated February 14, 1998, filed with the SEC by FMR Corp. ("FMR"), which indicated that FMR had sole voting power as to 141,700 shares and sole dispositive power as to 4,690,000 shares. Such Schedule 13G indicates that Fidelity Management & Research Company ("Fidelity"), a wholly-owned subsidiary of FMR, beneficially owns 4,480,600 of such shares (as to which shares Edward C. Johnson 3d, chairman of FMR, and Fidelity Funds each have sole power of disposition). The power to vote these shares resides with the Board of Trustees of Fidelity Funds. Of the shares beneficially owned by FMR, Fidelity Management Trust Company, a wholly owned subsidiary of FMR, is the beneficial owner of 209,400 shares, of which Mr. Johnson and FMR have sole dispositive power over 209,400 shares and sole voting power over 141,700 shares. Such Schedule 13G states that members of the family of Mr. Johnson may be deemed to control FMR. (4) The ownership information set forth in the table is based in its entirety on material contained in a Schedule 13G, dated February 6, 1998, filed with the SEC by Travelers Group Inc. ("Travelers"), and its wholly owned subsidiary Salomon Smith Barney Holdings Inc. ("SSB Holdings"). The Schedule 13G stated that Travelers has shared voting power and shared dispositive power as to 2,325,086 shares, of which 2,308,286 are held by SSB Holdings, and that Travelers and SSB Holdings each disclaimed beneficial ownership of such shares. (5) This figure includes approximately 20,620, 67,369, 13,305, 24,218 and 221,118 shares of common stock held in the Company s Profit-Sharing Plan trust fund with respect to which Messrs. Cruikshank, Dunphy, Hickey, Pesci and the executive officers of the Company who participate in such Plan as a group, respectively, may, by virtue of their participation in such Plan, be deemed to be beneficial owners. The participants in such Plan include, in general, all full-time employees of the Company except employees who are covered by collective bargaining agreements that do not provide for their participation. As of March 17, 1998, approximately 2,162,344 shares of the Company common stock were held in the trust fund under such Plan, constituting approximately 5.1% of the outstanding shares of the Company's common stock. The Company has been advised that Bankers Trust Company, the trustee of such Plan, does not deem itself the beneficial owner of the shares of the Company common stock held as trustee of such Plan. (6) The number of shares held by Mr. Dunphy includes 81,600 shares held by him as custodian for certain of his children and 29,250 shares held by a charitable foundation for which he shares voting and investment power. The number of shares held by Mr. Farrell includes 11,200 shares held in a revocable retirement trust of which he is the trustee and sole beneficiary. All but 1,200 of the shares held by Mr. Miller are held indirectly through a limited partnership for which he shares voting and investment power. Mr. San Soucie shares investment and voting power as to 3,120 of the shares beneficially owned by him with his wife. (7) This figure includes, without duplication, all of the outstanding shares referred to in notes 5 and 6 above as well as 12,400 shares for which voting and investment power is shared by an executive officer of the Company and 3,580 shares held by or for family members of executive officers of the Company who are not named in the above table. Item 13. Certain Relationships and Related Transactions Not applicable. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as a part of this Annual Report on Form 10-K: (i) Financial Statements and Financial Statement Schedule See Index to Consolidated Financial Statements and Schedule on page F-2 herein. (ii) Exhibits Exhibit Number Description 2.1 Agreement and Plan of Merger dated as of August 14, 1997 (the "Merger Agreement") by and among W. R. Grace & Co., Packco Acquisition Corp. and the Corporation. [Exhibit 2.1 to the Corporation's Current Report on Form 8-K, Date of Report August 14, 1997, File No. 1-7834, is incorporated by reference.] 2.2 Form of Distribution Agreement (the "Distribution Agreement") by and among Grace, W. R. Grace & Co.-Conn. ("Grace-Conn."), and Grace Specialty Chemicals, Inc. ("Grace Chemicals"). [Exhibit 2.2 to the Corporation's Current Report on Form 8-K, Date of Report August 14, 1997, File No. 1-7834, is incorporated by reference.] 3.1 Unofficial Composite Certificate of Incorporation of the Company as currently in effect. [Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, File No. 1-7834, is incorporated herein by reference.] 3.2 By-Laws of the Company as currently in effect. [Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, File No. 1-7834, is incorporated herein by reference.] 4.1 Amended and Restated Credit Agreement among the Company, certain of its subsidiaries, Bankers Trust Company, as agent, and various financial institutions, dated as of June 8, 1994 and amended and restated as of August 22, 1996. [Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, File No. 1-7834, is incorporated herein by reference.] 4.2 Term Sheet for Senior Convertible Preferred Stock of New Sealed Air (referred to therein as "Newco") (Exhibit E to the Merger Agreement). [Exhibit 4.1 to the Corporation's Current Report on Form 8-K/A, Date of Report August 14, 1997, File No. 1-7834, is incorporated by reference.] 4.3 Amendment No. 1 dated August 14, 1997 to the Amended and Restated Credit Agreement among the Corporation, certain of its subsidiaries, Bankers Trust Company, as agent, and various financial institutions, dated as of June 8, 1994 and amended and restated as of August 22, 1996. [Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-7834, is incorporated herein by reference.] 10.1 Form of Employee Benefits Allocation Agreement by and among Grace, Grace-Conn. and Grace Chemicals. [Exhibit 10.1 to the Corporation's Current Report on Form 8-K, Date of Report August 14, 1997, File No. 1-7834, is incorporated by reference.] 10.2 Form of Tax Sharing Agreement by and among Grace, Grace-Conn. and the Corporation (Exhibit B to the Distribution Agreement). [Exhibit 10.2 to the Corporation's Current Report on Form 8-K, Date of Report August 14, 1997, File No. 1-7834, is incorporated by reference.] 10.3 Contingent Stock Plan of the Company, as amended. [Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-7834, is incorporated herein by reference.]* 10.4 Restricted Stock Plan for Non-Employee Directors of the Company, as amended. [Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-7834, is incorporated herein by reference.]* 21 Subsidiaries of the Company. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule *Compensatory plan or arrangement of management required to be filed as an exhibit to this report on Form 10-K. (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the fiscal quarter ended December 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEALED AIR CORPORATION (Registrant) Date: March 27, 1998 By s/T. J. DERMOT DUNPHY T. J. Dermot Dunphy Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date By s/ T. J. DERMOT DUNPHY March 27, 1998 T. J. Dermot Dunphy Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) By s/ HORST TEBBE March 27, 1998 Horst Tebbe Vice President-Finance and Chief Financial Officer (Principal Financial Officer) By s/ JEFFREY S. WARREN March 27, 1998 Jeffrey S. Warren Controller (Principal Accounting Officer) By s/ JOHN K. CASTLE March 27, 1998 John K. Castle Director By s/ LAWRENCE R. CODEY March 27, 1998 Lawrence R. Codey Director By s/ CHARLES F. FARRELL, JR. March 27, 1998 Charles F. Farrell, Jr. Director By s/ DAVID FREEMAN March 27, 1998 David Freeman Director By s/ ALAN H. MILLER March 27, 1998 Alan H. Miller Director By s/ R. L. SAN SOUCIE March 27, 1998 R. L. San Soucie Director FINANCIAL SUPPLEMENT SEALED AIR CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 <\PAGE> FINANCIAL SUPPLEMENT to Annual Report on Form 10-K for the Year Ended December 31, 1997 SEALED AIR CORPORATION AND SUBSIDIARIES Index to Financial Supplement Page Selected Financial Data............................................F-2 Management's Discussion and Analysis of Results of Operations and Financial Condition...................................... F-3 Report of Independent Certified Public Accountants.................F-9 Consolidated Statements of Earnings for the three years ended December 31, 1997...................................... F-10 Consolidated Balance Sheets at December 31, 1997 and 1996..........F-11 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1997................................ F-13 Consolidated Statements of Cash Flows for the three years ended December 31, 1997...................................... F-14 Notes to the Consolidated Financial Statements.....................F-15 Interim Financial Information (Unaudited)..........................F-28 Consolidated Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts........... . F-29 F-1 <\PAGE> Selected Financial Data (In thousands of dollars except per share data)
1997 1996 1995(1) 1994 1993 Consolidated Earnings Statement Data Net sales by class of product: Engineered products $307,759 $284,974 $252,535 $208,363 $180,508 Surface protection and other cushioning products 399,221 368,692 333,519 234,587 204,645 Food packaging products 104,663 106,473 103,866 56,444 51,023 Other products 31,190 29,473 33,200 19,792 15,518 Total 842,833 789,612 723,120 519,186 451,694 Cost of sales 523,517 495,185 466,952 327,423 282,147 Marketing, administrative and development expenses 172,795 164,355 147,288 107,854 95,434 Transaction expenses 8,405 - - - - Operating profit 138,116 130,072 108,880 83,909 74,113 Other income (expense), net (4,628) (15,477) (21,726) (22,706) (28,652) Earnings before income taxes 133,488 114,595 87,154 61,203 45,461 Income taxes 53,567 45,266 34,426 23,987 19,547 Earnings before cumulative effect of accounting change and early redemption of subordinated notes 79,921 69,329 52,728 37,216 25,914 Cumulative effect of accounting change (2) - - - - 1,459 Early redemption of subordinated notes, net of income taxes (3) - - - (5,576) - Net earnings $ 79,921 $ 69,329 $ 52,728 $ 31,640 $ 27,373 Basic earnings per common share (4): Before cumulative effect of accounting change and early redemption of subordinated notes $ 1.88 $ 1.63 $ 1.25 $ .94 $ .66 Cumulative effect of accounting change (2) - - - - .04 Early redemption of subordinated notes, net of income taxes (3) - - - (.14) - Basic earnings per common share $ 1.88 $ 1.63 $ 1.25 $ .80 $ .70 Consolidated Balance Sheet Data Working capital $ 87,155 $ 58,910 $ 41,945 $ 15,767 $ 33,828 Total assets 498,360 467,119 443,545 331,117 279,818 Long-term debt, less current installments 48,506 99,900 149,808 155,293 190,058 Shareholders' equity (deficit) 257,283 186,649 106,338 11,012 (29,419) (1)Includes the operations of Trigon Industries Limited from the date of its acquisition in January 1995. (2)Reflects cumulative effect of the implementation as of January 1, 1993 of Financial Accounting Standard No. 109, "Accounting for Income Taxes." (3)Reflects after-tax charge to earnings arising from the early redemption in 1994 of the Company's 12-5/8% Senior Subordinated Notes. (4)Per common share data has been restated for periods prior to 1995 to reflect the effect of a two-for-one stock split in the nature of a 100% stock dividend distributed on September 29, 1995 to shareholders of record at the close of business on September 15, 1995.
