-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EyAg17EnccdT4J+Di+6Rvtzgiud+2Pp5cML9Es+zQutCiXUCDMw6NVdqmxk0ZHKN RYy9nCO1F7DRs6qutEgBfw== 0000950136-02-001487.txt : 20020515 0000950136-02-001487.hdr.sgml : 20020515 20020515155255 ACCESSION NUMBER: 0000950136-02-001487 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: W R GRACE & CO CENTRAL INDEX KEY: 0001045309 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 650773649 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13953 FILM NUMBER: 02652084 BUSINESS ADDRESS: STREET 1: 1750 CLINT MOORE ROAD CITY: BOCA RATON STATE: FL ZIP: 33487-2707 BUSINESS PHONE: 5613622000 MAIL ADDRESS: STREET 1: 1750 CLINT MOORE ROAD CITY: BOCA RATON STATE: FL ZIP: 33487-2707 FORMER COMPANY: FORMER CONFORMED NAME: GRACE SPECIALTY CHEMICALS INC DATE OF NAME CHANGE: 19970902 10-Q 1 file001.txt QUARTERLY REPORT - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (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, 2002 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 - ---------------------------------- --------------------------- (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 ----------- ---------- 65,479,625 shares of Common Stock, $0.01 par value, were outstanding at April 30, 2002. - -------------------------------------------------------------------------------- W. R. GRACE & CO. AND SUBSIDIARIES Table of Contents -----------------
Page No. PART I. FINANCIAL INFORMATION -------- - ------ Item 1. Financial Statements Report of Independent Accountants I - 1 Consolidated Statement of Operations I - 2 Consolidated Statement of Cash Flows I - 3 Consolidated Balance Sheet I - 4 Consolidated Statement of Shareholders' Equity (Deficit) I - 5 Consolidated Statement of Comprehensive Income (Loss) I - 5 Notes to Consolidated Financial Statements I - 6 to I - 17 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition I - 18 to I - 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk I - 27 PART II. OTHER INFORMATION - -------- Item 1. Legal Proceedings II - 1 Item 6. Exhibits and Reports on Form 8-K II - 1
REPORT OF INDEPENDENT ACCOUNTANTS 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, 2002, and the related consolidated statements of operations, of cash flows and of comprehensive income (loss) for each of the three-month periods ended March 31, 2002 and March 31, 2001, and the consolidated statement of shareholder's equity (deficit) for the three-month period ended March 31, 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, 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. Management's intentions with respect to this matter are also described in Note 1. 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of operations, of cash flows, of shareholders' equity (deficit) and of comprehensive (loss) income 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 29, 2002. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland April 23, 2002 I-1
============================================================================================================ W. R. GRACE & CO. AND SUBSIDIARIES THREE MONTHS ENDED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) MARCH 31, ============================================================================================================ Amounts in millions, except per share amounts 2002 2001 ------------------------------------ Net sales........................................................ $ 413.5 $ 395.7 Other income..................................................... 6.3 18.9 ------------------------------------ 419.8 414.6 ------------------------------------ Cost of goods sold, exclusive of depreciation and amortization shown separately below......................................... 261.6 252.4 Selling, general and administrative expenses..................... 91.8 90.8 Research and development expenses ............................... 11.9 10.5 Depreciation and amortization ................................... 22.8 22.5 Interest expense and related financing costs .................... 4.8 9.0 ------------------------------------ 392.9 385.2 ------------------------------------ Income from continuing operations before Chapter 11 reorganization expenses and income taxes...................................... 26.9 29.4 Chapter 11 reorganization expenses, net ......................... (4.4) (2.9) Provision for income taxes....................................... (10.1) (11.9) ------------------------------------ NET INCOME .................................................. $ 12.4 $ 14.6 ============================================================================================================ BASIC EARNINGS PER COMMON SHARE $ 0.19 $ 0.22 Average number of basic shares .................................. 65.4 65.3 DILUTED EARNINGS PER COMMON SHARE................................ $ 0.19 $ 0.22 Average number of diluted shares................................. 65.4 65.3 ============================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. I-2
==================================================================================================================================== W. R. GRACE & CO. AND SUBSIDIARIES THREE MONTHS ENDED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) MARCH 31, ==================================================================================================================================== Dollars in millions 2002 2001 --------------------------------------- OPERATING ACTIVITIES Income before Chapter 11 reorganization expenses and income taxes........................ $ 26.9 $ 29.4 Reconciliation to cash provided by (used for) operating activities: Depreciation and amortization ...................................................... 22.8 22.5 Interest accrued on pre-petition debt subject to compromise......................... 3.4 -- Gain on sales of investments........................................................ -- (7.9) Loss (gain) on disposals of assets.................................................. 0.2 (2.8) Provision for environmental remediation............................................. 3.8 -- Net income from life insurance policies............................................. (2.9) (4.1) Changes in assets and liabilities, excluding effect of businesses acquired and foreign currency transaction: Increase in notes and accounts receivable, net.................................. (9.0) (13.3) Decrease in subordinated interest of accounts receivable sold .................. -- 1.3 Increase in inventories ........................................................ (6.5) (17.9) Decrease in accounts payable ................................................... (14.3) (21.4) Decrease in accrued liabilities ................................................ (10.2) (29.1) Decrease (increase) in net pension assets ...................................... 2.8 (3.2) Expenditures for asbestos-related litigation ................................... (1.5) (103.1) Proceeds from asbestos-related insurance ....................................... 1.0 31.7 Expenditures for environmental remediation ..................................... (3.8) (8.4) Expenditures for postretirement benefits ....................................... (4.6) (5.6) Expenditures for retained obligations of discounted operations ................. (1.0) (5.2) Other .............................................................................. 12.5 (12.2) --------------------------------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES AND CHAPTER 11 REORGANIZATION EXPENSES........................................................ 19.6 (149.3) Chapter 11 reorganization expenses paid, net ............................................ (2.9) (2.9) Income taxes paid, net of refunds ....................................................... (4.6) (6.9) --------------------------------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ............................... 12.1 (159.1) --------------------------------------- INVESTING ACTIVITIES Capital expenditures .................................................................... (13.2) (11.3) Businesses acquired in purchase transactions, net of cash acquired ...................... (25.0) (56.5) Investments in life insurance policies................................................... (12.6) (12.9) Proceeds from life insurance policies ................................................... 6.2 10.6 Proceeds from sales of investments....................................................... -- 7.9 Proceeds from disposals of assets ....................................................... 0.6 3.7 --------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES ............................................. (44.0) (58.5) --------------------------------------- FINANCING ACTIVITIES Proceeds from loans secured by cash value of life insurance, net of repayments........... (2.1) 46.6 Borrowings under non-debtor and pre-petition credit facilities, net of repayments........ (0.4) 99.7 Borrowings under debtor-in-possession facility........................................... 20.0 -- Repayments of borrowings under debtor-in-possession facility............................. (20.0) -- --------------------------------------- NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES ............................... (2.5) 146.3 --------------------------------------- Effect of currency exchange rate changes on cash and cash equivalents ................... (0.6) (4.8) --------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS .............................................. (35.0) (76.1) Cash and cash equivalents, beginning of period .......................................... 181.3 191.9 --------------------------------------- Cash and cash equivalents, end of period ................................................ $ 146.3 $ 115.8 ====================================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. I-3
============================================================================================================================ W. R. GRACE & CO. AND SUBSIDIARIES MARCH 31, DECEMBER 31, CONSOLIDATED BALANCE SHEET (UNAUDITED) 2002 2001 ============================================================================================================================ Amounts in millions, except par value and shares ASSETS CURRENT ASSETS Cash and cash equivalents ......................................................... $ 146.3 $ 181.3 Notes and accounts receivable, net ................................................ 309.0 302.1 Inventories ....................................................................... 180.2 174.8 Deferred income taxes ............................................................. 29.5 22.5 Asbestos-related insurance expected to be realized within one year ................ 8.7 9.7 Other current assets............................................................... 53.0 57.7 -------------------------------------- TOTAL CURRENT ASSETS ......................................................... 726.7 748.1 Properties and equipment, net of accumulated depreciation and amortization of $1,002.7 (2001 - $995.3)...................................... 596.5 589.0 Goodwill .......................................................................... 57.4 55.8 Cash value of life insurance policies, net of policy loans......................... 87.0 75.6 Deferred income taxes ............................................................. 493.7 502.9 Asbestos-related insurance expected to be realized after one year.................. 283.7 283.7 Other assets ...................................................................... 457.2 461.9 -------------------------------------- TOTAL ASSETS ................................................................. $ 2,702.2 $ 2,717.0 ====================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) LIABILITIES NOT SUBJECT TO COMPROMISE CURRENT LIABILITIES Debt payable within one year ...................................................... $ 6.8 $ 7.8 Accounts payable .................................................................. 84.3 99.0 Income taxes payable .............................................................. 15.5 14.4 Other current liabilities ......................................................... 119.9 127.9 -------------------------------------- TOTAL CURRENT LIABILITIES .................................................... 226.5 249.1 Debt payable after one year........................................................ -- -- Deferred income taxes ............................................................. 21.2 20.8 Other liabilities ................................................................. 276.0 275.2 -------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE................................... 523.7 545.1 LIABILITIES SUBJECT TO COMPROMISE - NOTE 2......................................... 2,315.3 2,313.6 -------------------------------------- TOTAL LIABILITIES............................................................. 2,839.0 2,858.7 -------------------------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT) Common stock issued, par value $.01; 300,000,000 shares authorized; outstanding: 2002 - 65,479,000 shares (2001 - 65,399,600) 0.8 0.8 Paid in capital ................................................................... 433.1 433.0 Retained earnings (accumulated deficit)............................................ (125.4) (137.8) Treasury stock, at cost: 2002 - 11,500,800 shares (2001 - 11,500,800).............. (137.0) (137.0) Accumulated other comprehensive loss .............................................. (308.3) (300.7) -------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ......................................... (136.8) (141.7) -------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ......................... $ 2,702.2 $ 2,717.0 ============================================================================================================================
The Notes to Consolidated Financial Statements are an integral part of these statements. I-4
================================================================================================================================ W. R. GRACE & CO. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) ================================================================================================================================ Accumulated TOTAL Common Stock Other SHAREHOLDERS' and Accumulated Treasury Comprehensive EQUITY Dollars in millions Paid in Capital Deficit Stock Loss (DEFICIT) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001........... $ 433.8 $ (137.8) $ (137.0) $ (300.7) $ (141.7) Net income .......................... -- 12.4 -- -- 12.4 Stock plan activity ................. 0.1 -- -- -- 0.1 Other comprehensive loss............. -- -- -- (7.6) (7.6) ---------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2002........... $ 433.9 $ (125.4) $ (137.0) $ (308.3) $ (136.8) ================================================================================================================================
