-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H2tvVbMgt4jnKaOsZaLO/rh6GWnfUDIr324duLz5BApAmUG9nqb0WK6Kc2Vz2P1r r0w9doPeXrNMimaxmQzEiw== 0000950131-97-002126.txt : 19970507 0000950131-97-002126.hdr.sgml : 19970507 ACCESSION NUMBER: 0000950131-97-002126 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NALCO CHEMICAL CO CENTRAL INDEX KEY: 0000069598 STANDARD INDUSTRIAL CLASSIFICATION: 2890 IRS NUMBER: 361520480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04957 FILM NUMBER: 97565866 BUSINESS ADDRESS: STREET 1: ONE NALCO CTR CITY: NAPERVILLE STATE: IL ZIP: 60563 BUSINESS PHONE: 7083051000 MAIL ADDRESS: STREET 1: ONE NALCO CENTER CITY: NAPERVILLE STATE: IL ZIP: 60563-1198 10-K 1 FORM 10-K 1996 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to COMMISSION FILE NUMBER 1-4957 NALCO CHEMICAL COMPANY INCORPORATED IN THE STATE OF DELAWARE I.R.S. EMPLOYER IDENTIFICATION NO. 36-1520480 ONE NALCO CENTER, NAPERVILLE, ILLINOIS 60563-1198 TELEPHONE 630-305-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED COMMON STOCK PAR VALUE $0.1875 PER CHICAGO STOCK EXCHANGE NEW YORK STOCK SHARE EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant was $2,429,327,728 at February 20, 1997.* The number of shares outstanding of each of the issuer's classes of Common Stock, as of February 20, 1997 was 66,924,647 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1996 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Registrant's Proxy Statement dated March 18, 1997 for the April 17, 1997 Annual Meeting of Shareholders are incorporated by reference into Part III. - - -------------- * Excludes reported beneficial ownership by all directors and executive officers of the Registrant; however, this determination does not constitute an admission of affiliate status for any of these stockholders. - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- TABLE OF CONTENTS PART I
PAGE ---- Item 1 Business........................................................ 1 Executive Officers of the Registrant............................ 3 Item 2 Properties...................................................... 4 Item 3 Legal Proceedings............................................... 5 Item 4 Submission of Matters to a Vote of Security Holders............. 5 PART II Market for the Registrant's Common Stock and Related Security Item 5 Holder Matters.................................................. 5 Item 6 Selected Financial Data......................................... 5 Management's Discussion and Analysis of Financial Condition and Item 7 Results of Operations........................................... 5 Item 8 Financial Statements and Supplementary Data..................... 6 Changes in and Disagreements with Accountants on Accounting and Item 9 Financial Disclosure............................................ 6 PART III Item 10 Directors and Executive Officers of the Registrant.............. 6 Item 11 Executive Compensation.......................................... 6 Item 12 Security Ownership of Certain Beneficial Owners and Management.. 6 Item 13 Certain Relationships and Related Transactions.................. 6 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 6
PART I ITEM 1. BUSINESS. Nalco Chemical Company was incorporated in 1928 in Delaware and has its principal executive offices at One Nalco Center, Naperville, Illinois 60563. Its telephone number is 630-305-1000. As used in this report, "Company" and "Nalco" refer to Nalco Chemical Company and its consolidated subsidiaries. Nalco is engaged in the manufacture and sale of highly specialized Service Chemicals. Specified financial information by geographic area is shown in Note 2 of the Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders and is incorporated herein by reference. Nalco is in the business of providing services, chemicals, technology, equipment, and systems (monitoring and surveillance) used in water treatment, pollution control, energy conservation, steelmaking, papermaking, mining and mineral processing, electricity generation, other industrial processes, and commercial building utility systems. Service Chemicals are developed, formulated, and manufactured to meet specific customer needs. They are part of value added programs designed to help customers maintain a high level of operating performance and efficiency in their facilities, improve the quality of customers' end products, or help customers meet environmental discharge limits in a cost-effective way. Nalco products are used for purposes such as: control of scale, corrosion, foam and fouling in cooling systems, boilers, and other equipment; clarification of water; separation of liquids and solids; improving combustion; control of dust; lubrication and corrosion protection in rolling, drawing and forming of metals; improving production of pulp and qualities of paper; recovery of minerals; and specialized process applications in a variety of industries. The quality and on-site availability of technical expertise provided through highly qualified Nalco personnel are very important considerations to customers. The effective use of the Company's products requires a substantial amount of problem solving, monitoring, and technical assistance on the part of Nalco employees. Service Chemicals are usually marketed through Nalco's own organization because of the high degree of technical service required. The worldwide field sales force is trained in the application and use of Nalco Service Chemicals, and is supported by a marketing and research staff of specialists in the technology and use of various Nalco Service Chemicals. Competitive conditions vary for Nalco depending on the industries served and the products involved. Management believes the Company is one of the most important worldwide suppliers of water treatment products and Service Chemical programs, based on estimated sales of comparable products for industrial customers on the process side (e.g., the manufacturing process, which a plant uses to produce its end product) and the water treatment side (e.g., boilers for power generation or cooling systems for process temperature control). The Company sells its products and Service Chemical programs in more than 120 countries, and is the largest or second largest supplier of those products in most of the countries it does business. All aspects of this business are considered to be very competitive, and companies providing similar products or programs range in size from very large multinational companies to small local manufacturers. The number of competitors varies by product application and ranges from a few large companies to hundreds of small local companies. The Company's principal method of competition is based on quality service, product performance and technology through safe, practical applied science. In October 1996, the Company completed the sale of its discontinued superabsorbent chemicals business. The gain on the sale was $3 million, net of income taxes of $1 million. This business generated revenue of approximately $63 million up to the date of the sale. In June 1996, the Company completed the acquisition of Diversey Water Technologies, a middle market water treatment business with operations in North America and Europe and annual revenues of approximately $60 million. In December 1996, the Company purchased the water treatment services chemicals business of Albright & Wilson, which serves customers such as steel and electric utility companies throughout the United Kingdom. Annual revenues are approximately $5 million. 1 In January 1997, the Company completed the acquisition of International Water Consultants Beheer B.V. (IWC) and the assets of Nutmeg Technologies, Inc. (Nutmeg). IWC, which serves the water treatment needs of customers in the Netherlands, Belgium, Germany and the Commonwealth of Independent States, reported 1996 revenues of approximately $20 million. Nutmeg, a water treatment company which serves markets mainly in the Northeast United States, had 1996 sales of approximately $9 million. There were no other significant changes in the markets served or in the methods of distribution since the beginning of 1996. Although no single Service Chemicals product represents a material portion of the business, historically, new product and new market developments have been designed to increase market penetration and to maintain sales and earnings growth. OTHER MATTERS Primarily as a result of the formation of the Nalco/Exxon joint venture, the Company adopted a worldwide consolidation plan in 1994 for manufacturing and support operations. The production volume reduction caused by redundancies associated with the joint venture formation required the Company to down size, close, and consolidate operations. In addition, certain support functions have been or are being regionalized on a pan-European basis in order to more efficiently serve customers. The majority of these activities have been completed, and all should be completed by the end of 1997. The principal raw materials used by Nalco ordinarily are available in adequate quantities from several sources of supply in the United States and in foreign countries. Purchases of chemicals are made in the ordinary course of business and in accordance with the requirements of production. Inventories of Service Chemicals are maintained in Nalco-owned facilities and in warehouses situated throughout the United States and in countries in which subsidiaries operate. Shipments to customers may be made from either manufacturing plants or warehouse stocks. Nalco owns or is licensed under a large number of patents relating to a number of products and processes. Nalco's rights under such patents and licenses are of significant importance in the operation of the business, but no single patent or license is believed to be material with respect to its business. Over 800 patents existed at the end of 1996 with remaining durations ranging from less than one year to 20 years with an average duration of about 10 years. Nalco's business is considered nonseasonal. Large dollar amounts of backlogs are unusual since chemicals are normally shipped within a few days of the receipt of orders. The dollar amount of the normal backlog of orders is not considered to be significant in relation to the total annual dollar volume of sales of Nalco. The Company does not depend upon either a single customer, or very few customers, for a material part of the business. Nalco's laboratories are involved in research and development of chemical products and in providing technical support, including chemical analyses of water and process samples. Research and development expenses of continuing operations amounted to $41.9 million in 1996, compared to $39.8 million in 1995, and $45.7 million in 1994. There were approximately 6,500 persons employed full time by Nalco at the end of 1996. Compliance with Federal, State, and local regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings, or competitive position of Nalco. There are no material capital expenditures for environmental control facilities anticipated during 1997. Compliance with increasingly stringent regulations should not have a material effect upon earnings but may strengthen the competitive position of Nalco because of available capital and technical resources. 2 Although inflation is not a significant factor domestically, the Company adjusts selling prices to maintain profit margins wherever possible. Investments are made in modern plants and equipment that will increase productivity and thereby minimize the effect of rising costs. In addition, the last-in, first-out (LIFO) valuation method is used for some of the Company's inventories, so that changing material costs are recognized in reported income and pricing decisions. The impact of inflation in foreign exchange movements at foreign subsidiaries is managed by minimizing assets exposed to currency movements and by increasing sales prices to parallel increases in local inflation rates. The Company emphasizes working capital management, frequent dividend remittance, timely settlement of intercompany account balances, foreign currency borrowings, and selected hedging. In most hyperinflationary economies, the rate of local currency devaluation is related to and approximately equal to the local inflation rate. Therefore, Nalco attempts to increase its local selling prices to help offset the impact of devaluation on exposed assets and the impact of increases in local content costs. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant are named below together with their principal occupation. During the last 5 years all of the executive officers have been employed by the Company, as indicated, except for W. E. Buchholz. E. J. Mooney has been Chairman of the Board and Chief Executive Officer of the Company since 1994 and President since 1990. He had been Chief Operating Officer since 1992 and an Executive Vice President since 1988. M. B. Harp has been Executive Vice President, Operations since 1995. He had been Executive Vice President, International Operations since 1993 and a Group Vice President since 1988. W. S. Weeber has been Executive Vice President, Operations Staff since 1993. He had been a Group Vice President since 1986. P. Dabringhausen has been Group Vice President and President, Process Chemicals Division since 1993. He had been a Vice President since 1991, and was President, Nalco Pacific from 1989 to 1992. S. D. Newlin has been Group Vice President, President, Nalco Europe since 1994. He had been Vice President, President, Nalco Pacific since 1992. During 1992 he was General Manager, Pulp and Paper Chemicals Group; and from 1990 to 1992 he was General Manager of UNISOLV(R). J. D. Tinsley has been Group Vice President and President, Water and Waste Treatment Division since 1993. During 1992 he was a Group Vice President and President, Process Chemicals Division; and from 1986 to 1992 he was Vice President, Corporate Development. G. M. Brannon was elected Group Vice President, President, Nalco Pacific effective February 1997. He had been Vice President, President, Nalco Pacific since 1994; and from 1990 to 1994 he was General Manager of the Utility Chemicals Group. G. Pinzon was elected Group Vice President, President, Nalco Latin America effective February 1997. He had been Vice President, President, Nalco Latin America since 1994. He was Division Vice President, Latin America from 1989 to 1994, and Company Manager of Nalco de Venezuela, C.A. from 1992 to 1994. W. E. Buchholz was elected Senior Vice President and Chief Financial Officer effective February 1997. He had been Vice President and Chief Financial Officer since 1993. He was formerly Vice President--Finance and Chief Financial Officer for Cincinnati Milacron, Inc. (a manufacturer of industrial equipment, supplies and services for the metal cutting and plastic processing industries) since 1987. The corporate officers of the Registrant are usually elected at the annual meeting of directors and hold office for a term of one year. 3 There is no family relationship between any of the executive officers. No arrangement or understanding exists between the executive officers and any other person pursuant to which such officers were selected as officers of the Registrant. For further information on the executive officers of the Registrant, please refer to page 42 of the Company's 1996 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 2. PROPERTIES. Nalco has facilities used to produce and store inventories and service customer needs at 9 domestic and 26 foreign locations. Primary domestic manufacturing plants are located in:
LAND AREA BUILDING AREA (ACRES) (SQ. FT.) --------- ------------- Carson, California................................ 21 84,000 Jonesboro, Georgia................................ 12 35,000 Chicago, Illinois................................. 39 750,000 Garyville, Louisiana.............................. 246 170,000 Paulsboro, New Jersey............................. 14 33,000 Chagrin Falls, Ohio............................... 14 28,000
Other domestic manufacturing and/or warehouse facilities are located in: Oklahoma City, Oklahoma; Clarksburg, West Virginia; and Vancouver, Washington. The general offices of the Company are located on a 146-acre site in Naperville, Illinois. This facility includes three five-story buildings totaling 417,000 square feet. About 317,000 square feet is used for office space and the balance is used for support services and storage. A power plant with a cogeneration system (steam and electricity) serves both the Corporate and Technical Centers and has 31,000 square feet of space. The primary domestic research facility is located in Naperville, Illinois. The Naperville Technical Center is adjacent to the Corporate Center and houses process simulation areas in buildings which total 235,000 square feet. Primary foreign manufacturing plants are located in:
LAND AREA BUILDING AREA (ACRES) (SQ. FT.) --------- ------------- Botany, Australia................................. 10 102,000 Suzano, Brazil.................................... 14 81,000 Burlington, Canada................................ 14 138,000 Cheshire, England................................. 15 226,000 Biebesheim, Germany............................... 28 103,000 Cisterna di Latina, Italy......................... 25 88,000 Celra, Spain...................................... 25 109,000 Anaco, Venezuela.................................. 43 76,000
Other foreign facilities are located in: Perth, Australia; Vienna, Austria; Buenos Aires, Argentina; Santiago, Chile; Suzhou, The People's Republic of China; Soledad, Colombia; Lerma, Mexico; West Bengal, India; Bogor, Indonesia; Kashima, Japan; Tilburg, the Netherlands; Auckland, New Zealand; Calamba, Laguna, Philippines; Dammam, Saudi Arabia; Jurong Town, Singapore; Hsin Chu Hsien, Taiwan; and Maracaibo, Venezuela. 4 The Company also has a 72,000 square-foot business and technical center on a 12-acre site in Oegstgeest, the Netherlands. This facility serves customers throughout Europe. In addition to the property mentioned above, Nalco occupies general and sales offices and warehouses which are rented under short-term leases. Except for land leased in the Philippines, Saudi Arabia, Chile, The People's Republic of China, and Argentina, all other real property (including all production facilities) is owned by Nalco. While the plants are of varying ages, the Company believes that they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. In 1996, the Company opened a new manufacturing plant, laboratory and offices on a four-acre site in Suzhou, The People's Republic of China. This 30,000 square-foot facility is located near Shanghai. Consolidation of operations continued in 1996 with the closing of the Edmonton, Canada plant. Also in 1996, the Company sold its superabsorbent polymer production plant located in Garyville, Louisiana, and its plant in Jordbro, Sweden. A new manufacturing plant, under construction near Buenos Aires, Argentina, is scheduled to open in 1997. Capital expenditures for 1997 should approximate $100.0 million compared to the $92.5 million spent in 1996, if planned sales and earnings for 1997 are reached. ITEM 3. LEGAL PROCEEDINGS. For information on this item, please refer to Note 19 of the Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Registrant's Common Stock is listed on the New York and Chicago Stock Exchanges. The number of holders of record of Common Stock, par value $0.1875 per share, at December 31, 1996 was 5,349. Dividends and Common Stock market prices included in the Quarterly Summary in the Company's 1996 Annual Report to Shareholders are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data including net sales, earnings from continuing operations, earnings from continuing operations per common share, total assets, long-term debt, and cash dividends paid are reported in the Eleven Year Summary in the Company's 1996 Annual Report to Shareholders and are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations which is included in the section titled "Management's Discussion and Analysis--1996 vs. 1995," "Management's Discussion and Analysis--1995 vs. 1994," and "Management's Discussion and Analysis--Financial Condition" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. 5 Liquidity and Capital Resources Management's discussion of liquidity and capital resources which is included in the section titled "Management's Discussion and Analysis--Cash Flows" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Report of Independent Accountants, the Consolidated Financial Statements, and the Notes to Consolidated Financial Statements of the Registrant and its subsidiaries, included in the Company's 1996 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Summary in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Item 10 information is set forth in Part I, Item 1, under Executive Officers of the Registrant and also in the Company's Proxy Statement dated March 18, 1997, under Election of Directors through Election of Directors--Meeting of the Board and Committees of the Board, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information contained under Election of Directors--Directors' Remuneration and Retirement Policies through Election of Directors--Change in Control in the Company's Proxy Statement dated March 18, 1997, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained under Shares Outstanding and Voting Rights in the Company's Proxy Statement dated March 18, 1997, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements of the Registrant and its subsidiaries included in the Company's 1996 Annual Report to Shareholders are incorporated herein by reference in Item 8: Statements of Consolidated Financial Condition December 31, 1996 and 1995 Statements of Consolidated Earnings Years ended December 31, 1996, 1995 and 1994 Statements of Consolidated Cash Flows Years ended December 31, 1996, 1995 and 1994 Statement of Consolidated Common Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Quarterly Summary (Unaudited) Years ended December 31, 1996 and 1995 Report of Independent Accountants
6 (2) The following consolidated financial statement schedule for the years 1996, 1995 and 1994 is submitted herewith: Report of Independent Accountants on Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Exhibits Exhibit 3A --Restated Certificate of Incorporation/2/ Exhibit 3B --Certificates of Correction and Amendment to the Restated Certificate of Incorporation/6/ Exhibit 3C --Certificate of Designations, Preferences and Rights of Series B ESOP Convertible Preferred Stock/4/ Exhibit 3D --Certificate of Designations, Preference and Rights of Series C Junior Participating Preferred Stock/1//2/ Exhibit 3E --By-laws/9/ Exhibit 10A --Form of Key Executive Agreement/1/ 10B --Agreements to Restore Benefits Reduced by Excess ERISA-Related Limits/1/ 10C --Form of Death Benefit Agreement/2/ 10D --Management Incentive Plan/8/ 10E --Restricted Stock Plan/6/ 10F --1982 Stock Option Plan as amended April 26, 1984, January 30, 1987, February 12, 1993, and October 17, 1996/1//0/ 10G --Deferred Compensation Plan for Directors/3/ 10H --Supplemental Retirement Income Plan/5/ 10I --1990 Stock Option Plan as amended April 23, 1992, February 12, 1993, and October 17, 1996/1//0/ 10J --Stock Option Plan for Non-Employee Directors/7/ 10K --Directors Benefit Protection Trust of Nalco Chemical Company/5/ 10L --Management Benefit Protection Trust of Nalco Chemical Company/5/ 10M --Restricted Stock Trust of Nalco Chemical Company/5/ 10N --Performance Share Plan as amended effective February 16, 1996 and October 17, 1996/1//0/ 10O --Employee Stock Compensation Plan as amended effective January 1, 1996 and October 17, 1996/1//0/ 10P --Non-Employee Directors Stock Compensation Plan/8/ Exhibit 11 --Computation of Earnings Per Share Exhibit 13 --Those portions of the 1996 Annual Report to Shareholders expressly incorporated herein by reference Exhibit 21 --Subsidiaries of the Registrant Exhibit 23 --Consent of Independent Accountants Exhibit 27 --Financial Data Schedule Exhibit 99A --Notice of Annual Meeting and Proxy Statement/1//3/ Exhibit 99B --September 16, 1996 Letter to Shareholders with Summaries of the Preferred Share Purchase Rights Agreement/1//1/ Exhibit 99C --Form 11-K Annual Report