F-2 Management's Discussion and Analysis of Results of Operations and Financial Condition On August 14, 1997, the Company and W. R. Grace & Co. ("Grace") entered into a definitive merger agreement to combine Grace's packaging business ("Grace Packaging") with the Company. This transaction is described in the Company's Joint Proxy Statement/Prospectus dated February 13, 1998 (the "Joint Proxy Statement/Prospectus"), which was filed with the Securities and Exchange Commission and distributed to the stockholders of the Company in connection with a special meeting of the stockholders held on March 23, 1998 at which the stockholders approved such merger agreement. The transactions contemplated by the merger agreement are currently expected to be completed on or about March 31, 1998. For accounting purposes, such merger will be treated as a purchase of the Company by Grace (after the spin-off of Grace's specialty chemicals business). Except for the discussion of certain transaction expenses that the Company incurred in 1997 in connection with this merger, and certain other matters, the following discussion does not give effect to any of the changes that are expected to occur as a result of the merger. Results of Operations Net Sales Net sales increased 7% in 1997 compared with 1996 and 9% in 1996 compared with 1995. The 1997 increase in net sales was due primarily to higher unit volume in the Company's major classes of products partially offset by the negative effect of foreign currency translation as the U.S. dollar strengthened against most foreign currencies. Net sales also benefited modestly from the additional net sales of recently acquired businesses. Excluding the negative effect of foreign currency translation, the increase in net sales would have been 10% for 1997 compared with 1996. The recent economic difficulties in Asia did not have a significant effect on the Company's consolidated operating results or financial condition for 1997. During 1997, the Company made small acquisitions in Australia and Italy. These acquisitions, which were made for cash in the aggregate amount of approximately $10 million and accounted for as purchases, were not material to the Company's consolidated financial statements. The 1996 increase in net sales was due primarily to higher unit volume in the Company's major classes of products, the added net sales of businesses acquired during 1996, discussed below, and higher average selling prices for certain products. Foreign currency translation did not have a material effect on the Company's operating results in 1996. During 1996, the Company made several acquisitions. These included the acquisition in June 1996 of the protective packaging business of Southcorp Holdings Limited, which had previously been the Company's licensee in Australia. They also included small acquisitions in Canada, Finland, Germany and the United States. These transactions, which were made for cash in the aggregate amount of approximately $30 million and accounted for as purchases, were not material to the Company's consolidated financial statements. Net sales from domestic operations, which represented 61%, 61% and 62% of consolidated net sales in 1997, 1996 and 1995, respectively, increased 7% in 1997 compared with 1996 and 8% in 1996 compared with 1995. The 1997 increase was due primarily to higher unit volume in the Company's major classes of products. The 1996 increase was due primarily to higher unit volume in certain of the Company's major classes of products as well as higher average selling prices for certain products. Net sales from foreign operations, which represented 39%, 39% and 38% of consolidated net sales in 1997, 1996 and 1995, respectively, increased 7% in 1997 compared with 1996 and 11% in 1996 compared with 1995. The 1997 increase was due primarily to higher unit volume and the added net sales of recently acquired businesses partially offset by the negative effect of foreign currency translation. Excluding the negative effect of foreign currency translation, net sales from foreign operations would F-3 have increased 15% compared to 1996. The 1996 increase was primarily due to the added net sales of businesses acquired in 1996, higher unit volume in certain of the Company's major classes of products and, to a lesser extent, higher average selling prices for certain products. Net sales of engineered products, which consist primarily of Instapak (R) products and specialty polyethylene foams, increased 8% in 1997 compared with 1996 and 13% in 1996 compared with 1995. The increase in net sales in both 1997 and 1996 was due primarily to higher unit volume and in 1996, to a lesser extent, higher average selling prices for certain products. Net sales of surface protection and other cushioning products, primarily air cellular products, other polyethylene foam products and protective and durable mailers and bags, increased 8% in 1997 compared with 1996 and 11% in 1996 compared with 1995. The increase in net sales in both 1997 and 1996 was due primarily to higher unit volume and the added net sales of recently acquired businesses and in 1996, to a lesser extent, to higher average selling prices for certain products. Net sales of food packaging products, which consist primarily of Dri-Loc (R) pads and food packaging films and systems, decreased 2% in 1997 compared with 1996 but increased 3% in 1996 compared with 1995. In 1997, added net sales from a business acquired in 1997 and higher unit volume were more than offset by the negative effect of foreign currency translation. The decrease in 1997 also reflects the transfer in 1996 of certain food packaging products to an unconsolidated joint venture in Australia. The 1996 increase was due primarily to higher unit volume of the Company's Dri-Loc (R) products, which was partially offset by the effects of the transfer to the joint venture and lower unit volume in certain other food packaging products. Net sales of other products increased 6% in 1997 compared with 1996 primarily due to added net sales of recently acquired businesses and higher unit volume in certain products. Net sales of other products decreased 11% in 1996 compared with 1995 primarily due to decreased unit volume of the Company's mill tonnage paper products partially offset by an increase in unit volume of the Company's specialty adhesive products. Costs and Expenses Cost of sales increased 6% in 1997 and 1996 compared with the respective prior years. The increase in both 1997 and 1996 reflects primarily the higher level of net sales partially offset by the effect of certain lower raw material costs. Cost of sales as a percentage of net sales was 62.1%, 62.7% and 64.6% in 1997, 1996 and 1995, respectively. Marketing, administrative and development expenses increased 10% in 1997 compared with 1996 and 12% in 1996 compared with 1995. The 1997 increase reflects the Company's higher level of operations and transaction expenses of $8,405,000 (the "Transaction Expenses") partially offset by the absence of certain expenses (discussed below) in 1997. The Transaction Expenses consisted of certain professional fees incurred in 1997 primarily related to the pending merger with Grace Packaging. The Company will incur additional expenses in 1998 in connection with this transaction. Excluding such expenses, marketing, administrative and development expenses increased 5% compared to 1996. The 1996 increase reflects the Company's higher level of operations, including the added marketing, administrative and development expenses of acquired companies and costs associated with the integration of these companies. Marketing, administrative and development expenses (excluding the Transaction Expenses) amounted to 20.5%, 20.8% and 20.4% as a percentage of net sales in 1997, 1996 and 1995, respectively. F-4 Operating Profit Operating profit increased 6% in 1997 compared with 1996 and 19% in 1996 compared with 1995 primarily reflecting the Company's higher level of net sales and the changes in costs and expenses discussed above. Excluding the Transaction Expenses, operating profit increased 13% in 1997 compared with 1996. Domestic operating profit, which represented 76%, 73% and 70% of consolidated operating profit in 1997, 1996 and 1995, respectively, increased 10% in 1997 compared with 1996 (18% excluding the Transaction Expenses) and 26% in 1996 compared with 1995. Domestic operating profit was 19%, 19% and 16% of total domestic net sales in 1997, 1996 and 1995, respectively. Excluding the Transaction Expenses, domestic operating profit amounted to 21% of total domestic net sales in 1997. Foreign operating profit, which represented 24%, 27% and 30% of consolidated operating profit in 1997, 1996 and 1995, respectively, decreased 3% in 1997 compared with 1996 but increased 5% in 1996 compared with 1995. The 1997 decrease was primarily due to certain integration costs in the Asia Pacific region, costs of new operations in various foreign markets and the negative effect of foreign currency translation, which more than offset the effect of the Company's higher level of foreign net sales on foreign operating profit in 1997. The 1996 increase was primarily due to the Company's higher level of foreign net sales partially offset by the added expenses of acquired companies, including additional amortization of acquired intangible assets, and integration costs. Foreign operating profit amounted to 10%, 11% and 12% of total foreign net sales in 1997, 1996 and 1995, respectively. Other Income (Expense) Other expense decreased to $4,628,000 in 1997 compared with $15,477,000 in 1996 and $21,726,000 in 1995. Interest expense, which is the principal component of this item, decreased to $6,950,000 in 1997 from $13,350,000 in 1996 and $19,106,000 in 1995. The decrease in interest expense in both years resulted primarily from lower levels of outstanding indebtedness compared with the previous year and in 1996, to a lesser extent, lower effective interest rates. Income Taxes The