================================================================================================================================= W. R. GRACE & CO. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ================================================================================================================================== Dollars in millions 2002 2001 ------------------ ----------------- NET INCOME............................................................................. $ 12.4 $ 14.6 ------------------ ----------------- OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments............................................... (7.6) (17.8) Net unrealized loss on investment...................................................... -- (0.2) ------------------ ----------------- Total other comprehensive (loss).................................................... (7.6) (18.0) ------------------ ----------------- COMPREHENSIVE INCOME (LOSS)............................................................ $ 4.8 $ (3.4) =================================================================================================================================
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 - -------------------------------------------------------------------------------- W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a worldwide basis. These businesses consist of catalysts and silica products ("Davison Chemicals") and construction chemicals, building materials and sealants and coatings ("Performance Chemicals"). W. R. Grace & Co. conducts substantially all of its business through a direct, wholly owned subsidiary, W. R. Grace & Co.-Conn. ("Grace-Conn."). Grace-Conn. owns substantially all of the assets, properties and rights of W. R. Grace & Co., either directly or through subsidiaries. As used in these notes, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors. VOLUNTARY BANKRUPTCY FILING: In response to a sharply increasing number of asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), W. R. Grace & Co. and 61 of its United States subsidiaries and affiliates, including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The cases were consolidated and are being jointly administered under case number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the Filing. During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in bodily injury claims, higher than expected costs to resolve bodily injury and certain property damage claims, and class action lawsuits alleging damages from a former attic insulation product. (These claims are discussed in more detail in Note 3 to the Consolidated Financial Statements.) After a thorough review of these developments, the Board of Directors of Grace concluded on April 2, 2001 that a federal court-supervised Chapter 11 filing provides 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 is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to realize its pre-petition claims except pursuant to an order of the Bankruptcy Court. The Debtors intend to address all of their pending and future asbestos-related claims and all other pre-petition claims in a plan of reorganization. Such a plan of reorganization may include the establishment of a trust through which all pending and future asbestos-related claims would be channeled for resolution. However, it is currently impossible to predict with any degree of certainty the amount that would be required to be contributed to the trust, how the trust would be funded, how other pre-petition claims would be treated or what impact any reorganization plan may have on the shares of common stock of the Company. The interests of the Company's shareholders could be substantially diluted or cancelled under a plan of reorganization. The formulation and implementation of the plan of reorganization is expected to take a significant period of time. Status of Chapter 11 Proceedings - Since the Filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court. In addition, the Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations in the ordinary course of business, including employee wages and benefits, customer programs, shipping charges and a limited amount of claims of essential trade creditors. As provided by the Bankruptcy Code, the Debtors had the exclusive right to propose a plan of reorganization for a 120-day period following the Filing Date. The Debtors have received an extension of their exclusive period during which to file a plan of reorganization through August 1, 2002, and an extension of the Debtors' exclusive rights to solicit acceptances of a reorganization plan through October 1, 2002. Three creditors' committees, two representing asbestos claimants and the third representing other unsecured I-6 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 (who Grace expects to be appointed by the Bankruptcy Court in the near future), are likely to play important roles in the Chapter 11 Cases. The Debtors are required to bear certain of the committees' and the future asbestos claimants representative's costs and expenses, including those of their counsel and financial advisors. In November 2001, the Debtors' Chapter 11 Cases, as well as the Chapter 11 Cases of four unrelated companies with asbestos-related claims, were assigned to Judge Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. An additional asbestos-related Chapter 11 case was assigned to Judge Wolin in March 2002. Judge Wolin will preside over the asbestos bodily injury matters affecting all six companies and, at his choosing, certain other asbestos-related lawsuits particular to Grace. Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the Western District of Pennsylvania, sitting in Wilmington, Delaware, will preside over the Debtors' other bankruptcy matters. At a hearing on April 22, 2002, the Bankruptcy Court entered an order establishing a bar date of March 31, 2003 for claims of general unsecured creditors, asbestos property damage claims and medical monitoring claims related to asbestos. The bar date does not apply to asbestos-related bodily injury claims or claims related to Zonolite(R) attic insulation, which will be addressed separately. In addition, a trial to determine whether the 1998 transaction involving Grace's former packaging business and Sealed Air Corporation constituted a fraudulent conveyance was set for September 30, 2002. Impact on Debt Capital - All of the Debtors' pre-petition debt is now in default due to the Filing. The accompanying Consolidated Balance Sheet as of March 31, 2002 reflects the classification of the Debtors' pre-petition debt within "Liabilities subject to compromise." The Debtors have entered into a debtor-in-possession post-petition loan and security agreement with Bank of America, N.A. (the "DIP facility") in the aggregate amount of $250 million. The DIP facility has a term expiring in April 2003 and bears interest under a formula based on the London Inter-Bank Offered Rate ("LIBOR") rate plus 2.00 to 2.25 percentage points depending on the level of loans outstanding. 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 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, 2002, such pre-petition liabilities include fixed obligations (such as debt and contractual commitments) as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation and other claims.) The recorded amounts of such liabilities generally reflect accounting measurements as of the Filing Date adjusted, as warranted, for changes in facts and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the Consolidated Financial Statements for detail of the "Liabilities subject to compromise" as of March 31, 2002, and as of the Filing Date.) Obligations of Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. 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 2001 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 I-7 adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three month interim period ended March 31, 2002 are not necessarily indicative of the results of operations for the year ending December 31, 2002. RECLASSIFICATIONS: Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the 2002 presentation. ADOPTION OF NEW ACCOUNTING STANDARDS: Grace adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), on January 1, 2002. In accordance with SFAS No. 142, Grace ceased the amortization of goodwill on January 1, 2002. The pro forma impact of applying the new non-amortization provisions of SFAS No. 142 in the first quarter of 2001 was $0.1 million, which had no impact on either basic or diluted earnings per share. SFAS No. 142 requires that goodwill and indefinite life intangible assets be tested for impairment on an annual basis. For purposes of measuring impairment under the provisions of SFAS No. 142, Grace has identified its reporting units as catalyst products, silica products, speciality construction chemicals, specialty building materials and specialty sealants and coatings. In connection with the adoption of SFAS No. 142, Grace is currently evaluating its goodwill and other intangible assets that have indefinite useful lives, and anticipates that this evaluation will not result in an impairment charge. This assessment will be completed by June 30, 2002. In October 2001 issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and expands the scope of discontinued operations. Grace adopted SFAS No. 144 on January 1, 2002. The adoption did not have a material effect on its financial statements. USE OF ESTIMATES: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and assumptions affecting the assets and liabilities (including contingent 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. Grace's accounting measurements that are most affected by management's estimates of future events are: o Contingent liabilities such as asbestos-related matters, environmental remediation, tax exposures and retained obligations of divested businesses. o Pension and postretirement liabilities that depend on assumptions regarding discount rates and total returns on invested funds. o Depreciation and amortization periods for long-lived assets, including property and equipment and intangibles. o Realization values of various assets such as receivables, inventories, goodwill, insurance and tax attributes. The accuracy of these and other estimates may also be materially affected by the uncertainties arising under the Chapter 11 Cases. - -------------------------------------------------------------------------------- 2. CHAPTER 11 RELATED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- As a result of the Filing, Grace's Consolidated Balance Sheet as of March 31, 2002 separately identifies the liabilities that are "subject to compromise" as a result of the Chapter 11 proceedings. In Grace's case, "Liabilities subject to compromise" represent pre-petition liabilities as determined under U.S. generally accepted accounting principles. Changes to the recorded amount of such liabilities will be based on developments in the Chapter 11 Cases and management's assessment of the claim amounts that will ultimately be allowed by the Bankruptcy Court. Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1) cash payments under approved court orders; 2) the accrual of interest on pre-petition debt at the pre-petition contractual rate; 3) accruals for employee-related programs; and 4) changes in estimates related to pre-petition contingent liabilities and assets. Components of Liabilities subject to compromise are as follows: ================================================================ MARCH 31, Filing Date (Dollars in millions) 2002 ================================================================ Debt, pre-petition plus accrued interest......... $ 527.7 $ 511.5 Accounts payable........... 32.2 43.0 Income taxes payable....... 218.3 210.1 Asbestos-related liability. 994.9 1,002.8 Other postretirement benefits................. 165.1 185.4 Environmental remediation............. 152.9 164.8 Retained obligations of divested businesses...... 81.8 75.5 Pension related............ 76.0 70.8 Other accrued liabilities.. 66.4 102.1 -------------------------------- $ 2,315.3 $ 2,366.0 ================================================================ I-8 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, 2002. ================================================================ Cumulative (Dollars in millions) 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........... (8.4) Other court orders including employee wages and benefits, sales and use tax and customer programs....................... (87.4) Expense/(income) items: Interest on pre-petition debt.......... 24.3 Adjustments to employment-related accruals............................. 12.2 Environmental accruals................. 9.6 Interest on income tax contingencies... 9.7 Balance sheet reclassifications........... (3.3) ----------------- Balance, end of period.................... $ 2,317.0 ================================================================ Pre-Filing Date liabilities allowable under court orders............................ $ 1.7 Pre-Filing Date liabilities subject to compromise.............................. $ 2,315.3 ================================================================ Pre-Filing Date obligations allowable under current court orders and expected to be paid prior to an adopted plan of reorganization are classified as "Liabilities not subject to compromise." Additional liabilities subject to compromise may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. The Debtors recorded Chapter 11 reorganization expenses for three months ended March 31, 2002 consisting of: ================================================================ THREE MONTHS ENDED MARCH 31, (Dollars in millions) 2002 ================================================================ Legal and financial advisory fees.......... $ 4.5 Interest income............................ (0.1) ----------------- Chapter 11 reorganization expenses, net.... $ 4.4 ================================================================ Pursuant to SOP 90-7, interest income earned on the Debtors' cash balances must be offset against reorganization expenses. Condensed financial information of the Debtors is presented below: =============================================================== W. R. GRACE & CO. - CHAPTER 11 FILING JANUARY 1, ENTITIES 2002 TO DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS MARCH 31, (Dollars in millions) 2002 =============================================================== Net sales, including intercompany............ $ 236.0 Other income................................. 14.0 --------------- 250.0 --------------- Cost of goods, including intercompany, exclusive of depreciation and amortization shown separately below.................... 150.5 Selling, general and administrative expenses. 63.9 Research and development expenses............ 10.1 Depreciation and amortization ............... 15.1 Interest expense and related financing costs. 4.6 --------------- 244.2 --------------- Income before Chapter 11 reorganization expenses, income taxes, and equity in net income of non-filing entities............. 5.8 Chapter 11 reorganization expenses, net ..... (4.4) Provision for income taxes .................. (4.1) Equity in net income of non-filing entities . 15.1 --------------- NET INCOME ............................... $ 12.4 =============================================================== =============================================================== W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES JANUARY 1, 2002 DEBTOR-IN-POSSESSION CONDENSED STATEMENT OF TO CASH FLOWS MARCH 31, (Dollars in millions) 2002 =============================================================== OPERATING ACTIVITIES Net income................................... $ 12.4 Reconciliation to net cash provided by (used for) operating activities: Non-cash items, net........................ 18.9 Increase in accounts receivable due to termination of securitization program.... -- Decrease in subordinated interest of accounts receivable sold................. -- Changes in other assets and liabilities, excluding the effect of businesses acquired................................. (33.3) ---------------- NET CASH USED FOR OPERATING ACTIVITIES.... (2.0) NET CASH USED FOR INVESTING ACTIVITIES..... (15.6) NET CASH USED FOR FINANCING ACTIVITIES..... (6.4) ---------------- NET DECREASE IN CASH AND CASH EQUIVALENTS.. (24.0) Cash and cash equivalents, beginning of period 38.0 ---------------- Cash and cash equivalents, end of period..... $ 14.0 =============================================================== I-9 =============================================================== W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES DEBTOR-IN-POSSESSION BALANCE SHEET MARCH 31, (Dollars in millions) 2002 =============================================================== ASSETS CURRENT ASSETS Cash and cash equivalents .................. $ 14.0 Notes and accounts receivable, net ......... 126.6 Receivables from non-filing entities, net .. 34.6 Inventories ................................ 85.7 Other current assets........................ 81.1 ---------------- TOTAL CURRENT ASSETS .................... 342.0 Properties and equipment, net............... 380.3 Cash value of life insurance policies, net of policy loans...................... 87.0 Deferred income taxes ...................... 493.4 Asbestos-related insurance expected to be realized after one year.................. 283.7 Loans receivable from non-filing entities, net ..................................... 385.0 Investment in non-filing entities .......... 170.4 Other assets ............................... 335.4 ---------------- TOTAL ASSETS ............................ $ 2,477.2 =============================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) LIABILITIES NOT SUBJECT TO COMPROMISE Current liabilities ........................ $ 72.3 Debt payable within one year ............... 1.5 Other liabilities .......................... 224.9 ---------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 298.7 LIABILITIES SUBJECT TO COMPROMISE .......... 2,315.3 ---------------- TOTAL LIABILITIES........................ 2,614.0 SHAREHOLDERS' EQUITY (DEFICIT) .......... (136.8) ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ...................... $ 2,477.2 =============================================================== In addition to Grace's financial reporting obligations as prescribed by the U.S. Securities and Exchange Commission ("SEC"), the Debtors are also required, under the rules and regulations under 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. On April 2, 2001, Grace filed voluntary petitions for reorganization under Chapter 11 to use the court-supervised reorganization process to achieve predictability and fairness in the claims settlement process. See Note 1 for further discussion. As of the Filing Date, Grace was a defendant in 65,656 asbestos-related lawsuits, 16 involving claims for property damage (one of which has since been dismissed), and the remainder involving 129,191 claims for bodily injury. Due to the Filing, holders of asbestos-related claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Debtors. Additional asbestos-related claims are expected to be filed as part of the Chapter 11 claims process. Separate creditors' committees representing the interests of property damage and bodily injury claimants have been appointed in the Chapter 11 Cases. Grace's obligations with respect to present and future claims will be determined through proceedings in the Bankruptcy Court and through negotiations with each of the official committees appointed in the Chapter 11 Cases and a legal representative of future asbestos claimants, which is expected to provide the basis for a plan of reorganization. PROPERTY DAMAGE LITIGATION The plaintiffs in property damage lawsuits generally seek to have the defendants absorb the cost of removing, containing or repairing the asbestos-containing materials in the affected buildings. Each property damage case is unique in that the age, type, size and use of the building, and the difficulty of asbestos abatement, if necessary, vary from structure to structure. Information regarding product identification, the amount of product in the building, the age, type, size and use of the building, the jurisdictional history of prior cases and the court in which the case is pending has provided meaningful guidance as to the range of potential costs. Grace has recorded an accrual for all outstanding property damage cases for which sufficient information is available to form a reasonable estimate of such exposure. Through March 31, 2002, out of 379 asbestos property damage cases filed, 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 seven cases for a total of $60.3 million; 207 property damage cases were settled for a total of $696.8 million; and 15 cases remain outstanding. Grace may receive additional asbestos property damage claims as part of its Chapter 11 proceeding. I-10 Of the 15 remaining cases, seven relate to a former attic insulation product and eight relate to a number of former asbestos-containing products (two of which also involve such attic insulation product). The attic insulation cases were filed as class action lawsuits in 2000 and 2001 on behalf of owners of homes containing Zonolite attic insulation. 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. These cases are expected to be heard by the Bankruptcy Court within the next year. While Grace has not completed its investigation of the claims described in these cases, Grace believes that this product was and continues to be safe for its intended purpose and poses little or no threat to human health. At this time, Grace is not able to assess the extent of any possible liability related to this matter. BODILY INJURY LITIGATION Bodily injury claims are generally similar to each other (differing primarily in the type of asbestos-related illness allegedly suffered by the plaintiff). However, Grace's estimated liability for such claims has been influenced by numerous variables, including the solvency of other former asbestos producers, cross-claims by co-defendants, the rate at which new claims are filed, the jurisdiction in which the claims are filed, and the defense and disposition costs associated with these claims. Grace's bodily injury liability reflects management's estimate, as of the Filing Date, of the number and ultimate cost of present and future bodily injury claims expected to be asserted against Grace given demographic assumptions of possible exposure to asbestos containing products previously manufactured by Grace. Through the Filing Date, 16,354 asbestos bodily injury lawsuits involving approximately 35,720 claims were dismissed without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved), and approximately 55,489 lawsuits involving approximately 163,698 claims were disposed of (through settlement and judgments) for a total of $645.6 million. ASBESTOS-RELATED LIABILITY Since litigation is stayed by the Chapter 11 Cases, ongoing costs are generally limited to claims administration costs and to defense costs incurred in connection with litigation permitted by the Bankruptcy Court. Any other adjustments to the recorded liability will be based on developments in the Chapter 11 Cases. For periods prior to and as of the Filing Date, Grace's estimated property damage and bodily injury liabilities were based on its experience with, and recent trends in, asbestos litigation. Its recorded liabilities covered indemnity and defense costs for pending property damage cases and for pending and projected future bodily injury claims. No change has been made to the pre-filing asbestos-related liability except to record the payment of normal post-filing administrative costs primarily related to claims processing. However, due to the Filing and the uncertainties of asbestos-related litigation, actual amounts could differ materially from the recorded liability. The total asbestos-related liability balances as of March 31, 2002 and December 31, 2001 were $994.9 million and $996.3 million, respectively. As of March 31, 2002, the asbestos-related liability was included in "Liabilities subject to compromise." ASBESTOS INSURANCE Grace previously purchased insurance policies that cover a portion of 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 attic insulation claims as well as other property damage claims. In addition, Grace believes that additional coverage for attic insulation claims may exist under excess insurance policies not subject to settlement agreements. Grace has settled with excess insurance carriers that wrote policies available for bodily injury claims in layers of insurance that Grace believes may be reached based on its current estimates. 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 liability and are considered to be collectible. I-11 =============================================================== ESTIMATED INSURANCE RECOVERY ON ASBESTOS-RELATED LIABILITIES (Dollars in millions) =============================================================== INSURANCE RECEIVABLE Asbestos-related insurance receivable, beginning of year........................ $ 293.4 Proceeds received under asbestos-related insurance settlements ................... (1.0) - --------------------------------------------------------------- Asbestos-related insurance receivable, end of quarter............................ 292.4 - --------------------------------------------------------------- Total amounts due from insurance carriers . 292.4 Expected to be realized within one year ... (8.7) - --------------------------------------------------------------- Expected to be realized after one year .... $ 283.7 =============================================================== - -------------------------------------------------------------------------------- 4. ACQUISITIONS - -------------------------------------------------------------------------------- In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst manufacturing assets of Borealis A/S. In March 2002, Grace acquired the business and assets of Addiment, Incorporated, a leading supplier of specialty chemicals to the concrete paver and masonry industries in the U.S. and Canada. Proforma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or aggregate basis. - -------------------------------------------------------------------------------- 5. OTHER INCOME - -------------------------------------------------------------------------------- Components of other income are as follows: =============================================================== OTHER INCOME THREE MONTHS ENDED (Dollars in millions) MARCH 31, =============================================================== 2002 2001 ---------------------- Investment income.................... $ 2.9 $ 4.1 Gain on sale of investments.......... -- 7.9 Net (losses) gains on dispositions of assets.............................. (0.2) 2.8 Tolling revenue...................... 0.5 0.6 Interest income...................... 0.8 1.8 Equity in net losses of affiliates... (1.0) (0.4) Other miscellaneous income .......... 3.3 2.1 - --------------------------------------------------------------- Total other income................... $ 6.3 $18.9 =============================================================== - -------------------------------------------------------------------------------- 6. OTHER BALANCE SHEET ACCOUNTS - -------------------------------------------------------------------------------- ================================================================ MARCH 31, December 31, (Dollars in millions) 2002 2001 - ---------------------------------------------------------------- NOTES AND ACCOUNTS RECEIVABLE, NET Trade receivables, less allowances of $4.6 (2001 - $5.7)............... $ 286.1 $ 276.4 Other receivables, less allowances of $1.7 (2001 - $1.9)............... 22.9 25.7 ----------- ----------- $ 309.0 $ 302.1 ================================================================ INVENTORIES Raw materials ...................... $ 42.1 $ 39.2 In process ......................... 33.4 27.6 Finished products .................. 105.3 108.1 General merchandise ................ 25.5 25.8 Less: Adjustment of certain inventories to a last-in/first-out (LIFO) basis ..................... (26.1) (25.9) ----------- ----------- $ 180.2 $ 174.8 ================================================================ OTHER ASSETS Deferred pension costs............. $ 323.2 $ 326.1 Deferred charges .................. 42.6 44.9 Long-term receivables, less allowances of $0.6 (2001 - $0.6). 2.8 2.8 Investments in unconsolidated affiliates....................... 2.5 3.0 Patents, licenses and other intangible assets, net .......... 86.1 85.1 ----------- ----------- $ 457.2 $ 461.9 ================================================================ OTHER CURRENT LIABILITIES Accrued compensation .............. $ 33.2 $ 39.4 Accrued interest .................. 4.8 4.8 Deferred tax liability ............ 0.9 0.8 Customer volume rebates ........... 10.5 19.2 Accrued commissions ............... 4.7 6.1 Accrued reorganization fees ....... 7.7 6.4 Other accrued liabilities ......... 58.1 51.2 ----------- ----------- $ 119.9 $ 127.9 ================================================================ OTHER LIABILITIES Pension related ................... $ 266.8 $ 266.5 Other accrued liabilities ......... 