SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to_______ Commission file number 1-12139 SEALED AIR CORPORATION (Exact name of registrant as specified in its charter) Delaware 65-0654331 - ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Park 80 East Saddle Brook, New Jersey 07663-5291 - ------------------------------- ---------------------- (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code (201) 791-7600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- There were 83,619,100 shares of the registrant's common stock, par value $0.10 per share, and 35,758,634 shares of the registrant's Series A convertible preferred stock, par value $0.10 per share, outstanding as of July 31, 1999.
PART I FINANCIAL INFORMATION SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings For the Three and Six Months Ended June 30, 1999 and 1998 (In thousands of dollars except per share data) (Unaudited) For the For the Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 --------- --------- ---------- ----------- Net sales $695,121 $670,005 $1,374,058 $1,101,040 Cost of sales 441,541 442,945 874,780 733,858 --------- --------- ---------- ----------- Gross profit 253,580 227,060 499,278 367,182 Marketing, administrative and development expenses 131,969 124,084 260,583 218,537 Goodwill amortization 12,331 12,018 24,582 12,108 --------- --------- ---------- ----------- Operating profit 109,280 90,958 214,113 136,537 Other income (expense): Interest expense (14,738) (20,642) (29,457) (20,724) Other, net 1,143 (1,537) (1,021) (1,948) --------- --------- ---------- ----------- Other expense, net (13,595) (22,179) (30,478) (22,672) --------- --------- ---------- ----------- Earnings before income taxes 95,685 68,779 183,635 113,865 Income taxes 44,493 33,214 85,829 51,248 --------- --------- ---------- ----------- Net earnings $ 51,192 $ 35,565 $ 97,806 $ 62,617 ========= ========= ========== ========== Less: Series A Preferred stock dividends 17,879 18,011 35,789 18,011 Less: Retroactive recognition of preferred stock dividends -- -- -- 18,011 Add: Excess of book value over repurchase price of Series A preferred stock 29 -- 39 -- --------- --------- ---------- ----------- Net earnings ascribed to common shareholders $ 33,342 $ 17,554 $ 62,056 $ 26,595 ========= ========= ========== =========== Earnings per common share (See Note 4): Basic $ 0.40 $ 0.21 $ 0.74 $ 0.43 ========= ========= ========== =========== Diluted $ 0.40 $ 0.21 $ 0.74 $ 0.43 ========= ========= ========== =========== Weighted average number of common shares outstanding: Basic 83,626 83,612 83,505 62,249 ========= ========= ========== =========== Diluted 83,758 83,746 83,637 62,426 ========= ========= ========== =========== See accompanying notes to consolidated financial statements. 2
SEALED AIR CORPORATION Consolidated Balance Sheets June 30, 1999 and December 31, 1998 (In thousands of dollars except share data) June 30, December 31, 1999 1998 (Unaudited) ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 60,027 $ 44,986 Notes and accounts receivable, net of allowances for doubtful accounts of $19,076 in 1999 and $17,945 in 1998 450,118 453,124 Inventories 269,065 275,312 Other current assets 72,226 71,192 ---------- ----------- Total current assets 851,436 844,614 ---------- ----------- Property and equipment: Land and buildings 414,005 420,589 Machinery and equipment 1,322,147 1,349,716 Other property and equipment 115,308 121,252 Construction in progress 50,767 54,538 ---------- ----------- 1,902,227 1,946,095 Less accumulated depreciation and amortization 858,824 829,513 ---------- ----------- Property and equipment, net 1,043,403 1,116,582 ---------- ----------- Goodwill, less accumulated amortization of $60,218 in 1999 and $36,083 in 1998 1,883,948 1,907,736 Other assets 177,859 170,998 ---------- ----------- Total assets $3,956,646 $ 4,039,930 ========== =========== See accompanying notes to consolidated financial statements. 3
SEALED AIR CORPORATION Consolidated Balance Sheets June 30, 1999 and December 31, 1998 (Continued) (In thousands of dollars except share data) June 30, December 31, 1999 1998 (Unaudited) ----------- ------------ LIABILITIES, CONVERTIBLE PREFERRED STOCK & SHAREHOLDERS' EQUITY Current Liabilities: Short-term borrowings and current portion of long-term debt $ 148,656 $ 85,131 Accounts payable 163,992 176,594 Other current liabilities 209,008 230,332 Income taxes payable 43,026 42,933 ---------- ---------- Total current liabilities 564,682 534,990 Long-term debt, less current portion 845,332 996,526 Deferred income taxes 206,289 200,699 Other liabilities 82,002 79,577 ---------- ---------- Total liabilities 1,698,305 1,811,792 ---------- ---------- Series A convertible preferred stock, $50 per share redemption value, authorized and issued 36,016,696 shares in 1999 and 36,021,851 shares in 1998, including 257,500 shares in 1999 and 200,000 shares in 1998 in treasury, mandatory redemption in 2018 1,787,960 1,791,093 Shareholders' equity: Common stock, $.10 par value. Authorized 400,000,000 shares, issued 84,009,118 shares in 1999 and 83,806,361 shares in 1998 8,401 8,380 Additional paid-in capital 622,958 610,505 Retained earnings (deficit) 54,051 (7,966) Accumulated translation adjustment (172,884) (124,843) ---------- ---------- 512,526 486,076 ---------- ---------- Less: Deferred compensation 27,193 28,683 Less: Cost of treasury common stock, 331,904 shares in 1999 and 494,550 shares in 1998 11,838 17,234 Less: Minimum pension liability 3,114 3,114 ---------- ---------- Total shareholders' equity 470,381 437,045 ---------- ---------- Total liabilities, preferred stock and shareholders' equity $3,956,646 $4,039,930 ========== ========== See accompanying notes to consolidated financial statements. 4
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1999 and 1998 (In thousands of dollars) (Unaudited) 1999 1998 ---------- ---------- Cash flows from operating activities: Net earnings $ 97,806 $ 62,617 Adjustments to reconcile net earnings to net cash provided by operating activities, net of effect of businesses acquired: Depreciation and amortization 111,946 86,006 Amortization of senior debt discount 19 -- Deferred tax (benefit)provision (2,162) 5,673 Net loss on disposals of fixed assets 105 608 Changes in operating assets and liabilities, net of assets and liabilities acquired and transferred to/from Grace: Notes and accounts receivable (11,253) (8,743) Inventories (1,031) 5,320 Other current assets (422) 1,417 Other assets (1,542) (9,357) Accounts payable (9,753) (2,243) Other current liabilities (7,563) 9,301 Other liabilities 4,317 5,271 ---------- --------- Net cash provided by operating activities 180,467 155,870 ---------- --------- Cash flows from investing activities: Capital expenditures for property and equipment (31,843) (32,462) Proceeds from sales of property and equipment 2,155 4,191 Businesses acquired, net of cash acquired and debt assumed (8,905) 48,994 ---------- --------- Net cash(used) provided by investing activities (38,593) 20,723 ---------- --------- Cash flows from financing activities: Net advances to Grace -- (24,106) Proceeds from long-term debt 298,175 1,258,807 Payment of long-term debt (455,053) (125,768) Payment of senior debt issuance costs (1,950) -- Dividends paid on preferred stock (35,821) -- Purchase of treasury preferred stock (2,836) -- Proceeds from stock option exercises 1,663 -- Transfer of funds to New Grace -- (1,256,614) Net proceeds from short-term borrowings 69,352 4,230 ---------- --------- Net cash used in financing activities (126,470) (143,451) ---------- --------- Effect of exchange rate changes on cash and cash equivalents (363) 922 ---------- --------- Cash and cash equivalents: Increase during the period 15,041 34,064 Balance, beginning of period 44,986 -- ---------- --------- Balance, end of period $ 60,027 $ 34,064 ========== ========= See accompanying notes to consolidated financial statements. 5
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1999 and 1998 (Continued) (In thousands of dollars) (Unaudited) 1999 1998 ---------- ---------- Supplemental Cash Flow Items: Interest payments, net of amounts capitalized $ 30,135 $ 13,745 ========== ========== Income tax payments $ 85,275 $ 11,016 ========== ========== Non-Cash Items: Issuance of 36,021,851 shares of Series A convertible preferred stock and 40,647,815 shares of common stock in connection with the Recapitalization $ -- $1,801,093 ========== ========== Net assets acquired in exchange for the issuance of 42,624,246 shares of common stock in connection with the Merger, net of cash balance of $51,259 acquired $ -- $2,110,752 ========== ========== See accompanying notes to consolidated financial statements. 6
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 1999 and 1998 (In thousands of dollars) (Unaudited) For the For the Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 -------- -------- -------- -------- Net Earnings $ 51,192 $ 35,565 $ 97,806 $ 62,617 Other comprehensive income: Foreign currency translation adjustments (7,362) (2,561) (48,041) (12,678) -------- -------- -------- -------- Comprehensive income $ 43,830 $ 33,004 $ 49,765 $ 49,939 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 7