Company's effective income tax rate was 40.1% in 1997 and 39.5% in 1996 and 1995. The Company's effective tax rate was higher than the statutory U.S. federal income tax rate in each year primarily due to state income taxes and, in 1997, the non-deductibility of a portion of the Transaction Expenses. The Company anticipates that its effective income tax rate for the first quarter of 1998 will be higher than that in 1997 primarily due to the non-deductibility of certain additional expenses to be incurred in 1998 related to the merger. Earnings Net earnings increased 15% in 1997 compared with 1996 and 31% in 1996 compared with 1995. Excluding the Transaction Expenses, net earnings for 1997 increased 24% compared with 1996 primarily reflecting the Company's higher level of operating profit and lower interest expense. Liquidity and Capital Resources The Company's principal sources of liquidity are cash flows from operations and amounts available under the Company's existing lines of credit. The Company has met substantially all of its working capital and capital expenditure requirements as well as its debt servicing requirements with funds provided by operations and by borrowings under its available lines of credit or otherwise. F-5 Cash flows from operating activities were $108,321,000 in 1997, $116,065,000 in 1996 and $75,218,000 in 1995. The decrease in 1997 compared with 1996 was due primarily to the Transaction Expenses and changes in certain operating assets which partially offset the Company's higher levels of earnings and depreciation and amortization. The changes in operating assets, primarily receivables and inventory, were due primarily to the Company's higher level of operations and the timing of cash receipts and changes in inventory. The increase in 1996 compared to 1995 was due primarily to higher levels of earnings, higher levels of depreciation and amortization, and changes in operating assets and liabilities resulting primarily from the Company's higher level of operations. Cash flows used in investing activities were $33,983,000 in 1997, $45,544,000 in 1996 and $47,993,000 in 1995. Such cash was used primarily to fund acquisitions and capital expenditures. The fluctuation between years was primarily due to the timing of acquisitions and capital expenditures. Cash flows used in financing activities were $41,228,000 in 1997, $75,121,000 in 1996 and $30,912,000 in 1995. The lower amount of net cash used for financing activities in 1997 was due to the Company's lower level of outstanding debt in 1997. Such cash used in 1997 includes primarily the net repayment of $43,180,000 of long-term debt in 1997 partially offset by net proceeds from notes payable discussed below. At December 31, 1997, there were no outstanding borrowings under the BT Credit Agreement (discussed below). Cash used for financing activities in 1997 also reflects the Company's purchase of 159,200 of its common shares for use in the Company's employee benefit plans as discussed below. The higher amount of net cash used in financing activities in 1996 primarily reflects the higher level of net repayments of outstanding debt in 1996 compared with 1995. At December 31, 1997, the Company had working capital of $87,155,000, or 17% of total assets, compared to working capital of $58,910,000, or 13% of total assets, at December 31, 1996. The increase in 1997 was due primarily to an increase in cash and cash equivalents. Net cash provided by operations exceeded the net cash used in the Company's investing and financing activities during 1997. This increase in cash was partially offset by an increase in notes payable primarily due to the timing of borrowings for working capital purposes by certain foreign operations. The Company's ratio of current assets to current liabilities (current ratio) was 1.5 at December 31, 1997 and 1.4 at December 31, 1996. The Company's ratio of current assets less inventory to current liabilities (quick ratio) was 1.2 at December 31, 1997 and 1.0 at December 31, 1996. The increases in these ratios in 1997 resulted primarily from the increase in working capital discussed above. Long-term debt, less current installments, declined to $48,506,000 at December 31, 1997 from $99,900,000 at December 31, 1996 due primarily to the repayment of all amounts outstanding under the BT Credit Agreement and the effects of foreign currency fluctuations during 1997. Other long-term debt at December 31, 1997 included primarily $47,257,000 of foreign loans that have been incurred for acquisitions, working capital and other corporate purposes. Current installments of long-term debt were $2,641,000 at December 31, 1997 and $2,891,000 at December 31, 1996. The BT Credit Agreement is an unsecured $200 million revolving credit facility with Bankers Trust Company, as agent for a syndicate of banks, that expires on June 30, 2001. As of December 31, 1997, the Company's available lines of credit, including the BT Credit Agreement, amounted to approximately $264 million, of which approximately $230 million was unused. Such lines of credit permit the Company and certain of its subsidiaries to borrow for working capital and other corporate purposes. Upon the consummation of the Grace Packaging merger, it is expected that the BT Credit Agreement will be terminated and replaced by other credit facilities that are discussed in the Joint Proxy Statement/Prospectus. The Company's obligations under the BT Credit Agreement and certain other loans and lines of credit bear interest at floating rates. The Company has entered into certain derivative financial instruments, including interest rate swaps, collars and cross currency swaps, that F-6 have the effect of fixing or limiting the Company's exposure to fluctuations in interest rates on a portion of the Company's floating rate debt. The BT Credit Agreement provides for changes in borrowing margins based on financial criteria and imposes certain limitations on the operations of the Company and its subsidiaries. These limitations include restrictions on the incurrence of additional indebtedness, the creation of liens, the making of investments, dispositions of property or assets, certain transactions with affiliates, and the payment by the Company of cash dividends to its stockholders, as well as financial covenants relating to interest coverage and debt leverage. The Company was in compliance with these requirements as of December 31, 1997. The Company's shareholders' equity increased to $257,283,000 at December 31, 1997 from $186,649,000 at December 31, 1996 primarily as a result of the Company's net earnings for 1997 partially offset by a net reduction in the Company's accumulated translation adjustment due to the effect of foreign currency fluctuations. During 1997, the Company purchased 159,200 of its common shares for $8,772,000 for use in the Company's employee benefit plans. See Note 8 of the Notes to the Consolidated Financial Statements. Impact of Inflation Inflation did not have a material impact on the Company's consolidated financial statements in the 1995 to 1997 period. Environmental Issues The Company's worldwide operations are subject to environmental laws and regulations which, among other things, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company reviews the effects of environmental laws and regulations on its operations and believes that it is in substantial compliance with all material applicable environmental laws and regulations. At December 31, 1997, the Company was a party to, or otherwise involved in, several federal and state government environmental proceedings and private environmental claims for the cleanup of Superfund or other sites. The Company may have potential liability for investigation and cleanup of certain of such sites. At most of such sites, numerous companies, including either the Company or one of its predecessor companies, have been identified as potentially responsible parties ("PRPs") under Superfund or related laws. It is the Company's policy to provide for environmental cleanup costs if it is probable that a liability has been incurred and if an amount which is within the estimated range of the costs associated with various alternative remediation strategies is reasonably estimable, without giving effect to any possible future insurance proceeds. As assessments and cleanups proceed, these liabilities are reviewed periodically and adjusted as additional information becomes available. At December 31, 1997 and 1996, such environmental related provisions were not material. While it is often difficult to estimate potential liabilities and the future impact of environmental matters, based upon the information currently available to the Company and its experience in dealing with such matters, the Company believes that its potential liability with respect to such sites is not material to the Company's consolidated financial position. Environmental liabilities are paid over an extended period, and the timing of such payments cannot be predicted with certainty. Year 2000 Issues Like many other companies, the Company will have to ensure that its information systems are able to recognize and process date-sensitive information properly as the year 2000 approaches. Systems that do not properly recognize and process this information could generate erroneous data or even fail. The Company has conducted a worldwide comprehensive review of its key computer systems and has identified a number of F-7 systems that could be affected by the "Year 2000" issue. The Company has undertaken steps to ensure that these systems will function properly, including installing vendor-supplied upgrades or new software or modifying existing software. The Company believes that these steps will be substantially completed by the end of 1998, that the costs to the Company to complete these steps will not be material to the Company's consolidated financial position and that the Year 2000 issue will not pose significant problems. Nevertheless, if