9.2 8.7 ----------- ----------- $ 276.0 $ 275.2 ================================================================ - -------------------------------------------------------------------------------- 7. LIFE INSURANCE - -------------------------------------------------------------------------------- Grace is the beneficiary of life insurance policies on certain current and former employees with benefits in force of approximately $2,288.5 million and a net cash surrender value of $87.0 million at March 31, 2002. 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 each of the three months ended March 31, 2002 and 2001, and components of the net cash value of such policies at March 31, 2002 and December 31, 2001: I-12 ============================================================ LIFE INSURANCE - ACTIVITY SUMMARY THREE MONTHS ENDED (Dollars in millions) MARCH 31, ============================================================ 2002 2001 -------------- -------------- Earnings on policy assets. $ 11.6 $ 11.9 Interest on policy loans.. (8.7) (7.8) Premiums.................. -- -- Proceeds from policy loans -- (48.7) Policy loan repayments.... 2.1 2.1 Net investing activity.... 6.4 2.3 ----------------------------- Change in net cash value $ 11.4 $ (40.2) ============================================================ Tax-free proceeds received $ 6.2 $ 10.6 ============================================================ COMPONENTS OF MARCH 31, December 31, NET CASH VALUE 2002 2001 ============================================================ Gross cash value........... $ 482.9 $ 477.5 Principal - policy loans... (375.5) (377.6) Accrued interest - policy loans.................... (20.4) (24.3) ----------------------------- Net cash value.......... $ 87.0 $ 75.6 ============================================================ Insurance benefits in force $ 2,288.5 $ 2,291.0 ============================================================ 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. - -------------------------------------------------------------------------------- 8. DEBT - -------------------------------------------------------------------------------- On March 31, 2002, and December 31, 2001, Grace's debt was as follows: ============================================================== COMPONENTS OF DEBT MARCH 31, December 31, (Dollars in millions) 2002 2001 ============================================================== DEBT PAYABLE WITHIN ONE YEAR Bank borrowings............ $ -- $ -- Other short-term borrowings 6.8 7.8 ------------------------------ $ 6.8 $ 7.8 ============================== DEBT PAYABLE AFTER ONE YEAR DIP facility .............. $ -- -- Other long-term borrowings $ -- -- ------------------------------ $ -- $ -- ============================== DEBT SUBJECT TO COMPROMISE Bank borrowings ........... $ 500.0 $ 500.0 Other borrowings .......... 1.1 1.3 Accrued interest .......... 26.6 23.2 ------------------------------ $ 527.7 $ 524.5 ------------------------------ Full-year weighed average interest rates on total debt .................... 2.7% 5.8% ============================================================== In April 2001, the Debtors entered into a debtor-in-possession post-petition loan and security agreement with Bank of America, N.A. (the "DIP facility") in the aggregate amount of $250 million. The DIP facility has a term of two years, is secured by a priority lien on substantially all assets of the Debtors, and bears interest based on the London Inter-Bank Offered Rate (LIBOR) plus 2.00 to 2.25 percentage points. As of March 31, 2002 Grace had no outstanding borrowings under the DIP facility. However, $11.7 million of standby letters of credit were issued under the facility as of March 31, 2002. The letters of credit, which reduce available funds under the facility, were issued mainly for trade-related matters such as performance bonds, as well as certain insurance and environmental matters. - -------------------------------------------------------------------------------- 9. SHAREHOLDERS' EQUITY (DEFICIT) - -------------------------------------------------------------------------------- The Company is authorized to issue 300,000,000 shares of common stock. Of the common stock unissued on March 31, 2002, approximately 12,634,096 shares were reserved for issuance pursuant to stock option and other stock incentive plans. In the first three months of 2002, the Company did not grant any stock options. For the year ended December 31, 2001, the Company granted a total of 1,339,846 options with an average exercise price of $2.53. In May 2000, the Company's Board of Directors approved a program to repurchase up to 12,000,000 of the Company's outstanding shares in the open market. The Company made no purchases during the first three months of 2002. For additional information, see Notes 16 and 18 to the Consolidated Financial Statements in the 2001 Form 10-K. - -------------------------------------------------------------------------------- 10. EARNINGS PER SHARE - -------------------------------------------------------------------------------- The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share. ============================================================== EARNINGS PER SHARE (Amounts in millions, except per THREE MONTHS ENDED share amounts) MARCH 31, ============================================================== 2002 2001 --------------------------- NUMERATORS Net income .................... $ 12.4 $ 14.6 =========================== DENOMINATORS Weighted average common shares - basic calculation ........... 65.4 65.3 Effect of dilutive securities: Employee compensation-related shares....................... -- -- --------------------------- Weighted average common shares diluted calculation............ 65.4 65.3 =========================== BASIC EARNINGS PER SHARE $ 0.19 $ 0.22 =========================== DILUTED EARNINGS PER SHARE $ 0.19 $ 0.22 ============================================================== I-13 - -------------------------------------------------------------------------------- 11. COMPREHENSIVE INCOME (LOSS) - -------------------------------------------------------------------------------- The tables below present the pre-tax, tax and after-tax components of Grace's other comprehensive loss for the three months ended March 31, 2002 and 2001: ============================================================= THREE MONTHS ENDED After- MARCH 31, 2002 Pre-tax Tax Tax (Dollars in millions) Amount Benefit Amount ============================================================= Foreign currency translation adjustments. $ (7.6) -- $(7.6) --------------------------------- Other comprehensive loss.. $ (7.6) $ -- $(7.6) ============================================================= ============================================================= Three Months Ended After- March 31, 2001 Pre-tax Tax Tax (Dollars in millions) Amount Benefit Amount ============================================================= Unrealized losses on security................ $ (0.2) $ 0.1 $ (0.1) Reclassification adjustment for gains realized in net income.. (0.2) 0.1 (0.1) --------------------------------- Net unrealized loss....... (0.4) 0.2 (0.2) Foreign currency translation adjustments. (17.8) -- (17.8) --------------------------------- Other comprehensive loss.. $ (18.2) $ 0.2 $ (18.0) ============================================================= The table below presents the components of Grace's accumulated other comprehensive loss at March 31, 2002 and December 31, 2001: ============================================================= COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS MARCH 31, December 31, (Dollars in millions) 2002 2001 ============================================================= Foreign currency translation adjustments ............. $(172.3) $(164.7) Minimum pension liability adjustments ............. (136.0) (136.0) ---------------------------- Total accumulated other comprehensive loss....... $(308.3) $(300.7) ============================================================= - -------------------------------------------------------------------------------- 12. 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 investigatory and remediation efforts where an assessment has indicated that a probable liability has been incurred and the amount of loss can be reasonably estimated. These accruals do not take into account any discounting for the time value of money. At March 31, 2002, Grace's liability for environmental investigatory and remediation costs related to continuing and discontinued operations totaled $152.9 million, as compared to $153.1 million at December 31, 2001. Grace made cash payments in the first three months of 2002 and 2001 of $3.8 million and $8.4 million, respectively, to remediate environmentally impaired sites. These amounts have been charged against previously established reserves. In the first quarter of 2002, Grace recorded a pre-tax charge of $3.8 million, primarily for remediation and defense costs at previously operated vermiculite mining and processing sites. The environmental risks related to Grace's former vermiculite mining and processing activities could result in material future charges to Grace's earnings, the amounts of which are not currently determinable. (See discussion under "Vermiculite Related Matters" below.) Grace's environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated. These liabilities are evaluated based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties. Grace expects that the funding of environmental remediation activities will be affected by the Chapter 11 proceedings, but cannot predict at this time if such proceedings will have a favorable or adverse effect; any such effect could be material. Grace's environmental liabilities are included in "Liabilities subject to compromise" as of March 31, 2002. Vermiculite Related Matters In November 1999, the U.S. Environmental Protection Agency ("EPA") began an investigation into alleged excessive levels of asbestos-related disease related to Grace's former vermiculite mining activities in the Libby, Montana area. 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 evacuation and removal of contaminated soil, health screening of Libby residents and former mine I-14 workers, and investigation and monitoring costs. In this action, the United States is also seeking a declaration of Grace's liability that would be binding in future actions to recover further response costs. The EPA has reported that it has spent approximately $25.4 million in response costs in and around Libby through June 2001. As Libby is expected to be added to EPA's National Priorities List of Superfund sites, Grace expects that the EPA may incur significant additional response costs, but is unable to estimate the amount at this time. Grace intends to review the EPA's actions and cost claims to determine whether they are justified and reasonable. This lawsuit is not subject to the automatic stay provided under the U.S. Bankruptcy Code and is expected to be tried during the first quarter of 2003. However, recovery of any response costs would be subject to the Chapter 11 proceedings. In February 2000, a purported class action lawsuit was filed in the U.S. District Court in Missoula, Montana against Grace on behalf of all owners of improved, private real property situated within 12 miles of Libby, Montana. The action alleges that the class members have suffered harm in the form of environmental contamination and loss of property rights resulting from Grace's former vermiculite mining and processing operations. The complaint seeks remediation, property damages and punitive damages. In October 2000, a purported class action lawsuit was filed in the U.S. District Court for Minnesota against Grace on behalf of all owners of real property situated near a former vermiculite processing plant in northeast Minneapolis. The action alleges that the class members have suffered harm in the form of environmental contamination and loss of property rights resulting from the former vermiculite processing operations. The complaint seeks remediation, property damages, and punitive damages. Grace has not completed its investigation of these claims, and, therefore, is not able to assess the extent of any possible liability related to these lawsuits. These cases have been stayed as a result of the Filing. 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 The Internal Revenue Service (IRS) is challenging deductions of interest on loans secured by corporate owned life insurance (COLI) policies for years prior to January 1, 1999. In 2000, Grace paid $21.2 million of tax and interest related to this issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted approximately $163.2 million in interest attributable to COLI policy loans. Grace filed a claim for refund of the amount paid to date and will contest any future IRS assessments on the grounds that these insurance policies and related loans had, and continue to have a valid business purpose, that the COLI policies have economic substance and that interest deductions claimed were in compliance with tax laws in effect at the time. Grace has accrued for potential tax and interest liability related to the likely challenge of this tax position and continues to accrue interest as part of the quarterly tax provision The IRS also has assessed additional federal income tax withholding and Federal Insurance Contributions Act taxes plus interest and related penalties for calendar years 1993 through 1995 against a Grace subsidiary that formerly operated a temporary staffing business for nurses and other healthcare personnel. The assessments, aggregating $21.8 million, were made in connection with a meal and incidental expense per diem plan for travelling healthcare personnel, which was in effect through 1999. The IRS contends that certain per diem reimbursements should have been treated as wages subject to employment taxes and federal income tax withholding. Grace contends that its per diem and expense allowance plans were in accordance with statutory and regulatory requirements, as well as other published guidance from the IRS. Grace expects that the IRS will make additional assessments for the 1996 through 1999 periods. The matter is currently pending in the U.S. Court of Claims. Grace has received notification from a foreign taxing authority assessing tax deficiencies plus interest relating to the purchase and sale of foreign bonds in 1989 and 1990. This assessment, totaling $10.5 million, is related to the Bekaert Group, which Grace sold in 1991 but as to which Grace retained liability for tax deficiencies attributable to tax periods prior to the sale. The matter is currently before the foreign authorities, but no decision has been rendered. As a result of Grace's Chapter 11 filing, certain tax matters related to open tax years, including COLI interest deductions, could become the direct obligations of predecessor companies that now own Grace's former healthcare and packaging businesses. I-15 One or both of these companies could be directly liable to tax authorities for Grace's tax deficiencies. Pursuant to agreements relating to each transaction, Grace may be required to indemnify both parties for taxes relating to periods prior to the closing of such transactions. Any indemnification obligation that arises as a result of these matters would be a pre-petition liability subject to the Chapter 11 proceedings. FRAUDULENT TRANSFERS The Company and one of its subsidiaries have been named in purported class action suits alleging that the 1996 reorganization involving a predecessor of Grace and Fresenius A.G. and the 1998 reorganization involving a predecessor of Grace and Sealed Air Corporation were fraudulent transfers. The suits are alleged to have been brought on behalf of all individuals who then had lawsuits on file asserting personal injury or wrongful death claims against any of the defendants. The other defendants in the suits have all asserted claims against Grace for indemnification. Grace believes that the suits are without merit. These lawsuits have been stayed as a result of Grace's Chapter 11 filing. However, fraudulent transfer claims related to the Sealed Air transaction are expected to be heard by the Bankruptcy Court commencing on September 30, 2002. 