SEALED AIR CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 and 1998 (Amounts in thousands, except per share data) (Unaudited) (1) Reorganization, Recapitalization and Merger On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and Sealed Air Corporation ("old Sealed Air"), completed a series of transactions as a result of which: (a) The specialty chemicals business of the Company was separated from its packaging business, the packaging business ("Cryovac") was contributed to one group of wholly owned subsidiaries, and the specialty chemicals business was contributed to another group of wholly owned subsidiaries ("New Grace"); the Company and Cryovac borrowed approximately $1.26 billion under two revolving credit agreements (the "Credit Agreements") (which, as amended, are discussed below) and transferred substantially all of those funds to New Grace; and the Company distributed all of the outstanding shares of common stock of New Grace to its shareholders. As a result, New Grace became a separate publicly owned corporation that is unrelated to the Company. These transactions are referred to below as the "Reorganization." (b) The Company recapitalized its outstanding shares of common stock, par value $0.01 per share ("Grace Common Stock"), into a new common stock and Series A convertible preferred stock, each with a par value of $0.10 per share (the "Recapitalization"). (c) A subsidiary of the Company merged into old Sealed Air (the "Merger"), with old Sealed Air being the surviving corporation. As a result of the Merger, old Sealed Air became a subsidiary of the Company, and the Company was renamed Sealed Air Corporation. References to "Grace" in these notes refer to the Company before the Reorganization, the Recapitalization and the Merger. (2) Basis of Presentation The Merger was accounted for as a purchase of old Sealed Air by the Company as of March 31, 1998. Accordingly, the financial statements include the operating results and cash flows as well as the assets and liabilities of Cryovac for all periods presented. The operating results, cash flows, assets and liabilities of old Sealed Air are included from March 31, 1998. See Note 8 for unaudited selected pro forma statement of earnings information for the quarter and six months ended June 30, 1998. For periods prior to the Merger, the financial statements exclude all of the assets, liabilities (including contingent liabilities), revenues and expenses of Grace other than the assets, liabilities, revenues and expenses of Cryovac. Subsequent to the Merger, the consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the consolidated financial position and results of operations for the quarter and six months ended June 30, 1999 have been made. The consolidated statements of earnings for the three and six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. 8
Certain prior period amounts have been reclassified to conform to the current year's presentation. (3) Equity In connection with the Recapitalization, the Company, among other things, recapitalized the outstanding shares of Grace Common Stock into 40,647,815 shares of the Company's common stock and 36,021,851 shares of Series A convertible preferred stock (convertible into approximately 31,900,000 shares of the Company's common stock), each with a par value of $0.10 per share. In the Merger, the Company issued 42,624,246 shares of common stock to the shareholders of old Sealed Air. The outstanding Series A preferred stock is convertible at any time into approximately 0.885 share of common stock for each share of preferred stock, votes with the common stock on an as-converted basis, pays a cash dividend, as declared by the Board of Directors, at an annual rate of $2.00 per share, payable quarterly in arrears, becomes redeemable at the option of the Company beginning March 31, 2001, subject to certain conditions, and is subject to mandatory redemption on March 31, 2018 at $50 per share, plus any accrued and unpaid dividends. Because it is subject to mandatory redemption, the Series A convertible preferred stock is classified outside of the shareholders' equity section of the balance sheet. At its date of issuance, the fair value of the Series A convertible preferred stock exceeded its mandatory redemption amount primarily due to the common stock conversion feature of such preferred stock. Accordingly, the carrying amount of the Series A convertible preferred stock is reflected in the consolidated balance sheet at its mandatory redemption value. The Company has authority to issue a total of 50,000,000 shares of preferred stock, par value $0.10 per share. (4) Earnings Per Common Share In calculating basic and diluted earnings per common share for the first six months of 1998, retroactive recognition was given to the Recapitalization as if it had occurred on January 1, 1998 in accordance with SAB No. 98. Accordingly, net earnings were reduced for preferred stock dividends for the first quarter of 1998 (as if such shares had been outstanding during the period) to arrive at net earnings ascribed to common shareholders. The weighted average number of outstanding common shares used for the first six months of 1998 to calculate basic earnings per common share was calculated on an equivalent share basis using the weighted average number of shares of common stock outstanding for the first quarter of 1998, adjusted to reflect the terms of the Recapitalization. The weighted average number of common shares used to calculate diluted earnings per common share also considers the exercise of dilutive stock options in each period. The outstanding preferred stock is not assumed to be converted in the calculation of diluted earnings per common share for all periods presented because the treatment of the preferred stock as the common stock into which it is convertible would be antidilutive (i.e., would increase earnings per common share) in those periods. The following table sets forth the reconciliation of the basic and diluted earnings per common share computations for the three and six months ended June 30, 1999 and 1998 (amounts other than per share amounts in thousands). 9
<TABLE> Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Basic EPS: NUMERATOR Net earnings $ 51,192 $ 35,565 $ 97,806 $ 62,617 Add: Excess of book value over repurchase price of preferred stock 29 -- 39 -- Less: Preferred stock dividends 17,879 18,011 35,789 18,011 Less: Retroactive recognition of preferred stock dividends -- -- -- 18,011 - ---------------------------------------------------------------------------------------- Net earnings ascribed to common shareholders $ 33,342 $ 17,554 $ 62,056 $ 26,595 - ---------------------------------------------------------------------------------------- DENOMINATOR Weighted average common shares outstanding - basic 83,626 83,612 83,505 62,249 - ---------------------------------------------------------------------------------------- Basic earnings per common share $ 0.40 $ 0.21 $ 0.74 $ 0.43 - ---------------------------------------------------------------------------------------- Diluted EPS: NUMERATOR Net earnings ascribed to common shareholders $ 33,342 $ 17,554 $ 62,056 $ 26,595 - ---------------------------------------------------------------------------------------- DENOMINATOR Weighted average common shares Outstanding - basic 83,626 83,612 83,505 62,249 Effect of assumed exercise of stock options 132 134 132 177 Weighted average common shares Outstanding - diluted 83,758 83,746 83,637 62,426 - ---------------------------------------------------------------------------------------- Diluted earnings per common share $ 0.40 $ 0.21 $ 0.74 $ 0.43 - ---------------------------------------------------------------------------------------- </TABLE> (5) Inventories At June 30, 1999 and December 31, 1998, the components of inventories by major classification (raw materials, work in process and finished goods) were as follows: June 30, December 31, 1999 1998 ----------- ------------ Raw materials $ 61,579 $ 63,805 Work in process 51,294 50,714 Finished goods 172,364 176,965 ----------- ----------- Subtotal 285,237 291,484 Reduction of certain inventories to LIFO basis (16,172) (16,172) ----------- ----------- Total inventories $ 269,065 $ 275,312 =========== ============ 10