these steps are not completed successfully in a timely manner, the Company's operations and financial performance could be adversely affected. Also, the Company is in the process of contacting key suppliers, banks, customers and other unaffiliated companies to assess their Year 2000 compliance programs, since the Company could be adversely affected by the failure of these unaffiliated companies to adequately address this issue. Forward-Looking Statements Certain statements made by the Company in this report and in future oral and written statements by management of the Company may be forward- looking in nature, or "forward-looking statements." These forward- looking statements are based upon management's current expectations concerning future events and discuss, among other things, anticipated future performance and future business plans. Forward-looking statements are identified by such words and phrases as "expects," "believes," "will continue," "plans to," "could be" and similar expressions. Forward-looking statements are necessarily subject to uncertainties, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. While the Company is not aware that any of the factors listed below will adversely affect the future performance of the Company, the Company recognizes that it is subject to a number of uncertainties, such as general economic, business and market conditions, conditions in the industries and markets that use the Company's packaging materials, the development and success of new products, the Company's success in entering new markets, competitive factors, raw material availability and pricing, changes in the Company's relationship with customers and suppliers, future litigation and claims (including environmental matters) against the Company, changes in domestic or foreign laws or regulations, difficulties related to the Year 2000 issue, and costs or difficulties that may arise relating to the transaction with Grace. New Financial Pronouncements In 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS 131 establishes reporting standards for information about operating segments in annual financial statements, for selected information about operating segments in interim financial reports issued to shareholders and for related disclosures about products and services, geographic areas and major customers. Both SFAS 130 and SFAS 131 are effective for fiscal years beginning after December 15, 1997. As these are disclosure-related standards, neither the adoption of SFAS 130 nor the adoption of SFAS 131 will have any effect on the Company's consolidated results of operations, financial position or cash flows. F-8 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders of Sealed Air Corporation: We have audited the accompanying consolidated balance sheets of Sealed Air Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sealed Air Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG Peat Marwick LLP Short Hills, New Jersey January 20, 1998, except for note 2, which is as of March 23, 1998 F-9 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years Ended December 31, 1997, 1996 and 1995 (In thousands of dollars except per share data)
1997 1996 1995 Net sales $842,833 $789,612 $723,120 Cost of sales 523,517 495,185 466,952 Gross profit 319,316 294,427 256,168 Marketing, administrative and development expenses 172,795 164,355 147,288 Transaction expenses 8,405 - - Operating profit 138,116 130,072 108,880 Other income (expense): Interest income 1,696 1,482 1,187 Interest expense (6,950) (13,350) (19,106) Other, net 626 (3,609) (3,807) Other income (expense), net (4,628) (15,477) (21,726) Earnings before income taxes 133,488 114,595 87,154 Income taxes 53,567 45,266 34,426 Net earnings $79,921 $69,329 $52,728 Basic earnings per common share $ 1.88 $ 1.63 $ 1.25 See accompanying notes to consolidated financial statements.
F-10 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1996 (In thousands of dollars except share data)
1997 1996 Assets Current assets: Cash and cash equivalents $ 35,481 $ 2,985 Accounts receivable, less allowance for doubtful accounts of $5,799 in 1997 and $5,623 in 1996 132,325 124,204 Other receivables 8,037 8,258 Inventories 58,895 57,231 Prepaid expenses 2,742 1,095 Deferred income taxes 13,285 13,193 Total current assets 250,765 206,966 Property and equipment: Land and buildings 84,780 81,629 Machinery and equipment 204,241 199,275 Leasehold improvements 8,274 8,409 Furniture and fixtures 10,639 12,029 Construction in progress 7,307 6,139 315,241 307,481 Less accumulated depreciation and amortization 144,114 132,919 Property and equipment, net 171,127 174,562 Patents and patent rights, less accumulated amortization of $16,636 in 1997 and $15,139 in 1996 10,430 11,998 Excess of cost over fair value of net assets acquired, less accumulated amortization of $20,249 in 1997 and $12,966 in 1996 42,149 47,840 Other assets 23,889 25,753 $498,360 $467,119 See accompanying notes to consolidated financial statements.
F-11 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1996 (In thousands of dollars except share data)
1997 1996 Liabilities and Shareholders' Equity Current liabilities: Notes payable $23,929 $12,674 Current installments of long-term debt 2,641 2,891 Accounts payable 48,843 46,934 Accrued wages, salaries and related costs 36,235 33,448 Other accrued liabilities 39,220 36,401 Income taxes payable 12,742 15,708 Total current liabilities 163,610 148,056 Long-term debt, less current installments 48,506 99,900 Deferred income taxes 16,571 19,863 Other liabilities 12,390 12,651 Total liabilities 241,077 280,470 Commitments and contingent liabilities (notes 6, 7 and 10) Shareholders' equity: Preferred stock, no par value. Authorized: 1,000,000 shares; none issued in 1997 and 1996 - - Common stock, $.01 par value. Authorized: 125,000,000 shares in 1997 and 60,000,000 shares in 1996; Issued: 42,856,704 shares in 1997 and 42,747,704 shares in 1996 429 427 Additional paid-in capital 180,512 167,801 Retained earnings 95,942 16,021 Accumulated translation adjustment (933) 8,615 275,950 192,864 Less: Deferred compensation 9,821 5,988 Treasury stock at cost: 232,458 shares held in 1997 and 226,758 shares held in 1996 8,846 227 Total shareholders' equity 257,283 186,649 $498,360 $467,119 F-12
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995 (In thousands of dollars)
1997 1996 1995 COMMON STOCK Balance, beginning of year $427 $425 $201 Shares issued for awards of contingent stock 1 1 2 Shares issued for non-cash compensation 1 1 1 Shares issued in acquisitions - - 9 Two-for-one stock split - - 212 Balance, end of year 429 427 425 ADDITIONAL PAID-IN CAPITAL Balance, beginning of year 167,801 158,400 114,686 Shares issued for awards of contingent stock 8,336 3,396 6,091 Tax benefit in excess of amortization on stock awards 1,065 1,700 527 Contingent stock forfeited (7) (51) (48) Shares issued for non-cash compensation 3,317 3,743 3,239 Shares issued in acquisitions - - 34,117 Shares issued related to prior year acquisition - 613 - Two-for-one stock split - - (212) Balance, end of year 180,512 167,801 158,400 RETAINED EARNINGS (DEFICIT) Balance, beginning of year 16,021 (53,308) (106,036) Net earnings 79,921 69,329 52,728 Balance, end of year 95,942 16,021 (53,308) ACCUMULATED TRANSLATION ADJUSTMENT Balance, beginning of year 8,615 7,279 6,126 Foreign currency translation (9,548) 1,336 1,153 Balance, end of year (933) 8,615 7,279 DEFERRED COMPENSATION Balance, beginning of year (5,988) (6,232) (3,717) Excess of fair value over proceeds from awards of contingent stock (8,308) (3,305) (5,933) Amortization 4,467 3,498 3,370 Contingent stock forfeited 8 51 48 Balance, end of year (9,821) (5,988) (6,232) TREASURY STOCK Balance, beginning of year (227) (226) (248) Shares reissued for awards of contingent stock 154 - - Contingent stock forfeited (1) (1) (2) Shares issued in acquisitions - - 24 Purchase of treasury shares (8,772) - - Balance, end of year (8,846) (227) (226) TOTAL SHAREHOLDERS' EQUITY $257,283 $186,649 $106,338 See accompanying notes to consolidated financial statements.
F-13 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 (In thousands of dollars)
1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 79,921 $ 69,329 $ 52,728 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of property and equipment 23,196 22,862 20,473 Other depreciation and amortization 22,582 17,035 14,807 Deferred tax provision (2,940) (5,297) (1,375) Net losses on disposals of property and equipment 105 149 273 Non-cash compensation 322 3,242 3,556 Other, net (2,860) 2,217 811 Change in operating assets and liabilities, net of acquisitions: Receivables (15,284) (7,798) (13,016) Inventories (5,031) 1,164 (5,953) Prepaid expenses (1,884) 1,644 (1,441) Accounts payable 2,558 1,113 (9,262) Other accrued liabilities 10,854 12,119 11,050 Income taxes payable (3,218) (1,714) 2,567 Net cash provided by operating activities 108,321 116,065 75,218 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment (24,349) (17,015) (21,056) Proceeds from sales of property and equipment 463 1,497 776 Net cash utilized in purchase of subsidiaries (10,097) (30,026) (27,713) Net cash used in investing activities (33,983) (45,544) (47,993) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 13,162 108,131 75,271 Principal payments on long-term debt (56,342) (177,039) (114,281) Net proceeds from (payments on) notes payable 10,724 (6,213) 8,098 Purchase of treasury shares (8,772) - - Net cash used in financing activities (41,228) (75,121) (30,912) Effect of exchange rate changes on cash and cash equivalents (614) (76) 195 CASH AND CASH EQUIVALENTS: Increase (decrease) during the period 32,496 (4,676) (3,492) Balance, beginning of period 2,985 7,661 11,153 Balance, end of period $ 35,481 $ 2,985 $ 7,661 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 7,093 $ 14,173 $ 18,582 Income taxes $ 53,704 $ 39,991 $ 33,898 See accompanying notes to consolidated financial statements.