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 the Company's operations or financial condition. FINANCIAL ASSURANCES At March 31, 2002, Grace had gross financial assurances issued and outstanding of $247.3 million, comprised of $135.2 million of gross surety bonds issued by various insurance companies and $112.1 million of standby letters of credit issued by various banks. Of the standby letters of credit, $29.4 million act as collateral for surety bonds, thereby reducing Grace's overall obligations under its financial assurances to a net $217.9 million. These financial assurances were established for a variety of purposes, including insurance and environmental matters, asbestos settlements and appeals, trade-related commitments and other matters. Of the net amount of $217.9 million of financial assurances, approximately $9.4 million were issued by non-Debtor entities and $222.5 million were issued by the Debtors. Of the amounts issued by the Debtors, approximately $196.8 million were issued before the Filing Date, with the remaining $11.7 million being issued under the DIP facility subsequent to the Filing. ACCOUNTING FOR CONTINGENCIES Although the outcome of each of the matters discussed above cannot be predicted with certainty, Grace has assessed its risk and has made accounting estimates as required under U.S. generally accepted accounting principles. As a result of the Filing, claims related to the items discussed above will be addressed as part of Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have been included in "Liabilities subject to compromise" on the accompanying Consolidated Balance Sheet as of March 31, 2002. The amounts of these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts recorded by Grace at March 31, 2002. - -------------------------------------------------------------------------------- 13. BUSINESS SEGMENT INFORMATION - -------------------------------------------------------------------------------- The table below presents information related to Grace's business segments for each of the three months ended March 31, 2002 and 2001. 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. Pre-tax operating income for Davison Chemicals includes Grace's equity income in Advanced Refining Technologies LLC ("ART"), a hydroprocessing joint venture between Grace and Chevron Products Company, a unit of ChevronTexaco, Inc. For further information concerning ART, refer to Note 6 to the Consolidated Financial Statements in the 2001 Form 10-K. ============================================================= BUSINESS SEGMENT DATA THREE MONTHS ENDED (Dollars in millions) MARCH 31, ============================================================= 2002 2001 --------------------------- NET SALES Davison Chemicals............ $ 215.4 $ 198.4 Performance Chemicals........ 198.1 197.3 --------------------------- TOTAL........................ $ 413.5 $ 395.7 PRE-TAX OPERATING INCOME Davison Chemicals............ $ 26.9 $ 24.3 Performance Chemicals........ 19.6 17.8 --------------------------- TOTAL........................ $ 46.5 $ 42.1 ============================================================= I-16 The table below presents information related to the geographic areas in which Grace operated for each of the three months ended March 31, 2002 and 2001. ============================================================= GEOGRAPHIC AREA DATA THREE MONTHS ENDED (Dollars in millions) MARCH 31, ============================================================= 2002 2001 --------------------------- NET SALES United States.............. $ 192.1 $ 199.0 Canada and Puerto Rico..... 12.1 8.5 Europe..................... 123.8 107.6 Asia Pacific............... 60.0 54.1 Latin America.............. 25.5 26.5 --------------------------- TOTAL........................ $ 413.5 $ 395.7 ============================================================= The pre-tax operating income for Grace's business segments for each of the three months ended March 31, 2002 and 2001 is reconciled below to income before Chapter 11 reorganization expenses and income taxes presented in the accompanying Consolidated Statement of Operations. ============================================================== RECONCILIATION OF BUSINESS SEGMENT DATA TO FINANCIAL STATEMENTS THREE MONTHS ENDED (Dollars in millions) MARCH 31, ============================================================== 2002 2001 --------------------------- Pre-tax operating income - business segments........... $ 46.5 $ 42.1 Interest expense and related financing costs............. (4.8) (9.0) Interest income............... 0.8 1.8 Corporate operating costs..... (12.7) (13.1) Other, net.................... (2.9) 7.6 --------------------------- Income before Chapter 11 reorganization expenses and income taxes................ $ 26.9 $ 29.4 ============================================================== I-17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DESCRIPTION OF BUSINESS - -------------------------------------------------------------------------------- Grace is engaged in specialty chemicals and specialty materials businesses on a global basis. Its business segments are Davison Chemicals, which produces catalysts and silica products, and Performance Chemicals, which produces construction chemicals, building materials and sealants and coatings. - -------------------------------------------------------------------------------- VOLUNTARY BANKRUPTCY FILING - -------------------------------------------------------------------------------- In response to a sharply increasing number of asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), the Company and 61 of its United States subsidiaries and affiliates, including W. R. Grace & Co.-Conn. (collectively, the "Debtors"), filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The cases were consolidated and are being jointly administered under case number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the Filing. During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in bodily injury claims, higher than expected costs to resolve bodily injury and certain property damage claims, and class action lawsuits alleging damages from a former attic insulation product. (These claims are discussed in more detail in Note 3 to the Consolidated Financial Statements.) After a thorough review of these developments, the Board of Directors of Grace concluded on April 2, 2001 that a federal court-supervised Chapter 11 filing provides 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 is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to realize its pre-petition claims except pursuant to an order of the Bankruptcy Court. The Debtors intend to address all of their pending and future asbestos-related claims and all other pre-petition claims in a plan of reorganization. Such a plan of reorganization may include the establishment of a trust, through which all pending and future asbestos-related claims would be channeled for resolution. However, it is currently impossible to predict with any degree of certainty the amount that would be required to be contributed to the trust, how the trust would be funded, how other pre-petition claims would be treated or what impact any reorganization plan may have on the shares of common stock of the Company. The interests of the Company's shareholders could be substantially diluted or cancelled under a plan of reorganization. The formulation and implementation of the plan of reorganization is expected to take a significant period of time. Status of Chapter 11 Proceedings - Since the Filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court. In addition, the Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations in the ordinary course of business, including employee wages and benefits, customer programs, shipping charges and a limited amount of claims of essential trade creditors. As provided by the Bankruptcy Code, the Debtors had the exclusive right to propose a plan of reorganization for a 120-day period following the Filing Date. The Debtors have received an extension of their exclusive period during which to file a plan of reorganization through August 1, 2002, and an extension of the Debtors' exclusive rights to solicit acceptances of a reorganization plan through October 1, 2002. 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 (who Grace expects to be appointed by the Bankruptcy Court in the near future), are likely to play important roles in the Chapter 11 Cases. The Debtors are required to bear certain of the committees' and the future asbestos claimants representative's costs and expenses, including those of their counsel and financial advisors. I-18 In November 2001, the Debtors' Chapter 11 Cases, as well as the Chapter 11 Cases of four unrelated companies with asbestos-related claims, were assigned to Judge Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. An additional asbestos-related Chapter 11 case was assigned to Judge Wolin in March 2002. Judge Wolin will preside over the asbestos bodily injury matters affecting all six companies and, at his choosing, certain other asbestos-related lawsuits particular to Grace. Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the Western District of Pennsylvania, sitting in Wilmington, Delaware, will preside over the Debtors' other bankruptcy matters. At a hearing on April 22, 2002 the Bankruptcy Court entered an order establishing a bar date of March 31, 2003 for claims of general unsecured creditors, asbestos property damage claims and medical monitoring claims related to asbestos. The bar date does not apply to asbestos-related bodily injury claims or claims related to Zonolite(R) attic insulation, which will be addressed separately. In addition, a trial to determine whether the 1998 transaction involving Grace's former packaging business and Sealed Air Corporation constituted a fraudulent conveyance was set for September 30, 2002. Impact on Debt Capital - All of the Debtors' pre-petition debt is now in default due to the Filing. The accompanying Consolidated Balance Sheet as of March 31, 2002 reflects the classification of the Debtors' pre-petition debt within "Liabilities subject to compromise." The Debtors have entered into a debtor-in-possession post-petition loan and security agreement with Bank of America, N.A. (the "DIP facility") in the aggregate amount of $250 million. The DIP facility has a term expiring in April 2003 and bears interest under a formula based on the London Inter-Bank Offered Rate ("LIBOR") rate plus 2.00 to 2.25 percentage points depending on the level of loans outstanding. 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 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, 2002, such pre-petition liabilities include fixed obligations (such as debt and contractual commitments) as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation and other claims.) The recorded amounts of such liabilities generally reflect accounting measurements as of the Filing Date adjusted, as warranted, for changes in facts and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the Consolidated Financial Statements for detail of the "Liabilities subject to compromise" as of March 31, 2002 and as of the Filing Date.) Obligations of Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. During the period ended March 31, 2002, the Debtors recorded Chapter 11 reorganization expenses of $4.4 million. See Note 1 to the consolidated Financial Statements for further information concerning the Chapter 11 filing. - -------------------------------------------------------------------------------- CRITICAL ACCOUNTING 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 (including contingent 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. Grace's accounting measurements that are I-19 most affected by management's estimates of future events are: o Contingent liabilities such as asbestos-related matters, environmental remediation, tax exposures and retained obligations of divested businesses. o Pension and postretirement liabilities that depend on assumptions regarding discount rates and total returns on invested funds. o Depreciation and amortization periods for long-lived assets, including property and equipment and intangibles. o Realization values of various assets such as receivables, inventories, goodwill, insurance and tax attributes. The accuracy of these and other estimates may also be materially affected by the uncertainties arising under the Chapter 11 Cases. CONTINUING OPERATIONS Set forth below is a chart that lists key operating statistics and percentage changes for the three months ended March 31, 2002 and 2001, which should be referenced when reading management's discussion and analysis of the results of continuing operations. The chart below, as well as the financial information presented throughout this discussion, divides Grace's financial results between "core operations" and "noncore activities." Core operations comprise the financial results of Davison Chemicals, Performance Chemicals and the costs of corporate activities that directly or indirectly support business operations. In contrast, noncore activities comprise all other events and transactions not directly related to the generation of revenue or the support of core operations.
