Document 7OJ8y1GZ46BGx87mXZRjgGebE

\ rt - ** #* DISCLOSURE, INCORPORATED EDGAR DOCUMENT PRINT SUMMARY ** ** ** ** ** DATE PRINTED: ** TINE PRINTED: ** ** COMPANY NAME: ** COMPANY NUMBER: ** ** DOCUMENT CONTROL#: #* ** DOCUMENT TYPE: ** DOCUMENT DATE: ** AMENDMENT: ** ** PORTION(S) PRINTED: ** ** ** ** PAGES PRINTED: ** ** ** ** 03/31/95 10:34 A.M. N R GRACE ft CO W016000000 95525533 10-X 03/31/95 1 104 ** *# ** ** ** ** ** ** ** ** *# ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** #* ** ** ** ** ** ** ** ** ** ** # ** ** ** ** ** ** ** ** ** ** ** ## ** ** ** ** ** ## ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission file number 1-3720 W. R. GRACE & CO. Inco1otaratetedoftiNnedwerYtohrek Laws of the I.R.S. Employer Identification No. 13-3461988 ONE TOWN CENTER ROAD, BOCA RATON, FLORIDA 33486-1010 407/362-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $1 par value Common Stock Purchase Rights } New York Stock Exchange, Inc. } Chicago Stock Exchange, Incorporated 7-3/4% Notes Due 2002 (issued by W. R. Grace & Co.-Conn., a wholly owned subsidiary) and related Guarantees / New York Stock Exchange, Inc. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the Proxy Statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of W. R. Grace & Co. voting stock held by nonaffiliates was approximately $3.6 billion at February 1, 1995. At March 1, 1995, 94,250,680 shares of W. R. Grace & Co. Common Stock, $1 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED Proxy Statement for Annual Meeting to be held May 10, 1995 (specified portions) Part III TABLE OF CONTENTS PAGE PART I Item l. Item 2. Item 3. Item 4. Business............................................................................................................................................................l Introduction............................................................................................................................................1 Strategic Restructuring ....................................................................................................... 1 Industry Segments ...................................................................................................................... 4 Specialty Chemicals ............................................................................................................ 4 Health Care......................................................................................................................................9 Other Operations...............................................................................................................................12 Research Activities.................................................................................................................12 Environmental, Health and Safety Matters.................................................................13 Materials and Energy.....................................................................................................................14 Properties.....................................................................................................................................................15 Legal Proceedings................................................................................................................................15 SuBmission of Matters to a Vote of Security Holders................................................................................................................................................22 Executive Officers ............................................................................. .............................................................. 22 PART II . Item 5. Item 6. Item 7. Item 8. Item 9. Market for Registrant's Common Equity and Related Stockholder Matters .......................................................................................... 23 Selected Financial Data.................................................................................................................24 Management's Discussion and Analysis of Finan cial Condition and Results ofOperations.................................................................24 Financial Statements and Supplementary Data..............................................................25 Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure......................................................................25 PART III Item 10. Directors and Executive Officers of the Registrant..............................................................................................................................................25 Item 11. Executive Compensation............................................................................................................. 25 Item 12. Security Ownership of Certain Beneficial Owners and Management...............................................................................................................25 Item 13. Certain Relationships and Related Transactions.........................................................25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................................................................................................26 Signatures....................................................................................................................................................................31 Financial Supplement .......................................................................................................................................... F-l PART I ITEM 1. BUSINESS. INTRODUCTION W. R. Grace & Co., through its subsidiaries, is primarily engaged in the specialty chemical business on a worldwide basis and m specialized health care activities. In its chemical operations, Grace develops, manufactures and markets specialty chemicals ana materials and related systems. In health care, Grace is primarily engaged in supplying kidney dialysis services,* in providing home infusion, home respiratory therapy and home health services {* and in the manufacture and sale of products and equipment used to provide dialysis and other medical services. As used in this Report, the term "Company" refers to W. R. Grace & Co., a New York corporation, and the term "Grace" refers to the Company and/or one or more of its subsidiaries. Grace's principal executive offices are located at One Town Center Road, Boca Raton, Florida 33486-1010, and its telephone number is 407/362-2000. At year-end 1994, Grace had approximately 38,000 full-time employees worldwide in its continuing operations (approximately 2,400 in discontinued operations). Grace's Consolidated Financial Statements for the three years in the period ended December 31, 1994 ("Consolidated Financial Statements") and certain other financial information included in the Company's 1994 Annual Report to Shareholders are set forth in the Financial Supplement to this Report and incorporated by reference herein. STRATEGIC RESTRUCTURING In 1991, Grace announced a new corporate strategy with the principal objective of enhancing shareholder value. The major components of the strategy are (a) focusing on core businesses to accelerate profitable growth; (b) upgrading financial performance, principally by selling or monetizing noncore businesses, managing debt levels consistent with profitable growth opportuni ties, and reducing overhead; and (c) integrating corporate and operating unit functions through global product line management. The core businesses referred to above are health care, packaging, catalysts and other silica-based products, construction products, water treatment and process chemicals, and container products. As part of its corporate strategy, Grace has reorganized the management of these core businesses on the basis of global product lines. Grace also has organized task forces that have developed and are implementing "best practices" relating to financial systems and processes, information systems, human resources. logistics and other management functions; has implemented processes to better allocate capital among its businesses; and has retired or refinanced substantially all of its higher-cost debt. SALE AND MONETIZATION OF NONCORE BUSINESSES. Pursuant to its strategy, Grace has substantially completed the sale or monetization of its noncore businesses. In 1991, Grace sold its specialty textiles business; its automotive chemicals and sound deadening components businesses; investments in two fharmaceutical businesses; its Trinidadian fertilizer operationsits animal eed businesses; its polyurethane foam sealant manufacturing business; and its Japanese microwave products business. In 1992, Grace sold its book, video and software distribution businesses and its organic chemicals business and related assets. In 1992, Grace also completed a transaction to monetize a portion of its cocoa and chocolate business bv selling a 21% limited partnership interest in Grace Cocoa Associates, L.P. ("Grace Cocoa"), which owns this business and other assets, resulting in Grace's receipt of approximately $300 million in cash. During 1993, Grace sold a number of noncore businesses and corporate investments, including substantially all of its oil and gas and energy services businesses, a 50% interest in a Japanese chemical business, a food hygiene services business and minority investments in Grace-Sierra Horticultural Products Company and Canonie Environmental Services Corp. In 1994, Grace continued its strategic restructuring by disposing of noncore businesses for gross proceeds of approximately $b46 million, including substantially all of its interest in Colowyo Coal Company; its printing products business and a related unit; its battery separators business{* its interest in The Restaurant Enterprises Group, Inc.; its electromagnetic interference shielding materials and thermal interface products businesses; its American Breeders Service and Caribbean fertilizer businesses; and its specialty paper and structural ceramics parts businesses. Grace is actively pursuing the disposition of its remaining noncore businesses and expects to complete their disposition in 1995. STRATEGIC ACQUISITIONS AND OTHER INITIATIVES. As part of its strategy to focus on core business growth, Grace has made, and expects to continue to make, strategic acquisitions directly related to its core businesses, including acquisitions intended to expand its core businesses outside the United States. In 1992, Grace acquired the North American food service packaging business of Du Pont Canada. In 1993, Grace acquired (a) the water treatment ana related operations of Aquatec Quimica S.A. of Brazil, which has significant operations throughout South America, as well as opera- 2 \ tions in Portugal and the United States; and (b) the Katalistics fluid cracking catalyst additive business previously owned by a joint venture between Union Carbide Corporation and AlliedSignal Inc. In the 1992-93 period, Grace acquired Home Intensive Care, Inc., a United States provider of alternate site infusion therapy and dialysis health care services, for approximately $136 million in cash (inclusive of expenses and assumed debt); regional United States providers of home infusion therapy services and home support nursing services, as well as additional dialysis centers located primarily in the United States, for a total of approximately $128 million; Riggers Meaizintechnik GmbH, a German manufacturer and distributor of dialysis products, for approximately $30 million (inclusive of expenses and assumed debt); the Renacare unit of Lloyds Chemists pic, the leading United Kingdom producer of dialysis concentrate and a distributor of associated products, for approximately $10 million in cash; and Virginia-based American Homecare Equipment, Inc., a provider of home infusion ana respiratory therapy services, for approximately 116,000 shares of the Company's common stock ana other consideration. In 1993, Grace also formed a 51%-owned joint venture with a large chemical and industrial concern headquartered in Volgograd, Russia, to produce flexible packaging for sale throughout the Commonwealth of Independent States; the joint venture begem production in the third quarter of 1994. In 1994, Grace made acquisitions totaling $351.7 million (inclusive of cast acquired and debt assumed), primarily in its Health care, construction products and packaging product lines. These acquisitions included Home Nutritional Services, Inc., a United States provider of home infusion therapy services, for approximately $132 million (inclusive of expenses and assumed debt); 56 United States dialysis clinics and 34 dialysis clinics and 8 laboratories iocated in Europe, Latin America and the Asia Pacific area for a total of approximately $146 million; the Schur Multiflex group of European flexible packaging businesses; construction chemicals businesses; and ADTEC AB, a worldwide market er of pollution control equipment headguartered in Goteberg, Sweden. In addition, during 1994 Grace and a family-owned company based in Singapore agreec to form a joint venture in Malaysia; Grace would hold a 51% interest in the joint venture, which would produce rigid plastic packaging products for sale throughout Southeast Asia. In 1994, Grace also formed a 51%-owned joint venture with an Indian company to supply water treatment products and services in India. See Notes 3, 6, 11 and 12 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for additional information. 3 INDUSTRY SEGMENTS Information concerning the sales and revenues, pretax operating profit and identifiable assets of Grace's continuing operations by industry segment and Geographic area for 1994, 1993 and 1992 is contained in Note 17 to the onsolidated Financial Statements in the Financial Supplement. SPECIALTY CHEMICALS Grace's specialty chemical operations consist principally of the development, manufacture and sale of products and systems in five core market groups (see "Strategic Restructuring" above). These products and systems typically serve highly specialized markets and represent an important component (but a relatively small portion of the cost) of the end products in which they are used. Accordingly, competition is based primarily on technological capability, customer service and product quality. Grace's specialty chemical products and systems are marketed primarily through direct sales organizations. The following is a description of the products and services provided by each of Grace's core specialty chemical businesses. PACKAGING. Grace's packaging business ("Grace Packaging") provides high- Eerformance total packaging systems on a worldwide basis, competing principally y providing superior quality products and services for specialized customer needs. The principal products and services provided by Grace Packaging are (a) flexible plastic packaging systems (including material, equipment and services) for a broad range of perishable foods such as meat, prepared foods, baked goods, ?oultry, produce, cheese, and smoked and processed meat products; (b) shrink ilms for packaging a variety of consumer and industrial products; (c) foam trays for supermarkets and poultry and other food processors; and (d) rigid plastic containers for dairy and other food and nonfood products. Grace Packaging competes through three product groups: flexible packaging (marketed extensively under the Cryovac(Registered Trademark} registered trademark), Formpac-TM- foam trays, ana Omicron-TM- rigid plastic containers. Cryovac flexible packaging products include shrink bags, shrink films, laminated films, medical films, and equipment. The Cryovac packaging products group developed and introduced flexible plastic vacuum shrink packaging in the late 1940s, contributing to expanded food distribution and marketing by providing superior protection against decay-inducing bacteria and moisture loss. The market for Cryovac products has since shifted from industrial food applications toward the retail food market, and Cryovac packaging 4 technology has also been introduced in nonfood applications such as flexible packaging for consumer merchandising and electronic and medical products. " The flexible packaging products group differentiates itself from its competitors by offering a combination of the following core competencies: (l) proprietary film processing technology; (2) resin tecnnology, permitting the- ?roauction of materials suited to specific customer needs; (3) packaging and ood science expertise, providing better understanding of the interaction between packaging materials and packaged products; (4J complete systems support capability, providing a single source of supply for customer needs; (5) a talented employee base that strives to anticipate, meet and exceed customer expectations; and (6) an effective sales and distribution network. Foam trays are produced by the Formpac business group of Grace Packaging, primarily for sale to supermarkets and poultry and other food processors m the eastern two-thirds of the United States. Formpac proprietary technology has also been successfully used in certain packaging applications outside the Unitec States. Grace Packaging's Omicron business group produces rigid plastic packaging applications, primarily for dairy products in Australia. Omicron products use proprietary thermoforming technology, involving the controlled thinning and shaping of hot plastic sheets to increase strength and rigidity while minimizinc weight. As described above under "Strategic Restructuring - Strategic Acquisi tions and Other Initiatives," Grace plans to expand the Omicron business into Southeast Asia through a recently formed joint venture. Grace Packaging's sales and revenues were $1.4 billion in 1994, $1.3 billion in 1993 and $1.2 billion in 1992. Approximately 52% of Grace Packaging's 1994 sales and revenues were generated in North America, 28% in Europe, 12% in Asia Pacific and the remainder in Latin America. At year-end 1994, Grace Packaging employed approximately 9,400 people in 24 production facilities (9 in North America, 6 in Europe, 5 in Latin America and 4 in Asia Pacific) and 80 sales offices, serving approximately 18,000 customers. Resins are the principal raw materials used by Grace Packaging. Although prices for ethylene-based resins were volatile in the second half of 1994 due tc unscheduled supplier plant closings and increased demand, there is currently an adequate worldwide supply of resins at generally stable prices. Grace Packaginc has typically increased the sales prices of its products in response to increases in the prices of resins and other raw materials. In most cases, multiple sources of resins and other raw materials exist, with at least one source located in each global region. 5 Although sales and revenues tend to be slightly higher in the fourth -- quarter, seasonality is generally not significant to the business. As a result of product introductions, marketing programs and improvements in global economi conditions, worldwide demand for Grace Packaging products grew at a rapid pace in 1994, placing pressure on existing capacity. To address this matter, capacity additions in all regions (including a shrink films manufacturing plant in Kuantan, Malaysia) are currently underway. CATALYSTS AND OTHER SILICA-BASED PRODUCTS. This core business ("Grace Davison") is composed of three principal product groups: fluid cracking catalysts, polyolefin catalysts and silica and zeolite adsorbents. These products involve silica, alumina and zeolite technology and the design and manufacture of products to meet customer specifications; they are sold to major oil refiners, plastics and chemical manufacturers, and consumer products compa nies . Fluid cracking catalysts are used by petroleum refiners to upgrade oil to more valuable transportation fuels such as gasoline and iet and diesel fuel. Oil refining is a highly specialized discipline, demanding tnat products be tailorec to meet local variations in raw materials and operational needs. Competition i: based on technology, product performance, customer service and price. Polyolefin catalysts and catalyst supports are essential components used ii manufacturing nearly naif of all high density and linear low density polyethylene resins, which are used in products such as plastic film and pipe. The polyolefin catalyst business is technology-intensive and focused on providing products specifically formulated to meet end-user applications. Manufacturers generally compete on a worldwide basis, and competition has intensified recently due to evolving technologies, particularly the use of metallocenes. Silica and zeolite adsorbents are used in plastics, toothpastes, paints, insulated glass and other products, as well as in the refining of edible oils. Silicas are used in coatings as flatting agents, in plastics to improve handling, in toothpastes as thickeners and cleaners, in food to carry flavors and prevent caking, and in the purification of edible oils. Grace Davison's sales and revenues were $610 million in 1994, $572 million in 1993, and $519 million in 1992; approximately 55% of Grace Davison's 1994 sales and revenues were generated in North America, 35% in Europe, 6% in Asia Pacific and 2% in Latin America. At year-end 1994, Grace Davison employed ap proximately 2,700 persons worldwide in nine facilities (six in the United States and one each in Canada, Germany and Brazil). 6 Most raw materials used in the manufacture of Grace Davison products are available from multiple sources and, in some instances, are produced or supplie< by Grace. Because of the diverse applications of products using Grace Davison technology and the geographic areas m which such products are used, seasonalif does not have a significant effect on Grace Davison's businesses. CONSTRUCTION PRODUCTS. Grace Construction Products ("GCP") is a leading supplier of specialty materials and systems to the worldwide construction industry. GCP products and systems strengthen concrete, control corrosion, prevent water damage and protect structural steel against collapse due to fire. These products include concrete admixtures, cement processing additives, and fireproofing and waterproofing materials. In North America, GCP also manufactures and distributes reinforced fiberglass building components, masonry block additives and products, and vermiculite products used in construction and other industrial applications. GCP's products are sold to a broad customer base, including cement manufacturers, ready-mixed and prestressed concrete producers, specialty subcontractors and applicators, masonry block manufacturers, building materials distributors and other industrial manufacturers. GCP competes with several large global suppliers and smaller regional competitors. Competition is based largely on pricing, product performance, proprietary technology and technical support and service. GCP's 1994 sales and revenues totaled $387 million (69% in North America, 17% in Europe, 14% in Asia Pacific and less than 1% in Latin America). Sales and revenues were $333 million in each of 1993 and 1992. At year-end 1994, GCP employed approximately 2,100 persons at approximately 62 production facilities (35 in North America, 9 in Southeast Asia, 7 in Australia, 6 in Europe, 4 in Latin America and 1 in Japan) and 79 sales offices worldwide. The supplies and raw materials used for manufacturing GCP products are primarily commodities obtained from multiple sources, including commodity chemical producers, petroleum companies, other construction industry suppliers and paper manufacturers. In most instances, there are at least two alternative suppliers for the raw materials used by GCP. The construction business is seasonal, based on weather conditions, and cyclical, in response to economic conditions and construction demand. To increase profitability and minimize the impact of cyclical downturns in regional economies, GCP strives to introduce nev; ana improved products, has implemented a lower cost structure in North America and Europe ana continues to increase its presence in European and Southeast Asian markets. 