Exhibit Nos. 10A-10P constitute management contracts, compensation plans, or arrangements covering directors and officers of the Company. 7 (b) Reports on Form 8-K filed in the fourth quarter of 1996 are: None - - -------- /1Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1986. /2Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1987. /3Incorporated/herein by reference from the Registrant's Form 8-K dated July 24, 1986. /4Incorporated/herein by reference from the Registrant's Form 8-K dated May 15, 1989. /5Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1990. /6Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1991. /7Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1992. /8Incorporated/herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1996. /9Incorporated/herein by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1996. /1/Incorporated/herein0by/reference from the Registrant's Form 10-Q for the quarter ended September 30, 1996. /1/Incorporated/herein1by/reference from the Registrant's Form 8-K dated June 24, 1996. /1/Incorporated/herein2by/reference from the Registrant's Form 8-A dated June 24, 1996. /1/Incorporated/herein3by/reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1997. 8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. NALCO CHEMICAL COMPANY E. J. Mooney By___________________________________ E. J. Mooney Chairman, Chief Executive Officer and President Date: March 27, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 27, 1997 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
NAME TITLE ---- ----- W. E. Buchholz Senior Vice President and Chief Financial ___________________________________________ Officer W. E. Buchholz R. L. Ratliff Controller ___________________________________________ R. L. Ratliff J. L. Ballesteros Director ___________________________________________ J. L. Ballesteros H. G. Bernthal Director ___________________________________________ H. G. Bernthal H. Corless Director ___________________________________________ H. Corless H. M. Dean Director ___________________________________________ H. M. Dean J. P. Frazee, Jr. Director ___________________________________________ J. P. Frazee, Jr. A. L. Kelly Director ___________________________________________ A. L. Kelly F. A. Krehbiel Director ___________________________________________ F. A. Krehbiel E. J. Mooney Director ___________________________________________ E. J. Mooney W. A. Pogue Director ___________________________________________ W. A. Pogue J. J. Shea Director ___________________________________________ J. J. Shea
9 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Nalco Chemical Company Our audits of the consolidated financial statements referred to in our report dated February 3, 1997 appearing on page 17 of the 1996 Annual Report to Shareholders of Nalco Chemical Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) 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 in conjunction with the related consolidated financial statements. Price Waterhouse LLP Chicago, Illinois February 3, 1997 10 NALCO CHEMICAL COMPANY AND SUBSIDIARIES -------------- SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E ------ ---------- ---------------------- ------------ ---------- ADDITIONS ---------------------- (2) (1) CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ----------- ---------- ---------- ---------- ------------ ---------- Reserves deducted in the Statements of Consolidated Financial Condition from the assets to which they apply Allowance for doubtful accounts Year Ended: December 31, 1996... $4,439,000 $ 388,000 $738,000(A) $629,000(B) $4,936,000 ========== ========== ======== ======== ========== December 31, 1995... $5,605,000 $ (648,000) $ -- $518,000(B) $4,439,000 ========== ========== ======== ======== ========== December 31, 1994... $4,470,000 $1,845,000 $ -- $710,000(B) $5,605,000 ========== ========== ======== ======== ==========
- - -------- Note A--Valuation of assets acquired. Note B--Excess of accounts written off over recoveries. 11 EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 --------------------------- 1996 1995 1994 -------- -------- ------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) PRIMARY Average shares outstanding during the year...... 67,280 67,495 68,460 Net effect of dilutive stock options and shares contingently issuable-based on the treasury stock method using average market price........ 319 410 569 -------- -------- ------- TOTALS........................................ 67,599 67,905 69,029 ======== ======== ======= Earnings from continuing operations............. $145,936 $135,664 $73,248 Earnings from discontinued operations, net of taxes.......................................... 8,546 18,034 23,863 -------- -------- ------- Net earnings.................................... 154,482 153,698 97,111 Preferred stock dividends, net of taxes......... (11,363) (11,208) (11,026) -------- -------- ------- Net earnings to common shareholders............. $143,119 $142,490 $86,085 ======== ======== ======= Per share amounts: Earnings from continuing operations............. $ 1.99 $ 1.83 $ .90 Earnings from discontinued operations, net of taxes.......................................... .13 .27 .35 -------- -------- ------- Net earnings to common shareholders............. $ 2.12 $ 2.10 $ 1.25 ======== ======== =======
EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 --------------------------- 1996 1995 1994 -------- -------- ------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FULLY DILUTED Average shares outstanding...................... 67,280 67,495 68,460 Average dilutive effect of assumed conversion of ESOP Convertible Preferred Shares.............. 7,930 8,037 8,125 Additional shares assuming exercise of dilutive stock options and shares contingently issuable- based on the treasury stock method using the year-end market price, if higher than average market price................................... 406 415 575 -------- -------- ------- TOTALS........................................ 75,616 75,947 77,160 ======== ======== ======= Earnings from continuing operations............. $145,936 $135,664 $73,248 Earnings from discontinued operations, net of taxes.......................................... 8,546 18,034 23,863 -------- -------- ------- Net earnings.................................... 154,482 153,698 97,111 Additional ESOP contribution resulting from assumed conversion, net of taxes............... (4,515) (4,643) (4,911) Tax adjustment on assumed common dividends...... (920) (793) (684) -------- -------- ------- Net earnings to common shareholders............. $149,047 $148,262 $91,516 ======== ======== ======= Per share amounts: Earnings from continuing operations............. $ 1.86 $ 1.71 $ .88 Earnings from discontinued operations, net of taxes.......................................... .11 .24 .31 -------- -------- ------- Net earnings to common shareholders............. $ 1.97 $ 1.95 $ 1.19 ======== ======== =======
EXHIBIT (21) NALCO CHEMICAL COMPANY AND SUBSIDIARIES -------------- SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the registrant, all of which are wholly-owned unless otherwise indicated, are as follows:
STATE OR OTHER JURISDICTION OF INCORPORATION OR COMPANY ORGANIZATION ------- ------------------- Domestic: ADX....................................................... Michigan Aluminate Sales Corporation............................... Illinois Chicago Chemical Company.................................. Illinois Board Chemistry, Inc...................................... Illinois Diversey Water Technologies, Inc.......................... Delaware Nalco Delaware............................................ Delaware Nalco Foreign Sales Corporation........................... U.S. Virgin Islands Nalco FT, Inc............................................. Delaware Nalco Japan Company, Ltd.................................. Delaware Nalco Leasing Corporation................................. Delaware Nalco Neighborhood Development Corporation................ Delaware Nalco Resources Investment Company........................ Texas Nalco TWO, Inc............................................ Delaware NalFirst Holding Inc...................................... Delaware(1) NalFirst Leasing Corporation.............................. Delaware(1) Nalgreen, Inc............................................. Delaware NalTech, Inc.............................................. Delaware Oil Products & Chemical Company, Inc...................... Illinois The Flox Company.......................................... Minnesota Visco Products Company.................................... Texas Foreign: Deutsche Nalco-Chemie, G.m.b.H............................ Germany Deutsche Nalco Equipment G.m.b.H.......................... Germany Diversey Water Technologies Limited....................... United Kingdom Diversey Water Technologies, Ltd.......................... Canada DWT SRL................................................... Italy Nalco Anadolu A.S......................................... Turkey Nalco Applied Services of Europe B.V...................... Netherlands Nalco Argentina, S.A...................................... Argentina Nalco Australia Pty. Limited.............................. Australia Nalco Belgium N.V./S.A.................................... Belgium Nalco Brazil Ltda......................................... Brazil Nalco Canada, Inc......................................... Canada Nalco Chemical A.B........................................ Sweden Nalco Chemical B.V........................................ Netherlands Nalco Chemical Company (Philippines) Inc.................. Philippines Nalco Chemical Company (Thailand) Limited................. Thailand Nalco Chemical Gesellschaft m.b.H......................... Austria Nalco Chemical (H.K.) Limited............................. Hong Kong Nalco Chemie.............................................. Czechoslovakia
STATE OR OTHER JURISDICTION OF INCORPORATION COMPANY OR ORGANIZATION ------- --------------- Nalco de Venezuela, C.A...................................... Venezuela Nalco Ecuador, S.A........................................... Ecuador Nalco Chemical Egypt......................................... Egypt Nalco Espanola, S.A.......................................... Spain Nalco Europe B.V............................................. Netherlands Nalco France................................................. France Nalco Chem................................................... Russia Nalco Gulf Limited........................................... Dubai Nalco Hellas S.A............................................. Greece Nalco Holdings Australia Pty. Limited........................ Australia Nalco Investments Australia, Pty. Limited.................... Australia Nalco Investments U.K. Limited............................... United Kingdom Nalco Italiana, S.p.A........................................ Italy Nalco Japan Technical Center Co. Ltd......................... Japan Nalco Kemiai Kft............................................. Hungary Nalco Korea Co., Ltd......................................... South Korea Nalco Limited................................................ United Kingdom Nalco New Zealand, Ltd....................................... New Zealand Nalco Norge A/S.............................................. United Kingdom Nalco Pacific Pte. Ltd....................................... Singapore Nalco Poland................................................. Poland Nalco Portuguesa (Q.I.) Ltda................................. Portugal Nalco Productos Quimicos de Chile S.A........................ Chile Nalco Saudi Co., Ltd......................................... Saudi Arabia (2) Nalcochemical (Malaysia) SDN BHD............................. Malaysia Nalcomex, S.A. de C.V........................................ Mexico Nalfleet, Inc................................................ United Kingdom Nal-Lite Produtos Quimicos Ltda.............................. Brazil NCC Mauritius Limited........................................ Mauritius P.T. Nalco Perkasa........................................... Indonesia (3) Quimica Nalco de Colombia, S.A............................... Colombia Suomen Nalco Oy.............................................. Finland Taiwan Nalco Chemical Co., Ltd............................... Taiwan (4) Deryshares, B.V.............................................. Netherlands Nalco Chemical India, Ltd.................................... India (5) Nalco Chemical Company (Suzhou) Ltd.......................... China (6)
- - -------- Note (1)--80% of voting securities owned by Registrant Note (2)--60% of voting securities owned by Registrant Note (3)--51% of voting securities owned by Registrant Note (4)--55% of voting securities owned by Registrant Note (5)--65% of voting securities owned by Registrant Note (6)--95% of voting securities owned by Registrant EXHIBIT (23) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-3 (Numbers 33-57363, 33-53111, 2-97721, 33-9934 and 2-97721) and Form S-8 (Numbers 333-06955, 333- 06963, 33-54377, 33-38033, 33-38032, 33-29149, 2-97721, 2-97131 and 2-82642) of our report dated February 3, 1997, which appears on page 17 of the 1996 Annual Report to Shareholders of Nalco Chemical Company, which is incorporated by reference in Nalco Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 10 of this Form 10-K. We also consent to the incorporation by reference in the Registration Statement of our report dated March 17, 1997 appearing on page 1 of the Annual Report of the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan on Form 11-K for the year ended December 31, 1996. Price Waterhouse LLP Chicago, Illinois March 27, 1997 EX-13 2 1996 ANNUAL REPORT TO SHAREHOLDERS NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1996 FORM 10-K GRAPHS AND IMAGE MATERIAL 1996 ANNUAL REPORT TO SHAREHOLDERS The following is a list and narrative description of graphs included in those portions of the 1996 Annual Report to Shareholders expressly incorporated herein by reference. In the portion of the Annual Report to Shareholders titled "Management's Discussion and Analysis" the following graphs appear: Sales, based on continuing operations, in millions of dollars. The amounts for 1992 - 1994 include the Company's petroleum chemical operations. The values depicted in the graph are as follows:
Year Amount ---- ------ 1992 $1,287 1993 $1,292 1994 $1,247 1995 $1,215 1996 $1,304 Depreciation, in millions of dollars. The values depicted in the graph are as follows: Year Amount ---- ------ 1992 $ 76 1993 $ 83 1994 $ 85 1995 $ 85 1996 $ 92
Earnings before income taxes, in millions of dollars. The amount for 1994 excludes a $68 million pretax provision for formation and consolidation expenses. The values depicted in the graph are as follows:
Year Amount ---- ------ 1992 $ 209 1993 $ 211 1994 $ 206 1995 $ 213 1996 $ 229
NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1996 FORM 10-K GRAPHS AND IMAGE MATERIAL 1996 ANNUAL REPORT TO SHAREHOLDERS Market Value of Nalco Common Share at Year-End Closing Price, in dollars. The values depicted in the graph are as follows:
Year Amount ---- ------- 1992 $34.625 1993 $37.50 1994 $33.50 1995 $30.125 1996 $36.125 Shareholders' Equity, in millions of dollars. The values depicted in the graph are as follows: Year Amount ---- ------- 1992 $576 1993 $551 1994 $544 1995 $580 1996 $655 Cash Provided by Operating Activities, in millions of dollars. The values depicted in the graph are as follows: Year Amount ---- ------- 1992 $208 1993 $256 1994 $249 1995 $213 1996 $229 Return on Shareholders' Equity, based on continuing operations, excluding net charge for formation and consolidation expenses in 1994, and before extraordinary loss and effect of accounting change in 1993, in percentages. The values depicted in the graph are as follows: Year Amount ---- ------ 1992 22.6% 1993 24.2% 1994 22.9% 1995 24.1% 1996 23.5%
NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1996 FORM 10-K GRAPHS AND IMAGE MATERIAL 1996 ANNUAL REPORT TO SHAREHOLDERS Capital Additions, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1992 $131 1993 $118 1994 $126 1995 $127 1996 $ 93 Dividends per Common Share, in dollars. The values depicted in the graph are as follows: Year Amount ---- ------ 1992 $ 0.84 1993 $0.885 1994 $0.945 1995 $ 0.99 1996 $ 1.00
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Nalco Chemical Company In our opinion, the accompanying statements of consolidated financial condition and the related consolidated statements of earnings, of cash flows and of common shareholders' equity present fairly, in all material respects, the financial position of Nalco Chemical Company and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company'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 supporting 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. Price Waterhouse LLP Chicago, Illinois February 3, 1997 R. R. Ross Engagement Partner -17- MANAGEMENT'S DISCUSSION AND ANALYSIS 1996 vs 1995 Sales from continuing operations were $1,304 million in 1996, an increase of 7 percent over last year's sales of $1,215 million. Sales by Diversey Water Technologies (DWT), a middle market water treatment business which was acquired by the Company in mid-1996, accounted for slightly less than one-third of the improvement. Sales for 1996 and 1995 by major operating unit were as follows:
1996 vs 1995 (in millions) 1996 1995 Increase - - ----------------------------------------------------- ------------- Water and Waste Treatment $ 409.6 $ 373.1 10% Process Chemicals 349.5 316.9 10 Europe 289.3 285.8 1 Latin America 107.3 92.6 16 Pacific 147.8 146.1 1 -------- -------- Total $1,303.5 $1,214.5 7 ======== ========
The Water and Waste Treatment Division reported a 10 percent gain over 1995, with a little more than half of the increase attributable to sales by DWT. Modest improvements were posted by the other four marketing groups in the Division. Sales by the Process Chemicals Division rose 10 percent over last year, as the Pulp and Paper Group reported a double-digit gain and the other two groups in the Division posted more modest increases. The Latin America Division reported a 16 percent sales gain, as solid double-digit improvements were posted by all but two of the operating units in the region. Reported sales by the Pacific Division were up 1 percent over last year, which reflected business that was transferred as of the beginning of 1996 to the Nalco/Exxon Energy Chemicals, L.P. (Nalco/Exxon) joint venture. Pacific Division sales increased 12 percent, excluding from 1995 sales the business transferred to Nalco/Exxon, as solid double-digit improvements were posted by operations in Indonesia and Korea. Sales by Nalco's former affiliate company in India, which became a majority owned subsidiary in the fourth quarter of 1995, also contributed to the sales growth in the Division. Sales by the Europe Division were up 1 percent over 1995. Higher sales in local currencies by most operating units in the region, combined with sales by the European operations of DWT, were largely offset by sales decreases due to the stronger U.S. dollar compared to last year and business now with the Nalco/Exxon joint venture. Cost of products sold was 43.6 percent of sales for 1996, compared with 43.7 percent of sales for 1995. This slight improvement was mainly attributable to higher margins of the newly acquired DWT. Changes in product mix resulted in slightly lower gross margins for the Company's existing North American operations, and gross margins of the three International Divisions were also slightly lower than last year on a combined basis. Operating expenses in 1996 were up $41 million, or 8 percent over 1995, with higher selling and service expenses accounting for most of this increase. Expenses of DWT and other operations acquired since late 1995 contributed to over half of the change in selling expense. Most of the remainder represented increased spending to support growth in Latin America, the Pacific, and the paper market. Worldwide, research expenses increased $2 million, or 5 percent over 1995, as higher expenses in North America and Latin America were partly offset by lower expenses in Europe and the Pacific. The increase in research expenses in North America was mainly attributable to higher salaries and employee benefits. -18- Administrative expenses for 1996 were up $5 million, or 12 percent over 1995, as a result of higher provisions for incentive plans and employee benefit costs. Interest and other income for 1996 was down $5 million from 1995. Contributing to this decline were translation losses resulting from the devaluation of the Venezuelan bolivar during the second quarter of 1996, lower interest income reflecting a decrease in invested balances, and a gain on the sale of assets recognized last year. Interest expense of $14 million in 1996 was down $2 million from 1995, which was mainly attributable to lower interest rates. Nalco's equity in earnings of Nalco/Exxon was $25 million, an $8 million increase over the $17 million reported in 1995. This increase reflects strong growth in the joint venture's international operations, improved operating efficiencies, and business transferred to the joint venture as of the beginning of 1996. The effective tax rate for 1996 was 36.4 percent, comparable to the effective tax rate for 1995. Earnings from continuing operations as a percent to sales was 11.2 percent in 1996, which was unchanged from the rate for 1995. In late October 1996, the Company completed the sale of its discontinued superabsorbent chemicals business, realizing a gain of $3 million, net of income taxes. Earnings from the discontinued operation, exclusive of the $3 million net gain on the sale, were $6 million in 1996 and $18 million in 1995. (See Note 3). The Company makes limited use of derivative financial instruments such as interest rate swaps and foreign exchange contracts. Interest rate swaps are used to reduce the potential impact of increases in interest rates on floating rate long-term debt, while foreign exchange contracts are used to minimize exposure and reduce risk from exchange rate fluctuations. The Company does not hold or issue financial instruments for trading purposes. (See Note 17). The Company is involved in environmental clean-up activities in connection with former waste disposal sites and plant locations and litigation in the normal course of business. (See Note 19). This involvement has not had, nor is it expected to have, a material effect on the Company's earnings or financial position. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which requires companies to account for employee stock-based compensation plans using a fair value based method of accounting. However, SFAS 123 allows companies to continue to apply the intrinsic value based method prescribed under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," provided certain pro forma disclosures are made with respect to a fair value method. The Company adopted the disclosure-only provisions of SFAS 123. (See Note 8). -19- 1995 vs 1994 When the Nalco/Exxon joint venture partnership was formed during 1994, Nalco transferred the business and sales volume of its U.S. Petroleum Chemicals Division and certain petroleum chemical product lines of its international operations to the joint venture. While this formation did not change Nalco's net assets or results of operations, several historical captions in the consolidated financial statements were affected. Because 1994 results have not been reclassified to exclude petroleum chemical operations, the following unaudited statement of consolidated earnings for the year ended December 31, 1994 is presented. It reflects results of operations on a comparable basis with 1995; that is, Nalco petroleum chemical operations are excluded for the first eight months of 1994 and recognized as if they were accounted for by the equity method.