(6) Income Taxes The Company's effective income tax rates were 46.5% and 48.3% for the second quarters of 1999 and 1998, respectively. Such rates were higher than the statutory U.S. federal income tax rate primarily due to the non-deductibility of the goodwill amortization resulting from the Merger and state income taxes. (7) Long-Term Debt On May 18, 1999, the Company issued $300 million aggregate principal amount of 10-year 6.95% senior notes ("Senior Notes") under Rule 144A and Regulation S of the Securities Act of 1933, as amended. Accrued interest on the Senior Notes is payable semi-annually in cash on May 15 and November 15 of each year, commencing on November 15, 1999. The net proceeds of $297,834 from the issuance of the Senior Notes were used to reduce outstanding borrowings under the Credit Agreements described below. At June 30, 1999, the outstanding borrowings under the Senior Notes were $297,853 net of unamortized bond discount of $2,147. At June 30, 1999, the Company's outstanding debt consisted primarily of borrowings made under the Credit Agreements described below, the Senior Notes and certain other loans incurred by the Company's subsidiaries. The Company's outstanding debt balance as of December 31, 1998 primarily included borrowings under the Credit Agreements and certain other loans incurred by the Company's subsidiaries. The Company's two principal Credit Agreements are a 5-year revolving credit facility that expires on March 30, 2003 and a 364-day revolving credit facility that expires on March 27, 2000. During the first six months of 1999, the Company voluntarily reduced the amounts available under the Credit Agreements from $1 billion to $650 million under the 5-year revolving credit facility and from $600 million to $475 million under the 364-day revolving facility. As of June 30, 1999, outstanding borrowings under the 5-year and 364-day revolving credit facilities were approximately $537 million (included in long-term debt) and $41 million (included in short-term borrowings), respectively. The Credit Agreements provide that the Company and certain of its subsidiaries may borrow for various purposes, including the refinancing of existing debt, the provision of working capital and other general corporate needs. The Company's obligations under the Credit Agreements bear interest at floating rates. The weighted average interest rate under the Credit Agreements was approximately 5.6% at June 30, 1999 and 5.8% at December 31, 1998. The Company has entered into certain interest rate swap agreements that have the effect of fixing the interest rates on a portion of such debt. The weighted average interest rates at June 30, 1999 and December 31, 1998 did not change significantly as a result of these derivative financial instruments. The Credit Agreements provide for changes in borrowing margins based on financial criteria and the Company's senior unsecured debt ratings, and impose certain limitations on the operations of the Company and certain of its subsidiaries. The limitations include financial covenants relating to interest coverage and debt leverage as well as certain restrictions on the incurrence of additional indebtedness, the creation of liens, mergers and acquisitions, and certain dispositions of property and assets. The Company was in compliance with these requirements as of June 30, 1999. The Senior Notes impose certain limitations on the operations of the Company and certain of its subsidiaries. The limitations include restrictions on the creation of liens, entrance into sale-leaseback transactions, merger or consolidation of the Company and disposition of substantially all of the Company's assets. The Company was in compliance with these requirements as of June 30, 1999. On July 19, 1999, the Company issued euro 200 million (approximately $205 million) aggregate principal amount of 7-year 5.625% notes in the European market ("Euro Notes") 11
under Regulation S of the Securities Act of 1933, as amended. Accrued interest on the Euro Notes is payable annually in cash on July 19 of each year, commencing on July 19, 2000. The net proceeds of euro 198,624 (approximately $203 million) were used to repay borrowings under the Credit Agreements. (8) Pro Forma Information The following table presents selected unaudited pro forma statement of earnings information for the quarter and six months ended June 30, 1998 as a result of the Reorganization, the Recapitalization and the Merger. Such information reflects pro forma adjustments made in combining the historical results of old Sealed Air and Cryovac as a result of such transactions for the three and six months ended June 30, 1998. Such amounts include for the first quarter of 1998, among others, incremental goodwill amortization of approximately $10 million and incremental interest expense of approximately $20 million. This pro forma information is not intended to represent what the Company's actual results of operations would have been for such periods. <TABLE> For the For the Three Months Ended Six Months Ended June 30, June 30, -------------------- ---------------------- Reported Pro Forma Reported Pro Forma 1999 1998(1) 1999 1998(1) ---- ------- ---- ------- <S> <C> <C> <C> <C> Net sales by business segment: Food and specialty packaging $431,807 $419,932 $857,786 $820,802 Protective packaging 263,314 250,073 516,272 492,990 - -------------------------------------------------------------------------------------- Total net sales 695,121 670,005 1,374,058 1,313,792 Cost of sales 441,541 434,945 874,780 858,795 - -------------------------------------------------------------------------------------- Gross profit 253,580 235,060 499,278 454,997 Marketing, administrative and development expenses 131,969 124,084 260,583 248,646 Goodwill amortization 12,331 12,018 24,582 23,939 - -------------------------------------------------------------------------------------- Operating profit 109,280 98,958 214,113 182,412 Other income (expense): Interest expense (14,738) (20,642) (29,457) (43,095) Other, net 1,143 (1,537) (1,021) (1,333) - -------------------------------------------------------------------------------------- Other expense, net (13,595) (22,179) (30,478) (44,428) Earnings before income taxes 95,685 76,779 183,635 137,984 Income taxes 44,493 35,787 85,829 64,187 - -------------------------------------------------------------------------------------- Net earnings 51,192 40,992 97,806 73,797 - -------------------------------------------------------------------------------------- Less: Preferred stock dividends 17,879 18,011 35,789 36,022 Add: Excess of book value over repurchase price of preferred stock 29 -- 39 -- - -------------------------------------------------------------------------------------- Net earnings ascribed to common shareholders 33,342 22,981 62,056 37,775 12
Earnings per common share (2) Basic 0.40 0.27 0.74 0.45 Diluted 0.40 0.27 0.74 0.45 - -------------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Basic 83,626 83,612 83,505 83,443 Diluted 83,758 83,746 83,637 83,620 - -------------------------------------------------------------------------------------- (1) The second quarter of 1998 represents the actual operating results resulting from the Merger of Sealed Air and Cryovac excluding the non-cash inventory charge of approximately $8 million resulting from the turnover of certain of the Company's inventories previously stepped-up to fair value in connection with the Merger. (2) For purposes of calculating basic and diluted earnings per common share in the 1998 periods, net earnings have been reduced by the dividends that would have been payable on the Company's Series A convertible preferred stock for the first quarter of 1998 if such shares had been outstanding during such period to arrive at net earnings ascribed to common shareholders. The weighted average number of outstanding common shares used to calculate basic earnings per common share is calculated on an equivalent share basis using the weighted average number of shares outstanding of the Company's common stock for the first quarter of 1998, adjusted to reflect the terms of the Recapitalization. The assumed conversion of the convertible preferred stock is not considered in the calculation of diluted earnings per common share for all periods presented as the effect is antidilutive (i.e. would increase the earnings per common share for each period presented). </TABLE> (9) Restructuring and Other Charges The Company's restructuring reserve, which arose primarily out of a restructuring undertaken by the Company during the third quarter of 1998, amounted to $10,579 at June 30, 1999 and $26,924 at December 31, 1998. The components of the restructuring charges, spending and other activity through June 30, 1999 and the remaining reserve balance at June 30, 1999 were as follows: <TABLE> Employee Contract Termination Plant/Office Termination Costs Closures Costs Total - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Restructuring reserve at December 31, 1998 25,362 1,562 - 26,924 Cash payments during 1999 (16,004) (341) - (16,345) - --------------------------------------------------------------------------------------------- Restructuring reserve at June 30, 1999 9,358 1,221 - 10,579 - --------------------------------------------------------------------------------------------- </TABLE> The Company expects to incur approximately $43,289 of cash outlays to carry out this restructuring program, of which approximately $32,710 was incurred through June 30, 1999. These cash outlays include primarily severance and other personnel related costs, costs of terminating leases and facilities and equipment disposition costs. In connection with the restructuring, the Company is eliminating 750 positions, or approximately 5% of its workforce, across all functional areas. Through June 30, 1999, approximately 624 positions had been eliminated, and all restructuring actions, including remaining asset dispositions, are expected to be completed by the end of 1999 although certain cash outlays will continue into future years. (10) Business Segment Information The Company operates in two reportable business segments: (i) Food and Specialty Packaging and (ii) Protective Packaging. The Food and Specialty Packaging segment comprises the Company's Cryovac(R) food and specialty products. The Protective Packaging segment includes the aggregation of the Company's packaging products, engineered products and specialty products, all of which products are for non-food applications. The Food and Specialty Packaging segment includes flexible materials and related systems (shrink film products, laminated films and specialty packaging systems marketed primarily under the Cryovac(R) trademark for a broad range of perishable foods). This segment also includes rigid packaging and absorbent pads (absorbent pads used for the packaging of 13