7 WATER TREATMENT. Grace's water treatment and process chemicals business ("Grace Dearborn") consists of the water treatment and paper industry services business lines, which market the following products and services: (a) chemical treatments and related equipment and services to prevent corrosion, scale and microbiological growth in industrial utility waters, heating and cooling applications, ana industrial wastewater applications for clarification, sludge de-watering, odor control and water recycling; (b) paper industry process chemicals, support equipment and related consulting services; (c) hydrocarbon processing chemicals, related support equipment and services to protect and optimize processing system performance; (d) chemical treatments, support equipment and services for sugar processing, including processing sugar into alcohol as a gasoline substitute; (e) chemical treatments to protect industrial canned food cooking and sterilizing equipment; and (f) paint detackification products and services to remove paint sludge from water wash paint spray sys tems . Grace Dearborn sales and revenues for 1994 totaled $363 million (40% in Europe, 39% in North America, 18% in Latin America and 3% in Asia Pacific) . Sales and revenues for 1993 and 1992 were $330 million and $302 million, respectively. At year-end 1994, Grace Dearborn employed approximately 2,700 persons at 20 plants (6 in Latin America, 5 in Europe, 4 in each of North Amer ica and Asia Pacific and 1 in South Africa) and 107 sales offices. The raw materials used in Grace Dearborn's business lines are readily available from multiple sources, generally at stable prices. The paper industry services business is affected by the cyclicality of the global paper market. The water treatment services business responds to (but is not adversely affected by) seasonal fluctuations, concentrating on boiler treatment in winter and cooling system treatment in summer. The effects of seasonality are further diminished by the geographic diversity of the markets served by Grace Dearborn. CONTAINER PRODUCTS. Grace's container business ("Grace Container") consists primarily of four product lines: container sealants, closure sealants, coatings for metal packaging, and specialty polymers. The principal products marketed by these product lines include sealing compounds and related application equipment for food and beverage cans and other rigid containers; gasketing materials for the metal crown, aluminum roll-on and plastic closure segments of the glass/plastic container packaging markets; adhesive lacquers and associated protective and decorative coatings for metal closures; protective and decorative coatings and lacquers for rigid food and beverage containers; lubri cants used primarily in two-piece can manufacturing; and formulated engineered polymers for printed circuit board and component assembly in the electronics, electrical, automotive and defense industries, including surface mount and conductive adhesives, capacitor coatings, light emitting diode encapsulants and conformal coatings. 8 Grace Container sales and revenues were $325 million, $306 million and $32 million in 1994, 1993 and 1992, respectively. Its products are marketed internationally, with 33% of 1994 sales and revenues in Europe, 32% in North America, 26% in Asia Pacific and 9% in Latin America. At year-end 1994, Grace Container employed approximately 1,700 persons at 30 plants and 59 sales office: worldwide. Competition is based on providing high-quality customer service, as well as on price and product quality and reliability. The raw materials used i: Grace Container's operations are generally available from multiple spurces. A1 though demand for container packaging and sealant products tends to increase during the warmest months of the year, the inpact of such seasonality on Grace Container is offset almost entirely by the geographic diversity of the markets it serves. HEALTH CARE Grace's health care business ("Grace Health Care") is primarily engaged in supplying kidney dialysis services; in providing home infusion, home respiratory therapy and home health services; and in the manufacture and sale of products and equipment used to provide dialysis and other medical services. Grace Health Care provides kidney dialysis and related services for outpatients with chronic renal failure. At December 31, 1994, Grace Health Care operated 590 centers providing dialysis and related services (526 in North America, 42 in Europe, 15 in Latin America, and 7 in Asia Pacific); these centers, substantially all of which are leased, average approximately 5t600 square feet in size. Grace Health Care also provides inpatient acute dialysis services under contracts with hospitals in the United States (488 at December 31, 1994) and furnishes dialysis equipment and supplies to patients who elect home treatment. At December 31, 1994, Grace Health Care was treating approximately 40,000 patients in the United States and 5,000 patients in other countries. Revenues from kidney dialysis services were $1.3 billion in 1994, $3 billion in 1993 and $860 million in 1992. Grace Health Care also manufactures disposable bloodlines, dialysis solutions, artificial kidneys (dialyzers) and dialysis machines for use in its dialysis centers and for sale to unaffiliated dialysis providers and home patients; distributes dialysis supplies and equipment and other medical products and supplies manufactured by others; and provides laboratory services (including hepatitis testing) in the United States and Portugal. Approximately 60% of the" sales of dialysis and other medical products supplies ana equipment reflect sales to patients not directly treated, or facilities not operated, by Grace Health Care. Grace Health Care also provides infusion and respiratory therapy services to patients in their homes through a network of 9 \ 108 United States locations (107 leased and l owned) in 36 states. Infusion therapy consists of the intravenous delivery of an expanding range of medications and nutritional preparations, such as chemotherapy, total parentera nutrition, antibiotic therapy and drugs for pain management. Respiratory therapy consists of the delivery of oxygen and aerosolized drugs and the use of monitors, nebulizers and ventilators. In addition, Grace Health Care provides home health services through nine locations in California. Grace Health Care's United States business is dependent on the continuatio of Medicare and other third-party insurance coverage for dialysis and home care services and products. At such time as Medicare becomes a patient's primary payor for dialysis (generally, 3 months following commencement of treatment or, in the case of patients covered by employer-sponsored health insurance, 21 months after commencement of treatment) and/or homecare products and services, Medicare currently reimburses suppliers of such services and products for approximately 80% of established fees or reasonable charges; the remaining 20% is paid by the patient and/or a non-Medicare insurance carrier. Because in most cases the prices of dialysis services and products in the United States are directly or indirectly regulated by Medicare, competition in the industry is based primarily on quality and accessibility of service. In addition, some states limit competition under laws that restrict the number of dialysis facilities within a geographic area based on need, as determined by state agencies. Competition in the home care business is also based on quality of service as well as price{ and, where state laws do not impose limits on competition, there are no significant barriers to entering this business. Further, the rapid growth of managed care (a combination of financial incentive; and management controls intended to direct patients to efficient providers in cost-effective settings) has placed greater emphasis on service costs for patients insured by third parties; therefore, cost efficiency is also a key element of competition in this market. Based upon Grace's knowledge and understanding of the health care industry in general and of other providers of kidney dialysis and infusion therapy, as well as information obtained from publicly available sources, Grace Health Care believes that it is among the most cost-efficient of the companies in its field and that it is the leading United States supplier of dialysis services and products and a leading United States provider of infusion ana respiratory therapies. In most countries other than the United States where Grace Health Care provides dialysis services, prices and the opening of new facilities are directly or indirectly regulated by governments, and competition is based primarily on the quality and availability of service. 10 Except as noted in the following paragraph, Grace Health Care believes _ there are adequate sources of supply for the raw materials and products used in its health care services and medical products businesses. At year-end 1994, Grace Health Care employed approximately 17,000 persons full-time at its facilities wcprldwide. Grace Health Care's businesses generally are not seasons or cyclical in nature. - National Medical Care, Inc. ("NMC") is Grace's principal health care subsidiary. In 1993, the United States Food and Drug Administration ("FDA") issued import alerts with respect to (a) hemodialysis bloodlines manufactured a NMC's plant located in Reynosa, Mexico and (b) hemodialyzers manufactured in NMC's Dublin, Ireland facility. Products subject to FDA import alerts may not enter the United States until the FDA approves the quality assurance systems of the facility at which such products are manufactured. In January 1994, NMC entered into a consent decree providing for the resumption of importation of bloodlines and hemodialyzers following certification by NMC that the relevant facility complies with FDA regulations and successful completion of an FDA inspection to verify such compliance. The consent decree also requires NMC to certify and maintain compliance with applicable FDA manufacturing requirements at all of its United States manufacturing facilities. NMC submitted all required certifications for its United States and non-United States facilities in accordance with the timetable specified in the consent decree, and the bloodline import alert was lifted in March 1994. The Dublin hemodialyzer manufacturing facility was inspected by the FDA in December 1994, and NMC anticipates completion of all remaining corrective actions in the second quarte: of 1995. No fines or penalties have been imposed on NMC as a result of any of the FDA's actions or in connection with the consent decree. Neither the import alerts nor previously reported recalls of certain NMC products have had, or are expected to have, a material effect on Grace's results of operations or financial condition. HEALTH CARE INVESTMENT. Grace has a 47% common equity interest in a company that serves hospitals and other health care institutions by recruiting nurses and other trained health care personnel and placing them on temporary assignments throughout the United States. Grace also owns preferred stock of the company and options to acquire an additional 51% common equity interest in the company; options covering a 39% common equity interest are currently exer cisable ana expire in 2001, and options covering the remaining 12% become exercisable in 1996 and expire in 2001. See "Strategic Restructuring" above for information concerning 1993 and 1994 transactions involving Grace's health care business. 11 OTHER OPERATIONS THERMAL AND EMISSION CONTROL SYSTEMS. Grace's thermal and emission contro systems business (which is included in the Specialty Chemicals segment in the Consolidated Financial Statements) consists of four principal product groups: web processing products, industrial emission control products, mobile emission control products, and specialty catalysts. These products are designed to customer specifications and sold to a variety of industrial customers. Web processing products, consisting primarily of air flotation dryers and auxiliary equipment, are sold principally to the graphic arts, coating and converting markets. Competition is based upon system design, service and product performance. The industrial emission control products group manufactures volatile organic compound control equipment, including thermal, catalytic, and regenerative oxidation systems. Demand for this equipment is driven principair by government regulations, and competition is based upon technology, product performance and price. The mobile emission control products group sells washcoat materials and specialty substrates. Washcoat materials are used hy catalyst manufacturers to enhance the performance of catalytic converters sold to automotive original equipment manufacturers. Competition is based primarily on technology and product performance. In February 1995, Grace and Engelhard Corporation an nounced the formation of a 50/50 joint venture to manufacture and market metalbased catalytic converters to the automotive industry. Specialty catalysts are used to control volatile organic compounds, nitrogen oxides and carbon monoxide from a variety of sources. DISCONTINUED OPERATIONS. In 1993, Grace classified its remaining noncore businesses as discontinued operations. As described above under "Strategic Restructuring - Sale and Monetization of Noncore Businesses," in 1993 ana 1994 Grace completed the sale and monetization of a substantial portion of these businesses. Grace is actively pursuing the disposition of its remaining discontinued operations and expects to complete their disposition in 1995. See Notes 3, 6 and 12 to the Consolidated Financial Statements in the Financial Supplement and "Strategic Restructuring" above for additional information. RESEARCH ACTIVITIES Grace engages in active research and development programs directed toward the development of new products and processes ana 12 the improvement of, and development of new uses for, existing products and processes. Research is carried out by product line laboratories in North America, Europe, Asia and Latin America and by the Corporate Research Division, which has facilities in Columbia, Maryland, Lexington, Massachusetts, and Atsugi, Japan. The Research Division's activities focus on Grace's core produc lines and include research in specialty polymers; medical products; water treatment; catalysis; construction materials; photopolymers; specialty packaging; and process engineering, principally involving the development of technologies to manufacture chemical specialties and biomedical products. Research and development expenses relating to continuing operations amounted to $132 million in 1994, $135 million in 1993 and $130 million in 1992 (including expenses incurred in funding external research projects). The amount of research and development expenses relating to government- and customersponsored projects (as opposed to projects sponsored by Grace) is not material. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for additional information. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS In constructing and operating its facilities, Grace incurs capital and operating expenditures relating to the protection of the environment, as well a: costs to remediate properties. The following table sets forth Grace's expenditures in the past three years, and its estimated expenditures in 1995 anc 1996, for (a) the operation and maintenance of environmental facilities and the disposal of hazardous and nonhazardous wastes with respect to continuing operations; (b) capital improvements to environmental control facilities relating to continuing operations; and (c) the remediation of sites: (a) Operation of Facilities and Masts Disposal (b) Capital laprov--nt (in Billion*) (c) Raaadiation 1992 1993 1994 1995 (ast.) 1996 (ast.) $56 45 41 42 45 $! 20 22 26 23 $35 44 31 45 39 13 Such expenditures have not had, and are not expected to have, a material effect on Grace's other capital expenditures or on its earnings or competitive position. See Note 11 to the Consolidated Financial Statements and "Management1: Discussion and Analysis of Results of Operations and Financial Condition" in th< Financial Supplement. Grace's corporate environment, health and safety ("EHS") policy was reviewed and revised in 1994 to reflect organizational and other changes. The revised policy affirms the Company's commitment to continuous improvement in environment, health and safety performance. The policy is supported through programs including specialized safety training for employees, monitoring of the workplace environment, and training and guidance for employees with respect to EHS regulatory compliance. In 1994, Grace announced the creation of its Commitment to Care-SMprogram, modeled on the Responsible Care{Registered Trademark} program of the Chemical Manufacturers Association. The Commitment to Care program extends the basic elements of the Responsible Care program to all Grace locations worldwide, to the extent applicable. The program embraces specific objectives in six key areas of environment, health and safety: product stewardship, employee health and safety, community awareness and emergency response, process safety, distribution, and pollution prevention. The effort is coordinated worldwide to encourage the sharing of best practices among Grace's business units. Certain EHS management resources were consolidated into a central EHS department in 1993. The EHS department provides environmental assistance, training, and medical/toxicology, industrial hygiene and safety services to support EHS programs in Grace facilities worldwide. The department also audits operating facilities and oversees the remediation of environmentally impaired sites for which Grace has responsibility; in 1994, the department audited Grace facilities in all world regions. See Item 3 of this Report for information concerning environmental proceedings to which Grace is a party and "Management1s Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for additional information concerning environmental matters. MATERIALS AND ENERGY The availability and prices of the raw materials and fuels used by Grace are subject to worldwide market conditions and governmental policies. On the basis of existing arrangements, Grace does not anticipate any major disruptions of its business in 1995 14 \ as a result of shortages of raw materials or energy. Should shortages occur, their effect on GraceTs operations would depend upon their nature, duration and severity and consequently cannot be determined at this time. However, arrangements have been made, and will continue to be made, for long-term commitments for many of Grace's raw materials and fuel requirements from primar sources of supply. See "Industry Segments" above for additional information. ITEM 2. PROPERTIES. Grace operates chemical, manufacturing and other types of plants and facilities (including office and other service facilities) throughout the wprld Grace considers its major operating properties to be in good operating conditio and suitable for their current use. Although Grace believes that the productiv capacity of its plants and other facilities, taking into account planned expansion, is generally adequate for current operations and foreseeable growth, it conducts ongoing, long-range forecasting of its capital requirements to assure that additional capacity will be available when and as needed (see information regarding Grace's capital expenditures on page F-27 of the Financia Supplement). Accordingly, Grace does not anticipate that its operations or income will be materially affected by the absence of available capacity. Additional information regarding Grace's properties is set forth in Item 1 above and in Notes 1, 8 and 11 to the Consolidated Financial Statements in the Financial Supplement. ITEM 3. LEGAL PROCEEDINGS. ASBESTOS LITIGATION. Grace is a defendant in lawsuits relating to previously sold asbestos-containing products and anticipates that it will be named as a defendant in additional asbestos-related lawsuits in the future. At year-end 1994, Grace was a defendant in approximately 38,700 asbestos-related lawsuits representing approximately 68,000 claims (as compared to approximately 38,100 lawsuits and 56,700 claims at year-end'1993). In most of these lawsuits Grace is one of many defendants. Of the lawsuits pending at year-end 1994, 65 (92 at year-end 1993) involved claims for property damage allegedly caused by the use of asbestos-containing materials in the construction of buildings. The plaintiffs in these lawsuits generally seek, among other things, to have the defendants absorb the cost of removing, containing or repairing the asbestoscontaining materials in the affected buildings. The remaining asbestos-related lawsuits involved claims for personal injury. Through year-end 1994, 126 asbestos property damage cases had been dismissed with respect to Grace without payment of any damages or settlement amounts; judgments had been entered in favor of Grace 15 in 10 cases (excluding one case that was settled following appeal of a judgment in favor of Grace and another case in which the plaintiff was granted a new trial on appeal, limited to statute of limitations issues); Grace had been held liable for a total of $74.6 million in 7 cases (3 of which are on appeal); and 159 property damage suits and claims had been settled by Grace for a total of $341.8 million. Included in the asbestos property damage lawsuits pending against Grace anc others at year-end 1994 were the following class actions: (1) a Pennsylvania State court action (PRINCE GEORGE CENTER, INC. V. U.S. GYPSUM COMPANY, ET AL., Court of Common Pleas of Philadelphia County), certified in 1992, covering all commercial buildings in the United States leased in whole or in part to the United States government on or after May 30, 1986; (2) an action{ conditionally certified by the United States Court of Appeals for the Fourth Circuit in 1993 and pending in the United States District Court for the District of South Carolina, covering all public and private colleges and universities in the United States whose buildings contain asbestos materials (CENTRAL WESLEYAN COLLEGE, ET AL. V. W. R. GRACE, ET AL.); and (3) a purported class action (ANDERSON MEMORIAL HOSPITAL, ET AL. V. W. R. GRACE & CO., ET AL.), filed in 199; in the Court of Common Pleas for Hampton County, South Carolina, on behalf of all entities that own, in whole or in part, any building containing asbestos materials manufactured by Grace or one of the other named defendants, other thar buildings subject to the class action lawsuits described above and any building owned by the federal or any state government. In July 1994, the claims of most Class members in ANDERSON MEMORIAL HOSPITAL, ET AL. , V. W. R. GRACE & CO., ET AL. were dismissed due to a ruling that a South Carolina statute prohibits nonresidents from pursuing claims in the South Carolina state courts with respect to buildings located outside the state. The plaintiffs have reguested that the Court reconsider its decision. In August 1994, Grace entered into an agreement to settle IN RE: ASBESTOS SCHOOL LITIGATION, a nationwide class actior brought in 1983 in the United States District Court for the Eastern District of Pennsylvania on behalf of all public and private elementary and secondary schools in the United States that contain friable asbestos materials (other thar schools that "opted out" of the class). The terms of the settlement agreement (which is subject to judicial review and approval after class members have an opportunity to be heard) are not expected to have a significant effect on Grace's consolidated results of operations or financial position. The remaining asbestos lawsuits pending at year-end 1994 involved claims for personal injury. Through year-ena 1994, approximately 8,400 personal injury lawsuits involving 22,200 claims had been dismissed with respect to Grace without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved), and approximately 17,000 such suits involving 20,000 claims had been disposed of for a total of $77.1 16 million (see "Insurance Litigation" below). However, as a result of various trends (including the insolvency of other former asbestos producers and cross claims by co-defendants in asbestos personal injury lawsuits), the costs incurred in disposing of such lawsuits in the past may not be indicative of the costs of disposing of such lawsuits in the future. In 1991, the Judicial Panel on Multi-District Litigation consolidated in the United States District Court for the Eastern District of Pennsylvania, for pre-trial purposes, all asbestos personal injury cases pending in the federal courts, including approximately 7,000 cases then pending against Grace,- 3,200 new cases involving 6,500 claims against Grace have subsequently been added to the consolidated cases. To date, no action has been taken by the court handlin< the consolidated cases that would indicate whether the consolidation will affeci Grace's cost of disposing of these cases or its defense costs. Grace's ultimate exposure in respect of its asbestos-related lawsuits and claims will depend on the extent to which its insurance will cover damages for which it may be held liable, amounts paid in settlement and litigation costs. While (a) Grace's insurance carriers have not acknowledged or have denied the applicability of their insurance coverage to Grace's asbestos property damage lawsuits and claims (except as discussed below under "Insurance Litigation"), (b) Grace is currently in litigation with certain carriers concerning the applicability and extent of its insurance coverage and (c) the resolution of certain issues, primarily relating to the availability of coverage for specific years, will require further judicial proceedings, Grace believes that its insur ance will cover a substantial portion of any damages, settlement amounts and litigation costs related to its asbestos litigation and claims. Consequently, Grace believes that the resolution of its asbestos litigation will not have a material adverse effect on its consolidated financial position or results of operations. See "Insurance Litigation" below and Note 2 to the Consolidated Financial Statements in the Financial Supplement for additional information. ENVIRONMENTAL AND OTHER PROCEEDINGS. Grace (together with other companies) has been designated a "potentially responsible party" ("PRP") by the United States Environmental Protection Agency ("EPA") with respect to absorbing the costs of investigating and remediating pollution at various sites. At year-end 1994, proceedings were pending with respect to approximately 40 sites as to which Grace has been designated a PRP. Federal law provides that all PRPs may be held jointly and severally liable for the costs or investigating and remediating a site. Grace is also conducting investigatory and remediation activities at sites under the jurisdiction or state and/or local authorities. 