F-14 SEALED AIR CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of Sealed Air Corporation and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Substantially all of the Company's non-U.S. subsidiaries are included in the consolidated financial statements on a calendar year basis while certain non-U.S. subsidiaries are included on the basis of a fiscal year ended November 30. Certain prior years' financial statement amounts have been reclassified to conform with their 1997 presentation. Foreign Currency All balance sheet accounts are translated at year-end exchange rates, and statement of earnings items are translated at weighted average month-end exchange rates. Resulting translation adjustments are made directly to a separate component of shareholders' equity. Earnings before income taxes includes an aggregate exchange loss of $1,951,000 for the year ended December 31, 1997 (an aggregate exchange gain of $271,000 and an aggregate loss of $828,000 for the years ended December 31, 1996 and 1995, respectively). Cash and Cash Equivalents Investments with original maturities of three months or less are considered to be cash equivalents. The Company's policy is to invest cash in excess of short-term operating and debt service requirements in such cash equivalents, which amounted to $41,667,000 and $3,489,000 at December 31, 1997 and 1996, respectively. These instruments consisted of money market and commercial paper amounts stated at cost, which approximates market because of the short maturity of these instruments. Derivative Financial Instruments The Company has limited involvement with derivative financial instruments that have off-balance-sheet risk. These financial instruments generally include cross currency swaps, interest rate swaps, caps and collars and foreign exchange forwards and options relating to the Company's borrowing and trade activities. Such financial instruments are used to manage the Company's exposure to fluctuations in interest rates and foreign exchange rates. The Company does not purchase, hold or sell derivative financial instruments for trading or speculative purposes. The Company is exposed to credit risk in the event of the inability of the counterparties to perform under their obligations. However, the Company seeks to minimize such risk by entering into transactions with counterparties that are major financial institutions with high credit ratings. The Company records realized and unrealized gains and losses from foreign exchange hedging instruments (including cross currency swaps, forwards and options) differently depending on whether the instrument qualifies for hedge accounting. Gains and losses on those foreign exchange instruments that qualify as hedges are deferred as part of the cost basis of the asset or liability being hedged and are recognized in the statement of earnings in the same period as the underlying transaction. Realized and unrealized gains and losses on instruments that do not qualify for hedge accounting are recognized currently in the statement of earnings. The Company records the net payments or receipts from interest rate swaps, caps, collars and the interest rate component of cross currency swaps as adjustments to interest expense on a current basis. If an interest rate hedging instrument were terminated prior to the maturity F-15 date, any gain or loss would be amortized into earnings over the shorter of the original term of the derivative instrument and the underlying transaction. Inventories Inventories are stated at the lower of cost or market. The majority of U.S. inventories are valued using the last-in, first-out ("LIFO") method; other U.S. inventories, principally parts used in packaging systems, are valued using the first-in, first-out ("FIFO") method. Inventories of foreign operations are valued using primarily the FIFO method. Had the FIFO method (which approximates current cost) been used for all inventory at December 31, 1997, inventories would have been higher by $4,032,000 ($4,729,000 and $4,557,000 in 1996 and 1995, respectively). The cost elements of work in process and finished goods inventories are raw materials, direct labor and manufacturing overhead. Property and Equipment Property and equipment are stated at acquisition cost. Property and equipment no longer in use or surplus to the Company's needs are carried at the lower of cost or fair value. Depreciation of buildings and equipment is provided over the estimated useful lives (generally periods ranging up to 40 years and 10 years, respectively) of the related assets. Amortization of leasehold improvements is provided over the lesser of the term of the lease or the asset's useful life. The Company generally uses the straight-line method of depreciation for financial reporting purposes and accelerated methods of depreciation for income tax purposes. Intangibles and Other Assets Patents and patent rights are stated at acquisition cost. Amortization of patents and patent rights is recorded using the straight-line method over the remaining legal lives of the patents, generally for periods ranging up to 20 years. The excess of cost over fair value of net assets acquired is amortized over periods ranging up to 40 years. The carrying value of the excess of cost over fair value of net assets acquired is periodically reviewed by the Company. Impairments are recognized when the expected future undiscounted operating cash flows derived from such intangible assets are less than their carrying value. Other intangible assets, including non-competition agreements, included in other assets are amortized over the life of such agreements using the straight-line method, usually ranging from 1 to 5 years. Impairment of Long-Lived Assets Long-lived assets, including property and equipment, certain intangibles, and the excess of cost over fair value of net assets acquired related to those assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying amount. Employee Benefit Plans The Company has a non-contributory profit-sharing plan covering most U.S. employees, except those employees covered by collective bargaining agreements that do not provide for their participation. Contributions to this plan, which are made at the discretion of the Board of Directors, may be made in cash, shares of the Company's common stock, or in a combination of cash and shares of the Company's common stock. The Company also has a thrift and Section 401(k) plan in which most U.S. employees of the Company are eligible to participate, except those employees who are covered by certain collective bargaining agreements that do not provide for participation in the plan. Under this plan, the F-16 Company matches 50% of each employee's contributions to a maximum company contribution of 3% of the employee's compensation. Forfeitures of non-vested interests in each of these plans remain in the respective plans for the benefit of the remaining participants. The Company also has pension or other retirement plans for employees of certain foreign subsidiaries and certain U.S. employees who are covered by collective bargaining agreements. Company contributions to or provisions for its profit-sharing, thrift and other retirement plans, net of forfeitures, are charged to operations and amounted to $12,009,000 in 1997 ($10,903,000 and $10,069,000 in 1996 and 1995, respectively). The Company provides various other benefit programs to active employees including group medical, insurance and other welfare benefits. The costs of these benefit programs are charged to operations as incurred. Eligibility to participate in these programs generally ceases upon retirement or other separation from service except as required by applicable law. Research and Development Costs Research and development costs are charged to operations as incurred and amounted to $15,781,000 in 1997 ($15,449,000 and $14,597,000 in 1996 and 1995, respectively). Environmental Expenditures Environmental expenditures that relate to ongoing business activities are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenues, are expensed. Liabilities are recorded when the Company determines that environmental assessments or remediations are probable and that the costs or a range of costs to the Company associated therewith can be reasonably estimated. Income Taxes The Company and its domestic subsidiaries file a consolidated U.S. federal income tax return. The Company's non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. The Company provides for taxes on the assumed repatriation of accumulated earnings of its foreign subsidiaries. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. Earnings Per Common Share At December 31, 1997, the Company retroactively adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," for all periods for which earnings per share information is presented. Under the provisions of this statement, basic earnings per common share are computed on the basis of the weighted average number of shares of common stock outstanding during the year, including stock awards and shares issued as non-cash compensation. The weighted average number of common shares outstanding in 1997 was 42,613,000 (42,459,000 and 42,057,000 in 1996 and 1995, respectively). The Company has no potentially dilutive securities and therefore is not subject to diluted earnings per share presentation or disclosure requirements. F-17 Other Matters The Company is primarily engaged in a single line of business: the manufacture and sale of protective and specialty packaging materials and systems to a diverse group of customers throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. No single customer or affiliated group of customers accounts for more than 10% of the Company's net sales. In conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the Company's consolidated financial statements. Actual results could differ from these estimates. Note 2 Pending Merger with Packaging Business of W. R. Grace & Co. On August 14, 1997, the Company and W. R. Grace & Co. ("Grace") entered into a definitive merger agreement to combine Grace's packaging business ("Grace Packaging") with the Company. This transaction is described in the Company's Joint Proxy Statement/Prospectus dated February 13, 1998 (the "Joint Proxy Statement/Prospectus"), which was filed with the Securities and Exchange Commission and distributed to the