Reclas- sified (in millions) 1995 1994 - - -------------------------------------------------------------------------- Net Sales $1,214.5 $1,110.0 Operating costs and expenses Cost of products sold 531.3 482.3 Selling and service 399.5 364.3 Research and development 39.8 39.6 Administrative and general 38.4 39.2 Formation and consolidation - 68.2 - - -------------------------------------------------------------------------- 1,009.0 993.6 - - -------------------------------------------------------------------------- Operating Earnings 205.5 116.4 Interest and other income 7.2 16.5 Interest expense (16.2) (20.8) Equity in earnings of partnership 16.9 19.9 - - -------------------------------------------------------------------------- Earnings from Continuing Operations Before Income Taxes 213.4 132.0 Income taxes 77.7 58.8 - - -------------------------------------------------------------------------- Earnings from Continuing Operations 135.7 73.2 Earnings from discontinued operations, net of taxes 18.0 23.9 - - -------------------------------------------------------------------------- Net Earnings $ 153.7 $ 97.1 ==========================================================================
Sales from continuing operations were $1,215 million in 1995, a 3 percent decline from reported sales of $1,247 million for 1994. On a comparable basis, however, sales for 1995 were 9 percent higher than the year before. Sales for 1995 and 1994 by major operating unit were as follows:
1995 vs 1994 Increase (in millions) 1995 1994 (Decrease) - - --------------------------------------------------- ------------ Water and Waste Treatment $ 372.9 $ 363.9 2% Process Chemicals 317.1 281.6 13 Europe 285.8 259.0 10 Latin America 92.6 80.4 15 Pacific 146.1 125.1 17 - - -------------------------------------------------- 1,214.5 1,110.0 9 Petroleum Chemicals - 136.8 - - - --------------------------------------------------- Total $1,214.5 $1,246.8 (3) ===================================================
The following discussion of results of operations compares 1995 to the reclassified 1994 results presented above. Sales by the Water and Waste Treatment Division rose 2 percent. Solid improvements were reported by the UNISOLV and WATERGY Groups, while a more modest increase was reported by the Basic Industry Group. The Process Chemicals Division posted a 13 percent sales improvement as double-digit gains were reported by all three groups in the Division. Sales by the Europe Division were up 10 percent. The weaker dollar compared to 1994 accounted for part of this increase, but double-digit gains in local currencies -20- were reported by subsidiaries in Italy and Spain, as well as the Division's pan- European paper business. The Latin America Division turned in a 15 percent sales improvement, as double-digit gains were reported by subsidiary companies in Argentina, Brazil, and Chile. Slightly more than two-thirds of the increase for the Division was attributable to Nalcomex (Mexico), a former affiliate, which became a wholly owned subsidiary in the fourth quarter 1994. Sales by the Pacific Division were up 17 percent, as double-digit gains were reported by all but two of the subsidiary companies in the Division. Cost of products sold was 43.7 percent of sales for 1995, compared with 43.5 percent of sales for 1994. Increased raw material costs, partly offset by higher selling prices, accounted for slightly lower gross margins reported by operations in North America in 1995. Operating expenses in 1995 rose $35 million, or 8 percent over 1994, excluding the $68 million charge in 1994 for formation and consolidation expenses discussed below. Selling and service expenses accounted for this increase, primarily to support growth in Latin America, the Pacific, and the worldwide paper market. The increase was also partly attributable to the weaker dollar used to translate expenses of most international subsidiaries, mainly those in Europe. Worldwide, research expenses were comparable to 1994, as increased expenses in Europe and the Pacific were offset by lower expenses in the United States and Latin America. Higher European and Pacific research costs reflect a full year of operations in 1995 for new facilities opened during 1994. The reduction in research expenses in the United States was mainly attributable to lower employee benefit costs. Administrative expenses for 1995 were down slightly from 1994 as a result of lower provisions for incentive plans and employee benefit costs. Primarily as a result of the formation of the Nalco/Exxon joint venture, the Company adopted a worldwide consolidation plan for manufacturing and support operations during 1994. As a result of this plan, the Company recorded a pretax provision for formation and consolidation expenses of $68 million ($54 million after tax, or 70 cents per share on a fully diluted basis) in 1994. (See Note 4). Interest and other income for 1995 was down $9 million from 1994. This was primarily attributable to a $5 million gain on the sale of the Company's automotive paint spray booth business in 1994. Also contributing to the decrease was a drop in interest income as a result of lower invested cash balances, and lower realized exchange and unrealized translation gains reported by the Company's subsidiary in Brazil. Interest expense totaled $16 million in 1995, a decrease of $5 million from 1994, which was also mainly attributable to the Company's Brazilian subsidiary. This change, along with the change in realized exchange and unrealized translation gains discussed above, was the result of a monetary control program instituted by the Brazilian government in mid-1994. Nalco's equity in earnings of Nalco/Exxon was $17 million, a $3 million decline from the $20 million combined earnings reported by Nalco petroleum chemical operations from January to August 1994 and the Company's equity in the joint venture's earnings. This decrease reflected the weak petroleum market in the United States, as well as start-up and consolidation expenses for the joint venture. The effective tax rate for 1995 was 36.4 percent, comparable to the 1994 effective tax rate based on the reclassified results for 1994 presented above, excluding the formation and consolidation expense of $68 million and related net tax benefit of $14 million. Earnings from continuing operations as a percent to sales was 11.2 percent in 1995. Based on the reclassified results above and excluding the net formation and consolidation expense, earnings from continuing operations as a percent to sales was 11.5 percent in 1994. As previously discussed, the Company disposed of its superabsorbent chemicals business in 1996, and reported its results as discontinued operations. Earnings from the discontinued superabsorbent chemicals business were $18 million in 1995, down $6 million from the $24 million reported in 1994. -21- MANAGEMENT'S ANALYSIS--FINANCIAL CONDITION Total assets increased $34 million, or 2 percent during 1996. Accounts receivable were $13 million, or 6 percent higher than at the end of 1995. Over two-thirds of this increase was attributable to the accounts receivable of DWT, which was acquired by the Company in mid-1996. (See Note 10). Higher worldwide sales levels in the fourth quarter 1996 also contributed to the increase. Inventories decreased approximately $1 million, or 1 percent from year-ago levels. Lower balances in North America and Latin America were partly offset by inventories from the DWT acquisition. Investment in and advances to partnership was unchanged during 1996, as Nalco's $25 million of equity in the earnings of Nalco/Exxon was offset by borrowings and distributions from the joint venture. The $47 million net carrying amount of assets of discontinued operations at the end of 1995 consisted primarily of buildings and manufacturing equipment of the superabsorbent chemicals business which was sold in October 1996. The $72 million increase in goodwill was mainly attributable to the acquisition of DWT. In addition, the weaker U.S. dollar in relation to the British pound and Australian dollar compared to the end of 1995 accounted for about 10 percent of the increase in goodwill. Total liabilities decreased $40 million, or 5 percent during 1996 primarily because of a net decrease in short-term and long-term debt. Shareholders' equity increased $74 million, or 13 percent during 1996, primarily because net earnings of $155 million exceeded dividends totaling $79 million. Common stock repurchases of 0.7 million shares at a cost of $26 million were offset by treasury stock transactions for stock option, benefit, and other plans totaling $16 million. The weaker U.S. dollar in relation to various international currencies, most notably the British pound and Australian dollar, compared to the end of 1995 resulted in an $8 million decrease in foreign currency translation adjustments. Nalco's return on average shareholders' equity was 23.5 percent in 1996, slightly lower than the 24.1 percent in 1995 based on earnings from continuing operations. MANAGEMENT'S ANALYSIS--CASH FLOWS One of Nalco's most significant financial strengths is its ability to consistently generate strong cash flow from operations. Net cash provided by operating activities was $229 million in 1996, which was generated primarily from net earnings before noncash charges for depreciation and amortization. Significant cash flow requirements in 1996 included capital investments of $93 million, business purchases of $83 million, dividends of $79 million, and $26 million for the reacquisition of common stock. In 1995, cash from operations was $213 million compared to the 1994 total of $249 million. Over 60% of the 1996 capital investments of $93 million was attributable to investments in North America, which included $18 million for PORTA-FEED units and $10 million for transportation equipment. Investments in manufacturing facilities and related support equipment for operations in Argentina and The People's Republic of China totaled $8 million. The Company plans to continue to invest in internal growth in 1997 and it is expected that capital investments will exceed $100 million. -22- Other significant investing activities in 1996 included the acquisitions of DWT and the water treatment chemicals business of Albright & Wilson U.K. Limited for approximately $83 million net of cash acquired. Borrowings from Nalco/Exxon totaled $23 million during 1996, and the Company received $41 million from the sale of the discontinued superabsorbent chemicals business. Over two-thirds of the 1995 capital investments of $127 million was attributable to investments in the United States, which included $26 million for PORTA-FEED units, $17 million for field equipment, and $13 million for transportation equipment. Other significant investing activities in 1995 included the acquisition of an additional 25 percent interest of Nalco Chemical India, Ltd., a former affiliated company, for approximately $10 million net of cash acquired, and the purchase of the pulp and paper chemical business of Texo Corporation for $14 million. Additional cash investments in Nalco/Exxon totaled $8 million in 1995. Investing activities in 1994 totaled $164 million, which included $126 million for investments in property, plant, and equipment. Over 60 percent of the capital spending in 1994 was for investments in the United States and included $19 million for PORTA-FEED units, $18 million for field equipment, and $14 million for transportation equipment. The most significant investment overseas was $18 million to complete the construction of the Nalco Europe Business and Technical Center in the Netherlands, which was opened in mid-1994. Investing activities in 1994 also included the purchase of the remaining 60 percent interest of Nalcomex (Mexico), a former affiliated company, for approximately $18 million, and cash investments in Nalco/Exxon of $26 million. Net financing activities of $115 million in 1996 included dividends paid on common stock of $67 million or $1.00 per share. Since the Company's founding in 1928, it has paid 274 consecutive quarterly dividends, and expects to continue its policy of paying regular cash dividends. The Company continued its stock repurchase program in 1996 by reacquiring 0.7 million shares of common stock at a cost of $26 million. In 1995, the Company reacquired 1.3 million shares of common stock at a cost of $42 million, and 1.8 million shares were repurchased for $61 million in 1994. Management believes that the stock repurchase program represents a sound economic investment for Nalco's shareholders. Other financing activities in 1996 consisted primarily of a net decrease in short-term and long- term debt of $22 million. Among the most significant financing activities in 1995 and 1994 were payments for cash dividends and the repurchase of common stock. Management expects that internal growth in existing businesses will be financed principally from internally generated funds. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco also had a $260 million Revolving Credit Agreement with ten banks. The credit arrangements were unused at December 31, 1996. On January 31, 1997, the Revolving Credit Agreement was increased to $350 million with eleven banks. (See Note 14). With the agreement of the banks, with two weeks notice, this credit can be increased to $600 million. In addition, most foreign subsidiaries have established short-term borrowing facilities in local currency and use them as the need arises. Net debt (short-term and long-term borrowings less cash and cash equivalents) totaled $245 million, $278 million, and $222 million at December 31, 1996, 1995, and 1994, respectively. Management believes that Nalco's strong cash flow, together with its unused debt capacity, provides ample capability for the Company to pursue investment opportunities ranging from internal growth to acquisitions and stock repurchase. -23- Statements of Consolidated Earnings
Year Ended December 31 ------------------------------- (in millions, except per share figures) 1996 1995 1994 - - ---------------------------------------------------------------------------- Net Sales $1,303.5 $1,214.5 $1,246.8 Operating costs and expenses Cost of products sold 568.6 531.3 543.7 Selling and service 433.4 399.5 405.3 Research and development 41.9 39.8 45.7 Administrative and general 42.9 38.4 47.8 Formation and consolidation - - 68.2 -------- -------- -------- 1,086.8 1,009.0 1,110.7 -------- -------- -------- Operating Earnings 216.7 205.5 136.1 Interest and other income 2.6 7.2 16.6 Interest expense (14.4) (16.2) (21.8) Equity in earnings of partnership 24.5 16.9 6.9 -------- -------- -------- Earnings from Continuing Operations Before Income Taxes 229.4 213.4 137.8 Income taxes 83.5 77.7 64.6 -------- -------- -------- Earnings from Continuing Operations 145.9 135.7 73.2 Earnings from discontinued operations, net of taxes 8.6 18.0 23.9 -------- -------- -------- Net Earnings $ 154.5 $ 153.7 $ 97.1 ======== ======== ======== Earnings Per Common Share--Primary Earnings from continuing operations $ 1.99 $ 1.83 $ .90 Discontinued operations, net of taxes .13 .27 .35 -------- -------- -------- Net earnings $ 2.12 $ 2.10 $ 1.25 ======== ======== ======== Earnings Per Common Share--Fully Diluted Earnings from continuing operations $ 1.86 $ 1.71 $ .88 Discontinued operations, net of taxes .11 .24 .31 -------- -------- -------- Net earnings $ 1.97 $ 1.95 $ 1.19 ======== ======== ======== Average Shares Outstanding (in thousands) Primary 67,599 67,905 69,029 ======== ======== ======== Fully Diluted 75,616 75,947 77,160 ======== ======== =======
The notes to consolidated financial statements on pages 28 through 37 are an integral part of these statements. -24-
- - ------------------------------------------------------------------------- Statements of Consolidated Financial Condition December 31 -------------------- (in millions, except per share figures) 1996 1995 - - ------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 38.8 $ 38.1 Receivables, less allowances of $4.9 in 1996 and $4.4 in 1995 233.4 220.3 Inventories Finished products 61.4 62.4 Materials and work in process 29.4 29.0 -------- -------- 90.8 91.4 Prepaid expenses, taxes, and other current assets 22.2 20.2 -------- -------- Total Current Assets 385.2 370.0 Other Assets Investment in and advances to partnership 126.0 126.2 Discontinued operations - net - 47.1 Goodwill, less accumulated amortization of $24.7 in 1996 and $18.6 in 1995 202.5 131.0 Miscellaneous 158.8 166.2 -------- -------- Total Other Assets 487.3 470.5 Net Property, Plant, and Equipment 522.0 520.0 -------- -------- Total Assets $1,394.5 $1,360.5 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Short-term debt $ 31.3 $ 95.0 Accounts payable 114.6 126.9 Accrued compensation 32.3 27.3 Other accrued expenses 65.7 71.9 Income taxes 45.8 34.7 -------- -------- Total Current Liabilities 289.7 355.8 Long-Term Debt 252.6 221.5 Deferred Income Taxes 42.9 53.3 Accrued Pension Benefits 38.6 37.3 Accrued Postretirement Benefits 98.5 97.7 Other Liabilities 17.7 14.6 Commitments and Contingent Liabilities - - Shareholders' Equity Preferred stock--par value $1.00 per share 0.4 0.4 Capital in excess of par value of shares 188.6 191.7 Unearned ESOP compensation (162.6) (166.6) -------- -------- 26.4 25.5 Common stock--par value $.1875 per share; 80.3 shares issued 15.1 15.1 Capital in excess of par value of shares 31.2 27.8 Retained earnings 992.0 916.2 Minimum pension liability adjustment (6.1) (6.0) Foreign currency translation adjustments (39.9) (48.0) Common stock reacquired--at cost (364.2) (350.3) -------- -------- Total Shareholders' Equity 654.5 580.3 -------- -------- Total Liabilities and Shareholders' Equity $1,394.5 $1,360.5 ======== ========
The notes to consolidated financial statements on pages 28 through 37 are an integral part of these statements. -25-
- - -------------------------------------------------------------------------------- Statements of Consolidated Cash Flows Years Ended December 31 ---------------------------- (in millions) 1996 1995 1994 - - -------------------------------------------------------------------------------- Cash Provided by (Used for) Operating Activities Net earnings $ 154.5 $ 153.7 $ 97.1 Adjustments to reconcile net earnings to cash provided by operating activities Formation and consolidation expenses - - 68.2 Depreciation and amortization 98.3 89.2 89.2 Equity in earnings of partnership, net of distributions (14.0) (10.8) (6.9) Noncurrent deferred income taxes (9.0) (13.0) (3.8) Other--net 9.1 0.6 6.8 Changes in current assets and liabilities Receivables 6.4 (20.5) 10.2 Inventories (0.1) (10.2) (19.3) Accounts payable (15.9) 21.5 22.8 Other (0.4) 2.0 (15.2) ------- ------- ------- Net Cash Provided by Operating Activities 228.9 212.5 249.1 ------- ------- ------- Cash Provided by (Used for) Investing Activities Additions to property, plant, and equipment (92.5) (126.7) (125.6) Business purchases (83.4) (23.8) (20.4) (Investments in) advances from partnership 18.0 (8.2) (26.3) Proceeds from sale of business 41.2 - 6.4 Other investing activities 7.2 2.6 1.6 ------- ------- ------- Net Cash (Used for) Investing Activities (109.5) (156.1) (164.3) ------- ------- ------- Cash Provided by (Used for) Financing Activities Cash dividends, net of taxes (78.7) (78.1) (75.7) Proceeds from long-term debt 59.2 6.8 2.2 Payments of long-term debt (12.1) (3.3) (7.7) Increase (decrease) in short-term debt (69.5) 46.4 8.0 Common stock reacquired (26.3) (42.4) (61.3) Other financing transactions 9.9 9.8 13.4 ------- ------- ------- Net Cash (Used for) Financing Activities (117.5) (60.8) (121.1) Effect of foreign exchange rate changes on cash and cash equivalents (1.2) (2.6) 3.3 ------- ------- ------- Increase(decrease) in cash and cash equivalents 0.7 (7.0) (33.0) Cash and cash equivalents at the beginning of the year 38.1 45.1 78.1 ------- ------- ------- Cash and Cash Equivalents at the End of the Year $ 38.8 $ 38.1 $ 45.1 ======= ======= =======
The notes to consolidated financial statements on pages 28 through 37 are an integral part of these statements. -26-
