UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13953
W. R. GRACE & CO.
Delaware 65-0773649
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(State of Incorporation) (I.R.S. Employer
Identification No.)
7500 Grace Drive
Columbia, Maryland 21044
(410) 531-4000
-----------------------------------------
(Address and phone number of principal
executive offices)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
65,616,330 shares of Common Stock, $0.01 par value, were outstanding at April
30, 2004.
PORTIONS AMENDED
The Registrant hereby amends its report on Form 10-Q for the quarterly period
ended March 31, 2004 for the restatement of the Registrant's consolidated
financial statements as of March 31, 2004 and December 31, 2003 to correct the
U.S. dollar translation of a third party's interest in a small consolidated
joint venture. Due to a currency conversion error, the third party interest was
mistakenly calculated at $20.0 million instead of $200,000, a condition that was
discovered as part of Grace's second quarter 2004 financial review. The effect
of this non-cash correction to Grace's December 31, 2003 balance sheet was to
increase shareholders' equity by $19.8 million and to decrease liabilities by
the same amount. This condition had no effect on originally reported net loss,
per share amounts, net sales, operating income or any other element of Grace's
Consolidated Statement of Operations for the year ended December 31, 2003, or
for the three months ended march 31, 2004. Except as set forth in Note 1A to the
accompanying consolidated financial statements, no other changes are made to the
Registrant's report on Form 10-Q for the quarterly period ended March 31, 2004.
W. R. GRACE & CO. AND SUBSIDIARIES
Table of Contents
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm I - 1
Consolidated Statements of Operations I - 2
Consolidated Statements of Cash Flows I - 3
Consolidated Balance Sheets I - 4
Consolidated Statement of Shareholders' Equity (Deficit) I - 5
Consolidated Statements of Comprehensive Income I - 5
Notes to Consolidated Financial Statements I - 6 to I - 21
Item 4. Controls and Procedures I - 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K II - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of
Directors of W. R. Grace & Co.:
We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of March 31, 2004, and the related consolidated
statements of operations and of comprehensive income (loss) for each of the
three-month periods ended March 31, 2004 and March 31, 2003, the consolidated
statements of shareholders' equity (deficit) for the three-month period ended
March 31, 2004 and the consolidated statements of cash flows for each of the
three-month periods ended March 31, 2004 and March 31, 2003. These interim
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated interim financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated interim financial statements, on April 2, 2001, the
Company and substantially all of its domestic subsidiaries voluntarily filed for
protection under Chapter 11 of the United States Bankruptcy Code, which raises
substantial doubt about the Company's ability to continue as a going concern in
its present form. The accompanying consolidated interim financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of operations, of
cash flows, of shareholders' equity (deficit) and of comprehensive income (loss)
for the year then ended (not presented herein). Our report, which was modified
as to a matter raising substantial doubt about the Company's ability to continue
as a going concern, was dated January 27, 2004 (except for Note 1A of the
financial statements as to which the date is August 6, 2004). In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
As discussed in Note 1A, the accompanying consolidated financial statements have
been restated to correct the U.S. dollar translation of a third party's interest
in a consolidated joint venture.
/s/ PricewaterhouseCoopers LLC
PricewaterhouseCoopers LLP
McLean, Virginia
April 27, 2004, except for Note 1A, as to which the date is August 6, 2004
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W. R. GRACE & CO. AND SUBSIDIARIES THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) MARCH 31,
=====================================================================================================
In millions, except per share amounts 2004 2003
------------------
Net sales ..................................................................... $ 518.5 $ 444.8
------------------
Cost of goods sold, exclusive of depreciation and amortization shown separately
below ..................................................................... 331.7 296.7
Selling, general and administrative expenses, exclusive of net pension expense
shown separately below .................................................... 102.2 91.7
Depreciation and amortization ................................................. 27.2 24.7
Research and development expenses ............................................. 12.7 14.1
Net pension expense ........................................................... 12.3 13.5
Interest expense and related financing costs .................................. 3.9 4.2
Other expense (income) ........................................................ (3.2) (5.8)
Provision for environmental remediation ....................................... -- 2.0
------------------
486.8 441.1
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Income before Chapter 11 expenses, income taxes, and minority interest ........ 31.7 3.7
Chapter 11 expenses, net ...................................................... (4.5) (2.7)
Provision for income taxes .................................................... (10.9) (3.1)
Minority interest in consolidated entities .................................... (0.5) (0.2)
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NET INCOME (LOSS) ......................................................... $ 15.8 $ (2.3)
=====================================================================================================
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) ......................................................... $ 0.24 $ (0.04)
Average number of basic shares ........................................... 65.6 65.5
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) ......................................................... $ 0.24 $ (0.04)
Average number of diluted shares ......................................... 65.8 65.5
=====================================================================================================
The Notes to Consolidated Financial Statements
are an integral part of these statements.
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W. R. GRACE & CO. AND SUBSIDIARIES THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) MARCH 31,
===============================================================================================
In millions 2004 2003
-----------------------
OPERATING ACTIVITIES
Income before Chapter 11 expenses, income taxes, and minority interest $ 31.7 $ 3.7
Reconciliation to net cash provided by operating activities:
Depreciation and amortization ................................... 27.2 24.7
Interest accrued on pre-petition debt subject to compromise ..... 2.7 2.9
Loss on sales of investments and disposals of assets ............ 0.2 0.3
Provision for environmental remediation ......................... -- 2.0
Income from life insurance policies, net ........................ (1.5) (3.1)
Changes in assets and liabilities, excluding effect of businesses
acquired/divested and foreign currency translation:
Working capital items ....................................... (33.2) (17.9)
Contributions to defined benefit pension plans .............. (2.4) (1.1)
Contributions to postretirement benefit plans ............... (2.6) (3.1)
Expenditures for asbestos-related litigation ................ (1.9) (2.3)
Proceeds from asbestos-related insurance .................... 1.6 1.1
Expenditures for environmental remediation .................. (2.9) (3.1)
Expenditures for retained obligations of divested businesses. (0.4) --
Pension expense and other non-cash items .................... 14.5 13.7
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE INCOME TAXES AND
CHAPTER 11 EXPENSES .......................................... 33.0 17.8
Chapter 11 expenses paid, net ........................................ (2.0) (3.8)
Income taxes paid, net of refunds .................................... (10.3) (4.3)
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 20.7 9.7
-----------------------
INVESTING ACTIVITIES
Capital expenditures ................................................. (9.1) (18.0)
Investment in life insurance policies ................................ (4.6) (4.9)
Proceeds from life insurance policies ................................ 5.3 3.6
Proceeds from sales of investments and disposals of assets ........... 0.1 0.7
-----------------------
NET CASH USED FOR INVESTING ACTIVITIES .......................... (8.3) (18.6)
-----------------------
FINANCING ACTIVITIES
Net change in loans secured by cash value of life insurance policies . (1.3) (0.9)
Borrowings under credit facilities, net of repayments ................ 8.9 (0.6)
Borrowings under debtor-in-possession facility, net of fees .......... (0.5) (2.2)
Repayments of borrowings under debtor-in-possession facility ......... -- --
-----------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ............ 7.1 (3.7)
-----------------------
Effect of currency exchange rate changes on cash and cash equivalents. (3.4) 4.4
-----------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ 16.1 (8.2)
Cash and cash equivalents, beginning of period ....................... 309.2 283.6
-----------------------
Cash and cash equivalents, end of period ............................. $325.3 $275.4
===============================================================================================
The Notes to Consolidated Financial Statements
are an integral part of these statements.
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(RESTATED) (RESTATED)
W. R. GRACE & CO. AND SUBSIDIARIES MARCH 31, DECEMBER 31,
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 2004 2003
=====================================================================================================
In millions, except par value and shares
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 325.3 $ 309.2
Accounts and other receivables, net ................................... 353.8 347.5
Inventories ........................................................... 226.2 214.6
Deferred income taxes ................................................. 29.4 29.8
Other current assets .................................................. 27.4 27.8
------------------------
TOTAL CURRENT ASSETS ............................................. 962.1 928.9
Properties and equipment, net of accumulated depreciation and
amortization of $1,226.2 (2003 - $1,216.9) ....................... 635.1 656.6
Goodwill .............................................................. 84.2 85.2
Cash value of life insurance policies, net of policy loans ............ 92.9 90.8
Deferred income taxes ................................................. 591.8 587.1
Asbestos-related insurance expected to be realized after one year ..... 267.8 269.4
Other assets .......................................................... 257.6 256.2
------------------------
TOTAL ASSETS ..................................................... $2,891.5 $2,874.2
========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year .......................................... $ 15.9 $ 6.8
Accounts payable ...................................................... 110.1 101.8
Income taxes payable .................................................. 19.9 16.6
Other current liabilities ............................................. 111.2 129.2
------------------------
TOTAL CURRENT LIABILITIES ........................................ 257.1 254.4
Deferred income taxes ................................................. 35.1 35.3
Other liabilities ..................................................... 304.4 296.0
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TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ...................... 596.6 585.7
Liabilities Subject to Compromise - Note 2 ............................ 2,447.7 2,452.3
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TOTAL LIABILITIES ................................................ 3,044.3 3,038.0
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
outstanding: 2004 - 65,616,330 (2003 - 65,558,510) ............... 0.8 0.8
Paid-in capital ....................................................... 431.6 432.1
Accumulated deficit ................................................... (155.1) (170.9)
Treasury stock, at cost: shares: 2004 - 11,363,430 (2003 - 11,421,250) (135.2) (135.9)
Accumulated other comprehensive loss .................................. (294.9) (289.9)
------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ............................. (152.8) (163.8)
------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ............. $2,891.5 $2,874.2
=====================================================================================================
The Notes to Consolidated Financial Statements
are an integral part of these statements.