meat, fish and poultry, foam trays for supermarkets and food processors, and rigid plastic containers for dairy and other food products). The Protective Packaging segment includes cushioning and surface protection products (including air cellular cushioning materials, films for non-food applications, polyurethane foam packaging systems sold under the Instapak(R) trademark, polyethylene foam sheets and planks, a comprehensive line of protective and durable mailers and bags, certain paper-based protective packaging materials, suspension and retention packaging, and packaging systems) and other products (principally specialty adhesive products). <TABLE> For the For the Three Months Ended Six Months Ended June 30, June 30, -------------------------------------- -------------------------------------- 1999 1998 1999 1998 ==================================================================================================================================== <S> <C> <C> <C> <C> Net sales Food and Specialty Packaging $ 431,807 $ 419,932 $ 857,786 $ 795,454 Protective Packaging 263,314 250,073 516,272 305,586 - ------------------------------------------------------------------------------------------------------------------------------------ Total segments $ 695,121 $ 670,005 $ 1,374,058 $ 1,101,040 ==================================================================================================================================== Operating profit Food and Specialty Packaging $ 72,688 $ 64,210 $ 140,252 $ 100,824 Protective Packaging 56,958 41,227 110,511 50,282 - ------------------------------------------------------------------------------------------------------------------------------------ Total segments 129,646 105,437 250,763 151,106 Corporate operating expenses(1) (20,366) (14,479) (36,650) (14,569) - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 109,280 $ 90,958 $ 214,113 $ 136,537 ==================================================================================================================================== Depreciation and amortization Food and Specialty Packaging $ 27,269 $ 31,112 $ 55,618 $ 53,725 Protective Packaging 15,218 13,299 30,132 19,892 - ------------------------------------------------------------------------------------------------------------------------------------ Total segments 42,487 44,411 85,750 73,617 Corporate (including goodwill amortization) 13,672 12,299 26,196 12,389 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 56,159 $ 56,710 $ 111,946 $ 86,006 ==================================================================================================================================== (1) Includes goodwill amortization of $12,331 and $12,018 in the second quarters of 1999 and 1998, respectively and $24,582 and $12,108 in the first six months of 1999 and 1998, respectively. </TABLE> (11) Acquisitions During the first six months of 1999, the Company made certain small acquisitions. These transactions, which were effected in exchange for cash, were accounted for as purchases and were not material to the Company's consolidated financial statements. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and Sealed Air Corporation ("old Sealed Air") completed a series of transactions as a result of which: (a) The specialty chemicals business of the Company was separated from its packaging business, the packaging business ("Cryovac") was contributed to one group of wholly owned subsidiaries, and the specialty chemicals business was contributed to another group of wholly owned subsidiaries ("New Grace"); the Company and Cryovac borrowed approximately $1.26 billion under two revolving credit agreements (the "Credit Agreements") (which, as amended, are discussed below) and transferred substantially all of those funds to New Grace; and the Company distributed all of the outstanding shares of common stock of New Grace to its stockholders. As a result, New Grace became a separate publicly owned corporation that is unrelated to the Company. These transactions are referred to below as the "Reorganization." (b) The Company recapitalized its outstanding shares of common stock, par value $0.01 per share ("Grace Common Stock"), into a new common stock and Series A convertible preferred stock (the "Series A Preferred Stock"), each with a par value of $0.10 per share (the "Recapitalization"). (c) A subsidiary of the Company merged into old Sealed Air (the "Merger"), with old Sealed Air being the surviving corporation. As a result of the Merger, old Sealed Air became a subsidiary of the Company, and the Company was renamed Sealed Air Corporation. References to "Grace" in this Management's Discussion and Analysis refer to the Company before the Reorganization, the Recapitalization and the Merger. The Merger was accounted for as a purchase of old Sealed Air by the Company as of March 31, 1998. Accordingly, the financial statements include the operating results and cash flows as well as the assets and liabilities of Cryovac for all periods presented. The operating results, cash flows, assets and liabilities of old Sealed Air are included from March 31, 1998. For periods prior to the Merger, the financial statements exclude all of the assets, liabilities (including contingent liabilities), revenues and expenses of Grace other than the assets, liabilities, revenues and expenses of Cryovac. In order to facilitate a review of the factors that affected the Company's operating results for the second quarter and first six months of 1999, the Company has included selected unaudited pro forma financial information in Note 8 to the consolidated financial statements included in this Form 10-Q. 15
RESULTS OF OPERATIONS Discussion and Analysis of Reported Operating Results The Company's net sales increased 4% to $695,121,000 in the second quarter of 1999 from $670,005,000 in the second quarter of 1998. A discussion of the factors affecting this increase in net sales in the second quarter of 1999 is set forth below in the discussion and analysis of pro forma operating results. For the six-month period, the Company's net sales increased 25% to $1,374,058,000 in 1999 from $1,101,040,000 in 1998. This increase in net sales as well as most of the increases in cost of sales, marketing, administrative and development expenses and other costs and expenses, including the substantial increases in interest expense and goodwill amortization, that the Company experienced in the six-month period were due primarily to the inclusion of the protective packaging business of old Sealed Air in the entire 1999 period, but not in the first quarter of 1998, and adjustments arising from the Merger, the Reorganization and the Recapitalization. Gross profit increased as a percentage of net sales to 36.5% for the second quarter of 1999 from 33.9% for the second quarter of 1998. For the first six months of 1999, gross profit as a percentage of net sales was 36.3% compared to 33.3% in the 1998 period. During the second quarter of 1998, the Company incurred a non-cash inventory charge of approximately $8,000,000 (the "Inventory Charge") resulting from the turnover of certain of the Company's inventories previously stepped-up to fair value in connection with the Merger. Excluding the Inventory Charge, gross profit as a percentage of net sales would have been 35.1% and 34.1% for the second quarter and first six-months of 1998, respectively. The increases in both periods, excluding the Inventory Charge, resulted primarily from the higher level of net sales, certain lower raw material costs and cost reductions arising out of certain improvements in the Company's operations. The higher level of marketing, administrative and development expenses reflects primarily the higher level of net sales and, as noted above with respect to the six-month period, is due primarily to the inclusion of old Sealed Air's operations for the full first six months of 1999 but only the second quarter of 1998. Such expenses also reflect the absence in the first six months of 1999 of $18,044,000 of corporate expenses that were allocated to Cryovac by Grace in the first quarter of 1998 prior to the Merger. Such allocations ceased upon the Merger. As a result of the Merger, the Company recorded goodwill amortization of $24,582,000 in the first six months of 1999 compared to $12,108,000 in the first six months of 1998. Other expense, net which reflects primarily interest expense on the Company's indebtedness, decreased for the second quarter of 1999 due to the lower level of debt outstanding during the 1999 period. The increase in interest expense for the first six months of 1999 was due to the timing of indebtedness entered into under the Credit Agreements on March 31, 1998, whereby the debt under the Credit Agreements was outstanding for the full six-month period of 1999 but only for the second quarter of 1998. The Company's effective income tax rate for the quarter ended June 30, 1999 was 46.5% compared to 48.3% for the quarter ended June 30, 1998. The effective tax rate for 16