17 In addition, Hatco Corporation ("Hatco"), which purchased the assets of a Grace chemical business in 1978, previously instituted a lawsuit against Grace in the United States District Court for the District of New Jersey seeking recovery of cleanup costs for waste allegedly generated at a New Jersey facility during the period of Grace's ownership. Grace has also filed a lawsuit against its insurance carriers seeking indemnity against any damages assessed against' Grace in the underlying lawsuit, as well as defense costs. In decisions rendered during 1993, the Court ruled that Grace is responsible for a substantial portion of Hatco's costs. These decisions are currently under review by the United States Court of Appeals for the Third Circuit. In an earlier decision, the District Court had resolved, in a manner favorable to Grace, certain legal issues regarding Grace's right to insurance coverage; however, the ultimate liability of Grace's insurance carriers will be determinec at trial. Remediation costs, and Grace's share of such costs, will be determined once ongoing site investigations are completed and a remediation plar is approved by the State of New Jersey, which is not expected to occur before the latter part of 1995. As a result of the above factors, the amount that Grace may be required to pay to Hatco (which Grace expects will be partially offset by recoveries from insurance carriers) cannot be reliably estimated at this time. Grace is also a party to other proceedings involving federal, state and/or local government agencies and private parties regarding compliance with environmental laws and regulations by its continuing operations. These proceedings are not expected to result in significant sanctions or in any material liability. As a voluntary participant in the EPA Toxic Substances Control Act Compliance Audit Program, Grace agreed to undertake a corporate-wide audit of compliance with Section 8 of such Act and to pay a stipulated civil penalty for each study or report that EPA alleges should have been, but was not, submitted to the EPA as required under such Section. Although final review of the audit is not complete, Grace believes it will be required to pay the EPA penalties aggregating from $250,000 to $400,000 for information discovered in the course of the audit. In addition, Grace has voluntarily reported to the EPA violations of certain notification and related requirements under such Act, and penalties may be assessed against Grace in connection therewith; the amount of such penalties cannot be determined at this time. In addition, in 1993, the United States Department of Justice filed suit against Grace in the United States District Court for the District of Montana, Great Palls Division, alleging certain violations of the Clean Air Act in connection with the demolition of a mill in Libby, Montana during late 1991 and early 1992. In May 1994, Grace signed a consent decree in which it agreed to pay penalties of $510,000 and to implement certain procedures under the Clean Air Act at 28 facilities. The consent decree was approved by the United States District Court for the District of Montana, Great Falls Division, in December 1994, and the penalties were paid in January 1995. Grace believes that the amount recorded in the Consolidated Financial Statements for environmental remediation costs is adequate. In addition, Grace is presently involved in litigation with its insurance carriers seeking to hold them responsible for certain amounts for which Grace may be held liable with respect to such costs. The outcome of such litigation, as well as the amount oi any recoveries that Grace may receive in connection therewith, is presently uncertain. For further information, see Note 11 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement. INSURANCE LITIGATION. Grace is involved in litigation with certain insurance carriers with respect to asbestos-related claims and environmental liabilities. Its asbestos-related insurance actions consist of a case styled MARYLAND CASUALTY CO. V. W. R. GRACE & CO., pending in the United States District Court for the Southern District of New York; STATE OF MISSISSIPPI V. THE FLINTKOTE CO., ET AL., pending in the Circuit Court of Jackson County, Mississippi; DAYTON INDEPENDENT SCHOOL DISTRICT V. UNITED STATES MINERAL PRODUCTS COMPANY, ET AL., pending in the United States District Court for the Eastern District of Texas; INDEPENDENT SCHOOL DISTRICT NO. 197, ET AL. V. W. R. GRACE & CO. AND ACCIDENT & CASUALTY INSURANCE CO., ET AL., pending in the First Judicial District in Minnesota; THE COUNTY OF HENNEPIN V. CENTRAL NATIONAL INSURANCE COMPANY, ET AL., pending in the Fourth Judicial District in Minnesota; ECOLAB, INC. V. CENTRAL NATIONAL INSURANCE CO., pending in the District Court for Ramsey County, Minnesota; and AMERICAN EMPLOYERS' INSURANCE CO., AMERICAN RE-INSURANCE CO., AND COMMERCIAL UNION INSURANCE CO., AND UNIGARD SECURITY INSURANCE CO. V. W. R. GRACE & CO., CONTINENTAL CASUALTY CO., AND MARYLAND CASUALTY CO., which is pending in the New York state courts; Grace's insurance actions relating to environmental liabilities consist of MARYLAND CASUALTY CO. V. w. R. GRACE & CO., pending in the United States District Court for the Southern District of New York; and HATCO CORP. V. W. R. GRACE & CO.-CONN., pending in the United States District Court for the District of New Jersey. The relief sought by Grace in these actions would provide insurance to partially offset Grace's estimated exposure with respect to the actions' subject matter, including amounts previously expended by Grace to defend claims and satisfy judgments and settlements (see Note 2 to the Consolidated Financial Statements in the Financial Supplement). The factual bases underlying these actions are the nature of the underlying asbestos-related and environmental claims, the language of the insurance policies sold by the carriers to Grace and the drafting history of those policies. 19 In 1991 (in an asbestos-related case involving Maryland Casualty Co.), the United States District Court for the Southern District of New York determined that coverage for property damage is triggered by the "discovery of damage" during the period covered by the relevant policy. In September 1993, the United States Court of Appeals for the Second Circuit reversed the District Court's ruling as to a "discovery of damage" trigger for such claims and, instead, ruled that coverage for these claims is triggered based on the date of installation of asbestos-containing materials. In January 1994, the United States Court of Appeals for the Second Circuit granted Grace's petition for a rehearing concerning the September 1993 decision, and on May 16, 1994, the Court issued a new decision confirming its September 1993 decision. As a result, Grace recorded a noncash charge of $200 million after taxes in the second quarter of 1994 to reflect the reduction in asbestos property damage insurance coverage. Subsequently, the Second Circuit refused to rehear its decision, and the United States Supreme Court denied Grace's petition for a writ of certiorari with respect to the Second Circuit decision. In 1991 and 1994, the Mississippi Court referred to above held that certain of Grace's excess insurance carriers are obligated to defend and indemnify Grace, determining that, for purposes of insurance coverage, damage to buildings from asbestos-containing products occurs at the time such products are put in place and that the damage continues as long as the building contains the products (referred to as a "continuous trigger"); the 1994 ruling is being appealed. In 1992, the Minnesota court referred to above reached a similar decision in interpreting Grace's insurance policies. In January 1994, the Minnesota court entered judgment against certain of Grace's carriers m the amount of $14.2 million, but that judgment was reversed by the Minnesota Court of Appeals in January 1995. Further review of that decision will be sought. Prior to 1993, Grace received payments totaling $97.7 million from insurance carriers ($66.2 million prior to 1992 and $31.5 million in 1992), the majority of which represented the aggregate remaining obligations owed to Grace by those carriers for primary-level insurance coverage written for the period June 30, 1962 through June 30, 1987. In 1993, Grace received $74.6 million under settlements with insurance carriers, in reimbursement for amounts previously expended by Grace in connection with asbestos-related litigation; these settlements also provide for future reimbursements of $114 million. In 1994, Grace settled with three additional insurance carriers and received $111.6 million under such settlements, and in early 1995, Grace settled with a primarylevel insurer for $100 million. As a result of these payments, insurance litigations were dismissed as to the primary-level product liability insurance . coverage previously sold by the relevant insurers to Grace; however, litigations continue as to certain excess-level carriers. 20 \ Grace continues to be involved in litigation with certain of its insurance carriers, including an affiliated group of carriers, that had agreed to a settlement and had made a series of payments thereunder during 1993. The group of carriers subsequently notified Grace that it would not honor the agreement (which had not been executed) due to the September 1993 decision of the United States Court of Appeals for the Second Circuit referred to above. Grace believes that the settlement agreement is binding and initiated action to enforce the settlement agreement. In January 1994, the United States District Court for the Eastern District of Texas held that the agreement is enforceable. The affiliated group of carriers appealed this ruling to the United States Court of Appeals for the Fifth Circuit ana has sought to attack it in a collateral action in the United States District Court for the Southern District of New York; however, Grace successfully stayed this attack. See Note 2 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Financial Supplement for additional information. FUMED SILICA PLANT LITIGATION. In 1993, Grace initiated legal action in the Belgian courts against the Flemish government to recover losses resulting from the closing of Grace's fumed silica plant in Puurs, Belgium. (See Note 8 to the Consolidated Financial Statements in the Financial Supplement for additional information.) Grace is seeking damages in excess of four billion Belgian francs (approximately $123 million at the December 31, 1994 exchange rate), plus interest and lost profits. This claim was dismissed at the trial court level and is now being appealed by Grace. The trial court also determined that Grace should repay approximately 2j9 million Belgian francs (approximately $7.4 million at the December 31, 1994 exchange rate) plus interest to the Flemish government for previously received investment grants; this decision is also being appealed by Grace. Also pending is an arbitration involving the engineering company that was responsible for the design and construction of the fumed silica plant. The outcome of this proceeding may affect the action filed against the Flemish government. During 1994, a claim by the company from which Grace had agreed to purchase hydrogen for use in the plant under a long-term contract was settled. SHAREHOLDER LITIGATION. In March 1995, a lawsuit was brought against the Conqaany and all of the members of its Board of Directors (as well as J. P. Bolauc, who resigned as President, Chief Executive Officer and a director of the Company in March 1995) in New York State Supreme Court, New York County (WEISER V. GRACE, ET AL., Index No. 95-106285). The lawsuit, which purports to be a derivative action (I.E., an action brought on behalf of the Company), alleges that the individual defendants breached their fiduciary duties to the Company (a) by providing J. Peter Grace (who is currently the Chairman and a director of the Company, but 21 \ who has agreed not to stand for re-election to those positions) with certain compensation arrangements upon his retirement as the Company's Chief Executive Officer in 1992 ana (b) by approving Mr. Bolduc's severance arrangements, and that Messrs. Grace and Bolduc breached their fiduciary duties by accepting such benefits and payments. The lawsuit seeks unspecified damages, attorneys' fees gnd costs, and such other relief as the Court deems proper. Similar claims are made, and similar relief is sought, in a second purported derivative action (JACOBSEN V. GRACE, ET AL., New York Supreme Court, New York County, Index No. 95-107355) brought in March 1995 against the Company, all of its directors, Mr. Bolduc and J. Peter Grace III, a son of Mr. Grace. In addition, the second lawsuit alleges that the defendants breached their fiduciary duties to the Company in other respects and seeks eguitable relief, including the cancellation of Mr. Grace's consulting agreement with the Company and the repayment of various amounts to the Company. OTHER. The Company has been notified that the Securities and Exchange Commission is conducting an infomral inquiry into the Company's prior disclsoures, including disclosures regarding benefits and arrangements Srovided to Mr. J. Peter Grace, Jr., and certain matters relating to . Peter Grace III, the son of Mr. Grace, Jr. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. This Item is inapplicable, as no matters were submitted to a vote of the Company's security holders during the fourth quarter of 1994. EXECUTIVE OFFICERS The Company's current executive officers are listed below. Executive officers are elected to serve until the following annual meeting of the Company's Board of Directors,* the next such meeting is scheduled to be held on May 10, 1995. Name and Age Office First Elected R. H. Beber (61) Executive Vice President and General Counsel Robert J. Bettacchi (52) Vice President F. Peter Boer (54) Executive Vice President Jean-Louis Greze (63) Executive Vice President Constantine L. Hampers (62) Executive Vice President 05/10/93 09/01/91 02/01/90 01/05/89 05/10/93 06/06/91 22 Thomas A. Holmes (71) James R. Hyde (56) Donald H. Kohnken (60) Fred Lempereur (57) Ian Priestnell (51) Brian J. Smith (50) Acting President and Chief Executive Officer 03/02/95 Vice President 07/01/87 Executive Vice President 12/07/89 Senior Vice President 02/06/92 Vice President 02/06/92 Executive Vice President 07/06/89 and Chief Financial Officer All the above executive officers have been actively engaged in Grace's business for the past five years, other than Mr. Holmes, who retired as chairman, president and chief executive officer of Ingersoll-Rand Company in 1988. Mr. Holmes has been a director of the Company since 1989. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Except as provided below, the information called for by this Item appears in the Financial Supplement under the heading "Financial Summary" opposite the caption "Other Statistics - Common shareholders of record" (page F-28); under the heading "Quarterly Summary and Statistical Information" opposite the captions "Dividends declared per common share" and "Market price of common stock" (page F-25); and in Note 13 to the Consolidated Financial Statements (page F-20). Each share of the Company's Common Stock has an attendant Common Stock Purchase Right ("Right"). The Rights are not and will not become exercisable unless and until certain events occur (as described below). Until such events occur, the Rights will automatically trade with the Common Stock and separate certificates for the Rights will not be distributed. The Rights will become exercisable on the tenth business day (or such later business day as may be fixed by the Company's Board of Directors) after a person or group (a) becomes an "interested shareholder", as defined in Section 912 of the New York Business Corporation Law (generally, a beneficial owner of 20% or more of the outstanding voting stock), or (b) commences a tender offer or exchange offer that would result in such person or group becoming an interested shareholder. The Rights will not have any voting power at any time. 23 When the Rights become exercisable, each Right will initially entitle the holder to buy from the Company one share of Common Stock for $87.50, subject to adjustment in certain cases (''purchase price") . If, at any time after the Rights become exercisable, (a) the Company is involved in a merger or other business combination in which (i) the Company is not the surviving corporation or (ii) any of the Common Stock is changed or converted into or exchanged for stock or other securities of any other person or cash or other property, or (b) 50% of the Company's assets, cash flow or earning power is sold, each Right will entitle the holder to buy a number of shares of common stock of the acquiring company having a market value equal to twice the purchasf price. Alternatively, each right not owned by a person who becomes an interested shareholder would become exercisable for Common Stock (or other consideration) having a market value equal to twice the purchase price. The Rights may be redeemed by the Company at $.025 per Right (payable in cash, Common Stock or any other form of consideration deemed appropriate by the Board) at any time through the tenth business day (or such later business day a may be fixed by the Board) after a public announcement that a person or group has become an interested shareholder; this right of redemption may be reinstatec if all interested shareholders reduce their holdings to 10% or less of the outstanding Common Stock. The Rights will expire in January 1997. The Rights may be amended either before or after they become exercisable. However, the basic economic terms of the Rights (such as the purchase and redemption prices and the expiration date) cannot be changed. IH K H O ITEM 6. SELECTED FINANCIAL DATA. The information called for by this Item appears under the heading "Financial Summary" (page F-28 of the Financial Supplement) and in Notes 5, 6, and 16 to the Consolidated Financial Statements (pages F-12, F-13, F-17 and F-2 of the Financial Supplement). In addition, Exhibit 12 to this Report (page F-3 of the Financial Supplement) contains the ratio of earnings to fixed charges anc combined fixed charges and preferred stock dividends for Grace for the years 1990-1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information called for by this Item appears on pages F-29 to F-32 of the Financial Supplement. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibits on page F-l of the Financial Supplement. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. This item is inapplicable, as no such changes or disagreements have occurred. PART III ITEM IQ. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Except for information regarding the Company's executive officers (see pages 22 and 23), the information called for by this Item is incorporated in this Report by reference to the definitive Proxy Statement for the Company's 1995 Annual Meeting of Shareholders, except for information not deemed to be "soliciting material" or "filed" with the Securities and Exchange Commission ("SEC"), information subject to Regulations 14A or 14C under the Securities Exchange Act of 1934 ("Exchange Act") or information subject to the liabilities of Section 18 of the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Items 11, 12 and 13 is incorporated in this Report by reference to the definitive Proxy Statement for the Company's 1995 Annual Meeting of Shareholders, except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS AND SCHEDULES. See the Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibits on page F-l of the Financial Supplement. REPORTS ON FORM 8-K. The Company filed one Report on Form 8-K during the fourth quarter of 1994. The Report, which was filed on October 27, 1994, reported the Company's results of operations for the three-month and nine-month periods ended September 30, 1994. EXHIBITS. The exhibits to this Report are listed below. Other than exhibits that are filed herewith, all exhibits listed below are incorporated herein by reference. Exhibits indicated by an asterisk (*) are the management contracts and compensatory plans, contracts or arrangements required to be filec as exhibits to this Report. EXHIBIT WHERE LOCATED Certificate of Incorporation of W. R. Grace & Co., as amended Exhibit 3 to Form 8-K (filed 6/9/88) By-laws of W. R. Grace & Co., as amended Filed herewith Indenture dated as of Septem ber 29, 1992 among W. R. Grace & Co.-Conn., W. R. Grace & Co. and Bankers Trust Company Exhibit 4.2 to Form 10-K (filed 3/26/93) Indenture dated as of January 28, 1993 among W. R. Grace & Co.-Conn., W. R. Grace & Co. and NationsBank of Georgia, N.A. Exhibit 4.4 to Form 10-K (filed 3/26/93) 364-Day Credit Agreement, dated as of September 1, 1994, among W. R. Grace & Co.-Conn., W. R. Grace & Co., the several banks Parties thereto and Chemical ank, as agent for such banks Exhibit 4.1 to Form 10-Q (filed 11/10/94) 26 Credit Agreement, dated as of September 1, 1994, among W. R. Grace & Co.-Conn., W. R. Grace & Co., the several banks parties thereto and Chemical Bank, as agent for such banks First Amendment, dated as of December 28, 1994, to the 364Day Credit Agreement, dated as of September 1, 1994 First Amendment, dated as of December 28, 1994, to the Credit Agreement, dated as of September 1, 1994 Amended and Restated Rights Agreement dated as of June 7, 1990 between W. R. Grace & Co. and Manufacturers Hanover Trust Company W. R. Grace & Co. Executive Salary Protection Plan, as amended W. R. Grace & Co. 1981 Stock Incentive Plan, as amended W. R. Grace & Co. 1986 Stock Incentive Plan, as amended W. R. Grace & Co. 1989 Stock Incentive Plan, as amended W. R. Grace & Co. 1994 Stock Incentive Plan W. R. Grace & Co. 1994 Stock Retainer Plan for Nonemployee Directors Forms of Stock Option Agreements Forms of Restricted Share Award Agreements \ Exhibit 4.2 to Form 10-Q (filed 11/10/94) Filed herewith Filed herewith Exhibit to Amendment on Form 8 to Application for Registration on Form 8-B (filed 6/19/90) Exhibit 19(f) to Form 8-K (filed 6/9/88)* Exhibit 28(a) to Form 10-Q (filed 8/13/91)* Exhibit 28(b) to Form 10-Q (filed 8/13/91)* Exhibit 28(c) to Form 10-Q (filed 8/13/91)* Filed herewith* Filed herewith* Exhibit 10(h) to Form 10-K (filed 3/28/92)* Exhibit 10(i) to Form 10-K (filed 3/28/92)* 27 Information Concerning W. R. Grace & Co. Incentive Compen sation Program, Deferred Compensation Program and Long-Term Incentive Program w. R. Grace & Co. Long-Term Incentive Plan W. R. Grace & Co. Retirement Plan for Outside Directors, as amended Employment Agreement dated as of April l, 1991 between W. R. Grace & Co.-Conn, and Constantine L. Hampers, as amended Housing Loan Agreement dated as of August 1, 1987 between w. R. Grace & Co. and J. P. Bolduc, related Amendment and Assignment dated May 10, 1988 Employment Agreement dated August 1, 1993 between J. P. Bolduc and W. R. Grace & Co. Stock Option Agreement dated June 30, 1993 between David L. Yunich and W. R. Grace & Co. Stock Option Agreement dated June 30, 1993 between David L. Yunich and W. R. Grace & Co. Retirement Agreement between W. R. Grace & Co. and J. Peter Grace dated December 21, 1992 Executive Severance Agreement dated as of September 1, 1992 between W. R. Grace & Co. and J. P. Bolduc Executive Severance Agreement dated September 1, 1992 between W. R. Grace & Co. and Constantine L. Hampers \ Pages 8-13 and 27-30 of Proxy Statement (filed 4/11/94)* Exhibit 10(1) to Form 10-K (filed 3/29/91)* Exhibit 10(o) to Form 10-K (filed 3/28/92)* Exhibit 10(x) to Form 10-K (filed 3/28/92)* Exhibit 10(g) to Form 10-K (filed 3/29/88); Exhibit 19(i) to Form 8-K (filed 6/9/88)* Exhibit 10.13 to Form 10-K (filed 3/28/94)* Exhibit 10.14 to Form 10-K (filed 3/28/94)* Exhibit 10.15 to Form 10-K (filed 3/28/94)* Exhibit 10.23 to Form 10-K (filed 3/26/93)* Exhibit 10.24 to Form 10-K (filed 3/26/93)* Exhibit 10.26 to Form 10-K (filed 3/26/93)* 28 Form of Executive Severance Agreement between W. R. Grace & Co. and others Consulting Agreement dated June 1, 1992 between W. R. Grace & Co. and Kamsky Associates, Inc. Incentive Compensation Agreement dated June 1, 1992 between National Medical Care, Inc. and Kamsky Associates, Inc. Consulting Agreement dated as of December 1993 between National Medical Care, Inc. and Virginia A. Kamsky Consulting Agreement dated as of June 16, 1993 by and between National Medical Care, Inc., The Humphrey Group, Inc. and Gordon J. Humphrey Employment Termination Agreement dated June 30, 1993 between J. R. Wright, Jr. and W. R. Grace & Co. W. R. Grace & Co. Supplemental Executive Retirement Plan, as amended Agreement dated March 1, 1995 between W. R. Grace & Co. and Jean-Louis Greze Agreements dated March 2 and March 7, 1995 between J. P. Bolduc and W. R. Grace & Co. Letter Agreement dated April 1, 1991 between National Medical Care, Inc. and Constantine L. Hampers Weighted Average Number of Shares and Earnings Used in Per Share Computations Exhibit 10.28 to Form 10-K (filed 3/26/93)* Exhibit 10.29 to Form 10-K (filed 3/26/93)* Exhibit 10.30 to Form 10-K (filed 3/26/93)* Filed herewith* Exhibit 10.23 to Form 10-K (filed 3/28/94)* Exhibit 10.24 to Form 10-K (filed 3/28/94)* Exhibit 10.25 to Form 10-K (filed 3/28/94)* Filed herewith* Filed herewith* Filed herewith* Filed herewith (in Financial Supplement to 10-K) 29 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends Selected Portions of the 1994 Annual Report to Shareholders of W. R. Grace & Co. List of Subsidiaries of W. R. Grace & Co. Consent of Independent Accoun tants Powers of Attorney Letter of Intent dated November 5, 1993 between H. R. Grace & Co. and J. Peter Grace III, as amended Agency Agreement dated June 13, 1994 between HSC Holding Co., Inc. and Grace Hotel Services Corporation Letter Agreement dated December 14, 1994 among HSC Holding Co., Inc., Grace Hotel Services Corporation and W. R. Grace & Co. Services Agreement dated November 10, 1994 between HSC Holding Co., Inc. and Grace Hotel Services Corporation Filed herewith (in Financial Supplement to 10-K) Filed herewith (in Financial Supplement to 10-K) Filed herewith Filed herewith (in Financial Supplement to 10-K) Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed o its behalf by the undersigned, thereunto duly authorized. W. R. GRACE & CO. By /s/ B. J. Smith Date: March 29, 1995 B. J. Smith (Executive Vice President) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 1995. SIGNATURE TITLE T. A. Holmes* Director and Acting President (Acting Principal Executive Officer) G. C. Dacey* E. w. Duffy* C. H. Erhart, Jr.