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W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
================================================================================================================================
Accumulated TOTAL
Common Stock Other SHAREHOLDERS'
and Accumulated Treasury Comprehensive EQUITY
IN MILLIONS Paid-in Capital Deficit Stock Loss (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003, AS RESTATED $432.9 $(170.9) $(135.9) $(289.9) $(163.8)
Net income ............................ -- 15.8 -- -- 15.8
Stock plan activity ................... (0.5) -- 0.7 -- 0.2
Other comprehensive (loss) income ..... -- -- -- (5.0) (5.0)
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BALANCE, MARCH 31, 2004, AS RESTATED .. $432.4 $(155.1) $(135.2) $(294.9) $(152.8)
================================================================================================================================
=================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) MARCH 31,
=================================================================================================================================
In millions 2004 2003
-------------------------------------
NET INCOME (LOSS)..................................................................... $ 15.8 $ (2.3)
OTHER COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation adjustments........................................... (5.0) 9.4
-------------------------------------
COMPREHENSIVE INCOME ................................................................. $ 10.8 $ 7.1
=================================================================================================================================
The Notes to Consolidated Financial Statements
are an integral part of these statements.
I-5
W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL
REPORTING POLICIES
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W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals
and specialty materials businesses on a worldwide basis. These businesses
consist of catalyst and silica products ("Davison Chemicals") and construction
chemicals, building materials and sealants and coatings ("Performance
Chemicals").
W. R. Grace & Co. conducts substantially all of its business through a direct,
wholly owned subsidiary, W. R. Grace & Co.-Conn. ("Grace-Conn."). Grace-Conn.
owns substantially all of the assets, properties and rights of W. R. Grace & Co.
on a consolidated basis, either directly or through subsidiaries.
As used in these notes, the term "Company" refers to W. R. Grace & Co. The term
"Grace" refers to the Company and/or one or more of its subsidiaries and, in
certain cases, their respective predecessors.
VOLUNTARY BANKRUPTCY FILING: In response to a sharply increasing number of
asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), W.
R. Grace & Co. and 61 of its United States subsidiaries and affiliates,
including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions
for reorganization (the "Filing") under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
cases were consolidated and are being jointly administered under case number
01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of
its U.S. subsidiaries were not included in the Filing.
During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 process provided the
best forum available to achieve predictability and fairness in the claims
settlement process.
By filing under Chapter 11, Grace expects to be able to both obtain a
comprehensive resolution of the claims against it and preserve the inherent
value of its businesses. Under Chapter 11, the Debtors expect to continue to
operate their businesses as debtors-in-possession under court protection from
their creditors and claimants, while using the Chapter 11 process to develop and
implement a plan for addressing the asbestos-related claims against them.
Consequence of Filing - As a consequence of the Filing, pending litigation
against the Debtors for pre-petition matters is generally stayed (subject to
certain exceptions in the case of governmental authorities), and no party may
take action to realize its pre-petition claims except pursuant to an order of
the Bankruptcy Court.
The Debtors intend to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. Such a
plan of reorganization may include the establishment of a trust through which
all pending and future asbestos-related claims would be channeled for
resolution. However, it is currently impossible to predict with any degree of
certainty the amount that would be required to be contributed to the trust, how
the trust would be funded, how other pre-petition claims would be treated or
what impact any reorganization plan may have on the shares of common stock of
the Company. The interests of the Company's shareholders could be substantially
diluted or cancelled under a plan of reorganization. The value of Grace common
stock following a plan of reorganization, and the extent of any recovery by
non-asbestos-related creditors, will depend principally on the ultimate value
assigned to Grace's asbestos-related claims, which will be addressed through the
Bankruptcy Court proceedings. The formulation and implementation of the plan of
reorganization is expected to take a significant period of time.
Since the Filing, all motions necessary to conduct normal business activities
have been approved by the Bankruptcy Court.
Status of Chapter 11 Proceedings - As provided by the Bankruptcy Code, the
Debtors had the exclusive right to propose a plan of reorganization for a
120-day period following the Filing Date. The Debtors have
I-6
received extensions of their exclusivity period during which to file a plan of
reorganization through February 1, 2004, and extensions of the Debtors'
exclusive right to solicit acceptances of a reorganization plan through April 1,
2004. A motion is pending before the Bankruptcy Court to further extend these
exclusivity periods.
Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These committees will
have the right to be heard on all matters that come before the Bankruptcy Court
and, together with a legal representative of future asbestos claimants (whom
Grace expects to be appointed by the Bankruptcy Court in the future), are likely
to play important roles in the Chapter 11 Cases. The Debtors are required to
bear certain costs and expenses of the committees and of the future asbestos
claimants' representative, including those of their counsel and financial
advisors.
The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a
senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding
over asbestos bodily injury matters and the fraudulent conveyance litigation
described below. He has assigned the Debtors' other bankruptcy matters to Judge
Judith Fitzgerald, a U.S. bankruptcy judge from the Western District of
Pennsylvania, sitting in Wilmington, Delaware.
Claims Filings - The Bankruptcy Court established a bar date of March 31, 2003
for claims of general unsecured creditors, asbestos-related property damage
claims and medical monitoring claims related to asbestos. The bar date did not
apply to asbestos-related bodily injury claims or claims related to Zonolite(R)
attic insulation ("ZAI"), which will be dealt with separately.
Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 450 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before the bar date.
Approximately 7,000 of the 10,000 non-asbestos related claims involve claims by
employees or former employees for future retirement benefits such as pension and
retiree medical coverage. Grace views most of these claims as contingent and
does not plan to address them until a later date in the Chapter 11 proceeding.
The other non-asbestos related claims include claims for payment for goods and
services; taxes; product warranties; principal plus interest under pre-petition
credit facilities; amounts due under leases; leases and other executory
contracts rejected in the Bankruptcy Court; environmental remediation;
indemnification or contribution from actual or potential co-defendants in
asbestos-related and other litigation; pending non-asbestos-related litigation;
and non-asbestos related personal injury.
The Debtors' initial analysis indicated that many claims are duplicates,
represent the same claim filed against more than one of the Debtors, lack any
supporting documentation, or provide insufficient supporting documentation. As
of March 31, 2004, the Debtors had filed with the Bankruptcy Court approximately
1,100 objections with respect to such claims, most of which were non-substantive
(duplicates, no supporting documentation, late filed claims, etc.). The Debtors
expect to file a substantial number of additional objections, most of which will
be substantive, as analysis and evaluation of the claims progresses. However,
based on its initial claims analysis and other available information, Grace
increased its estimated liability for environmental remediation and
asbestos-related litigation as discussed in Notes 3 and 11. No other changes to
Filing Date liabilities are deemed warranted at this time.
The medical monitoring claims were made by individuals who allege exposure to
asbestos through Grace's products or operations. These claims, if sustained,
would require Grace to fund ongoing health monitoring costs for qualified
claimants. However, based on the number and expected cost of such claims, Grace
does not believe such claims will have a material effect on its Consolidated
Financial Statements. No specific liability has been established for these
claims.
Grace believes that its recorded liabilities represent a reasonable estimate of
the ultimate allowable amount for claims that are not in dispute or have been
submitted with sufficient information to both evaluate merit and estimate the
cost of the claim. However, because of the uncertainties of the Chapter 11 and
litigation process, the in-progress state of Grace's investigation of submitted
claims, and the lack of documentation in support of many claims, such recorded
liabilities may prove to be insufficient to satisfy all of such claims. As
claims are resolved, or where better information becomes available and is
I-7
evaluated, Grace will make adjustments to the liabilities recorded on its
financial statements as appropriate. Any such adjustments could be material to
its consolidated financial position and results of operations.
Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent, at the Debtors' expense, the ZAI
claimants in a proceeding to determine certain threshold scientific issues
regarding ZAI. The Debtors expect the Bankruptcy Court to establish a schedule
for hearing pending motions following a status conference in May 2004. (See Note
3 for background information.)