stockholders of the Company in connection with a special meeting of the stockholders held on March 23, 1998 at which the stockholders approved such merger agreement. The transactions contemplated by the merger agreement are currently expected to be completed on or about March 31, 1998. For accounting purposes, such merger will be treated as a purchase of the Company by Grace (after the spin-off of Grace's specialty chemicals business). During 1997, the Company incurred transaction expenses of $8,405,000 related to certain professional fees primarily in connection with this merger. Note 3 Acquisitions During 1997, the Company made small acquisitions in Australia and Italy. These acquisitions, which were made for cash in the aggregate amount of approximately $10 million and were accounted for as purchases, were not material to the Company's consolidated financial statements. In June 1996, the Company acquired the Australian and New Zealand protective packaging business of Southcorp Holdings Limited. During 1996, the Company also made several other small acquisitions, including acquisitions in Canada, Finland, Germany and the United States. These transactions, which were made for cash in the aggregate amount of approximately $30 million and accounted for as purchases, were not material to the Company's consolidated financial statements. On January 10, 1995, the Company acquired Trigon Industries Limited ("Trigon"), a privately owned, New Zealand-based manufacturer of food packaging films and systems, durable mailers and bags and specialty adhesive products, for 882,930 newly issued shares of common stock valued at $35.70 per share and $25,592,000 in cash primarily provided by proceeds from borrowings under the BT Credit Agreement (note 6), representing a purchase price of approximately $57 million. The acquired net assets of Trigon included property and equipment of approximately $28,400,000, intangible assets of approximately $43,000,000 including trademarks, non-competition agreements, and the excess of cost over the fair value of net assets acquired, $25,000,000 of net indebtedness, and working capital of approximately $12,000,000. Such acquisition was accounted for as a purchase. During 1995, the Company made certain other small acquisitions in the United States. These transactions, which were effected in exchange for shares of the Company's common stock, cash or a combination of the Company's common stock and cash, were accounted for as purchases and were not material to the Company's consolidated financial statements. F-18 Note 4 Geographic Areas The Company's operations are conducted primarily in the United States, Europe, the Asia/Pacific region, Canada and Latin America, and its products are distributed in these areas as well as other parts of the world. Net sales for each major geographic area include transfers to other geographic areas. Such transfers are made at prices intended to provide reasonable and appropriate returns to the selling unit, and applicable eliminations have been applied to the intergeographic transactions. Operating profit consists of net sales less operating expenses. Other income (expense), net and income taxes have not been added or deducted in the computation of operating profit for each geographic area. Corporate expenses have been allocated to the geographic areas for whose benefit the expenses were incurred. Identifiable assets are those assets that are used in the Company's operations in each geographic area. Information by Major Geographic Area: (In thousands of dollars) Net Operating Identifiable Sales Profit Assets 1997 United States $ 540,213 $ 104,496 $ 223,650 Europe 214,311 25,840 171,347 Asia/Pacific & Other 127,027 7,780 103,363 Eliminations (38,718) - - Consolidated $ 842,833 $ 138,116 $ 498,360 1996 United States $ 504,449 $ 95,375 $ 213,223 Europe 204,474 25,696 156,242 Asia/Pacific & Other 113,687 9,001 97,654 Eliminations (32,998) - - Consolidated $ 789,612 $ 130,072 $ 467,119 1995 United States $ 464,820 $ 75,828 $ 213,099 Europe 188,558 24,617 153,563 Asia/Pacific & Other 94,864 8,435 76,883 Eliminations (25,122) - - Consolidated $ 723,120 $ 108,880 $ 443,545 NOTE: Net sales shown for the United States, Europe and Asia/Pacific and Other include transfers to other geographic areas as follows: United States, 1997--$27,134,000; 1996 --$22,888,000; 1995 -- $18,412,000; Europe, 1997 --$7,042,000; 1996 --$4,781,000; 1995 -- $2,398,000; Asia/Pacific and Other, 1997--$4,542,000; 1996 --$5,329,000; 1995 --$4,312,000. F-19 Note 5 Inventories At December 31, 1997, the components of inventories, by major classification (raw materials, work in process and finished goods) are as follows: (In thousands of dollars) 1997 1996 Raw materials $ 22,279 $ 23,497 Work in process 2,204 2,622 Finished goods 38,444 35,841 Subtotal 62,927 61,960 Less LIFO reserve 4,032 4,729 Total inventory $ 58,895 $ 57,231 Note 6 Debt A summary of long-term debt at December 31, 1997 and 1996 follows: (In thousands of dollars) 1997 1996 BT Credit Agreement $ - $ 38,228 Foreign loans 47,257 59,719 Other 3,890 4,844 Total 51,147 102,791 Less current installments 2,641 2,891 Long-term debt, less current installments $ 48,506 $ 99,900 The BT Credit Agreement is an unsecured $200 million revolving credit facility that expires on June 30, 2001. The BT Credit Agreement has no minimum annual paydown provision. As of December 31, 1997, there were no outstanding borrowings under the BT Credit Agreement. At December 31, 1996, the Company's outstanding borrowings under the BT Credit Agreement were $38,228,000. The weighted average interest rate under the BT Credit Agreement was approximately 6.8% at December 31, 1996. Had the Company not been a party to derivative financial instruments, discussed below, the weighted average interest rates related to the BT Credit Agreement would have been approximately 6.7% at December 31, 1996. Foreign loans have been incurred for acquisitions, working capital and other corporate purposes. Certain of such loans are secured by foreign assets of approximately $7 million and are due in varying annual installments through 2010 with fixed and variable interest rates. The weighted average interest rates on such loans were 6.8% and 7.4% at December 31, 1997 and 1996, respectively. The Company's obligations under the BT Credit Agreement and certain foreign and other loans and lines of credit bear interest at floating rates. The Company utilizes certain derivative financial instruments to manage its exposure to fluctuations in interest rates, including interest rate swaps and collars and cross currency swaps. The BT Credit Agreement provides for changes in borrowing margins based on certain financial criteria and imposes certain limitations on the operations of the Company and its subsidiaries that include restrictions on the incurrence of additional indebtedness, the creation of liens, the making of investments, dispositions of property or assets, certain transactions with affiliates, and the payment by the Company of cash dividends to its stockholders, as well as certain financial covenants relating to interest coverage and debt leverage. The Company was in compliance with these requirements as of December 31, 1997. F-20 The Company had available lines of credit at December 31, 1997, under the BT Credit Agreement and other credit facilities of approximately $264 million, of which approximately $230 million was unused. The Company is not subject to any material compensating balance requirements in connection with its lines of credit. Scheduled annual maturities of long-term debt for the five years subsequent to December 31, 1997 are as follows: 1998 - $2,641,000; 1999 - - $29,439,000; 2000 -$1,504,000; 2001 -$13,974,000; and 2002 - $1,120,000. Note 7 Financial Instruments The Company is required by generally accepted accounting principles to disclose its estimate of the fair value of material financial instruments, including those recorded as assets or liabilities in its consolidated financial statements and derivative financial instruments. The fair value estimates of the Company's various debt instruments were derived by evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. Such estimates are subjective and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the Company's estimates. The carrying amounts of current assets and liabilities approximate fair value due to their short-term maturity. The carrying amounts and estimated fair values of the Company's material, non-current financial instruments at December 31, 1997 and 1996 are as follows: (In thousands of dollars) 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value On-Balance-Sheet Liabilities: BT Credit Agreement $ - $ - $38,228 $38,228 Foreign loans 47,257 47,489 59,719 60,163 Other loans 3,890 3,681 4,844 4,565 Other liabilities 12,390 12,390 12,651 12,651 Off-Balance-Sheet Instruments (Derivatives) Interest Rate Swaps - 167 - 324 Interest Rate Collars - 681 - 505 Cross Currency Swaps - (173) - 1,760 Foreign Exchange Forward Contracts - 23 - - The Company utilizes derivative financial instruments to manage its exposure to flucuations in interest rates and foreign exchange rates. The Company does not purchase, hold or sell derivative financial instruments for trading or speculative purposes. Interest rate swaps are used to reduce the Company's exposure to fluctuations in interest rates by fixing the rate of interest the Company pays on the notional amount of debt. At December 31, 1997 and 1996, the Company was party to interest rate swaps with an aggregate notional amount of approximately $14 million. These swaps fix the rate of interest paid on the notional amount of certain non-U.S. dollar denominated long-term debt at rates which ranged from 8.55% to 8.60% in 1997 and 1996. Such swaps expire through September 1999. Interest rate collars are used to reduce the Company's exposure to fluctuations in interest rates by limiting fluctuations in the rate of interest the Company pays on a notional amount of debt. At December 31, 1997 and 1996, the Company was party to interest rate collars with an aggregate notional amount of approximately $8 million. These collars limit the rate of interest paid on the notional amount of certain non- U.S. dollar denominated long-term debt to between 7.28% and 11.0% F-21 through June 1999 and between 8.27% and 11.0% from