================================================================================================================================= ANALYSIS OF CONTINUING OPERATIONS THREE MONTHS ENDED (Dollars in millions) MARCH 31, ================================================================================================================================= % Change 2002 2001 Fav (Unfav) --------------------------------------------- NET SALES: DAVISON CHEMICALS Catalyst products......................................................... $ 153.7 $ 142.7 7.7% Silica products........................................................... 61.7 55.7 10.8% --------------------------------------------- TOTAL DAVISON CHEMICALS....................................................... 215.4 198.4 8.6% --------------------------------------------- PERFORMANCE CHEMICALS Construction chemicals.................................................... 81.9 78.0 5.0% Building materials........................................................ 57.4 57.8 (0.7%) Sealants and coatings..................................................... 58.8 61.5 (4.4%) --------------------------------------------- TOTAL PERFORMANCE CHEMICALS................................................... 198.1 197.3 0.4% --------------------------------------------- TOTAL GRACE SALES - CORE OPERATIONS........................................... $ 413.5 $ 395.7 4.5% ================================================================================================================================= PRE-TAX OPERATING INCOME: Davison Chemicals......................................................... $ 26.9 $ 24.3 10.7% Performance Chemicals..................................................... 19.6 17.8 10.1% Corporate Operating Costs................................................. (12.7) (13.1) 3.1% --------------------------------------------- PRE-TAX INCOME FROM CORE OPERATIONS........................................... 33.8 29.0 16.6% --------------------------------------------- PRE-TAX (LOSS) INCOME FROM NON-CORE ACTIVITIES................................ (2.9) 7.6 NM --------------------------------------------- Interest expense.......................................................... (4.8) (9.0) 46.7% Interest income........................................................... 0.8 1.8 (55.6%) --------------------------------------------- INCOME BEFORE CHAPTER 11 REORGANIZATION EXPENSES AND INCOME TAXES 26.9 29.4 (8.5%) Chapter 11 reorganization expenses, net....................................... (4.4) (2.9) (51.7%) Provision for income taxes ................................................... (10.1) (11.9) 15.1% --------------------------------------------- INCOME FROM CONTINUING OPERATIONS ............................................ $ 12.4 $ 14.6 (15.1%) ================================================================================================================================= NET SALES BY REGION: North America................................................................. $ 204.2 $ 207.5 Europe........................................................................ 123.8 107.6 Asia Pacific.................................................................. 60.0 54.1 Latin America................................................................. 25.5 26.5 --------------------------------------------- TOTAL......................................................................... $ 413.5 $ 395.7 =================================================================================================================================
NM = Not meaningful. I-20 NET SALES The following table identifies the quarter-over-quarter increase or decrease in sales attributable to changes in product volume, product price and/or mix, and the impact of foreign currency translation. ============================================================== NET SALES THREE MONTHS ENDED MARCH 31, 2002 AS A PERCENTAGE INCREASE (DECREASE) FROM THREE VARIANCE ANALYSIS MONTHS ENDED MARCH 31, 2001 ============================================================== VOLUME PRICE/MIX TRANSLATION TOTAL ------------------------------------------- Davison Chemicals...... 10.6% 1.1% (3.1%) 8.6% Performance Chemicals...... 4.4% (1.0%) (3.0%) 0.4% Net sales........ 7.5% 0.1% (3.1%) 4.5% - -------------------------------------------------------------- By Region: North America 3.3% (4.7%) (0.2%) (1.6%) Europe......... 14.6% 7.3% (6.8%) 15.1% Asia Pacific... 14.1% 1.5% (4.7%) 10.9% Latin America.. (0.5%) 3.8% (7.1%) (3.8%) ============================================================== Grace's net sales increased 4.5% to $413.5 million in the first quarter of 2002 compared to the same period in 2001. The first quarter was favorably impacted by continued strong demand for refining catalysts, augmented by revenue and earnings from acquisitions in catalyst and silica products and construction chemicals. Acquisitions completed in 2001 contributed $15.8 million or 4.0% of the sales growth in the first quarter 2002. The impact from foreign currency translation was experienced principally in Europe and Latin America, where sales, reported in U.S. dollars, were adversely affected by 6.8% and 7.1%, respectively. In the first quarter of 2002, all product groups experienced volume growth. Asia Pacific catalyst volumes were strong due to increased sales of hydroprocessing catalysts. Silica products sales reflect the addition of two acquisitions since the first quarter of 2001. Construction chemicals volume growth in Europe was primarily attributable to the acquisition of Pieri S.A. completed in the third quarter of 2001. PRE-TAX INCOME FROM CORE OPERATIONS Pre-tax income from core operations was $33.8 million for the first quarter of 2002, compared to $29.0 million for the first quarter 2001, a 16.6% increase quarter-over-quarter. Operating income of Davison Chemicals for the first quarter of 2002 was $26.9 million, up 10.7% versus 2001, and its operating margin of 12.5% was 0.3 percentage points higher than the first quarter of the prior year. Operating income and margins were favorably impacted by lower energy costs and improved productivity in the first quarter of 2002 compared with the first quarter of 2001. Operating income of Performance Chemicals for the first quarter of 2002 was $19.6 million, up 10.1% versus 2001, with an operating margin of 9.9%, up 0.9 percentage points from 2001. Operating income and margins were favorably impacted by lower operating expenses and material costs, attributable to Grace's productivity efforts in the first quarter of 2002. Corporate operating costs include expenses incurred by corporate headquarters functions in support of core operations. Corporate operating costs in the first quarter of 2002 were $12.7 million, compared with $13.1 million in first quarter 2001, a 3.1% decrease resulting from lower costs for support functions, offset, in part, by increased pension expense. PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES Expense from noncore activities totaled $2.9 million for the three months ended March 31, 2002, compared with income of $7.6 million for the prior year period. The expense from noncore activities for 2002 included additional pension and postretirement expenses related to retirees of former businesses, as well as an accrual for legal and environmental costs primarily related to Grace's former vermiculite mining operations in Libby, Montana, offset by income from Grace's life insurance policies. Income from 2001 included $7.7 million from the sale of Grace's remaining interest in Cross Country Staffing and income from Grace's life insurance policies, offset by pension and other postretirement expenses. CHAPTER 11 REORGANIZATION EXPENSE Net reorganization expenses for the three months ended March 31, 2002 and 2001 of $4.4 million and $2.9 million, respectively, consist primarily of legal and consulting fees incurred by Grace and three creditors' committees related to the Chapter 11 Filing. INTEREST AND INCOME TAXES Net interest expense for the first quarter of 2002 was $4.0 million, a decrease of 44.4% from net interest expense of $7.2 million in 2001. This decrease is attributable primarily to a declining interest rate environment. Grace is continuing to accrue interest expense on its pre-petition debt at the pre-petition contractual rate, which amounted to $3.4 million in the first quarter of 2002. The Company's provision for income taxes at the federal corporate rate of 35% was $7.9 million for the three months ended March 31, 2002. The primary difference between this amount and the overall provision for income taxes of $10.1 million is I-21 attributable to current period interest on tax contingencies and the non-deductibility of certain Chapter 11 reorganization expenses. DAVISON CHEMICALS Recent Acquisitions In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst manufacturing assets of Borealis A/S. Sales The Davison Chemicals segment is a leading global supplier of catalysts and silica products. Catalyst products represented approximately 37% of Grace's 2002 first quarter sales (36% - 2001). This segment includes: fluid cracking catalysts and additives used in petroleum refineries to convert distilled crude oil into transportation fuels and other petroleum-based products; hydroprocessing catalysts which upgrade heavy oils and remove certain impurities, polyolefin catalysts, which are essential components in the manufacture of polyethylene used in products such as high-performance plastic pipe and other plastic parts; and chemical catalysts, which are used in a variety of chemical processes. Silica products, which represented 15% of Grace's 2002 first quarter sales (14% - 2001), are used in a wide range of industrial, consumer and biotechnology applications such as coatings, food processing, plastics, adsorbents, personal care products and separations. In the first quarter of 2002, catalyst products sales were $153.7 million, an increase of 7.7% compared with the same period in 2001, reflecting a higher demand for Grace's refining catalysts to meet increased gasoline usage. Worldwide demand for gasoline increased 2-3% compared with the first quarter of the prior year. Silica products sales for the first quarter of 2002 were $61.7 million, up 10.8% compared with the first quarter of 2001. This increase was primarily from two acquisitions completed in the past year which expanded the silicas product line into precipitated silicas, chromatography columns and separations media. Excluding the negative impact of foreign exchange, sales for the Davison Chemicals segment were up 11.7% over the prior year period. Operating Earnings Pre-tax operating income of $26.9 million reflected a 10.7% increase compared with 2001. Operating income and margins were favorably impacted by lower energy costs and improved productivity in the first quarter of 2002 compared with the first quarter of 2001. PERFORMANCE CHEMICALS Recent Acquisitions In March 2002, Grace acquired the business and assets of Addiment, Incorporated, a leading supplier of specialty chemicals to the concrete paver and masonry industries in the U.S. and Canada. Sales The major product groups of the Performance Chemicals segment are specialty construction chemicals and specialty building materials, which are used primarily by the nonresidential construction industry; and container sealants and coatings for food and beverage packaging, and other related products. Construction chemicals, which represented 20% of Grace's 2002 and 2001 first quarter sales, add strength, control corrosion, and enhance the handling and application of concrete, and reduce the manufacturing cost and improve the quality of cement. Building materials, which represented 14% of Grace's 2002 first quarter sales (15% - 2001), prevent water damage to structures and protect structural steel against collapse due to fire. Sealants and coatings, which represented 14% of Grace's 2002 first quarter sales (15% - 2001), seal beverage and food cans, and glass and plastic bottles, and protect metal packaging from corrosion and the contents from the influences of metal. In the first quarter of 2002, sales of construction chemicals were $81.9 million, an increase of 5.0% over the first quarter of 2001. Sales increases were strongest in Europe, with the Pieri S.A. acquisition, completed in July 2001, favorably impacting volume. Sales of building materials in the first quarter of 2002 decreased 0.7% to $57.4 million, with good results in residential roofing underlayments being offset by softness in commercial fire protection. Sales of sealants and coatings decreased 4.4% to $58.8 million for the quarter, reflecting a continued decline in demand for metal food packages in favor of plastic and paper substitutes. Excluding the negative impact of foreign exchange, sales for the Performance Chemicals segment were up 3.4% over the prior year period. Operating Earnings Pre-tax operating income increased 10.1% from $17.8 million in 2001 to $19.6 million in 2002. Operating income and margins were favorably impacted by lower I-22 operating expenses and material costs, primarily attributable to Grace's productivity efforts. - -------------------------------------------------------------------------------- FINANCIAL CONDITION - -------------------------------------------------------------------------------- The charts below are intended to enhance understanding of Grace's overall financial position by separately displaying assets, liabilities and cash flows related to core operations from those related to noncore activities. The Company's management structure and activities are tailored to the separate focus and accountability of core operations and noncore activities. CORE OPERATIONS The Company had a net asset position supporting its core operations of $1,337.0 million at March 31, 2002, compared with $1,299.6 million at December 31, 2001 (including the cumulative translation account reflected in Shareholders' Equity (Deficit) of ($172.4) million for 2002 and ($164.8) million for 2001). After-tax return on capital invested in core operations for the first quarter of 2002 remained even with all of 2001. Net cash flows from core operations increased primarily due to the easing of working capital pressures experienced in the first quarter of 2001 (just before Grace's Chapter 11 filing) and from a 16.6% increase in pre-tax income from core operations. =============================================================== CORE OPERATIONS MARCH 31, December 31, (Dollars in millions) 2002 2001 - --------------------------------------------------------------- BOOK VALUE OF INVESTED CAPITAL Receivables...................... $ 302.2 $ 296.3 Inventory........................ 180.2 174.8 Properties and equipment, net.... 590.4 582.9 Intangible assets and other...... 622.2 616.8 -------------------------- ASSETS SUPPORTING CORE OPERATIONS 1,695.0 1,670.8 Accounts payable and accruals.... (358.0) (371.2) -------------------------- CAPITAL INVESTED IN CORE OPERATIONS $ 1,337.0 $ 1,299.6 After-tax return on average invested capital................ 9.6% 9.6% =============================================================== THREE MONTHS ENDED MARCH 31, CASH FLOWS FROM CORE OPERATIONS 2002 2001 - --------------------------------------------------------------- Pre-tax operating income......... $ 33.8 $ 29.0 Depreciation and amortization.... 22.8 22.5 -------------------------- PRE-TAX EARNINGS BEFORE DEPRECIATION AND AMORTIZATION .. 56.6 51.5 Working capital and other changes (27.6) (101.7) -------------------------- CASH FLOW BEFORE INVESTING....... 29.0 (50.2) Capital expenditures............. (13.2) (11.3) Businesses acquired.............. (25.0) (56.5) - --------------------------------------------------------------- NET CASH FLOW FROM CORE OPERATIONS $ (9.2) $ (118.0) =============================================================== NONCORE ACTIVITIES The Company has a number of financial exposures originating from past businesses, products and events. These obligations arose from transactions and/or business practices that date back to when Grace was a much larger company, when it produced products or operated businesses that are no longer part of its revenue base, and when government regulations and scientific knowledge were much less advanced than today. The table below summarizes the net noncore liability at March 31, 2002 and December 31, 2001 and the net cash flow from noncore activities for the three months ended March 31, 2002 and 2001: =============================================================== NONCORE ACTIVITIES (Dollars in millions) - ----------------------------------- MARCH 31, December 31, NET NONCORE LIABILITY 2002 2001 =============================================================== Asbestos-related litigation..... $ (994.9) $ (996.3) Asbestos-related insurance receivable ..................... 292.4 293.4 ---------------------------- Asbestos-related liability, net. (702.5) (702.9) Environmental remediation....... (152.9) (153.1) Postretirement benefits......... (165.1) (169.1) Retained obligations and other.. (81.8) (80.6) ---------------------------- NET NONCORE LIABILITIES......... $(1,102.3) $(1,105.7) =============================================================== THREE MONTHS ENDED MARCH 31, NET CASH FLOW FROM NONCORE ---------------------------- ACTIVITIES 2002 2001 =============================================================== Pre-tax income from noncore activities...................... $ (2.9) $ 7.6 Other changes................... 3.6 (2.2) Cash spending for: Asbestos-related litigation, net of insurance recovery........... (0.5) (71.4) Environmental remediation....... (3.8) (8.4) Postretirement benefits......... (4.6) (5.6) Retained obligations and other.. (1.0) (5.2) - --------------------------------------------------------------- NET CASH FLOW FOR NONCORE ACTIVITIES ..................... $ (9.2) $ (85.2) =============================================================== As described under "Voluntary Bankruptcy Filing," the resolution of most of these noncore recorded and contingent liabilities will be determined through the Chapter 11 proceedings. Grace cannot predict with any certainty how, and for what amounts, any of such estimates will be resolved. The amounts of these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts recorded by Grace at March 31, 2002. ASBESTOS-RELATED MATTERS Grace is a defendant in lawsuits relating to previously sold asbestos-containing products. In the first three months of 2002, Grace paid $0.5 million for the defense and disposition of asbestos-related property damage and bodily injury litigation, net of amounts received under settlements with insurance carriers, compared to net expenditures in the first three months of 2001 of $71.4 million. At March 31, 2002, Grace's I-23 balance sheet reflects a gross liability of $994.9 million ($702.5 million, net of insurance). This liability represents management's estimate of the undiscounted net cash outflows in satisfaction of Grace's current and expected asbestos-related claims, based on facts and circumstances existing prior to the Filing. Changes to the recorded amount of such liability will be based on Chapter 11 developments and management's assessment of the claim amounts that will ultimately be allowed by the Bankruptcy Court. The Consolidated Balance Sheet at March 31, 2002 includes total amounts due from insurance carriers of $292.4 million pursuant to settlement agreements with insurance carriers. The recovery of amounts due from insurance carriers is dependent upon the timing, character and exposure periods of asbestos-related claims. Grace's Chapter 11 bankruptcy proceedings could also affect recovery timing and amounts. Grace intends to address all of its pending and future asbestos-related claims as part of a plan of reorganization under Chapter 11. Grace will seek to have the Bankruptcy Court establish a process to assess and appropriately quantify the numerous property damage and bodily injury claims against it. Measurement of Grace's asbestos-related liabilities will be materially affected by Bankruptcy Court rulings, the outcome of litigation and negotiations among interested parties. ENVIRONMENTAL MATTERS Grace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and regulations relating to the generation, storage, handling, discharge and disposition of hazardous wastes and other materials. At March 31, 2002, Grace's liability for environmental investigatory and remediation costs related to both continuing and discontinued operations totaled $152.9 million, as compared to $153.1 million at December 31, 2001. In addition, Grace is facing environmental lawsuits related to previously operated vermiculite mining and processing sites that could result in a material future charge to Grace's earnings, the amount of which is not currently determinable. The EPA reported that it had expended approximately $25.4 million in response costs in and around Libby, Montana (the site of a former Grace vermiculite mine) through June 2001. Grace expects that the EPA may incur significant additional response costs, as Libby is expected to be added to the EPA's National Priorities List of Superfund sites. The EPA is also evaluating environmental risks at several vermiculite processing sites throughout the U.S. which processed vermiculite from Libby, Montana, and has made claims against Grace to fund clean-up activities. Grace intends to review the EPA's actions and cost claims to determine whether they are justified and reasonable. These actions are not subject to the automatic stay provided under Section 362 of the U.S. Bankruptcy Code, but any allowed claim would be subject to the Chapter 11 proceedings. PENSION BENEFITS The decline in value of the U.S. and global equity markets, coupled with a decline in interest rates, primarily in the second half of 2001, created a shortfall between the accounting measurement of Grace's U.S. salaried qualified pension obligations and the market value of dedicated pension assets. This condition required a balance sheet adjustment in shareholders' equity (deficit) at December 31, 2001 of $124.4 million, and increased Grace's pension expense charged to core operations by approximately $3.5 million in the first three months of 2002 compared with the first quarter of 2001. POSTRETIREMENT BENEFITS Grace provides certain postretirement health care and life insurance benefits for retired employees, a large majority of which pertain to retirees of previously divested businesses. These plans are unfunded, and Grace pays the costs of benefits under these plans as they are incurred. Spending under this program during the first quarter of 2002 was $4.6 million. Grace's recorded liability of $165.1 million at March 31, 2002 is stated at net present value discounted at 7.25%. The continued payment of these benefits has been approved by the Bankruptcy Court. RETAINED OBLIGATIONS OF DIVESTED BUSINESSES The principal retained obligations of divested businesses relate to contractual indemnification and to contingent liabilities not passed on to the new owner. At March 31, 2002, Grace had recorded $81.8 million to satisfy such obligations. Prior to Grace's Chapter 11 filing, $43.5 million of this total was expected to be paid over periods ranging from 2 to 10 years. The remainder represents estimates of probable cost to satisfy specific contingencies that were expected to be resolved over the next few years. However, most of these matters are now subject to the automatic stay of the Bankruptcy Court and will be resolved as part of Grace's Chapter 11 proceedings. I-24 TAX MATTERS The Internal Revenue Service ("IRS") is challenging the deductions related to interest on loans secured by under corporate owned life insurance ("COLI") policies for years prior to January 1, 1999. In 2000 Grace paid $21.2 million of tax and interest related to this issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted approximately $163.2 million in interest attributable to COLI policy loans. Grace filed a claim for refund of the amount paid to date and will contest any future IRS assessments on the grounds that these insurance policies and related loans had, and continue to have, a valid business purpose, that the COLI policies have economic substance and that interest deductions claimed were in compliance with tax laws in effect at the time. Grace has accrued for potential tax and interest liability related to the likely challenge of this tax position, and continues to accrue interest as part of the quarterly tax provision. During the first quarter of 2001, a U.S. District Court ruling, American Electric Power, Inc. vs. United States, denied interest deductions of a taxpayer in a similar situation. American Electric Power, Inc. is currently appealing this ruling. However, in light of the ruling, Grace recorded an additional accrual in 2000 for tax exposure and related interest, and continues to accrue interest on estimated amounts that may be due. There are two additional COLI cases decided against the taxpayer currently on appeal. The taxpayer in Winn-Dixie Stores, Inc. v. Commissioner of Internal Revenue has petitioned for a rehearing in the United States Court of Appeals. CM Holdings, Inc. v. Internal Revenue Service is currently on appeal to the United States Court of Appeals. Finally, Dow Chemical Company has filed an action to recover income taxes and interest paid in connection with its COLI policies, and that case is currently pending in the United States District Court. Grace is monitoring these cases and will continue to reassess its legal posture as the cases evolve. The IRS also has assessed additional federal income tax withholding and Federal Insurance Contributions Act taxes plus interest and related penalties for calendar years 1993 through 1995 against a Grace subsidiary that formerly operated a temporary staffing business for nurses and other healthcare personnel. The assessments, aggregating $21.8 million, were made in connection with a meal and incidental expense per diem plan for traveling healthcare personnel that was in effect through 1999. The IRS contends that certain per diem reimbursements should have been treated as wages subject to employment taxes and federal income tax withholding. Grace contends that its per diem and expense allowance plans were in accordance with statutory and regulatory requirements, as well as other published guidance from the IRS. Grace expects that the IRS will make additional assessments for the 1996 through 1999 periods. The matter is currently pending in the U.S. Court of Claims. Grace has received notification from a foreign taxing authority assessing tax deficiencies plus interest relating to the purchase and sale of foreign bonds in 1989 and 1990. This assessment, totaling $10.5 million, is related to the Bekaert Group, which Grace sold in 1991 but as to which Grace retained liability for tax deficiencies attributable to tax periods prior to the sale. The matter is currently before the foreign tax authorities, but no decision has been rendered. As a result of Grace's Chapter 11 filing, certain tax matters related to open tax years, including COLI interest deductions, could become the direct obligations of predecessor companies that now own Grace's former healthcare and packaging businesses. One or both of these companies could be directly liable to tax authorities for Grace's tax deficiencies. Pursuant to agreements relating to each transaction, Grace may be required to indemnify both parties for taxes relating to periods prior to the closing of such transactions. Any indemnification obligation that arises as a result of these matters would be a pre-petition liability subject to the Chapter 11 proceedings. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- CASH FLOW Grace's net cash flow provided by core operations before investing was $29.0 million in the first quarter of 2002 compared with cash used for core operations of $50.2 million in the comparable period of 2001. Acquisition investments aggregated $25.0 million in the first quarter of 2002, compared with $56.5 million in the comparable period of 2001. Total Grace capital expenditures for the first quarter of 2002 and 2001 were $13.2 million and $11.3 million, respectively, substantially all of which was directed toward its business segments and were of a routine nature. Grace's cash flow from core operations in 2002 is expected to be relatively stable and consistent with recent years. Grace expects to continue to invest excess cash flow and/or other available capital resources in its core business base. These investments are likely to be in the form of added plant capacity, product line extensions and geographic market expansions. Such investments may be subject to I-25 Bankruptcy Court approval and Chapter 11 creditor committee review. The pre-tax cash outflow of noncore activities was $9.2 million in the first three months of 2002 compared to an outflow of $85.2 million in the comparable period in 2001. The decreased cash outflow was primarily attributable to lower asbestos-related payments in 2002 as compared to 2001, resulting from the stay on payments for asbestos-related claims after the Filing Date. Expenditures for environmental remediation were lower in the first three months of 2002 due partly to Grace's Chapter 11 proceedings and partly to the completion of remediation work on certain sites. Postretirement benefit payments, which are allowed to be paid under Grace's Chapter 11 proceedings, were lower in the first three months of 2002 than the prior year, due to plan adjustments. The payments for retained obligations of divested businesses and other contingencies were lower in the first three months of 2002 due to the stay of litigation and to the one-time nature of these matters. Cash flows used for investing activities in the first three months of 2002 were $44.0 million, compared to cash used of $58.5 million in the first three months of 2001. Net cash outflows in the first three months of 2002 were primarily for businesses acquired and capital expenditures as discussed above. Net cash outflows of 2001 consisted of $56.5 million in businesses acquired, capital expenditures and net investment in life insurance policies of $2.9 million, offset by proceeds from the sale of investments and disposals of assets. Proceeds from disposals of assets in the first three months of 2002 were also lower than the comparable period in 2001, with $0.6 million in 2002 and $3.7 million in 2001. Net cash used for financing activities in the first three months of 2002 was $2.5 million as compared to net cash provided by financing activities of $146.3 million in the first three months of 2001. In 2002, this principally represents net repayments for loans secured by cash value of life insurance policies. In the first three months of 2001, this represents $46.6 million in proceeds from loans secured by the cash value of life insurance policies and borrowings under credit facilities of $99.7 million. DEBT AND OTHER CONTRACTUAL OBLIGATIONS Total debt outstanding at March 31, 2002 was $534.5 million. As a result of the Filing, Grace is now in default on $501.1 million of such debt, which has been included in "Liabilities subject to compromise" as of March 31, 2002. The automatic stay provided under the Bankruptcy Code prevents Grace's lenders from taking any action to collect the principal amounts as well as related accrued interest. However, Grace will continue to accrue and report interest on such debt during the Chapter 11 proceedings (unless further developments lead management to conclude that it is probable that such interest will be compromised). At March 31, 2002, Grace had gross financial assurances outstanding of $247.3 million, comprised of $135.2 million of gross surety bonds issued by various insurance companies and $112.1 million of standby letters of credit issued by various banks. Of the standby letters of credit, $29.4 million act as collateral for surety bonds, thereby reducing Grace's overall obligations under its financial assurances to a net amount of $217.9 million. These financial assurances were established for a variety of purposes, including insurance and environmental matters, asbestos settlements and appeals, trade-related commitments and other matters. Of the net amount of $217.9 million of financial assurances, approximately $9.4 million were issued by non-Debtor entities and $208.5 million were issued by the Debtors. Of the amounts issued by the Debtors, approximately $196.8 million were issued before the Filing Date, with the remaining $11.7 million being issued under the DIP facility. - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS - -------------------------------------------------------------------------------- The forward-looking statements contained in this document are based on current expectations regarding important risk factors. Actual results may differ materially from those expressed. In addition to the uncertainties referred to in Management's Discussion and Analysis of Results of Operations and Financial Condition, other uncertainties include the impact of worldwide economic conditions; pricing of both the Company's products and raw materials; customer outages and customer demand; factors resulting from fluctuations in interest rates and foreign currencies; the impact of competitive products and pricing; the continued success of Grace's process improvement initiatives; the impact of tax and legislation and other regulations in the jurisdictions in which the Company operates; and developments in and the outcome of the Chapter 11 proceedings discussed above. Also, see "Introduction and Overview - Projections and Other Forward-Looking Information" in Item 1 of Grace's current Annual Report on Form 10-K. I-26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- Grace had no outstanding derivative financial instruments on March 31, 2002. For further information concerning Grace's quantitative and qualitative disclosures about market risk, refer to Notes 13 and 15 in the Consolidated Financial Statements in the 2001 Form 10-K. I-27 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- Notes 1, 3 and 12 to the interim consolidated financial statements in Part I of this Report are incorporated herein by reference. 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 (b) Reports on Form 8-K. The Company filed no reports on Form 8-K ------------------- during the first quarter of 2002. 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: May 15, 2002 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 II-3 EX-15 3 file002.txt ACCOUNTANTS' AWARENESS LETTER EXHIBIT 15 May 15, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated April 23, 2002 on our review of interim financial information of W. R. Grace & Co. (the "Company") as of and for the period ended March 31, 2002, and included in the Company's Quarterly Report on Form 10-Q for the quarter then ended, is incorporated by reference in its Registration Statements on Form S-8 (Nos. 333-37024, 333-49083, 333-49507, 333-49509, 333-49511, 333-49513, 333-49515, 333-49517, 333-49703, and 333-49705). Very truly yours, /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Baltimore, Maryland -----END PRIVACY-ENHANCED MESSAGE-----