In September 2000, Grace was named in a purported class action lawsuit filed in
California Superior Court for the County of San Francisco, alleging that the
1996 reorganization involving a predecessor of Grace and Fresenius Medical Care
Holdings, Inc. ("Fresenius") and the 1998 reorganization involving a predecessor
of Grace and Sealed Air Corporation ("Sealed Air") were fraudulent transfers.
The Bankruptcy Court authorized the Official Committee of Asbestos Personal
Injury Claimants and the Official Committee of Asbestos Property Damage
Claimants to proceed with claims against Fresenius and Sealed Air on behalf of
the Debtors' estates.
On November 29, 2002, Sealed Air and Fresenius each announced that they had
reached agreements in principle with such Committees to settle asbestos and
fraudulent conveyance claims related to such transactions. Under the terms of
the Fresenius settlement, as subsequently revised and subject to certain
conditions, Fresenius would contribute $115.0 million to the Debtors' estate as
directed by the Bankruptcy Court upon confirmation of the Debtors' plan of
reorganization. In July 2003, the Fresenius settlement was approved by the
Bankruptcy Court. Under the terms of the proposed Sealed Air settlement, Sealed
Air would make a payment of $512.5 million (plus interest at 5.5% per annum,
commencing on December 21, 2002) and nine million shares of Sealed Air common
stock (valued at $447.6 million as of March 31, 2004), as directed by the
Bankruptcy Court upon confirmation of the Debtors' plan of reorganization. The
Sealed Air settlement has not been agreed to by the Debtors and remains subject
to the approval of the Bankruptcy Court and the fulfillment of specified
conditions. The Debtors are unable to predict how these settlements may
ultimately affect their plan of reorganization.
Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of March 31, 2004
reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."
The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The term of the DIP facility expires on April
1, 2006.
Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of Debtors'
assets and the liquidation of certain of Debtors' liabilities are subject to
significant uncertainty. While operating as debtors-in-possession, the Debtors
may sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the Consolidated Financial Statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the Consolidated Financial Statements, which do not
currently give effect to any adjustments to the carrying value or classification
of assets or liabilities that might be necessary as a consequence of a plan of
reorganization.
Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of March 31, 2004, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments), as well as estimates of costs
related to contingent liabilities (such as asbestos-related litigation,
environmental remediation, and other claims). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted for changes in facts and circumstances, new information
obtained in the claims review process, and/or rulings under Grace's Chapter 11
proceedings subsequent to the Filing. (See Note 2 to the Consolidated Financial
Statements for detail of the
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liabilities subject to compromise.) Obligations of Grace subsidiaries not
covered by the Filing continue to be classified on the Consolidated Balance
Sheets based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.
BASIS OF PRESENTATION: The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's 2003 Annual Report on Form 10-K.
Such interim Consolidated Financial Statements reflect all adjustments that, in
the opinion of management, are necessary for a fair presentation of the results
of the interim periods presented; all such adjustments are of a normal recurring
nature. Potential accounting adjustments discovered during normal reporting and
accounting processes are evaluated on the basis of materiality, both
individually and in the aggregate, and are recorded in the accounting period
discovered, unless a restatement of a prior period is necessary. All significant
intercompany accounts and transactions have been eliminated.
The results of operations for the three-month interim period ended March 31,
2004 are not necessarily indicative of the results of operations for the year
ending December 31, 2004.
RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2004 presentation.
EFFECT OF NEW ACCOUNTING STANDARDS: In December 2003, the Financial Accounting
Standards Board ("FASB") revised Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," to require additional disclosure about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit plans
and other postretirement plans. Grace adopted the provisions of SFAS No. 132 in
December 2003. (See Note 12.)
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). Grace adopted the provisions of FIN 46
in 2002. The adoption of FIN 46 required Grace to consolidate Advanced Refining
Technologies LLC, a joint venture between Grace and Chevron Products Company.
The impact of this consolidation did not result in a material change to Grace's
Consolidated Financial Statements.
STOCK INCENTIVE PLANS: SFAS No. 123 permits the Company to follow the
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and not recognize compensation
expense for its stock-based incentive plans. Had compensation cost for the
Company's stock-based incentive compensation plans been determined based on the
fair value at the grant dates of awards under those plans, consistent with the
fair value methodology prescribed by SFAS No. 123, the Company's net income
(loss) and related earnings (loss) per share for the three-month periods ended
March 31, 2004 and 2003 would have been reduced to the pro forma amounts
indicated below:
================================================================================
PRO FORMA EARNINGS
UNDER SFAS NO. 123 THREE MONTHS ENDED
(In millions, except per share amounts) MARCH 31,
================================================================================
2004 2003
---------------------------
Net income (loss), as reported .................. $ 15.8 $ (2.3)
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for
all awards, net of related tax effects......... (0.1) (0.4)
---------------------------
Pro forma net income (loss) (1) ................. $ 15.7 $ (2.7)
===========================
Basic earnings (loss) per share:
As reported...................................... $ 0.24 $ (0.04)
Pro forma net income (loss) (1) ................. 0.24 (0.04)
Diluted earnings (loss) per share:
As reported...................................... $ 0.24 $ (0.04)
Pro forma net income (loss) (1) ................. 0.24 (0.04)
================================================================================
(1) Due to Grace's Chapter 11 Filing, these pro forma amounts may not be
indicative of future income (loss) and earnings (loss) per share.
To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model.
There were no option grants in the first quarter of 2004 and the year ended
2003.
USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires that management make
estimates and assumptions affecting the assets and liabilities reported at the
date of the Consolidated Financial Statements, and the revenues and expenses
reported for the periods presented. Actual amounts could differ from those
estimates. Changes in estimates are recorded in the period identified. Grace's
accounting measurements that are most affected by management's estimates of
future events are:
I-9
o Contingent liabilities such as asbestos-related matters (see Note 3),
environmental remediation (see Note 11), income taxes (see Note 11), and
retained obligations of divested businesses.
o Pension and postretirement liabilities that depend on assumptions regarding
discount rates and/or total returns on invested funds.
o Depreciation and amortization periods for long-lived assets, including
property and equipment, intangible, and other assets.
o Realization values of various assets such as net deferred tax assets, trade
receivables, inventories, insurance receivables, income taxes, and
goodwill.
The accuracy of these and other estimates may also be materially affected by
uncertainties arising under the Chapter 11 Cases.
--------------------------------------------------------------------------------
1A. RESTATEMENT
--------------------------------------------------------------------------------
The Company's financial statements as of December 31, 2003, have been restated
to correct the U.S. dollar translation of a third party's interest in a small
consolidated joint venture. Due to a currency conversion error, the third party
interest was mistakenly calculated at $20.0 million instead of $200,000, a
condition that was discovered as part of Grace's second quarter 2004 financial
review. The effect of this non-cash correction to Grace's December 31, 2003
balance sheet was to increase shareholders' equity by $19.8 million and to
decrease liabilities by the same amount. The effect of the restatement on the
accompanying financial statements is as follows:
================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions) MARCH 31, 2004 DECEMBER 31, 2003
================================================================================
As As
Previously AS Previously AS
Reported RESTATED Reported RESTATED
-----------------------------------------------
Other current liabilities ...... $ 131.0 $111.2 $ 149.0 $ 129.2
Accumulated other comprehensive
loss........................... (314.7) (294.9) (309.7) (289.9)
================================================================================
The restatement has no effect on the Consolidated Statements of Operations, of
Cash Flows, or of Comprehensive Income for the three months ended March 31, 2004
and 2003. The restatement does not affect the financial position or results of
operations of Grace's operating segments as previously reported.
--------------------------------------------------------------------------------
2. CHAPTER 11 RELATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
As a result of the Filing, Grace's Consolidated Balance Sheets separately
identify the liabilities that are "subject to compromise" as a result of the
Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise"
represent pre-petition liabilities as determined under U.S. generally accepted
accounting principles. Changes to the recorded amount of such liabilities will
be based on developments in the Chapter 11 Cases and management's assessment of
the claim amounts that will ultimately be allowed by the Bankruptcy Court.
Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1)
cash payments under approved court orders; 2) the accrual of interest on
pre-petition debt at the pre-petition contractual rate; 3) accruals for
employee-related programs; and 4) changes in estimates related to pre-petition
contingent liabilities.
Components of liabilities subject to compromise are as follows:
================================================================================
(In millions) MARCH 31, DECEMBER 31,
(Unaudited) 2004 2003
================================================================================
Debt, pre-petition plus accrued interest......... $ 555.2 $ 552.7
Asbestos-related liability ...................... 990.3 992.3
Income taxes..................................... 218.6 217.9
Environmental remediation ....................... 329.5 332.4
Postretirement benefits other than pension....... 131.2 134.3
Special pension arrangements..................... 69.9 69.5
Retained obligations of divested businesses...... 56.6 57.0
Accounts payable ................................ 31.6 31.9
Other accrued liabilities ....................... 64.8 64.3
------------ ------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE ......... $ 2,447.7 $ 2,452.3
================================================================================
I-10
Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through March 31, 2004.