* J. W. Prick* J. P. Grace* G. P. Jenkins* R. C. Macauley* J. E. Phipps* J. A. Puelicher* D. W. Robbins, Jr.* E. J. Sullivan* D. L. Yunich* Directors /s/ B. J. Smith Executive Vice President (B. J. Smith) (Principal Financial Officer) /s/ R. N. Sukenik Vice President and Controller (R. N. Sukenik) (Principal Accounting Officer) * By signing his name hereto, Robert B. Lamm is signing this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission. By /s/ Robert B. Lamm Robert B. Lamm (Attorney-in-Fact) 31 FINANCIAL SUPPLEMENT to ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 W. R. GRACE & CO. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE AND EXHIBITS PAGE Report of Independent Accountants on Financial Statement Schedule F-2 Consent of Independent Accountants.............................................................................F-2 Report of Independent Accountants..................................................................................F-3 Consolidated Statement of Operations for the three years in the period ended December 31, 1994 ..................................................................................F-4 Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1994 ..................................................................................F-5 Consolidated Balance Sheet as at December 31, 1994 and 1993. . . . F-6 Consolidated Statement of Shareholders' Equity for the three years in the period ended December 31, 1994....................................................F-7 Notes to Consolidated Financial Statements ......................................................... F-8-F-24 Quarterly Summary and Statistical Information - Unaudited.....................F-25 Worldwide Operations................................................................................................................. F-26 Capital Expenditures, Net Fixed Assets and Depreciation and Lease Amortization...................................................................................................... F-27 Financial Summary...........................................................................................................................F-28 Management's Discussion and Analysis of Results of Operations and Financial Condition......................................................................................................F-29 Financial Statement Schedule Schedule VIII - Valuation and Qualifying Account and Reserves..................................................................................F-33 Exhibit 11: Weighted Average Number of Shares and Earnings Used in Per Share Computations.................................................................................................F-34 Exhibit 12: Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends.....................F-35 THE FINANCIAL DATA LISTED ABOVE APPEARING IN THIS FINANCIAL SUPPLEMENT ARE INCORPORATED BY REFERENCE HEREIN. THE FINANCIAL STATEMENT SCHEDULE SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. FINANCIAL STATEMENTS OF 50%- OR LESS-OWNED PERSONS AND OTHER PERSONS ACCOUNTED FOR BY THE EQUITY METHOD HAVE BEEN OMITTED AS PROVIDED IN RULE 3-09 OF SECURITIES AND EXCHANGE COMMISSION REGULATION S-X. FINANCIAL STATEMENT SCHEDULES NOT INCLUDED HAVE BEEN OMITTED BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED INFORMATION IS SHOWN IN THE CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO. F-l REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of W. R. Grace & Co. Our audits of the consolidated financial statements referred to in our report dated February 1, 1995 appearing on page 29 of the 1994 Annual Report to Shareholders of W. R. Grace & Co. (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed on page F-l in the Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibits of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read i conjunction with the related consolidated financial statements. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP New York, New York February 1, 1995 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting parts of the Registration Statements on Form S-3 (Nos. 33-51041, 33-50983 and 33-25962) and Form S-8 (Nos. 33-7504, 33-15182, 33-27960, 33-54201 and 33-54203) of W. R. Grace & Co. of our report dated February 1, 1995 appearing on page 29 of the 1994 Annual Report to Shareholders, which report is included at page F-3 of this Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears above. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP New York, New York March 27, 1995 F-2 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING Management is responsible for the preparation, as well as the integrity and objectivity, of the consolidated financial statements and other financial information included in this report. Such financial information has been prepared in conformity with generally accepted accounting principles and accordingly includes certain amounts that represent management's best estimates and judgments. For many years, management has maintained internal control systems to assist it in fulfilling its responsibility for financial reporting, including careful selection of personnel; segregation of duties; formal business, accounting and reporting policies and procedures; and an internal audit function. While no system can ensure elimination of all errors and irregularities, Grace's systems which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed and transactions are properly executed and reported The concept of reasonable assurance is based on the recognition that there are limitations in all systems and that the cost of such systems should not exceed the benefits to be derived. The Audit Committee of the Board of Directors, which is comprised of directors who are neither officers nor employees of nor consultants to Grace, meets regularly with Grace's senior financial personnel, internal auditors and independent accountants to review audit plans and results as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal control systems. The Audit Committee reports its findings and also recommends the selection of independent accountants to the Board of Directors. Grace's management, internal auditors and independent accountants have direct and confidential access to the Audit Committee at all times. The independent accountants are engaged to conduct audits of and render a report on the consolidated financial statements in accordance with generally accepted auditing standards. These standards include a review of the systems of interna] controls and tests of transactions to the extent considered necessary by the independent accountants for purposes of supporting their opinion as set forth ir their report. B. J. Smith Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, NY 10036 February 1, 1995 TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF W. R. GRACE & CO. In our opinion, the consolidated financial statements appearing on pages F-4 through F-24 of this report present fairly, in all material respects, the financial position of W. R. Grace & Co. and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Grace's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supportinc the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 5 and 16, Grace adopted new accounting standards for income taxes and postretirement benefits in 1992. /S/ PRICE WATERHOUSE LLP F-3 CONSOLIDATED FINANCIAL STATEMENTS N. R. Grace 0 Co. Subsidiaries CONSOLIDATED STATEMENT OF OPERATIONS DOLLARS IN MILLIONS, EXCEPT FER SHARE AMOUNTS Salas and rsvanuaa ............................................................................................................................................. Othar incoaw (Nota 4)...................................................................................................................................... Total.......................................................................................................................................*................................. Cost of goods aold and oparating expanses............................................................................... Sailing, ganaral and adainiatrativa expenses .................................................................... Depreciation and aaortixatien................................................................................................................. Interest expense and ralatad financing coats (Nota 9).............................................. Research and devalopaant expanses...................................................................................................... Provision relating to asbastos-ralatad insurance coverage (Nota 2) . . Provision relating to a fused silica plant (Note 9)................................................... Total.............................................................................................................................................................................. Xncoee froe continuing operations before incone taxaa............................................. Provision for incoaa taxaa (Nota S)................................................................................................ Incoee free continuing oparations...................................................................................................... Loss froe diacontinuad operations (Nota () .......................................................................... Incoee/(loss) before cumulative affect of accounting changes ....................... Cumulative affect of accounting changes (Notes 5 and 1C) .................................. Net income/(loss).................................................................................................................................................. Earnings/(loss) per share: Continuing operations.................................................................................................................................. Cumulative affect of accounting changes............................................................................... Nat earnings/(loss)....................................................................................................................................... Fully diluted earnings per share: Continuing operations.................................................................................................................................. Net earnings........................................................................................................................................................ 1994 1993 1992 5,093.3 SO.5 5,143.9 $ 4,409.4 53.2 4,471.5 $ 4,227.0 59.9 4,395.9 2,954.9 1,220.9 2S0.7 . 109.9 133.4 31S.0 -- 5,004.7 2,CIS.7 1,021.7 234.S 94.4 135.0 159.0 -- 4,250.4 2,591.7 1,019.7 232.1 99.9 130.0 -- 140.0 4,203.3 139.1 SS.9 221.2 95.9 192.5 134.9 93.3 124.4 (109.4) 57.7 (152.2) 93.3 -- 36.0 -- (104.5) (190.0) 93.3 $ 26.0 (294.5) $ .99 $ - .99 $ .99 $ .99 $ 1.4S $-- .29 1.45 .29 # .64 9 (2.12) 9 (3.29) 9 .62 9 -- (i) THB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, FADES F-S TO F-24, ARB INTBORAL FARTS OF THESE STATEMENTS. (1) NOT PRESENTED AS THE EFFECT IS ANTI-DILUTIVE. F-4 CONSOLIDATED STATEMENT OF CASH FLOWS DOLLARS IN MILLIONS 1994 13 1992 OPERATING ACTIVITIES Income from continuing operations before incom taxaa............................................................................... Reconciliation to cash provided by operating activities: Depreciation and amortisation............................................................................................................................................. Provision relating to asbestos-related insurance coverage.............................................................. Prevision relating to a fused silica plant ...................................................................................................... Changes in assets and liabilities, excluding effect of businesses acquired/divested and foreign exchange: (Increase)/decrease in notes and accounts receivable, net......................................................... Increase in inventories...................................................................................................................................... Net (payeents for)/proceeds free settlements of interest rate agreements . . . Proceeds fron asbestos-related insurance asttlamants .................................................................... Payeents made for asbestos-related litigation settlements, judgments and defense costs ......................................................................................................................................................................... Increase in accounts payable.................................................................................................................- . . . Other.............................................................................................................................................................................. Net pretax cash provided by operating activities of continuing operations....................... Net pretax cash provided by operating activities of discontinued operations. . . . Net pretax cash provided by operating activities .......................................................................................... Income taxes paid.................................................................................................................................................................................... Net cash provided by operating activities................................................................................................................. $ 139.1 2C0.7 314.0 (159.5) (43.4) (4.0) 135.5 (155.4) 10.3 73. 533.0 C. 5 539.5 (95.0) 453.5 $ 221.2 334.4 159.0 "" (103.2) (50.5) C7.9 74.5 (177.7) 50.1 (174.4) 301.C 44.3 345.5 (102.7) 343.1 $ 192.5 232.1 -- 140.0 45.4 (2.3) 3.3 31.5 (101.9) 39.5 (214.2) 355.9 175.3 537.3 (99.9) 435.3 INVESTING ACTIVITIES (1) Capital expenditures ......................................................................................................................................................................... Businesses acquired in purchase transactions, net of cash acquired and debt assumed Increase in net assets of discontinued operations.......................................................................................... Net proceeds from divestments.................................................................................................................................................. Net proceeds fron sale/leaseback transactions...................................................................................................... Proceeds from disposals of assets....................................................................................................................................... Other...................................................................................................................................................................................................................... Net cash used for investing activities ...................................................................................................................... (444.C) (274.9) (32.9) 553.9 -- 34.0 34.9 (101.4) FINANCING ACTIVITIES (2) Dividends paid .......................................................................................................................................................................................... Repayments of borrowings having original maturities in excess of three months. . . Increase in borrowings having original maturities in excess of three months. . . . Net (repayments of)/increase in borrowings having original maturities of less than three months..................................................................................................................................................... Sale of limited partner interest ....................................................................................................................................... Other...................................................................................................................................................................................................................... Net cash used for financing activities ...................................................................................................................... Effect of exchange rate changes on cash and cash equivalents ........................................................ Increase/(decrease) in cash and cash equivalents .......................................................................................... Cash and cash equivalents, beginning of year (132.0) (141.2) 535.1 (505.9) -- 31.1 (322.9) 1.5 30.7 47.4 (309.0 (305.5) (43.1) 444.9 27.2 15.4 -- (151.9) (129.4) (512.4) 373.0 155.7 -- 5.4 (105.9) (.5) (15.2) 53.5 (399.4) (51.2) (101.5) 221.2 -35.7 (35.5) (337.7) (125.9) (274.0) 355.7 (509.0) 397.0 13.5 (241.4) (3.5) (144.3) 207.1 Caah and eaah aquivalanta, and of yaar $ 7. 3 $ 47.( $ <2.4 TMB HOOTS TO CONSOLIDATED FINANCIAL nUHUIS, PAOBS P-4 TO P-34, ttl INTEGRAL PARTS OP THBSB STATSHBMTS. (1) SBB HOOT 3 TO THB COMSOLIDAOTD PIHAHC1AL STATEMENTS FOR SUPPLEMENTAL INFORMATION RELATINS TO NON-CASH INVESTING ACTIVITIES. (2) SBB HOOTS 3 AMD 9 TO THB CONSOLIDATED FINANCIAL STAOTMBHTS FOR SDPPLBNEHTAL INFORMATION RBLATINO TO NON-CASH FIMANdHO ACTIVITIES. F-5 CONSOLIDATE! BALANCE SHUT DOLLARS XN MILLIONS, EXCEPT MR VALOR ASSETS CURRENT ASSETS Cash and cuh equivalents..................................................................................................... Hotas and accounts receivable, nat (Kota 7)................................................... Inventories (Nota 7) ................................................................................................................ Mat aaaata of discontinued operations (Hota C) ........................................ Dafarrad income taxaa................................................................................................................. Other currant aaaata ................................................................................................................. TOTAL CDRRENT ASSETS........................................................................................................... Properties and equipment, nat (Kota ) .............................................................. Qoodvill, laaa accuaulatad amortisation of $71. (1993 - $53.2) Asbaatos-ralatad inauranca racaivabla (Hota 3) ........................................ Othar aaaata (Nota 7)........................................ .................................................................... TOTAL ASSETS ................................................................................................................................. December 31, 1994 1*93 $ 79.3 975.7 5X4.2 335.C 295.4 29.7 2,225.9 1,730.1 <72.5 512.6 1,096.5 $ 6,230.6 $ 47.C <57.4 441.0 751.3 134.1 35.2 2,077.5 1,454.1 451.5 952.3 1,133.0 $ 6,109.6 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-tan dabt (Nota 9)................................................................................................ Accounts payable ...................................................................................................................... Income taxes ................................................................................................................................. Othar current liabilities................................................................................................ Minority interest (Nota 12).......................................................................................... TOTAL CURRENT LIABILITIES.......................................................................................... Long-ten dabt (Nota 9)...................................................................................................... Othar noncurrant liabilities ..................................................................................... Dafarrad income takas........................................................................................................... Noncurrant liability for asbaatos-ralatad litigation (Nota 2) TOTAL LIABILITIES................................................................................................................. $ 430.9 433.7 197.0 972.9 297.0 2,231.5 1,095.5 590.9 92.5 512.4 4,725.1 $ 532.6 414.6 126.5 <21.9 297.0 1,992.5 1,173.5 513.5 97.4 713.7 4,591.0 COMMITMENTS AND CONTINOBNCIBS (Notes 2, 9 and 11) SHAREHOLDERS' EQUITY (Nota 13) Preferred stocks, $100 par value ................................................................................................................. Cnmei.in stock, $1.00 par value; 300,000,000 ahans authorised,- outstanding at Dacenbar 31: 1994 - 94,093,000; 1993 - 93,465,000 . . . . Paid in capital................................................................................................................................................................... Retained earnings.............................................................................................................................................................. Cumulative translation adjustments ........................................................................................................... TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 7.4 94.1 309.9 1.147.S (53.3) 1,504.5 $ 6,230.6 7.4 93.5 297.9 1,196.2 (67.3) 1,517.6 $ 6,109.6 THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, PAGES F-8 TO F-24, ARE INTEGRAL PARTS OF THESE STATEMENTS. F-6 CONSOLIDATED STATEMENT OP SHARBHOU3EKS' EQUITY DOLLARS IN MILLIONS PREFERRED STOCKS Balance, beginning of year Other........................................................ Balance, end of year COMMON STOCK Balance, beginning of year . . . . Conversion of notes and debenture* Stock options and awards ..... Acquisition.............................................................. Balance, end of year PAID IN CAPITAL Balance, beginning of year . . . . Conversion of notes and dabanturss Stock options and awards ....................... Acquisition.............................................................. Other............................................................................... Balance, end of year .................................. RETAINED EARNINGS Balance, beginning of year Net income/(loss)....................... Dividends paid ............................. Balance, end of year CUMULATIVE TRANSLATION ADJUSTMENTS Balance, beginning of year .... Translation adjustments............................ Balance, end of year .................................. TOTAL SHAREHOLDERS' EQUITY ISM 1SS3 1992 $ 7.4 7.4 $ 7.S (.1) 7.4 $ 7.5 7.5 93.5 -- -- 94.1 9.9 2.8 .7 el 93.5 i.c -- 1.3 -* 9.9 217.1 -- 20.5 -.5 309.8 151.4 109.7 23.9 3.7 .1 297.9 120.1 -- 31.1 -- .2 151.4 1,195.2 3.3 (132.0) 1,147.5 1.29B.5 25.0 (12*.4) 1,196.2 1,719.0 (294.5) (125.9) 1,29*.6 (67,.3) 14..0 (S3..2) $1,504.5 (2.4) (64.9) (67.2) $1,517.6 90..0 (92..4) (2..4) $1,545.0 THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, PAGES F-8 TO F-24, ARE INTEGRAL PARTS OF THESE STATEMENTS. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of W. R. Grace & Co. and majority-owned companies (collectively, Grace). Intercompany transactions and balances are eliminated in consolidation. Investments in affiliated companies (20%-50% owned) are accounted for under the equity method. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements and related notes have been reclassified to conform to the current year's presentation and as required with respect to discontinued operations. CASH EQUIVALENTS Cash equivalents consist of highly liquid instruments with maturities of three months or less when purchased. The recorded amounts approximate fair value because of the short maturities of these investments. INVENTORIES Inventories are stated at the lower of cost or market. methods of determining cost are used, including first-in/first-out, for substantially all U.S. chemical inventories, last-in/first-out. value for raw ana packaging materials is based on current cost and, inventory classifications, on net realizable value. Several average and, Market for other PROPERTIES AND EQUIPMENT Properties and equipment are stated at the lower of cost or net realizable value. Depreciation of properties and equipment is generally computed using the straight-line method over the estimated useful lives of the assets. Interest is capitalized in connection with major project expenditures and amortized, generally on a straight-line basis, over the estimated useful lives of the assets. Fully depreciated assets are retained in properties and equipment and related accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is charged or credited to income. GOODWILL AND OTHER AMORTIZATION Goodwill arises from certain purchase transactions and is amortized using the straight-line method over appropriate periods not exceeding 40 years. Patient relationships (see Note 7) are amortized using the straight-line method over 17 years. INCOME TAXES Effective January 1, 1992, Grace adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The Statement requires the use of an asset and liability approach for the accounting and financial reporting of income taxes. FOREIGN CURRENCY TRANSLATION Foreign currency transactions and financial statements (except for those relating to countries with highly inflationary economies) are translated into U.S. dollars at current exchange rates, except that revenues, costs and expenses are translated at average exchange rates during each reporting period. The financial statements of subsidiaries located in countries with highly inflationary economies must be remeasured as if the functional currency were the U.S. dollar. The remeasurement creates translation adjustments that are reflected in net income. Allocations for income taxes included in the translation adjustments account in shareholders' equity were not significant. EARNINGS PER SHARE Primary earnings per share are computed on the basis of the weighted average number of common shares outstanding. Fully diluted earnings per share assume the conversion of convertible debt (with an increase in net income for the after-tax interest savings) and the issuance of common stock equivalents related to stock options. FINANCIAL INSTRUMENTS Grace enters into interest rate agreements and foreign exchange forward and option contracts to manage exposure to fluctuations in interest and foreign currency exchange rates. The cash differentials paid or received on interest rate agreements are accrued and recognized as adjustments to interest expense. Gains and losses realized upon settlement of these agreements (recorded as other noncurrent liabilities or other assets, respectively) are deferred and either amortized to interest expense over a period relevant to the agreement if the underlying hedged instrument remains outstanding, or recognized immediately if the underlying hedged instrument is settled. Premiums paid on caps are amortized t interest expense over the term of the cap. Cash flows related to the agreement are classified as operating activities in the Consolidated Statement of Cash Flows, consistent with the interest payments on the underlying debt. Gains and losses on foreign currency forward and option contracts offset gains and losses resulting from the underlying transactions. Gains and losses on contracts that hedge specific foreign currency commitments are deferred and recorded in net income in the period in which the transaction is consummated. Gains and losses on contracts that hedge net investments in foreign subsidiarie: are recorded in the cumulative translation adjustments account in shareholders' equity. See Note 10 for additional information on financial instruments. F-8 .2 ASBESTOS AND RELATED INSURANCE LITIGATION Grace is a defendant in lawsuits relating to previously sold asbestos-containin< products and anticipates that it will be named as a defendant in additional asbestos-related lawsuits in the future. At December 31, 1994, Grace was a defendant in approximately 38,700 asbestos-related lawsuits representing approximately 68,000 claims (versus approximately 38,100 lawsuits and 56,700 claims at December 31, 1993). In most of these lawsuits, Grace is one of many defendants. Of the lawsuits pending at December 31, 1994, 65 (92 at December 31, 1993) involved claims for property damage allegedly caused by the use of asbestos-containing materials m the construction of buildings. The plaintiffs in these lawsuits generally seek, among other things, to have the defendants absorb the cost of removing, containing or repairing the asbestos-containing materials in the affected buildings. The remaining asbestos-related lawsuits involved claims for personal injury. PROPERTY DAMAGE LITIGATION Through December 31, 1994, 126 asbestos property damage cases had been dismissec with respect to Grace without payment of any damages or settlement amounts; judgments had been entered in favor of Grace in 10 cases (excluding one case that was settled following appeal of a judgment in favor of Grace and another case in which the plaintiff was granted a new trial on appeal, limited to statute of limitations issues); Grace had been held liable for a total of $74.6 in 7 cases (3 of which are on appeal); and 159 property damage suits and claims had been settled by Grace for a total of $341.8. Included in the asbestos property damage lawsuits pending against Grace anc others at year-end 1994 were tne following class actions: (1) a Pennsylvania state court action, certified in 1992, covering all commercial buildings in the U.S. leased in whole or in part to the U.S. government on or after May 30, 1986 and (2) an action, conditionally certified by the U.S. Court of Appeals for the Fourth Circuit in 1993 and pending in a U.S. District Court in South Carolina, covering all public and private colleges and universities in the U.S. whose buildings contain asbestos materials. In July 1994, a South Carolina state court judge dismissed the claims of most class members from a purported nationwide class action asbestos property damage lawsuit. In his ruling, the judge determined that a South Carolina statute prohibits non-residents from pursuing claims in the South Carolina state courts with respect to buildings located outside the state. The plaintiffs have requested that the court reconsider its decision. In August 1994, Grace entered into an agreement to settle a nationwide class action pending in the U.S. District Court for the Eastern District of Pennsylvania on behalf of all public and private elementary and secondary schools that contain friable asbestos materials (other than schools that ''opted out" of the class). The terms of the settlement agreement (which is subject to judicial review and approval after class members have an opportunity to be heard) are not expected to have a significant effect on Grace's consolidated results of operations or financial position. PERSONAL INJURY LITIGATION Through December 31, 1994, approximately 8,400 asbestos personal injury lawsuits involving 22,200 claims had been dismissed with respect to Grace without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved), and approximately 17,000 such suits involving 20,000 claims had been disposed of for a total of $77.1. However, as a result of various trends (including the insolvency of other former asbestos producers and cross claims by co-defendants in asbestos personal injury lawsuits), the costs incurred in disposing of such lawsuits in the past may not be indicative of the costs of disposing of such lawsuits in the future. RANGE OF POTENTIAL EXPOSURE Although personal injury cases are generally similar to each other (differing only in the type of asbestos-related illness allegedly suffered by the plaintiff), each property damage case is unique in that building age, type, size and utilization and difficulty of abatement, if necessary, vary from structure to structure; thus, the amounts involved in prior dispositions of property damage cases are not necessarily indicative of the amounts that may be required to dispose of such cases in the future. In addition, in property damage cases, information regarding product identification on a building-by-building basis (I.E., whether or not Grace products were actually used in the construction of the building), the age, type, size and use of the building, the jurisdictional history of prior cases ana the court in which the case is pending provide the only meaningful guidance as to potential future costs. However, much of this information is not yet available in a majority of the property damage cases currently pending against Grace. Accordingly, estimates of future costs to dispose of these cases are, in most instances, based on incomplete information, as well as assumptions that may not be accurate. Further, uncertainty with respect to the class actions described in "Property Damage Litigation" above make it more difficult to reliably predict the costs Grace will incur in disposing of asbestos-related litigation. F-9 Subject to the preceding qualifications (which Grace believes to be significant) Grace has attempted to estimate its future costs to dispose of this litigation and has concluded that it is probable that the personal injury and property damage cases pending at December 31, 1994 can be disposed of for a total of $712.4, inclusive of legal fees and expenses, of which Grace has recorded $612.4 as a noncurrent liability and $100.0 as a current liability. This compares to the estimated liability (current and noncurrent) of $813.7 at December 31, 1993, reflecting payments made and the recording in the fourth quarter of 1994 of an additional provision of $50.0 for future costs. INSURANCE COVERAGE AND LITIGATION Grace's ultimate exposure in respect of its asbestos-related lawsuits and claims will depend on the extent to which its insurance will cover damages for which it may be held liable, amounts paid in settlement and litigation costs. Grace has recorded a receivable of $512.6 at December 31, 1994 for the insurance proceeds it expects to receive in reimbursement for prior payments and estimated future payments to dispose of asbestos-related litigation. This compares to a total receivable of $962.3 at December 31, 1993, reflecting net insurance proceeds received, the recognition in the fourth quarter of 1994 of $50.0 in additional insurance proceeds expected to be received, the reclassification of $100.0 received in January 1995 in settlement of a coverage dispute, and the non-cash charge of $316.0 described below. In September 1993, the U.S. Court of Appeals for the Second Circuit issued a decision that had the effect of reducing the amount of insurance coverage available to Grace with respect to asbestos property damage litigation ana claims. The Court of Appeals reversed an earlier District Court ruling that coverage for asbestos property damage claims is triggered by the "discovery of damage" and instead ruled that, under New York law (which governs a significant portion of the policies that provide asbestos-related insurance coverage), such coverage is triggered based on the date of installation of asbestos-containing materials. As a result of this decision, Grace recorded a non-cash charge of $475.0 ($300.0 after-taxes) in the 1993 third quarter, but reversed $316.0 ($200.0 after-taxes) of the charge in the 1993 fourth quarter, after the court withdrew its September 1993 decision and agreed to rehear the case. On May 16, 1994, the court issued a new decision confirming its September 1993 decision. As a result, Grace reinstated a non-cash charge of $316.0 ($200.0 after-taxes) in the second quarter of 1994 to reflect the reduction in asbestos property damage insurance coverage. Grace has settled coverage disputes with certain insurance carriers. At December 31, -1994, these settlements provided for the future receipt by Grace of $187.0, including $100.0 received in January 1995. These amounts have been recorded as current and noncurrent notes receivable. In 1994, Grace received a total of $138.6 pursuant to settlements with certain insurance carriers in reimbursement for monies previously expended by Grace in connection with asbestos-related litigation; of this amount, $27.0 was received pursuant to settlements entered into in 1993, which had been separately classified as notes receivable. A portion of the $138.6 has been paid to plaintiffs in previously settled asbestos-related lawsuits. Additionally, $100.0 was received in January 1995 in settlement of a coverage dispute. Prior to 1994, Grace received payments totalling $172.3 from insurance carriers, the majority of which represented the aggregate remaining obligation owed to Grace by those carriers for primary level insurance coverage written by them for the period June 30, 1962 through June 30, 1987. Grace continues to seek to recover from its excess insurers the balance of the payments it has made with respect to asbestos-related litigation. As part of this effort, Grace continues to be involved in litigation with certain of its insurance carriers, including an affiliated group of carriers that had agreed to a settlement and had made a series of payments under that agreement in 1993. The group of carriers subsequently notified Grace that it would no longer honor the agreement (which had not been executed) due to the September 1993 U.S. Court of Appeals decision discussed above. Grace believes that the settlement agreement (which involves approximately $240.0 of the asbestos-related receivable of $512.6 at December 31, 1994) is binding and initiated action to enforce the settlement agreement. In January 1994, the U.S. District Court for the Eastern District of Texas held the agreement to be enforceable. The affiliated group of carriers has appealed this ruling to the U.S. Court of " Appeals for the Fifth Circuit and sought to attack it in a collateral action in the U.S. District Court for the Southern District of New York; however, Grace successfully stayed this collateral attack. For the period October 20, 1962 through June 30, 1985 - the most relevant period for asbestos-related litigation - Grace purchased, on an annual basis, a much as eight levels of excess insurance coverage. In general, excess policies provide that when claims paid exhaust coverage at one level, the insured may seek payment from the carriers at the next higher level. For that 23-year period, the first six levels of excess insurance available from the insurance companies that Grace believes to be solvent (based primarily upon reports from leading independent insurance rating service) provide coverage of approximately $1,400.0 (which includes the amounts reflected in the receivable discussed above). As mentioned previously, the May 1994 decision from the U.S. Court of Appeals for the Second Circuit nas limited the amount of insurance coverage available for property damage claims. However, if the amount available in the first six levels should prove to be insufficient for personal injury lawsuits and claims, Grace has substantial additional coverage available in its two remaining levels of excess coverage. In Grace's opinion, it is probable that recoveries from its insurance carriers (including amounts reflected in the receivable discussed above), along with other funds, will be available to satisfy the personal injury and property damage lawsuits and claims pending at December 31, 1994. Consequently, Grace believes that the resolution of its asbestos-related litigation will not have a material effect on its consolidated results of operations or financial position. F-10 3. ACQUISITIONS AND DIVESTMENTS ACQUISITIONS During 1994, Grace made acquisitions totalling $351.7 (inclusive of cash acquired and debt assumed), primarily in its health care, construction products ana packaging product lines. Grace acquired Home Nutritional Services, Inc. in the first quarter of 1994 for approximately $131.8 (inclusive of cash and assumed debt totalling $30.4) ana acquired kxdney dialysis centers and other health care businesses during 1994 for an aggregate of approximately $145.3 in cash. In the first quarter of 1994, Grace acquired construction chemicals businesses, and in the fourth quarter of 1994, Grace acquired a European flexible packaging business. In 1993, Grace acquired Home Intensive Care, Inc. for approximately $129.0 in cash and other health care businesses for an aggregate of $115.0 in cash and $3.8 in common stock. Additionally, during 1993 Grace acquired Latin America's largest water treatment business for approximately $57.6 m cash. In 1992, Grace completed the purchase of the common stock of Grace Energy Corporation (Grace Energy) not owned by Grace for $77.3 in cash. See Note 6 foi a discussion of divestment activity with respect to Grace Energy's businesses. During 1992, Grace continued to expand its health care operations through the acquisition of several businesses and facilities for consideration totalling $44.2 in cash. DIVESTMENTS During 1994, Grace realized gross proceeds of $646.2 (inclusive of debt assumed by the buyers) from divestments, including payments made under financing arrangements entered into in connection with divestments in prior years. Substantially all businesses divested during 1994 were previously classified as discontinued operations. Divestment proceeds received in 1994 include $42.8 foi Grace's remaining interest in The Restaurant Enterprises Group, Inc. (REG). In 1993, Grace completed the sale of substantially all of the oil and gas operations of Grace Energy and certain corporate investments, all of which were Sreviously classified as discontinued operations. Other non-core businesses ivested during 1993 included a 50% interest in a Japanese chemical operation and a food industry hygiene services business for approximately $31.4 and $11.2, respectively. In 1992, Grace sold its book, video and software distribution business, which was previously classified as a discontinued operation, and its organic chemicals business and related assets. See Note 6 for a discussion of divestment activity related to discontinued operations. 4. OTHER INCOME 1994 1993 1992 Interest income........................................................................ Equity in earnings of affiliated companies . Gains on sales of investments..................................... Other, net................................................................................... $ 1.7 2.9 27.4 18.5 $21.7 1.0 22.9 17.6 $ 3.9 3.4 12.6 38.9 $ 50.5 $63.2 $ 58.8 Gains on sales of investments include a 1994 gain of $27.0 on the sale of Grace's remaining interest in REG and a 1993 gain of $21.7 on the sale of a 50% interest in a Japanese chemical operation (see Note 3). Interest income in 199 includes $20.0 relating to the settlement of prior years' Federal income tax returns. F-ll 5. INCOME TAXES Effective January 1, 1992, Grace adopted SFAS No. 109, "Accounting for Income Taxes," which applies an asset and liability approach requiring the recognition of deferred tax assets and liabilities with respect to the expected future tax consequences of events that have been recorded in the consolidated financial statements and tax returns. If it is more likely than not that all or a portioi of a deferred tax asset will not be realized, a valuation allowance must be recognized. As permitted under SFAS No. 109, Grace elected not to restate prio: periods' consolidated financial statements to give effect to SFAS No. 109. Excluding the deferred tax benefit recognized upon the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," the effect of the adoption of SFAS No. 109 on Grace's 1992 financial statements was not material. In the third quarter of 1993, Grace recorded the effects of the Omnibus Budget Reconciliation Act of 1993 (OBRA), which was enacted in August 1993. Among other things, OBRA increased the maximum U.S. Federal corporate tax rate to 35% (from 34%), effective January 1, 1993. However, neither this rate increase nor the other provisions of OBRA had a material effect on Grace's results of operations. The components of income/(loss) from continuing operations before income taxes are as follows: 1994 1993 1992 Domestic....................................................................................... Foreign............................................................................................ $ 44.3 94.8 $ 139.1 $ 125.4 95.8 $ 221.2 $ 206.4 (13.9) $ 192.5 The provision/(benefit) for income taxes allocated to continuing operations consisted of: 1994 1993 1992 Federal income taxes: Current .................................................................................. Deferred.................................................................................. State and local income taxes - current . . . Foreign income taxes: ^Current.................................................................................. Deferred.................................................................................. $ 25.3 (34.8) 21.8 49.1 (5.6) $ 53.6 (28.7) 19.1 44.4 (1.6) $ 75.6 (20.2) 16.5 57.6 5.3 $ 55.8 $ 86.8 $134.8 At December 31, 1994 and 1993, deferred tax assets and liabilities consisted of the following items: Reserves not yet deductible for tax purposes ..................... Research and development expenses................................................... Postretirement benefits other than pensions.......................... Net operating loss carryforwards .................................................... Tax credit carryforwards ........................................................................ State deferred taxes .................................................................................. Provision relating to asbestos-related expenses. . . . Capitalized inventory costs and inventory reserves . . Pension and insurance reserves ......................................................... Other.......................................................................................................................... Total deferred tax assets .............................................................. Depreciation and amortization. . Prepaid pension cost .......................... Other................................................................... Total deferred tax liabilities Valuation allowance for deferred tax assets. Net deferred tax assets ......................................... 1994 1993 $254.4 107.3 93.3 54.4 49.0 37.5 36.2 15.3 14.8 54.4 716.6 167.4 72.3 21.3 261.0 137.0 $318.6 $ 96.9 112.2 92.1 47.1 84.9 29.2 7.8 19.4 26.2 42.1 557.9 141.5 71.0 4.0 216.5 129.7 $211.7 In connection with the adoption of SPAS No. 109, Grace recognized a valuation allowance of $88.4, which has been adjusted to reflect subsequent events. The valuation allowance relates to the uncertainty as to the realization of certain deferred tax assets, including U.S. tax credit carryforwards, state and local net operating loss carryforwards and net deferred tax assets, and net operating loss carryforwards in certain foreign jurisdictions. Based upon anticipated future results, Grace has concluded, after consideration of the valuation allowance, that it is more likely than not that the net deferred tax asset balance will be realized. At December 31, 1994, there were $45.0 of tax credit carryforwards with expiration periods through 1998 and $4.0 of tax credit carryforwards with no expiration period. Additionally, there were state and local and foreign net operating loss carryforwards with a tax effect of $54.4 and various expiration periods. The U.S. Federal corporate tax rate reconciles to the effective tax rate for continuing operations as follows: U.S. Federal corporate tax rata................................................................................................................. Incraaaa/(decrease) In tax rata resulting from: U.S. and foreign taxae on foreign operations ............................................................... Utilization of general business credits............................................................................... State and local inrene taxes, net of U.S. Fedsral incoae tax benefit Valuation allowance for deferred tax assets.................................................................... lapact of U.S. and foreign tax rate changes on deferred taxes. . . . Basis difference on sale of invaefant............................................................................... Other, net .............................................................................................................................................................. ffective tax rate.................................................................................................................................................. 1)H 1933 1992 35.0% 3.1 (1.5) .3 -- -- (5.5) 3.3 40.1% 35.0% 7.3 .) 4. C -- (3.3) -- (1.5) 39.3% 34.0% 10.9 -- 5.4 24.3 -- -- (4.7) 70.0% P-r*fri U.S. and foreign taxes have not been provided on approxinataly $301.3 of undistributed earnings of certain foreign subsidiaries, as such earnings are being retained indefinitely by such subeidiarias for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes of approximately $37.3 and additional U.S. Federal inconi taxes to the extant they are not offset by foreign tax credits. It is not practicable to estimate the total tax liability that would be incurred upon such a distribution. 