- - ------------------------------------------------------------------------------------------------------------------------- Statements of Consolidated Common Shareholders' Equity (in millions, except per share figures) - - ------------------------------------------------------------------------------------------------------------------------- Common Stock Capital in Minimum Foreign Reacquired Common Excess of Pension Currency -------------------- Stock Par Value Retained Liability Translation Number Issued of Shares Earnings Adjustment Adjustments of Shares Cost ------ ---------- --------- ----------- ------------ ---------- -------- Balance at January 1, 1994 $15.1 $ 10.6 $819.2 $(7.1) $(49.3) 11.4 $(259.6) Net earnings 97.1 Dividends on preferred stock --net of tax benefit of $4.6 (11.0) Dividends on common stock ($0.945 per share) (64.7) Treasury stock transactions 12.3 1.5 (67.4) Stock issued under option, benefit, and other plans 2.6 (0.5) 9.3 Minimum pension liability adjustment 1.4 Currency translation adjustments 10.0 ----- ------ ------ ----- ------ ---- ------- Balance at December 31, 1994 15.1 25.5 840.6 (5.7) (39.3) 12.4 (317.7) Net earnings 153.7 Dividends on preferred stock --net of tax benefit of $4.2 (11.2) Dividends on common stock ($0.99 per share) (66.9) Treasury stock transactions 1.3 (42.4) Stock issued under option, benefit, and other plans 2.3 (0.5) 9.8 Minimum pension liability adjustment (0.3) Currency translation adjustments (8.7) ----- ------ ------ ----- ------ ---- ------- Balance at December 31, 1995 15.1 27.8 916.2 (6.0) (48.0) 13.2 (350.3) Net earnings 154.5 Dividends on preferred stock --net of tax benefit of $3.9 (11.4) Dividends on common stock ($1.00 per share) (67.3) Treasury stock transactions 0.7 (26.3) Stock issued under option, benefit, and other plans 3.4 (0.6) 12.4 Minimum pension liability adjustment (0.1) Currency translation adjustments 8.1 ----- ------ ------ ----- ---- ---- ------- Balance at December 31, 1996 $15.1 $ 31.2 $992.0 $(6.1) $(39.9) 13.3 $(364.2) ===== ====== ====== ===== ====== ==== =======
The notes to consolidated financial statements on pages 28 through 37 are an integral part of these statements. -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY--Nalco's consolidated financial statements include the accounts of the parent company and its majority-owned subsidiaries. All intercompany balances and transactions are eliminated. Investments in partnerships and affiliated companies are reported on the equity method. Certain amounts in the prior years' financial statements and notes thereto have been reclassified to conform to the current year presentation. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK--Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Management believes the likelihood of incurring material losses due to concentration of credit risk is remote. The principal financial instruments subject to credit risk are as follows: Cash and cash equivalents, short-term marketable securities - Nalco has a formal policy of placing these instruments in investment grade companies or financial institutions and limiting the size of an investment with any single entity. Receivables - A large number of customers in diverse industries and geographies, as well as the practice of establishing reasonable credit lines, limits credit risk. The allowances for doubtful accounts are adequate to cover potential credit risk losses. Foreign exchange contracts and derivatives - The Company has formal policies which establish credit limits and investment grade credit criteria of "A" or better for all counterparties. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. DERIVATIVES--Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. FOREIGN CURRENCY TRANSLATION--The local currency has been designated as the functional currency in financial statements of companies which account for approximately 89 percent of total foreign subsidiary net assets at the end of 1996. These financial statements are translated at current and average exchange rates, with any resulting translation adjustments included in the currency translation adjustment account in shareholders' equity. The remaining subsidiaries operate in countries with highly inflationary environments and their statements are translated using a combination of current, average, and historical exchange rates, with the resulting translation impact included in results of operations. Transactions executed in different currencies resulting in exchange adjustments are included in results of operations. The impact of foreign currency exchange transactions, included in interest and other income in 1996, 1995, and 1994, was not significant. INVENTORY VALUATION--Inventories are valued at the lower of cost or market. Approximately 36 percent of the inventories at the end of 1996 are valued using the last-in, first-out (LIFO) method. The remaining inventories are valued using the average cost or first-in, first-out (FIFO) method. If the FIFO method of accounting had been used for all inventories, reported inventory amounts would have been approximately $25 million higher at both December 31, 1996 and 1995. GOODWILL--Goodwill consists of costs in excess of the fair value of net tangible and identified intangible assets of acquired companies and is generally amortized over 40 years using the straight-line method. The Company annually evaluates whether the projected earnings and undiscounted cash flows of each of the acquired companies is sufficient to recover the carrying value of the net investment, including goodwill, in order to determine if an impairment has occurred. Management is currently of the opinion that no such impairment exists. STOCK-BASED COMPENSATION--Effective January 1, 1996, the Company adopted the "disclosure method" provisions of Statement of Financial Accounting Standards No. 123(SFAS 123) "Accounting for Stock-Based Compensation." As permitted under SFAS 123, the Company continues to recognize stock-based compensation costs under the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25(APB 25), "Accounting for Stock Issued to Employees." INCOME TAXES--Income taxes are recognized during the year in which transactions enter into the determination of financial statement income, with deferred income taxes being provided for the tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases. Deferred income taxes are provided on the undistributed earnings of foreign subsidiaries and affiliated companies except to the extent such earnings are considered to be permanently reinvested in the subsidiary or affiliate. Where it is contemplated that earnings will be remitted, credit for foreign taxes already paid generally will offset applicable U.S. income taxes. In cases where foreign tax credits will not offset U.S. income taxes, appropriate provisions are included in the Consolidated Statements of Earnings. Repatriation of permanently reinvested earnings would not materially increase the Company's tax liabilities. RETIREMENT PLANS--The cost of retirement plans is computed on the basis of accepted actuarial methods (using the projected unit credit method for the principal plan) and includes current service costs, amortization of increases in prior service costs over the expected future service of active participants as of the date such costs are first recognized, and amortization of the initial unrecognized net pension asset or liability on a straight-line basis over 18 years. -28- The costs of health and life insurance postretirement benefits are accrued as earned. Annual expense represents a combination of interest and service cost provisions. Most postretirement benefits are not funded. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)--ESOP contribution expense is based upon non-level debt payments made by the ESOP to meet the plan funding requirements. An adjustment to increase expense is made when the computed amount is less than 80 percent of the cumulative expense that would be recognized under the "shares allocated" method. EARNINGS PER SHARE--Primary earnings per common share is computed by dividing net earnings (after deducting preferred stock dividends, net of income taxes) by the weighted average number of shares and share equivalents outstanding during the year. Fully diluted earnings per share is based upon the weighted average number of common shares and share equivalents, plus the weighted average number of common shares resulting from the assumed conversion of the Series B ESOP Convertible Preferred Stock (preferred stock). Earnings for purposes of computing fully diluted earnings per share are reduced for additional ESOP debt service expense resulting from the assumed replacement of preferred stock dividends with common stock dividends, net of related tax benefits. NOTE 2--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA Nalco is engaged in the worldwide manufacture and sale of highly specialized Service Chemical programs. This includes production and service related to the sale and application of chemicals and technology used in water treatment, pollution control, energy conservation, oil production and refining, steelmaking, papermaking, mining, and other industrial processes. Within Nalco, sales between geographic areas are made at prevailing market prices to customers minus an amount intended to compensate the sister Nalco company for providing quality customer service. Operating earnings represent sales less cost of products sold and operating expenses. In computing operating earnings by geographic area, none of the following items is considered: general corporate expenses, interest income or expense, equity in earnings of partnerships and affiliated companies, or income taxes. Identifiable assets are those directly associated with operations of the geographic area. Corporate assets consist mainly of cash and cash equivalents; marketable securities; investments in unconsolidated partnership, affiliates, and leveraged leases; and capital assets used for corporate purposes. Corporate assets for 1995 also include the net assets of discontinued operations, which are classified as North American identifiable assets for the year 1994. GEOGRAPHIC AREA DATA
(in millions) 1996 1995 1994 - - ----------------------------------------------------------------- Sales North America $ 797.4 $ 723.6 $ 769.7 Europe 289.3 285.8 288.9 Latin America 107.3 92.6 90.6 Pacific 147.8 146.1 127.7 Sales between areas (38.3) (33.6) (30.1) -------- -------- -------- $1,303.5 $1,214.5 $1,246.8 ======== ======== ======== Operating Earnings North America $ 154.4 $ 132.9 $ 111.7 Europe 34.6 38.9 8.3 Latin America 21.7 22.1 16.6 Pacific 20.4 22.9 19.8 Expenses not allocated to areas (14.4) (11.3) (20.3) -------- -------- -------- $ 216.7 $ 205.5 $ 136.1 ======== ======== ======== Identifiable Assets North America $ 550.9 $ 526.1 $ 485.2 Europe 271.6 259.9 245.2 Latin America 67.3 60.4 66.9 Pacific 185.4 171.3 147.9 Corporate 319.3 342.8 324.0 -------- -------- -------- $1,394.5 $1,360.5 $1,269.2 ======== ======== ========
Sales and operating earnings for 1994 include results for the Company's U.S. Petroleum Chemicals Division and certain petroleum chemical product lines of its international operations which were transferred to Nalco/Exxon effective September 1, 1994. Sales included were approximately $137 million in 1994. (See Note 11). In 1994, operating earnings were reduced by a pretax provision of $68 million for formation and consolidation expenses. (See Note 4). Of that amount, approximately $34 million was included in European operations. NOTE 3--DISCONTINUED OPERATIONS In October 1996, the Company completed the sale of its discontinued superabsorbent chemicals business. The gain on the sale was $3 million, net of income taxes of $1 million. The results of the superabsorbent chemicals business have been classified as discontinued operations in the accompanying financial statements. Sales from the discontinued operation, which are excluded from consolidated sales, amounted to $63 million in 1996, $96 million in 1995, and $99 million in 1994. Excluding the aforementioned gain on the sale, net earnings from discontinued operations totaled $6 million in 1996, $18 million in 1995, and $24 million in 1994, which included the pretax operating earnings of the discontinued operations, less applicable income taxes of $4 million in 1996, $11 million in 1995, and $15 million in 1994. The effective income tax rate for discontinued operations differs from the federal statutory rate primarily because of state income taxes, net of federal tax benefit. -29- NOTE 4--FORMATION AND CONSOLIDATION EXPENSES The Company adopted a worldwide consolidation plan for manufacturing and support operations during 1994, primarily as a result of the formation of Nalco/Exxon discussed in Note 11. The production volume reduction caused by redundancies associated with the joint venture formation required the Company to down size, close, and consolidate operations. In addition, certain support functions have been or are being regionalized on a pan-European basis in order to more efficiently serve customers. As a result, the Company recorded a pretax provision of $68 million ($54 million after tax, or 70 cents per share on a fully diluted basis) in 1994. Included in this provision was the cost of termination benefits; costs associated with facility closings and the disposition of certain assets; and payments for post-closure plant environmental remediation, legal and consulting fees, and other exit costs. Cash expenditures charged against the provision to date have been funded through operating cash flows, and the Company anticipates that future cash expenditures will be similarly funded. A tax benefit of $14 million, net of tax costs associated with the contribution of assets to various joint venture entities, was included in the Company's 1994 income tax provision related to the formation and consolidation expenses. Charges against the provision for formation and consolidation expenses totaled $25 million in 1994, $20 million in 1995, and $12 million in 1996. Charges against the provision in 1996 included cash payments of approximately $8 million for termination benefits and $1 million for legal, consulting, and post-closure plant environmental remediation expenses. Noncash asset write-downs totaling approximately $3 million were also charged against the provision in 1996. The balance of $11 million at December 31, 1996 will be used primarily for remaining termination benefits. NOTE 5--PENSION PLANS The Company has several noncontributory defined benefit pension plans covering most employees in the United States and those with six foreign subsidiaries. The principal domestic plan represents approximately 68 percent of the projected benefit obligation (PBO) and 80 percent of the total market value of assets. This plan provides benefits that are based on years of service and the employee's highest paid 48 months during the last 120 months before termination of employment. Approximately 96 percent of the assets in the plan at December 31, 1996 was invested in stocks, bonds, and insurance contracts, and the remaining assets were invested in professionally managed real estate trusts and partnerships. No contributions have been made since 1984 due to the present funded position of the plan and none are anticipated in 1997. Three of the six foreign pension plans are unfunded, generally because amounts contributed are not deductible for tax purposes. Employees in the United States whose pension benefits exceed ERISA limitations are covered by a supplementary non-qualified, unfunded pension plan which is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The accruals for the cost of this plan are based on substantially the same actuarial methods and economic assumptions as those used for the principal plan. Net pension expense for all defined benefit plans included in operating results was comprised of:
(in millions) 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned $ 16.8 $ 12.4 $ 17.4 Interest costs on the PBO 25.6 23.7 24.3 Actual return on plan assets (31.8) (60.7) (0.2) Net amortizations and deferrals 4.3 35.8 (23.7) --------- -------- -------- Net pension expense for defined benefit plans $ 14.9 $ 11.2 $ 17.8 ========= ======== ======== Assumptions for the plans as of the end of the last three years were as follows: U.S. Plans ---------------------------- 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------------- Weighted-average discount rates 8.0% 7.25% 9.0% Rates of increase in compensation levels 4.0 4.0 4.8 Rates of return on plan assets 9.5 9.5 9.0 - - --------------------------------------------------------------------------------------------------------------------- Foreign Plans ---------------------------- 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------------- Weighted-average discount rates 6.5-9.0% 6.0-9.0% 7.0-9.0% Rates of increase in compensation levels 4.0-6.25 4.0-6.5 4.5-6.5 Rates of return on plan assets 6.5-9.75 6.0-9.5 7.0-9.5 - - ---------------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial condition at year end for plans in which assets exceed the accumulated benefit obligation (ABO):
(in millions) 1996 1995 - - ------------------------------------------------------------ Actuarial present value of: Vested benefit obligation $220.5 $194.1 Non-vested benefit obligation 17.6 15.6 ------ ------ Total ABO 238.1 209.7 Effect of future salary increases 58.3 88.6 ------ ------ Total PBO 296.4 298.3 Plan assets at fair market value 322.8 311.1 ------ ------ Plan assets in excess of the PBO 26.4 12.8 Unrecognized net (asset) from date of adoption (21.6) (24.7) Unrecognized prior service cost 9.7 11.0 Unrecognized net actuarial losses (gains) (2.2) 16.4 ------ ------ Net pension assets recognized $ 12.3 $ 15.5 ====== ======
-30- The following table sets forth the funded status and amounts recognized in the consolidated statements of financial condition at year end for plans in which the ABO exceeds assets:
(in millions) 1996 1995 - - ------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $ 26.2 $ 26.5 Non-vested benefit obligation 4.7 3.2 ------ ------ Total ABO 30.9 29.7 Effect of future salary increases 11.0 12.6 ------ ------ Total PBO 41.9 42.3 Plan assets at fair market value - - ------ ------ Plan assets (less) than the PBO (41.9) (42.3) Unrecognized net liability from date of adoption 2.2 2.6 Unrecognized prior service cost 6.6 7.4 Unrecognized net actuarial losses 12.8 14.3 Adjustment to recognize minimum liability (18.3) (19.3) ------ ------ Net pension (liabilities) recognized $(38.6) $(37.3) ====== ======
The above table includes the supplementary non-qualified plan for employees in the United States whose pension benefits exceed ERISA limitations and certain foreign pension plans. In accordance with SFAS 87, "Employers' Accounting for Pensions," the Company has recorded a minimum pension liability for certain plans, representing the excess of the ABO over plan assets and accrued pension costs. A corresponding amount was recognized as an intangible asset, except to the extent that these additional liabilities exceeded related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities was charged directly to shareholders' equity. The excess minimum pension liability resulted in after-tax charges to shareholders' equity of approximately $6 million, net of income taxes of approximately $4 million, in 1996 and 1995. NOTE 6--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Nalco has defined benefit postretirement plans that provide medical, dental, and life insurance benefits for substantially all United States retirees and eligible dependents. Nalco retains the right to change or terminate these benefits. Net postretirement benefit expense for all defined benefit plans included in operating results was comprised of:
(in millions) 1996 1995 1994 - - -------------------------------------------------------------------------------- Service cost for benefits earned $ 2.2 $ 1.8 $ 3.3 Interest cost 5.1 5.5 6.8 Net amortization (1.5) (1.7) - ------ ------ ------ $ 5.8 $ 5.6 $ 10.1 ====== ====== ======
The components of the accrued postretirement benefit liability as of the end of the last two years were as follows.