================================================================================
(In millions) Cumulative
(Unaudited) Since Filing
================================================================================
Balance, Filing Date......................................... $ 2,366.0
Cash disbursements and/or reclassifications under Bankruptcy
Court orders:
Freight and distribution order......................... (5.7)
Trade accounts payable order........................... (9.1)
Other court orders including employee wages and
benefits, sales and use tax, and customer programs.. (196.2)
Expense/(income) items:
Interest on pre-petition debt............................. 49.4
Employee-related accruals................................. 11.5
Change in estimate of asbestos-related
property damage contingencies........................... 30.0
Change in estimate of environmental contingencies......... 219.0
Change in estimate of income tax contingencies............ 8.5
Balance sheet reclassifications............................ (25.7)
---------------
Balance, end of period....................................... $ 2,447.7
================================================================================
Additional liabilities subject to compromise may arise due to the rejection of
executory contracts or unexpired leases, or as a result of the allowance of
contingent or disputed claims.
The Debtors' Chapter 11 expenses for each of the three-month periods ended March
31, 2004 and March 31, 2003 consisted of:
================================================================================
THREE MONTHS ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
---------------------------
Legal and financial advisory fees ................. $ 4.8 $ 2.8
Interest income ................................... (0.3) (0.1)
---------------------------
Chapter 11 expenses, net........................... $ 4.5 $ 2.7
================================================================================
Pursuant to SOP 90-7, interest income earned on the Debtors' cash balances must
be offset against Chapter 11 expenses.
Condensed financial information of the Debtors is presented below:
================================================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES DEBTOR-IN-POSSESSION
STATEMENTS OF OPERATIONS THREE MONTHS ENDED
(In millions) (Unaudited) MARCH 31,
================================================================================
2004 2003
--------------------------
Net sales, including intercompany ................... $ 269.4 $ 225.7
--------------------------
Cost of goods sold, including intercompany, exclusive
of depreciation and amortization shown separately
below............................................. 194.4 158.5
Selling, general and administrative expenses,
exclusive of net pension expense shown separately
below ............................................ 61.6 56.8
Research and development expenses.................... 8.6 10.9
Depreciation and amortization........................ 14.5 15.5
Net pension expense.................................. 11.0 12.3
Interest expense and related financing costs......... 3.8 4.2
Other expense (income)............................... (9.3) (17.0)
Provision for environmental remediation.............. -- 2.0
--------------------------
284.6 243.2
--------------------------
Loss before Chapter 11 expenses, income taxes, and
equity in net income of non-filing entities....... (15.2) (17.5)
Chapter 11 expenses, net............................. (4.5) (2.7)
Benefit from income taxes............................ 2.5 1.8
--------------------------
Loss before equity in net income of non-filing
entities........................................... (17.2) (18.4)
Equity in net income of non-filing entities.......... 33.0 16.1
--------------------------
NET INCOME (LOSS).................................... $ 15.8 $ (2.3)
================================================================================
I-11
================================================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES DEBTOR-IN-POSSESSION
CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED
(In millions) (Unaudited) MARCH 31,
================================================================================
2004 2003
------------------------
OPERATING ACTIVITIES
Loss before Chapter 11 expenses, income taxes, and
equity in net income of non-filing entities.......... $ (15.2) $ (17.5)
Reconciliation to net cash provided by (used for)
operating activities:
Non-cash items, net................................. 15.5 17.0
Contributions to defined benefit pension plans...... (1.1) (3.1)
Changes in other assets and liabilities, excluding
the effect of businesses acquired/divested........ (8.6) (13.5)
------------------------
NET CASH USED FOR OPERATING ACTIVITIES ................ (9.4) (17.1)
NET CASH USED FOR INVESTING ACTIVITIES ................ (6.0) (15.3)
NET CASH USED FOR FINANCING ACTIVITIES ................ (1.8) (3.1)
------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (17.2) (35.5)
Cash and cash equivalents, beginning of period......... 120.5 56.8
------------------------
Cash and cash equivalents, end of period............... $ 103.3 $ 21.3
================================================================================
================================================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES DEBTOR-IN-POSSESSION (RESTATED) (RESTATED)
BALANCE SHEETS MARCH 31, DECEMBER 31,
(In millions) (Unaudited) 2004 2003
================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 103.3 $ 120.5
Accounts and other receivables, net ............ 114.1 105.6
Receivables from non-filing entities, net....... 35.5 46.2
Inventories..................................... 85.6 81.2
Other current assets............................ 45.2 47.9
------------------------------
TOTAL CURRENT ASSETS............................ 383.7 401.4
Properties and equipment, net................... 374.3 383.9
Cash value of life insurance policies, net of
policy loans................................. 92.9 90.8
Deferred income taxes .......................... 592.6 587.9
Asbestos-related insurance
expected to be realized
after one year............................... 267.8 269.4
Loans receivable from
non-filing entities, net..................... 444.1 448.0
Investment in non-filing entities............... 340.2 303.6
Other assets.................................... 94.3 92.7
------------------------------
TOTAL ASSETS.................................... $ 2,589.9 $ 2,577.7
================================================================================
================================================================================
(RESTATED) (RESTATED)
MARCH 31, DECEMBER 31,
(In millions) (Unaudited) 2004 2003
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities............................. $ 94.8 $ 98.0
Other liabilities............................... 200.2 191.2
------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE..... 295.0 289.2
LIABILITIES SUBJECT TO COMPROMISE............... 2,447.7 2,452.3
------------------------------
TOTAL LIABILITIES............................... 2,742.7 2,741.5
SHAREHOLDERS' EQUITY (DEFICIT) ................. (152.8) (163.8)
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) .................................... $ 2,589.9 $ 2,577.7
================================================================================
In addition to Grace's financial reporting obligations as prescribed by the U.S.
Securities and Exchange Commission ("SEC"), the Debtors are also required, under
the rules and regulations of the Bankruptcy Code, to periodically file certain
statements and schedules and a monthly operating report with the Bankruptcy
Court. This information is available to the public through the Bankruptcy Court.
This information is prepared in a format that may not be comparable to
information in Grace's quarterly and annual financial statements as filed with
the SEC. The monthly operating reports are not audited, do not purport to
represent the financial position or results of operations of Grace on a
consolidated basis, and should not be relied on for such purposes.
--------------------------------------------------------------------------------
3. ASBESTOS-RELATED LITIGATION
--------------------------------------------------------------------------------
Grace is a defendant in property damage and bodily injury lawsuits relating to
previously sold asbestos-containing products. As of the Filing Date, Grace was a
defendant in 65,656 asbestos-related lawsuits, 17 involving claims for property
damage (one of which has since been dismissed), and the remainder involving
129,191 claims for bodily injury. Due to the Filing, holders of asbestos-related
claims are stayed from continuing to prosecute pending litigation and from
commencing new lawsuits against the Debtors. Additional asbestos-related claims
will be subject to the Chapter 11 process established by the Bankruptcy Court.
Separate creditors' committees representing the interests of property damage and
bodily injury claimants have been appointed in the Chapter 11 Cases. Grace's
obligations with respect to present and
I-12
future claims will be determined through proceedings in the Bankruptcy Court and
negotiations with each of the official committees appointed in the Chapter 11
Cases and a legal representative of future asbestos claimants, which
negotiations are expected to provide the basis for a plan of reorganization.
PROPERTY DAMAGE LITIGATION
The plaintiffs in asbestos property damage lawsuits generally seek to have the
defendants absorb the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Each property damage
case is unique in that the age, type, size and use of the building, and the
difficulty of asbestos abatement, if necessary, vary from structure to
structure. Information regarding product identification, the amount of product
in the building, the age, type, size and use of the building, the legal status
of the claimant, the jurisdictional history of prior cases and the court in
which the case is pending has provided meaningful guidance as to the range of
potential costs. Grace has recorded a liability for all outstanding property
damage claims for which sufficient information is available to form a reasonable
estimate of the cost to resolve such claims.
Out of 380 asbestos property damage cases filed prior to the Filing Date, 141
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in eight cases (one of which is on appeal) for a total of $86.1
million; 207 property damage cases were settled for a total of $696.8 million;
and 16 cases remain outstanding (including the one on appeal). Of the 16
remaining cases, eight relate to ZAI and eight relate to a number of former
asbestos-containing products (two of which also involve ZAI).
Approximately 4,000 additional property damage claims were filed prior to the
March 31, 2003 claims bar date. Such claims were reviewed in detail by Grace,
categorized into claims with sufficient information to be evaluated or claims
that require additional information and, where sufficient information existed,
the cost of resolution was estimated. (Approximately 170 claims contained
insufficient information to permit an evaluation.) As a result of such review,
and after considering the factors described above, Grace recorded a $30.0
million liability as its estimated cost of recovery for such additional claims
in the fourth quarter of 2003.
The ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of
owners of homes containing ZAI. These cases seek damages and equitable relief,
including the removal, replacement and/or disposal of all such insulation. The
plaintiffs assert that this product is in millions of homes throughout the U.S.
and that the cost of removal could be several thousand dollars per home. As a
result of the Filing, these cases have been transferred to the U.S. Bankruptcy
Court. Based on Grace's investigation of the claims described in these lawsuits,
and testing and analysis of this product by Grace and others, Grace believes
that the product was and continues to be safe for its intended purpose and poses
little or no threat to human health. In July 2002, the Bankruptcy Court approved
special counsel to represent, at the Debtors' expense, the ZAI claimants in a
proceeding to determine certain threshold scientific issues regarding ZAI. The
parties have completed discovery with respect to these threshold issues and have
filed motions asking the Bankruptcy Court to resolve a number of important legal
and factual issues regarding the ZAI claims. The Debtors expect the Bankruptcy
Court to establish a schedule for hearing the pending motions following the next
status conference in May 2004. At this time, Grace is not able to assess the
extent of any possible liability related to this matter.
BODILY INJURY LITIGATION
Asbestos bodily injury claims are generally similar to each other (differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff). However, Grace's estimated liability for such claims has been
influenced by numerous variables, including the solvency of other former
producers of asbestos containing products, cross-claims by co-defendants, the
rate at which new claims are filed, the jurisdiction in which the claims are
filed, and the defense and disposition costs associated with these claims.
Grace's bodily injury liability reflects management's estimate, as of the Filing
Date (adjusted for post-Filing defense and claims administration costs), of the
number and ultimate cost of present and future bodily injury claims expected to
be asserted against Grace given demographic assumptions of possible exposure to
asbestos containing products previously manufactured by Grace.
Cumulatively through the Filing Date, 16,354 asbestos bodily injury lawsuits
involving approximately 35,720 claims were dismissed without payment of any
damages or settlement amounts (primarily on the basis that Grace products were
not involved) and
I-13
approximately 55,489 lawsuits involving approximately 163,698 claims were
disposed of (through settlement and judgments) for a total of $645.6 million.
Approximately 1,000 claims for medical monitoring were filed against the Debtors
prior to the bar date. These claims were made by individuals for medical
monitoring, but not bodily injury, due to exposure to asbestos through Grace's
products or operations. Based on the number and expected value of such claims,
Grace does not believe such claims will have a material effect on the
Consolidated Financial Statements.
ASBESTOS-RELATED LIABILITY
The total asbestos-related liability balances as of March 31, 2004 and December
31, 2003 were $990.3 million and $992.3 million, respectively. The decrease in
the liability is due to the payment of ongoing post-Filing administrative costs
relating to claims management and defense costs permitted by the Bankruptcy
Court. The recorded liability is included in "liabilities subject to
compromise."
The liability covers indemnity and defense costs for pending and projected
future bodily injury claims as of the Filing Date, and pending property damage
claims for which sufficient information was available, including the new
property damage claims submitted prior to the March 31, 2003 bar date. Since the
Filing, Grace is aware that bodily injury claims have continued to be filed
against co-defendant companies, and at higher than historical rates. Grace
believes that had it not filed for Chapter 11 reorganization, it likely would
have received thousands more claims than it had previously projected. Grace has
no basis for reliably adjusting its asbestos-related liability for this trend.
It will adjust its recorded liability based on developments in the Chapter 11
Cases. Due to the Filing and the uncertainties of asbestos-related litigation,
the actual amount of Grace's asbestos-related liability could differ materially
from the recorded liability.
Recently, federal legislation has been proposed to address asbestos-related
bodily injury litigation. In addition, several states have enacted or proposed
legislation affecting asbestos-related bodily injury litigation. At this time,
Grace cannot predict what impact any such legislation would have on Grace's
asbestos-related bodily injury liability or its ultimate plan of reorganization.
ASBESTOS INSURANCE
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Insurance coverage for asbestos-related
liabilities has not been commercially available since 1985. Grace has settled
with and has been paid by all of its primary insurance carriers with respect to
both property damage and bodily injury cases and claims. Grace has also settled
with its excess insurance carriers that wrote policies available for property
damage cases; those settlements involve amounts paid and to be paid to Grace.
Grace believes that certain of these settlements may cover ZAI claims, as well
as other property damage claims. In addition, Grace believes that additional
coverage for ZAI claims may exist under excess insurance policies not subject to
settlement agreements. Grace has settled with excess insurance carriers that
wrote policies available for bodily injury claims in layers of insurance that
Grace believes may be reached based on its current estimates.
The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements are based on the recorded
amount of the asbestos-related liability and are only collectible as liabilities
are satisfied. In the event that Grace's ultimate asbestos-related liability is
determined to exceed recorded amounts, insurance exists to cover a portion of
such incremental liability, but generally in a lower proportion than the
currently recorded insurance receivable bears to the currently recorded
liability.
--------------------------------------------------------------------------------
4. OTHER EXPENSE (INCOME)
--------------------------------------------------------------------------------
Components of other expense (income) are as follows:
================================================================================
OTHER EXPENSE (INCOME) THREE MONTHS ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
----------------------
Investment income ................................... $ (1.5) $ (3.1)
Interest income ..................................... (0.9) (1.2)
Net loss on sale of investments and disposals of
assets............................................. 0.2 0.3
Tolling revenue...................................... (0.3) (0.5)
Foreign currency..................................... 1.4 1.3
Other miscellaneous income .......................... (2.1) (2.6)
-----------------------
Total other expense (income)......................... $ (3.2) $ (5.8)
================================================================================
In March 2004, Grace began accounting for currency fluctuations on a Euro 293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The
I-14
change was prompted by new tax laws in Germany and Grace's cash flow planning
for its Chapter 11 reorganization, which indicated that it is no longer
reasonable to consider this loan as part of the permanent capital structure in
Germany. The effect of the change in exchange rates related to this loan over
the first quarter was $9.8 million unfavorable, $8.5 million of which is
reflected in other comprehensive income and $1.3 million of which is reflected
in the Consolidated Statements of Operations as part of other expense (income).
--------------------------------------------------------------------------------
5. OTHER BALANCE SHEET ACCOUNTS
--------------------------------------------------------------------------------
================================================================================
(RESTATED) (Restated)
MARCH 31, December 31,
(In millions) 2004 2003
================================================================================
ACCOUNTS AND OTHER RECEIVABLES, NET
Trade receivables, less allowance of $4.8
(2003 - $4.6)...................................... $ 339.1 $ 331.5
Other receivables, less allowances of $1.7
(2003 - $1.7)...................................... 14.7 16.0
-------------------------
$ 353.8 $ 347.5
================================================================================
INVENTORIES
Raw materials........................................ $ 54.7 $ 53.5
In process........................................... 38.2 35.8
Finished products.................................... 145.9 134.0
General merchandise.................................. 28.0 29.4
Less: Adjustment of certain inventories to a
last-in/first-out (LIFO) basis.................... (40.6) (38.1)
-------------------------
$ 226.2 $ 214.6
================================================================================
OTHER ASSETS
Deferred pension costs.............................. $ 118.6 $ 115.9
Deferred charges ................................... 46.8 45.7
Long-term receivables, less allowances of $0.7
(2003 - $0.7) .................................... 9.1 9.2
Patents, licenses and other
intangible assets, net............................ 62.7 65.1
Pension-unamortized prior service cost.............. 19.8 19.8
Investments in unconsolidated
affiliates and other............................. 0.6 0.5
-------------------------
$ 257.6 $ 256.2
================================================================================
OTHER CURRENT LIABILITIES
Accrued compensation................................ $ 40.8 $ 44.8
Deferred tax liability.............................. 0.4 0.5
Customer volume rebates............................. 16.7 28.1
Accrued commissions................................. 6.1 9.8
Accrued reorganization fees......................... 9.4 6.9
Other accrued liabilities .......................... 37.8 39.1
-------------------------
$ 111.2 $ 129.2
================================================================================
OTHER LIABILITIES
Pension-underfunded plans .......................... $ 286.7 $ 278.5
Other accrued liabilities .......................... 17.7 17.5
-------------------------
$ 304.4 $ 296.0
================================================================================
--------------------------------------------------------------------------------
6. LIFE INSURANCE
--------------------------------------------------------------------------------
Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $92.9 million and $90.8
million at March 31, 2004 and December 31, 2003, respectively. The policies were
acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an
extended number of years. The following table summarizes activity in these
policies for the three months ended March 31, 2004 and 2003, and components of
the net cash value at March 31, 2004 and December 31, 2003:
================================================================================
LIFE INSURANCE - ACTIVITY SUMMARY THREE MONTHS ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
-------------------------------
Earnings on policy assets....................... $ 9.1 $ 11.8
Interest on policy loans........................ (7.6) (8.7)
Premiums........................................ -- --
Policy loan repayments.......................... 1.3 0.9
Net investing activity.......................... (0.7) 1.3
-------------------------------
Change in net cash value........................ $ 2.1 $ 5.3
================================================================================
Tax-free proceeds received...................... $ 5.3 $ 3.6
================================================================================
COMPONENTS OF MARCH 31, December 31,
NET CASH VALUE 2004 2003
================================================================================
Gross cash value................................ $ 482.4 $ 478.5
Principal - policy loans........................ (373.9) (365.3)
Accrued interest - policy loans................. (15.6) (22.4)
-------------------------------
Net cash value.................................. $ 92.9 $ 90.8
================================================================================
Insurance benefits in force..................... $ 2,208.5 $ 2,213.1
================================================================================
Grace's financial statements display income statement activity and balance sheet
amounts on a net basis, reflecting the contractual interdependency of policy
assets and liabilities. See Note 11 for tax contingencies regarding certain of
these life insurance policies.
I-15
--------------------------------------------------------------------------------
7. DEBT
--------------------------------------------------------------------------------
================================================================================
COMPONENTS OF DEBT MARCH 31, December 31,
(In millions) 2004 2003
================================================================================
DEBT PAYABLE WITHIN ONE YEAR
DIP facility...................................... $ -- $ --
Other short-term borrowings....................... 15.9 6.8
-----------------------------
$ 15.9 $ 6.8
=============================
DEBT PAYABLE AFTER ONE YEAR
DIP facility ..................................... $ -- $ --
DEBT SUBJECT TO COMPROMISE
Bank borrowings................................... $ 500.0 $ 500.0
Other borrowings.................................. 3.5 3.7
Accrued interest.................................. 51.7 49.0
-----------------------------
$ 555.2 $ 552.7
=============================
Annualized weighted average interest rates on
total debt...................................... 1.9% 2.1%
================================================================================
In April 2001, the Debtors entered into the DIP facility for a two-year term in
the aggregate amount of $250 million. The DIP facility is secured by a priority
lien on substantially all assets of the Debtors, and bears interest based on
LIBOR. The Debtors have extended the term of the DIP facility through April 1,
2006. Grace had no outstanding borrowings under the DIP facility as of March 31,
2004; however, $25.4 million of standby letters of credit were issued and
outstanding under the facility. The letters of credit, which reduce available
funds under the facility, were issued mainly for trade-related matters such as
performance bonds, and certain insurance and environmental matters.
--------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on March 31, 2004, approximately 9,174,968 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first three months of 2004 and the year ended December 31, 2003, Grace
did not grant any stock options.
For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2003 Form 10-K.
--------------------------------------------------------------------------------
9. EARNINGS (LOSS) PER SHARE
--------------------------------------------------------------------------------
The following table shows a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings (loss) per share.
================================================================================
EARNINGS (LOSS) PER SHARE THREE MONTHS ENDED
(In millions, except per share amounts) MARCH 31,
================================================================================
2004 2003
---------------------
NUMERATORS
Net income (loss)..................................... $ 15.8 $ (2.3)
=====================
DENOMINATORS
Weighted average common shares - basic calculation.... 65.6 65.5
Dilutive effect of employee stock options............. 0.2 --
---------------------
Weighted average common shares
diluted calculation................................. 65.8 65.5
=====================
BASIC EARNINGS (LOSS) PER SHARE......................... $ 0.24 $ (0.04)
=====================
DILUTED EARNINGS (LOSS) PER SHARE....................... $ 0.24 $ (0.04)
================================================================================
As a result of the loss incurred during the three months ended March 31, 2003,
employee compensation shares of approximately 500,000 were excluded from the
diluted loss per share calculation because their effect would have been
antidilutive.
--------------------------------------------------------------------------------
10. COMPREHENSIVE (LOSS) INCOME
--------------------------------------------------------------------------------
Grace's other comprehensive (loss) income consists entirely of foreign currency
translation adjustments. The table below presents the pre-tax, tax and after tax
amounts of Grace's other comprehensive (loss) income for the three months ended
March 31, 2004 and 2003:
================================================================================
After
Pre-tax Tax Tax
(In millions) Amount Benefit Amount
================================================================================
THREE MONTHS ENDED:
March 31, 2004.......................... $ (5.0) $ -- $ (5.0)
March 31, 2003.......................... $ 9.4 $ -- $ 9.4
================================================================================
The table below presents the components of Grace's accumulated other
comprehensive loss at March 31, 2004 and December 31, 2003:
================================================================================
COMPONENTS OF ACCUMULATED (RESTATED) (Restated)
OTHER COMPREHENSIVE LOSS MARCH 31, December 31,
(In millions) 2004 2003
================================================================================
Foreign currency translation .................. $ (29.5) $ (24.5)
Minimum pension liability ..................... (265.4) (265.4)
--------------- ---------------
Accumulated other comprehensive loss........... $ (294.9) $ (289.9)
================================================================================
Grace is a global enterprise, which operates in over 40 countries with local
currency generally deemed to be the functional currency for accounting purposes.
The foreign currency translation amount represents the adjustment necessary to
translate the balance sheets valued in local currencies to the U.S. dollar as of
the end of each period presented. The decline in foreign currency translation at
March 31, 2004 compared with
I-16
December 31, 2003 is due to the strengthening of the U.S. dollar against most
other reporting currencies.
--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------
ASBESTOS-RELATED LITIGATION - SEE NOTE 3
ENVIRONMENTAL REMEDIATION
General Matters and Discussion
Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
investigative and remediation efforts where an assessment has indicated that a
probable liability has been incurred and the cost can be reasonably estimated.
These accruals do not take into account any discounting for the time value of
money.
Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings; any such effect could
be material. Grace's environmental liabilities are included in "liabilities
subject to compromise" as of March 31, 2004.
At March 31, 2004, Grace's estimated liability for environmental investigative
and remediation costs totaled $329.5 million, compared with $332.4 million at
December 31, 2003. This liability covers both vermiculite and non-vermiculite
related matters. The amount is based on funding and/or remediation agreements in
place and Grace's best estimate of its cost for sites not subject to a formal
remediation plan.
Cash expenditures charged against previously established reserves for the three
months ended March 31, 2004 and 2003 were $2.9 million and $3.1 million,
respectively.
Vermiculite Related Matters
From the 1920's until 1990, Grace and previous owners conducted vermiculite
mining and related activities near Libby, Montana. The vermiculite ore that was
mined contained varying amounts of asbestos as a contaminant, almost all of
which was removed during processing. Expanded vermiculite from Libby was used in
products such as fireproofing, insulation and potting soil. In November 1999,
Region 8 of the Environmental Protection Agency ("EPA") began an investigation
into alleged excessive levels of asbestos-related disease in the Libby
population related to these former mining activities. This investigation led the
EPA to undertake additional investigative activity and to carry out response
actions in and around Libby. On March 30, 2001, the EPA filed a lawsuit in U.S.
District Court for the District of Montana, Missoula Division (United States v.
W. R. Grace & Company et al.) under the Comprehensive Environmental Response,
Compensation and Liability Act for the recovery of costs allegedly incurred by
the United States in response to the release or threatened release of asbestos
in the Libby, Montana area relating to such former mining activities. These
costs include cleaning and/or demolition of contaminated buildings, the
excavation and removal of contaminated soil, health screening of Libby residents
and former mine workers, and investigation and monitoring costs. In this action,
the EPA also sought a declaration of Grace's liability that would be binding in
future actions to recover further response costs.
In connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, in December 2002, the District Court granted the United
States' motion for partial summary judgment on a number of issues that limited
Grace's ability to challenge the EPA's response actions. In January 2003, a
trial was held on the remainder of the issues, which primarily involved the
reasonableness and adequacy of documentation of the EPA's cost recovery claims
through December 31, 2001. On August 28, 2003, the District Court issued a
ruling in favor of the United States that requires Grace to reimburse the
government for $54.5 million in costs expended through December 2001, and for
all appropriate future costs to complete the clean-up. Grace has appealed the
court's ruling.
As a result of such ruling and Grace's analysis of estimated remediation costs
at vermiculite processing sites currently or formerly operated by Grace, Grace
estimates its total liability for vermiculite-related
I-17
matters at March 31, 2004 at $181.0 million. Grace's estimate of expected costs
is based on public comments regarding the EPA's spending plans, discussions of
spending forecasts with EPA representatives, and analysis of other information
made available from the EPA. The EPA's cost estimates have changed regularly and
increased substantially over time. Consequently, Grace's estimate may change
materially as more information becomes available. Grace's liability for this
matter is included in "liabilities subject to compromise" as of March 31, 2004.