the first six months of 1999 was 46.7% compared to 45.0% for the 1998 period. Such rates were higher than the statutory U.S. federal income tax rate primarily due to the non-deductibility of the goodwill amortization resulting from the Merger and state income taxes. As a result of the factors discussed above, the Company's net earnings increased to $51,192,000 from $35,565,000 for the second quarter of 1998 and to $97,806,000 for the first six months of 1999 from $62,617,000 for the first six months of 1998. Basic and diluted earnings per common share for the quarter increased to $.40 from $0.21 in the 1998 period and for the first six months of 1999 increased to $0.74 from $0.43 in the 1998 period. Discussion and Analysis of Pro Forma Operating Results The following discussion relates to the unaudited selected pro forma financial information that appears in Note 8 to the consolidated financial statements included in this Form 10-Q. Reported net sales for the second quarter of 1999 increased 4% to $695,121,000 compared with $670,005,000 for the second quarter of 1998. For the six-month period, the Company's reported net sales increased 5% to $1,374,058,000 compared with pro forma net sales of $1,313,792,000 in the 1998 period. The increases in net sales in both periods were primarily due to higher unit volume, partially offset by the negative effect of foreign currency translation. The Company's net sales continued to be affected in the second quarter and first six months of 1999 by the continued weakness of foreign currencies compared with the U.S. dollar in Latin America, Europe and the Asia-Pacific region. Excluding the negative effect of foreign currency translation, net sales would have increased 6% for both the second quarter and, on a pro forma basis, the first six months of 1999 compared to the respective 1998 periods. Net sales from domestic operations increased approximately 4% compared with the second quarter of 1998 and, on a pro forma basis, 5% compared to the first six months of 1998, primarily due to increased unit volume. Net sales from foreign operations, which represented approximately 46% of the Company's total net sales in both periods, increased approximately 3% compared with the second quarter of 1998 and, on a pro forma basis, 5% compared with the first six months of 1998, primarily due to increased unit volume which more than offset the negative effect of foreign currency translation. Net sales of the Company's food and specialty packaging products segment, which consists primarily of the Company's Cryovac(R) food packaging products and Dri-Loc(R) absorbent pads, increased approximately 3% for the second quarter and, on a pro forma basis, 5% compared to the first six months of 1998. These increases were due primarily to higher unit volume partially offset by the negative effect of foreign currency translation. Excluding the negative effect of foreign currency translation, net sales of 17
this segment would have increased by 6% for the second quarter and, on a pro forma basis, 7% for the first six months of 1999 compared to the respective 1998 periods. Net sales of the Company's protective packaging segment, which consists primarily of Cryovac(R) performance shrink films, Instapak(R) chemicals and equipment, air cellular and polyethylene foam surface protection and cushioning materials and protective and durable mailers and bags, increased 5% for the second quarter and, on a pro forma basis, 5% for the first six months of 1999 compared to the respective 1998 periods. These increases were due primarily to higher unit volume. The sales benefit resulting from small acquisitions completed during the past year was largely offset by changes in product mix and average selling prices and by foreign currency translation for both the second quarter and, on a pro forma basis, the first six months of 1999. Excluding the negative effect of foreign currency translation, net sales of this segment would have increased 6% for the second quarter and, on a pro forma basis, 5% for the first six months of 1999 compared to the respective 1998 periods. On a pro forma basis (which excludes the effect of the Inventory Charge), gross profit as a percentage of net sales was 36.5% for the second quarter and 36.3% for the first six months of 1999 compared to 35.1% and 34.6% for the respective 1998 periods. These increases resulted primarily from the higher level of net sales, certain lower raw material costs and cost reductions arising out of certain improvements in the Company's operations. Marketing, administrative and development expenses and goodwill amortization as a percentage of net sales were 20.8% for the second quarter of 1999 compared to 20.3% for the 1998 period and were 20.8% for the first six months of 1999 compared to, on a pro forma basis, 20.7% for the 1998 period. These increases reflect continuing integration and information system costs partially offset by certain improvements in the Company's operations. On a pro forma basis, other expense, net, which reflects primarily interest expense on the Company's indebtedness, decreased compared to the second quarter and first six months of 1998 primarily due to the lower level of debt outstanding during the 1999 periods. On a pro forma basis, the Company's effective income tax rates were 46.5% and 46.6% in the second quarters of 1999 and 1998, respectively, and 46.7% and 46.5% for the first six months of 1999 and 1998, respectively. These rates are higher than the applicable statutory rates primarily due to the non-deductibility for tax purposes of the goodwill amortization resulting from the Merger and state income taxes. The Company expects that its effective tax rate will remain higher than statutory rates for 1999. As a result of the above, the Company recorded net earnings of $51,192,000 for the second quarter of 1999 and $97,806,000 for the first six months of 1999 compared to pro forma net earnings of $40,992,000 and $73,797,000 for the respective 1998 periods. Basic and diluted earnings per common share were $0.40 for the second quarter of 1999 and, on a pro forma basis, $0.27 for the second quarter of 1998. Basic and diluted 18
earnings per common share were $0.74 for the first six months of 1999 and, on a pro forma basis, $0.45 for the first six months of 1998. The effect of the conversion of the Company's outstanding convertible preferred stock is not considered in the calculation of diluted earnings per common share because it would be antidilutive (i.e., would increase earnings per common share for the quarter ended June 30, 1999 and pro forma earnings per common share for the quarter ended June 30, 1998 to $0.44 and $0.36, respectively, and for the six months ended June 30, 1999 and pro forma earnings per common share for the six months ended June 30, 1998 to $0.85 and $0.64, respectively). Liquidity and Capital Resources The Company's principal sources of liquidity are cash flows from operations and amounts available under the Company's existing lines of credit, including principally the Credit Agreements mentioned above. Prior to the consummation of the Merger, Cryovac participated in Grace's centralized cash management system, whereby cash received from operations was transferred to, and disbursements were funded from, centralized corporate accounts. As a result, any cash flows from operations that were in excess of Cryovac's cash needs were transferred to these corporate accounts and used for other corporate purposes. In connection with the Reorganization, most of the Company's net cash at March 31, 1998 (other than $51,259,000 of cash recorded on the balance sheet of old Sealed Air immediately before the Merger) was transferred to New Grace. Net cash provided by operating activities amounted to $180,467,000 and $155,870,000 in the first six months of 1999 and 1998, respectively. The increase in operating cash flows for the first six months of 1999 was primarily due to the inclusion of the operations of old Sealed Air for the full six month period, increased net earnings and higher levels of depreciation and amortization partially offset by the change in operating assets and liabilities due to the timing of cash receipts and payments and the Company's higher level of operations. Net cash used in investing activities amounted to $38,593,000 in the first six months of 1999 compared to net cash provided by investing activities of $20,723,000 in the 1998 period. The change in the first six months of 1999 compared to the 1998 period was primarily due to the absence in the 1999 period of the cash acquired from old Sealed Air in the Merger and the use of $8,905,000 of cash to make various small acquisitions in 1999. Capital expenditures were $31,843,000 in the 1999 period and $32,462,000 in the 1998 period. Net cash used in financing activities amounted to $126,470,000 in the first six months of 1999 and $143,451,000 in the first six months of 1998. The net cash used in the first six months of 1999 was used primarily to repay outstanding debt, principally under the Credit Agreements, and to pay dividends on the Company's Series A Preferred Stock. Such amounts were partially offset by the net proceeds from the Senior Notes, which were used to reduce outstanding borrowings under the Credit Agreements, and net proceeds from short-term borrowings. In the 1998 period, cash used in financing activities primarily 19