6. DISCONTINUED OPERATIONS COCOA, BATTERY SEPARATORS AMD ENGINEERED MATERIALS AMD SYSTEMS .Grace's battery separators business; certain engineered Waterloo businesses, principally its printing products, material technology, and.electromagnetic radiation control businesses (oollectively, EMS); and its cocoa business and other non-core businesses ware classified as discontinued operations in the (1) REFLECTS AN ALLOCATION OF INTEREST EXPENSE BASED ON (a) A RATIO OF THE NET ASSETS OF THE BUSINESSES CLASSIFIED AS DISCONTINUED OPERATIONS IN THE SECOND QUARTER OF 1993 AS COMPARED TO GRACE'S TOTAL CAPITAL AND (b> GRACE'S INCREMENTAL B0RR0NHV8 RATE APPLIED TO BOTH THE EXPECTED FROCSBDS FROM THE DIVESTMENT OF OtACB ENERGY AND TO THE NET ASSETS OF GRACE DISTRIBUTION THROUGH THE DATES OF THEIR RESPECTIVE SALES, ASSUMING THAT AMOUNTS RECEIVED FROM THE DIVESTMENT OF THESE BUSINESSES MERE USED TO REDUCE DEBT. THE ABOVE OPERATING RESULTS FOR THE PERIODS PRIOR TO CLASSIFICATION AS DISCONTINUED OPERATIONS INCLUDE INTEREST EXPRNSH ALLOCATIONS OP $2.5 AND $38. FOR 1993 AND 1993, RESPECTIVELY. For financial reporting purpoaee, the aaaata, liabilities, results of operations and cash flowa of Grace Cocoa Associates, L.P. (LP) are included in Grace's consolidated financial statements as a component of discontinued operations, and the outside investors' interest in LP is reflected as a minority interest in the Consolidated Balance Sheet. See Note 12 for a further discussion of LP. P-14 ssnrwrt quarter of 1M). At that tins, a provision of $105.0 (not of an applicable tax benefit of $22.3) was recorded to reflect the loaaes expected on the diveataant of theee buaineaaea. During 1904, Brace eold ita battery separators business and substantially all of MS for gross proceeds of $315.2. In February 1995, Oraca sold its coaposita aaterials business, leaving its nicrowave business as the raoaining BUS business to divest. Total proceeds received free the divsstnant of these businesses approxiaated prior eatiaatas. OKAa BURST Grace Bnergy was classified as a discontinued operation in 1992. The loss froa discontinued operations in 1993 included a provision of $155.0 (not of an applicable tax benefit of $91.5) to reflect the losses expected on the diveataant of Qrace Bnsrgy's operations. In 1994, Orace sold substantially all of its interest in Colowyo Coal Coapany (Oolowyo), Orace Bnergy'a only reclining significant operation, for proeeeda of $219.3, including $192.9 of proceeds froa a non-recourse financing secured by a portion of the revenues froa certain longtern coal contracts. Orace retained a liaited partnership interest in Oolowyo, entitling it to share in the revenues froa these coal contracts. In 1993, Orace sold substantially all of the oil and gas operations of Orace Bnergy for net cash proceeds of $395.0. Total proceeds received froa the divestasnt of those businesses approxiaated prior eatiaatas. BRACB DISTRIBUTION AND OTHBR In 1994, Orace sold its aniaal genetics and Caribbean fertiliser operations for proceeds of $44.1. These and other businesses were classified as discontinued operations in 1993. In 1993, Orace eoapleted the sale of its ainority interests in Canonic Bnvironaantal Services Corporation and Brace-Sierra Horticultural Products Coapany for total proceeds of $41.3. P-13 The less fzoa discontinued operations la 1**2 included an aftar-tax provision of $12.1 relating to tha loaa aaaociatad with tha eale of Brace1 raaaining Nexican-style raataurant operation. In March 1**2, Grace coapleted tha aale of Grace Diatribution for $97. in caah and notes. Operating loaaaa of Grace'a discontinued operations subsequent to their classification aa such were $14.2, $54.5, and $7.2 in 1994, 1993, and 1992, respectively; these aaounta are consistent with aaounte originally estinated and have been charged against established reeervea. Operating results and sales and revenues prior to classification sa discontinued operations were as follows: 1993 1992 COCOA Sales and revenues . . .................................................................................................$ 142.1 $ C93.5 (Loes)/incoae free operations before taxes (1)............................$ Incons tax benefit..................................................................................................... (5.0 $ 1.9 1.0 .4 (Loss)/lnoans fzoa discontinued operations................................. $ (4.C) $ 2.2 BATTERY SEPARATORS AMD BNS Sales and revenues............................................................................................................$ 93.9 $ 413.4 Incone fzoa operations before taxes (1)..................................................$ Incane tax provision ................................................................................................ 4.7 (3.1) $ 29.1 (10.1) Incoae fzoa discontinued operations...............................................................$ 2.5 $ 19.0 GRACE ENERGY Sales and revenues............................................................................................................$ Loss fzoa operations before taxes (1).........................................................$ Incone tax benefit...................................................................................................... Lose free discontinued operations.....................................................................$ -- $ 245.3 -- $ (11.1) -- c.s -- $ (4.5) GRACB DISTRIBUTION AMD OTHER Sales and revenues......................................................................................................$ 14.4 $ 95.5 Loss fzoa operations before taxes (1)................................................... $ Incoae tax benefit...................................................................................................... (1.7) .3 $ (14.2) 4.4 Loss fron discontinued operations..............................................................$ (1.4) $ (11.9) Total operating results of discontinued operations .... Net pretax loss an disposals of operations ........................................ Incoae tax benefit on disposals of operations.................................. $ (3.4) (127.3) 22.3 $ 4.9 (255.1) 99.0 > Total lose fron discontinued operations...................................................$(109.4) $(152.2) One* is pursuing ths divestment of its cocos business, its remaining MS business and other investments, and expects to conclude such transactions in 19*5. Hat assets of Braes's roaainiag discontinued operations (excluding intercompany assats) at December 31, 1M4 ere as follows: Properties and equipment, net..................................................................................... InviatMnts in and advances to affiliated ooapanita....................... Other assets .................................................................................................................................. Total assets....................................................................................................................... Current liabilities................................................................................................................. Other noncurrent liabilities ..................................................................................... Total liabilities ...................................................................................................... Net assets............................................................................................................................ COCOA 276.3 Its.4 -- 42.6 504.3 1S.6 7. 244.5 $ 239.5 OTHER s 21.5 34.2 3.7 16.7 $ 115.1 15. 3.5 19.3 5 95.4 TOTAL $ 297.4 223.4 34.7 59.3 $ 419.4 201.4 42.4 243.4 $ 335.4 7. OTHER BALANCE SHEET ITEMS NOTES AND ACCOUNTS RECEIVABLE Trade receivables, leas allowances of $95.1 (1993 - $49.7) Settlements due froa insurance carriers - current....................... Other receivables, leas allowances of $.1 (1993 - $.6) . . 1994 1993 $ 743.0 127.0 10C. 7 $ 975.7 $ 545.7 27.0 4.7 $ S57.4 INVENTORIES Raw and packaging materials............................................................................................................................................. In process .......................................................................................................................................................................................... Finished products......................................................................................................................................................................... General merchandise................................................................................................................................................................... Leas: Adjustment of certain inventories to a last-in/first-out (LIFO) basis. . $ 129.4 75.3 249.5 42.7 (43.1) 514.2 $ 111.4 59.9 243.3 47.0 (40.4) 441.0 OTHER ASSETS Prepaid pension costs................................................................................................................................................................... Patient relationships, less accumulated amortization of $117.2 (1993 - $96.5). . Long-tern receivables, less allowances of $30.C (1993 - $13.4) ............................................. Deferred charges ............................................................................................................................................................................... Deferred income taxes................................................................................................................................................................... 214.2 214.9 152.3 133.3 115.7 $ 224.2 194.4 177.0 110.4 175.0 Long-tan ..taanta..................................................................................................... Tiiinfnf in and advaneaa to affiliatad umgianiaa............................................................................... Patanta and licanaaa.................................................................................................................................................................... Ottiax................................................................................................................................................................................................................ 75.3 65.0 35.5 7 $ 1,0*5.5 104.4 51.4 33. "-3 $1,133.0 During 1994 and 1993, Grace entered into agreements to sell up to $320.0 and $270.0, respectively, of interests in designated pools of trade receivables. Ai December 31, 1994 and 1993, $296.8 and $263.8, respectively, had been received pursuant to such sales; these amounts are reflected as reductions to trade accounts receivable. Under the terms of these agreements, new interests in trade receivables art sold as collections reduce previously sold trade receivables. There is no recourse to Grace, nor is Grace required to repurchase any of the trade receivables in the pools; if certain trade receivables in the pools prove to be uncollectible, other trade receivables are substituted (to the extent available). The costs related to such sales are expensed as incurred and recorded as interest ejq>ense and related financing costs. There were no gains or losses on these transactions. Inventories valued at LIFO cost comprised 25.2% and 29.0% of inventories at December 31, 1994 and 1993, respectively. The liquidation of prior years' LIFO inventory layers in 1994, 1993, and 1992 did not materially affect cost of goods sold in any of these years. F-15 8. PROPERTIES AND EQUIPMENT Land............................................................. Buildings................................................... Machinery, equipment and other Projects under construction. . Properties and equipment, gross . . Accumulated depreciation and amortization Properties and equipment, net 1994 1993 $ 52.4 698.3 2,080.2 397.4 3,228.3 (1,498.2) $ 1,730.1 $ 51.3 636.1 1,842.5 247.9 2,777.8 (1,323.7) $ 1,454.1 Interest costs have been incurred in connection with the financing of certain assets prior to placing them in service. Interest costs capitalized in 1994, 1993, and 1992 were $9.4, $7.4, and $20.4, respectively. Depreciation and lease amortization expense relating to properties and equipment amounted to $215.1, $196.1, and $202.1 in 1994, 1993, and 1992, respectively. Grace's rental expense for operating leases amounted to $65.8, $63.8, and $80.0 in 1994, 1993, and 1992, respectively. See Note 11 for information regarding contingent rentals. At December 31, 1994, minimum future payments for operating leases were: 1995 ............................................................................................ 1996 ............................................................................................ 1997 ............................................................................................ 1998 ............................................................................................ 1999 ................................... Later years............................................................................. Total minimum lease payments............................... $ 65.3 55.0 46.2 36.0 28.5 66.9 $ 297.9 The above minimum lease payments reflect sublease income of $11.3 per year for 1995 through 1999 and a total of $38.6 in later years. In 1992, a critical raw material supplier to Grace's fumed silica plant in Belgium was effectively denied a previously promised permit, resulting xn the shutdown of the supplier's plant. As a result, the continued operation of Grace's plant would have required Grace to obtain other suppliers and/or take other actions requiring significant additional investment. Consequently, Grace closed its plant and in the third quarter of 1992 recorded a one-time provision of $140.0, reflecting the entire net book value of the facility and certain additional expenses. Grace is continuing to seek recovery, through litigation, for certain losses incurred as a result of the shutdown of the plant and is actively pursuing the sale of the plant1s land and buildings. F-16 1994 1993 SHORT-TERM DEBT CoBurclal paper (3.Ct weighted average intaraat rata at yaar-and 1993) (1)............................................................................................... Currant aaturitlaa of leng-taxa dabt.......................................................................... Othar abort-tar* borrowing* (2).......................................................................................... $ ICC.* 2*4.3 $ 430.9 $ 1*7.4 9.1 35*.1 $ 532.C LONG-THRU DEBT CoBMreial papar (C.0% and 3.Ct weighted avazaga Intaraat rata* at yaar-and 1994 and 1993, respectively) (1) ............................ Bank borrowing* (s.*% and 3.*% vaightad avaraga intaraat rataa at yaar-and 1994 and 1993, raapactivaly) (1) ............................ 9.0* Notes Du* 2004 (3).................................. .................................................................... 7.4* Kotos Du* 2000 (4)................................................................................................................. 7.75* Notes Du* 2002 (5) ........................................................................................................... S.5* Notes Du* 1995 (C)................................................................................................................. Radium-Tarn Notes, Series A (C.9* weighted avazaga intaraat rat* at yaar-and 1994) (7).......................................................................... Sundry indabtadnees with varioua futurities through 200* . . . . $ 5.5 $ 30.5 103. S 300.0 300.0 . 150.0 150.0 479.5 -- 300.0 150.0 150.0 135.5 137.9 73.3 Lass currant naturitiss of long-tar* dabt 1,265.4 155.5 1,192.6 9.1 $1,099.9 $1,173.5 Pull-year weighted avaraga intaraat rata on total dabt 5.S* 5.5* (1) UND8R BANK REVOLVING CREDIT AGREEMENTS IN EFFECT AT YBAR-HND 1994, QRACB NAY BORROW DP TO $700.0 AT INTEREST RAXES BASED UPON THE PREVAILING PRINE, FEDERAL FUNDS AND/OR EURODOLLAR RAZES. OF THAT AMOUNT, $350.0 IS AVAILABLE UNDER A 3C4-DAY CREDIT AGREEMENT EXPIRING AUGUST 31, 1995, AMD $350.0 IS AVAILABLE UNDER A LONG-TERM FACILITY EXPIRING SEPTEMBER 1, 1999. AT DECEMBER 31, 1994, NO BORRONINOS WERE OUTSTANDING UNDER THESE CREDIT AGREEMENTS. THESE AGREEMENTS ALSO SUPPORT THE ISSUANCE OF COMMERCIAL PAPER AND BANK BORROWINGS, $109.0 OF WHICH NAS OUTSTANDING AT DECEMBER 31, 1994 (INCLUDED IN LONG-TERM DEBT ABOVE) . AT DECEMBER 31, 1994, THE AGGREGATE AMOUNT OF NET UNUSED AND UNRESERVED BORROWINGS UNDER THE LONG-TERM AND 364-DAY FACILITIES MAS $591.0. THESE AGREEMENTS REPLACED A CREDIT AGREEMENT UNDER WHICH $714.* OF 364-DAY FACILITIES AND $510.4 OF LONG-TERM FACILITIES HAD BEEN AVAILABLE. GRACE'S ABILITY TO BORROW UNDER THE CURRENT FACILITIES IS SUBJECT TO COMPLIANCE WITH VARIOUS COVENANTS, INCLUDING MAINTENANCE OF TOTAL DEBT TO TOTAL CAPITALIZATION AMD INTEREST COVERAGE RATIOS. (2) REPRESENTS BORRONINOS UNDER VARIOUS LINES OF CREDIT AND OTHER MISCELLANEOUS BORROWINGS, PRIMARILY OF NON-U.S. SUBSIDIARIES. (3) DURING THE THIRD QUARTER OF 1994, GRACE 80LD $300.0 OF 5.0* NOTES DUB 2004 AT AN INITIAL PUBLIC OFFERING PRICE OF 99.794* OF PAR, TO YIELD 9.03*. to maturity. KXOK \ (4) DURIHQ THB FIRST QUARTER OP 1PP3, GRACE SOU) XT PAR (300.0 OF 7.4* NOTBS DOS 2000. URIRKST IS FAZABLB SBMIANNUALLY, AMD SHI MOTHS MAS MOT Bl R1DEEMED PRIOR TO MATURITY. (5) DORIMO THB THIRD QUARTER OF 1P92, ORACH SOLD AT PAR (150.0 OF 7.7S4 MOTHS DOB 2002. IKTBRBST IS FAZABLB SBMIANNUALLY, AMD THB NOTBS MAY MOT BB RBDBBMBD PRIOR TO MATURZTY. (C) DORIMB THB FOURTH QUARTER OF 1PP2, ORACH SOLD $150.0 OF C.5* MOTBS DOB 19*5 AT AH INITIAL PUBLIC OFFERING) PRICH OF 99.750* OF PAR, TO YIBLD C.59*. IMTBRBST IS PAXABLB SBMIAMMUALLT, AND THB MOTHS MAT NOT BB RBDBBMBD PRIOR TO MATURITY. (7) DURING THB SBOOMD QUARTER OF 1994, ORACH BMTBRBD INTO AM AORRBMSNT PROVIDING FOR THB ISSUANCE AMD SALB FROM TIMB TO TIHB OF ITS HBDIUH-TBRM NOTBS, SBRIBS A (MTHS), KITH AH AOORBOATB ISSUE PRICB OF UP TO $300.0. THB NTNS MAY BBAR IMTBRBST AT BITHBR FIXED OR FLOATINB RATES AMD HAVB MATURITY DATBS HORB THAN NINB MONTHS FROM THBIR RBSPBCTIVB DATBS OF I8SUANCB. INTBRBST ON BACH FIXED RAT8 HIM IS PAYABLE SEMIANNUALLY, AMD IMTBRBST ON BACH FLOATINB RATE MTN IS PAXABLB AS BSXABLISHHD AT THB TIMB OF I8S0AHCB. Payment of substantially all of Grace's borrowings may be accelerated, and its principal borrowing agreements terminated, upon the occurrence of a default under certain other Grace borrowings. Scheduled maturities of debt outstanding at December 31, 1994 are: 1995 - $166.6; 1996 - $88.1; 1997 - $111.6; 1998 - $5.1; and 1999 - $13.4. Interest expense, excluding related financing costs, for 1994, 1993, and 1992 amounted to $86.9, $81.5, and $90.0, respectively. Interest payments made in 1994, 1993, and 1992 amounted to $106.1, $102.5, and $166.8, respectively. A registration statement that became effective in January 1994 covers $750.0 of debt and/or equity securities that may be sold from time to time. December 31, 1994, $321.5 (including up to $171.5 of MTNs) remains available under the registration statement. At F-17 10. FINANCIAL INSTRUMENTS LONG-TERM DEBT/INTEREST RATE AGREEMENTS To manage its exposure to changes in interest rates, Grace enters into interest rate agreements, most of which effectively convert fixed-rate debt into variable-rate debt based on the London Interbank Offered Rate. At December 31, 1994 and 1993, the notional amounts of outstanding interest rate swaps related to long-term debt were $1,010.0 and $970.0, respectively. Notional amounts do not quantify risk or represent assets or liabilities of Grace, but are used in the calculation of cash settlements under the agreements. Management does not currently intend to settle any of the agreements prior to maturity. Grace's debt and interest rate management objective is to reduce its cost of funding over the long term, considering economic conditions and their potential inpact on Grace. The strategy emphasizes improving liquidity by developing and maintaining access to a variety of long-term and short-term capital markets. Grace enters into standard interest rate swaps that have readily identifiable inpacts on interest cost and are characterized by broad market liquidity. During 1994 and 1993, Grace realized positive cash flows of $10.0 and $87.0, respectively, from interest rate agreements. Realized gains and losses on interest rate agreements are amortized to interest expense over a period relevant to the agreement (1-10 years); at December 31, 1994 and 1993, unamortized net gains were $43.0 and $56.0, respectively. At December 31, 1994 and 1993, Grace would have been required to pay $121.0 and $23.0, respectively, to retire these agreements. The maturities ana notional amounts of the swaps closely match underlying debt instruments. This will result in the changes in the fair value of swaps being substantially offset by changes in the fair value of the debt. At December 31, 1994 and 1993, the fair value of long-term debt was $1,070.0 and $1,210.0, respectively. The fair value of long-term debt is determined by obtaining quotes from financial institutions. FOREIGN CURRENCY CONTRACTS Grace enters into a variety of foreign exchange forward and option contracts to manage its exposure to fluctuations m foreign currency exchange rates. These contracts generally involve the exchange of one currency for another at a future date. At December 31, 1994 and 1993, Grace had notional principal amounts of approximately $10.0 and $34.9, respectively, in contracts to buy or sell foreign currency in the future. The recorded values at December 31, 1994 and 1993, which approximated fair value based on exchange rates at December 31, 1994 and 1993, were not significant. OTHER FINANCIAL INSTRUMENTS At December 31, 1994 and 1993, the recorded value of financial instruments such as cash, short-term investments, trade receivables and payables and short-term debt approximated their fair values, based on the short-term maturities of these instruments. Additionally, the recorded value of both long-term investments and receivables approximated fair values. Fair value is determined based on expected future cash flows, discounted at market interest rates, and other appropriate valuation methodologies. MARKET AND CREDIT RISKS Exposure to market risk on interest rate and foreign currency contracts results from fluctuations in interest and currency rates, respectively, during the periods in which the contracts are outstanding. The counterparties to Grace's interest rate swap agreements and currency exchange contracts consist of a diversified group of major financial institutions, each of which is rated investment grade. Grace is exposed to credit risk to the extent of potential nonperformance by counterparties on financial instruments. Any potential credit exposure does not exceed the fair value as stated above; Grace believes the ris] of incurring losses due to credit risk is remote. F-18 11. COMMITMENTS AND CONTINGENT LIABILITIES Grace is the named tenant or guarantor with respect to certain lease obligations of previously divested businesses. The leases, some of which extend to 2014, have future minimum lease payments aggregating $67.3. Grace is also the named tenant or guarantor with respect to lease obligations having future minimum lease payments of $35.8, as to which a previously divested home center business had been released In bankruptcy; offsetting this is $35.1 of future minimum rental income from subtenants. Grace continues to attempt to sublease the remaining properties and believes its ultimate exposure is not material. Grace is the named tenant with respect to lease obligations, with future minimum lease payments of $15.2, that have been assigned to Hermans, a previously divested business. Grace believes its ultimate exposure under these leases is not material and that it is fully indemnified by other parties for an} losses it may incur under these leases. Grace is contingently liable with respect to leases entered into by REG'S subsidiaries. After undergoing a reorganization in 1993, REG (now named Family Restaurants, Inc.) has agreed to indemnify Grace with respect to these leases. At December 31, 1994, these leases have future minimum lease payments of $68.3. Grace believes any risk of loss from these contingent liabilities is remote. Grace is subject to loss contingencies resulting from environmental laws and regulations, which, among other things, impose obligations to remove or mitigate the effects on the environment of the disposal or release of substances at various sites. Grace accrues for anticipated costs associated with investigatory and remediation efforts where an assessment has indicated that a loss is probable and can be reasonably estimated. At December 31, 1994, Grace's liability for environmental investigatory and remediation costs related to continuing and discontinued operations totalled approximately $216.0, as compared to $160.0 at December 31, 1993. The principal reason for this increase is due to a change in the estimated costs of remediation at a former manufacturing site due to additional required remediation activities. Additionally, a change in the estimated liability for remediation costs related to a previously divested business, as a result of a court ruling that Grace is responsible for a substantial portion of the costs, contributed to an increase in the liability; Grace has separately recorded a receivable for the amount expected to be received from its insurance carriers with respect to this liability. In 1994, periodic provisions were recorded for environmental and plant closure expenses, which include the costs of future environmental investigatory and remediation activities. Additionally, in the first quarter of 1994, Grace recorded a provision of approximately $40.0, principally to provide for future environmental costs. These provisions are included in the Consolidated Statement of Operations as part of cost of goods sold and operating expenses. Grace's current balance sheet reserves are considered adequate to cover the aforementioned liabilities. Grace's environmental liabilities are reassessed whenever environmental circumstances become better defined and/or remediation efforts and their costs can be better estimated. The measurement of the liability is evaluated quarterly based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method and extent of remediation at each site, and the apportionment of costs among potentially responsible parties. As some of the previously mentioned issues are decided (the outcome of which is subject to various uncertainties) and/or new sites are assessed and costs can be reasonably estimated, Grace will continue to review and analyze the need for additional accruals. 