Non-Vermiculite Related Matters
At March 31, 2004 and December 31, 2003, Grace's estimated liability for
remediation of sites not related to its former vermiculite mining and processing
activities was $148.5 million and $151.4 million, respectively. This liability
relates to Grace's current and former operations, including its share of
liability for off-site disposal at facilities where it has been identified as a
potentially responsible party. This liability also reflects Grace's evaluation
of environmental-related claims submitted as part of the Chapter 11 process for
which sufficient information was available. As Grace receives new information
and continues its claims evaluation process, its estimated liability may change
materially. Grace's liability for this matter is included in "liabilities
subject to compromise" as of March 31, 2004.
Insurance Matters
Grace is a party to three environmental insurance coverage actions involving one
primary and one excess insurance carrier regarding the applicability of the
carriers' policies to Grace's environmental remediation costs. The outcome of
such litigation, as well as the amounts of any recoveries that Grace may
receive, is presently uncertain. Accordingly, Grace has not recorded a
receivable with respect to such insurance coverage.
TAX MATTERS
Grace has received the examination report from the Internal Revenue Service (the
"IRS") for tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments, including accrued
interest. The most significant contested issue addressed in such report concerns
corporate-owned life insurance ("COLI") policies and is discussed below. Other
proposed IRS tax adjustments include Grace's tax position regarding research and
development credits, the reporting of certain divestitures and other
miscellaneous proposed adjustments. The tax audit for the 1993 through 1996 tax
period was under the jurisdiction of the IRS Office of Appeals, where Grace
filed a protest. The IRS Office of Appeals has returned the audit to the
examination team for further review of the proposed adjustments as well as
several affirmative tax claims raised by Grace. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. In addition, Grace will be required to report to
state and local tax jurisdictions the additional taxable income (and the related
accrued interest) resulting from IRS adjustments upon resolution of the Federal
tax audits. Grace believes that the impact of probable tax return adjustments
are adequately recognized as liabilities at March 31, 2004. Any cash payment as
a result of such adjustment would be subject to Grace's Chapter 11 proceedings.
In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its
employees as part of a strategy to fund the cost of postretirement employee
health care benefits and other long-term liabilities. COLI premiums have been
funded in part by loans issued against the cash surrender value of the COLI
policies. The IRS is challenging deductions of interest on loans secured by COLI
policies for years prior to 1999. In 2000, Grace paid $21.2 million of tax and
interest related to this issue for tax years 1990 through 1992. Subsequent to
1992, Grace deducted approximately $163.2 million in interest attributable to
COLI policy loans. Although Grace continues to believe that the deductions were
legitimate, the IRS has successfully challenged interest deductions claimed by
other corporations with respect to broad-based COLI policies in three out of
four litigated cases. Given the level of IRS success in COLI cases, Grace
requested and was granted early referral to the IRS Office of Appeals for
consideration of possible settlement alternatives of the COLI interest deduction
issue.
On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding
requesting that the Bankruptcy Court authorize Grace to enter into a settlement
agreement with the IRS with respect to Grace's COLI interest deductions. The tax
years at issue are 1989 through 1998. Under the terms of the proposed
settlement, the government would allow 20% of the aggregate amount of the COLI
interest deductions and Grace would owe federal income tax and interest on the
remaining 80%. Grace has accrued for the potential tax and interest liability
related to the
I-18
disallowance of all COLI interest deductions and continues to accrue interest.
On October 22, 2002, the Bankruptcy Court issued an order authorizing Grace to
enter into settlement discussions with the IRS consistent with the
aforementioned terms and further ordered that any final agreement would be
subject to Bankruptcy Court approval. Grace has reached a tentative agreement
with the IRS on such settlement and intends to submit it for Bankruptcy Court
approval.
The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel that was in effect through 1999, the year in which Grace sold the
business. The IRS contends that certain per diem reimbursements should have been
treated as wages subject to employment taxes and federal income tax withholding.
Grace contends that its per diem and expense allowance plans were in accordance
with statutory and regulatory requirements, as well as other published guidance
from the IRS. The IRS has issued additional assessments aggregating $40.1
million for the 1996 through 1998 tax periods. The statute of limitations has
expired with respect to the 1999 tax year. Grace has a right to indemnification
for approximately 36% of any tax liability (including interest thereon) for the
period from July, 1996 through December, 1998 from its former partner in the
business. The matter is currently pending in the United States Court of Claims.
Grace is currently in discussions with the Department of Justice concerning
possible settlement options. Grace does not expect the resolution of this matter
to have significant adverse impact on its Consolidated Financial Statements.
PURCHASE COMMITMENTS
From time to time, Grace engages in purchase commitments in its various business
activities, all of which are expected to be fulfilled with no material adverse
consequences to Grace's operations or financial position.
GUARANTEES AND INDEMNIFICATION OBLIGATIONS
Grace is a party to many contracts containing guarantees and indemnification
obligations. These contracts primarily consist of:
o Contracts providing for the sale of a former business unit or product line
in which Grace has agreed to indemnify the buyer against liabilities
arising prior to the closing of the transaction, including environmental
liabilities. These liabilities are included in "liabilities subject to
compromise" in the Consolidated Balance Sheets;
o Guarantees of real property lease obligations of third parties, typically
arising out of (a) leases entered into by former subsidiaries of Grace, or
(b) the assignment or sublease of a lease by Grace to a third party. These
obligations are included in "liabilities subject to compromise" in the
Consolidated Balance Sheets;
o Licenses of intellectual property by Grace to third parties in which Grace
has agreed to indemnify the licensee against third party infringement
claims;
o Contracts entered into with third party consultants, independent
contractors, and other service providers in which Grace has agreed to
indemnify such parties against certain liabilities in connection with their
performance. Based on historical experience and the likelihood that such
parties will ever make a claim against Grace, such indemnification
obligations are immaterial; and
o Product warranties with respect to certain products sold to customers in
the ordinary course of business. These warranties typically provide that
product will conform to specifications. Grace generally does not establish
a liability for product warranty based on a percentage of sales or other
formula. Grace accrues a warranty liability on a transaction-specific basis
depending on the individual facts and circumstances related to each sale.
Both the liability and annual expense related to product warranties are
immaterial to the Consolidated Financial Statements.
FINANCIAL ASSURANCES
At March 31, 2004, Grace had gross financial assurances issued and outstanding
of $252.2 million, comprised of $136.8 million of gross surety bonds issued by
various insurance companies and $115.4 million of standby letters of credit and
other financial assurances issued by various banks. Of the standby letters of
credit, $19.0 million act as collateral for surety bonds, thereby reducing
Grace's overall obligations under its financial assurances to a net amount of
$233.2 million. These financial assurances were established for a variety of
purposes, including
I-19
insurance and environmental matters, asbestos settlements and appeals,
trade-related commitments and other matters. Of the net amount of $233.2 million
of financial assurances, approximately $12.2 million were issued by non-Debtor
entities and $221.0 million were issued by the Debtors. Of the amounts issued by
the Debtors, approximately $191.1 million were issued before the Filing Date,
with the remaining $29.9 million being subsequent to the Filing, of which $25.4
million was issued under the DIP facility.
ACCOUNTING FOR CONTINGENCIES
Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to certain of the items discussed above will be addressed
as part of Grace's Chapter 11 proceedings. Accruals recorded for such
contingencies have been included in "liabilities subject to compromise" on the
accompanying Consolidated Balance Sheets. The amounts of these liabilities as
ultimately determined through the Chapter 11 proceedings could be materially
different from amounts recorded by Grace at March 31, 2004.
--------------------------------------------------------------------------------
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
--------------------------------------------------------------------------------
Grace maintains defined benefit pension plans covering employees of certain
units who meet age and service requirements. Benefits are generally based on
final average salary and years of service. Grace funds its U.S. pension plans in
accordance with U.S. federal laws and regulations. Non-U.S. pension plans are
funded under a variety of methods, as required under local laws and customs.
Grace also provides, through nonqualified plans, supplemental pension benefits
in excess of qualified plan limits imposed by Federal tax law. These plans cover
officers and certain key employees and serve to increase the combined pension
amount to the level which they otherwise would have received under the qualified
plans in the absence of such limits. The unqualified plans are unfunded and
Grace pays the costs of benefits as they are incurred.
Grace provides postretirement health care and life insurance benefits for
retired employees of certain U.S. business units and certain divested units. The
postretirement medical plan provides various levels of benefits to employees
(depending on their dates of hire) who retire from Grace after age 55 with at
least 10 years of service. These plans are unfunded, and Grace pays the costs of
benefits under these plans as they are incurred. Grace applies SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires that the future costs of postretirement health care and life insurance
benefits be accrued over the employees' years of service.
The components of net periodic benefit cost for the three months ended March 31,
2004 and 2003 are as follows:
================================================================================
COMPONENTS OF NET PERIODIC BENEFIT COST THREE MONTHS ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
-------------------------------------
U.S. OTHER U.S. Other
-------------------------------------
Service cost............................. $ 2.9 $ 0.2 $ 2.5 $ 0.2
Interest cost............................ 13.9 1.7 14.0 2.2
Expected return on plan assets........... (12.6) -- (11.0) --
Amortization of prior service cost....... 1.4 (3.2) 1.4 (3.2)
Amortization of unrecognized actuarial
loss................................... 4.6 0.7 4.7 1.0
-------------------------------------
NET PERIODIC BENEFIT COST................ $ 10.2 $ (0.6) $ 11.6 $ 0.2
================================================================================
Grace previously disclosed in its financial statements for the year ended
December 31, 2003 that it expected to contribute $40 million to its domestic
qualified defined benefit pension plans in 2004, $33 million to satisfy minimum
funding requirements under the Employee Retirement Income Security Act of 1974
("ERISA") and $7 million to help fund the shortfall between Grace's U.S.
qualified pension obligations and the market value of dedicated pension assets.
In April 2004, a Federal law was passed that provides for a two-year
modification to the regulatory framework that governs pension funding. Under the
new law, the interest rate to be used to determine the level of underfunding in
a defined benefit pension plan is based on interest rates on long-term corporate
bonds instead of interest rates on 30-year U.S. Treasury bonds. As a result of
the new law, Grace is required to contribute $44.5 million to its domestic
qualified defined benefit pension plans for the 2004 plan year ($0.1 million of
which is payable in 2004 and $44.4 million of which is payable by September
2005) to satisfy its minimum funding requirements under ERISA. Grace may seek to
contribute more than the minimum amount in 2004 to more effectively manage its
longer term funding obligations. Contributions to the U.S. qualified pension
plans are subject to the
I-20
approval of the Bankruptcy Court. Grace expects to contribute approximately $4.4
million to its domestic nonqualified pension plans and approximately $12.0
million to its other postretirement plans in 2004.
Contributions to fund the postretirement health care and life insurance plans
are discretionary, as the plans are not subject to any minimum regulatory
funding requirements. For the three months ended March 31, 2004 and 2003, Grace
has contributed $2.6 million and $3.1 million to the plan, respectively.
--------------------------------------------------------------------------------
13. BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------
Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Davison Chemicals produces a variety of catalyst and silica products.
Performance Chemicals produces specialty construction chemicals, building
materials and sealants and coatings. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for the three-month periods ended March 31, 2004 and
2003. Only those corporate expenses directly related to the segment are
allocated for reporting purposes. All remaining corporate items are reported
separately and labeled as such.
================================================================================
THREE MONTHS
BUSINESS SEGMENT DATA ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
------------------
NET SALES
Davison Chemicals......................................... $ 270.9 $ 239.1
Performance Chemicals..................................... 247.6 205.7
------------------
TOTAL....................................................... $ 518.5 $ 444.8
==================
PRE-TAX OPERATING INCOME
Davison Chemicals......................................... $ 32.0 $ 20.3
Performance Chemicals..................................... 27.6 12.1
------------------
TOTAL....................................................... $ 59.6 $ 32.4
================================================================================
The table below presents information related to the geographic areas in which
Grace operated for the three months ended March 31, 2004 and 2003.
================================================================================
THREE MONTHS
GEOGRAPHIC AREA DATA ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
------------------
NET SALES
United States........................................... $ 202.3 $ 188.6
Canada and Puerto Rico.................................. 22.9 15.6
Europe, other than Germany.............................. 165.2 134.7
Germany................................................. 28.2 20.1
Asia Pacific............................................ 72.7 61.4
Latin America........................................... 27.2 24.4
------------------
TOTAL..................................................... $ 518.5 $ 444.8
================================================================================
The pre-tax operating income for Grace's business segments for the three-month
periods ended March 31, 2004 and 2003 is reconciled below to income before
Chapter 11 expenses, income taxes, and minority interest presented in the
accompanying Consolidated Statements of Operations.
================================================================================
RECONCILIATION OF BUSINESS SEGMENT DATA THREE MONTHS
TO FINANCIAL STATEMENTS ENDED
(In millions) MARCH 31,
================================================================================
2004 2003
-------------------
Pre-tax operating income - business segments............... $ 59.6 $ 32.4
Minority interest ......................................... 0.5 0.2
Loss on sale of investments and disposals of assets........ (0.2) (0.3)
Provision for environmental remediation ................... -- (2.0)
Interest expense and related financing costs............... (3.9) (4.2)
Corporate costs............................................ (21.1) (18.9)
Other, net................................................. (3.2) (3.5)
-------------------
Income before Chapter 11 expenses, income taxes, and
minority interest ....................................... $ 31.7 $ 3.7
================================================================================
Corporate costs include expenses of corporate headquarters functions incurred in
support of core operations, such as corporate financial and legal services,
human resources management, communications and regulatory affairs. This item
also includes certain pension and postretirement benefits, including the
amortization of deferred actuarial losses that are considered a core operating
cost but not allocated to business segments.
I-21
ITEM 4. CONTROLS AND PROCEDURES
GENERAL STATEMENT OF RESPONSIBILITY
The management of Grace is responsible for the preparation, integrity and
objectivity of the Consolidated Financial Statements and the other information
included in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly include certain amounts that represent management's best
estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal controls to assist it in fulfilling its
responsibility for financial reporting. These internal controls consist of the
control environment, risk assessment, control activities, information and
communication, and monitoring. A chartered Disclosure Committee oversees Grace's
public financial reporting process and key managers are required to confirm
their compliance with Grace's policies and internal controls. While no system of
internal controls can ensure elimination of all errors and irregularities,
Grace's internal controls, which are reviewed and modified in response to
changing conditions, have been designed to provide reasonable assurance that
assets are safeguarded, policies and procedures are followed, transactions are
properly executed and reported, and appropriate disclosures are made. The
concept of reasonable assurance is based on the recognition that there are
limitations in all systems of internal control and that the costs of such
systems should not exceed their benefits.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of March 31, 2004, Grace carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, Grace's Chief Executive Officer and Chief
Financial Officer (the "Officers") concluded that the Company's disclosure
controls and procedures were effective in ensuring that information required to
be disclosed in the Company's periodic filings under the Exchange Act is
accumulated and communicated to such Officers to allow timely decisions
regarding required disclosures. However, in early August 2004, the Officers
became aware of a mistake in Grace's measurement of the U.S. dollar translation
of a third party's equity interest in a small foreign joint venture caused by a
two-decimal-point error in the currency conversion factor. The joint venture has
2003 net sales of approximately $775,000, all of which were made to Grace
affiliates, and owner's equity of approximately $400,000. The third party's
equity interest was measured at $20 million instead of $200,000, which resulted
in an overstatement of Grace's liabilities and an understatement of Grace's
shareholders' equity by $19.8 million in Grace's December 31, 2003 and March 31,
2004 consolidated balance sheets. This noncash error was uncovered as part of
Grace's financial review procedures for the quarter ended June 30, 2004. The
error had no effect on originally reported net income/loss, per share amounts,
net sales, operating income, or any other item in Grace's Consolidated
Statements of Operations for the year ended December 31, 2003 or for the first
quarter ended March 31, 2004. The error was communicated to Grace's Audit
Committee and independent auditors when found.
Upon investigation, it was determined that Grace's validation and review
procedures existing at both December 31, 2003 and March 31, 2004 related to the
consolidation accounting process should have, but failed to, detect this
computational error. As a result, such Officers now conclude that the Company's
disclosure controls and procedures were effective except as they relate to the
consolidation accounting process in operation at December 31, 2003 or at March
31, 2004. The Officers' believe that added validation and review procedures
implemented during 2004, together with those existing before, when appropriately
applied, are effective to identify errors of this nature. Grace's independent
auditors have advised the Officers that the condition existing, prior to the
implementation of added procedures in 2004, when combined with the relative
magnitude of the identified error on the measurement of components of
shareholders' equity, constituted, at the December and March balance sheet
dates, a material weakness in disclosure controls and procedures.
Except for the changes in Grace's consolidation accounting procedures which now
include added steps of validation and review, and for periodic enhancements to
control processes and policies in response to changing business, organizational,
legal and regulatory conditions, there were no changes in the Company's internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
I-22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following is a list of Exhibits filed as part of this
Quarterly Report on Form 10-Q:
15 Accountants' Awareness Letter
31.1 Certification of Periodic Report by Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Periodic Report by Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the first quarter of 2004:
January 29, 2004 - Press release announcing Grace's financial results
for the quarter and full year ended December 31, 2003.
II-1
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
W. R. GRACE & CO.
-----------------------------------------
(Registrant)
Date: August 9, 2004 By /s/ Paul J. Norris
--------------------------------------
Paul J. Norris
Chairman and
Chief Executive Officer
Date: August 9, 2004 By /s/ Robert M. Tarola
--------------------------------------
Robert M. Tarola
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
II-2
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
15 Accountants' Awareness Letter
31.1 Certification of Periodic Report by Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Periodic Report by Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2002
II-3