reflected the proceeds from borrowings under the Credit Agreements, offset by the contribution of funds to New Grace in connection with the Reorganization and the repayment of debt, principally relating to the Credit Agreements. At June 30, 1999, the Company had working capital of $286,754,000, or 7% of total assets, compared to working capital of $309,624,000, or 8% of total assets, at December 31, 1998. The decrease in working capital was primarily due to increases in short-term borrowings and decreases in notes and accounts receivable and inventory that were partially offset by an increase in cash and a decrease in accounts payable and other current liabilities (which related to accrued payroll and costs associated with the Company's restructuring program). The Company's ratio of current assets to current liabilities (current ratio) was 1.5 at June 30, 1999 and 1.6 at December 31, 1998. The Company's ratio of current assets less inventory to current liabilities (quick ratio) was 1.0 at June 30, 1999 and 1.1 at December 31, 1998. On May 18, 1999, the Company issued $300 million aggregate principal amount of 10-year 6.95% senior notes ("Senior Notes") under Rule 144A and Regulation S of the Securities Act of 1933, as amended (the "Securities Act"). Accrued interest on the Senior Notes is payable semi-annually in cash on May 15 and November 15 of each year, commencing on November 15, 1999. The net proceeds of $297,834,000 from the issuance of the Senior Notes were used to reduce outstanding borrowings under the Credit Agreements described below. At June 30, 1999, the outstanding borrowings under the Senior Notes were $297,853,000 net of unamortized bond discount of $2,147,000. At June 30, 1999, the Company's outstanding debt consisted primarily of borrowings made under the Credit Agreements described below, the Senior Notes and certain other loans incurred by the Company's subsidiaries. The Company's outstanding debt balance as of December 31, 1998 primarily included borrowings under the Credit Agreements and certain other loans incurred by the Company's subsidiaries. The Company's two principal Credit Agreements are a 5-year revolving credit facility that expires on March 30, 2003 and a 364-day revolving credit facility that expires on March 27, 2000. During the first six months of 1999, the Company voluntarily reduced the amounts available under the Credit Agreements from $1 billion to $650 million under the 5-year revolving credit facility and from $600 million to $475 million under the 364-day revolving facility. Borrowings outstanding under the 5-year revolving credit facility are recorded as long-term debt, and borrowings outstanding under the 364-day facility are recorded as short-term borrowings. The Credit Agreements provide that the Company and certain of its subsidiaries may borrow for various purposes, including the refinancing of existing debt, the provision of working capital and other general corporate needs. Amounts repaid under the Credit Agreements may be reborrowed from time to time, up to the maximum $1.125 billion commitment amount under the Credit Agreements. The Company's obligations under the Credit Agreements bear interest at floating rates. The weighted average interest rate under the Credit Agreements was approximately 20
5.6% at June 30, 1999 and 5.8% at December 31, 1998. The Company has entered into certain interest rate swap agreements that have the effect of fixing the interest rates on a portion of such debt. The weighted average interest rate at June 30, 1999 and December 31, 1998 did not change significantly as a result of these derivative financial instruments. The Credit Agreements provide for changes in borrowing margins based on financial criteria and the Company's senior unsecured debt ratings, and impose certain limitations on the operations of the Company and certain of its subsidiaries. The limitations include financial covenants relating to interest coverage and debt leverage as well as certain restrictions on the incurrence of additional indebtedness, the creation of liens, mergers and acquisitions, and certain dispositions of property and assets. The Company was in compliance with these requirements as of June 30, 1999. The Senior Notes impose certain limitations on the operations of the Company and certain of its subsidiaries. The limitations include restrictions on the creation of liens, entrance into sale-leaseback transactions, merger or consolidation of the Company and disposition of substantially all of the Company's assets. The Company was in compliance with these requirements as of June 30, 1999. At June 30, 1999, the Company had available lines of credit, including those available under the Credit Agreements, of approximately $1.4 billion of which approximately $723 million were unused. On July 19, 1999, the Company issued euro 200 million (approximately $205 million) aggregate principal amount of 7-year 5.625% notes in the European market ("Euro Notes") under Regulation S of the Securities Act. Accrued interest on the Euro Notes is payable annually in cash on July 19 of each year, commencing on July 19, 2000. The net proceeds of euro 198,624,000 (approximately $203 Million) were used to repay borrowings under the Credit Agreements. The Company's shareholders' equity was $470,381,000 at June 30, 1999 compared to $437,045,000 at December 31, 1998. Shareholders' equity increased in 1999 due to the Company's net earnings of $97,806,000, which were partially offset by the payment of the preferred stock dividends of $35,821,000 and by an additional foreign currency translation adjustment of $48,041,000. OTHER MATTERS Quantitative and Qualitative Disclosures about Market Risk For a discussion of market risks at December 31,1998, refer to Item 7a of the Company's Form 10-K for the year ended December 31, 1998. 21
Interest Rates The Company uses interest rate swaps to reduce exposure to fluctuations in interest rates by fixing the rate of interest the Company pays on a portion of the Company's debt. Interest collars are used to reduce the Company's exposure to fluctuations in the rate of interest by limiting fluctuations in the rate of interest. At June 30, 1999, the Company had interest rate swap and collar agreements, maturing at various dates through March 2003, with a combined notional amount of approximately $140,000,000 compared with a notional amount of $265,000,000 at December 31, 1998. On May 18,1999, the Company issued $300 million aggregate principal amount of 10-year 6.95% senior notes. The net proceeds of $297,834,000 were used to reduce outstanding variable-rate borrowings under the Credit Agreements. Foreign Exchange Contracts The Company uses interest rate and currency swaps to limit foreign exchange exposure and limit or adjust interest rate exposure by swapping certain borrowings in U.S. dollars for borrowings denominated in foreign currencies. At June 30, 1999 the Company had interest rate and currency swap agreements, maturing through March 2002, with an aggregate notional amount of approximately $4,500,000. The Company uses foreign currency forwards to fix the amount payable on certain transactions denominated in foreign currencies. At June 30, 1999 the Company had foreign currency forward contracts, maturing at various dates through August 1999, with an aggregate notional amount of approximately $13,100,000. Environmental Matters The Company is subject to loss contingencies resulting from environmental laws and regulations, and it accrues for anticipated costs associated with investigatory and remediation efforts when an assessment has indicated that a loss is probable and can be reasonably estimated. These accruals do not take into account any discounting for the time value of money and are not reduced by potential insurance recoveries, if any. Environmental liabilities are reassessed whenever circumstances become better defined and/or remediation efforts and their costs can be better estimated. These liabilities are evaluated periodically based on available information, including the progress of remedial investigations at each site, the current status of discussions with regulatory authorities regarding the methods and extent of remediation and the apportionment of costs among potentially responsible parties. As some of these issues are decided (the outcomes of which are subject to uncertainties) and/or new sites are assessed and costs can be reasonably estimated, the Company adjusts the recorded accruals, as necessary. However, 22