(in millions) 1996 1995 - - -------------------------------------------------------------------------------- Actuarial present value of postretirement benefit obligations: Retirees $ 32.8 $ 34.8 Fully eligible active plan participants 8.3 7.3 Other active plan participants 23.8 26.9 ------ ------ Accumulated postretirement benefit obligation 64.9 69.0 Unrecognized net gain 37.5 31.4 ------ ------ Accrued postretirement benefit liability 102.4 100.4 Less current portion 3.9 2.7 ------ ------ Noncurrent liability $ 98.5 $ 97.7 ====== ======
The assumptions used to measure the accumulated postretirement benefit obligation are as follows:
1996 1995 1994 - - -------------------------------------------------------------------------------- Weighted-average discount rate 8.0% 7.25% 9.0% Health care cost trend rate 7.5 8.0 11.0
The health care cost trend rate will decrease 0.5 percent per year to an ultimate rate of 5.0 percent. A one-percentage-point increase in the assumed health care cost trend rate would have increased the 1996 postretirement benefit expense by approximately $1 million and would have increased the 1996 accumulated postretirement benefit obligation by $7 million. NOTE 7--EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Nalco's ESOP gives most United States employees an additional opportunity to share in the ownership of the Company's stock. Preferred shares are allocated to eligible employees based on a percentage of pretax earnings. Selected information about the ESOP is as follows:
(dollar in millions, shares in thousands) 1996 1995 1994 - - -------------------------------------------------------------------------------- Preferred stock dividends $ 15.3 $ 15.4 $ 15.6 Interest expense on ESOP debt $ 9.4 $ 11.2 $ 10.6 ESOP benefit expense $ 3.2 $ 2.5 $ 1.9 ESOP contribution payments $ 5.1 $ 2.1 $ - Preferred shares at year end: Allocated 124.2 107.2 88.0 Committed-to-be-released 24.9 23.6 23.9 Suspense 243.8 268.6 292.3
- - -------------------------------------------------------------------------------- -31- NOTE 8--STOCK OPTION AND PERFORMANCE PLANS Nalco's 1996 Stock Option Plan and its 1990 Stock Option Plan for key management employees authorized the granting of stock options for the purchase of up to 8,000,000 shares and 6,000,000 shares, respectively, of Nalco common stock. The Company's 1982 Stock Option Plan authorized the granting of either incentive stock options or non-qualified options for the purchase of up to 6,000,000 shares of Nalco's common stock. No additional grants will be made under the 1982 plan. The option price under these plans cannot be less than the fair market value on the date of grant. Options granted since 1989 generally become exercisable ratably over the three years following the grant date, and will expire ten years after the date granted. Options granted prior to 1989 have a term of ten years, and were exercisable upon grant. Options may be exercised in whole or in part for cash, shares of common stock, or a combination thereof. The 1990 Stock Option Plan for Non-Employee Directors authorizes the granting of stock options to outside directors for the purchase of up to 500,000 common shares. The option price under the plan cannot be less than the fair market value on the date of the grant. These options become exercisable upon grant, and expire ten years from the grant date. Information regarding these stock option plans for 1996, 1995, and 1994 is as follows:
1996 1995 1994 ------------------------------- -------------------------------- ---------------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------ ----------------- ----------- ------------------- ---------- ---------------------- At the beginning of the year 6,657,723 $32.17 4,327,223 $29.73 4,383,477 $28.17 Granted 1,595,200 $31.64 2,801,200 $34.43 439,700 $35.15 Exercised (500,460) $20.54 (360,700) $19.49 (413,655) $17.70 Expired or cancelled (279,100) $34.04 (110,000) $35.02 (82,299) $35.71 At the end of the year 7,473,363 $32.77 6,657,723 $32.17 4,327,223 $29.73 Options exercisable at end of year 4,574,896 $32.33 3,584,024 $30.08 3,179,179 $27.46 Weighted-average fair value of options granted during the year $6.53 $8.98
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------- ------------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price - - ----------------------- ------------------- ---------------- ---------------- ------------------- ---------------- $15.78 to $20.16 685,675 1.9 yrs. $19.86 685,675 $19.86 $23.38 to $29.82 210,400 4.5 $26.49 210,400 $26.49 $31.69 to $34.44 4,281,200 8.4 $33.40 1,483,633 $33.45 $35.75 to $36.31 2,296,088 5.6 $36.02 2,195,188 $36.03 --------- --------- $15.78 to $36.31 7,473,363 6.9 $32.77 4,574,896 $32.33 ========= =========
The Company applies APB 25 and related Interpretations in accounting for the aforementioned stock plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans while compensation expense has been recognized for its compensatory plans. Had compensation cost for the Company's fixed stock option plans been determined based on the fair value based method, as defined in SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
(in millions, except per share data) 1996 1995 - - -------------------------------------------------------------------------------- Net earnings As reported $154.5 $153.7 Pro forma 146.1 149.0 - - -------------------------------------------------------------------------------- Earnings per share Primary As reported $ 2.12 $ 2.10 Pro forma 1.99 2.03 Fully diluted As reported 1.97 1.95 Pro forma 1.86 1.89 - - --------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: dividend yield of 3.2 percent and 3.2 percent; expected volatility of 20.7 percent and 21.4 percent; risk-free interest rate of 6.5 percent and 7.4 percent; and expected lives of 6.6 and 6.0 years. The effects of applying SFAS 123 in the above pro forma disclosures are not indicative of future amounts as they do not include the effects of awards granted prior to 1995, some of which would have had income statement effects in 1995 and 1996 due to the three-year vesting period associated with the fixed stock option awards. Additionally, future amounts are likely to be affected by the number of grants awarded since additional awards are generally expected to be made at varying amounts. In 1996, the Performance Share Plan for designated officers and other key executives was amended and reapproved by the shareholders. It provides for the annual assignment of performance shares which are contingent upon future earnings growth of the Company. Performance awards shall be paid half in cash and half in the Company's common stock, except that any payments made after 1,000,000 shares have been issued shall be made only in cash and only with respect to contingent performance shares already assigned. The cash portion of an award shall be paid after determination of the award; however, the right to receive common shares shall not vest to a participant until three years after the end of a performance period. In 1996, $2 million was charged to earnings for compensatory stock related plans. No significant charge to earnings was made for such plans in 1995 or 1994. -32- NOTE 9--INCOME TAXES The sources of earnings from continuing operations before income taxes were as follows:
(in millions) 1996 1995 1994 - - -------------------------------------------------------------------------------- Domestic $ 168.6 $ 162.1 $ 132.5 Foreign 60.8 51.3 5.3 ------- ------ ------- Total $ 229.4 $ 213.4 $ 137.8 ======= ======= =======
The lower level of foreign source earnings in 1994 is primarily attributable to formation and consolidation expenses. (See Note 4). The components of income tax provisions attributable to earnings from continuing operations are summarized as follows:
(in millions) 1996 1995 1994 - - -------------------------------------------------------------------------------- Current Federal $ 50.9 $ 38.2 $ 41.7 State 10.4 8.6 10.8 Foreign 20.6 29.5 28.7 ------ ------ ------ 81.9 76.3 81.2 ------ ------ ------ Deferred Federal (3.0) 5.6 (3.0) State (0.1) 0.1 (0.3) Foreign 4.7 (4.3) (13.3) ------ ------ ------ 1.6 1.4 (16.6) ------ ------ ------ Total $ 83.5 $ 77.7 $ 64.6 ====== ====== ======
Current foreign taxes listed above include taxes withheld by foreign governments on distributions from subsidiaries and affiliates (principally dividends and service fees). Current foreign taxes in 1994 also include $11 million of taxes on partnership formation. Nalco made income tax payments of $84 million, $77 million, and $92 million during 1996, 1995, and 1994, respectively. The effective income tax rate varies from the federal statutory rate because of the factors indicated below:
1996 1995 1994 - - -------------------------------------------------------------------------------- Statutory U.S. federal tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.9 2.6 4.9 Foreign taxes on formation and consolidation - - 8.2 Other (1.5) (1.2) (1.3) ---- ---- ---- Effective tax rate 36.4% 36.4% 46.8% ==== ==== ====
Details of the 1996 and 1995 deferred tax assets and liabilities are as follows:
(in millions) 1996 1995 - - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits $ 41.2 $ 40.8 Formation and consolidation expenses 3.9 9.0 Other 46.1 42.7 ------ ------ Total 91.2 92.5 ------ ------ Deferred tax liabilities: Depreciation 59.2 66.3 Leveraged lease investments 29.6 29.9 Other 29.0 26.1 ------ ------ Total 117.8 122.3 ------ ------ Net deferred tax liability $ 26.6 $ 29.8 ====== ====== Included in: Prepaid expenses, taxes, and other current assets $ (7.1) $ (9.0) Miscellaneous other assets (6.5) (8.8) Income taxes (2.7) (5.7) Deferred income taxes 42.9 53.3 ------ ------ $ 26.6 $ 29.8 ====== ======
NOTE 10--ACQUISITIONS On June 28, 1996, the Company completed the acquisition of DWT, a middle market water treatment business. The acquisition was accounted for as a purchase and, accordingly, the operating results of DWT subsequent to the date of acquisition are included in the Company's consolidated financial statements. In late December 1996, the Company completed the purchase of the water treatment services chemicals business of Albright & Wilson, which serves customers such as steel and electric utility companies throughout the United Kingdom. The purchase price of these two businesses was $83 million, net of cash acquired. The purchase price exceeded the fair value of the net tangible assets acquired by $75 million, which was allocated to goodwill and other intangible assets. The goodwill and other intangible assets are being amortized over periods ranging from 15 to 40 years. In October 1995, the Company purchased an additional 25 percent of the common shares of Nalco Chemical India, Ltd. (Nalco India) from ICI India, Ltd. for approximately $11 million. The purchase price exceeded the fair value of the net tangible assets acquired by $9 million. Nalco already owned 40 percent of the common shares of Nalco India and had been accounting for earnings on the equity basis. In November 1995, the Company purchased the pulp and paper chemical business of Texo Corporation for $14 million. The purchase price exceeded the fair value of the net tangible assets acquired by $13 million. The pro forma impact as if these acquisitions had occurred at the beginning of the respective years is not significant. -33- NOTE 11--INVESTMENT IN AND ADVANCES TO PARTNERSHIP The Company's investment in partnership consists of its 60 percent interest in Nalco/Exxon, a joint venture partnership which was formed on September 1, 1994. The Company's investment in Nalco/Exxon of $126 million at December 31, 1996 included $23 million in demand notes payable to Nalco/Exxon. There were no outstanding borrowings from the joint venture at December 31, 1995. All significant management decisions of the joint venture require agreement by both the Company and Exxon. In addition, certain provisions of the joint venture agreement provide Exxon with an option to cause Nalco/Exxon to redeem a portion of the Company's interest in Nalco/Exxon such that subsequent to such redemption, the Company and Exxon shall share equally in the results of the joint venture. As a result of the Company not exercising control over Nalco/Exxon, its investment in the joint venture is accounted for by the equity method. The following table summarizes the Company's equity in earnings of Nalco/Exxon and distributions from the partnership for the years 1996 and 1995 and its initial four months of operations in 1994:
(in millions) 1996 1995 1994 - - -------------------------------------------------------------------------------- Nalco/Exxon: Net sales $436.6 $420.8 $156.0 Earnings before income taxes 42.4 32.4 12.8 Net income 35.7 28.0 10.7 Nalco's equity interest 60% 60% 60% ------ ------ ------ Nalco's equity in net income 21.4 16.8 6.4 Amortization and income preference, net 3.1 0.1 0.5 ------ ------ ------ Equity in earnings of partnership $ 24.5 $ 16.9 $ 6.9 ====== ====== ====== Distributions received from partnership $ 8.4 $ 6.1 $ - ====== ====== ======
The Company's investment in Nalco/Exxon at December 31, 1996 included $5 million for the net excess of the Company's investment over its equity in the joint venture's net assets which is being amortized to equity earnings over the life of the related assets. In addition, the Company received a 6 percent, 8 percent, and 10 percent earnings preference in 1996, 1995, and 1994, respectively, which has been included in equity earnings. Condensed balance sheet information for the Nalco/Exxon joint venture at December 31, 1996 and 1995 was as follows:
(in millions) 1996 1995 - - -------------------------------------------------------------------------------- Current assets $159.6 $198.9 Noncurrent assets 171.9 124.8 Current liabilities 72.5 97.9 Noncurrent liabilities 38.1 31.0 - - --------------------------------------------------------------------------------
The Company entered into a four year agreement with Nalco/Exxon on September 1, 1994 to provide certain administrative services to the partnership. Fees earned by the Company in 1996, 1995, and 1994 were $15 million, $16 million, and $5 million, respectively. In the normal course of business, the Company supplies Nalco/Exxon with certain products, and purchases certain products from Nalco/Exxon. These transactions are generally at cost and were not significant in 1996, 1995, or 1994. NOTE 12--FINANCE SUBSIDIARIES Nalco has four finance subsidiaries, one wholly-owned and three 80%-owned, which were established to increase the return on financial assets. These subsidiaries are the lessor of a diversified portfolio of leveraged leases involving creditworthy lessees. Amounts related to the finance subsidiaries which are included in the Statements of Consolidated Financial Condition and Earnings are as follows:
(in millions) 1996 1995 1994 - - -------------------------------------------------------------------------------- At Year End Leveraged lease investments $ 33.8 $ 36.3 $ 44.1 Current liabilities 0.8 1.1 1.7 Deferred income taxes and other 29.6 29.9 34.8 ------ ----- ----- Net assets $ 3.4 $ 5.3 $ 7.6 ------ ------ ------ For the Year Net earnings $ 1.5 $ 2.3 $ 1.4 Dividends received by Nalco 0.2 0.3 0.3 - - --------------------------------------------------------------------------------
Investments in leased property represent future rentals and residuals, net of nonrecourse debt. The leased assets are financed primarily by nonrecourse loans which are secured by the lessees' rental obligations and the leased property, but ownership of the property is retained by the finance subsidiaries. Such loans amounted to approximately $51 million at December 31, 1996 and 1995. Income from leveraged lease transactions is reported on the financing method, which requires income recognition over the life of the lease at a level rate of return on the positive net investment. NOTE 13--PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment (including major improvements) are recorded at cost. Depreciation of buildings and equipment is calculated over their estimated useful lives generally using the straight-line method. The estimated useful lives of the major classes of depreciable assets are as follows: buildings 15 to 40 years; equipment 3 to 15 years. Property, plant, and equipment consists of the following:
(in millions) 1996 1995 - - -------------------------------------------------------------------------------- Land $ 38.6 $ 38.7 Buildings 205.6 202.0 Equipment 925.2 860.9 -------- -------- 1,169.4 1,101.6 Allowances for depreciation (647.4) (581.6) -------- -------- Net property, plant, and equipment $ 522.0 $ 520.0 ======== ========
-34- NOTE 14--SHORT-TERM DEBT Short-term debt consists of the following:
(in millions) 1996 1995 - - ------------------------------------------------------------------------------- Commercial paper borrowings $ 3.0 $45.0 Current maturities of long-term debt 6.4 28.2 Notes payable 21.9 21.8 ----- ----- $31.3 $95.0 ===== =====
The weighted average interest rate on short-term debt was 7.7 percent and 7.8 percent at December 31, 1996 and 1995, respectively. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco had a $260 million Revolving Credit Agreement (RCA) with ten banks. This agreement was structured as a five-year revolving credit. Borrowings under the agreement would have been at rates which, at Nalco's option, varied with the prime rate, CD rate, LIBOR, or money market rates. The credit line carried a facility fee of .10 percent. The credit arrangements were unused at December 31, 1996 and 1995. The $260 million RCA was replaced effective January 31, 1997 with a $350 million RCA with eleven banks. Terms of this new RCA are substantially similar to those of the previous RCA, with a facility fee of .08 percent. NOTE 15--LONG-TERM DEBT Long-term debt consists of the following:
(in millions) 1996 1995 - - ------------------------------------------------------------------------------- ESOP loans $162.6 $171.9 Other 96.4 77.8 ------ ------ 259.0 249.7 Less current portion (6.4) (28.2) ------ ------ Total $252.6 $221.5 ====== ======
In 1989, the ESOP borrowed $200 million to purchase preferred stock from the Company. Nalco borrowed $66 million which was subsequently loaned to the ESOP, and guaranteed the balance of $134 million. Borrowings related to the ESOP are reflected as long-term debt with a corresponding reduction of shareholders' equity (unearned ESOP compensation). The ESOP is repaying the loans and interest over a projected 20-year period ending December 31, 2008 using Company contributions and dividends from preferred stock. As the principal amount of the borrowings is repaid, the debt and the unearned ESOP compensation are being reduced. $88 million of borrowings are variable rate notes which are presently remarketed on a monthly basis with a final maturity on December 31, 2008. Any notes which cannot be successfully remarketed will be purchased by the Company or one of its subsidiaries. The Company entered into an interest rate swap agreement which effectively converted the $88 million of variable rate notes into fixed-rate debt of 7.3 percent. The notional value of the swap agreement decreased to $59 million in 1996, and will decrease to $51 million and $43 million in 1997 and 1998, respectively, with final maturity in 1999. The remaining borrowings are comprised of a $38 million variable rate loan which matures in 2008 and a $37 million loan with a fixed rate of 8.1 percent and a final maturity in the year 2000. The $96 million in other long-term debt includes $50 million of commercial paper borrowings in the United States and $41 million owed by a foreign subsidiary at a variable interest rate. The balance was borrowed by various foreign subsidiaries. Interest paid by Nalco was $14 million, $15 million, and $20 million in 1996, 1995, and 1994, respectively. The following table presents the projected annual maturities of long-term debt for the next five years after 1996:
(in millions) - - ---------------------- 1997 $ 6.4 1998 12.0 1999 12.8 2000 10.2 2001 --
The amounts above include approximately $37 million in maturities related to the ESOP loans. NOTE 16--SHAREHOLDERS' EQUITY Information on preferred and common shares is summarized in the following table:
(dollars in millions, except per share amounts) 1996 1995 - - -------------------------------------------------------------------------------- Preferred stock, par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock--outstanding; 392,851 shares--1996 and 399,423 shares--1995 $ 0.4 $ 0.4 Series A Junior Participating Preferred Stock--none issued at December 31, 1995 Series C Junior Participating Preferred Stock--none issued at December 31, 1996 Common stock, par value $.1875 per share; authorized 200,000,000 shares; issued 80,287,568 shares 15.1 15.1 - - --------------------------------------------------------------------------------
There were 13,263,648 shares and 13,163,155 shares held in treasury at December 31, 1996 and 1995, respectively. -35- In 1994, Nalco's Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company's common stock. During 1996, the repurchase of those shares was completed and the Board of Directors authorized the repurchase of an additional 3,000,000 shares. The Company issued 415,800 shares of preferred stock to the ESOP in 1989 for $481.00 per share, the preference price upon liquidation. This preferred stock ranks senior to Series C Junior Participating Preferred Stock and common stock as to the payment of dividends and the distribution of assets on liquidation, dissolution and winding up of Nalco. Dividends on each share of preferred stock are cumulative and will be paid quarterly at the rate of 8 percent or $38.48 per annum. Full conversion of preferred shares occurs upon a holder's retirement or separation of service from the Company, and effective in 1999 participants in the ESOP may partially convert their stock upon reaching age 55. The conversion ratio and number of votes per share of preferred stock are subject to adjustment under certain conditions. The preferred stock entitles a participant to 20 votes per share, voting together with the holders of common stock and initially was convertible into 20 shares of common stock. The shares of preferred stock are redeemable by Nalco at $485.81 per share, declining to $481.00 per share on or after May 15, 1997. Also, the shares of preferred stock may be required to be redeemed by Nalco under certain circumstances. During 1996, 6,572 preferred shares were converted to 132,179 common shares of Nalco stock. During 1995 and 1994, 4,801 and 3,582 preferred shares were converted to 96,212 and 72,212 common shares, respectively. Approximately 8,000,000 common shares have been reserved for the conversion of preferred stock. In 1996, the 1986 Preferred Share Purchase Rights expired and the Board of Directors declared a dividend distribution of one Preferred Share Purchase Right (Right) for each outstanding share of common stock. The Rights are not exercisable or transferable apart from the common stock until a person or group has acquired, or makes a tender offer for 15 percent or more of the common stock. If Nalco is acquired in a merger or other business combination transaction or 50 percent or more of Nalco's assets or earning power are sold, each Right other than that held by the acquiring party will entitle the holder to receive, upon exercise at a price of $125, subject to adjustment, common stock of either Nalco or the acquiring company having a value equal to two times that price. The Rights are redeemable at $.01 each at any time before a 15 percent or greater position has been acquired, and expire on August 31, 2006. In connection with the expiration of the 1986 Preferred Share Purchase Rights and the distribution of the 1996 Rights, the Company's Series A Junior Participating Preferred Stock was cancelled and its Series C Junior Participating Preferred Stock was authorized. NOTE 17--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Nalco has limited involvement with derivative financial instruments and does not trade them. The Company does use derivatives to fix the cost of issuing debt and to manage well defined interest rate and foreign exchange exposures. Notional Amounts and Credit Exposures of Derivatives The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate primarily to interest rates and foreign exchange rates. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. Interest Rate Risk Management Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating rate long-term debt. As of December 31, 1996 the Company was a counterparty to one interest rate swap with a notional value of $59 million at December 31, 1996 and $78 million at December 31, 1995. This swap fixes interest payments on a corresponding amount of floating rate ESOP notes at 7.3 percent until February 1999. The notional amount decreases to $51 million and $43 million in 1997 and 1998, respectively. The average interest rate received on this interest rate swap was 4.5 percent and 4.9 percent in 1996 and 1995, respectively. At December 31, 1995, the Company was a counterparty to five additional interest rate swaps. Three interest rate swaps entered into in 1991 were designed to fix interest rate payments at 8.5 percent on $160 million of floating rate debt used to acquire affiliated companies in that year. In 1993, with cash from the sale of other subsidiaries, Nalco elected to repay the $160 million of debt, and therefore entered into two interest rate swaps with an aggregate notional value of $160 million which offset the three 1991 interest rate swaps. Nalco received 4.6 percent on these two swaps in exchange for paying a floating rate of interest equal to the floating rate received on the 1991 swaps. All five of these agreements matured in March 1996. The average interest rate received on the 1991 interest rate swaps and the average rate paid on the 1993 interest rate swaps was 5.4 percent in 1996 and 6.0 percent in 1995. Foreign Exchange Risk Management The Company enters into various types of foreign exchange contracts in managing its intercompany foreign exchange risk, including currency swaps and forward exchange contracts. -36- The Company's currency swap agreements were designed to hedge foreign currency intercompany loans that have maturities up to nine years. Gains and losses related to these swaps are offset with gains and losses on the underlying foreign currency loans. Forward exchange contracts are used to hedge various intercompany transactions with foreign subsidiaries and usually have maturities of six months, but occasionally may mature in one year. The Company had foreign exchange contracts with a notional value of $69 million and $115 million at December 31, 1996 and 1995, respectively. Deferred realized and unrealized gains and losses from firm foreign currency commitments, based on dealer-quoted prices, are included in the Statements of Consolidated Financial Condition as either miscellaneous other assets or accounts payable. They are recognized in earnings as part of the underlying transaction when it is recognized. There was no net deferred realized and unrealized gain or loss at December 31, 1996 or December 31, 1995. NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 1996 and 1995:
1996 1995 ----------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - - ------------------------------------------------------------------- Nonderivatives: Cash and cash equivalents $ 38.8 $ 38.8 $ 38.1 $ 38.1 Short-term debt 31.3 31.3 95.0 95.0 Long-term debt 252.6 253.8 221.5 224.4 Derivatives: Miscellaneous other assets 1.6 - 3.3 3.3 Other liabilities - 2.7 3.1 7.7 - - --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair values of financial instruments: Cash and cash equivalents - The carrying amount approximates fair value because of the short-term maturities of such instruments. Short-term debt - The carrying amount approximates fair value because of the short-term maturities of such instruments. Long-term debt - The carrying amount of term borrowings at variable interest rates approximates fair value. The fair value of the Company's fixed-rate ESOP borrowings was estimated using discounted cash flow analyses, based on the Company's current borrowing rates for similar types of borrowing arrangements. Derivatives - The fair value of derivatives, including currency swaps, foreign currency forward exchange contracts, and interest rate swaps was estimated based on current settlement prices, quoted market prices of comparable contracts, and pricing models or formulas using current assumptions. NOTE 19--CONTINGENCIES AND LITIGATION Nalco has been named as a potentially responsible party (PRP) by the Environmental Protection Agency (EPA) or state enforcement agencies at 14 waste sites where some financial contribution is or may be required. These agencies have also identified many other parties who may be responsible for clean-up costs at the waste disposal sites. Nalco's financial contribution to remediate these sites is expected to be minor. There has been no significant financial impact on Nalco up to the present, nor is it anticipated that there will be in the future, as a result of these matters. Nalco has and will continue to make provisions for these costs if the Company's liability becomes probable and when costs can be reasonably estimated. As of December 31, 1996, the Company had undiscounted reserves of approximately $1 million for the maximum amount of known environmental clean-up costs. The Company's 1996 expenditures relating to environmental compliance and clean-up activities were not significant. These environmental reserves represent management's current estimate of its proportional clean-up costs and are based upon negotiation and agreement with enforcement agencies, its previous experience with respect to clean-up activities, a detailed review by the Company of known conditions, and information about other PRPs. They are not reduced by any possible recoveries from insurance companies or other PRPs not specifically identified. Although management cannot determine whether or not a material effect on future operations is reasonably likely to occur, given the evolving nature of environmental regulations, it believes that the recorded reserve levels are appropriate estimates of the potential liability. Although settlement will require future cash outlays, it is not expected that such outlays will materially impact the Company's liquidity position. It is the Company's policy to accrue for estimated post-closure and site remediation costs when the decision has been made by management to close a facility. In the ordinary course of its business, Nalco is also a party to a number of lawsuits and is subject to various claims, the outcome of which, in the opinion of management, should not have a material effect on the consolidated financial position of Nalco. -37-
- - ------------------------------------------------------------------------------------------------------------------------------- Eleven Year Summary (dollar amounts in millions, except per share figures) 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------- Net Sales $1,303.5 $1,214.5 $1,246.8 Operating costs and expenses Cost of products sold 568.6 531.3 543.7 Selling and service 433.4 399.5 405.3 Research and development 41.9 39.8 45.7 Administrative and general 42.9 38.4 47.8 Formation and consolidation - - 68.2 - - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Costs and Expenses 1,086.8 1,009.0 1,110.7 - - ------------------------------------------------------------------------------------------------------------------------------- Operating Earnings 216.7 205.5 136.1 Interest and other income 2.6 7.2 16.6 Interest expense (14.4) (16.2) (21.8) Equity in earnings of partnership 24.5 16.9 6.9 - - ------------------------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations Before Income Taxes 229.4 213.4 137.8 Income taxes 83.5 77.7 64.6 - - ------------------------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations 145.9 135.7 73.2 Earnings from discontinued operations 8.6 18.0 23.9 - - ------------------------------------------------------------------------------------------------------------------------------- Earnings before Extraordinary Loss and Effect of Accounting Change 154.5 153.7 97.1 Extraordinary loss from retirement of debt, net of taxes - - - Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes - - - - - ------------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 154.5 $ 153.7 $ 97.1 =============================================================================================================================== Per Share of Common Stock Earnings from continuing operations--fully diluted $ 1.86 $ 1.71 $ .88 Discontinued operations .11 .24 .31 Extraordinary item - - - Accounting change - - - Net earnings 1.97 1.95 1.19 Cash dividends paid 1.00 .99 .945 - - ------------------------------------------------------------------------------------------------------------------------------- Financial Ratios Earnings as a percent to sales* 11.2% 11.2% 5.9% Earnings as a percent to shareholders' equity* 23.5 24.1 13.2 Effective income tax rate* 36.4 36.4 46.8 Common stock dividends paid as a percent to earnings* 46.1 49.2 88.4 Research and development expenses as a percent to sales* 3.2 3.3 3.7 Current ratio 1.3 to 1 1.0 to 1 1.3 to 1 - - ------------------------------------------------------------------------------------------------------------------------------- Financial Position Data Working capital $ 95.5 $ 14.2 $ 87.8 Total assets 1,394.5 1,360.5 1,269.2 Property, plant, and equipment (cost) 1,169.4 1,101.6 1,067.1 Long-term debt 252.6 221.5 245.3 Deferred income taxes 42.9 53.3 56.8 Shareholders' equity 654.5 580.3 544.2 - - ------------------------------------------------------------------------------------------------------------------------------- Other Data Working capital provided from operations $ 237.2 $ 219.2 $ 250.1 Capital investments 92.5 126.7 125.6 Depreciation and amortization* 94.9 84.8 84.8 Dividends on common stock 67.3 66.9 64.7 Cost of common stock repurchased 26.3 42.4 61.3 Wages, salaries, commissions, and benefits 427.9 387.4 411.1 Common shares outstanding at year end (thousands) 67,024 67,124 67,900 Market price per share of common stock at year end $ 36.125 $ 30.125 $ 33.50 Number of common shareholders of record 5,349 5,669 6,005 Number of employees at year end 6,502 6,081 5,935 - - -------------------------------------------------------------------------------------------------------------------------------
NOTE: Shares outstanding and per share amounts have been restated to reflect the two-for-one stock split in 1991. NOTE: Certain assets have been reclassified for the years 1992 to 1995 to conform to the current year presentation. * Based on earnings from continuing operations before extraordinary loss and effect of accounting change. -38-
- - --------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 1988 1987 1986 - - --------------------------------------------------------------------------------------- $1,291.6 $1,286.9 $1,164.4 $1,013.1 $ 899.1 $ 843.0 $ 738.3 $ 658.5 555.0 557.4 513.1 449.8 406.2 388.4 341.7 298.3 410.2 397.7 357.2 291.7 252.9 236.5 204.9 185.8 49.7 47.5 45.7 40.2 35.5 32.3 30.7 29.2 52.9 53.3 47.0 50.2 47.2 50.0 38.9 41.4 - - - - - - - - - - --------------------------------------------------------------------------------------- 1,067.8 1,055.9 963.0 831.9 741.8 707.2 616.2 554.7 - - --------------------------------------------------------------------------------------- 223.8 231.0 201.4 181.2 157.3 135.8 122.1 103.8 14.4 18.3 18.9 19.9 27.0 20.6 14.9 12.6 (27.5) (40.3) (27.1) (11.5) (9.7) (9.5) (8.2) (6.0) -- -- -- -- -- -- -- -- --------------------------------------------------------------------------------------- 210.7 209.0 193.2 189.6 174.6 146.9 128.8 110.4 81.9 81.8 74.2 72.9 66.3 53.1 51.9 48.1 - - --------------------------------------------------------------------------------------- 128.8 127.2 119.0 116.7 108.3 93.8 76.9 62.3 23.9 17.8 18.8 14.4 11.6 12.2 3.4 1.4 - - --------------------------------------------------------------------------------------- 152.7 145.0 137.8 131.1 119.9 106.0 80.3 63.7 (10.6) -- -- -- -- -- -- -- (56.5) -- -- -- -- -- -- -- - - --------------------------------------------------------------------------------------- $ 85.6 $ 145.0 $ 137.8 $ 131.1 $ 119.9 $ 106.0 $ 80.3 .$ 63.7 ======================================================================================= $ 1.57 $ 1.57 $ 1.47 $ 1.42 $ 1.32 $ 1.20 $ .97 $ .79 .31 .22 .24 .18 .14 .15 .04 .02 (.14) -- -- -- -- -- -- -- (.72) -- -- -- -- -- -- -- 1.02 1.79 1.71 1.60 1.46 1.35 1.01 .81 .885 .84 .83 .755 .68 .645 .60 .60 - - --------------------------------------------------------------------------------------- 10.0% 9.9% 10.2% 11.5% 12.0% 11.1% 10.4% 9.5% 24.2 22.6 24.4 26.6 23.5 20.1 17.9 15.7 38.9 39.1 38.4 38.4 38.0 36.1 40.3 43.6 47.4 46.2 48.6 45.3 47.1 53.8 61.4 75.6 3.8 3.7 3.9 4.0 3.9 3.8 4.2 4.4 2.0 to 1 2.5 to 1 2.0 to 1 2.3 to 1 2.3 to 1 2.1 to 1 1.8 to 1 1.7 to 1 - - --------------------------------------------------------------------------------------- $ 185.4 $ 314.3 $ 256.3 $ 229.7 $ 218.5 $ 174.4 $ 121.8 $ 86.7 1,202.3 1,338.2 1,324.4 1,037.0 938.5 838.9 781.8 621.9 1,129.9 1,044.2 957.8 840.3 720.1 648.7 607.5 547.6 252.1 413.8 394.1 282.2 214.0 100.8 72.8 38.4 58.1 107.3 90.8 77.8 62.7 53.7 47.3 42.3 550.6 576.3 528.7 455.6 443.7 477.5 446.8 407.5 - - --------------------------------------------------------------------------------------- $ 245.6 $ 226.7 $ 218.5 $ 192.4 $ 159.1 $ 148.4 $ 132.9 $ 113.2 117.8 131.0 136.8 114.9 86.4 61.6 57.2 63.6 82.2 75.4 62.1 45.5 37.8 40.4 38.5 37.8 61.1 58.8 57.8 52.9 51.0 50.5 47.2 47.1 58.5 14.3 -- 80.5 111.7 21.5 11.6 -- 413.6 403.7 376.6 326.0 282.5 263.8 231.3 203.7 68,905 70,021 69,828 69,292 72,199 77,129 78,298 78,542 $37.50 $ 34.625 $ 41.625 $ 28.25 $ 24.75 $17.625 $16.625 $ 13.75 6,111 6,129 5,543 5,099 5,224 5,477 5,668 5,821 6,802 6,714 6,832 5,862 5,489 5,381 5,085 4,868 - - ---------------------------------------------------------------------------------------
-39- Quarterly Summary (Unaudited)
1996 1995 ---------------------------------- ---------------------------------- (dollar amounts in millions, First Second Third Fourth First Second Third Fourth except per share figures) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - - ------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Sales $301.9 $318.6 $343.3 $339.7 $292.5 $302.3 $310.0 $309.7 Gross earnings 166.9 179.0 196.3 192.7 164.0 170.2 174.1 174.9 Earnings from continuing operations 30.0 34.5 41.0 40.4 32.9 32.4 35.5 34.9 Discontinued operations 1.8 2.5 1.5 2.8 4.9 4.7 5.0 3.4 Net earnings 31.8 37.0 42.5 43.2 37.8 37.1 40.5 38.3 Per common share Earnings-fully diluted Continuing operations .38 .44 .52 .52 .41 .41 .45 .45 Discontinued operations .02 .03 .02 .03 .07 .06 .07 .04 Net earnings .40 .47 .54 .55 .48 .47 .52 .49 Dividends .25 .25 .25 .25 .24 .25 .25 .25 Market price High 33 1/4 32 7/8 36 1/4 39 35 5/8 38 1/8 38 5/8 34 3/8 Low 28 1/8 29 1/8 28 1/2 34 1/2 33 32 7/8 32 5/8 28 1/8 - - -----------------------------------------------------------------------------------------------------------------
-40- CORPORATE OFFICERS E. J. Mooney (55) Chairman and CEO 28 years of service Milford B. Harp (59) Executive Vice President, Operations 33 years of service W. Steven Weeber (54) Executive Vice President, Operations Staff 30 years of service Peter Dabringhausen (58) Group Vice President, President Process Chemicals Division 27 years of service George M. Brannon (45) Group Vice President, President Nalco Pacific 21 years of service Stephen D. Newlin (44) Group Vice President, President Nalco Europe 21 years of service Gilberto Pinzon (56) Group Vice President, President Nalco Latin America 27 years of service J. David Tinsley (56) Group Vice President, President Water and Waste Treatment Division 31 years of service Ronald J. Allain (56) Senior Vice President, Research and Development 26 years of service David R. Bertran (53) Senior Vice President, Manufacturing and Logistics 13 years of service William E. Buchholz (54) Senior Vice President, Chief Financial Officer 4 years of service James F. Lambe (51) Senior Vice President, Human Resources 28 years of service John D. Berthoud (53) Vice President, Marketing and Quality Management 26 years of service William E. Parry (46) Vice President General Counsel 2 years of service Anthony J. Sadowski (58) Vice President, Environmental Health and Safety 30 years of service Dale W. Walker (60) Vice President, Corporate Sales 37 years of service Robert L. Ratliff (48) Controller 21 years of service William G. Marshall (50) Treasurer 16 years of service Suzzanne J. Gioimo (53) Secretary 27 years of service Craig J. Holderness (44) Assistant Treasurer 19 years of service Elizabeth R. Ewing (37) Assistant Treasurer 1 year of service (As of March 1, 1997) -42- EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the statement of consolidated financial condition at December 31, 1996 and the statement of consolidated earnings for the year ended December 31, 1996 of NALCO Chemical Company and Subsidiaries and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 38,800,000 0 238,300,000 (4,900,000) 90,800,000 385,200,000 1,169,400,000 (647,400,000) 1,394,500,000 289,700,000 252,600,000 15,100,000 0 400,000 639,000,000 1,394,500,000 1,303,500,000 1,303,500,000 568,600,000 568,600,000 0 0 14,400,000 229,400,000 83,500,000 145,900,000 8,600,000 0 0 154,500,000 2.12 1.97
EX-99.C 4 FORM 11-K NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN --------------------- FINANCIAL STATEMENTS AND SCHEDULES ------------- DECEMBER 31, 1996 and 1995 -------------------------- EXHIBIT 99C SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) {X} Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the Fiscal year ended December 31, 1996 OR {_} Transition report pursuant to section 15(d) of the Securities Exchange Act of 1934 For the Transition period from __________to__________ Commission file number 1-4957 PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN OF NALCO CHEMICAL COMPANY NALCO CHEMICAL COMPANY One Nalco Center Naperville, Illinois 60563-1198 (Issuer and address of principal executive offices) NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ FINANCIAL STATEMENTS AND SCHEDULES ------------- INDEX -----
Page ---- Report of Independent Accountants 1 Statements of Net Assets Available for Plan Benefits 2 Statements of Changes in Net Assets Available for Plan Benefits 3 Notes to Financial Statements 4-12 Supplementary Schedules: Assets Held for Investment Schedule I Reportable Transactions Schedule II
Note: All other schedules have been omitted because they are not applicable. Report of Independent Accountants --------------------------------- March 17, 1997 To the Employee Benefit Plan Administration Committee of Nalco Chemical Company In our opinion, the accompanying statements of net assets available for plan benefits and the related statements of changes in net assets available for plan benefits present fairly, in all material respects, the net assets available for benefits of the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan at December 31, 1996 and 1995, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the plan'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 supporting 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. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the supplementary schedules is presented for purposes of additional analysis and is not a required part of the basic financial statements but is additional information required by ERISA. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. [Signature of Price Waterhouse LLP] NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS ---------------------------------------------------- AS OF DECEMBER 31, 1996 and 1995 --------------------------------
1996 1995 ---- ---- Investments, at fair value: Nalco Chemical Company common stock $103,167,292 $100,518,780 Mutual funds 80,842,233 60,607,197 Group annuity contract deposits 54,277,887 54,727,955 Bank commingled investment funds 25,382,090 12,549,164 Collective short-term investment funds 15,966,425 22,810,487 ------------ ------------ 279,635,927 251,213,583 Loans receivable from participants 5,272,538 5,369,879 Accrued income receivable 197,768 1,949,817 ------------ ------------ Net assets available for plan benefits $285,106,233 $258,533,279 ============ ============
The accompanying notes are an integral part of these financial statements. -2- NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS --------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995 ----------------------------------------------
1996 1995 ---- ---- Sources of net assets: Contributions by employees $ 12,995,367 $ 11,807,207 Dividend income 4,255,329 5,909,331 Interest Income 4,739,023 6,333,726 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 941,886 265,060 Net realized/unrealized appreciation of investments 31,980,537 2,867,189 ------------ ------------ Total sources of net assets 54,912,142 27,182,513 Applications of net assets: Account expenses (68,265) (69,477) Withdrawals by participants (28,270,923) (42,691,647) ------------ ------------ Increase (decrease) in net assets available for plan benefits 26,572,954 (15,578,611) Net assets available for plan benefits at beginning of period 258,533,279 274,111,890 Net assets available for plan benefits at end of period $285,106,233 $258,533,279 ============ ============
The accompanying notes are an integral part of these financial statements -3- NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 1996 and 1995 -------------------------- NOTE 1 - DESCRIPTION OF THE PLAN: - - -------------------------------- The Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan (the Plan) is a voluntary contribution, individual account plan, which covers substantially all Nalco Chemical Company (the Company) employees. No service requirement exists before an employee is eligible to participate in the Plan. Pursuant to section 6 of the Plan document, profit sharing contributions are at the discretion of the Company. The Company has not contributed to the Plan since January 1, 1990. The Plan also accepts transfers of Company common stock and cash from the Employee Stock Ownership Plan for retirees. Beginning in 1993, the Plan expanded to include seven investment alternatives: the Nalco Stock Fund, the U.S. Government Money Market Fund, the Stable Capital Fund, the Bond Index Fund, the Balanced Fund, the Growth and Income Fund, and the Equity Index Fund. In 1995, an international equity fund was added, the EuroPacific Fund. A participant who has attained the age of 50 can transfer once per calendar year a minimum of 10% of his balance from the Nalco Stock Fund to any of the other funds in the Plan. The maximum allowable transfer is determined by the Employee Benefit Plan Administration Committee (EBPAC). Participants electing to make tax-deferred contributions through cash or salary deductions have the option of investing these contributions in a combination of any of the funds. Participants can transfer assets acquired with their individual funds at their discretion. A participant can also make contributions which are not tax-deferred through payroll deductions or a lump-sum investment. All participant contributions vest immediately, and participants are entitled to their entire account balance upon retirement, termination, disability, or death as a lump-sum payment (or in semi- annual stock installments for shares in the Nalco Stock Fund). Effective June 1, 1993, participants are allowed to borrow from the Plan, provided the amount does not exceed the lesser of one-half the vested Plan balance of the participant, or $50,000. The length of the loan is decided by the employee, subject to certain governmental restrictions, and the interest charged is determined by EBPAC and communicated to the participants in writing. At December 31, 1996, employees participating in the Plan had invested in the available funds as follows (some have investments in more than one fund):
1996 1995 ----- ----- Total employees participating 3,204 3,314 Nalco Stock Fund 2,556 2,805 U.S. Government Money Market Fund 223 208 Stable Capital Fund 1,652 1,903 Bond Index Fund 356 306 Balanced Fund 1,011 801 Growth and Income Fund 2,129 3,209 Equity Index Fund 1,415 962 EuroPacific Fund 788 423
-4- The Company believes that the Plan will continue without interruption, but reserves the right to terminate the Plan at any time. In the event of termination of the Plan, the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan Trust (the Trust) will continue until all of the funds held by The Northern Trust Company (the Trustee) have been distributed to the participants or their beneficiaries. Such distribution will be made in accordance with the provisions of the Plan document in effect on the date of its termination. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: - - ---------------------------------------- Basis of Accounting The financial statements of the Plan are prepared on the accrual basis of accounting, except for benefit payments to former participants which are recorded when paid as noted below. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates. Withdrawals by Participants Withdrawals by participants includes benefit payments, transfers out of the plan, and net loan activity. Valuation of Investments All investments, except for group annuity contract deposits, are valued by the Trustee based on the closing market value on the last business day of the plan year. The group annuity contract deposits are stated at estimated fair value, which represents contributions made under the contracts at original cost plus interest at the contract rate. The insurance companies are contractually liable for the contract value provided the investment remains with the insurance company. Amounts Due Participants: In accordance with ERISA requirements for reporting by employee benefit plans, benefit payments to former participants are recorded when paid. Accordingly, at December 31, 1996 and December 31, 1995, the following amounts have been allocated to the individual accounts of former participants, but not recorded as liabilities on the Statements of Net Assets Available for Plan benefits or withdrawals by participants in the Statements of Changes in Net Assets Available for Plan Benefits:
1996 1995 ---- ---- Nalco Stock Fund $ 7,579,954 $ 8,208,607 U.S. Government Money Market Fund 174,865 122,832 Stable Capital Fund 28,827,318 32,572,418 Bond Index Fund 1,135,151 1,217,764 Balanced Fund 3,452,008 2,503,391 Growth and Income Fund 12,802,784 10,183,784 Equity Index Fund 4,158,228 2,080,864 EuroPacific Fund 2,036,652 758,694 ----------- ----------- $60,166,960 $57,648,354 =========== ===========
-5- The preceeding accounting treatment results in a difference between these financial statements and the Form 5500 as these amounts have been recorded as liabilities as of December 31, 1996 and 1995, and have been included in the benefits paid for the respective years on the form 5500. NOTE 3 - INVESTMENTS: - - -------------------- The cost of investments and number of shares or units held at December 31, 1996 and 1995 were as follows:
1996 1995 -------------------------------------------------------- Shares or Units Cost Shares or Units Cost -------------------------------------------------------- Nalco Chemical Company common stock 2,855,842 $ 40,377,018 3,336,723 $ 45,355,634 American Balanced Fund 897,776 12,221,073 601,822 7,809,304 American EuroPacific Fund 393,984 9,438,990 139,496 3,073,456 Dreyfus Government Money Market Instruments 1,913,427 1,913,427 1,120,759 1,120,759 Fidelity Investments: Hartford Annuity Contract deposit 2,493,039 2,493,039 2,443,354 2,443,354 Life of Georgia Contract deposit 5,935,391 5,935,391 5,610,737 5,610,737 Pacific Mutual Contract deposit 2,952,635 2,952,635 5,536,568 5,536,568 Provident Contract deposit 3,506,039 3,506,039 6,150,722 6,150,722 Sun Life America Contract deposit 2,056,298 2,056,298 5,519,295 5,519,295 Allamerica Group Annuity Contract deposit 4,185,459 4,185,459 3,873,151 3,873,151 Ohio National Group Annuity Contract deposit 2,792,475 2,792,475 5,229,712 5,229,712 Protective Life Group Annuity Contract deposit 2,732,537 2,732,537 5,162,583 5,162,583 John Hancock Mutual Life Insurance Company Group Annuity Contract deposit 2,729,307 2,729,307 5,160,833 5,160,833 J. P. Morgan Group Annuity Contract deposit 10,000,000 10,000,000 10,041,000 10,041,000 New York Life Group Annuity Contract deposit 5,233,580 5,233,580 ---- ---- New York Life Group Annuity Contract deposit 1,538,896 1,538,896 ---- ---- Principal Mutual Group Annuity Contract deposit 5,244,967 5,244,967 ---- ---- Transamerica Group Annuity Contract deposit 2,877,266 2,877,266 ---- ---- Neuberger & Berman Guardian Fund 2,169,599 44,705,133 2,073,127 40,241,819 Barclays Equity Index Fund 1,147,067 17,686,050 626,968 7,917,347 Barclays Government/Corporate Bond Index Fund 236,123 2,629,958 212,773 2,278,191 The Northern Trust Company Collective Short-Term Investment Fund 15,966,425 15,966,425 22,810,487 22,810,487 ------------ ------------ Total $199,215,963 $185,334,952 ============ ============
-6- Individual investments that represent 5% or more of the fair value of net assets available for plan benefits at December 31, 1996 are as follows:
Shares or Units Cost Fair Value ------------------------------------------ Barclays Equity Index Fund 1,147,067 $17,686,050 $ 22,482,506 Nalco Chemical Company common stock 2,855,842 40,377,018 100,167,292 Neuberger & Berman Commingled Guardian Fund 2,169,599 44,705,133 55,606,827 The Northern Trust Company Collective Short-Term Investment Fund 15,966,425 15,966,425 15,966,425
NOTE 4 - TRANSACTIONS WITH RELATED PARTY: - - ---------------------------------------- Certain expenses pertaining to the operation of the Plan are paid by the Company and are not charged against the assets or income of the Plan. In addition, various administrative, legal, and accounting services are performed by Company personnel on behalf of the Plan. No charges are made to the Plan for these services. NOTE 5 - INCOME TAX STATUS: - - -------------------------- The Internal Revenue Service issued a letter of determination dated July 17, 1995 stating the Plan is qualified under section 401(a) of the Internal Revenue Code (the Code) and is, therefore, exempt from federal income taxation under section 501(a) of the Code. Participants are not subject to federal income tax until amounts are distributed to them. -7- NOTE 6 - GROUP ANNUITY CONTRACTS: - - -------------------------------- The fair value of group annuity contract deposits at December 31, 1996 and 1995 was comprised of the following:
December 31, 1996 1995 ---- ---- John Hancock Mutual Life Insurance Company contract deposit, GAC7892, due 12/1/97 (5.77% in 1996 and 1995) $2,729,307 $ 5,160,833 Fidelity Management Trust Company: ---- ---- Hartford contract deposit, GA10156, due 12/21/98 (4.87% in 1996 and 1995) 2,493,039 2,443,354 Life of Georgia contract deposit, FR101, open (6.15% in 1996 and 1995) 5,935,391 5,610,737 Pacific contract deposit, G2608041, due 6/1/98 (6.65% in 1996 and 1995) 2,952,635 5,536,568 Provident contract deposits, #627-0569201A, due 6/1/97 (6.21% in 1996 and 1995); #627-05692-02A, due 6/1/98 (7.00% in 1995) 3,506,039 6,150,722 Sun Life America contract deposits, #4656, due 7/25/98 (6.58% in 1996); FA464, due 12/1/95 (4.45% in 1995) 2,056,298 5,519,295 Allamerica contract deposit, GA91636A, due 11/30/97 (8.05% in 1996 and 1995) 4,185,459 3,873,151 Ohio National contract deposit, #5708, due 12/1/97 (6.75% in 1996 and 1995) 2,792,475 5,229,712 Protective Life contract deposit, GA1191, due 6/1/97 (5.85% in 1996 and 1995) 2,732,537 5,162,583 J. P. Morgan contract deposit, NALCO-01, due 6/1/2000 (6.08% in 1996 and 1995) 10,000,000 10,041,000 New York Life contract deposit, #30481, due 6/30/99 (6.11% in 1996) 5,233,580 ---- New York Life contract deposit, #30481-002, due 7/12/97 (5.90% in 1996) 1,538,896 ---- Principal Mutual contract deposit, #4-23183, due 12/31/2000 (6.41% in 1996) 5,244,967 ---- Transamerica contract deposit, S1393-00, 50% due 6/30/97 and 50% due 1/30/98 (6.13% in 1996) 2,877,262 ---- ----------- ----------- $54,277,887 $54,727,955 =========== ===========
Average yields for the above contracts are not calculated as the rates are guaranteed. No valuation reserve was established in 1996 or 1995 as the companies listed all maintain at least an A+ credit rating. -8- NOTE 7 - STATEMENTS OF NET ASSETS: The statements of net assets available for plan benefits by fund as of December 31, 1996 and 1995 are as follows: NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ----------------------------------------------------------- AS OF DECEMBER 31, 1996 -----------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Growth & Fund Fund Fund Fund Fund Income Fund ---- ---- ---- ---- ---- ----------- Investments, at fair value: Nalco Chemical Company common stock $103,153,745 Mutual funds $1,913,427 $13,062,639 $55,606,827 Group annuity contract deposits $54,277,887 Bank commingled mutual funds $2,899,584 Collective short-term investment fund 923,478 14,643,455 ------------ ---------- ----------- ---------- ----------- ------------ 104,077,223 1,913,427 68,921,342 2,899,584 13,062,639 55,606,827 Loans receivable from participants Accrued income receivable 8,061 7,011 181,661 ------------ ---------- ----------- ---------- ----------- ------------ Net assets available for plan benefits $104,085,284 $1,920,438 $69,103,003 $2,899,584 $13,062,639 $55,606,827 ============ ========== =========== ========== =========== ===========
Equity Index EuroPacific Clearing Fund Fund Loan Account Account Total ---- ---- ------------ ------- ----- Nalco Chemical Company common stock $13,547 $103,167,292 Mutual funds $ 10,259,340 80,842,233 Group annuity contract 54,277,887 deposits Bank commingled mutual $22,482,506 25,382,090 funds Collective short-term investment fund 399,492 15,966,425 ----------- ----------- ---------- -------- ------------ $22,482,506 $10,259,340 $413,039 $279,635,927 Loans receivable from participants $5,272,538 5,272,538 Accrued income receivable 1,035 197,768 ----------- ----------- ---------- -------- ------------ Net assets available for plan benefits $22,482,506 $10,259,340 $5,272,538 $414,074 $285,106,233 =========== =========== ========== ======== ============
-9- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ----------------------------------------------------------- AS OF DECEMBER 31, 1995 -----------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Growth & Equity Index Fund Fund Fund Fund Fund Income Fund Fund ---- ---- ---- ---- ---- ----------- ---- Investments, at fair value: Nalco Chemical Company common stock $100,495,795 Mutual funds $1,120,759 $8,515,778 $47,744,107 Group annuity contract deposits $54,727,955 Bank commingled mutual funds $2,549,022 $10,000,142 Collective short-term investment fund 538,239 22,199,352 1 ------------ ---------- ----------- ---------- ---------- ----------- ----------- 101,034,034 1,120,759 76,927,307 2,549,023 8,515,778 47,744,107 10,000,142 Loans receivable from participants Accrued income receivable 6,007 4,560 92,824 1,844,016 ------------ ---------- ----------- ---------- ---------- ----------- ----------- Net assets available for plan benefits $101,040,041 $1,125,319 $77,020,131 $2,549,023 $8,515,778 $49,588,123 $10,000,142 ============ ========== =========== ========== ========== =========== =========== EuroPacific Clearing Fund Loan Account Account Total ---- ------------ ------- ----- Investments, at fair value: Nalco Chemical Company common stock $22,985 $100,518,780 Mutual funds $3,226,553 60,607,197 Group annuity contract deposits 54,727,955 Bank commingled mutual funds 12,549,164 Collective short-term investment fund 135 2 72,758 22,810,487 ---------- ----------- ------- ------------ 3,226,688 2 95,743 251,213,583 Loans receivable from participants $5,369,879 5,369,879 Accrued income receivable 1 2,409 1,949,817 ---------- ---------- ------- ------------ Net assets available for plan benefits $3,226,689 $5,369,881 $98,152 $258,533,279 ========== ========== ======= ============
-10- NOTE 8 - STATEMENTS OF CHANGES IN NET ASSETS: - - --------------------------------------------- The statements of changes in net assets available for benefits by fund for the year ended December 31, 1996 and 1995 are as follows: NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ---------------------------------------------------------------------- DECEMBER 31, 1996 -----------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Growth & Equity Index Fund Fund Fund Fund Fund Income Fund Fund ---- ---- ---- ---- ---- ----------- ---- Sources of net assets: Contributions by employees $ 758,733 $ 120,998 $ 2,528,121 $ 216,843 $ 1,031,468 $ 5,362,833 $ 2,085,277 Dividend income 3,099,842 424,394 565,562 Interest income 77,157 62,414 4,140,330 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 941,886 Net transfers authorized by participants (11,876,137) 837,002 (2,983,492) 170,806 2,775,143 (4,632,297) 7,847,638 Net realized/unrealized appreciation (depreciation) of investments 18,404,557 55,858 1,002,573 7,865,115 3,544,864 ------------ ---------- ---------- ---------- ----------- ---------- ----------- Total sources of net assets 11,406,038 1,020,414 3,684,959 443,507 5,233,578 9,161,213 13,477,779 Applications of net assets: Account expenses 2,815 Withdrawals by participants (8,360,795) (225,295) (11,604,902) (92,946) (686,717) (3,142,509) (995,415) ------------ ---------- ----------- ---------- ----------- ---------- ----------- Increase (decrease) in net assets available for plan benefits 3,045,243 795,119 (7,917,128) 350,561 4,546,861 6,018,704 12,482,364 Net assets available for plan benefits at beginning of period 101,040,041 1,125,319 77,020,131 2,549,023 8,515,778 49,588,123 10,000,142 ------------ ---------- ----------- ---------- ----------- ----------- ----------- Net assets available for plan benefits at end of period $104,085,284 $1,920,438 $69,103,003 $2,899,584 $13,062,639 $55,606,827 $22,482,506 ============ ========== =========== ========== =========== =========== ===========
EuroPacific Clearing Fund Loan Account Account Total ---- ------------ ------- ----- Sources of net assets: Contributions by employees $ 819,745 $ 71,349 $ 12,995,367 Dividend income 160,966 4,565 4,255,329 Interest income $ 446,323 12,799 4,739,023 Transfers from Nalco Chemical Company Employee Stock 941,886 Ownership Plan Net transfers authorized by participants 5,704,703 (125,137) 2,281,771 0 Net realized/unrealized appreciation (depreciation) of investments 1,108,492 (922) 31,980,537 ----------- ---------- ----------- ------------ Total sources of net assets 7,793,906 321,186 2,369,562 54,912,142 Applications of net assets: Account expenses (71,080) (68,265) Withdrawals by participants (761,255) (418,529) (1,982,560) (28,270,923) ----------- ---------- ----------- ------------ Increase (decrease) in net assets available for plan benefits 7,032,651 (97,343) 315,922 26,572,954 Net assets available for plan benefits at beginning of period 3,226,689 5,369,881 98,152 258,533,279 ----------- ---------- ----------- ------------ Net assets available for plan benefits at end of period $10,259,340 $5,272,538 $ 414,074 $285,106,233 =========== ========== =========== ============
-11- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ---------------------------------------------------------------------- DECEMBER 31, 1995 -----------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Growth & Fund Fund Fund Fund Fund Income Fund ---- ---- ---- ---- ---- ----------- Sources of net assets: Contributions by employees $ 837,162 $ 316,842 $ 3,506,154 $ 159,149 $ 753,065 $ 4,730,669 Dividend income 3,408,420 299,279 2,137,624 Interest income 66,061 61,669 5,776,349 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 265,060 Net transfers authorized by participants (3,511,076) (93,073) (10,976,567) 174,565 47,412 907,330 Net realized/unrealized appreciation (depreciation) of investments (10,351,426) 360,554 1,400,454 9,091,198 ------------ ---------- ------------ ---------- ---------- ----------- Total sources of net assets (9,285,799) 385,438 (1,694,064) 694,268 2,500,210 16,866,821 Applications of net assets: Account expenses (3,180) Withdrawals by participants (14,860,930) (206,827) (15,031,673) (55,623) (293,835) (2,567,591) ------------ ---------- ------------ ---------- ---------- ----------- Increase (decrease) in net assets available for plan benefits (24,146,729) 78,611 (16,728,917) 638,645 2,206,375 14,299,230 Net assets available for plan benefits at beginning of period 125,186,770 1,046,708 93,749,048 1,910,378 6,309,403 35,288,893 ------------ ---------- ------------ ---------- ---------- ----------- Net assets available for plan benefits at end of period $101,040,041 $1,125,319 $ 77,020,131 $2,549,023 $8,515,778 $49,588,123 ============ ========== ============ ========== ========== ===========
Equity Index EuroPacific Clearing Fund Fund Loan Account Account Total ---- ----- ------------ ------- ----- Sources of net assets: Contributions by employees $ 984,267 $ 516,233 $ 3,676 $ 11,807,207 Dividend income 64,008 5,909,331 Interest income 137 $ 415,553 13,957 6,333,726 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 265,060 Net transfers authorized by participants 3,038,757 2,597,629 (198,667) 8,013,690 0 Net realized/unrealized appreciation (depreciation) of investments 2,100,958 265,451 2,867,189 ----------- ----------- ---------- ----------- ------------ Total sources of net assets 6,123,982 3,443,448 216,886 8,031,323 27,182,513 Applications of net assets: Account expenses (66,297) (69,477) Withdrawals by participants (366,886) (216,759) (464,085) (8,627,438) (42,691,647) ----------- ----------- ---------- ----------- ------------ Increase (decrease) in net assets available for plan benefits 5,757,096 3,226,689 (247,199) (662,412) (15,578,611) Net assets available for plan benefits at beginning of period 4,243,046 5,617,080 760,564 274,111,890 ----------- ----------- ---------- ----------- ------------ Net assets available for plan benefits at end of period $10,000,142 $ 3,226,689 $5,369,881 $ 98,152 $258,533,279 =========== =========== ========== =========== ============
-12- SCHEDULE I ---------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ ASSETS HELD FOR INVESTMENT -------------------------- AS OF DECEMBER 31, 1996 -----------------------
Identity of Issuer Description of Investment Cost Fair Value - - ------------------ ------------------------- ---- ---------- Nalco Chemical Company 2,855,842 shares of common stock $ 40,377,018 $103,167,292 Fidelity Management Trust Company: John Hancock Group annuity contract deposit, GAC7892, 5.77%, due 12/1/97 2,729,307 2,729,307 Hartford Group annuity contract deposit, GA10156, 4.87%, due 12/21/98 2,493,039 2,493,039 Life of Georgia Group annuity contract deposit, FR101, 6.15%, open 5,935,391 5,935,391 Pacific Group annuity contract deposit, G2608401, 6.65%, due 6/1/98 2,952,635 2,952,635 Provident Group annuity contract deposit, #627-05692-01A, 6.21%, due 6/1/97 3,506,039 3,506,039 Sun Life America Group annuity contract deposit, #4656, 6.58%, due 7/25/98 2,056,298 2,056,298 Allamerica Group annuity contract deposit, GA91636A, 8.05%, due 11/30/97 4,185,459 4,185,459 Ohio National Group annuity contract deposit, 5708, 6.75%, due 12/1/97 2,792,475 2,792,475 Protective Life Group annuity contract deposit, GA1191, 5.85%, due 6/1/97 2,732,537 2,732,537 J.P. Morgan Group annuity contract deposit, NALCO-01, 6.08%, due 6/1/2000 10,000,000 10,000,000 New York Life Group annuity contract deposit, #30481, 6.11%, due 6/30/99 5,233,580 5,233,580 New York Life Group annuity contract deposit, #30481-002, 5.90%, due 7/12/97 1,538,896 1,538,896 Principal Group annuity contract deposit, #4-23183, 6.41%, due 12/31/2000 5,244,967 5,244,967 Transamerica Group annuity contract deposit, 51393-00, 6.13%, 50% due 6/30/97 and 50% due 1/30/98 2,877,264 2,877,264 American American EuroPacific Growth Fund - 393,984 shares 9,438,990 10,259,340 American Balanced Fund - 897,776 shares 12,221,073 13,062,639 Dreyfus U.S. Government Money Market Fund 1,913,427 1,913,427 Neuberger & Berman Guardian Fund - 2,169,599 shares 44,705,133 55,606,827 Barclays Global Investors Barclays Equity Index Fund -1,147,067 shares 17,686,050 22,482,506 Barclays Bond Index Fund -236,123 shares 2,629,958 2,899,584 The Northern Trust Company Collective Short-Term Investment Fund 15,966,425 15,966,425 *Participant loans Participant loans, average interest rate of 8.80% 5,272,538 5,272,538 ------------ ------------ *Party-in-interest to the Plan. $204,488,499 $284,908,465 ============ ============
NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ REPORTABLE TRANSACTIONS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 SCHEDULE II ------------------------------------ -----------
Expenses Incurred With Identity of Party Involved Description of Asset Purchase Price Selling Price Transaction Cost of Asset - - --------------------------- -------------------- -------------- ------------- ----------- ------------- Category (iii) - A series of security transactions in excess of 5% of the current value of plan assets: - - ------------------------------------------------------------------------------------------------------ Neuberger & Berman Management Neuberger & Berman Guardian Equity Fund: 135 purchases $13,457,662 $13,457,662 126 sales $10,901,052 $ 8,994,348 The Northern Trust Company Collective Short-Term Investment Fund: 108 purchases $36,709,398 $36,709,398 165 sales $43,553,459 $43,553,459 Barclays Global Investors Barclays Equity Index Fund: 180 purchases $13,289,633 $13,289,633 72 sales $ 4,351,621 $ 3,520,930 Nalco Chemical Company Nalco Chemical Company Common Stock: 4 purchases $ 1,781,936 $ 2,692 $ 1,781,936 14 sales $15,054,188 $20,871 $ 6,261,771
Value of Asset on Transaction Net Gain Identity of Party Involved Date (Loss) - - -------------------------- ---- ------ Neuberger & Berman Management $13,457,662 $10,901,052 $1,906,704 The Northern Trust Company $36,709,398 $43,553,459 Barclays Global Investors $13,289,633 $ 4,351,621 $ 830,691 Nalco Chemical Company $ 1,781,936 $15,054,188 $8,771,546
There were no reportable category (i), (ii), or (iv) transactions for the year ended December 31, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. PROFIT SHARING, PAY DEFERRAL AND INVESTMENT PLAN OF NALCO CHEMICAL COMPANY /s/ J. F. Lambe BY______________________________ Member, Employee Benefit Plan Administration Committee Dated: March 27, 1997 -----END PRIVACY-ENHANCED MESSAGE-----