12. MINORITY INTEREST Minority interest consists of a limited partner interest in LP. The total capital of LP at December 31, 1994 was $1,473.2. LP's assets consist of Grace Cocoa's worldwide cocoa and chocolate business, long-term notes and demand loan, due from various Grace entities and guaranteed by W. R. Grace & Co. and its principal operating subsidiary, and cash. Grace had $368.1 of borrowings from LP at December 31, 1994. Four Grace entities serve as general partners of LP and own general partner interests totalling 79.03% in LP; the sole limited partner of LP, which initially acquired its interest in LP in exchange for a $300.0 cash capital contribution ($297.0 of which was funded by outside investors), owns a 20.97% limited partner interest in LP. LP is a separate and distinct legal entity from each of the Grace entities and has separate assets, liabilities, business functions and operations. For financial reporting purposes, the assets, liabilities, results of operations and cash flows of LP are included in Grace's consolidated financial statements as a component of discontinued operations and the outside investors' interest in LP is reflected as a minority interest. F-19 13. SHAREHOLDERS' EQUITY The weighted average number of shares of common stock outstanding during 1994 was 93,936,000 (1993 - 91,461,000; 1992 - 89,543,000). W. R. Grace & Co. is authorized to issue 300,000,000 shares of common stock. Of the common stock unissued at December 31, 1994, approximately 11,214,000 shares are reserved for issuance pursuant to stock options and other stock incentives. In addition, at December 31, 1994, approximately 105,297,000 shares were reserved for issuance under Common Stock Purchase Rights (Rights). A Right is issued for each outstanding share of common stock; the Rights are not and will not become exercisable unless and until certain events occur, and at nc time will the Rights have any voting power. Preferred stocks authorized, issued and outstanding are: Sharaa aa of Daeaabar 31, 19*4 Authorizad and laauad In Traaauxy Outstanding Par valua of Sharaa Outstanding 1994 1993 1992 6% Cumulative (1) 8% Cumulative Claaa A (2) 8% Noncumulative Claaa B (2) 40,000 50,000 40,000 3,535 33,544 18,415 35,454 15,356 21,585 $3.6 1.6 2.2 $7-4 $3.6 1.6 2.2 $7.4 $3.6 1.7 2.2 7.S (1) ISO VOTES PER SHJUtB. (2) IS VOTES PER SHARE. Dividends paid on the preferred stocks amounted to $.5 in each of 1994, 1993, and 1992. The Certificate of Incorporation also authorizes 5,000,000 shares of Class C Preferred Stock, $1 par value, none of which has been issued. 14. STOCK INCENTIVE PLANS Changes in outstanding common stock options are summarized below: 1994 1993 Avtngt 1992 Avaragt KBfBBJt OP HMM mRCin FRIO maker of Shares Exercise Brice Mibtt of Shares iuniH Price Balance at beginning of year . . . Options granted................................................... Options exercised............................................. Options terminated or canceled . . Balance at end of year ............................. C,><5,304 l,35t,>00 B,334,304 (506,444) (104,073) 7,513,000 $35.40 43.37 29.21 27.32 39.Oft 5,355,107 1,451,435 7,035,613 (503,355) (170,053) 5,955,304 $35.09 30.00 25.*9 40.12 35.4ft 6,113,340 1,445,300 7,557,540 (1,133,063) (59,490) 5,255,1*7 $32.01 37.77 25.29 27.97 35.09 At December 31, 1994, options covering 5,633,761 shares (1993 - 5,056,256; 1992 - 4,025,840) were exercisable and 3,547,094 shares (1993 - 1,804,122; 1992 - 3,087,994) were available for additional grants. F-20 15. PENSION PLANS Grace maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based on final average salary and years of service. Grace funds its U.S. pension plans in accordance with federal laws and regulations. Non-U.S. pension plans are funded under a variety of methods because of differing local laws and customs and therefore cannot be summarized. Approximately 60* of U.S. and non-U.S. plar assets at December 31, 1994 were common stocks, with the remainder primarily fixed income securities. Pension (benefit)/cost is comprised of the following components: 1994 U.S. NON-U.S. 1999 D.S. Non-O.S. 1992 O.S. Ncn-0.8. S.rvic. cost on banafita aaxnad during tha yaar............................ ... Intaraat cost on banafita aamad in prior yaara............................. Actual loa./ (ratum) on plan asaata.............................................................. Dafarrad (loaa)/gain on plan aaaata.............................................................. Aaortiration of nat gaina and prior aarvica coata....................... ...Nat paneion (banafit)/coat ..................................................................................... $ 35.C 49.S 17.9 (49.5) (7.7) $ 13.4 19.3 10.4 (37.4) (1.6) $ 17. C 3C.3 (104.3) 54.1 (5.3) $ 9.5 17.1 (55.7) 3C.0 (1.7) 11.1 31.7 (20.9) (30.5) (4.4) $ 9.4 1C.5 (30.4) 9.5 (5.5) $ (3.9) $ 4.3 ..... ....... $ (1.5) ....... $ 4.2 .. ..... $ (17.0) . - ..... $ (.7) ....... The funded status of these plans was as follows: Actuarial praaant valua of banafit obligation: Vtittd ............................................................................................................................................. Accumulated banafit obligation ..................................................................................... Total projactad banafit obligation .......................................................................... Plan aaaata at fair valua...................................................................................................... Plan aaaata in axcaaa of projactad banafit obligation....................... Unanortizad nat gain at initial adoption......................................................... 19M U.S. NOH-U.S. 1993 U.S. Non-U.S. $ 575.3 $ 579.* $ CSC. 7 751. C 114.9 (43.9) $ 171.4 $ 179.7 $ 240.3 3C8.3 38.0 (3.4) $ 614.2 $ 620.0 $ 691.4 83C.4 145.0 (96.1) $ 173. C $ 183.3 $ 3C3.4 370.1 C .7 (6.4! Unaaortizsd prior ssrvics eoat Ubrscognissd ut loos/(gain) . Prepaid pansien cost 31.3 C3.4 $ 135.7 4.0 (13.0) $ 15.3 (1) 34.0 47.4 $ 131.3 4.2 . $ 5.4 (1T~ (1) INCLUDES $70.3 IN 1394 AND $55.0 IN 1993 OP DBPBKUD PENSION COSTS. The following significant assumptions were used in 1994, 1993, and 1992: 1994 1993 U.S. NON-U. S. U.S. Non-U.S. 1992 U.S. Non-U.S. Discount rata at Decanber 31,........................................................ Expected long-tarn rate of return............................................. Rate of coapenaatien increase......................................................... 5.5% 9.0 5.5 5.0 - 12.0% 5.0 - 10.5 4.0 - 7.5 7.5% 9.0 5.5 4.5 - 9.2% 6.0 - 10.5 3.5 - 7.5 5.0% 9.0 6.0 5.0 - 12.0% 5.0 - 11.0 3.5 - 7.5 Grace's Retirement Plan for Salaried Enployees (Plan) contains provisions under which the Plan would automatically terminate in the event of a change in control of W. R. Grace & Co. and Plan benefits would be secured through tne purchase of annuity contracts. Upon such termination, a portion of the Plan's excess assets would be placed in an irrevocable trust to fund various employee benefit plans and arrangements of Grace, and any balance would be returned to Grace. F-21 \ 16. OTHER POSTRETIREMENT BENEFIT PLANS Grace provides certain other postretirement health care and life insurance benefits for retired employees of specified U.S. Units. These retiree medical and life insurance plans provide various levels of benefits to employees (depending on their date of hire) who retire from Grace after age 55 with at least 10 years of service. The plans are currently unfunded. Effective January 1, 1992, Grace adopted SPAS No. 106, which requires the accrual method of accounting for the future costs of postretirement health care and life insurance benefits over the employees' years of service. The "pay as you go" method of accounting, used prior to 1992. recognized these costs on a cash basis. The adoption of SPAS No. 106 on the immediate recognition basis, concurrent with the adoption of SPAS No. 109, resulted in a charge to 1992 earnings of $190.0, net of $98.0 of deferred income taxes. In addition, the application of SPAS No. 106 resulted in a decrease of $5.1 in 1992 after-tax earnings from continuing operations. Grace's cash flow, however, is unaffected by implementation of SPAS No. 106, as Grace continues to pay the costs of postretirement benefits as they are incurred. Included in noncurrent liabilities as of December 31, 1994 and 1993 are the following: Accumulated postretirement bmnafit obligation: Retireee.......................................................................................... Fully eligible participants .................................. Active ineligible participants............................ Accumulated postretirement benefit obligation. Unrecognized net loss ................................................... Unrecognized prior service benefit. . . . Accrued postretirement benefit obligation. . . 1994 1993 $192.6 12.1 26.3 $169.9 36.9 39.3 231.0 (29.5) 44.6 244.1 (40.7) 52.9 $251.1 $256.3 Net periodic postretirement benefit cost for the years ended December 31, 1994, 1993, and 1992 is comprised of the following components: Service cost ....................................................................................................................................... Interest cost on accuznilated postretirement benefit obligation 19941 1993 $ 2.1 1C.2 $ 2.2 13.2 1993 $ 3-9 15.C Amortization of not lea*............................. Amortisation of prior aarviea baoafit Mat pariodic poatratiraaant banafit ooat 1.2 (4.3) $ 15.2 .3 (4.S) $ 11.1 (l.) $ 17.5 As a result of classifying certain operations as discontinued, Grace recognized reductions in the accrued postretirement benefit obligation of approximately $16.6 and $23.5 in 1993 and 1992, respectively, which are reflected in the reserve for discontinued operations. During 1992, Grace's retiree medical plans were amended to increase cost sharing by employees retiring after January 1, 1993. This amendment decreased the accumulated postretirement benefit obligation by $48.6 at December 31, 1994 and will be amortized over an average remaining future service life of approximately 12 years. Medical care cost trend rates were projected at 10.9% in 1994, declining tc 6.0% through 2002 and remaining level thereafter. A one percentage point increase in each year's assumed medical care cost trend rate, holding all other assumptions constant, would increase the annual net periodic postretirement benefit cost by $3.0 and the accumulated postretirement benefit obligation by $18.7. The discount rates at December 31, 1994, 1993, and 1992 were 8.5%, 7.5%, and 8.0%, respectively. Effective January 1, 1994, Grace adopted SFAS No. 112, "Employers' Accounting for Postempioyment Benefits," which requires accrual accounting non-accumulating postemployment benefits. Grace's primary postemployment obligation is for disabled workers' medical benefits. These are currently for included in accrued postretirement costs under SFAS No. 106. The adoption of SFAS No. 112 did not have a material effect on Grace's results of operations or financial position. F-22 17. INDUSTRY SEGMENTS AND INFORMATION ABOUT FOREIGN OPERATIONS INDUSTRY SEGMENT INFORMATION Grace is a global producer of specialty chemicals and holds a leadership position in specialized health care services and products. The tables below present information related to Grace's two industry segments for the years 1994 -1992. Intersegment sales, eliminated in consolidation, are nominal and are not disclosed separately. Sales and Revenues ............................................. Pretax Operating Income (1). . . . Identifiable Assets............................................. Capital Expenditures ....................................... Depreciation and Amortization. . . Specialty Chemicals Health Care Total 1994 1993 1992 1994 1993 1992 1994 1993 1992 1994 1993 1992 1994 1993 1992 $3,218 2,895 3,062 338 284 299 2,364 1,996 1,893 329 209 224 148 138 151 $1,875 1,513 1,275 249 194 126 1,735 1,297 906 66 80 52 94 78 65 $5,093 4,408 4,337 587 478 425 4,099 3,293 2,799 415 289 276 242 216 216 F-23 \ INFORMATION ABOUT FOREIGN OPERATIONS The table below provides information pertaining to Grace's operations by geographic area. Asia Pacific and Latin America are included in Other. Salas and Seventies ........................................ Pretax Operating Incoaa (1). . . . Identifiable Aaeete........................................ 1994 1993 1**2 1**4 1**3 1993 1994 1993 1992 Obitad States $3,30* 2,ass 2,721 423 3SS 291 2,4S* 2, OSS i.ss* Panada $122 124 131 * 7 -- 92 2 75 Burope $1,OS* 32 1,0*1 74 47 75 1,02$ 7S3 772 Othar $$04 497 404 1 i* 59 $23 3*5 353 Total $$,0*3 4*409 4,337 $7 479 425 4*099 3,2*3 2,7* Fratax operating incoaa and total idantlfiabla aaaata Cor both aagaant and geographic results aza raconcilad below to incoaa free continuing operations bafora incoaa taxes and conaolidatad total aaaata, respectively, aa praaantad in tha conaolidatad Stataaant of Oparationa and Conaolidatad Balanea Sheet. Capital expenditures and dapraeiation and aaortization expanse axa raconcilad balow to tha raapactiva aaounta praaantad in tha Conaolidatad Stataaant of Caah Plows. Grace alloeatas to ita industry sagaants ganaral oorporata ovarhaad axpanaas, ganaral oorporata rasaareh arpanaas and cartain othar incoaa and expense itaas that can ba identified with aagaant oparationa. Pretax operating incoaa........................................................................................... Interest expanse and related financing costs ............................. Provision relating to asbastos-related insurance coverage Prevision relating to a fused silica plant .................................. Othar (axpanaas)/incoas, nat .......................................................................... Incoaa free continuing epazatieos before inmas taxes. . Identifiable aasats.............................................. Asbestos-related insurance receivable Ganaral corporate assets (2) . . . . Discontinued operations' net assets. Total assets 1**4 1*3 IMS 597 (110) (31$) -- (22) 139 $4,o S13 1,2*3 33C $$,331 $ 47* <*4) (IS*) -- (14) $ 221 $3,2*3 C2 1,0*3 7*1 $$.10 $ 42$ (100) -- (140) 9 $ 1*3 $2,7* 1,23$ 1.SC5 $$.$ Capital arpendi turea ........................................ Oeoaral oorporata expanditurea . . . Diacontinued operationa' expanditurea Total capital expenditures ....................... Depreciation and amortization............................................. General corporate depreciation and amortization Total depreciation and aeortization............................. 41S 30 $ 445 $ 343 19 * 341 $ 3S9 21 $ 310 $ 21C 19 235 9 374 34 9 9 394 9 214 16 9 313 (1) 1993 JU1D 1993 ANOONXS HAVE BUN RESTATED TO INCLUDE U ALLOCATION TO INDUSTRY SEGMENTS OF GENERAL CORPORATE OVERHEAD EXPENSES, GENERAL CORPORATE USEARCH EXPENSES AND CUXA1N OTHER INCOME AND EXPENSE ITUS TO CONFORM TO THE 1994 FRUENXATXON. (1) GENRRAL CORPORATE ASSETS PRINCIPALLY INCLUDE DEFERRED TAX ASSETS, DEFERRED PENSION ASSETS AND CORPORAIX RECEIVABLES AMD INVESTMENTS. F-24 QUARTERLY SUMIARY AMD STATISTICAL INFORMATION UNADDITED-DOLLARS IN HILLIORS, HXCBPT PER SHARE QUARTER ENDED 1C 2Q 3Q 4Q 1994 Specialty Ch--i rels......................................................... Health Car*............................................................................... Total aal*a and ravanuaa............................. Coat of goods sold and operating expanse* Met inooae/(losa).............................................................. Earnings/(loss) per share: (1) Met earning*/(loss) ........................................ Fully diluted earnings per share: Net earnings.............................................................. Dividends declared par r r--nn share. . . Market price of coaacn stock:. (2) High..................................................................................... Low.................................................................................... Close ............................................................................... 1993 (S) Specialty Cheaicals........................................................ Health Car*............................................................................... Total sales and revenues............................. Coat of goods sold and operating expenses Incoaa/(loss) froe continuing operations Loss from discontinued operations. . . . Net incone/(loss).............................................................. Earnings/(loss) per share: (1) Continuing operations .................................. Met earning*/(loss) ........................................ Fully diluted earning* per share: Continuing operations .................................. Net earning*.............................................................. Dividends declared per cannon share. . . Market price of coanon stock: (2) High......................................................................................... Low..................................................................................... Cloe# .................................................................................... $ 75.4 401.4 1,074.9 00. 39.2 $ .41 $ .40 $ .35 $ 4C 1/2 40 3/9 41 1/4 $ 40.1 330.1 00C.2 503.4 31.7 (3.4) 29.3 $ .35 .31 $ .34 .30 .35 $ 40 1/9 3C 3/4 39 1/2 703.0 454.0 1,239.9 721.5 (134.3) (3) $ (1.43) $ 015.5 401.2 $ 1,30.7 755.4 7C.0 $ .01 5 044.4 520.5 $ 1,472.0 707.4 103.4 $ 1.10 -- (4) $ .35 .00 $ .35 $ 1.00 $ .35 43 30 39 7/9 $ 42 3/9 39 1/4 41 1/2 41 1/9 3C 39 5/9 720.0 3C4.3 $ 1,004.1 44.1 53.0 (105.0) (51.1) $ .0 (.57) $ 734.7 401.4 $ l,13.l 0.1 (234.4) (5) -- (239.4) $ (2.54) (2.54) $ 702.0 400.1 1,192.0 710.1 295.2 -- 295.2 (7) $ 3.05 3.05 .54 -- (4) .35 $ -- (4) -- (4) .35 $ 3.03 3.03 .35 $ 40 5/9 39 1/2 40 1/2 $ 41 1/4 34 5/9 34 5/9 $ 40 5/9 34 3/4 40 5/9 (1) PER SHARE RESULTS PC* THE FOUR QUARTERS DIFFER FROM FULL-YEAR PER SHARE RBSULTS, AS A SEPARATE COMPUTATION OF EARNINBS PER SHARE IS MADE FOR BACH QUARTER PRESENTED. THB DIFFERENCE IN 1993 IS PRINCIPALLY DUB TO THE CONVERSION IN THB THIRD QUARTER OF OUTSTANDING DEBT INTO APPROXIMATELY 2.9 MILLION SHARES OP COMMON STOCK. (2) PRINCIPAL MARKET: MEM YORK STOCK EXCHANOB. (j) xNCumsa a *200.0 uaniunui or thb vrovzsiom ouiim to abbbstobRBUkXBD mOMKI UUVBRASB. (4) MOT HMIWID AS IBB DIKT ZS AMTZ'OZXOrZVB. (5) r*rr*ra MOORS HAVB BBBN RBCLASSZFZBD TO COWORN TO TUB 1M HtBSBHZAXZOII. (*) ZNCUDBS A *300.0 VROVZSZON RSLATZm TO ASBBSTOS-RSLAXSD ZHSDRAHCB OOVBBASB. (7) zifcunna a *200.0 rbvbrsal op m *300.0 brovzszom rblatzhb to asbbstos- RBLAXBD ZnOUkHCB OOVBBASB. F-25 WORLDWIDE OPERATIONS DOLLARS IN MILLIONS UNITED STATES/CANADA Specialty Chemicals........................................ Health Care.............................................................. Total............................................................................... EUROPE Specialty Chemicals........................................ Health Cara.............................................................. Total............................................................................... ASIA PACIFIC Specialty Chemicals........................................ Health Care.............................................................. Total............................................................................... LATIN AMERICA Specialty Chamicala........................................ Health Care.............................................................. Total............................................................................... SUBTOTAL .................................................................... Divsstad Businasaas........................................ TOTAL CONTINUING OPERATIONS. . . . 1994 Sales and Revenue, 1993 1992 $1,679 1,752 3,431 $1,556 1,424 2,979 $1,455 1,211 2,666 956 103 1,050 052 00 932 967 . SO 1,025 346 12 370 307 0 315 270 4 204 217 9 226 5,093 -- $5,093 101 1 102 4,400 -- $4,409 120 -- 120 4,095 242 $4,337 Pretax operating Incoaa (l) 1994 (2) 1993 (3) 1992 $192 240 432 $159 103 372 $145 109 257 49 30 67 (4) 5 9 17 74 47 04 54 44 41 2 2" 50 44 41 21 2 23 507 -- $507 13 -- 13 470 -- $475 10 . -- 10 400 35 $426 (1) AMOUNTS HAVE BBRN RBSTATKD TO OONPORH TO THB 1994 PRESENTATION ON A PRETAX BASIS AND INCLDDB THB ALLOCATION TO INDUSTRY SBCMBNTS OP OBNBKAL CORPORATE OVERHEAD EXPENSES, GENERAL CORPORATE RESEARCH BXFBHSBS AND CERTAIN OTHER INCOME AND EXPENSE ITEMS. (2) EXCLUDES A $316 PROVISION POR ASBESTOS-RELAXED INSURANCE COVERAGE. (3) EXCLUDBS A $159 PROVISION FOR ASBESTOS-RELATED INSURANCE COVERAGE. (4) EXCLUDBS A $140 PROVISION RELATING TO A PUNED SILICA PLANT IN BELGIUM. P-26 \ CAPITAL KXPBNDIT0RB8, HIT PIXSD MBITS and DBPMCZATiaN and limb amortisation DOLLARS in millions Capital Bxpanditurae 1PM If S3 1P93 Net Fixed Assets 1PP4 1993 1PP3 Depreciation and Lease Asortization (1) 1994 1993 1993 OPERATING GROUP Specialty Chemical*....................... Health Cara............................................. $329 SC Subtotal ................................................... Oeneral Corporate............................. 415 30 Total Continuing Operations. Divested Businesses....................... Discontinued Operations. . . 445 -- Total.............................................................. $445 $209 BO 3S9 21 310 --- $310 $200 S3 252 34 SBC 34 SB $395 $1,252 334 1,555 144 1,730 -- -- $1,730 $1,049 377 1,325 125 1,454 -- $1,454 $ 975 331 1,195 102 1,398 4 40C $1,705 $144 SC 300 15 215 -* -- $215 $135 46 1B1 IS 19C --- $195 $131 38 1C9 15 1B4 IB -- $202 GEOGRAPHIC LOCATION United States and Canada . . Europe ........................................................ Other Areas............................................. $272 SC 57 Subtotal ................................................... General Corporate............................ 415 30 Total Continuing Operations. Divested Busineesee....................... Discontinued Operations. . . 445 -- -- Total.............................................................. $445 -- $194 C8 37 3S9 31 310 -- -- $310 -- $155 B0 1C 353 34 2*5 34 SB $399 -- $ *4 431 171 1( SBC 144 1,730 -- $1,730 ............. $ 554 351 131 1,325 13B 1,454 -- $1,454 ............. $ 757 343 S7 lf 19C 103 1,398 4 40C $1,709 (1) CERTAIN 19*3 AND 1992 AMOUNTS RAVI BUN RBCLASSIFIBD TO CONFORM TO THB 1994 PRBSBNTATION. $129 55 16 300 15 315 -- -- $215 -- $117 49 IS 1B1 15 1PC .. " $195 -- $109 49 13 1C9 15 1B4 IB -- $202 -- F-27 FINANCIAL SUMMARY (1) DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1IN 13 1992 1991 1930 orstatement operations Sals* and ravanuas .............................................................................................. coat of gooda sold and oparating axpanaaa.......................................... Oapraeiatlon and amortization....................................................................... Intarast axpanaa and ralatad financing eoota ................................. Raaaarch and davalopaint axpanaaa............................................................. XncoM from continuing eparationa bafora income taxaa ................................................................................ Provision for incoaa taxaa ........................................................................... Incoaa frea continuing oparatiana bafora apacial itaaa (2) . Incoaa frea continuing oparatiana............................................................. (Loaa)/incoaa frea diacontinuad oparatiana ...................................... Cumulative affact of accounting changaa............................................... Nat incoaa/(loaa).................................................................................................. $5,093.3 2,954.9 240.7 109.9 132.4 $4,400.4 2,615.7 234.6 04.4 135.0 $4,337.0 2,501.7 232.1 99.0 130.0 $4,394.4 2,429.0 241.5 124.4 129.1 139.1 (3) 55.0 293.3 93.3 --93.3 221.2 (4) 06.0 234.4 134.4 (100.4) -- 26.0 192.5 (5) 134.0 202.0 57.7 (162.2) (190.0) (294.5) 334.2 132.5 199.2 301.7 14.9 -- 219.4 $4,309.7 2,494.4 227.2 139.4 125.4 272.1 97.5 174.4 174.4 29.2 -- 202.9 FINANCIAL POSITION Currant aaaata ........................................................................... Currant liabilitiaa.................................................................. Propartiaa and aquipaant, nat.......................................... ........................ Total aaaata ................................................................................ Total dabt .................................................................................... Sharaholdara' aquity - common atock............................ ........................ 1,730.1 1,497.1 $2,077.6 1,992.6 1,454.1 6,100.6 1,704.1 1,510.2 $2,091.4 1,439.4 1,707.9 5,599.4 1,019.2 1,537.5 $1,990.0 1,422.1 2,550.2 4,007.1 2,259.4 2,017.7 $2,300.1 1,490.1 2,442.1 6,226.5 2,295.9 1,905.0 DATA PER COMMON SHAMS Barninga frea continuing oparatiana bafora opaeial itaaa (2) Bamingo frea continuing oporaticna........................................................ Cuaulativa affact of accounting changaa............................................... Barninga/(loaa)....................................................................................................... Dividanda..................................................................................................................... Book valua ................................................................................................................. Avaraga coaaon aharaa outatanding (THOUSANDS)................................. 3.01 .99 -.99 1.40 15.91 93,934 $ 2.54 1.44 -.25 1.40 14.14 91,441 $ 2.26 .64 (2.12) (3.29) 1.40 17.10 09,543 $ 2.27 2.31 -- 2.50 1.40 22.77 97,234 $ 2.03 2.03 -- 2.34 1.40 22.14 95,979 OTHER STATISTICS Dividanda paid on ----- atock . Capital axpandituxaa ........................ % Total dabt to total capital. . rnannn aharaholdara of racord. . Coaaon atock prica ranga .... Nunbar of aaployaaa - continuing oporationa (THOUSANDS) .... ; 131.5 444.4 50.4% 19,501 44 1/2-34 $ 127.9 309.6 52.9% 19,350 41 1/4-34 5/0 $ 125.4 399.4 54.1% 20,949 45-32 $ 122.0 $ 120.2 447.0 513.7 52.7% 54.4* 21,949 23,327 40 3/4-23 3/0 33 5/0-17 37.9 34.0 32.9 32.9 34.2 (1) CERTAIN PRIOR YBAR AMOUNTS HAVB BBBN RBCLASSIFIED TO CONFORM TO THB 1994 PRESENTATION. (2) EXCLUDES PROVISIONS OF $200.0 AMD $100.0 IN 1994 AMD 1993, RB3FBCTIVHLX, RBLATING TO ASB8STOS-RBLATSD INSURANCB COVBRAOB, AND IN 1992 A $140.0 PROVISION RELATING TO A FUMED SILICA PLANT IN BBL6IUM AMD AN INCRSM8NTAL CHARGE OF $5.1 FOR POSTRBTIRBNBNT BENEFITS PRIOR TO PLAN ANBMDMBNTS, AND A STRATEGIC RESTRUCTURING GAIN OF $3.5 IN 1991. (3) INCLUDES A $316.0 PROVISION RBLATIMS TO ASBBSTOS-RSLATBD INSORANCB covnMS. (4) MCLBDSS A flSO.O PKOPISICM ULATZMO TO ASBUTOS-MLATSD XHSORAKS OOVSXAOB. (S) MCLODES A (140.0 PROVISION RRUXIMS TO A PORED SILICA PLANT III ULOItM. P-28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVIEW OF OPERATIONS OVERVIEW Sales and revenues of 2% in 1993 over revenues increased increased 16% in 1994 over 1993, as compared to an 1992. Excluding businesses divested in 1992, 1993 8% as compared to 1992. increase sales and Income from continuing operations in 1994 increased 21%, to $283.3 million, as compared to 1993, excluding non-cash charges of $200 million and $100 millioi after taxes ($316 million and $159 million pretax) recorded in 1994 and 1993, respectively, to reflect a reduction in insurance coverage for asbestos property damage lawsuits and claims. In 1992, Grace closed its fumed silica plant in Belgium and recorded a one-time provision of $140 million, representing the entire net book value of the facility and certain additional expenses. Excluding the asbestos and fumed silica charges, income from continuing operations for 1993 increased 19%, to $234.4 million, over 1992 (including businesses divested in 1992). For all periods presented, the Consolidated Statement of Operations has been restated to reflect the classification of certain businesses as discontinued operations, as discussed in Note 6 to the Consolidated Financial Statements. SPECIALTY CHEMICALS Sales and revenues increased 11% in 1994 as compared to 1993, reflecting favorable volume, price/product mix and currency translation variances estimated at 9%, 1% and 1%, respectively. Volume increases were experienced by all core Eroduct lines. Packaging volume increases were due to higher sales volumes of ags, films and laminates in all regions. The volume increases in construction products were due to the acquisition of construction chemicals businesses in the first quarter of 1994, improved construction markets in North America and Europe, and improved sales of waterproofing materials in North America. Water treatment volume increases were due to market share gains in Latin America and North America in the water treatment chemicals business and improving conditions in the paper industry process chemicals business in Europe. The volume increases in container were due to increased sales of can sealing products in Asia Pacific. Catalyst and other silica-based products volume increases were due to strong sales of dentifrice silica in North America and market share gains in Europe, improved polyolefin catalyst sales as a result of improved market conditions in Europe and Asia Pacific, and improved volumes in fluid cracking catalysts in Europe and Asia Pacific, partially offset by a decrease in fluid cracking catalyst volume in North America as a result of customers cracking better quality crude (requiring fewer catalysts) and an increase in customer maintenance shutdowns in 1994. Operating income before taxes increased by 19% in 1994 compared to 1993. North American results in 1994 were positively affected by strong growth in construction and packaging, mainly due to the volume increases noted above, partially offset by reduced profitability in fluid cracking catalysts due to the volume decreases noted above. European results improved significantly versus 1993, primarily due to improvements in fluid cracking and polyolefin catalysts and construction products (due to the volume increases noted above), partially offset by costs associated with streamlining European packaging, water treatment and container operations. In Asia Pacific, favorable results were achieved versus 1993, primarily in fluid cracking and polyolefin catalysts and container (due to the volume increases noted above). Latin American 1994 results improved versus 1993, primarily due to increased profitability in packaging (due to increased volumes in bags, films and laminates). Latin American results also benefited from improved economic conditions in Brazil; however, this was partially offset by the devaluation of the Mexican peso in late 1994. Excluding sales and revenues and operating income before taxes of businesses divested in 1992 and the fumed silica provision referred to above, sales and revenues increased by 3%, and operating income before taxes increased by 4%, in 1993 as compared to 1992. The increase in sales and revenues reflected favorable volume and price/product mix variances estimated at 6% and 2%, respectively, offset by an unfavorable currency translation variance estimated at 5%. Volume increases occurred in 1993 in packaging, water treatment, fluid cracking catalysts and silica products, and construction products. North American results significantly improved in 1993, as strong growth occurred in packaging, fluid cracking catalysts and silica products, and construction products, due mainly to strong volume increases. European results for most product lines were adversely affected by recessionary conditions, leading to reduced profitability; however, results for European fluid cracking catalysts and silica products improved, primarily due to increased volumes achieved following the withdrawal of certain competitors from this market in 1992. In Asia Pacific, favorable results were achieved, primarily in packaging and fluid cracking catalysts and silica products. In Latin America, results were down, primarily due to the costs of integrating the operations of a new water treatment business, partially offset by favorable results in packaging. HEALTH CARE Sales and revenues for 1994 increased by 24% over 1993, due to increases of 28% and 47%, respectively, in kidney dialysis services and home health care operations, partially offset by a decrease of 7% in medical products revenues. The decrease in medical products operations reflects a decline in bloodline sales resulting from import alerts issued in the 1993 second quarter (see discussion below). 1994 results for kidney dialysis services reflect acquisitions during 1994, and home health care operations include the results Home Nutritional Services, Inc. (HNS), a national provider of home infusion of therapy services acquired in April 1994. The number of centers providing dialysis and related services increased 18%, from 501 at year-ena 1993 to 590 at year-end 1994 (526 in North America, 42 in Europe, 15 in Latin America and 7 in Asia Pacific). F-29 \ ENVIRONMENTAL MATTERS Grace incurs costs related to environmental protection as required by laws and regulations, Grace's commitment to industry initiatives such as Responsible Care{REGISTRATED TRADEMARK} (the Chemical Manufacturers Association program) anc internal Grace standards. Worldwide expenses of continuing operations related to the operation and maintenance of environmental facilities and the disposal ol hazardous and nonhazardous wastes totalled $41 million, $45 million and $56 million in 1994, 1993 and 1992, respectively. Such costs are estimated to be approximately $42 million and $45 million in 1995 and 1996, respectively. In addition, worldwide capital expenditures for continuing operations relating to environmental protection totalled $22 million in 1994, compared to $20 million and $18 million in 1993 and 1992, respectively. Capital expenditures to conply with environmental initiatives in future years are estimated to be $26 million and $23 million in 1995 and 1996, respectively. Grace has also incurred costs to remediate environmentally impaired sites. These costs were $31 million, $44 million and $35 million in 1994, 1993 and 1992, respectively. These amounts have been charged against previously established reserves. Future cash outlays for remediation costs are expected to total $45 million in 1995 and $39 million in 1996. Expenditures have been funded from internal sources of cash and are not expected to have a significant effect on liquidity. Grace accrues for anticipated costs associated with investigatory and remediation efforts relating to the environment in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," which governs probability and the ability to reasonably estimate future costs. At December 31, 1994, Grace's liability for environmental investigatory and remediation costs related to continuing and discontinued operations totalled approximately $216 million, which amount does not take into account any discounting for future expenditures or possible future insurance recoveries. The measurement of the liability is evaluated quarterly based on currently available information. In 1994, periodic provisions were recorded for environmental and plant closure expenses, which include the costs of future environmental investigatory and remediation activities. Additionally, in the first quarter of 1994, Grace recorded a provision of approximately $40 million, principally to provide for future environmental costs. F-32 W. R. GRACE & CO. AMD SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in millions) SCHEDULE VII Description For the Year 19*4 Balance beginning of period Additions (deductions) Charged (credited) to costs snd expenses Other net** Balance at end of period Valuation and qualifying accounts dsductsd froa assets: Allowances for notes and accounts receivable. . . Securities of divested businesses ................................. Deferred tax assets valuation allowance Reserves: Poreign employee benefit obligations* Discontinued operations $ SO.3 $ 1(1.2 $ 139.7 $ 103.2 $ S $ (57.3) $ (1S6.3) $ 7.3 $ 95.2 4.9 $ 137.0 $ <4.4 $ 133.1 9 11.6 $ 107.2 $ 6.5 $ $ 52.5 $ 239.3 Description For the Year 1993 Balance beginning of period Additions (deductions) Charged (credited) to costs and expenses Other net** Balance at end of period Valuation and qualifying accounts deducted fron assets: Allowances for notes end accounts receivable. . . Securities of divested businesses Deferred tax assets valuation allowance Reserves: Poreign eaployse benefit obligations* $ 39.3 9 152.9 $ 143.1 $ 7.4 $ 8.3 $-- $ (56.4) $-- $ (13.4) 9 50.3 9 K1.2 $ 129.7 $ S3.4 $ 12.3 9 (31.2) 9 *4.4 Diaoontinuad opaxationa ............................................................. * (12.0 $ -- $ 132.1 Daacription For the Sear 1992 Balance beginning of paxiod Additions (daduetiona) Charged (exadited) to coats and axpanaaa Other net* - Balance at and of period Valuation and qualifying aceounta daductad fxon aaaata: Allowances fox notaa and aceounta raeaivabla. . . . Securities of divested buainaaaaa ...................................... .... Dafaxxad tax aaaata valuation allowance ........................ Rtitrvti: Foreign ploys* bmtfit obligations*............................. .... Diaoontinuad opaxationa ............................................................. $ 201.0 $ 40.0 (04.9) $ 51.9 $ (49.7) $ 15.0 $ 2.0 $ 39.3 $ 152.9 $ 143.1 $ 02.3 $ 15.4 $ 70.0 (14.5) $-- 03.4 $ 144.7 * Repreaenta legally aandatad eaployea benefit obligations, priaarily pension benefits, relating Co Brace's operations in Buxope. * Oonaiata of additions and daduetiona applicabla to businesses acquired, diapoaala of buainaaaaa, bad dabe write-offs, foreign currancy txanalation, raclaaaificationa (including tba daconaolidaticn of anounts ralaCing to diaoontinuad opaxationa) and aiacallanaoua othar adjuataanta. F-33 Exhibit 1 W. R. GRACE & CO. AND SUBSIDIARIES WEIGHTED AVERAGE NUMBER OF SHARES AND EARNINGS USED IN PER SHARE COMPUTATIONS 1t weighted average "-**-* of shares of Stock outetending were as follows: 1994 (in thousands) 1993 1992 Weighted average nuaber of shares of ri'--rin Stock outstanding ...................................................................... Conversion of convertible debt obligations ........................ Additional dilutive effect of outstanding options (as determined by the application of the treasury stock nathod) ................................................................................ Weighted average nuaber of shares of Common Stock outstanding assuming full dilution 93,934 -- 91,441 44 99,543 459 490 94,595 92,197 99,543 Income/(loss) used in the computation of earnings per share ware as follows: (in millions, except per share) 1994 1993 1992 Met Income/(loss)................................................................................................................................... Dividends paid on preferred stocks ......................................................................................... Income/(loss) used in per share computation of earnings and in per share computation of earnings assuming full dilution............................ . . 3.3 (.5) $ 24.0 (.5) (294.5) (.5) * 92.9 25.5 $ (295.0) Xamings/(loss) per share................................................................................................................. gamings per share assuming full dilution....................................................................... .11 $ .at (3.29) .11 $ .38 ._ * The effect of the converson of convertible securities and the exercise of outstanding options would be anti-dilutive. Therefore, they are not shown. F-34 W. R. GRACE & CO. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (in millions except ratios) (Unaudited) EXHIBIT 1 1*94 (c) Years nded December 31, (b) 1**3 (d) 1992 (e) 1991 1990 Nt incom. from continuing operations............................................. Add (doduct): Provision for lncons taxes.................................................................... Incosn taxes of 50%-omned oonpanias ........................................ Minority interest in ineoae of majority-owned subsidiaries .............................................................. Bquity in unrenitted earnings of less than 50t-oned coapanies ......................................................... Interest expense end related financing costs, including aaortixation of capitalised interest. . . Estimated amount of rental expense deemed to represent the interest factor ............................ $ *3.3 55. -- -(2.9) 135.5 22.3 Income as adjusted ................................................................................................ $297.0 $134.4 .l .1 -- (1.3) 122.7 21.3 $344.0 $ 57.7 134.5 2.1 -(1.0) 152.7 26.5 $302.1 $201.7 132.5 1.5 -- (2.5) 209.6 21.7 $564.5 $174.6 97.5 1.9 1.2 (2.1) 237.3 21.0 $531.4 Combined fixed charges and preferred stock dividends: Interest expense end related financing costs, including capitalised interest......................................................... Bstiaatad amount of rental expanse deeaed to represent the interest factor ............................. $143.2 22.3 Pixed charges................................................................................................................. Preferred stock dividend requirements (a).................................. ICS.5 .9 Combined fixed charges and preferred stock dividends ................................................................................................ $1*6.4 $122.0 21.3 144.1 .9 $145.0 $175.3 26.6 202.9 .9 $203.0 $224.5 21.7 246.2 .9 $247.1 $246.3 21.0 267.3 .5 $260.1 Ratio of earnings to fixed charges ................................................... 1.75 2.53 1.55 2.2* 1.9* Ratio of earnings to combined fixed charges and preferred stock dividends .................................................................... 1.75 2.51 1.57 2.25 1.95 (a) Xncraaaad to an ancunt representing tha pratax aacnings required to covar such requirements baaad on Qraca'a aCfaetiva tax rata for aach period praaantad. (b) Certain lMO - 1993 amounts have bean restated to conform to the 1994 presentation. (e) Includes a provision of $314.0 relating to asbestos-related insurance coverage. (d) Includes a provision of $159.0 relating, to asbestos-related insurance coverage. (a) Includes a provision of $140.0 relating to a funad silica plant in Belgium. F-35 W. R. GRACE & CO. Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1993 EXHIBIT INDEX EXHIBIT NO. 3.01 3.02 4.01 4.02 4.03 4.04 EXHIBIT WHERE LOCATED Certificate of Incorporation of W. R. Grace & Co., as amended By-laws of W. R. Grace & Co., as amended Indenture dated as of Septem ber 29, 1992 among W. R. Grace & Co.-Conn., W. R. Grace & Co. and Bankers Trust Company Indenture dated as of January 28, 1993 among W. R. Grace & Co.-Conn., W. R. Grace & Co. and NationsBank of Georgia, N.A. 364-Day Credit Agreement, dated as of September l, 1994, among W. R. Grace & Co.-Conn., W. R. Grace & Co., the several banks parties thereto and Chemical Bank, as agent for such banks Credit Agreement, dated as of September 1, 1994, among W. R. Grace & Co.-Conn., W. R. Grace & Co., the several banks parties thereto and Chemical Bank, as agent for such banks Exhibit 3 to Form 8-K (filed 6/9/88) Filed herewith* Exhibit 4.2 to Form 10-K (filed 3/26/93) Exhibit 4.4 to Form 10-K (filed 3/26/93) Exhibit 4.1 to Form 10-Q (filed 11/10/94) Exhibit 4.2 to Form 10-Q (filed 11/10/94) otner tnan exhibits that are filed herewith, all exhibits listed in this Exhibit Index are incorporated herein by reference. Exhibits indicated by an asterisk (*) are the management contracts and compensatory plans, contracts or arrangements required to be filed as exhibits to this Report. In accordance with paragraph (b)(4)(iii) of Item 601 of Regulation S-K, certain instruments relating to long-term debt are not being filed; W. R. Grace & Co. agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. 4.05 4.06 4.07 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.08 10.09 10.10 10.11 First Amendment, dated as of December 28, 1994, to the 364Day Credit Agreement, dated as of September 1, 1994 First Amendment, dated as of December 28, 1994, to the Credit Agreement, dated as of September 1, 1994 Amended and Restated Rights Agreement dated as of June 7, 1990 between W. R. Grace & Co. and Manufacturers Hanover Trust Company W. R. Grace & Co. Executive Salary Protection Plan, as amended W. R. Grace & Co. 1981 Stock Incentive Plan, as amended W. R. Grace & Co. 1986 Stock Incentive Plan, as amended W. R. Grace & Co. 1989 Stock Incentive Plan, as amended W. R. Grace & Co. 1994 Stock Incentive Plan W. R. Grace & Co. 1994 Stock Retainer Plan for Nonemployee Directors Forms of Stock Option Agreements Forms of Restricted Share Award Agreements Information Concerning W. R. Grace & Co. Incentive Compen sation Program, Deferred Compensation Program and Long-Term Incentive Program W. R. Grace & Co. Long-Term Incentive Plan W. R. Grace & Co. Retirement Plan for Outside Directors, as amended Filed herewith Filed herewith Exhibit to Amendment on Form 8 to Application for Registration on Form 8-B (filed 6/19/90) Exhibit 19(f) to Form 8-K (filed 6/9/88)* Exhibit 28(a) to Form 10-Q (filed 8/13/91)* Exhibit 28(b) to Form 10-Q (filed 8/13/91)* Exhibit 28(c) to Form 10-Q (filed 8/13/91)* Filed herewith* Filed herewith* Exhibit 10(h) to Form 10-K (filed 3/28/92)* Exhibit 10(i) to Form 10-K (filed 3/28/92)* Pages 8-13 and 27-30 of Proxy Statement (filed 4/11/94)* Exhibit 10(1) to Form 10-K (filed 3/29/91)* Exhibit 10(o) to Form 10-K (filed 3/28/92)* 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 Employment Agreement dated as of April l, 1991 between w. R. Grace & Co.-Conn, and Constantine L. Hampers, as amended Housing Loan Agreement dated as of August 1, 1987 between W. R. Grace & Co. and J. P. Bolduc, related Amendment and Assignment dated May 10, 1988 Employment Agreement dated August 1, 1993 between J. P. Bolduc and W. R. Grace & Co. Stock Option Agreement dated June 30, 1993 between David L. Yunich and W. R. Grace & Co. Stock Option Agreement dated June 30, 1993 between David L. Yunich and W. R. Grace & Co. Retirement Agreement between W. R. Grace & Co. and J. Peter Grace dated December 21, 1992 Executive Severance Agreement dated as of September 1, 1992 between W. R. Grace & Co. and J. P. Bolduc Executive Severance Agreement dated September 1, 1992 between W. R. Grace & Co. and Constantine L. Hampers Form of Executive Severance Agreement between W. R. Grace & Co. and others Consulting Agreement dated June 1, 1992 between W. R. Grace & Co. and Kamsky Associates, Inc. Incentive Compensation Agree ment dated June 1, 1992 between National Medical Care, Inc. and Kamsky Associates, Inc. Exhibit 10(x) to Form 10-K (filed 3/28/92)* Exhibit 10(q) to Form 10-K (filed 3/29/88); Exhibit 19(i) to Form 8-K (filed 6/9/88)* Exhibit 10.13 to Form 10-K (filed 3/28/94)* Exhibit 10.14 to Form 10-K (filed 3/28/94)* Exhibit 10.15 to Form 10-K (filed 3/28/94)* Exhibit 10.23 to Form 10-K (filed 3/26/93)* Exhibit 10.24 to Form 10-K (filed 3/26/93)* Exhibit 10.26 to Form 10-K (filed 3/26/93)* Exhibit 10.28 to Form 10-K (filed 3/26/93)* Exhibit 10.29 to Form 10-K (filed 3/26/93)* Exhibit 10.30 to Form 10-K (filed 3/26/93)* 10.23 10.24 10.25 10.26 10.27 10.28 10.29 11 12 13 21 23 Consulting Agreement dated as of December 1993 between National Medical Care, Inc. and Virginia A. Kamsky Consulting Agreement dated as of June 16, 1993 by and between National Medical Care, Inc., The Humphrey Group, Inc. and Gordon J. Humphrey Employment Termination Agreement dated June 30, 1993 between J. R. Wright, Jr. and W. R. Grace & Co. W. R. Grace & Co. Supplemental Executive Retirement Plan, as amended Agreement dated March 1, 1995 between W. R. Grace & Co. and Jean-Louis Greze Agreements dated March 2 and March 7, 1995 between J. P. Bolduc and W. R. Grace & Co. Letter Agreement dated April 1, 1991 between National Medical Care, Inc. and Constantine L. Hampers Weighted Average Number of Shares and Earnings Used in Per Share Computations Computation of Ratio of Earn ings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends Selected Portions of the 1994 Annual Report to Shareholders of W. R. Grace & Co. List of Subsidiaries of W. R. Grace & Co. Consent of Independent Accoun tants Filed herewith* Exhibit 10.23 to Form 10-K (filed 3/28/94)* Exhibit 10.24 to Form 10-K (filed 3/28/94)* Exhibit 10.25 to Form 10-K (filed 3/28/94)* Filed herewith* Filed herewith* Filed herewith* Filed herewith (in Financial Supplement to 10-K) Filed herewith (in Financial Supplement to 10-K) Filed herewith (in Financial Supplement to 10-K) Filed herewith Filed herewith (in Financial Supplement to 10-K) 24 99.01 99.02 99.03 99.04 Powers of Attorney Letter of Intent dated November 5, 1993 between W.R. Grace & Co. and J. Peter Grace III, as amended Agency Agreement dated June 13, 1994 between HSC Holding Co., Inc. and Grace Hotel Services Corporation Letter Agreement dated December 14, 1994 among HSC Holding Co., Inc., Grace Hotel Services Corporation and W.R. Grace & Co. ^ Services Agreement dated November 10, 1994 between HSC Holding Co., Inc. and Grace Hotel Services Corporation Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith