-----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, U2tjLNEuPzQr8/PIQ7yFQHqDF16DFO7pf8hfffcn+v4btF8yxLQmcyuYQ5vUcjnY vr1kkhU/U7lwHe6HxSfTYQ== 0000950131-98-002236.txt : 19980410 0000950131-98-002236.hdr.sgml : 19980410 ACCESSION NUMBER: 0000950131-98-002236 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-04957 FILM NUMBER: 98582052 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 1997 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 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, 1997 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 $2,584,316,152 at February 20, 1998.* The number of shares outstanding of each of the issuer's classes of Common Stock, as of February 20, 1998 was 66,146,687 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1997 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Registrant's Proxy Statement dated March 16, 1998 for the April 16, 1998 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 Item 5 Market for the Registrant's Common Stock and Related Security Holder Matters.................................................... 5 Item 6 Selected Financial Data........................................... 5 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 6 Item 7A Quantitative and Qualitative Disclosures About Market Risk........ 6 Item 8 Financial Statements and Supplementary Data....................... 6 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 7 PART III Item 10 Directors and Executive Officers of the Registrant................ 7 Item 11 Executive Compensation............................................ 7 Item 12 Security Ownership of Certain Beneficial Owners and Management.... 7 Item 13 Certain Relationships and Related Transactions.................... 7 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 7
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- 1198. 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 1997 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; improved 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 January 1997, the Company acquired the stock 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. In May 1997, the Company acquired the pulp and paper enzyme business of Ciba Specialty Chemicals, Inc. The enzyme technology which was acquired is used in paper mills to enhance fiber quality and water drainage during the paper making process. Also in May 1997, the Company increased its investment in Taiwan Nalco Chemical Co. Ltd. from 55 percent to 79 percent. 1 In August 1997, the Company acquired a majority interest in Green Label Products Inc. (Green Label). Green Label is located in Gainesville, Georgia and supplies odor control products, technology and application systems for chemically neutralizing objectionable odors of various processes. During October 1997, the Company acquired the assets of Chemical Technologies, Incorporated (CTI). CTI, with annual sales of approximately $18 million, is located in Jackson, Michigan and is a manufacturer and marketer of synthetic fluids and lubricants that are used in cooling and lubricating tooling employed in the machining of metal products. Also during October 1997, the Company acquired Gamus Quimica, Ltda., a Brazilian manufacturer and marketer of water treatment chemical products with annual sales of about $2 million. During November 1997, the Company acquired Chemco Water Technology, Inc. (Chemco). Chemco, which is located in Vancouver, Washington, manufactures and markets boiler and cooling water treatment chemicals and services to steel, paper, co-generation, chemical, petrochemical, food and beverage facilities throughout the United States. Chemco has annual sales of approximately $7 million. In November 1997, the Company announced it had signed a letter of intent to sell its 50 percent interest in Nalco Fuel Tech. In January 1998, the Company completed the acquisitions of USF Houseman Waterbehandeling BV (Houseman), a Dutch water treatment company based in Bergen op Zoom, Holland, and Trident Chemical Company (Trident) of Baton Rouge, Louisiana. Houseman provides boiler and cooling water chemicals and services to office buildings, retail outlets and manufacturing facilities throughout Holland, Spain and Belgium. Houseman has annual sales of more than $3 million. Trident manufactures and markets water treatment chemicals and services to refinery, petrochemical and utility customers throughout the Gulf Coast region of the United States. Trident had 1997 annual sales of approximately $9 million. In February 1998, the Company completed the merger of its South African water treatment interest with those of Chemical Services Limited. The merged entity, Nalco-Chemserve, is South Africa's largest specialty chemicals company. Estimated 1998 sales are anticipated to be approximately $35 million. There were no other significant changes in the markets served or in the methods of distribution since the beginning of 1997. 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 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 1997 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. 2 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 $43.0 million in 1997, compared to $41.9 million in 1996 and $39.8 million in 1995. There were approximately 6,900 persons employed full time by Nalco at the end of 1997. 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 1998. 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. 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. E. J. Mooney has been Chairman of the Board and Chief Executive Officer of the Company since 1994 and President since 1990. M. B. Harp has been Executive Vice President, Operations since 1995. He had been Executive Vice President, International Operations since 1993. W. S. Weeber has been Executive Vice President, Operations Staff since 1993. P. Dabringhausen has been Group Vice President, President, Pulp & Paper Division since January 1, 1998. He had been Group Vice President and President, Process Chemicals Division since 1993. S. D. Newlin has been Group Vice President, President, Specialty Division since January 1, 1998. He had been Group Vice President, President, Nalco Europe since 1994, and from 1992 to 1994 he was Vice President, President, Nalco Pacific. G. M. Brannon has been Group Vice President, President, Industrial Division since January 1, 1998. He had been Group Vice President, President, Nalco Pacific since February 1997. He was Vice President, President Nalco Pacific from 1994 to 1997, and from 1990 to 1994 he was General Manager of the Utility Chemicals Group. 3 G. Pinzon has been Group Vice President, President, Nalco Latin America since 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 has been Senior Vice President and Chief Financial Officer since February 1997. He had been Vice President and Chief Financial Officer since 1993. The corporate officers of the Registrant are usually elected at the annual meeting of directors and hold office for a term of one year. 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 the Inside Back Cover of the Company's 1997 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 11 domestic and 26 foreign locations. Primary domestic manufacturing plants are located in:
LAND BUILDING AREA AREA (ACRES) (SQ.FT.) ------- -------- Carson, California....................................... 21 84,000 Jonesboro, Georgia....................................... 12 35,000 Chicago, Illinois........................................ 39 750,000 Garyville, Louisiana..................................... 225 170,000 Paulsboro, New Jersey.................................... 14 34,000 Chagrin Falls, Ohio...................................... 13 28,000
Other domestic manufacturing and/or warehouse facilities are located in: Oklahoma City, Oklahoma; Charlotte, North Carolina; Jackson, Michigan; Baton Rouge, Louisiana; 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 BUILDING AREA AREA (ACRES) (SQ.FT.) ------- -------- Botany, Australia........................................ 10 102,000 Suzano, Brazil........................................... 14 90,000 Burlington, Canada....................................... 14 138,000 Cheshire, England........................................ 15 226,000 Biebesheim, Germany...................................... 28 103,000 Cisterna di Latina, Italy................................ 25 115,000 Celra, Spain............................................. 25 109,000 Anaco, Venezuela......................................... 43 82,000
4 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. 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 Charlotte, North Carolina; the Philippines; Saudi Arabia; Chile and The People's Republic of China, 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 1997, the Company opened a new manufacturing facility in Charlotte, North Carolina and purchased facilities in Jackson, Michigan and Vancouver, Washington. In January 1998, the Company purchased a facility located in Baton Rouge, Louisiana. Consolidation of operations continued in 1997 with the closing of the Clarksburg, West Virginia plant at year end. Capital expenditures for 1998 should approximate $100.0 million compared to the $101.4 million spent in 1997, if planned sales and earnings for 1998 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 1997 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, 1997 was 5,047. Dividends and Common Stock market prices, included in the Quarterly Summary appearing on page 39 of the Company's 1997 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 on pages 36 and 37 of the Company's 1997 Annual Report to Shareholders and are incorporated herein by reference. In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." In accordance with the requirements of SFAS 128, the Company has restated all prior period earnings per share data presented. 5 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--1997 vs. 1996," "Management's Discussion and Analysis--1996 vs. 1995" and "Management's Discussion and Analysis--Financial Condition," on pages 17 to 19 of the Company's 1997 Annual Report to Shareholders, is incorporated herein by reference. 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" on pages 20 and 21 of the Company's 1997 Annual Report to Shareholders, is incorporated herein by reference. Year 2000 Compliance Management's discussion of the effects of the Year 2000 Issue, which is included in the section titled "Management's Discussion and Analysis--Year 2000 Compliance" on page 21 of the Company's 1997 Annual Report to Shareholders, is incorporated herein by reference. EURO Currency The Company has initiated actions to determine the requirements of customers, vendors and government/regulatory agencies in regard to the European Economic and Monetary Union's (EMU) conversion to a single currency (EURO). Accordingly, no estimates are currently available for incremental costs, if any, that would be incurred to enable the Company to be compliant with any requirements that may be generated by the EMU's conversion to a single currency. Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and assumptions regarding the worldwide economy, technological innovation, competitive activity, interest rates, pricing, currency movements, and the development of certain markets. These statements are not guarantees of future results or events, and involve certain risks and uncertainties which are difficult to predict and many of which are beyond the control of the Company. Actual results and events could differ materially from those anticipated by the forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Management's discussion of its market risk exposures and its risk management strategies, which is included in the section titled "Management's Discussion and Analysis--1997 vs. 1996" on pages 17 and 18 of the Company's 1997 Annual Report to Shareholders, is incorporated herein by reference. The Registrant's market-risk-sensitive instruments do not subject the Registrant to material market risk exposures. 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 1997 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Summary in the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. In 1997, the Company adopted SFAS 128, "Earnings Per Share." In accordance with the requirements of SFAS 128, the Company has restated all prior period earnings per share data presented. 6 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 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 16, 1998, 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 16, 1998, 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 16, 1998, 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 1997 Annual Report to Shareholders are incorporated herein by reference in Item 8: Statements of Consolidated Financial Condition December 31, 1997 and 1996 Statements of Consolidated Earnings Years ended December 31, 1997, 1996 and 1995 Statements of Consolidated Cash Flows Years ended December 31, 1997, 1996 and 1995 Statements of Consolidated Common Shareholders' Equity Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Quarterly Summary (Unaudited) Years ended December 31, 1997 and 1996 Report of Independent Accountants (2) The following consolidated financial statement schedule for the years 1997, 1996 and 1995 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. 7 (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(/12/) 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(/10/) 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(/10/) 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(/10/) 10O --Employee Stock Compensation Plan as amended effective January 1, 1996 and October 17, 1996(/10/) 10P --Non-Employee Directors Stock Compensation Plan (/8/) Exhibit 11 --Computation of Earnings Per Share Exhibit 13 --Those portions of the 1997 Annual Report to Shareholders expressly incorporated herein by reference Exhibit 21 --Subsidiaries of the Registrant Exhibit 23 --Consent of Independent Accountants Exhibit 27A --Financial Data Schedule Exhibit 27B --Restated Financial Data Schedules Exhibit 99A --Notice of Annual Meeting and Proxy Statement(/13/) Exhibit 99B --September 16, 1996 Letter to Shareholders with Summaries of the Preferred Share Purchase Rights Agreement(/11/) 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. (b) Reports on Form 8-K filed in the fourth quarter of 1997 are: None - - -------- (/1/Incorporated)herein by reference from the Registrant's Form 10-K for the year ended 1986. (/2/)Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1987. (/3/)Incorporated herein by reference from the Registrant's Form 8-K dated July 24, 1986. (/4/)Incorporated herein by reference from the Registrant's Form 8-K dated May 15, 1989. (/5/)Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1990. (/6/)Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1991. (/7/)Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1992. 8 (/8/Incorporated)herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1996. (/9/)Incorporated herein by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1996. (/1//Incorporated0herein/by)reference from the Registrant's Form 10-Q for the quarter ended September 30, 1996. (/1//Incorporated1herein/by)reference from the Registrant's Form 8-K dated June 24, 1996. (/1//Incorporated2herein/by)reference from the Registrant's Form 8-A dated June 24, 1996. (/1//Incorporated3herein/by)reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 16, 1998. 9 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, 1998 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 27, 1998 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 B. S. Kelly Director ___________________________________________ B. S. Kelly F. A. Krehbiel Director ___________________________________________ F. A. Krehbiel E. J. Mooney Director ___________________________________________ E. J. Mooney S. A. Penrose Director ___________________________________________ S. A. Penrose W. A. Pogue Director ___________________________________________ W. A. Pogue J. J. Shea Director ___________________________________________ J. J. Shea
10 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 2, 1998 appearing on page 38 of the 1997 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 2, 1998 11 NALCO CHEMICAL COMPANY AND SUBSIDIARIES -------------- SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E ------ ---------- --------------------- ------------ ---------- ADDITIONS --------------------- (1) (2) CHARGED CHARGED TO BALANCE AT TO COSTS OTHER BALANCE AT BEGINNING 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: $938,000(B) December 31, 1997....... $4,936,000 $ 630,000 $ 22,000(A) 480,000(C) $4,170,000 ========== ========= ======== ======== ========== $738,000(A) December 31, 1996....... $4,439,000 $ 388,000 17,000(C) $646,000(B) $4,936,000 ========== ========= ======== ======== ========== December 31, 1995....... $5,605,000 $(648,000) $ 73,000(C) $591,000(B) $4,439,000 ========== ========= ======== ======== ==========
- - -------- Note A--Valuation of assets acquired. Note B--Excess of accounts written off over recoveries. Note C--Foreign currency translation adjustments. 12 EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 ---------------------------- 1997 1996 1995 -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC Average shares outstanding..................... 66,700 67,280 67,495 ======== ======== ======== Earnings from continuing operations............ $163,380 $145,936 $135,664 Earnings from discontinued operations, net of taxes......................................... -- 8,546 18,034 -------- -------- -------- Earnings before effect of accounting change.... 163,380 154,482 153,698 Cumulative effect of change in accounting for business process reengineering costs, net of taxes......................................... (4,544) -- -- -------- -------- -------- Net earnings................................... 158,836 154,482 153,698 Dividends on preferred stock, net of taxes..... (11,466) (11,363) (11,208) -------- -------- -------- Net earnings to common shareholders............ $147,370 $143,119 $142,490 ======== ======== ======== Per share amounts: Earnings from continuing operations............ $ 2.28 $ 2.00 $ 1.84 Earnings from discontinued operations, net of taxes......................................... -- .13 .27 Cumlative effect of change in accounting for business process reengineering costs, net of taxes......................................... (.07) -- -- -------- -------- -------- Net earnings to common shareholders............ $ 2.21 $ 2.13 $ 2.11 ======== ======== ========
EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 ---------------------------- 1997 1996 1995 -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) DILUTED Average shares outstanding during the year per Basic EPS..................................... 66,700 67,280 67,495 Effect of dilutive securities: Assumed conversion of preferred stock.......... 7,760 7,930 8,037 Stock options and contingently issuable shares. 805 319 410 -------- -------- -------- TOTALS....................................... 75,265 75,529 75,942 ======== ======== ======== Earnings from continuing operations............ $163,380 $145,936 $135,664 Earnings from discontinued operations, net of taxes......................................... -- 8,546 18,034 -------- -------- -------- Earnings before effect of accounting change.... 163,380 154,482 153,698 Cumulative effect of change in accounting for business process reengineering costs, net of taxes......................................... (4,544) -- -- -------- -------- -------- Net earnings................................... 158,836 154,482 153,698 Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes... (4,464) (4,515) (4,643) Income tax adjustment on assumed common dividends..................................... (1,041) (920) (793) -------- -------- -------- Net earnings to common shareholders............ $153,331 $149,047 $148,262 ======== ======== ======== Per share amounts: Earnings from continuing operations............ $ 2.10 $ 1.86 $ 1.71 Earnings from discontinued operations, net of taxes......................................... -- .11 .24 Cumulative effect of change in accounting for business process reengineering costs, net of taxes......................................... (.06) -- -- -------- -------- -------- Net earnings to common shareholders............ $ 2.04 $ 1.97 $ 1.95 ======== ======== ========
EX-13 3 1997 ANNUAL REPORT TO SHAREHOLDERS NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1997 FORM 10-K GRAPHS AND IMAGE MATERIAL 1997 ANNUAL REPORT TO SHAREHOLDERS The following is a list and narrative description of graphs included in those portions of the 1997 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 values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $1,215 1996 $1,304 1997 $1,434
Earnings before income taxes, based on continuing operations, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $213 1996 $229 1997 $256
Depreciation, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $85 1996 $92 1997 $93
NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1997 FORM 10-K GRAPHS AND IMAGE MATERIAL 1997 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 ---- ------ 1995 $30.125 1996 $36.125 1997 $39.563
Shareholders' Equity, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $580 1996 $655 1997 $653
Return on Shareholders' Equity, based on continuing operations, and before effect of change in accounting principle in 1997, in percentages. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 24.1% 1996 23.5% 1997 24.7%
Cash Provided by Operating Activities, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $213 1996 $229 1997 $214
NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1997 FORM 10-K GRAPHS AND IMAGE MATERIAL 1997 ANNUAL REPORT TO SHAREHOLDERS Capital Additions, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $127 1996 $ 93 1997 $101
Dividends per Common Share, in dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1995 $0.99 1996 $1.00 1997 $1.00
MANAGEMENT'S DISCUSSION AND ANALYSIS 1997 vs 1996 Sales were $1,434 million in 1997, an increase of 10 percent over last year's sales of $1,304 million. Changes in volume, mix and price increased sales 6 percent over 1996, while acquisitions resulted in a 5 percent gain over last year. Effective July 1, 1997, the Company adopted the policy of reporting freight revenues as a component of sales rather than offsetting freight costs that are included as a component of cost of products sold. This resulted in recognizing additional revenues of approximately $28 million for the year 1997. Adverse foreign currency translation effects resulting from the stronger U.S. dollar compared to virtually all European and Asian currencies reduced 1997 sales by approximately $39 million or 3 percent. Sales for 1997 and 1996 by major operating unit were as follows:
1997 vs 1996 (in millions) 1997 1996 Increase - - -------------------------------------------------------- -------- Water and Waste Treatment $ 470.6 $ 412.7 14% Process Chemicals 379.4 346.4 10 Europe 317.2 289.3 10 Latin America 113.1 107.3 5 Pacific 153.4 147.8 4 -------- -------- Total $1,433.7 $1,303.5 10 ======== ========
The Water and Waste Treatment Division reported a 14 percent gain over 1996. Slightly more than three-fourths of the increase was attributable to sales by acquired companies and the aforementioned change in the reporting of freight revenues. Modest improvements posted by the other four marketing groups in the Division accounted for the balance of the change. Sales by the Process Chemicals Division rose 10 percent over last year, with acquisitions and freight revenues representing slightly over one-third of the increase. Excluding freight, the General Industry and Pulp Technologies Groups reported double-digit gains while the Paper Group posted a more modest improvement. The Europe Division reported a 10 percent sales gain with most operations in the Division posting solid improvements in local currencies. Acquisitions and freight revenues had an 11 percent positive effect on Europe Division sales, but this was largely offset by a nearly 9 percent negative impact due to the stronger U.S. dollar compared to European currencies. The Latin America Division reported a 5 percent sales increase with double-digit gains posted by operations in Chile, Mexico and Venezuela. Acquisitions and the change in reporting of freight revenues were insignificant for the Division's sales, as well as for the Pacific Division. Pacific Division sales were up 4 percent over 1996 despite a nearly 10 percent negative translation impact resulting from the stronger U.S. dollar compared to Asian currencies. Double-digit gains in local currencies were reported by operations in China, Japan, Korea, Indonesia, the Philippines, Singapore/Malaysia and Thailand. Cost of products sold was 43.9 percent of sales for 1997, which reflects the classification of approximately $28 million of freight revenue as a component of sales rather than as an offset to cost of products sold. On a comparable basis, cost of products sold would have been 42.8 percent of sales as compared to 43.6 percent for 1996. This improvement was attributable to the Company's North American operations, and reflected lower raw material costs and tighter control of manufacturing expenses. Selling, administrative and research expenses were up $43 million or 8 percent over 1996, with acquisitions accounting for over two-thirds of this increase. Higher selling and service expenses in select markets account for most of the remaining change. The translation effect of changes in foreign currency exchange rates moderated the increase in expenses by approximately $15 million. Interest and other income for 1997 decreased $2 million from 1996. Unfavorable foreign currency exchange adjustments, primarily related to operations in the Pacific, accounted for most of the decrease. Interest expense of $15 million in 1997 was up $1 million over 1996, and reflected increased average borrowing levels to finance acquisitions and the repurchase of the Company's common stock. Nalco's equity in earnings of its Nalco/Exxon Energy Chemicals, L.P. (Nalco/Exxon) joint venture was $28 million, a $3 million improvement over the $25 million reported in 1996. The increase reflects improved margins and continuing benefits of cost controls. If Nalco's portion of Nalcos/Exxon's income tax expense was reclassified from equity in earnings of partnership to income taxes, the effective tax rate for 1997 and 1996 would have been 37.5 percent and 37.6 percent, respectively. Earnings from continuing operations as a percent to sales was 11.4 percent in 1997 compared to 11.2 percent for the year 1996. The Company recognized a one-time after-tax charge of $4.5 million during the fourth quarter of 1997, which was comprised of unamortized capitalized business process reengineering costs. (See Note 10). Because the Company conducts its business worldwide, its earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange - 17 - rates. The Company continually monitors its exposure to exchange rate risks, and reduces its exposure to changing foreign currency exchange rates through both operational and financial market actions. The Company's products are manufactured in several locations around the world, and its customers are served by locally-based sales engineers. This results in a cost base that is well diversified over a number of international currencies as well as the U.S. dollar. This diverse base of local currencies serves to partially offset the earnings effect of potential changes in the translated value of the Company's local currency denominated revenues. However, the primary operational method of mitigating the effect of foreign currency devaluations is the aggressive pursuit of local currency price increases. The Company also attempts to reduce its exposure to exchange rate fluctuations with regard to transactions through timely settlement of intercompany balances, the use of foreign currency borrowings, balance sheet structure and selective hedging. 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 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which establishes standards for computing and presenting earnings per share (EPS) and simplifies the standards for computing EPS previously found in Accounting Principles Board Opinion No. 15 (APB 15), "Earnings per Share." As prescribed by SFAS 128, the Company retroactively adopted this standard in the fourth quarter 1997, and has restated all prior-period EPS data presented. The adoption of SFAS 128 had little or no impact on previously reported EPS. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components. Comprehensive income is defined as all changes in shareholders' equity during a period except those resulting from investments by shareholders and distributions to shareholders. Comprehensive income includes net earnings, foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The Company adopted SFAS 130 in 1997, and all prior-period financial statements presented have been reclassified to reflect application of the provisions of SFAS 130. The adoption of SFAS 130 had no impact on the Company's consolidated results of operations, financial condition or cash flows. 1996 vs 1995 Sales from continuing operations were $1,304 million in 1996, an increase of 7 percent over 1995 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 posted a 10 percent gain over 1995, with slightly more than half of the increase attributable to sales by DWT. Sales by the Process Chemicals Division were up 10 percent over 1995, as the Pulp and Paper Group reported a double-digit gain. 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 only up 1 percent over 1995, because some business was transferred as of the beginning of 1996 to the Nalco/Exxon joint venture. On a comparable basis, Pacific Division sales increased 12 percent, 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 - 18 - 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 1995 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 1995 on a combined basis. Selling, administrative and research expenses in 1996 were up $41 million or 8 percent over 1995. Expenses of DWT and other operations acquired since late 1995, as well as increased spending to support growth in Latin America, the Pacific, and the paper market, accounted for most of the increase. 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, lower interest income reflecting a decrease in invested balances, and a gain on the sale of assets recognized in 1995. 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. The increase reflected 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. If the Company's share of the Nalco/Exxon joint venture's income tax expense was reclassified from equity in earnings of partnership to income taxes, the effective tax rate for 1996 and 1995 would have been 37.6 percent and 37.0 percent, respectively. 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). MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION Total assets increased $46 million or 3 percent during 1997. Accounts receivable were up $8 million or 4 percent. Most of this increase was attributable to the accounts receivable of operations which were acquired by the Company in 1997. (See Note 11). Higher worldwide sales levels in the fourth quarter 1997 also contributed to the increase. Conversely, the stronger U.S. dollar reduced the carrying value of the accounts receivable of the Company's international operations. If translation rates were unchanged from year-end 1996, accounts receivable would have been about 10 percent higher than the $242 million reported at the end of 1997. Inventories were up $4 million or 4 percent over year-ago levels, with acquisitions accounting for approximately three-fourths of the increase. Year- end 1997 inventories would have been about 12 percent higher than reported if foreign currency translation rates were constant from a year ago. The $47 million increase in goodwill was attributable to acquisitions made during 1997, partly offset by additional amortization and the translation effect of the stronger U.S. dollar in relation to various foreign currencies compared to the end of 1996. Total liabilities increased $48 million or 7 percent during 1997 mostly because of a net increase in short-term and long-term debt which was used primarily to finance acquisitions and repurchases of the Company's common stock. Shareholders' equity decreased $2 million during 1997. The translation impact of the stronger U.S. dollar resulted in a $42 million increase in foreign currency translation adjustments and a corresponding decrease in shareholders' equity. Common stock repurchases of 2.0 million shares at a cost of $76 million were partly offset by treasury stock transactions for stock option, benefit and other plans totaling $29 million. Net earnings of $159 million exceeded dividends totaling $78 million. Nalco's return on average shareholders' equity was 24.7 percent in 1997, slightly higher than the 23.5 percent in 1996 based on earnings from continuing operations. - 19 - MANAGEMENT'S DISCUSSION AND 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 $214 million in 1997, which was generated primarily from net earnings before noncash charges such as depreciation and amortization. Significant cash flow requirements in 1997 included capital investments of $101 million, business purchases of approximately $80 million, dividends of $78 million, and $76 million for the reacquisition of common stock. In 1996, cash provided by operations was $229 million compared to the 1995 total of $213 million. Approximately two-thirds of the 1997 capital investments of $101 million was attributable to investments in North America, which included $16 million for field equipment, an initial investment of $10 million for the implementation of the Company's new global management information systems, $9 million for PORTA- FEED units and $9 million for transportation equipment. The Company plans to continue to invest in internal growth in 1998 and it is expected that capital investments will exceed $100 million. Other significant investing activities in 1997 included the acquisition of several businesses that operate in the Company's core markets of water treatment and process chemicals, as well as an additional 24 percent interest in Nalco's subsidiary company in Taiwan, for a total of approximately $80 million, net of cash acquired. (See Note 11). Investing activities related to the Company's Nalco/Exxon joint venture partnership included an additional $12 million of borrowings from the joint venture. Investments in North America accounted for over 60% of the 1996 capital investments of $93 million, 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. 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. Investing activities in 1995 totaled $156 million, which included $127 million for investments in property, plant and equipment. Over two-thirds of the capital spending in 1995 was for investments in the United States and included $26 million for PORTA-FEED units, $17 million for field equipment and $13 million for transportation equipment. Investing activities in 1995 also included the purchase of an additional 25 percent interest of Nalco Chemical India, Ltd., the purchase of the pulp and paper chemical business of Texo Corporation, and additional cash investments in Nalco/Exxon. Net financing activities of $32 million in 1997 included dividends paid on common stock of $67 million or $1.00 per share. Since the Company's founding in 1928, it has paid 278 consecutive quarterly dividends, and expects to continue its policy of paying regular cash dividends. The Company continued its stock repurchase program in 1997 by reacquiring 2.0 million shares of common stock at a cost of $76 million. In 1996, the Company reacquired 0.7 million shares of common stock at a cost of $26 million, and 1.3 million shares were repurchased for $42 million in 1995. Cash received from treasury stock issued under option, benefit and other plans totaled $22 million in 1997 and $10 million in both 1996 and 1995. Management believes that the stock repurchase program represents a sound economic investment for Nalco's shareholders. Other financing activities in 1997 consisted primarily of a net increase in short-term and long-term debt of $95 million. - 20 - Among the most significant financing activities in 1996 and 1995 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 has a $350 million Revolving Credit Agreement with eleven banks. The credit arrangements were unused at December 31, 1997. (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 $308 million, $245 million and $278 million at December 31, 1997, 1996 and 1995, 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. MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR 2000 COMPLIANCE The potential computer system problems that may arise due to the year 2000 (the Year 2000 Issue) result from computer programs that were designed to use two digits rather than four to define years. Programs that use dates in calculations or sorting may yield unexpected results or fail completely when encountering the year "00" in 2000. The Company's Board of Directors authorized the investment of approximately $50 million for the worldwide implementation of new business and management information systems. The systems, based on software purchased from SAP America, Inc., will provide an integrated suite of core business applications to support all major functions worldwide including human resources, finance, environmental health and safety, sales and marketing, and manufacturing and logistics. The new systems are Year 2000 compliant, and will position the Company well to provide uninterrupted service to all of its customers in the year 2000 and beyond. It is expected that more than 80 percent of the estimated cost of implementation will be capitalized. At the time the systems are placed in service, the capitalized costs will be amortized over the systems' estimated useful lives. Implementation by geographic region is planned to occur beginning in 1998 and concluding in 2001. The Company is conducting a program to detect problems that may result from the Year 2000 Issue, including problems with any of the Company's current legacy systems that will not be replaced by the year 2000, as well as computerized equipment used at customers' sites. The program also addresses problems that may arise with suppliers, customers, service providers and other third parties. Management fully expects this program, in conjunction with the implementation of the new systems discussed above, to sufficiently address and deal globally with problems in a timely fashion to ensure no disruption in operations. However, failures by other parties to address their own Year 2000 Issue could have a material impact on the Company's ability to conduct its business, although no specific risks have been identified at this time. Costs of conducting this program are being expensed as incurred and are not expected to have a material impact on the results of operations. MANAGEMENT'S DISCUSSION AND ANALYSIS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and assumptions regarding the worldwide economy, technological innovation, competitive activity, interest rates, pricing, currency movements, and the development of certain markets. These statements are not guarantees of future results or events, and involve certain risks and uncertainties which are difficult to predict and many of which are beyond the control of the Company. Actual results and events could differ materially from those anticipated by the forward-looking statements. - 21 - - - -------------------------------------------------------------------------------- Statements of Consolidated Earnings
Years Ended December 31 -------------------------------------- (in millions, except per share figures) 1997 1996 1995 - - ----------------------------------------------------------------------------------------- Net Sales $1,433.7 $1,303.5 $1,214.5 Operating costs and expenses Cost of products sold 629.6 568.6 531.3 Selling, administrative and research expenses 561.4 518.2 477.7 -------- -------- -------- 1,191.0 1,086.8 1,009.0 -------- -------- -------- Operating Earnings 242.7 216.7 205.5 Interest and other income 0.7 2.6 7.2 Interest expense (15.3) (14.4) (16.2) Equity in earnings of partnership 28.2 24.5 16.9 -------- -------- -------- Earnings from Continuing Operations Before Income Taxes 256.3 229.4 213.4 Income taxes 92.9 83.5 77.7 -------- -------- -------- Earnings from Continuing Operations 163.4 145.9 135.7 Earnings from discontinued operations, net of taxes - 8.6 18.0 -------- -------- -------- Earnings Before Effect of Accounting Change 163.4 154.5 153.7 Cumulative effect of change in accounting for business process reengineering costs, net of taxes (4.5) - - -------- -------- -------- Net Earnings $ 158.9 $ 154.5 $ 153.7 ======== ======== ======== Earnings Per Common Share--Basic Earnings from continuing operations $ 2.28 $ 2.00 $ 1.84 Discontinued operations, net of taxes - .13 .27 Cumulative effect of change in accounting for business process reengineering costs, net of taxes (.07) - - -------- -------- -------- Net earnings $ 2.21 $ 2.13 $ 2.11 ======== ======== ======== Earnings Per Common Share--Diluted Earnings from continuing operations $ 2.10 $ 1.86 $ 1.71 Discontinued operations, net of taxes - .11 .24 Cumulative effect of change in accounting for business process reengineering costs, net of taxes (.06) - - -------- -------- -------- Net earnings $ 2.04 $ 1.97 $ 1.95 ======== ======== ======== Average Shares Outstanding (in thousands) Basic 66,700 67,280 67,495 ======== ======== ======== Diluted 75,265 75,529 75,942 ======== ======== ========
The notes to consolidated financial statements on pages 26 through 35 are an integral part of these statements. - 22 -
- - ------------------------------------------------------------------------- Statements of Consolidated Financial Condition December 31 --------------------- (in millions, except per share figures) 1997 1996 - - ------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 49.7 $ 38.8 Receivables, less allowances of $4.2 in 1997 and $4.9 in 1996 241.6 233.4 Inventories Finished products 68.2 61.4 Materials and work in process 26.3 29.4 -------- -------- 94.5 90.8 Prepaid expenses, taxes and other current assets 23.2 22.2 -------- -------- Total Current Assets 409.0 385.2 Other Assets Investment in and advances to partnership 122.9 126.0 Goodwill, less accumulated amortization of $29.5 in 1997 and $24.7 in 1996 249.4 202.5 Miscellaneous 167.1 158.8 -------- -------- Total Other Assets 539.4 487.3 Net Property, Plant and Equipment 492.5 522.0 -------- -------- Total Assets $1,440.9 $1,394.5 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Short-term debt $ 22.1 $ 31.3 Accounts payable 108.1 114.6 Accrued compensation 33.9 32.3 Other accrued expenses 57.5 65.7 Income taxes 34.0 45.8 -------- -------- Total Current Liabilities 255.6 289.7 Long-Term Debt 335.3 252.6 Deferred Income Taxes 37.2 42.9 Accrued Pension Benefits 40.8 38.6 Accrued Postretirement Benefits 100.7 98.5 Other Liabilities 18.6 17.7 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 184.1 188.6 Unearned ESOP compensation (151.1) (162.6) -------- -------- 33.4 26.4 Common stock--par value $.1875 per share; 80.3 shares issued 15.1 15.1 Capital in excess of par value of shares 40.8 31.2 Common stock reacquired--at cost (420.4) (364.2) Retained earnings 1,072.7 992.0 Accumulated other comprehensive income (88.9) (46.0) -------- -------- Total Shareholders' Equity 652.7 654.5 -------- -------- Total Liabilities and Shareholders' Equity $1,440.9 $1,394.5 ======== ========
The notes to consolidated financial statements on pages 26 through 35 are an integral part of these statements. - 23 -
- - ------------------------------------------------------------------------------- Statements of Consolidated Cash Flows Years Ended December 31 --------------------------- (in millions) 1997 1996 1995 - - ------------------------------------------------------------------------------- Cash Provided by (Used for) Operating Activities Net earnings $ 158.9 $ 154.5 $ 153.7 Adjustments to reconcile net earnings to cash provided by operating activities Cumulative effect of change in accounting for business process reengineering costs 4.5 - - Depreciation and amortization 103.2 98.3 89.2 Equity in earnings of partnership, net of distributions (17.4) (14.0) (10.8) Noncurrent deferred income taxes (5.0) (9.0) (13.0) Other--net 11.2 9.1 0.6 Changes in current assets and liabilities Receivables (25.2) 6.4 (20.5) Inventories (12.1) (0.1) (10.2) Accounts payable 0.7 (15.9) 21.5 Other (5.1) (0.4) 2.0 ------- ------- ------- Net Cash Provided by Operating Activities 213.7 228.9 212.5 ------- ------- ------- Cash Provided by (Used for) Investing Activities Additions to property, plant and equipment (101.4) (92.5) (126.7) Business purchases (79.6) (83.4) (23.8) (Investments in) advances from partnership 19.1 18.0 (8.2) Proceeds from sale of business - 41.2 - Other investing activities (4.9) 7.2 2.6 ------- ------- ------- Net Cash (Used for) Investing Activities (166.8) (109.5) (156.1) ------- ------- ------- Cash Provided by (Used for) Financing Activities Cash dividends, net of taxes (78.2) (78.7) (78.1) Proceeds from long-term debt 102.8 59.2 6.8 Payments of long-term debt (4.2) (12.1) (3.3) Increase (decrease) in short-term debt (3.8) (69.5) 46.4 Common stock reacquired (75.7) (26.3) (42.4) Other financing transactions 27.3 9.9 9.8 ------- ------- ------- Net Cash (Used for) Financing Activities (31.8) (117.5) (60.8) Effect of foreign exchange rate changes on cash and cash equivalents (4.2) (1.2) (2.6) ------- ------- ------- Increase(decrease) in cash and cash equivalents 10.9 0.7 (7.0) Cash and cash equivalents at the beginning of the year 38.8 38.1 45.1 ------- ------- ------- Cash and Cash Equivalents at the End of the Year $ 49.7 $ 38.8 $ 38.1 ======= ======= =======
The notes to consolidated financial statements on pages 26 through 35 are an integral part of these statements. - 24 - - - -------------------------------------------------------------------------------- Statements of Consolidated Common Shareholders' Equity (in millions, except per share figures) - - --------------------------------------------------------------------------------
-------------------------------------------------- Common Stock Capital in Reacquired Common Excess of -------------------- Stock Par Value Number Issued of Shares of Shares Cost -------------- ---------- ---------- -------- Balance at January 1, 1995 $15.1 $25.5 12.4 $(317.7) Net earnings Other comprehensive income: Minimum pension liability adjustment --net of tax benefit of $0.2 Currency translation adjustments --net of tax benefit of $0.9 Dividends on preferred stock --net of tax benefit of $4.2 Dividends on common stock ($0.99 per share) Treasury stock transactions 1.3 (42.4) Stock issued under option, benefit and other plans 2.3 (0.5) 9.8 ------ ----- --------- ------- Balance at December 31, 1995 15.1 27.8 13.2 (350.3) Net earnings Other comprehensive income: Minimum pension liability adjustment Currency translation adjustments --net of tax of $0.5 Dividends on preferred stock --net of tax benefit of $3.9 Dividends on common stock ($1.00 per share) Treasury stock transactions 0.7 (26.3) Stock issued under option, benefit and other plans 3.4 (0.6) 12.4 ------ ----- --------- ------- Balance at December 31, 1996 15.1 31.2 13.3 (364.2) Net earnings Other comprehensive income: Minimum pension liability adjustment --net of tax benefit of $0.8 Currency translation adjustments --net of tax benefit of $0.1 Dividends on preferred stock --net of tax benefit of $3.5 Dividends on common stock ($1.00 per share) Treasury stock transactions 2.0 (75.7) Stock issued under option, benefit and other plans 9.6 (1.0) 19.5 ------ ----- --------- ------- Balance at December 31, 1997 $15.1 $40.8 14.3 $(420.4) ====== ===== ========= =======
Accumulated Other Comprehensive Income ----------------------- Minimum Foreign Pension Currency Retained Liability Translation Comprehensive Earnings Adjustment Adjustments Income --------- ----------- ------------ -------------- Balance at January 1, 1995 $ 840.6 $(5.7) $(39.3) Net earnings 153.7 $153.7 Other comprehensive income: Minimum pension liability adjustment --net of tax benefit of $0.2 (0.3) (0.3) Currency translation adjustments --net of tax benefit of $0.9 (8.7) (8.7) 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 Stock issued under option, benefit and other plans --------- ----- ------ ------ Balance at December 31, 1995 916.2 (6.0) (48.0) $144.7 ====== Net earnings 154.5 $154.5 Other comprehensive income: Minimum pension liability adjustment (0.1) (0.1) Currency translation adjustments --net of tax of $0.5 8.1 8.1 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 Stock issued under option, benefit and other plans --------- ----- ------ ------ Balance at December 31, 1996 992.0 (6.1) (39.9) $162.5 ====== Net earnings 158.9 $158.9 Other comprehensive income: Minimum pension liability adjustment --net of tax benefit of $0.8 (1.2) (1.2) Currency translation adjustments --net of tax benefit of $0.1 (41.7) (41.7) Dividends on preferred stock --net of tax benefit of $3.5 (11.5) Dividends on common stock ($1.00 per share) (66.7) Treasury stock transactions Stock issued under option, benefit and other plans --------- ----- ------ ------ Balance at December 31, 1997 $1,072.7 $(7.3) $(81.6) $116.0 ========= ===== ====== ======
The notes to consolidated financial statements on pages 26 through 35 are an integral part of these statements. - 25 - 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 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 88 percent of total foreign subsidiary net assets at the end of 1997. 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. Foreign currency exchange losses, included in interest and other income in 1997, 1996 and 1995, were $4 million, $2 million and $1 million, respectively. INVENTORY VALUATION--Inventories are valued at the lower of cost or market. Approximately 38 percent of the inventories at the end of 1997 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 $24 million and $25 million higher at December 31, 1997 and 1996, respectively. GOODWILL--Goodwill consists of costs in excess of the fair value of net tangible and identified intangible assets of acquired companies and is amortized over periods ranging from 15 years to 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--The Company has 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. - 26 - 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. 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. RESEARCH AND DEVELOPMENT--Research and development costs ($43.0 million in 1997, $41.9 million in 1996, and $39.8 million in 1995) are charged to expense as incurred. 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 were sold in 1996. GEOGRAPHIC AREA DATA
(in millions) 1997 1996 1995 - - ------------------------------------------------------------------------------- Sales North America $ 898.5 $ 797.4 $ 723.6 Europe 317.2 289.3 285.8 Latin America 113.1 107.3 92.6 Pacific 153.4 147.8 146.1 Sales between areas (48.5) (38.3) (33.6) -------- -------- -------- $1,433.7 $1,303.5 $1,214.5 ======== ======== ======== Operating Earnings North America $ 177.3 $ 154.4 $ 132.9 Europe 41.4 34.6 38.9 Latin America 19.2 21.7 22.1 Pacific 20.0 20.4 22.9 Expenses not allocated to areas (15.2) (14.4) (11.3) -------- -------- -------- $ 242.7 $ 216.7 $ 205.5 ======== ======== ======== Identifiable Assets North America $ 615.6 $ 550.9 $ 526.1 Europe 272.9 271.6 259.9 Latin America 76.5 67.3 60.4 Pacific 158.5 185.4 171.3 Corporate 317.4 319.3 342.8 -------- -------- -------- $1,440.9 $1,394.5 $1,360.5 ======== ======== ========
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 and $96 million in 1995. Excluding the aforementioned gain on the sale, net earnings from discontinued operations totaled $6 million in 1996 and $18 million in 1995 which included the pretax operating earnings of the discontinued operations, less applicable income taxes of $4 million in 1996 and $11 million in 1995. 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. NOTE 4--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 69 percent of the projected benefit obligation (PBO) and 79 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, 1997 were 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 1998. Three of the six foreign pension plans are unfunded, generally because amounts contributed are not deductible for tax purposes. - 27 - 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 PBO. 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) 1997 1996 1995 - - ---------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned $ 16.0 $ 16.8 $ 12.4 Interest costs on the PBO 26.8 25.6 23.7 Actual return on plan assets (41.7) (31.8) (60.7) Net amortizations and deferrals 12.7 4.3 35.8 --------- --------- -------- Net pension expense for defined benefit plans $ 13.8 $ 14.9 $ 11.2 ========= ========= ======== Assumptions for the plans as of the end of the last three years were as follows: U.S. Plans --------------------------------- 1997 1996 1995 - - --------------------------------------------------------------------------------------------------------------------- Weighted-average discount rates 7.5% 8.0% 7.25% Rates of increase in compensation levels 4.0 4.0 4.0 Rates of return on plan assets 9.5 9.5 9.5 - - --------------------------------------------------------------------------------------------------------------------- Foreign Plans --------------------------------- 1997 1996 1995 --------- --------- -------- Weighted-average discount rates 6.0-7.25% 6.5-9.0% 6.0-9.0% Rates of increase in compensation levels 3.0-6.0 4.0-6.25 4.0-6.5 Rates of return on plan assets 6.0-8.75 6.5-9.75 6.0-9.5 - - ---------------------------------------------------------------------------------------------------------------------
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) 1997 1996 - - --------------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $239.0 $220.5 Non-vested benefit obligation 23.0 17.6 ------ ------ Total ABO 262.0 238.1 Effect of future salary increases 64.9 58.3 ------ ------ Total PBO 326.9 296.4 Plan assets at fair market value 340.2 322.8 ------ ------ Plan assets in excess of the PBO 13.3 26.4 Unrecognized net (asset) from date of adoption (18.4) (21.6) Unrecognized prior service cost 10.3 9.7 Unrecognized net actuarial losses (gains) 3.7 (2.2) ------ ------ Net pension assets recognized $ 8.9 $ 12.3 ====== ======
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) 1997 1996 - - --------------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $ 31.9 $ 26.2 Non-vested benefit obligation 3.3 4.7 ------ ------ Total ABO 35.2 30.9 Effect of future salary increases 8.3 11.0 ------ ------ Total PBO 43.5 41.9 Plan assets at fair market value - - ------ ------ Plan assets (less) than the PBO (43.5) (41.9) Unrecognized net liability from date of adoption 1.8 2.2 Unrecognized prior service cost 5.8 6.6 Unrecognized net actuarial losses 14.3 12.8 Adjustment to recognize minimum liability (19.2) (18.3) ------ ------ Net pension (liabilities) recognized $(40.8) $(38.6) ====== ======
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 Statement of Financial Accounting Standards No. 87 (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 $7 million and $6 million in 1997 and 1996, respectively. - 28 - NOTE 5--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) 1997 1996 1995 - - ---------------------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned $ 2.1 $ 2.2 $ 1.8 Interest cost 5.5 5.1 5.5 Net amortization (1.7) (1.5) (1.7) ----- ------ ------ $ 5.9 $ 5.8 $ 5.6 ===== ====== ====== The components of the accrued postretirement benefit liability as of the end of the last two years were as follows: (in millions) 1997 1996 - - --------------------------------------------------------------------------------------------------------- ------ ------ Actuarial present value of postretirement benefit obligations: Retirees $ 39.2 $ 32.8 Fully eligible active plan participants 10.3 8.3 Other active plan participants 28.3 23.8 ------ ------ Accumulated postretirement benefit obligation 77.8 64.9 Unrecognized net gain 26.8 37.5 ------ ------ Accrued postretirement benefit liability 104.6 102.4 Less current portion 3.9 3.9 ------ ------ Noncurrent liability $100.7 $ 98.5 ====== ======
The assumptions used to measure the accumulated postretirement benefit obligation were as follows:
1997 1996 1995 ----- ----- ----- Weighted-average discount rate 7.5% 8.0% 7.25% Health care cost trend rate 7.0 7.5 8.0
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 1997 postretirement benefit expense by approximately $1 million and would have increased the 1997 accumulated postretirement benefit obligation by $7 million. NOTE 6--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:
(dollars in millions, shares in thousands) 1997 1996 1995 - - ---------------------------------------------------------------------------------------------------------------------------------- Preferred stock dividends $ 15.0 $ 15.3 $ 15.4 Interest expense on ESOP debt $ 8.7 $ 9.4 $ 11.2 ESOP benefit expense $ 4.1 $ 3.2 $ 2.5 ESOP contribution payments $ 5.5 $ 5.1 $ 2.1 Preferred shares at year end: Allocated 140.0 124.2 107.2 Committed-to-be-released 22.9 24.9 23.6 Suspense 220.9 243.8 268.6 - - ----------------------------------------------------------------------------------------------------------------------------------
NOTE 7--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. - 29 - Information regarding these stock option plans for 1997, 1996 and 1995 is as follows:
1997 1996 1995 ---------------------------- --------------------------- --------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- ---------------- --------- ---------------- --------- ---------------- At the beginning of the year 7,473,363 $32.77 6,657,723 $32.17 4,327,223 $29.73 Granted 1,002,700 $36.48 1,595,200 $31.64 2,801,200 $34.43 Exercised (754,492) $28.17 (500,460) $20.54 (360,700) $19.49 Expired or cancelled (144,200) $34.04 (279,100) $34.04 (110,000) $35.02 At the end of the year 7,577,371 $33.69 7,473,363 $32.77 6,657,723 $32.17 Options exercisable at end of year 5,231,142 $33.34 4,574,896 $32.33 3,584,024 $30.08 Weighted-average fair value of options granted during the year $9.02 $6.53 $8.98
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------ Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price - - ---------------- ----------- ---------------- ---------------- ----------- ---------------- $19.09 TO $20.16 390,350 1.1 yrs $20.04 390,350 $20.04 $23.38 to $29.81 170,800 3.8 $26.75 170,800 $26.75 $31.69 to $34.44 3,952,200 7.4 $33.42 2,514,438 $33.54 $35.75 to $36.50 3,064,021 6.0 $36.17 2,155,554 $36.03 --------- --------- $19.09 to $36.50 7,577,371 6.5 $33.69 5,231,142 $33.34 ========= =========
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) 1997 1996 1995 - - -------------------------------------------------------------- Net earnings As reported $158.9 $154.5 $153.7 Pro forma 151.4 146.1 149.0 - - -------------------------------------------------------------- Earnings per share Basic As reported $ 2.21 $ 2.13 $ 2.11 Pro forma 2.10 2.00 2.04 Diluted As reported 2.04 1.97 1.95 Pro forma 1.94 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 1997, 1996 and 1995, respectively: dividend yield of 2.8 percent, 3.2 percent and 3.2 percent; expected volatility of 20.0 percent, 20.7 percent and 21.4 percent; risk-free interest rate of 6.3 percent, 6.5 percent and 7.4 percent; and expected lives of 6.3, 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, 1996 and 1997 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. Charges to earnings for compensatory stock related plans totaled $3 million in 1997 and $2 million in 1996. No significant charge to earnings was made for such plans in 1995. - 30 - NOTE 8--INCOME TAXES The sources of earnings from continuing operations before income taxes were as follows:
(in millions) 1997 1996 1995 - - -------------------------------------------------------------------------------- Domestic $185.7 $168.6 $162.1 Foreign 70.6 60.8 51.3 ------ ------ ------ Total $256.3 $229.4 $213.4 ====== ====== ======
The components of income tax provisions attributable to earnings from continuing operations are summarized as follows:
(in millions) 1997 1996 1995 - - -------------------------------------------------------------------------------- Current Federal $58.2 $50.9 $38.2 State 11.1 10.4 8.6 Foreign 25.6 20.6 29.5 ----- ----- ----- 94.9 81.9 76.3 ----- ----- ----- Deferred Federal (3.8) (3.0) 5.6 State (0.6) (0.1) 0.1 Foreign 2.4 4.7 (4.3) ----- ----- ----- (2.0) 1.6 1.4 ----- ----- ----- Total $92.9 $83.5 $77.7 ===== ===== =====
Current foreign taxes listed above include taxes withheld by foreign governments on distributions from subsidiaries and affiliates (principally dividends and service fees). Nalco made income tax payments of $103 million, $84 million and $77 million during 1997, 1996 and 1995, respectively. The effective income tax rate varies from the federal statutory rate because of the factors indicated below:
1997 1996 1995 - - -------------------------------------------------------------------------------- Statutory U.S. federal tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.6 2.9 2.6 Other (1.4) (1.5) (1.2) ---- ---- ---- Effective tax rate 36.2% 36.4% 36.4% ==== ==== ====
Details of the 1997 and 1996 deferred tax assets and liabilities are as follows:
(in millions) 1997 1996 - - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits $ 42.5 $ 41.2 Other 46.1 50.0 ------ ------ Total 88.6 91.2 ------ ------ Deferred tax liabilities: Depreciation 57.9 59.2 Leveraged lease investments 29.2 29.6 Other 26.5 29.0 ------ ------ Total 113.6 117.8 ------ ------ Net deferred tax liability $ 25.0 $ 26.6 ====== ====== Included in: Prepaid expenses, taxes and other current assets $ (6.2) $ (7.1) Miscellaneous other assets (5.8) (6.5) Income taxes (0.2) (2.7) Deferred income taxes 37.2 42.9 ------ ------ $ 25.0 $ 26.6 ====== ======
NOTE 9--EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS 128, "Earnings per Share." SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and simplifies the standards for computing EPS previously found in APB 15, "Earnings per Share." It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. SFAS 128 was effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application was not permitted. In accordance with the requirements of SFAS 128, the Company has restated all prior-period EPS data presented. Basic EPS is computed by dividing net earnings (after deducting preferred stock dividends, net of income taxes) by the weighted-average number of common shares outstanding during the year. Diluted EPS is based upon the weighted-average number of common shares and dilutive potential common shares outstanding, 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 diluted EPS 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. The following table reconciles the numerators and denominators of the basic and diluted EPS computations for earnings from continuing operations:
(dollars in millions, shares in thousands) 1997 1996 1995 - - -------------------------------------------------------------------------------- Earnings from continuing operations $ 163.4 $ 145.9 $ 135.7 Dividends on preferred stock, net of taxes (11.5) (11.3) (11.2) - - -------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders used in basic EPS 151.9 134.6 124.5 Assumed conversion of preferred stock 11.5 11.3 11.2 Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes (4.5) (4.5) (4.7) Income tax adjustment on assumed common dividends (1.0) (0.9) (0.8) - - -------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders used in diluted EPS $ 157.9 $ 140.5 $ 130.2 - - -----------------------------------------------------=========================== Average shares outstanding used in basic EPS 66,700 67,280 67,495 Effect of dilutive securities: Assumed conversion of preferred stock 7,760 7,930 8,037 Stock options and contingently issuable shares 805 319 410 - - -------------------------------------------------------------------------------- Average shares outstanding used in diluted EPS 75,265 75,529 75,942 - - -----------------------------------------------------===========================
- 31 - NOTE 10 -- ACCOUNTING CHANGE In November 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on Issue 97-13 (EITF 97-13), "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation." The consensus clarified the accounting for third-party and internally generated costs associated with projects that combine business process reengineering activities and information technology transformation, requiring that such costs be expensed as incurred. Additionally, the transition provisions of EITF 97-13 required any unamortized previously capitalized costs for business process reengineering activities to be written off in the quarter that contained November 20, 1997 and to be reported as a cumulative effect of a change in accounting principle. As a result of EITF 97-13, the Company recorded a noncash pretax charge of $7 million ($4.5 million after tax, or 6 cents per share on a diluted basis), which was comprised of unamortized capitalized business process reengineering costs. NOTE 11--ACQUISITIONS During 1997, the Company acquired eight businesses that operate in Nalco's core markets of water treatment and process chemicals. Each of the acquisitions was accounted for as a purchase and, accordingly, the operating results of each business were included in the consolidated results of the Company from its respective acquisition date. Also in 1997, the Company increased its investment in Taiwan Nalco Chemical Co. Ltd. from 55 percent to 79 percent. The combined purchase price for these acquisitions was approximately $80 million, net of cash acquired. On a preliminary basis, the purchase price exceeded the fair value of the net tangible assets acquired by about $70 million, which was allocated to goodwill and other intangible assets. The Company does not anticipate that the final purchase price allocations will differ significantly from the preliminary purchase price allocations recorded. In 1996, the Company acquired two water treatment businesses for a combined purchase price of $83 million, net of cash acquired. The purchase price exceeded the fair value of the net tangible assets acquired by $75 million. The pro forma impact as if these acquisitions had occurred at the beginning of the respective years is not significant. NOTE 12--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 in 1994. The Company's investment in Nalco/Exxon of $123 million at December 31, 1997 included $35 million in demand notes payable to Nalco/Exxon. There were $23 million of demand notes payable to Nalco/Exxon at December 31, 1996. 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 1997, 1996 and 1995:
(in millions) 1997 1996 1995 - - ------------------------------------------------------------------- Nalco/Exxon: Net sales $455.6 $436.6 $420.8 Earnings before income taxes 51.1 42.4 32.4 Net income 42.6 35.7 28.0 Nalco's equity interest 60% 60% 60% ------ ------ ------ Nalco's equity in net income 25.6 21.4 16.8 Amortization and income preference, net 2.6 3.1 0.1 ------ ------ ------ Equity in earnings of partnership $ 28.2 $ 24.5 $ 16.9 ====== ====== ====== Distributions received from partnership $ 9.2 $ 8.4 $ 6.1 ====== ====== ======
The Company's investment in Nalco/Exxon at December 31, 1997 included $8 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 4 percent, 6 percent and 8 percent earnings preference in 1997, 1996 and 1995, respectively, which has been included in equity earnings. Condensed balance sheet information for the Nalco/Exxon joint venture at December 31, 1997 and 1996 was as follows:
(in millions) 1997 1996 - - ------------------------------------------------------------------- Current assets $164.7 $159.6 Noncurrent assets 203.8 171.9 Current liabilities 89.9 79.4 Noncurrent liabilities 33.7 31.2 - - -------------------------------------------------------------------
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 1997, 1996 and 1995 were $14 million, $15 million and $16 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 1997, 1996 or 1995. - 32 - 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) 1997 1996 - - -------------------------------------------- --------- --------- Land $ 34.8 $ 38.6 Buildings 210.7 205.6 Equipment 889.7 925.2 -------- -------- 1,135.2 1,169.4 Allowances for depreciation (642.7) (647.4) -------- -------- Net property, plant and equipment $ 492.5 $ 522.0 ======== ========
NOTE 14--SHORT-TERM DEBT Short-term debt consists of the following: (in millions) 1997 1996 - - -------------------------------------------- -------- -------- Notes payable $ 18.9 $ 21.9 Current maturities of long-term debt 3.2 6.4 Commercial paper borrowings - 3.0 -------- -------- $ 22.1 $ 31.3 ======== ========
The weighted-average interest rate on short-term debt was 9.1 percent and 7.7 percent at December 31, 1997 and 1996, respectively. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco has a $350 million Revolving Credit Agreement with eleven banks. This agreement is structured as a five-year revolving credit. Borrowings under the agreement are at rates which, at Nalco's option, vary with the prime rate, CD rate, LIBOR or money market rates. The credit line carries a facility fee of .08 percent. The credit arrangements were unused at December 31, 1997. NOTE 15--LONG-TERM DEBT Long-term debt consists of the following: (in millions) 1997 1996 - - ----------------------------- ------- ------- ESOP loans $151.1 $162.6 Commercial paper borrowings 143.0 50.0 Other 44.4 46.4 ------ ------ 338.5 259.0 Less current portion (3.2) (6.4) ------ ------ Total $335.3 $252.6 ====== ======
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 $51 million in 1997, and will decrease to $43 million in 1998 with final maturity in 1999. The remaining borrowings are comprised of a $38 million variable rate loan which matures in 2008 and a $25 million loan with a fixed rate of 8.1 percent and a final maturity in the year 2000. The weighted-average interest rate of all ESOP loans was 6.5 percent at December 31, 1997. Commercial paper outstanding at December 31, 1997 is classified as long-term since the Company intends to refinance these borrowings on a long-term basis. Interest rates ranged from 5.7 percent to 6.1 percent with a weighted-average rate of 5.8 percent. The $44 million in other long-term debt includes $37 million owed by a foreign subsidiary at a variable interest rate (an effective rate of 5.2% at December 31, 1997), with the balance borrowed by various foreign subsidiaries. Interest paid by Nalco was $14 million, $14 million and $15 million in 1997, 1996 and 1995, respectively. The following table presents the projected annual maturities of long-term debt for the next five years after 1997: (in millions) - - ------------- 1998 $ 3.2 1999 13.3 2000 10.2 2001 -- 2002 --
The amounts above include approximately $25 million in maturities related to the ESOP loans. - 33 - NOTE 16--SHAREHOLDERS' EQUITY Information on preferred and common shares is summarized in the following table:
(dollars in millions, except per share amounts) 1997 1996 - - -------------------------------------------------------------------------------- Preferred stock, par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock--outstanding; 383,774 shares-1997 and 392,851 shares-1996 $ 0.4 $ 0.4 Series C Junior Participating Preferred Stock--none issued Common stock, par value $.1875 per share; authorized 200,000,000 shares; issued 80,287,568 shares 15.1 15.1 - - --------------------------------------------------------------------------------
There were 14,251,003 shares and 13,263,648 shares held in treasury at December 31, 1997 and 1996, respectively. In 1996, Nalco's Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company's common stock. During 1997, the Company repurchased approximately 1,950,000 of those 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 $481.00 per share, and may be required to be redeemed by Nalco under certain circumstances. During 1997, 9,077 preferred shares were converted to 182,417 common shares of Nalco stock. During 1996 and 1995, 6,572 and 4,801 preferred shares were converted to 132,179 and 96,212 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. Also in 1996, the Board of Directors approved a new Shareholder Rights Plan and 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, 1997 the Company was a counterparty to one interest rate swap with a notional value of $51 million at December 31, 1997 and $59 million at December 31, 1996. 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 $43 million in 1998. The average interest rate received on this interest rate swap was 4.6 percent and 4.5 percent in 1997 and 1996, respectively. Foreign Exchange Risk Management The Company enters into various types of foreign exchange contracts in managing its intercompany foreign exchange risk, including currency swaps, forward exchange contracts and option contracts. - 34 - The Company's currency swap agreements were designed to hedge foreign currency intercompany loans that have maturities up to eight years. Gains and losses related to these swaps are offset with gains and losses on the underlying foreign currency loans. Forward exchange and option contracts are used to hedge various intercompany transactions with foreign subsidiaries and usually have maturities of six months, but occasionally may have maturities of up to eighteen months. The Company had foreign exchange contracts with a notional value of $64 million and $69 million at December 31, 1997 and 1996, 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, 1997 or December 31, 1996. 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, 1997 and 1996:
1997 1996 ------------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - - -------------------------------------------------------------------------------- Nonderivatives: Cash and cash equivalents $ 49.7 $ 49.7 $ 38.8 $ 38.8 Short-term debt 22.1 22.1 31.3 31.3 Long-term debt 335.3 336.0 252.6 253.8 Derivatives: Miscellaneous other assets 7.0 4.6 1.6 - Other liabilities - - - 2.7 - - --------------------------------------------------------------------------------
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 and option 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 13 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 made 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, 1997, the Company had undiscounted reserves of approximately $2 million for the maximum amount of known environmental clean-up costs. The Company's 1997 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. - 35 -
- - ----------------------------------------------------------------------------------------------------------------- Eleven Year Summary (dollar amounts in millions, except per share figures) 1997 1996 1995 - - ----------------------------------------------------------------------------------------------------------------- Net Sales $ 1,433.7 $ 1,303.5 $ 1,214.5 Operating costs and expenses Cost of products sold 629.6 568.6 531.3 Selling, administrative and research expenses 561.4 518.2 477.7 Formation and consolidation - - - - - ----------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 1,191.0 1,086.8 1,009.0 - - ----------------------------------------------------------------------------------------------------------------- Operating Earnings 242.7 216.7 205.5 Interest and other income 0.7 2.6 7.2 Interest expense (15.3) (14.4) (16.2) Equity in earnings of partnership 28.2 24.5 16.9 - - ----------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations Before Income Taxes 256.3 229.4 213.4 Income taxes 92.9 83.5 77.7 - - ----------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations 163.4 145.9 135.7 Earnings from discontinued operations - 8.6 18.0 - - ----------------------------------------------------------------------------------------------------------------- Earnings Before Extraordinary Loss and Effect of Accounting Changes 163.4 154.5 153.7 Extraordinary loss from retirement of debt, net of taxes - - - Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes - - - Cumulative effect of change in accounting for business process reengineering costs, net of taxes (4.5) - - - - ----------------------------------------------------------------------------------------------------------------- Net Earnings $ 158.9 $ 154.5 $ 153.7 ================================================================================================================= Per Share of Common Stock Earnings from continuing operations--diluted $ 2.10 $ 1.86 $ 1.71 Discontinued operations - .11 .24 Extraordinary item - - - Accounting change (.06) - - Net earnings 2.04 1.97 1.95 Cash dividends paid 1.00 1.00 .99 - - ----------------------------------------------------------------------------------------------------------------- Financial Ratios Earnings as a percent to sales* 11.4% 11.2% 11.2% Earnings as a percent to shareholders' equity* 24.7 23.5 24.1 Effective income tax rate* 36.2 36.4 36.4 Common stock dividends paid as a percent to earnings* 40.9 46.1 49.2 Research and development expenses as a percent to sales 3.0 3.2 3.3 Current ratio 1.6 to 1 1.3 to 1 1.0 to 1 - - ----------------------------------------------------------------------------------------------------------------- Financial Position Data Working capital $ 153.4 $ 95.5 $ 14.2 Total assets 1,440.9 1,394.5 1,360.5 Property, plant and equipment (cost) 1,135.2 1,169.4 1,101.6 Long-term debt 335.3 252.6 221.5 Deferred income taxes 37.2 42.9 53.3 Shareholders' equity 652.7 654.5 580.3 - - ----------------------------------------------------------------------------------------------------------------- Other Data Working capital provided from operations $ 254.1 $ 237.2 $ 219.2 Capital investments 101.4 92.5 126.7 Depreciation and amortization* 103.2 94.9 84.8 Dividends on common stock 66.7 67.3 66.9 Cost of common stock repurchased 75.7 26.3 42.4 Wages, salaries, commissions and benefits 450.6 427.9 387.4 Common shares outstanding at year end (thousands) 66,037 67,024 67,124 Market price per share of common stock at year end $ 39.563 $ 36.125 $ 30.125 Number of common shareholders of record 5,047 5,349 5,669 Number of employees at year end 6,905 6,502 6,081 - - -----------------------------------------------------------------------------------------------------------------
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 changes. - 36 -
1994 1993 1992 1991 1990 1989 1988 1987 - - -------------------------------------------------------------------------------------------------------------------------- $ 1,246.8 $ 1,291.6 $ 1,286.9 $ 1,164.4 $ 1,013.1 $ 899.1 $ 843.0 $ 738.3 543.7 555.0 557.4 513.1 449.8 406.2 388.4 341.7 498.8 512.8 498.5 449.9 382.1 335.6 318.8 274.5 68.2 - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- 1,110.7 1,067.8 1,055.9 963.0 831.9 741.8 707.2 616.2 - - -------------------------------------------------------------------------------------------------------------------------- 136.1 223.8 231.0 201.4 181.2 157.3 135.8 122.1 16.6 14.4 18.3 18.9 19.9 27.0 20.6 14.9 (21.8) (27.5) (40.3) (27.1) (11.5) (9.7) (9.5) (8.2) 6.9 - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- 137.8 210.7 209.0 193.2 189.6 174.6 146.9 128.8 64.6 81.9 81.8 74.2 72.9 66.3 53.1 51.9 - - -------------------------------------------------------------------------------------------------------------------------- 73.2 128.8 127.2 119.0 116.7 108.3 93.8 76.9 23.9 23.9 17.8 18.8 14.4 11.6 12.2 3.4 - - -------------------------------------------------------------------------------------------------------------------------- 97.1 152.7 145.0 137.8 131.1 119.9 106.0 80.3 - (10.6) - - - - - - - (56.5) - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- $ 97.1 $ 85.6 $ 145.0 $ 137.8 $ 131.1 $ 119.9 $ 106.0 $ 80.3 ========================================================================================================================== $ .88 $ 1.57 $ 1.57 $ 1.47 $ 1.42 $ 1.32 $ 1.20 $ .97 .31 .31 .22 .24 .18 .14 .15 .04 - (.14) - - - - - - - (.72) - - - - - - 1.19 1.02 1.79 1.71 1.60 1.46 1.35 1.01 .945 .885 .84 .83 .755 .68 .645 .60 - - -------------------------------------------------------------------------------------------------------------------------- 5.9% 10.0% 9.9% 10.2% 11.5% 12.0% 11.1% 10.4% 13.2 24.2 22.6 24.4 26.6 23.5 20.1 17.9 46.8 38.9 39.1 38.4 38.4 38.0 36.1 40.3 88.4 47.4 46.2 48.6 45.3 47.1 53.8 61.4 3.7 3.8 3.7 3.9 4.0 3.9 3.8 4.2 1.3 to 1 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 - - -------------------------------------------------------------------------------------------------------------------------- $ 87.8 $ 185.4 $ 314.3 $ 256.3 $ 229.7 $ 218.5 $ 174.4 $ 121.8 1,269.2 1,202.3 1,338.2 1,324.4 1,037.0 938.5 838.9 781.8 1,067.1 1,129.9 1,044.2 957.8 840.3 720.1 648.7 607.5 245.3 252.1 413.8 394.1 282.2 214.0 100.8 72.8 56.8 58.1 107.3 90.8 77.8 62.7 53.7 47.3 544.2 550.6 576.3 528.7 455.6 443.7 477.5 446.8 - - -------------------------------------------------------------------------------------------------------------------------- $ 250.1 $ 245.6 $ 226.7 $ 218.5 $ 192.4 $ 159.1 $ 148.4 $ 132.9 125.6 117.8 131.0 136.8 114.9 86.4 61.6 57.2 84.8 82.2 75.4 62.1 45.5 37.8 40.4 38.5 64.7 61.1 58.8 57.8 52.9 51.0 50.5 47.2 61.3 58.5 14.3 - 80.5 111.7 21.5 11.6 411.1 413.6 403.7 376.6 326.0 282.5 263.8 231.3 67,900 68,905 70,021 69,828 69,292 72,199 77,129 78,298 $ 33.50 $ 37.50 $ 34.625 $ 41.625 $ 28.25 $ 24.75 $ 17.625 $ 16.625 6,005 6,111 6,129 5,543 5,099 5,224 5,477 5,668 5,935 6,802 6,714 6,832 5,862 5,489 5,381 5,085 - - --------------------------------------------------------------------------------------------------------------------------
- 37 - 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 R. R. Ross Chicago, Illinois Engagement Partner February 2, 1998 - 38 - Quarterly Summary (Unaudited)
1997 1996 ------------------------------------- ----------------------------------- (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 $ 334.6 $ 354.4 $ 371.0 $ 373.7 $ 301.9 $ 318.6 $ 343.3 $ 339.7 Gross earnings 189.8 201.8 206.0 206.5 166.9 179.0 196.3 192.7 Earnings from continuing operations 35.8 40.1 44.2 43.3 30.0 34.5 41.0 40.4 Discontinued operations - - - - 1.8 2.5 1.5 2.8 Cumulative effect of accounting change - - - (4.5) - - - - Net earnings 35.8 40.1 44.2 38.8 31.8 37.0 42.5 43.2 Per common share Earnings - diluted Continuing operations .46 .51 .57 .56 .38 .44 .52 .52 Discontinued operations - - - - .02 .03 .02 .03 Accounting change - - - (.06) - - - - Net earnings .46 .51 .57 .50 .40 .47 .54 .55 Dividends .25 .25 .25 .25 .25 .25 .25 .25 Market price High 38 7/8 40 41 13/16 42 7/16 33 1/4 32 7/8 36 1/4 39 Low 35 1/8 34 1/4 38 5/16 37 1/2 28 1/8 29 1/8 28 1/2 34 1/2 - - --------------------------------------------------------------------------------------------------------------------
- 39 - CORPORATE OFFICERS E. J. Mooney (56) Chairman and Chief Executive Officer 29 years of service Milford B. Harp (60) Executive Vice President, Operations 34 years of service W. Steven Weeber (55) Executive Vice President, Operations Staff 31 years of service George M. Brannon (46) Group Vice President, President Industrial Division 22 years of service Peter Dabringhausen (59) Group Vice President, President Pulp and Paper Division 28 years of service Stephen D. Newlin (45) Group Vice President, President Specialty Division 22 years of service Gilberto Pinzon (57) Group Vice President, President Latin America Division 28 years of service Ronald J. Allain (57) Senior Vice President, Research and Development 27 years of service David R. Bertran (54) Senior Vice President, Manufacturing and Logistics 14 years of service William E. Buchholz (55) Senior Vice President, Chief Financial Officer 5 years of service James F. Lambe (52) Senior Vice President, Human Resources 29 years of service J. David Tinsley (57) Senior Vice President, Corporate Sales 32 years of service John D. Berthoud (54) Vice President, Marketing and Quality Management 27 years of service J. Terry Burns (50) Vice President, President Pacific Division 21 years of service William E. Parry (47) Vice President General Counsel 3 years of service William J. Roe (44) Vice President, President Process Division 19 years of service Anthony J. Sadowski (59) Vice President, Environmental Health and Safety 31 years of service Dale W. Walker (61) Vice President 38 years of service Robert L. Ratliff (49) Controller 22 years of service William G. Marshall (51) Treasurer 17 years of service Suzzanne J. Gioimo (54) Secretary 28 years of service Elizabeth R. Ewing (38) Assistant Treasurer 2 years of service Craig J. Holderness (45) Assistant Treasurer 20 years of service Michael K. Mrozak (42) Assistant Controller, Financial Reporting 13 years of service Lee J. Plankis (51) Assistant Controller, Planning and Analysis 16 years of service (As of March 1, 1998) EX-21 4 SUBSIDIARIES OF THE REGISTRANT 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 Chem Technologies, Incorporated........................... Delaware Chemco Water Technology, Inc. ............................ Delaware Chicago Chemical Company.................................. Illinois Board Chemistry, Inc. .................................... Illinois Nalco Delaware............................................ Delaware Nalco Diversified Technologies, Inc. ..................... 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 Odor Control Technology, Inc. ............................ Georgia(2) Oil Products & Chemical Company, Inc. .................... Illinois The Flox Company.......................................... Minnesota Trident Chemical Company, Inc. ........................... Delaware Visco Products Company.................................... Texas Foreign: Alfoc Ltd................................................. United Kingdom Deutsche Nalco GmbH....................................... Germany 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 Gamus Quimica, Ltda. ..................................... Brazil Houseman Waterbehandeling B.V. ........................... Netherlands International Water Consultant B.V. ...................... Netherlands International Water Consultant Beheer B.V. ............... Netherlands IWC Chemische Produkten B.V. ............................. Netherlands IWC Consultant GmbH....................................... Germany Nalco Anadolu A.S. ....................................... Turkey Nalco Applied Services of Europe B.V. .................... Netherlands
STATE OR OTHER JURISDICTION OF INCORPORATION COMPANY OR ORGANIZATION ------- --------------- 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 Nalco de Venezuela, C.A. .................................... Venezuela Nalco de Venezuela Holding, S.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 Holding B.V............................................ Netherlands 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 Marketing, S.A. ....................................... Spain 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 (3) Nalcochemical (Malaysia) SDN BHD............................. Malaysia Nalcomex, S.A. de C.V. ...................................... Mexico Nalfleet, Inc. .............................................. United Kingdom Nalfloc Ltd. ................................................ United Kingdom Nal-Lite Produtos Quimicos Ltda.............................. Brazil NCC Mauritius Limited........................................ Mauritius P.T. Nalco Perkasa........................................... Indonesia (4) Quimica Nalco de Colombia, S.A. ............................. Colombia Suomen Nalco Oy.............................................. Finland Taiwan Nalco Chemical Co., Ltd. ............................. Taiwan (5)
STATE OR OTHER JURISDICTION OF INCORPORATION OR COMPANY ORGANIZATION ------- ------------- Deryshares, B.V. ............................................... Netherlands Nalco Chemical India, Ltd. ..................................... India (6) Nalco Chemical Company (Suzhou) Ltd. ........................... China (7)
- - -------- Note (1)--80% of voting securities owned by Registrant Note (2)--66% of voting securities owned by Registrant Note (3)--60% of voting securities owned by Registrant Note (4)--51% of voting securities owned by Registrant Note (5)--79% of voting securities owned by Registrant Note (6)--65% of voting securities owned by Registrant Note (7)--95% of voting securities owned by Registrant EX-23 5 CONSENT OF PRICE WATERHOUSE LLP 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 2, 1998, which appears on page 38 of the 1997 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, 1997. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 11 of this Form 10-K. We also consent to the incorporation by reference in the Registration Statement of our report dated March 20, 1998 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, 1997. PRICE WATERHOUSE LLP Chicago, Illinois March 27, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 49,700,000 0 245,800,000 (4,200,000) 94,500,000 409,000,000 1,135,200,000 (642,700,000) 1,440,900,000 255,600,000 335,300,000 15,100,000 0 400,000 637,200,000 1,440,900,000 1,433,700,000 1,433,700,000 629,600,000 629,600,000 1,191,000,000 0 15,300,000 256,300,000 92,900,000 163,400,000 0 0 (4,500,000) 158,900,000 2.21 2.04
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 DEC-31-1995 38,100,000 0 224,700,000 (4,400,000) 91,400,000 370,000,000 1,101,600,000 (581,600,000) 1,370,100,000 355,800,000 221,500,000 0 400,000 15,100,000 564,800,000 1,370,100,000 1,214,500,000 1,214,500,000 531,300,000 531,300,000 0 0 16,200,000 213,400,000 77,700,000 135,700,000 18,000,000 0 0 153,700,000 2.11 1.95
EX-27.3 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1996 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1996 MAR-31-1996 37,700,000 0 216,300,000 (4,400,000) 96,700,000 368,500,000 1,120,500,000 (598,300,000) 1,370,700,000 344,200,000 209,500,000 0 400,000 15,100,000 588,300,000 1,370,700,000 301,900,000 301,900,000 135,000,000 135,000,000 0 0 3,700,000 47,000,000 17,000,000 30,000,000 1,800,000 0 0 31,800,000 0.43 0.40
EX-27.4 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1996 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1996 JUN-30-1996 37,700,000 0 234,900,000 (4,300,000) 94,700,000 433,600,000 1,143,300,000 (613,300,000) 1,459,700,000 317,400,000 306,700,000 0 400,000 15,100,000 605,300,000 1,459,700,000 620,500,000 620,500,000 274,600,000 274,600,000 0 0 7,000,000 101,200,000 36,700,000 64,500,000 4,300,000 0 0 68,800,000 0.94 0.87
EX-27.5 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 SEP-30-1996 45,600,000 0 232,400,000 (5,000,000) 92,500,000 434,900,000 1,152,300,000 (631,700,000) 1,451,900,000 340,400,000 253,000,000 0 400,000 15,100,000 628,100,000 1,451,900,000 963,800,000 963,800,000 421,600,000 421,600,000 0 0 11,300,000 165,600,000 60,100,000 105,500,000 5,800,000 0 0 111,300,000 1.53 1.42
EX-27.6 11 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 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 0 400,000 15,100,000 639,000,000 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 2.13 1.97
EX-27.7 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1997 MAR-31-1997 41,000,000 0 249,400,000 (5,100,000) 90,100,000 396,300,000 1,161,100,000 (653,900,000) 1,411,900,000 313,000,000 241,900,000 0 400,000 15,100,000 644,000,000 1,411,900,000 334,600,000 334,600,000 144,800,000 144,800,000 136,400,000 0 3,600,000 56,400,000 20,600,000 35,800,000 0 0 0 35,800,000 0.49 0.46
EX-27.8 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JUN-30-1997 47,100,000 0 254,000,000 (5,000,000) 90,400,000 403,900,000 1,151,200,000 (649,900,000) 1,427,400,000 304,300,000 248,500,000 0 400,000 15,100,000 658,500,000 1,427,400,000 689,000,000 689,000,000 297,400,000 297,400,000 278,800,000 0 7,400,000 119,800,000 43,900,000 75,900,000 0 0 0 75,900,000 1.05 0.97
EX-27.9 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 63,900,000 0 247,800,000 (4,700,000) 88,700,000 418,600,000 1,146,200,000 (653,600,000) 1,426,600,000 309,500,000 245,700,000 400,000 0 15,100,000 657,600,000 1,426,600,000 1,060,000,000 1,060,000,000 462,400,000 462,400,000 418,500,000 0 11,100,000 188,600,000 68,500,000 120,100,000 0 0 0 120,100,000 1.67 1.54
EX-99.C 15 FORM OF 11-K ANNUAL REPORT - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to COMMISSION FILE NO. 1-4957 PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN OF NALCO CHEMICAL 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 ---------------- DECEMBER 31, 1997 AND 1996 NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN FINANCIAL STATEMENTS AND SCHEDULES INDEX
PAGE(S) ----------- 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....................................... 4-11 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 20, 1998 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, 1997 and 1996, 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 of 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. PRICE WATERHOUSE LLP 1 NALCO CHEMICAL COMPANY ---------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS AS OF DECEMBER 31, 1997 AND 1996
1997 1996 ------------ ------------ Investments, at fair value: Nalco Chemical Company common stock................ $ 98,123,822 $103,167,292 Mutual funds....................................... 98,974,383 80,842,233 Group annuity contract deposits.................... 50,965,924 54,277,887 Bank commingled investment funds................... 41,540,862 25,382,090 Collective short-term investment funds............. 10,500,682 15,966,425 ------------ ------------ 300,105,673 279,635,927 Loans receivable from participants................... 5,604,934 5,272,538 Due from Nalco Chemical Company Employee Stock Ownership Plan...................................... 89,410 -- Accrued income receivable............................ 246,199 197,768 ------------ ------------ Net assets available for plan benefits............... $306,046,216 $285,106,233 ============ ============
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, 1997 AND 1996
1997 1996 ------------ ------------ Sources of net assets: Contributions by employees....................... $ 14,403,378 $ 12,995,367 Dividend income.................................. 3,774,078 4,255,329 Interest Income.................................. 4,492,750 4,739,023 Transfers from Nalco Chemical Company Employee Stock Ownership Plan............................ 934,736 941,886 Net realized/unrealized appreciation of investments..................................... 30,169,423 31,980,537 ------------ ------------ Total sources of net assets........................ 53,774,365 54,912,142 Applications of net assets: Administrative expenses.......................... (71,324) (68,265) Withdrawals by participants...................... (32,763,058) (28,270,923) ------------ ------------ Increase in net assets available for plan benefits. 20,939,983 26,572,954 Net assets available for plan benefits at beginning of period......................................... 285,106,233 258,533,279 ------------ ------------ Net assets available for plan benefits at end of period............................................ $306,046,216 $285,106,233 ============ ============
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, 1997 AND 1996 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, 1997, employees participating in the Plan had invested in the available funds as follows (some have investments in more than one fund):
1997 1996 ----- ----- Total employees participating................................. 3,175 3,204 Nalco Stock Fund............................................ 2,410 2,556 U.S. Government Money Market Fund........................... 236 223 Stable Capital Fund......................................... 1,443 1,652 Bond Index Fund............................................. 403 356 Balanced Fund............................................... 1,135 1,011 Growth and Income Fund...................................... 2,236 2,129 Equity Index Fund........................................... 1,723 1,415 EuroPacific Fund............................................ 950 788
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, 4 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 include 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, 1997 and December 31, 1996, the following amounts have been allocated to the individual accounts of withdrawing 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:
1997 1996 -------- ---------- Nalco Stock Fund..................................... $244,098 $ 705,187 U.S. Government Money Market Fund.................... -- 4,894 Stable Capital Fund.................................. 267,323 1,101,967 Bond Index Fund...................................... -- 2,415 Balanced Fund........................................ 5,193 21,814 Growth and Income Fund............................... 155,336 561,128 Equity Index Fund.................................... 25,192 208,747 EuroPacific Fund..................................... 30,375 137,143 -------- ---------- $727,517 $2,743,295 ======== ==========
The preceding 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, 1997 and 1996, and have been included in the benefits paid for the respective years on the Form 5500. 5 NOTE 3--INVESTMENTS: The cost of investments and number of shares or units held at December 31, 1997 and 1996 were as follows:
1997 1996 ----------------------- ----------------------- SHARES OR SHARES OR UNITS COST UNITS COST ---------- ------------ ---------- ------------ Nalco Chemical Company Common Stock......................... 2,480,223 $ 37,146,056 2,855,842 $ 40,377,018 American Balanced Fund......... 1,139,119 16,371,281 897,776 12,221,073 American EuroPacific Fund...... 456,076 11,570,309 393,984 9,438,990 Dreyfus Government Money Market Instruments................... 2,676,600 2,676,600 1,913,427 1,913,427 Hartford Annuity Contract Deposit....................... 2,563,076 2,563,076 2,493,039 2,493,039 Life of Georgia Contract Deposit....................... 6,282,171 6,282,171 5,935,391 5,935,391 Pacific Mutual Contract Deposit....................... 3,149,032 3,149,032 2,952,635 2,952,635 Provident Contract Deposit..... 3,723,764 3,723,764 3,506,039 3,506,039 Sun Life America Contract Deposit....................... 2,191,985 2,191,985 2,056,298 2,056,298 Allamerica Group Annuity Contract Deposit.............. 4,522,389 4,522,389 4,185,459 4,185,459 Ohio National Group Annuity Contract Deposit.............. 2,979,775 2,979,775 2,792,475 2,792,475 Protective Life Group Annuity Contract Deposit.............. 2,892,390 2,892,390 2,732,537 2,732,537 John Hancock Mutual Life Insurance Company Group Annuity Contract Deposit...... -- -- 2,729,307 2,729,307 J.P. Morgan Group Annuity Contract Deposit.............. 10,000,000 10,000,000 10,000,000 10,000,000 New York Life Group Annuity Contract Deposit.............. 5,553,351 5,553,351 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.............. 5,581,170 5,581,170 5,244,967 5,244,967 Transamerica Group Annuity Contract Deposit.............. 1,526,821 1,526,821 2,877,266 2,877,266 Neuberger & Berman Guardian Fund.......................... 2,570,243 58,104,493 2,169,599 44,705,133 Barclays Equity Index Fund..... 1,437,519 26,606,279 1,147,067 17,686,050 Barclays Government/Corporate Bond Index Fund............... 294,949 3,553,220 236,123 2,629,958 The Northern Trust Company Collective Short-Term Investment Fund............... 10,500,682 10,500,682 15,966,425 15,966,425 ------------ ------------ Total...................... $217,494,844 $199,215,963 ============ ============
Individual investments that represent 5% or more of the fair value of net assets available for plan benefits at December 31, 1997 are as follows:
SHARES OR UNITS COST FAIR VALUE --------- ----------- ----------- Barclays Equity Index Fund................. 1,437,519 $26,606,279 $37,576,753 Nalco Chemical Company Common Stock........ 2,480,223 37,146,056 98,123,822 American Balanced Fund..................... 1,139,119 16,371,281 17,861,388 Neuberger & Berman Guardian Fund........... 2,570,243 58,104,493 66,569,298
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. 6 NOTE 6--GROUP ANNUITY CONTRACTS: The fair value of group annuity contract deposits at December 31, 1997 and 1996 was comprised of the following:
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- John Hancock Mutual Life Insurance Company contract deposit, GAC7892, due 12/1/97 (5.77% in 1996)............................................ -- $ 2,729,307 Hartford contract deposit, GA10156, due 12/21/98 (4.87% in 1997 and 1996)......................... $ 2,563,076 2,493,039 Life of Georgia contract deposit, FR101, due 9/9/99 (5.93% in 1997 and 6.15% in 1996)................ 6,282,171 5,935,391 Pacific contract deposit, G2608401, due 6/1/98 (6.65% in 1997 and 1996)......................... 3,149,032 2,952,635 Provident contract deposit, #627-0569-201A, due 6/1/99 (6.21% in 1997 and 1996)......................... 3,723,764 3,506,039 Sun Life America contract deposit, #4656, due 7/25/98 (6.58% in 1997 and 1996)......................... 2,191,985 2,056,298 Allamerica contract deposit, GA91636A, due 11/30/99 (8.05% in 1997 and 1996)......................... 4,522,389 4,185,459 Ohio National contract deposit, #5708, due 11/30/99 (6.75% in 1997 and 1996)......................... 2,979,775 2,792,475 Protective Life contract deposit, GA1191, due 6/1/98 (5.85% in 1997 and 1996)......................... 2,892,390 2,732,537 J.P. Morgan contract deposit, NALCO-01, due 6/1/2000 (5.50% in 1997 and 6.08% in 1996)................ 10,000,000 10,000,000 New York Life contract deposit, #30481, due 6/30/99 (6.11% in 1997 and 1996)......................... 5,553,351 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 1997 and 1996)......................... 5,581,170 5,244,967 Transamerica contract deposit, S1393-00, due 1/30/98 (6.13% in 1997 and 1996)......................... 1,526,821 2,877,264 ----------- ----------- $50,965,924 $54,277,887 =========== ===========
Average yields for the above contracts are not calculated as the rates are guaranteed. No valuation reserve was established in 1997 or 1996 as the companies listed all maintain at least an A+ credit rating. 7 NOTE 7--STATEMENTS OF NET ASSETS: The statements of net assets available for plan benefits by fund as of December 31, 1997 and 1996 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, 1997
U.S. GOVT STABLE NALCO STOCK MONEY MKT CAPITAL BOND INDEX BALANCED GROWTH & EQUITY FUND FUND FUND FUND FUND INCOME FUND INDEX FUND ----------- ---------- ----------- ---------- ----------- ----------- ----------- Investments, at fair value: Nalco Chemical Company common stock.......... $98,123,822 Mutual Funds........... $2,676,600 $17,861,388 $66,569,298 Group annuity contract deposits.............. $50,965,924 Bank commingled mutual funds................. $3,964,109 $37,576,753 Collective short-term investment fund....... 1,548,151 8,793,071 ----------- ---------- ----------- ---------- ----------- ----------- ----------- 99,671,973 2,676,600 59,758,995 3,964,109 17,861,388 66,569,298 37,576,753 Loans receivable from participants........... Due from Nalco Chemical Company Employee Stock Ownership Plan......... 89,410 Accrued income receivable............. 11,133 11,130 222,764 ----------- ---------- ----------- ---------- ----------- ----------- ----------- Net assets available for plan benefits.......... $99,772,516 $2,687,730 $59,981,759 $3,964,109 $17,861,388 $66,569,298 $37,576,753 =========== ========== =========== ========== =========== =========== ===========
EUROPACIFIC LOAN CLEARING FUND ACCOUNT ACCOUNT TOTAL ----------- ---------- -------- ------------ Investments, at fair value: Nalco Chemical Company common stock........................... $ 98,123,822 Mutual Funds..................... $11,867,097 98,974,383 Group annuity contract deposits.. 50,965,924 Bank commingled mutual funds..... 41,540,862 Collective short-term investment fund............................ $159,460 10,500,682 ----------- ---------- -------- ------------ 11,867,097 159,460 300,105,673 Loans receivable from participants.................... $5,604,934 5,604,934 Due from Nalco Chemical Company Employee Stock Ownership Plan... 89,410 Accrued income receivable........ 1,172 246,199 ----------- ---------- -------- ------------ Net assets available for plan benefits........................ $11,867,097 $5,604,934 $160,632 $306,046,216 =========== ========== ======== ============
8 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. STABLE NALCO MONEY MKT. CAPITAL BOND INDEX BALANCED STOCK FUND FUND FUND FUND FUND ------------ ---------- ----------- ---------- ----------- Investments, at fair value: Nalco Chemical Company common stock.......... $103,153,745 Mutual Funds........... $1,913,427 $13,062,639 Group annuity contract deposits.............. $54,277,887 Bank commingled mutual funds................. $2,899,584 Collective short-term investment fund....... 923,478 14,643,455 ------------ ---------- ----------- ---------- ----------- Loans receivable from participants........... 104,077,223 1,913,427 68,921,342 2,899,584 13,062,639 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 ============ ========== =========== ========== ===========
GROWTH & EQUITY EUROPACIFIC LOAN CLEARING INCOME FUND INDEX FUND FUND ACCOUNT ACCOUNT TOTAL ----------- ----------- ----------- ---------- -------- ------------ Investments, at fair value: Nalco Chemical Company common stock.......... $ 13,547 $103,167,292 Mutual Funds........... $55,606,827 $10,259,340 80,842,233 Group annuity contract deposits.............. 54,277,887 Bank commingled mutual funds................. $22,482,506 25,382,090 Collective short-term investment fund....... 399,492 15,966,425 ----------- ----------- ----------- ---------- -------- ------------ 55,606,827 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.......... $55,606,827 $22,482,506 $10,259,340 $5,272,538 $414,074 $285,106,233 =========== =========== =========== ========== ======== ============
9 NOTE 8--STATEMENTS OF CHANGES IN NET ASSETS: The statements of changes in net assets available for plan benefits by fund for the years ended December 31, 1997 and 1996 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 FOR THE YEAR ENDED DECEMBER 31, 1997
U.S. GOVT NALCO MONEY MKT STABLE BOND INDEX BALANCED GROWTH & STOCK FUND FUND CAPITAL FUND FUND FUND INCOME FUND ------------ ----------- ------------ ---------- ----------- ----------- Sources of net assets: Contributions by employees............. $ 685,190 $ 146,442 $ 1,983,419 $ 210,068 $ 1,267,695 $ 5,085,028 Dividend income........ 2,636,406 548,267 394,153 Interest income........ 70,793 113,949 3,832,273 Transfers from Nalco Chemical Company Employee Stock Ownership Plan........ 934,736 Net transfers authorized by participants.......... (8,883,795) 1,977,860 (4,764,197) 871,764 1,854,982 2,339,787 Net realized/unrealized appreciation of investments........... 9,435,900 263,048 2,331,498 9,336,785 ------------ ----------- ------------ ---------- ----------- ----------- Total sources of net assets.............. 4,879,230 2,238,251 1,051,495 1,344,880 6,002,442 17,155,753 Applications of net assets: Administrative expenses.............. Withdrawals by participants.......... (9,191,998) (1,470,959) (10,172,739) (280,355) (1,203,693) (6,193,282) ------------ ----------- ------------ ---------- ----------- ----------- Increase (decrease) in net assets available for plan benefits...... (4,312,768) 767,292 (9,121,244) 1,064,525 4,798,749 10,962,471 Net assets available for plan benefits at beginning of period.... 104,085,284 1,920,438 69,103,003 2,899,584 13,062,639 55,606,827 ------------ ----------- ------------ ---------- ----------- ----------- Net assets available for plan benefits at end of period................. $ 99,772,516 $ 2,687,730 $ 59,981,759 $3,964,109 $17,861,388 $66,569,298 ============ =========== ============ ========== =========== ===========
EQUITY EUROPACIFIC LOAN CLEARING INDEX FUND FUND ACCOUNT ACCOUNT TOTAL ----------- ----------- ---------- --------- ------------ Sources of net assets: Contributions by employees............. $ 3,077,632 $ 1,221,567 $ 726,337 $ 14,403,378 Dividend income........ 194,558 694 3,774,078 Interest income........ $ 459,017 16,718 4,492,750 Transfers from Nalco Chemical Company Employee Stock Ownership Plan........ 934,736 Net transfers authorized by participants.......... 6,310,004 293,698 (103) 0 Net realized/unrealized appreciation of investments........... 8,112,811 688,912 469 30,169,423 ----------- ----------- ---------- --------- ------------ Total sources of net assets.............. 17,500,447 2,398,735 459,017 744,115 53,774,365 Applications of net assets: Administrative expenses.............. (71,324) (71,324) Withdrawals by participants.......... (2,406,200) (790,978) (126,621) (926,233) (32,763,058) ----------- ----------- ---------- --------- ------------ Increase (decrease) in net assets available for plan benefits...... 15,094,247 1,607,757 332,396 (253,442) 20,939,983 Net assets available for plan benefits at beginning of period.... 22,482,506 10,259,340 5,272,538 414,074 285,106,233 ----------- ----------- ---------- --------- ------------ Net assets available for plan benefits at end of period................. $37,576,753 $11,867,097 $5,604,934 $ 160,632 $306,046,216 =========== =========== ========== ========= ============
10 NALCO CHEMICAL COMPANY ---------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND FOR THE YEAR ENDED DECEMBER 31, 1996
U.S. GOVT GROWTH NALCO STOCK MONEY MKT STABLE BOND INDEX BALANCED & INCOME FUND FUND CAPITAL FUND FUND FUND FUND ------------ ---------- ------------ ---------- ----------- ----------- Sources of net assets: Contributions by employees............. $ 758,733 $ 120,998 $ 2,528,121 $ 216,843 $ 1,031,468 $ 5,362,833 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) Net realized/unrealized appreciation (depreciation) of investments........... 18,404,557 55,858 1,002,573 7,865,115 ------------ ---------- ------------ ---------- ----------- ----------- Total sources of net assets.............. 11,406,038 1,020,414 3,684,959 443,507 5,233,578 9,161,213 Applications of net assets: Administrative expenses.............. 2,815 Withdrawals by participants.......... (8,360,795) (225,295) (11,604,902) (92,946) (686,717) (3,142,509) ------------ ---------- ------------ ---------- ----------- ----------- 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 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 ------------ ---------- ------------ ---------- ----------- ----------- 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 ============ ========== ============ ========== =========== ===========
EQUITY EUROPACIFIC LOAN CLEARING INDEX FUND FUND ACCOUNT ACCOUNT TOTAL ----------- ----------- ---------- ---------- ------------ Sources of net assets: Contributions by employees............. $ 2,085,277 $ 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 Ownership Plan........ 941,886 Net transfers authorized by participants.......... 7,847,638 5,704,703 (125,137) 2,281,771 0 Net realized/unrealized appreciation (depreciation) of investments........... 3,544,864 1,108,492 (922) 31,980,537 ----------- ----------- ---------- ---------- ------------ Total sources of net assets.............. 13,477,779 7,793,906 321,186 2,369,562 54,912,142 Applications of net assets: Administrative expenses.............. (71,080) (68,265) Withdrawals by participants.......... (995,415) (761,255) (418,529) (1,982,560) (28,270,923) ----------- ----------- ---------- ---------- ------------ Increase (decrease) in net assets available for plan benefits...... 12,482,364 7,032,651 (97,343) 315,922 26,572,954 Net assets available for plan benefits at beginning of period.... 10,000,142 3,226,689 5,369,881 98,152 258,533,279 ----------- ----------- ---------- ---------- ------------ Net assets available for plan benefits at end of period................. $22,482,506 $10,259,340 $5,272,538 $ 414,074 $285,106,233 =========== =========== ========== ========== ============
11 NALCO CHEMICAL COMPANY ---------------- SCHEDULE I--PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ASSETS HELD FOR INVESTMENT AS OF DECEMBER 31, 1997
IDENTITY OF ISSUER DESCRIPTION OF INVESTMENT COST FAIR VALUE - - ------------------ ------------------------- ---- ---------- *Nalco Chemical Company 2,480,223 shares of common stock $ 37,146,056 $ 98,123,822 Hartford Group annuity contract deposit, 2,563,076 2,563,076 GA10156, 4.87%, due 12/21/98 Life of Georgia Group annuity contract deposit, 6,282,171 6,282,171 FR101, 5.93%, due 9/9/99 Pacific Group annuity contract deposit, 3,149,032 3,149,032 G2608401, 6.65%, due 6/1/98 Provident Group annuity contract deposit, 3,723,764 3,723,764 #627-05692-01A, 6.21%, due 6/1/99 Sun Life America Group annuity contract deposit, 2,191,985 2,191,985 #4656, 6.58%, due 7/25/98 Allamerica Group annuity contract deposit, 4,522,389 4,522,389 GA91636A, 8.05%, due 11/30/99 Ohio National Group annuity contract deposit, 2,979,775 2,979,775 #5708, 6.75%, due 11/30/99 Protective Life Group annuity contract deposit, 2,892,390 2,892,390 GA1191, 5.85%, due 6/1/98 J.P. Morgan Group annuity contract deposit, 10,000,000 10,000,000 NALCO-01, 5.50%, due 6/1/2000 New York Life Group annuity contract deposit, 5,553,351 5,553,351 #30481, 6.11%, due 6/30/99 Principal Mutual Group annuity contract deposit, 5,581,170 5,581,170 #4-23183, 6.41%, due 12/31/2000 Transamerica Group annuity contract deposit, 1,526,821 1,526,821 S1393-00, 6.13%, due 1/30/98 American American EuroPacific Growth Fund-- 11,570,309 11,867,097 456,076 shares American Balanced Fund--1,139,119 shares 16,371,281 17,861,388 Dreyfus U.S. Government Money Market Fund 2,676,600 2,676,600 Neuberger & Berman Guardian Fund--2,570,243 shares 58,104,493 66,569,298 Barclays Global Investors Barclays Equity Index Fund--1,437,519 shares 26,606,279 37,576,753 Barclays Bond Index Fund--294,949 shares 3,553,220 3,964,109 *The Northern Trust Company Collective Short-Term Investment Fund 10,500,682 10,500,682 *Participant loans Participant loans, average interest rate of 8.64% 5,604,934 5,604,934 ------------ ------------ $223,099,778 $305,710,607 ============ ============
- - -------- *Party-in-interest to the Plan. 12 NALCO CHEMICAL COMPANY --------------- SCHEDULE II--PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1997 CATEGORY (III)--A SERIES OF SECURITY TRANSACTIONS IN EXCESS OF 5% OF THE CURRENT VALUE OF PLAN ASSETS:
EXPENSES VALUE OF INCURRED ASSET ON IDENTITY OF PARTY PURCHASE SELLING WITH COST OF TRANSACTION NET GAIN INVOLVED DESCRIPTION OF ASSET PRICE PRICE TRANSACTION ASSET DATE (LOSS) - - ----------------------- ---------------------- ----------- ----------- ----------- ----------- ----------- ---------- Neuberger & Berman Man- Neuberger & Berman agement Guardian Equity Fund 139 purchases $21,802,364 $21,802,364 $21,802,364 118 sales $11,347,288 8,442,781 11,347,288 $2,904,507 The Northern Trust Com- Collective Short-Term pany Investment Fund: 279 purchases 75,451,265 75,451,265 75,451,265 364 sales 80,917,008 80,917,008 80,917,008 Barclays Global Invest- Barclays Equity ors Index Fund: 164 purchases 14,371,898 14,371,898 14,371,898 86 sales 7,390,461 5,451,668 7,390,461 1,938,793 Nalco Chemical Company Nalco Chemical Company Common Stock: 5 purchases 2,440,901 $2,669 2,440,901 2,440,901 11 sales 14,634,855 19,604 5,408,633 14,634,855 9,206,618
There were no reportable category (i), (ii), or (iv) transactions for the year ended December 31, 1997 13 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 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----