June 1999 through June 2001. Cross currency swaps allow the Company to gain access to additional sources of international financing while limiting foreign exchange exposure and adjusting or limiting interest rate exposure by swapping borrowings in U.S. dollars for borrowings denominated in the functional currencies of the borrowers. At December 31, 1997, the Company was party to cross currency swaps with an aggregate notional amount of approximately $25 million with various expiration dates through May 2002. At December 31, 1996, the Company was party to cross currency swaps with an aggregate notional amount of $30 million with various expiration dates through May 2002. Foreign exchange forwards and options are generally used to reduce the Company's exposure to the risk that the eventual cash outflows resulting from firm commitments or anticipated transactions will be adversely affected by changes in exchange rates. At December 31, 1997, the Company was not party to any foreign currency options but was party to two foreign currency forward contracts with an aggregate notional amount of $4 million. Such forward contracts expire through December 1998. At December 31, 1996, the Company was not party to any material foreign currency options or forwards. The fair values of the Company's various derivative instruments, as advised by the Company's bankers, generally reflect the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date. The notional amounts referred to above represent agreed-upon amounts on which calculations of cash to be exchanged are based. The notional amounts are not a measure of the Company's exposure to credit or market risk. Realized and unrealized gains and losses on the Company's financial instruments and derivatives were not material to the consolidated financial statements in 1997, 1996, and 1995. The Company is exposed to credit losses in the event of the inability of the counterparties to perform under their obligations, but it does not expect any counterparties to fail to do so given their high credit ratings and financial strength. The Company believes that off-balance- sheet risk in conjunction with its derivative contracts would not be material in the case of non-performance on the part of the counterparties to such agreements. Note 8 Shareholders' Equity The Company's shareholders' equity increased to $257,283,000 at December 31, 1997 from $186,649,000 at December 31, 1996 primarily as a result of the Company's net earnings in 1997 partially offset by a net reduction in the Company's accumulated translation adjustment due to the effect of foreign currency fluctuations. During 1997, the Company purchased 159,200 of its common shares in the approximate aggregate amount of $8,772,000 for use in the Company's employee benefit plans. On September 29, 1995, the Company distributed a two-for-one stock split in the nature of a 100% stock dividend to the holders of record of the Company's common stock at the close of business on September 15, 1995 (the "1995 stock split"). All per share data and share information in the consolidated financial statements and notes thereto have been adjusted to give retroactive effect to the 1995 stock split where appropriate. F-22 A summary of changes in issued and outstanding shares of common stock and shares of treasury stock of the Company follows:
1997 1996 1995 Changes in common stock: Number of shares issued, beginning of year 42,747,704 42,506,573 20,111,618 Non-cash compensation 80,100 127,590 80,400 Awards of contingent stock 28,900 92,850 157,550 Shares issued related to acquisitions - 20,691 957,335 1995 stock split - - 21,199,670 Number of shares issued, end of year 42,856,704 42,747,704 42,506,573 Changes in treasury stock: Number of shares held, beginning of year 226,758 224,758 122,306 Shares issued in acquisition - - (11,927) Awards of contingent stock (153,800) - - Purchase of treasury shares 159,200 - - Contingent stock forfeited 300 2,000 2,000 1995 stock split - - 112,379 Number of shares held, end of year 232,458 226,758 224,758
Non-cash compensation in each year includes the shares, if any, issued as all or a portion of the Company's contribution to its profit-sharing plan as determined by the Board of Directors of the Company, for the respective preceding year and shares issued each year to non-employee directors under the restricted stock plan for non-employee directors (the "Directors Stock Plan"), discussed below. The amount charged to operations related to these shares issued was $322,000 in 1997 ($3,242,000 in 1996 and $3,556,000 in 1995). Non-cash compensation in 1997 included only the amount charged to operations for shares issued under the Directors Stock Plan, as the Company's 1997 profit-sharing plan contribution was made entirely in cash. The Directors Stock Plan, as mentioned above, provides annual grants of shares to non-employee directors, and interim grants of shares to eligible directors elected at other than an annual meeting, for less than 100% of fair value at date of grant in lieu of cash payments for certain directors' fees. Shares issued under this plan are restricted as to disposition by the holders as long as such holders remain directors of the Company. The excess of fair value over the granting price of shares issued under this plan is charged to operations at the date of such grant. The Company's contingent stock plan provides for the granting to employees of awards to purchase common stock (during the succeeding 60-day period) for less than 100% of fair market value at the date of award. Shares issued under the contingent stock plan ("Contingent Stock") are restricted as to disposition by the holders for a period of at least three years after issue. In the event of termination of employment prior to lapse of the restriction, the shares are subject to an option to repurchase by the Company at the price at which the shares were issued. Such restriction will lapse prior to the expiration of the vesting period if certain events occur which affect the existence or control of the Company. On August 14, 1997, the Board of Directors amended the contingent stock plan to provide that the Grace Packaging merger would not constitute such an event. The excess of fair value over the award price of Contingent Stock is charged to operations as compensation over a three-year period. In 1997, such charges amounted to $4,467,000 ($3,498,000 and $3,370,000 in 1996 and 1995, respectively). The aggregate fair value of Contingent Stock issued is credited to common stock and additional paid-in capital accounts, and the unamortized portion of the compensation is deducted from shareholders' equity. F-23 A summary of the changes in shares available for the Directors Stock Plan and the Contingent Stock Plan follows:
Changes in the Directors Stock Plan shares: 1997 1996 1995 Number of shares available, beginning of year 29,200 161,400 82,200 Shares issued for new awards (1) (7,200) (7,200) (1,500) 1995 stock split - - 80,700 Reduction in shares authorized during year - (125,000) - Number of shares available, end of year 22,000 29,200 161,400 Weighted average per share market value of stock on grant date (2) $45.75 $35.13 $21.50
Changes in the Contingent Stock Plan shares: 1997 1996 1995 Number of shares available, beginning of year 646,150 737,000 505,900 Shares issued for new awards (1) (182,700) (92,850) (157,550) Contingent stock forfeited 300 2,000 2,000 1995 stock split - - 386,650 Number of shares available, end of year 463,750 646,150 737,000 Weighted average per share market value of stock on grant date (2) $46.47 $36.59 $21.97 (1) For the Directors Stock Plan during 1995, all 1,500 shares were issued before the 1995 stock split. For the Contingent Stock Plan during 1995, 119,050 shares were issued before such stock split and the remaining 38,500 shares were issued after such stock split. (2) Per share data adjusted to reflect the effect of the 1995 stock split.
The Company has adopted only the disclosure provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The compensation cost that has been charged against income for the Company's stock-based compensation was noted above. Since such compensation cost is consistent with the compensation cost that would have been recognized for the Company's stock plans under the provisions of FASB Statement No. 123, the pro forma disclosure requirements under such statement are not applicable. The Company currently has the authority to issue 1,000,000 shares of preferred stock, without par value, none of which were issued at December 31, 1997. Note 9 Income Taxes The Company's method of accounting for income taxes is the asset and liability method, under which deferred tax assets and liabilities are recognized for temporary differences and are measured using enacted tax rates and laws applicable to the periods in which the taxes become payable. F-24 The components of earnings before income taxes follow: (In thousands of dollars) 1997 1996 1995 __________________________________________________________________ Domestic $107,261 $ 91,055 $ 61,007 Foreign 26,227 23,540 26,147 $133,488 $114,595 $ 87,154 The components of the provision for income taxes on earnings follow: (In thousands of dollars) 1997 1996 1995 __________________________________________________________________ Current tax provision: U.S. federal $36,409 $31,888 $20,624 U.S. state and local 9,345 8,085 5,830 Foreign 10,753 10,590 9,347 56,507 50,563 35,801 Deferred tax provision (benefit): Domestic (2,396) (4,067) (2,589) Foreign (544) (1,230) 1,214 (2,940) (5,297) (1,375) Provision for income taxes $53,567 $45,266 $34,426 The Company's deferred tax liability, net of deferred tax assets, at December 31, 1997 and 1996 amounted to $2,973,000 and $6,014,000, respectively. The principal components of the Company's deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows: (In thousands of dollars) 1997 1996 _____________________________________________________________________ Deferred tax assets: Accrued liabilities $ 5,924 $ 7,970 Patents and other intangibles 5,396 2,830 Facilities consolidation and integration 3,364 3,801 Inventory 2,736 824 Deferred compensation 1,561 1,121 Bad debts 1,423 732 Property and equipment 1,217 1,169 Deferred revenue 729 1,128 Other 6,735 5,159 29,085 24,734 Valuation allowance (810) (277) Deferred tax asset $28,275 $24,457 Deferred tax liabilities: Property and equipment $24,706 $24,944 Deferred revenue 1,011 855 Patents and other intangibles 434 598 Other 5,097 4,074 Deferred tax liability $31,248 $30,471 F-25 The Company expects that it is more likely than not that the net deferred tax assets of $28,275,000 at December 31, 1997 will be realized based on the future reversals of existing deferred tax liabilities and the continuation of earnings, which may be affected by factors outside the Company's control. The valuation allowance of $810,000 is maintained for certain foreign deferred tax assets primarily relating to insignificant net operating losses. The net change in the valuation allowance for deferred tax assets was an increase of $533,000 in 1997 related to additional foreign net operating losses in 1997. An explanation of the difference between the effective income tax rate and the statutory U.S. federal income income tax rate expressed as a percentage of earnings before income taxes for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Provision for foreign withholding taxes and additional U.S. taxes on repatriated and accumulated earnings of foreign subsidiaries 0.6 0.1 0.1 Tax effect of expenses not subject to tax benefit 2.4 1.4 1.7 State income taxes, net of U.S. federal income tax benefit 4.4 4.5 4.0 Taxes on foreign earnings at other than the statutory U.S. federal income tax rate (0.6) (0.6) (0.4) Other miscellaneous items (1.7) (0.9) (0.9) Effective income tax rate 40.1% 39.5% 39.5%
The Company's tax provisions for 1997, 1996 and 1995 give effect to foreign withholding taxes on the repatriation of accumulated earnings from the Company's foreign subsidiaries and additional U.S. taxes, if any, on such accumulated earnings. The Company has provided U.S. and foreign income taxes on the accumulated earnings of the Company's foreign subsidiaries through December 31, 1997. The Company's Dutch subsidiary is entitled to certain tax incentives to manufacture certain product lines under agreements with local tax authorities. The total amount of such incentives is dependent on the profitability of such product lines over a period extending through 1999. Note 10 Commitments and Contingent Liabilities The Company is obligated under the terms of various leases covering many of the facilities occupied by the Company. The Company accounts for substantially all of its leases as operating leases. Net rental expense for 1997 was $11,209,000 ($10,939,000 and $10,228,000 in 1996 and 1995, respectively). Estimated future minimum annual rental commitments under noncancelable real property leases expiring through 2023 are as follows: 1998 - $9,374,000; 1999 - $6,424,000; 2000 - $5,204,000; 2001 - $3,925,000; 2002 - $3,050,000; and subsequent years - $7,560,000. F-26 The Company's worldwide operations are subject to environmental laws and regulations which, among other things, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company reviews the effects of environmental laws and regulations on its operations and believes that it is in substantial compliance with all material applicable environmental laws and regulations. At December 31, 1997, the Company was a party to, or otherwise involved in, several federal and state government environmental proceedings and private environmental claims for the cleanup of Superfund or other sites. The Company may have potential liability for investigation and cleanup of certain of such sites. At most of such sites, numerous companies, including either the Company or one of its predecessor companies, have been identified as potentially responsible parties ("PRPs") under Superfund or related laws. It is the Company's policy to provide for environmental cleanup costs if it is probable that a liability has been incurred and if an amount which is within the estimated range of the costs associated with various alternative remediation strategies is reasonably estimable, without giving effect to any possible future insurance proceeds. As assessments and cleanups proceed, these liabilities are reviewed periodically and adjusted as additional information becomes available. At December 31, 1997 and 1996, such environmental related provisions are not material. While it is often difficult to estimate potential liabilities and the future impact of environmental matters, based upon the information currently available to the Company and its experience in dealing with such matters, the Company believes that its potential liability with respect to such sites is not material to the Company's consolidated financial position. Environmental liabilities may be paid over an extended period, and the timing of such payments cannot be predicted with certainty. The Company is also involved in various legal actions incidental to its business. Company management believes, after consulting with counsel, that the disposition of its litigation and other legal proceedings and matters, including environmental matters, will not have a material effect on the Company's consolidated financial position. F-27 Interim Financial Information (Unaudited) (In thousands of dollars except per share data)
Quarter Net Sales Gross Profit Net Earnings Earnings Per Share 1997 1996 1997 1996 1997(a) 1996 1997(a) 1996 First $202,859 $185,930 $ 75,434 $ 68,741 $ 19,441 $ 15,890 $ .46 $ .37 Second 211,607 193,116 79,776 72,661 21,671 17,573 .51 .42 Third 206,303 196,532 78,195 73,126 21,397 17,141 .50 .40 Fourth 222,064 214,034 85,911 79,899 17,412 18,725 .41 .44 Year $842,833 $789,612 $319,316 $294,427 $ 79,921 $ 69,329 $ 1.88 $ 1.63 a) Reported net of the transaction expenses incurred primarily related to the Grace Packaging merger in the amount of $850,000 in the third quarter and $7,555,000 in the fourth quarter of 1997. Excluding these expenses, net earnings and earnings per share for the third and fourth quarter of 1997 were $21,912,000, or $0.51 per share, and $22,963,000, or $0.54 per share, respectively. For 1997, the transaction expenses amounted to $8,405,000. Excluding such expenses, net earnings and earnings per share for 1997 were $85,987,000,or $2.02 per share.
F-28 SEALED AIR CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In thousands of dollars)
ADDITIONS BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS (1) (2) END OF YEAR Year ended December 31, 1997 Allowance for doubtful accounts $5,623 $ 1,073 $ 656 $1,553 $5,799 Year ended December 31, 1996 Allowance for doubtful accounts $5,261 $1,151 $ 301 $1,090 $5,623 Year ended December 31, 1995 Allowance for doubtful accounts $3,970 $2,421 $ 350 $1,480 $5,261 (1) Primarily recoveries of bad debts and allowance for doubtful accounts of companies acquired at dates of acquisition. (2) Primarily accounts receivable balances written off.
F-29 EX-21 2 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The following table sets forth the name and state or other jurisdiction of incorporation of the Company's subsidiaries. Except as otherwise indicated, each subsidiary is wholly-owned, directly or indirectly, by the Company and does business under its corporate name. Aire Sellado, S.A. de C.V. Mexico Creative Packaging Corporation* Japan Danco (NZ) Limited*** New Zealand E. T. Bygg AS Norway L'Imballaggio S.r.l. Italy Noja Immobiliaria, S.A. de C.V. Mexico Omni Supply Inc.** North Carolina PolyMask Corporation* Delaware Polypride, Inc. Delaware Sealed Air Australia Pty. Limited Queensland, Australia Sealed Air Brasil Ltda. Brazil Sealed Air B.V. Netherlands Sealed Air (Canada) Inc. Ontario, Canada Sealed Air Espana, S.A. Spain Sealed Air (Far East) Limited Hong Kong Sealed Air (FPD) Limited England Sealed Air GmbH Germany Sealed Air Japan Limited Nevada Sealed Air (Korea) Limited Korea Sealed Air Limited England Sealed Air (Malaysia) Sdn. Bhd. Malaysia Sealed Air N.V. Belgium Sealed Air (NZ) Limited New Zealand Sealed Air Norge AS Norway Sealed Air Oy Finland Sealed Air Packaging (Shanghai) China Co. Ltd. Sealed Air (Philippines) Inc. Philippines Sealed Air Polska Sp. z.o.o. Poland Sealed Air S.A.** France Sealed Air (Singapore) Pte. Limited Singapore Sealed Air S.p.A. Italy Sealed Air Svenska AB Sweden Sealed Air Systems S.A. France Sealed Air Taiwan Limited Taiwan Sealed Air Thailand Limited Thailand Sealed Air Trucking, Inc. Delaware Tepak S.p.A. Italy Trigon Packaging Systems (NZ) New Zealand Limited**** Trigon Viskase Pty. Limited* Queensland, Australia *The Company directly or indirectly owns 50% of the outstanding shares. **The Company directly or indirectly owns a majority of the outstanding shares. ***Does business as Sealed Air (New Zealand) Packaging Products Division. ****Does business as Sealed Air (New Zealand) Food Packaging Division. Certain subsidiaries are omitted from the above table. Such subsidiaries, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 1997. EX-23 3 EXHIBIT 23 Independent Auditors' Consent The Board of Directors Sealed Air Corporation: We consent to incorporation by reference in Registration Statement No. 33-41734 on Form S-8, Registration Statement No. 333-341 on Form S-3, Registration Statement No. 333-03985 on Form S-8, Registration Statement No. 33-57441 on Form S-3, Registration Statement No. 33-58843 on Form S-3, Registration Statement No. 333-7297 on Form S-3 and Registration Statement No. 333-7311 on Form S-3 of Sealed Air Corporation of our report dated January 20, 1998, except for note 2 which is as of March 23, 1998, relating to the consolidated balance sheets of Sealed Air Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and related consolidated financial statement schedule, which report appears in the December 31, 1997 annual report on Form 10-K of Sealed Air Corporation. KPMG Peat Marwick LLP Short Hills, New Jersey March 27, 1998 EX-27 4
5 The schedule contains summary information extracted from the consolidated statement of earnings for the twelve months ended December 31, 1997 and the consolidated balance sheet at December 31, 1997 and is qualified in its entirety by reference to such financial statements. 0000088204 SEALED AIR CORPORATION 12-MOS DEC-31-1997 DEC-31-1997 35481000 0 138124000 5799000 58895000 250765000 315241000 144114000 498360000 163610000 0 0 0 429000 256854000 498360000 842833000 842833000 523517000 523517000 181200000 1073000 6950000 133488000 53567000 79921000 0 0 0 79921000 1.88 1.88
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