the Company believes that it has adequately reserved for all probable and estimable environmental exposures. Year 2000 Computer System Compliance The Company is continuing to address various Year 2000 issues. Year 2000 issues arise from computer programs that utilize only the last two digits of a year to define a particular year rather than the complete four-digit year. As a result, certain computer programs may not properly process certain dates, particularly those that fall into the year 2000 or subsequent years. Year 2000 issues affect both computer-based information systems and systems with embedded microcontrollers or microcomputers. In addressing these issues, the Company has considered the following four areas: (a) computer-based information technology systems, (b) other systems not directly involving information technology, including embedded systems, (c) packaging and dispensing equipment used by the Company's customers, and (d) Year 2000 readiness of the Company's key suppliers and customers. The Company's action plan for dealing with these issues consists of the following four phases: (1) identifying the potentially affected items, (2) assessing the effect of Year 2000 issues on these items, (3) remediating the deficiencies of these items with updates, repairs or replacements, and (4) testing these items. State of Readiness The Company has examined the hardware and software of its computer-based information technology systems, including mainline systems, personal computers and telephone systems. The Company has also examined other devices incorporating electronic microchips that might fail as a result of the Year 2000 issue. These include security and control systems in Company facilities and programmable logic controllers and microcomputers embedded into production and other equipment in the Company's plants and warehouses. The Company has finished the identification and assessment phases of its Year 2000 action plan in these two areas. The Company has also completed approximately 95% of the remediation and testing phases of the plan for these areas. The Company has substantially completed its work on Year 2000 issues for computer-based information technology systems. The work remaining on Year 2000 issues primarily concerns non-information technology systems. The Company expects to complete substantially all work on Year 2000 issues by September 30, 1999. The Company continues to test new equipment and software before placing them into service. The Company has examined certain packaging and dispensing equipment that it has sold or leased to customers in order to identify Year 2000 issues. This equipment often incorporates microprocessors as controllers. The Company believes that no further remediation is necessary for these devices. 23
The Company has completed a Year 2000 issue survey of key suppliers. Remedial action is being requested as required. The Company has also contacted certain customers to assess their overall Year 2000 readiness. Costs The Company estimates that the total costs to address the Company's Year 2000 issues will be in the neighborhood of $6 million. No significant information technology projects have been deferred by the Company due to Year 2000 issues. Risks While the Company believes that it is taking all steps reasonably necessary to assure its ability to conduct business and to safeguard its assets during the period affected by Year 2000 issues, risks cannot in every case be eliminated. Utilities and other key suppliers, may disrupt one or more of the Company's operations if they are unable to conduct business during this period. Significant disruptions caused by Year 2000 issues in the industries which the Company serves could impact its operations. Year 2000 issues in other industries could have a ripple effect on the Company's business. If the Company is unable to complete its remediation efforts satisfactorily and on a timely basis, substantial business interruptions may occur in its operations. These could include disruptions to manufacturing operations, logistics, invoicing, collections and vendor payments. The Company's efforts described herein are expected to reduce the Company's uncertainty about Year 2000 issues. The Company believes that its efforts to date in this regard have contributed to reducing the risk of significant interruptions of its operations, and it intends to pursue these efforts as described herein. Contingency Plans The Company has certain contingency measures in place, including in some cases dual utility services, backup power equipment, backup data centers, manual backup procedures and alternate suppliers. The Company has developed a Year 2000 contingency plan to implement additional protection measures. The Company is in the process of implementing this plan on a timely basis. Euro Conversion On January 1, 1999, eleven of the fifteen members of the European Union (the "participating countries") established fixed conversion rates between their existing currencies (the "legacy currencies") and introduced the euro, a single common non-cash currency. The euro is now traded on currency exchanges and is being used in business transactions. 24
At the beginning of 2002, new euro-denominated bills and coins will be issued to replace the legacy currencies, and the legacy currencies will be withdrawn from circulation. By 2002, all companies operating in the participating countries are required to restate their statutory accounting data into euros as their base currency. In 1998, the Company established plans to address the systems and business issues raised by the euro currency conversion. These issues include, among others, (1) the need to adapt computer, accounting and other business systems and equipment to accommodate euro-denominated transactions, (2) the need to modify banking and cash management systems in order to be able to handle payments between customers and suppliers in legacy currencies and euros between 1999 and 2002, (3) the requirement to change the base statutory and reporting currency of each subsidiary in the participating countries into euros during the transition period, (4) the foreign currency exposure changes resulting from the alignment of the legacy currencies into the euro, and (5) the identification of material contracts and sales agreements whose contractual stated currency will need to be converted into euros. The Company believes that it will be euro compliant by January 1, 2002. The Company has implemented plans to accommodate euro-denominated transactions and to handle euro payments with third party customers and suppliers in the participating countries. The Company plans to meet the requirement to convert statutory and reporting currencies to the euro by acquiring and installing new financial software systems. If there are delays in such installation, the Company plans to pursue alternate means to convert statutory and reporting currencies to the euro by 2002. The Company expects that its foreign currency exposures will be reduced as a result of the alignment of legacy currencies, and the Company believes that all material contracts and sales agreements requiring conversion will be converted to euros prior to January 1, 2002. Although additional costs are expected to result from the implementation of the Company's plans, the Company also expects to achieve benefits in its treasury and procurement areas as a result of the elimination of the legacy currencies. Since the Company has operations in each of its business segments in the participating countries, each of its business segments will be affected by the conversion process. However, the Company expects that the total impact of all strategic and operational issues related to the euro conversion and the cost of implementing its plans for the euro conversion will not have a material adverse impact on its consolidated financial condition or results of operations. Recently Issued Statements of Financial Accounting Standards In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of FASB Statement No. 133." This Statement defers the effective date of SFAS No. 133 , "Accounting for 25
Derivative Instruments and Hedging Activities." This Statement, which the Company expects to adopt beginning January 1, 2001, establishes accounting and operating standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts. The Company is reviewing the potential impact, if any, of SFAS No. 133 on its Consolidated Financial Statements. Forward-Looking Statements Certain statements made by the Company in this Form 10-Q and in future oral and written statements by management of the Company may be forward-looking. These statements include comments as to the Company's beliefs and expectations as to future events and trends affecting the Company's business, its results of operations and its financial condition. These forward-looking statements are based upon management's current expectations concerning future events and discuss, among other things, anticipated future performance and future business plans. Forward-looking statements are identified by such words and phrases as "expects," "intends," "believes," "will continue," "plans to," "could be" and similar expressions. Forward-looking statements are necessarily subject to uncertainties, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. While the Company is not aware that any of the factors listed below will adversely affect the future performance of the Company, the Company recognizes that it is subject to a number of uncertainties, such as business and market conditions in Asia, Latin America and other geographic areas around the world, changes in the value of foreign currencies against the U.S. dollar, the ability of the Company to complete integration and restructuring activities relating to the merger of old Sealed Air and Cryovac and the success of those efforts as well as certain information systems projects, general economic, business and market conditions, conditions in the industries and markets that use the Company's packaging materials and systems, the development and success of new products, the Company's success in entering new markets, competitive factors, raw material availability and pricing, changes in the Company's relationship with customers and suppliers, future litigation and claims (including environmental matters) involving the Company, changes in domestic or foreign laws or regulations, or difficulties related to the Year 2000 issue or the euro conversion. 26
PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. (a) Certain provisions of the Certificate of Incorporation of the Company affecting the rights of holders of the common stock and the Series A convertible preferred stock of the Company were modified pursuant to the approval of the stockholders by a vote taken at the annual meeting of stockholders of the Company. (See Item 4 below and Exhibits 3.1 and 3.2.) (b) On May 18, 1999, the Company issued $300 million aggregate principal amount of 10-year 6.95% senior notes ("Senior Notes") under Rule 144A and Regulation S of the Securities Act of 1933, as amended (the "Securities Act"). The net proceeds from the issuance of the Senior Notes were used to reduce outstanding borrowings under the credit agreements (the "Credit Agreements") described under Liquidity and Capital Resources in the Management's Discussion and Analysis of Results of Operations and Financial Condition in Part I of this Form 10-Q. The Senior Notes impose certain limitations on the operations of the Company and certain of its subsidiaries. The limitations include restrictions on the creation of liens, entrance into sale-leaseback transactions, merger or consolidation of the Company and disposition of substantially all of the Company's assets. The Company was in compliance with these requirements as of June 30, 1999. On July 19, 1999, the Company issued euro 200 million (approximately $205 million) aggregate principal amount of 7-year 5.625% notes in the European market under Regulation S of the Securities Act. The net proceeds thereof were used to repay borrowings under the Credit Agreements. (c) In June 1999, the Company issued 425 shares of its common stock, par value $0.10 per share, to the Profit-Sharing Plan of the Company as part of its 1998 contribution to the Profit-Sharing Plan. The issuance of such shares to the Profit-Sharing Plan was not registered under the Securities Act because such transaction did not involve an "offer" or "sale" of securities under Section 2(3) of the Securities Act. Item 4. Submission of Matters to a Vote of Security Holders. On May 21, 1999, the Company commenced its annual meeting of stockholders. The annual meeting was thereafter adjourned until June 18, 1999 and further adjourned until July 16, 1999 in order to accept additional votes and proxies from stockholders on the proposals to 27
amend three provisions of the Certificate of Incorporation of the Company, as discussed below. At the first session of the meeting on May 21, 1999, the stockholders elected four Class I directors for a three-year term and ratified the appointment of KPMG LLP as the Company's independent public accountants for 1999. At the third session of the meeting on July 16, 1999, the stockholders approved three amendments to the Company's Amended and Restated Certificate of Incorporation that repealed certain provisions, which amendments required the affirmative vote of 80% in voting power of the Company's capital stock. Such provisions were as follows: (a) provisions requiring a classified board and removal of directors only for cause; (b) a provision prohibiting stockholder action by written consent; and (c) a provision requiring 80% stockholder vote to amend the Company's By-laws. At the first session of the meeting on May 21, 1999, a total of 76,365,742 shares of common stock and 31,412,432 shares of Series A convertible preferred stock ("preferred stock") were present in person or by proxy at the annual meeting, representing approximately 104,165,763 votes, or approximately 90% of the voting power of the Company entitled to vote at such meeting. Each share of common stock was entitled to one vote on each matter before the meeting, and each share of preferred stock was entitled to 0.885 votes on each matter before the meeting. At the third session of the meeting on July 16, 1999, a total of 78,120,012 shares of common stock and 31,714,931 shares of preferred stock were present in person or by proxy, representing approximately 106,187,726 votes, or approximately 92% of the voting power of the Company entitled to vote at such meeting. The votes cast on the matters before the meeting, including the broker non-votes where applicable, were as set forth below: Nominees for Election Number of Votes To Board of Directors: In Favor Withheld Hank Brown 103,448,697 717,066 John K. Castle 103,498,153 667,610 Charles F. Farrell, Jr. 103,486,754 679,009 Alan H. Miller 103,497,650 668,114 28
Approval of proposed amendments to Certificate of Incorporation: (a) Classified board and For 93,587,234 removal for cause Against 1,145,119 Abstentions 568,423 Broker Non-Votes 10,886,950 (b) Stockholder action For 93,632,958 by written consent Against 909,208 Abstentions 758,609 Broker Non-Votes 10,886,951 (c) 80% stockholder vote For 93,266,401 to amend By-laws Against 1,255,442 Abstentions 778,933 Broker Non-Votes 10,886,950 Ratification of KPMG For 103,603,195 LLP as Independent Against 209,128 Accountants Abstentions 353,439 Item 5. Other Information. Effective May 21, 1999, the Company amended Section 2.12 of its By-laws to include an advance notice provision. Nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the stockholders at an annual meeting of stockholders may be made (i) pursuant to the Company's notice of meeting, including matters covered by Rule 14a-8 under the Securities and Exchange Act of 1934, as amended, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Company who was a stockholder of record at the time of giving notice by the stockholder as provided in Section 2.12 of the Company's By-laws. A notice pursuant to clause (iii) of the preceding sentence of the intent of a stockholder to make a nomination or to bring any other matter before an annual meeting must be made in writing and received by the Secretary of the Company no earlier than the 119th day and not later than the close of business on the 45th day prior to the first anniversary of the date of mailing of the Company's proxy statement for the prior year's annual meeting. However, if the date of the annual meeting has changed by more than 30 days from the date it was held in the prior year or if the Company did not hold an annual meeting in the prior year, then such notice must be received a reasonable time before the Company mails its proxy statement. Each such notice by a stockholder must set forth certain information as delineated in Section 2.12 of the Company's By-laws. 29
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description 3.1 Amendments to the Certificate of Incorporation of the Company, effective July 20, 1999. 3.2 Unofficial Composite Copy of the Amended and Restated Certificate of Incorporation of the Company, as amended to date. 3.3 Amendments to the By-laws of the Company, effective May 21, 1999. 3.4 Complete copy of the Amended and Restated By-laws of the Company, as amended to date. 10.1 Second Amendment, dated as of June 2, 1999, to Global Revolving Credit Agreement (5-year), among the Company, certain of the Company's subsidiaries as guarantors and/or borrowers thereunder, ABN AMRO Bank N.V., as Administrative Agent, and certain other banks party thereto. 10.2 Second Amendment, dated as of June 2, 1999, to Global Revolving Credit Agreement (364-Day), among the Company, certain of the Company's subsidiaries as guarantors and/or borrowers thereunder, ABN AMRO Bank N.V., as Administrative Agent, and certain other banks party thereto. 10.3 Agreement dated as of April 6, 1999, between the Company and J. Gary Kaenzig, Jr. 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed the following Report on Form 8-K during the second quarter of 1999: Date of Report Disclosures May 13, 1999 Offering of $300,000,000 principal amount of 6.95% senior notes due 2009 pursuant to Rule 144A and Regulation S under the Securities Act. 30
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEALED AIR CORPORATION Date: August 12, 1999 By /s/ Jeffrey S. Warren ------------------------ Jeffrey S. Warren Controller (Authorized Executive Officer and Chief Accounting Officer) 31